Economics

The world is shrinking. Due to technological change, the cost of distance is declining. The falling costs of working remotely, of delivering goods and the ability to manufacture at low cost close to consumers will wreak enormous changes to where people decide to live and how businesses operate, according to consulting firm Bain & Company's Chief Macroeconomist Karen Harris. The changes present challenges for organisations and businesses as they face potential disruption.

At an Australian Institute of Company Directors Fellows' Breakfast earlier this month, Harris, who is the Managing Director of Bain's Macro Trends Group, presented the findings of the consulting company's research into the costs of distance.

"A confluence of technologies – you don't have to bet on any one of them – is changing the cost of distance," Harris told the audience of AICD Fellows. "The cost of moving information is free, the cost of moving people is going down, the cost of moving goods is collapsing," the New York-based Harris said.

Harris highlighted the potential effects of drones, robots and 3-D printing in making it easier for businesses to provide services for people who had made the decision to leave cities for more sparsely populated areas.

The cost of moving information is free, the cost of moving people is going down, the cost of moving goods is collapsing

Already drone delivery of a package costs 75-80% less than human delivery, according to Bain's research. Wide deployment of drones could drastically reduce the expense of delivering small packages, particularly for the last mile. 

At the same time a combination of robots and 3-D printing could lower the minimum efficient scale of businesses. Harris uses the example of service robots being deployed at casual dining outlets, which by the consulting firm’s estimates by 2025 could reduce by 30% the number of households the restaurant would need to service to break even. Meanwhile 3-D printing will allow the local production of standard parts and complex one-off items, reducing reliance on central manufacturing and warehousing. The technology could let companies build manufacturing bases closer to consumers.

The cost reductions of these technologies may allow retailers to service smaller population centres, while remaining profitable. "A much smaller town can have a much more interesting variety of stores," Harris told the audience at the Fellows’ breakfast.

A wider range of businesses and services would make these less dense areas more attractive. Added to this, the ease with which people can now work from home due to communication technology and skyrocketing property prices in cities mean the exodus already occurring out of developed cities around the globe is likely to continue.

Bain & Company’s advice to prepare for the disruptive decline in distance costs

Beware stranded assets

The value of fixed assets—including real property, such as apartment buildings, shopping centers, telecom fibre and toll roads—may fall sharply in some locations. The risk: Today’s investments become tomorrow’s write-offs. Companies can seek to minimise the risk of such stranded assets by keeping a sharp eye on population migration patterns and looking beyond cyclical economic swings that can mask migration flows.

Examine supply, distribution and logistics chains

Leadership teams can assess whether supply chains are vulnerable to a sharp decline in the cost of distance and experiment with alternatives that offer a lower net distance cost. They also can review the future need for large-scale production or warehouses vs. multiple smaller locations. 

Test and learn

Leadership teams can put themselves on the front lines of the transformation by starting now to incorporate new technologies such as robotics, 3-D printing and drones into their workflows. Not every bet will pay off, but the experience of testing and learning will help position early movers to benefit.

Stay alert to the migration of human capital and talent

Spatial freedom will pool talent in some locations, drain it from others and generally disperse it more widely than in the past. Depending on the specific talent and human capital needs of each business, this shift may require rethinking the core locations for centralised business functions.

Canvass the growing number of investment opportunities

To be among the first to spot trends, stay abreast of enabling technologies. What’s important is the pace at which they are adopted and combined, triggering new development.