So then, we have the individual, the government, business... and now we have the firm.... let me first define a firm.
A firm is an entity (open or closed) in society that is allowed by the laws of the land and within these laws to conduct business and create wealth for itself.
A firm takes in raw materials, employees, capital from society to create a product or service and sells it to members of the society willing to pay for it.
Now I think that is a reasonable and complete definition of what a firm is and what it does. I will look up some of my economics books and try to verify it...
How did business, which was simply open trade amongst the individuals in society, lead to the creation of the firm? Why did society allow the creation of a boundary between itself and business?
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Why this boundary?
Because the definition of a "group of people" united by a single mission/vision/purpose will create certain benefits that propel the Firm forward in its goal of delivering its product/service and accruing wealth - help it FIGHT the dissipative effects of random brownian motion, misaligned interests, diverse opinions that abound in the society at large...
The boundary thus
1) BRANDS the Firm EXTERNALLY, creating some "standard, or temporarily assumable" expectations in minds (both individual and collective) of external entities (suppliers, customers, regulators) who may have to interact with it. It creates a "market" (i.e. a body of shared expectations) in the "concept" that the Firm stands for (e.g. Search for Google, Erotica for Playboy and CPG for Clorox)
2) ALIGNS people INTERNALLY. I.e. homogenizes, and unidirectionally orients the interests of the people that are within the Firm (towards productivity, margins, performance), forcing them to over-ride their own individual desires/purposes (e.g. golf, couchpotato-ism, goofing off, writing poetry, chasing women etc.), and subjugate these to their "service" to the Firm as employees and principals. Their acceptance of the assumption (this may sound contrived, but it is intentional!) that of the value proposition of the Firm as an economic engine that will enrich OTHER aspects of their lives (marriage, kids, property) is what forces employees and principals to accept the 8-12 hour RENT that the Firm extracts of their personal time, in return for compensation of various kinds...
round the actions of the firm.
3) REDUCES Transaction costs WITHIN the Firm, relative to transaction costs ACROSS its boundaries. This one is of course, quite famous in economic theory. Where these Firm boundaries appear. Whenever there is a body of work that has economies of scale/scope, then an agglomeration of people that fence themselves off, can deliver that work with lower effort and dissipative intra-group transaction costs, than trying to ask a small part of a larger firm to fulfill this function. I am not sure what are the best places to read about this, but it has been beaten to death in the literature. There are also corrolaries and step-out observations... that show that in the future, as inter-human transaction costs (time needed for socialization, time needed to build trust, time needed to negotiate deals on non-standard services/products, time needed to commute for face-to-face relationship building etc.) continuously fall under the onslaught of technology... the "critical mass" size of an average Firm may actually FALL with time, leading to an atomization of the universe of firms. Fewer goliaths, ever more davids. You see this happening already in the long-tail of the internet - the entrepreneurs who operate at rarefied heights above Alexa 2000 need but a small pickaxe to mine gold... they will not find HUGE seams, but they will likely find enough opportunity to sustain small firms quite richly. These little firms outsource EVERYTHING (development, marketing, cust-service) and focus on ONLY one thing - creating a brand around a unique service... Ah! I digress.
4) CREATES a PERCEPTION of STABILITY that supports growth of confidence in internal people and external counterparties. A random association of people that are not governed by the Firm construct, may goof off, affiliate one day, leave the next etc. (kind of like an interest group, or a faux country club sometimes found embedded within a luxurious apartment compex). There is no sense of SOUNDNESS (this will be here tomorrow, and in a year from now, and in a decade from now) - which reduces the confidence (again, a state of mental conditioning) of potential employees, and potential financiers, suppliers and customers. Creating a Firm, and a show of COMMITMENT on behalf of the Principals creates that confidence, and enables further reduction in transaction costs. The longer a Firm has existed, and the larger it has become over time, the EASIER it is for a random person to gain this confidence. Ergo, you are more willing to buy a risky new router from Cisco, than from a po-dunk Valley startup. Same for the typical MBA grad - chase stable corporate jobs, over the risk of firms that may go belly up the day after tomorrow...
I think we may need to revisit the Open Vs. Closed aspect in another post/comment.
Right... I will take this one at a time... in the following order..
Definition: Boundary
An acknowledgement that the firm is a separate and distinct entity in society (separate from its owners, employees, etc).
and if I understand you correctly...
