Greg Satell

The first person to think seriously about how businesses function was Ronald Coase. In his groundbreaking 1937 paper he argued that firms gained competitiveness by reducing transaction costs, especially those related to information. In his view, firms could grow until the point that organizational costs cancelled out transactional benefits.

In the 1980s, Michael Porter built on this idea and made it more possible for managers to act on with his concept of value chains. His ideas provided managers with a blueprint for building competitive advantage. By increasing scale companies could create efficiencies along the entire value chain through either operational excellence or bargaining power with suppliers and customers. Costs would be further reduced through scale as firms moved up the experience curve.

In effect, competitiveness was the sum of all efficiencies and you created those efficiencies by building greater scale.

The world envisioned by Coase and Porter was relatively stable. Transaction costs were like weeds, which managers could gradually root out. Once the lines of competition were drawn, strategy was a mainly a matter of bringing “relative strength to bear against relative weakness,” as UCLA’s Richard Rumelt has put it.

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