Economic Scarcity versus Abundance in Digital Transformation
The shift from the economy of atoms to the economy of bits is disrupting many organizations. This economic growth comes with a set of advantages and disadvantages that all involved parties need to be aware of. Understanding economic scarcity versus abundance in digital transformation will help business leaders, engineers, and other stakeholders unlock new innovation possibilities.
Differences Between the Economies of Scarcity and Abundance
Industries and institutions are interested in transformation not only for technological advancement but also for digitalization’s economic impact. The economy of scarcity and the economy of abundance are important concepts when discussing this transformation.
The Economy of Scarcity
The economic theory of scarcity refers to a mismatch between limited resources and consumer demand. If a resource is scarce, but demand is high, not everyone can get what they want. There is a mismatch between the desired supply and the actual supply. This poses unique challenges for organizations that rely on scarce resources like water or skilled labor.
In economic terms, the scarcity principle explains the relationship between perceived value, supply and demand. If the supply is low and demand is high, the perceived value (and product price) will tend to rise. Equally, if the supply is large or seemingly unlimited, the perceived value tends to fall. This is why marketing campaigns often try to create artificial scarcity for a particular product in order to increase demand.
Historically, most organizations have operated within the economy of scarcity, relying on limited resources to create products and meet consumer demand. Scarcity keeps prices high and helps drive profitability.
The Economy of Abundance
Abundance refers to having ample resources. Unlike the economy of scarcity, the economy of abundance is built on the availability of near unlimited resources.
The economy of abundance is almost always present in the digital world—digital products and content are easy and cheap to copy, store, and transfer to millions. Digital products do not rely on scarce resources. This can be incredibly disruptive to an economy. In the past, distributing a new music album would have required millions of dollars of investment in recording, manufacturing and distribution. Today, with digital tools and digital distribution, that cost is almost zero. While this benefits creators of music, it also means that millions of dollars are no longer being deployed in the process of releasing an album. The money that previously supported workers, factories and regional economies has simply disappeared.
An abundance mindset can also lead to challenges. For example, according to the Jevons paradox, companies with efficient production lines tend to assume that they will use fewer scarce resources. In some cases, demand rises due to faster production and greater availability. This can inadvertently lead to higher usage of a scarce resource than before.
The economy of abundance stands in stark contrast to the economy of scarcity. Its rules, outcomes and the flow of monetary value are all radically different.
How Scarcity and Abundance Work Together
The economies of abundance and scarcity often work together as organizations evolve. For many, eliminating the need for scarce or nonrenewable resources is impossible; skilled labor, for example, is necessary to create viable digital technologies. Water stewardship is necessary for bottling companies and other manufacturers, and so on.
Artificial scarcity, or the scarcity of items despite technology development or available materials, is a common example of how scarcity and abundance work together. Although an organization has the technology or capacity for abundance, it makes the product scarce for certain reasons, such as copyrights or monopoly laws.
For example, a news organization may implement a paywall to prevent online viewers from accessing content without a subscription. The organization’s product becomes scarcer although content itself is available, which can lead to an increase in revenue. However, artificial scarcity can sometimes backfire. For example, the customers of the news organization may simply choose to use one of the many free news sites now available.
Economy of Atoms versus Economy of Bits in the Digital Transformation Process
In the digital age, the economy of atoms is shifting to the economy of bits. While the economy of atoms is an economy of scarcity, the economy of bits is one of abundance.
The Economy of Atoms
Atoms are nonrenewable resources. If an organization gives away an atom, it cannot easily recover it—once a product is transferred to a new owner, the atoms in that product no longer reside within the organization that created it.
The economy of atoms poses many organizational challenges that industry has evolved to overcome. It costs money and resources to move atoms along a value chain; businesses must pay for raw materials, fulfillment centers, shipping costs, production resources, and many other tools and processes. However, since the perceived value of atom-based products is often high, atom-based products are often priced higher than digital products.
Take, for example, revenue declines in the music industry. In 1995, the music market was worth $21.5 billion and relied on atom-based products such as CDs, cassette tapes, and vinyl records. With the rise of digital streaming services, this value dropped to $6.9 billion in 2015. By 2017, the old value chain, which relied on the economy of atoms, dropped to less than $1 billion in revenue. Again, it is important to remember that this also means that more than $20 billion in spending has disappeared from this segment of the economy.
The Economy of Bits
Digital bits are a renewable and abundant resource. When a stakeholder provides bits to an end customer or another person within the business, they retain a copy of the bits that is virtually indistinguishable from the original. The economy of bits is also known as the sharing economy.
Because bits are not physical, they require lower supply chain labor expenses than atoms, especially during distribution. This often decreases capital expenses (CAPEX) and operating expenses (OPEX). However, the economy of bits does require support infrastructure, such as a communications network or data center, which often costs millions of dollars to maintain.
The value of the data that the economy of bits produces can be quite high. For example, industries may create bits using embedded sensors, also known as the Internet of Things (IoT). These bits form useful data that can improve efficiency. By using techniques such as artificial intelligence and data analytics, actionable insights emerge.
Actionable insights can lead directly to the creation of value in the economy of bits. For example, monitoring of industrial processes via the use of IoT sensors can lead to a deeper understanding of material usage, equipment usage and maintenance cycles. This can lead directly to increases in productivity, decreased operating costs and other tangible process improvements.
Case Study: The Automotive Industry
With careful planning, the economies of atoms and bits can work together to deliver value. With digital transformation, organizations are able to use digital tools to increase atom-based product value and reduce overall costs. Take, for example, the digitalization of the automotive industry.
