Why do companies exist and do they need to?


This question might have seemed pointless about 10 years ago. A company, in its popular sense, was the most effective way to coordinate resources (such as people, time, materials, money, ideas) to viably produce goods and services. It still remains an effective mechanism, the difference today is that alternative means are available. What is pertinent about these alternative means is that they have the potential to change the economics of how business produces and distributes its merchandise. More than that, these alternative means overcome some of the significant limitations and constraints of the traditional design of business. Consider for example, that if a retailer wants to expand into a new market, it has to get physical product to customers in these new markets. 10 years ago (I use ten years in the proverbial sense throughout his post) the best way to do this, was to setup a bricks and mortar store as the mechanism for transacting with customers. This involved significant risk, because of the uncertainty that the investment in buildings, inventory, staff etc. may not bear fruit. The costs of performing a transaction with a customer in a new market were implicitly high because of the mechanism used. To illustrate a point about transacting mechanisms, consider how the availability of the internet and the virtual storefront changes the economics of retailing in a new market. The cost of a bricks and mortar infrastructure is obviously eliminated, which alone significantly reduces how much value is at stake.  Clearly the virtual storefront is not sufficient in itself to constitute a business in a new market, a logistics infrastructure, a financial infrastructure etc. is still required. The model for getting merchandise into customers hands will change and it will no doubt have its own risks. The point however, is that the simple act of digitizing the retail storefront significantly lowers the financial and bureaucratic cost of transacting in a new market. Digitization lowers the cost of the transaction and this redefines the risk. Amazon is a case in point. It’s history is vastly different from a traditional retail venture. For starters it retailing mechanism was nowhere near as capital intensive as say, starting up a Walmart store. Amazon began in a garage and within two months sold product in 50 American states and 45 countries. A traditional bricks and mortar retailing model could never scale up this way. The point is not that bricks and mortar is dead, the point is not that the internet is the proverbial “way to go.” The point is that as transaction costs come down it offers a new paradigm for conducting business and, more importantly that the new paradigms have the potential to overcome some of the key limitations and constraints faced by traditional models of business. In an economic climate where growth and development is nowhere near the effort and investment made to generate it, perhaps it’s time to look at alternative paradigms. The digital economy offers huge promise.

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