The Internet redefines the firms and their transaction costs

The Internet redefines the firms and their transaction costs

A firm is defined by all the activities which are more effectively coordinated by a hierarchical organization than by a market²²; the development in information technologies will modify this frontier, bringing about an evolution in internal coordination methods - these will become freer and less restricted by procedural constraints - and in relationships with the outside world which will more so now than in the past, give way to closer and more strategic ties between firms.

An analysis of this type, which has already been conducted in connection with the EDI, hints at a reduction in the average size of companies, more complex production processes and improved distribution of activities, each hierarchical entity concentrating on a specific activity of the value chain. What grounds are there for believing, today, that the development of the Internet²³, intranets and extranets will be more successful than EDI was in its time and that it will be sufficient to bring about a closer relationship between firms?

Previously, a company was characterized essentially by a specific strategy based on internal information. The Internet could deeply change this situation insofar as the exchange of strategic data:

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  becomes technically possible: progressive standardization of protocols and applications makes it possible to interconnect management systems, technical or commercial databases at extremely low cost and more efficiently than with EDI-type procedures;
  
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  often proves to be advantageous: companies actually have a difficult choice - either they keep such strategic data private, which gives them a long-term advantage over their competitors if they adopt the optimal policy; or, to a limited extent, they exchange their strategic information and use it cooperatively, which ensures greater efficiency, although advantages are distributed amongst all the parties involved. Such cooperation between competitors²⁴ already exists in the field of technical research and standardization;
  
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  often appears to be the only choice: employees of hierarchical companies progressively give way to experts who are more independent and who are less an integral part of the firm which employs them. In order to carry out their work, they have to exchange information with their peers and ultimately have closer links with their profession than with their employer. It is at this level that the issue of secrecy or cooperative competition actually arises; moreover, the secrecy which surrounds internal communications is rendered less secure by modern means of coordination, such as e-mail, which make it possible to trace all strategic information exchanged within a company - such information can be used in the courts by a competitor (cf. the current dispute between Microsoft and Netscape).
  

Companies will be increasingly characterized by the type of control they exercise over access to their strategic resources: technical innovations, and customer databases, projects, research and development, etc. Current debate on industrial espionage serves to illustrate companies’ confusion at their relative loss of control over their internal information. Some firms cling to the former model of a company at war with its competitors and carefully isolate their internal networks. Others, however, seek to take advantage of the increased efficiency provided by the networking of their strategic data. It is likely that the companies active in the intermediation sector will adopt this second type of model; indeed, this can already be seen in the dynamic of Internet sites.