Over the last few weeks, we have been discussing some ideas of how businesses will be transformed by forces under the description of Wikinomics. Particularly, we have been reviewing ideas presented in the recent book Wikinomics, How Mass Collaboration Changes Everything.

In 1937, an English socialist named Ronald H. Coase published a paper entitled “The Nature of the Firm.” He questioned why individuals join together in companies rather than act as individual buyers and sellers. One of the main reasons he found had to do with the cost of information. Producing a product from a loaf of bread to a car requires close cooperation and common purpose. It is impractical to break down each process into a series of separately negotiated transactions. Each transaction would incur individual costs that would outweigh any savings.

First of all, there would be search costs to find appropriate material suppliers. Then there would be the contracting costs and, finally, the coordination costs of meshing it all together. The corporations concluded that it made more sense to perform as many functions as possible in house, resulting in the emergence of the vertically integrated corporation. A corporation will, therefore, expand as long as it is cheaper to keep an operation in house rather than going to the open market. Conversely, if it is cheaper to go to the marketplace, do not do it internally.

Today, the Internet has made many transaction costs so low that a firm should shrink until the cost of performing a transaction internally no longer exceeds the cost of doing it externally. Today, transaction costs within many corporations are more onerous internally than over the Internet in the marketplace.

The new entity is the business web – clusters of businesses that come together over the Internet. Each company maintains its own identity but creates more wealth together than they could do individually. The future is pointing toward more collaboration across borders, cultures, companies and disciplines for companies to succeed. Effectively, it’s globalization or die.

So, how can business managers operate with the emergence of this perfect storm?