Production costs

Recall that a design is the information required to produce a novel product or service—the "recipe.” For products that themselves consist of information, such as software, the production cost is simply the cost of making a copy of the design—essentially zero. For physical products, however, the design recipe must be converted into a physical form before it can be used. In such cases, the input consists of the design instructions—the recipe—plus the materials, energy, and human effort required to carry out those instructions. The output is a product—the design converted into usable form.

One of the major advantages producers have historically had over single free innovators and open collaborative innovation projects is economies of scale with respect to mass production technologies. Mass production, which became widespread in the early twentieth century, is a set of techniques whereby certain physical products can be turned out in very high volumes at very low unit cost (Chandler 1977; Houn- shell 1984). The economies of scale in mass production generally depend on using a single design (or a small number of designs) over and over again. In classic mass production, changing designs interrupts the flow of products and incurs setup costs and switching costs, which reduce the overall efficiency of the process.

Can single free innovators or open collaborative innovation projects convert their various designs into physical products that will be economically competitive with the products of mass producers? Increasingly, the answer is Yes. Consider that today mass producers can design their production technologies to be independent of many of the specifics of the designs they produce. Such processes are said to provide "mass customization capabilities.” Computer-controlled production machines can adjust to create a single unique item at a cost that is not different from producing a stream of identical items on those same machines (Pine 1993; Tseng and Piller 2003). When mass customization is possible, producers can, in principle, make their low-cost, high-throughput factories available for the production of designs created by single individuals and collaborative free innovation projects. Also, and increasingly, individuals can purchase production equipment designed for personal use such as personal 3D printers, and thereby have a low-cost production capability of their own that is entirely independent of the factories of commercial producers.

Of course, for a long time to come, there will continue to be instances in which the economies of mass production depend significantly upon careful and subtle co-design of products and product-specific production systems. In such instances, producer innovators will continue to have an advantage in designing and producing goods and services for mass markets.

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