In Praise of Walls

In recent years, a vocal school of business experts has argued that leaps in information technology have made possible a new world of seamless collaboration among businesses, one that will bring enormous gains in efficiency and flexibility. Indeed, the experts counsel, executives should look for opportunities to tear down the “walls” a round their organizations, merging their companies into great, amorphous “enterprise networks” or “business webs.” Like other utopian visions, however, this one is full of hidden dangers.

It’s true, of course, that computer networks in general and the Internet in particular have made it easier for companies to share information about supply and demand, to blend their processes and to outsource more and more activities. Such efforts can enhance industry productivity by removing the friction from business transactions. But they also have the potential to undermine a company’s distinctiveness and hence, in the long run, its profitability.

Senior managers, then, face a central strategic challenge: They must defend their companies’ competitive advantages — many of which were built, in one way or another, on the proprietary control or distinctive use of information — while at the same time allowing information to flow freely in and out of their organizations through the general IT infrastructure that has been developed over the past decade. As they consider this task, they should bear in mind that new technologies will never conquer cutthroat competition. Companies will always need the walls they have so carefully erected over the years to protect their advantages.

The Coase Effect

The postcompany school has made some radical claims that may, given discussions of “coopetition” and the realities of ever increasing outsourcing, resonate with many managers. One of the most avid proponents of this concept, business consultant Don Tapscott, has gone so far as to herald the death of the stand-alone company as the fundamental unit of commerce. In a 2001 Strategy+ Business article entitled “Rethinking Strategy in a Networked World,” Tapscott argued that “in the future, strategists will no longer look at the integrated corporation as the starting point for creating value, assigning functions and deciding what to manage inside or outside a firm’s boundaries. Rather, strategists will start with a customer value proposition and a blank slate for the production and delivery system.&