Car manufacturers need to manage many atoms throughout the economic value chain, from raw materials to individual parts to complete vehicles. However, the industry has transitioned many of its processes from atom based to digital.
For example, design software eliminates paper processes and facilitates collaboration between multiple designers. Web applications allow customers to view, purchase, and customize cars at home. Additionally, some maintenance takes place remotely using sensors and algorithms.
While the economy of bits is transforming some of the automotive industry’s processes, most of the value chain still relies on atoms. This transformation is ongoing. In the future, vehicle manufacturers may replace some processes with digital technologies, such as 3D printing.
How Digital Transformation Is Enabling the Economy of Abundance
Relying on scarce resources will likely place industries in a challenging situation in the future. As a result, many industries are aiming for an economy of abundance—and digital transformation is facilitating this transition.
A New Way of Doing Business
The economy of bits is becoming more prevalent in modern industries. Some companies are creating digital twins, which connect the economy of atoms to the economy of bits.
A digital twin is a virtual representation of a company’s atom-based system or physical objects. This twin collects real-time data and stores information from other digital platforms to facilitate decision-making and learning. As a result, industries are able to analyze their processes and implement changes to increase efficiency and abundance.
This economic transformation not only facilitates new business techniques but also affects societal value perception. The rideshare industry, for example, has shifted how consumers view transportation. With insurance, gas, repairs, and other fees, cars are expensive to own. Most consumers do not spend their days inside their vehicles, meaning they spend this money just in case they need to use a car.
However, some companies are leveraging this inefficiency to deliver a bit-based service to customers. Rideshare companies increase efficiency by allowing consumers to request rides when they need them. This increases vehicle usage and decreases overall transportation costs for the consumer.
With on-demand services, consumers may be less likely to purchase their own vehicles and more likely to move to car sharing. In the future, this shift will likely lead to a decrease in vehicle ownership and revenue declines for certain parts of the automotive industry, while stimulating growth in others.
Adapting to the Economy of Abundance
Digital transformation disrupts businesses in several ways, affecting the operations of incumbent players while enabling expansion for others. As the digital revolution continues and more industries harness advanced analytics, existing companies will need to adapt to these changes.
To adapt to the economy of abundance, industries must recognize and predict the challenges a digital economy may pose. Once stakeholders acknowledge pending challenges, industries will need to take steps to counter them. Take, for example, the difference between camera companies Kodak and Fujifilm. When the rise of digital cameras and camera-enabled smartphones made film-based cameras virtually obsolete, Kodak went bankrupt, while Fujifilm remained stable.
This is because Kodak based nearly its entire business on atom-based photographs. When digital disruption occurred, Kodak saw stock declines and revenue loss due to reduced demand. Fujifilm, on the other hand, had diversified its offerings, and only a portion of its business became obsolete.
Technology will continue to evolve, regardless of whether a certain industry is evolving alongside it. To avoid irrelevancy and to soften the blow of the digital economy, industries need to adapt.
Dependence of Digital Transformation on the Economy of Atoms
An industry does not need to remove all physical objects to achieve its economic goals. Many industries still rely on atoms to produce value. Maintaining a balance between the two economies will unlock opportunities for digital innovation, such as new semiconductor applications.
New Manufacturing Processes in the Digital World
Industries have the ability to adapt their manufacturing processes to compensate for transformation-related revenue loss. Facilitating a digital transformation effort—such as developing a digital twin or implementing IoT-enabled devices along a production line—reduces a company’s reliance on atom-based processes.
Many digital technologies, such as cloud computing, centralize access to a company’s data. A centralized data platform can inform business strategies and increase the quality of decisions across multiple processes, including manufacturing. In turn, this transformation reduces CAPEX and OPEX and increases overall efficiency.
Digital transformation can also improve operational flexibility and organizational resilience, allowing organizations to shift their manufacturing processes to meet the needs of modern consumers, national security, and the economy at large. For example, during the COVID-19 pandemic, Honeywell began manufacturing hand sanitizer at two of its plants. General Motors also shifted several factories to ventilator production after signing a contract with the US Department of Health and Human Services. These abrupt business changes could only occur because both companies had deep, data-driven insights into the abilities of their respective organizations.
Transitioning to a Digital Economy
The economy of atoms flanks the economy of bits. One cannot exist without the other; the entire world is made of atoms, and scarce resources remain vital to many industries. Concurrently, more and more industries are recognizing the power of data and digital technology.
With IoT-enabled devices and other modern technologies, industries have the power to harness actionable insights and facilitate data-driven decision-making. With better informed decisions, industries are able to implement changes that drive productivity growth in the face of the digital revolution.
By recognizing and addressing potential disruptions, industries mitigate the resulting loss of value that is often inevitable with transformation. Industries will also need to reexamine resource allocation, paying attention to issues such as water scarcity to prepare for future trends.
To invest in its economic resiliency, an industry does not necessarily need to partner with a tech company or invest in advanced technology like a quantum computer. Public and private sector players are able to adopt these practices; the key to relevancy is in an industry’s agility, or ability to adapt.
From the Industrial Revolution to Transformation
Industries evolve or die based on their ability to innovate. Technology has always been a disruptor. Obvious examples include the impact of the Industrial Revolution and the invention of the automobile. Digitalization is a natural next step in the innovation journey. A digital economy presents disadvantages, but recognizing these challenges and harnessing the power of bits can empower organizations—and society as a whole. Organizations that embrace Digital Transformation can use it to strike an optimal balance between the economy of scarcity and the economy of abundance. In doing so, they will be well positioned to thrive and grow well into the future.
Learn more about economic scarcity, digital abundance, and the road to new technology in this white paper from the IEEE Digital Reality Initiative.
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