Ana Anjdelic responded to my latest post with some very interesting points. She commented that some of my suggestions would significantly increase transaction costs, specifically information search costs incurred by firm. Ana notes that increasing transaction costs in this way contradicts (or runs logically counter to) Coase’s view of the firm. She writes:
It’s true – knowledge “reshuffling” is key to innovation (or, as you said “when it comes to thinking, we need more disruption, not less.”) This reshuffling, however, creates a lot of “noise” (how do you know what you are looking for before you find it?), and ultimately accounts for less-than-efficient organization, because it creates crazy transaction costs.
And reduction of transaction costs is what made firms show up in the first place (in opposition to markets), as Ronald Coase would have said.
So, the very condition that’s critical for generation of new knowledge and/or recombining old and new knowledge is actually detrimental for efficiency. The question then is, how to combine organizational efficiency with innovation?
I think Ana is right to invoke Coase’s theory and to be concerned about drastically increasing transaction costs and it got me thinking.
My view: while historically firms were able to lessen the search costs associated with valuable information, this no longer applies. Firms are no longer the most efficient and effective means for collecting and sourcing innovative ideas and insights. Therefore, as Coase’s theory would predict, firms may need to go beyond their four walls an turn to the market, effectively outsourcing (or co-sourcing) a large portion of idea generation. Additionally, firms can further reduce information and search costs by leveraging technologies that tag, catalog, and organize knowledge–both within and outside firms. Continue reading