In the information intensive industries, almost all these assumptions come into question. To begin, the production and distribution of information is very different from that of physical products. Operations managers typically have focused their attention on the cost of producing a specified volume of a product or service during a given time period, where the average cost per unit is composed of a relatively small depreciation / amortization cost and a large variable component (particularly if the cost of materials is included). In addition, they typically assume that economies of scale operate to reduce costs only up to some point, after which the diseconomies of scale and complexity drive costs back up.
The cost structure for most information intensive products, however, is dominated by the up-front costs associated with developing a new product and creating its associated production /delivery system. The marginal cost of producing and delivering an incremental unit of such products in contrast is both generally quite small and essentially independent of the distance between producer and consumer. Creating Microsoft’s Office 2000 suite of programs for example, required the efforts of more than thousand developers working more than two years. Other examples include the development of large financial or other databases, entertainment products, and Internet services; the first unit costs a lot to produce but each successive unit costs very little.
Some “physical” products, such as IC’s and pharmaceuticals exhibit a similar kind of cost structure. A new state-of-the- art IC fabrication facility can now cost well over $2 billion – with the result that depreciation and maintenance account for more than 70 per cent of the total cost of the resulting chips. Similarly the cost of developing and getting FDA approval of a new drug and its manufacturing process usually takes at least seven years and can exceed $600 million. This “costly to produce but cheap to reproduce” world has two direct implications for operations management, teaching and research.
First, it suggests that project management is at least as important as process management. For many years project management has been included among the topics covered in OM. Textbooks and courses, and more recently product development has received vastly increased attention. But the amount of time O.M. academics spend researching and teaching about project management still accounts for a relatively small proportion of their total efforts. In most introductory courses, the topic is represented by only a class or two – often focusing on the theory and use of critical path analysis. In the case of information intensive products however, managing the development of that “first unit” effectively and quickly is generally far more important to success than is managing the process for providing additional units.
Although one could argue that managing a series of projects is sort of a process, it is a very different kind of a process than the ones O.M. has traditionally focused on. The learning curve, if any, for that kind of process is more discontinuous and much less amenable than traditional processes to the principles of continuous improvement and the use of PDCA (plan-do-check-act) cycle in problem identification and resolution. The clear implication is that much more time and attention needs to be devoted to the particular problems of project management. That’s where most of the money is spent, and that’s where an important source of competitive advantages lie, for reasons we will explore next.
Second, given the huge impact of initial cost, achieving low cost is less dependent on effective process management, or even continuous improvement, than it is on high cumulative output. This emphasis on the cumulative is due only partly to the familiar dynamics of learning curves (where marginal costs decrease at a constant rate with each doubling of volume, see and to the obvious fact that average cost per unit is calculated by dividing total cost dominated by the first unit’s cost) by cumulative volume. Cumulative volume is also important because unlike physical resources, which are consumed by or deteriorate with usage many forms of intellectual capital gain value as they are used. For example, knowledge management systems that are established for the purpose of sharing or creating new information provide better, more complete information as more parties join and use them.