06 August 2007

Coase's Law and Enterprise 2.0

A recent Collaborage blog entry mentioned Nobel Prize economist Ronald Coase as being the first economist of any consequence who has anything useful to say about information economics. 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).

Todd also says that "Around 13-16% of the organisations have social software implemented within the infrastructure." Impressive figures. I'd like to know where he got them or if they are just a gut feeling. In any case, Collaborage is an excellent blog.

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