Image: Stuart Bradford

The new economics of semiconductor manufacturing now makes it possible to produce chips profitably in much smaller volumes. This effect may not be very important for the fabs that make huge numbers of high-performance chips, but then again, that segment will take up a declining share of the total market. This isn't because demand for those chips will shrink. Rather, demand will grow even faster for products that require chips with rapid time-to-market and lower costs, such as consumer electronics.

Competition is shifting toward a new playing field. Now what matters is making a large variety of products, each product in small volumes and each perhaps for only a short time. Examples of these growing markets include cellphones and MP3 players, which are subject to trends in fashion. Then there are the thousands of chips that are increasingly finding their way into our homes, offices, automobiles—and into every nook and cranny of our lives.

You often hear executives in the semiconductor industry sighing for the next great vehicle for industry growth, like the PC in the 1990s and the minicomputer before that. Well, perhaps the next killer application won't be one thing but rather scores or hundreds of things, none of which require the raw performance that only the biggest, most technically advanced fabs can provide. Perhaps what the next wave of killer apps requires is a new business model, made possible by such things as TPS.

Throughout history, business models that reduced the minimum effective size of factories have transformed entire industries. Steelmaking was transformed by the minimill's ability to efficiently produce small batches of steel, business computing by a succession of ever-smaller machines starting from mainframes for payrolls and ultimately leading to the personal computer, and photographic film processing by fully automated one-hour film-processing machines, which were then replaced by digital photography. Because these transformations offered customers entirely new ways of doing things—rather than simply making the existing model work a bit better—we call them disruptions. The agents of disruption are invariably business models (although these models often come with a new technology wrapped inside).

Toyota's system has transformed the automobile industry. Fifty years ago, the industry offered far fewer car models because its scale curve was high—you had to sell a lot of units of a given model to be cost-effective. For example, in the 1950s, Chevrolet sold 1.5 million Impalas per year, a number that was considered high but not extraordinary. Now the industry regards 250 000 units per year as high, and many models sell at only a fifth to a tenth of that rate.

This change came about because of the decline in the minimum economic scale of a car factory. Some companies have handled the transition better than others. GM, once the paragon of massive mass production, posted a record $39 billion loss for 2007, providing yet more evidence of how hard it can be to emulate Toyota.

But there's more. To gain full benefit from the advances made on the manufacturing side, you may also need to restructure product development and design, purchasing, marketing, service, and other aspects of your company. That is, you must create a new business model.

Consider how the emergence of standardized modular components has made it possible for a technically untrained person to select among them and order a precisely configured computer, which a company can assemble and deliver in three days. This business model, made famous by Dell, has created new markets, industries, and subindustries.

Now imagine this modular design idea being extended to semiconductor devices. If that happened, even MBAs might be capable of specifying the components of their very own chips to be delivered to their doorsteps. Well, maybe not MBAs, but you get the picture.