The intrinsic structure of companies has long been a subject of study, most famously by Ronald Coase, the eminent British economist and recipient of the 1991 Nobel Prize in economics. In 1937, Coase published a seminal paper, The Nature of the Firm, in which he explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace.
However, markets are not perfectly fluid. Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on. Firms thus came into being to make it easier to get work done. A well managed company tries to achieve a good balance between the work that gets done within and outside its boundaries.
Over the past few decades, the firm has been going through dramatic changes, driven by both advances in information technologies and the heightened competitive pressures brought about by globalization. Fundamental changes have taken place in the structure of firms and in the overall flow of goods and services in the economy. As this 2005 IBM study noted:
“The nature of competition - increasingly intense, global and unpredictable - requires strength across the board. So the objective is to decompose the enterprise into its component parts, understand with great precision what is truly differentiating - where the enterprise has strengths and weaknesses - and then make decisions about how to build, buy or partner for world-class capability.”
“In this model, companies can focus their energies on their true point of differentiation, instead of trying to master many domains and ultimately squander competitive advantage by dispersing focus and investment. Rather than existing as static and fixed organizations, more enterprises could essentially become an aggregation of specialized entities with complementary interests - expanding, contracting and reconfiguring themselves in a way that best adapts to or even anticipates market dynamics.”