CHAPTER 14
Should Firms Do Tasks Inside the Hierarchy or Pass Them Outside to Entrepreneurs?
What tasks should a firm do itself, and which tasks should it let a third party do? This is an important question for the design of a firm.
Ronald Coase, who is widely considered to be the father of the Theory of the Firm, observed that firms will expand or shrink until the cost of making something equals the cost of buying it.* In effect, would it cost less to do things in-house rather than getting someone else to do it?
The CEO of the firm, whether a startup firm or a Fortune 500 company, is the de facto architect of the firm’s organization. The first (but not the only) structural decision facing the architect of the firm is deciding which tasks should ...
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