Size is Not a Strategy

In 1937, Ronald Coase, now professor emeritus at the University of Chicago Law School, wrote "The Nature of the Firm." The paper was so controversial that it took 54 years for the Nobel folks to reward Coase with the prize for economics. In his early twenties, while on a research fellowship in the United States, British-born Coase had seen that business organizations could perform some activities more efficiently than the market could. Transaction costs were lower inside the corporation. A carmaker might manufacture its own engines for less than it would cost to outsource them, for example.

But at some point, Coase wrote, "the costs of organizing additional transactions within the firm may rise." What's more, as the size and complexity of an organization grows, "the entrepreneur fails to place the factors of production in the uses where their value is greatest." Translation: Bigger is better -- but only up to a point. And that point is ever changeable, a function of the marketplace.

Today, Larry Downes says, the Internet and other technologies are lowering transaction costs in the market, reducing the optimal size for most business organizations: "The focus of corporate strategy has been on maximizing physical assets. More trucks, more factories, more people. Now the focus of asset management and asset exploitation should be on data. Screw physical assets! Organize your company, your strategy, and your execution around information."

In the emerging model, which Downes calls a "strategy machine," economies of scale do create competitive advantage. But those economies are rooted entirely in information. Standardize it, repackage it, use it to gain unique market insight, and turn it into products and services. "The better the information is," Downes declares, "the better the fuel, and the more things will come out the other end."

The Enron scandal, of course, tarnished the idea of information-based strategies and intangible assets: Why own pipelines when you can create fictional transactions? But fraud shouldn't diminish genuine insight. Henry Silverman, CEO of Cendant Corp., understands the "invisible capital engine." Since the early 1990s, Cendant has acquired a string of mostly troubled businesses -- Avis Rent a Car, Coldwell Banker, and the Howard Johnson hotel chain among them. They all had powerful brands. But more important, they owned great information assets: reservations systems. Listing services. Deep customer databases. Silverman spun off the hotels, the rental agencies, and the offices. But he kept the information assets and then franchised them back to the new owners of the physical assets. The more brands that Cendant collected, the more market insight Silverman had. "The firm could see overall trends," Downes says. "It could see local trends. And it could respond."

A strategy machine feeds off of market research, transaction data, and business intelligence. Early investments in information-based strategies produce new information products and services. Those, in turn, generate more ideas, which feed the next round of investment decisions. "Perhaps the most remarkable feature of the strategy machine," Downes writes, "is that the inputs and the outputs are the same. . . . Information is the input; better information is the output."

Can Big Companies Really Care About Customers?
It is late afternoon in the belly of the beast: a suburban outpost of Wal-Mart Stores, the largest company in America. All around, customers wheel big shopping carts crammed with big packages: big jugs of soda, big bags of mulch, big boxes of diapers. And it's all really, really cheap.

Indisputably, this is a big company that works brilliantly. Its throngs of customers depart contented. Not thrilled, not passionate, but satisfied. They've bought pretty much what they wanted and spent pretty much as little as possible. But is Wal-Mart the best that corporate America can offer? Or can we imagine something better?

In her landmark 1989 book, In the Age of the Smart Machine: The Future of Work and Power (Basic Books, 1989), Shoshana Zuboff predicted the enormous opportunity and risk inherent in the digital revolution. Her husband, James Maxmin, has been chief executive of Laura Ashley, Thorn Home Electronics, and Volvo UK. They are a true business-intellectual power couple. But ask for them along the winding country road in coastal Maine, where they've settled, and neighbors offer vacant looks. "Wait," says one after a moment. "You mean the people with the deer farm?"

Zuboff and Maxmin do, in fact, farm venison commercially on their property. But for the past six years, their defining preoccupation has been their new book, The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism (Viking Penguin, 2000), a daring attempt to reconceive the way that business is done.