The Amazing Shrinking Firm

from Medium

In his seminal paper, The Nature of the Firm, the great Ronald Coase stated that the optimal size of a firm in an industry will decrease as transaction costs in the industry decrease. The Internet has proven to be a singular tool to reduce transaction costs across almost every industry, so according to Coase, the size of the firm will shrink in response. My view is this phenomenon has only begun and will accelerate dramatically over the next decade.

The on-demand economy. The consumerization of enterprise. The bottoms-up economy. Micro-schools. Citizen journalists. Social media. All of these are symptoms of the same phenomena: the decimation of the firm. Transaction costs are being drastically lowered, enabling small companies to do what large companies used to do.

Everyone understands that firms can be smaller. The non-obvious conclusion is that firms should be smaller.

More here.

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One Comment

  1. I think this was a really interesting article to read since it was theorizing about the future back in 2015. So now in 2019, almost 2020, we can look back at Phillip Class’s predictions and research into whether his predictions were correct or not.

    I think Phillip did have the right idea that the
    ideal size of firms will begin to decrease and I believe we are still in that
    era today. With online retail becoming such a large player and disruptor within
    almost every industry, smaller firms are thriving. With lower overhead costs
    and more agile ability, small firms are able to maneuver and capitalize on this
    industry disruptor substantially more than large companies. According to the
    Census Bureau’s Statistics of U.S. Businesses from 2015, 96.4 percent of companies have fewer than 100, and 84.9 percent of companies have fewer than 20 employees! Within a time where consumer preferences and profitable opportunities are shifting so rapidly, smaller companies’ agile abilities are able reap the benefits more efficiently and effectively.

    Phillip spoke briefly about
    the larger companies’ techniques to combat this shift in ideal firm size and I
    think he brought up a great example that I am also seeing more often. Companies
    are shifting to a “team” or “group” basis to help decentralize power and
    increase agility within the company. Behemoth companies are beginning to
    understand that agility will beat scaling and they are taking corrective action
    to apply this principle. Within the large companies that I have worked for, I
    have seen a similar principle of decentralizing power through the use of
    teams/groups. I think this is an effective strategy to empower the employees
    and I believe it is a strategy that will continue to be implemented within the
    large companies.

    Lastly, I did not recognize the shift in school size which he continued about. Rather than splintering into smaller more specialized schools, recently I have found an increase in secondary education support organizations that serve as a complementary to existing schools. Rather than his prediction of schools become obsolete to more specialized schools due to the economic principle of economies of scale, there has rather been an increase in complementary educational service such as: educational apps, in-class curriculum changes, after-school education programs, etc. All in all, I really enjoyed reading back on a predictive theory that was based in 2015 and evaluating which of his predictions came to form.

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