Rhonda Germany and Raman Muralidharan

The availability of information is perhaps the single most significant contributor to corporate change. As Nobel laureate economist Ronald Coase concluded almost 70 years ago, the boundaries of the firm are defined by its transaction costs. “A firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market,” Mr. Coase, now a professor emeritus at the University of Chicago Law School, wrote. In the past, those costs were determined largely by information. Who could supply the needed goods? At what quality? For what price? Were better prices available? Better quality? Could delivery be guaranteed more quickly?

Hard to acquire and imperfect, information contributed to high transaction costs, which in turn led firms in many industries to vertically integrate…Today, as the costs of sharing and using information fall, companies and their industries have an impetus to “de-integrate,” according to the Coase theory. The trend is accelerating as the Internet and other services give companies access to even more information. The impact: The threshold of cost set by the availability of information can no longer define the firm’s or the industry’s boundaries.

The result is industry value chains that are undergoing almost continuous evolution. The morphing value chain – you might call its new form a value web, an extended enterprise, or (our favorite) a value constellation – challenges firms that thrived with an integrated approach. The best value-capture mechanisms may now lie outside the individual firm’s boundaries. Yet the value created by a firm may be necessary to the viability of the entire constellation. The nature and definition of the firm are also undergoing profound changes, thanks to the ubiquity of information. The firm is shifting from a self-contained value-creation and -capture apparatus into one part of an interdependent community whose members continually negotiate responsibility for value creation and the right to value capture.

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