Firms Are Commodities

Overcoming emotions in business in the new Low Touch Society

Note: Low Touch Economy syntagma was coined by Board of Innovation- boardofinnovation.com)

Introductory thoughts

Over time, various theories about firms have shaped how companies behave within the market, the fashion of the business ecosystems, the management styles, or organizational cultures. For instance, firms have been perceived as financial constructs. In the entrepreneurial world of nonsensical numbers and chaotic competitions, the firm has become a place of processed unfair advantage.

However, a few thinkers proposed other meanings for firms.

As early as 1937, Ronald Coase[1], a young British Scholar, published an article titled “The Nature of the Firm.” In this piece the firm was taken from the black box paradigm and positioned in a more analytical framework based on a cost theory. Coase introduced the transaction cost as a variable related to the performance of firm. Beside the concept of subjective costs defined by James Buchanan[2], the framework can be named the cost theory of firm.

In 1954, Peter Drucker[3] put forward an equally radical idea for business. His book, The Practice of Management, argued that the whole world was mistaken in thinking that the purpose of a firm is to make money for itself. Drucker claimed that making money is the result, not the goal of a corporation. Accordingly, a firm is a social construct able to create clients. A social construct should have a mission and a vision in order to shape the culture of the organization. This is the social construct theory of firm.

In 1997, Clayton Christensen[4] introduced his seminal theory of disruptive innovation that has changed the way managers think about innovation. This is an outstanding study about disruption as a new business phenomenon and a “guide” about how the existent incumbents can succeed against disruptive technologies.

I propose another perspective in this article, namely a transactional approach. This aims to position and define the firm as a commodity. Firms are not emotional belongings, social constructs or cost depositaries; firms are commodities. They are built for sale. The theory may see the wealth assets (financial and business) in a continuous exchange. The main hypothesis is that speeding transformation is an important condition for socioeconomic development. In this context, firms should have features for creating the transactional framework. If your firm does not have any value related to the “capital” (formal or informal) market, you have a problem. In the entrepreneurial business, an emotional framework and hard work are not enough.

Here I focus specifically on the transactional approach of the firm and its applicability in an uncertain world. In the world of small and medium ventures applicability is affected by two main barriers: legal framework and expensiveness. Transactions are costly and, in many cases, banned by law. Moreover, they represent an informational gap that cannot be bridged through the existent analysis systems and software platforms.

In order to perform, besides the management efficiency (cost theory) and cultural aspects (social construct theory), firms should be financed. Capitals should be transformed as the essence of capitalism. In the realm of entrepreneurial venture, financing the business is still an abstract and mostly improbable concept. As a matter of fact, the accessibility is limited as only 5% of SMB are bankable, only 1% can access some grants (such as EU funds or other subsidies), and less than 5% access private funds through formal channels. The statistics remain similar for Europe and the USA.

The transactional framework

Conceptualizing the firm as a commodity may ensure the overall success. It creates a psychological connection between the management action and the value of the firm; it enhances management effort to create a capital-oriented network for the company, based on understanding the value of the business. This approach may create a framework at a new performant operational level.

A set of exchange aspects is a fundamental requirement for this analysis. As a commodity, a firm should bear within its structure the following elements, further developed below:

  • Specifications;
  • Price (market value): a valuation or a simulation of value more related to market availability;
  • Qualified market: investors and/or buyers who match with your profile, industry, interests.
  1. Specifications. Traditionally, the business plan or the pitch deck have been considered the key specifications for a transactional framework. In the last few years, other concepts have been designed, such as the Business Model Generation Canvas[5] and the Onepager document. The Canvas and the Onepager are valuable instruments that can speed up the process of creating business assets offers to the financial assets demand.
  2. Price. This should be perceived as the founders’ product. A business is not sustainable as long as it does not have an exchangeable planned journey. It is just something circumstantial, with some present scenarios, but essentially no future. Besides a set of behavioral qualitative aspects, a transaction requires a price.

In this context, one question is pivotal: How much is your business?

Nowadays, an answer to this question is costly. The traditional method is due diligence. Besides costly, methods are inaccurate. They are profoundly affected by the consultants’ and entrepreneurs’ behaviors and knowledge. So why spend a lot of money for a service seemingly affected by subjectivism and inaccuracy? I propose a scenario that shifts the approach from valuation to value simulation. This approach may give a better view on what the value of business is. What is the difference between the two?

