System Economics: Economies of Speed, Scale, Scope and Span
This week I introduce a new framework for revealing analyzing the business value of systems that I use in my consulting practice.
Within System Economics, technology assets within a system exhibit transaction costs as factors of production. Transaction cost theory has been primarily applied firm-level analysis to reveal areas of specialization, the optimal size of the firm, and the role of technology in decreasing transaction costs that create firm boundries. At the system-level, transaction cost analysis of components and architecture provides a robust framework for system optimization and alignment with business objectives.
A technology asset portfolio determines the competitive capabilities of a company. The objective of a business system is to support economic gains, primarily through enhancing productivity.
Economic gains to productivity, as measured by per unit increases in efficiency, can be attributed to economies of speed, economies of scale, economies of scope and/or economies of span:
Economies of speed are achieved by using an asset to produce outputs at a higher rate of throughput. Through a decrease in the time required to produce an output, per-unit costs decline. Digital signal processors and parallel computing are examples of technology assets that realize economies of speed.
Economies of scale are achieved by using an asset to produce more of a single output. Through the increase in volume of products or services of that single output, per-unit costs decline, and more customers will be attracted. Centralized storage and high-capacity optical transmission systems are examples of technology assets that realize economies of scale.
Economies of scope are achieved by using an asset to produce different types of outputs. Through the increase in the number of outputs produced using the same asset, per-unit costs decline. Modular platforms are examples of technology assets that realize economies of scope.
Economies of span are achieved by efficient coordination, or sequenced use, of assets. Through the decreased transaction costs between stages of production, per-unit costs decline. Control and logistics systems are examples of technology assets that realize economies of span.
This week I will expand upon the above System Economics framework and apply it to specific trends such as Web Services.
9:24:36 AM 
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