A legal agreement between the firm and individuals such that you either follow the rules and are IN or NOT..
4. Your statement: 'A boundary between the firm and society helps to brand the firm externally'
A set of people get together and say:
My P/S (A search engine) (called Google) is very good at meeting this need... (say Search)... so many people use us... society now considers our P/S synonymous with Search... society creates this brand called Google... which stands for search...
The firm called Google... the P/S called Google... they are used interchangably... the brand is with the P/S and this is critical... if I create a Product called Scamster.com... and let it roam there anonymously... and let it meet the most fundamental need in humans... there is a brand out there...
So the need for a boundary between the firm and society to create a brand is not justified... there may be other reasons for a boundary... but creating a brand is definitely NOT one of them...
Lemma 1: Society creates a brand, not the firm...
Lemma 2: A good product or service automatically leads to a good brand... that then rubs off onto the firm that owns it... which is a pity... but then that is the point of this discussion... what is the purpose of the firm...
Bottom line:
Boundaries between the firm and the society don't lead to better brands....
3. Your statement: 'A boundary between the firm and society helps to align people internally'...
Alignment is whether I believe that the purpose of the firm is aligned with my own purpose of interest...
"I pay rent to the firm and the firm compensates me"
In this case, I have boundaries between me and the firm, the firm and society and I am *never* going to be aligned with the firm... as you said, I only have 24 hours, the firm wants 12... I want to give 6.... I WILL be unhappy from this point on... either I work 6 and get paid less or work 12 and do less... how can this lead to alignment? It is a lose-lose situation...
If we use the 'legal contract' definition of boundary... then it cannot possibly create alignment... it can create forced or bonded labor... but not alignment... thus...
Bottomline:
The creation of the firm and whatever boundaries it has with society is a result of pre-existing internal alignment... the creation of the boundary does nothing to improve this alignment...
2. Your statement: 'A boundary between the firm and society creates a perception of stability and increases internal and counterparty confidence'
Nops...
Internal confidence is increased iff the firm is meeting true customer needs.... Everything else follows... Meeting true customer needs leads to good sales leads to good profits (hopefully... operational efficiencies addressed next) and leads to internal confidence... as discussed with brands, meeting customer needs have nothing to do with boundaries
Counterparty confidence is purely based on future expectations of meeting customer needs... I will do business with you based on my level of confidence that you can meet your obligations in the future.. you can meet your obligations iff you have good EBIT.. which is iff you have good sales and good operations... you have good sales iff you are meeting customer needs... (operations I get to next) Deshalb... again... meeting customer needs has nothing to do with boundaries in society... ergo... boundaries do nothing for counterparty confidence...
Boundaries create a perception of stability... in a small way I think... I will have confidence in Skype since eBay ownes it... but really then I am holding eBay liable... Skype is not able to monetize its P&S so there is really no way I am doing business with Skype... but the key here is 'creates a perception...' boundaries of Skype do nothing for Skype... eBay boundaries are the ones protecting Skype... so effectively boundaries are really not the issue here... it is the NPV of your future expected cash flow... which is directly related to either sales... and opex which is dealt with below...
Bottomline:
Boundaries between society and the firm do nothing to improve internal and counterparty confidence... these are only affected by how well the firm conducts business...
1. Transaction costs.. now you are Jousting...
Your statement: 'A boundary between society and the firm reduces transaction costs'....
I completely agree with you there... this is the ONLY reason a firm should draw a line between itself and society... for the benefit of society... since the reduction of transactional costs (selling costs, etc) are all good... lead to more efficient markets....
Therefore boundaries reduce transaction costs --> less SG&A --> better EBIT.. leads to more counterparty and internal confidence... (in addition to meeting customer needs...)
(btw Better brands lead to lower SG&A --> same benefits.... )
and I LOVE this part...
'...These little firms outsource EVERYTHING (development, marketing, cust-service) and focus on ONLY one thing - creating a brand around a unique service... Ah! I digress...;
You have hit my point of the head... the PURPOSE of technology MUST be to reach a point where individuals meet the needs of other individuals... firms become irrelevant to capture economies of scale...
So if one thinks along this path... where the firm is atomized so the firm disintegrates into society... I don't understand how one can also justify drawing lines between the firm and society
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