  • Valuation is the financial method of a firm’s value calculation. The method is costly, as it implies specialized consultants and a long-lasting investigation approach. The method is used for acquisition or investment; it is an emotional journey that is extremely expensive. The result may be punctually used only in possible immediate transactions.
  • Value simulation is a subjective method of creating an image about the firm value. It can be done by selecting some quantitative and qualitative indicators, to be processed by an algorithm for simulating the value related to a business context. The method can dynamically be used for setting up scenarios and images about the business value and its evolution. It is a reliable tool for setting growth strategy and management education. Entrepreneurs can know aspects about the business value in any possible discussion and negotiations; in this way, it is a great knowledge asset.

  • 3. Qualified market. The qualified market for transacting firms is difficult to define and establish as long as the focus of management is on the immediate operational targets. That happens in any small and medium business venture. Therefore, in order to have a better image on the real performance of the business it is important to make a psychological shift to understanding the firm as a commodity. Then, the understanding of the qualified capital-based market can be done.

This is more than a search method. This is about creating a relationship framework. It is a process of knowing each other in a world where the process is affected by fear, distrust, and distance. Therefore, the only way to design a qualified market is a combination between a matchmaking mechanism and an explicit dialogue acceptance. Moreover, the possible market should be extended from national to regional and even to global levels. This can create a reliable framework for socioeconomic development.

The impact of the low touch society on firms’ transactional journey

We are living strange times. Organizations of all types are feeling the pressure to simultaneously wrestle with surviving the immediate crisis and planning for a radically changed future. How can these actions and strategies be designed?

History has shown that crises increase social and economic congestions and disconnections. Economy could lose its international vocation in a world grinded by nationalism, fear and hate. Therefore, we should understand that, besides protocols surrounding masks or social distancing, the context requires a profound transformation in order to heal the socioeconomic fractures.

Economic congestion is a concept related to a possible transactional process that is excessively costly and complex, due to the market imperfections, such informational gaps or lack of confidence. Congestions refers to exchanges that require large transaction costs, which subsequently render them inefficient or impossible. In effect, this congestion can throw societies back by many decades.

Therefore, the exchange relationship should be reframed. It is a matter of resilience and recognition of the context and its related vulnerabilities. It is important to ask some questions: How can market congestions be identified and understood? And how can they be healed?

It is also important to understand how the entrepreneurs and managers reframe their businesses.

Generally, the advanced digital connection and matchmaking might be the best economic scenarios for this time. Enlarging the investment market to the informal world and global level can speed the wealth transformation. This is a proposal for entrepreneurs to view their businesses as commodities. This is development!

The sins of the software platforms

The fundamental sin starts from the fact that technologists often see themselves as the solution rather than contributors to the solution. Therefore, there are many conceptual limitations in any digital initiative. For example, existent platforms that support the entrepreneurial companies to promote themselves are only databases administrated by filters. The digital interactions and virtual relationships are arguably difficult to manage. Therefore, for the sake of comfort and simplicity, technologists exclude any form of technologically and human-assisted matchmaking from the offered features. The result is that, in fact, the identified congestions are just partially addressed.

A closing note

As an entrepreneur, I contributed to the design and implementation of a matchmaking platform for entrepreneurs, small and medium businesses and investors (defined as people or businesses units having money) through ventacy.com. Our team has also developed a social communication wall and actions for qualifying the wealth market, including a set of services such as value simulating module and the Onepager builder. We see firms as commodities and we have developed an approach that creates a context for development. For this reason, we hope that our work will be an influential framework for others.

[1] Ronald Harry Coase was a British economist and author. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.

[2] James McGill Buchanan Jr. was an American economist known for his work on public choice theory, for which he received the Nobel Memorial Prize in Economic Sciences in 1986.

[3] Peter Ferdinand Drucker was an Austrian-born American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business corporation

[4] Clayton Magleby Christensen was an American academic and business consultant who developed the theory of “disruptive innovation”, first introduced in his 1997 book The Innovator’s Dilemma.

[5] See Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, 2010

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