Rethinking the rationale for the firm
Rethinking the rationale of the firm. In his seminal essay, “The Nature of the Firm,” Nobel Prize-winning economist Ronald Coase argued that firms exist to economize on market transactions. All economic activity incurs transaction or interaction costs—the costs (and time) required to find resources, get relevant information about them, negotiate to gain access, monitor their use, and switch from one source to another if needs are not being met. Coase simply and powerfully argued that, under certain circumstances, firms provided a more efficient mechanism to access and use resources than do open-market transactions. In this view, efficiency was the primary motivation for the rise of firms. It certainly seemed to explain the rise of modern industrial firms as described in such classics as Alfred Chandler’s Strategy and Structure.
As information technology systematically reduces interaction costs both within the firm and across firms more broadly, the very reason for the firm’s existence is changing [my emph]. Perhaps we should reasses the continuing rationale for the firm, shifting it from efficiency considerations to capability building and systemic innovation. This argument differs from (a relates somewhat to) that of the core-competencies school of strategy…That school contends that core competincies of the firm should serve as teh basis for strategy…
From our dynamic perspective, the primary role of the firm should be to accelerate the knowledge and capability building of its members so that all can create even more value.
- John Hagel III and John Seely Brown, The Only Sustainable Edge, p. 21-22 (2005)
Upon re-reading this, it seems that the true heaviness of that passage comes from learning what these guys mean when they use jargon like “capability building” and “interaction costs”…because they have really elaborate definitions that lend the concepts a richer meaning.
For example, in the preceding page, the authors propose three new axes on which to achieve competitive edge (i.e. “advantage”): Dynamic specialization, Connectivity and coordination, Leverage capability building. That sounds like meaningless jargon by itself, but it’s genius in context ;-)
I’m going to try and analyze that section in a forthcoming post and correlate their concept of advantage with Umair Haque’s frameworks (markets, networks, communities as the most efficient modes of organization and coordination; DNA; good v. evil)
