Coase’s Law and Enterprise 2.0
Thursday: August 2, 2007 6:43 AM
One of the things that seems to undisputable is that the productivity of the enterprise continues to increase year by year. The basic reason for this is the reduction of interaction and transaction costs within different organizations. Nobel Prize economist Ronald Coase is the first economist of any consequence who has anything useful to say about information economics. Coase studied why organizations are formed, what guides their growth and what leads to their demise. He observed that companies will 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." That is now known as Coase's Law. As organizations grow, they become complicated and find it costly to coordinate what they do.
Coase observed that there are always companies that can deliver goods and services more economically than the dominant enterprises. If the more efficient companies become organized, they'll squeeze out those that have been unable to manage their resources. The only recourse for the inefficient companies is to shift inefficient functions to external suppliers. For example, a carmaker will buy windows from a supplier rather than manufacture them in-house if that's more cost-effective. (Note: Ford originally had a glass factory).
Enterprise 2.0 is the next evolutionary step in reducing the transaction costs within the enterprise. So if you need a reason to get involved and start sharing information, realize that your contributions are helping keep work in house and not moving outside the firm. Ok, that was a cheap shot or was it? Many people believe that Web 2.0 is just another IT fad. Yes, CRM was a flop and the dotcom bubble hit us where it hurt. That being said, customer management and the Internet fundamentally altered how business gets done. While Web 2.0 may have plenty of bumps and bruises, it’s coming. Around 13-16% of the organizations have social software implemented within the infrastructure. Although, most experts say that number is much higher. Social Software may be the next enabler to continue the trend of lowering the transactional costs through out the enterprise.
One of the things that seems to undisputable is that the productivity of the enterprise continues to increase year by year. The basic reason for this is the reduction of interaction and transaction costs within different organizations. Nobel Prize economist Ronald Coase is the first economist of any consequence who has anything useful to say about information economics. Coase studied why organizations are formed, what guides their growth and what leads to their demise. He observed that companies will 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." That is now known as Coase's Law. As organizations grow, they become complicated and find it costly to coordinate what they do.
Coase observed that there are always companies that can deliver goods and services more economically than the dominant enterprises. If the more efficient companies become organized, they'll squeeze out those that have been unable to manage their resources. The only recourse for the inefficient companies is to shift inefficient functions to external suppliers. For example, a carmaker will buy windows from a supplier rather than manufacture them in-house if that's more cost-effective. (Note: Ford originally had a glass factory).
Enterprise 2.0 is the next evolutionary step in reducing the transaction costs within the enterprise. So if you need a reason to get involved and start sharing information, realize that your contributions are helping keep work in house and not moving outside the firm. Ok, that was a cheap shot or was it? Many people believe that Web 2.0 is just another IT fad. Yes, CRM was a flop and the dotcom bubble hit us where it hurt. That being said, customer management and the Internet fundamentally altered how business gets done. While Web 2.0 may have plenty of bumps and bruises, it’s coming. Around 13-16% of the organizations have social software implemented within the infrastructure. Although, most experts say that number is much higher. Social Software may be the next enabler to continue the trend of lowering the transactional costs through out the enterprise.
