Beruflich Dokumente
Kultur Dokumente
Informatuon
Systems on
Organizations
and Markets
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The
adoption of information technology (IT) in organizations has
been growing at a rapid pace. The use of the
technology has evolved from the automation of
structured processes to systems that are truly
revolutionary in that they introduce change
into fundamental business procedures.
Indeed, it is believed that "More than
being helped by computers, companies
will live by them, shaping strategy and
i
structure to fit new information
technology [25]" While the importance of the relationship between
information technology and organizational change is evidenced by the considerable literature on the subject, l
there is a lack of comprehensive analysis
of these issues from the economic
perspective. The aim of this article is
I
to develop an economic understanding of how information systems
affect some key measures of organization structure.
This article analyzes the roles of information systems, how they evolve and how
they affect organizations and markets. In particular,
60
Agency
AGENCY
COSTS
INTERNAL
COORDINATION
COSTS
DECISION
INFO~ON
C~
--Monitoring Costs
--Bonding Costs
--Residual Loss
,,, ,,,
,,,
oe1mion R l g h t B I n
Organhra~lon8
62
January 1991/Voi.34,No.l/COMMUNICATIONSO F
THE
ACM
Cost
OF M a r K m
Theory
Agency theory focuses on organizational problems that arise from informational considerations and on
how they are overcome so that
firms are a viable form o f economic
organization. While the theory provides useful insights into organizations, it cannot explain why, u n d e r
certain conditions, a firm can be a
more efficient form o f institution
than a market. Transaction cost
economics posits that there are
Why a Firm?
T h e preceding a r g u m e n t supports
the rationale behind the m a r k e t
mechanisms o f capitalist economies. Consider, however, another
p r e d o m i n a n t feature o f these econo m i e s - t h e firm. A firm is essentially a way o f bypassing the m a r k e t
system, since within a firm production is coordinated by a central authority (entrepreneurs or managers). Recalling the value o f markets,
63
E)rrERNAL
COORDINATION
COSTS
OPERATIONAL
--Search Costs
--Transportation Costs
--Inventory Holding Costs
--Communications Costs
or:.
MARKET
TMNSACI'ION
COSTS
G4
of A Finn:
Of Theorlom
January 1991/Vo1.34,N o . I / O O M M U N | G A T | O N S O F T H E
A(~M
Transaction
Costs
InternalCoordination Costs
and Operations Costs
Total Co
~S
66
other hand, general trading companies may face a steep rise in external coordination costs as they
e x p a n d globally. In any case, horizontal firm size is also d e t e r m i n e d
by the t r a d e o f f between operations
costs, external coordination costs
and internal coordination costs.
In this article, the firm is modeled as facing three costs compon e n t s - i n t e r n a l coordination costs,
external coordination costs and
operations costs, whose structures
a r e as described above. T h e optimal
(horizontal and vertical) size o f the
firm is d e t e r m i n e d by trading off
these costs. It is i m p o r t a n t to note
that the underlying cost structures
are closely related to the acquisition
o f information and can therefore
be affected by the use o f m o d e r n
IT.
OrSlanlzatlonn
And
Information
SYstems
$yl~eme
An information system in an organization has multiple roles: a) it increases scale efficiencies o f the
firm's operations (operations); b) it
processes basic business transactions (transaction processing); c) it
collects and provides information
relevant to managerial decisions
and even makes decisions (decision
support); d) it monitors and records the p e r f o r m a n c e o f employees
and functional units (monitoring
and p e r f o r m a n c e evaluation); and
e) it maintains records o f status and
change in the fundamental business
functions within the organization
and
maintains
communication
channels (documentation and communication). This list is not exhaus-
Operations. I n f o r m a t i o n systems
can have a direct impact on the productivity o f manufacturing and service operations. Recent advances in
factory automation, CAD/CAM,
robotics, CIM ( C o m p u t e r Integrated Manufacturing) and optical
scanner technology have contributed to i m p r o v e m e n t in quality and
productivity as well as the reduction
of labor costs and agency costs. An
often-observed outcome o f this
t r e n d is "late-mover advantage"
which favors late-arriving companies with the better technology and
its accompanying organizational
structure. J a p a n e s e auto makers,
Korean steel makers, and clothing
retailers like Benetton and the Limited have aggressively a d o p t e d new
I T and p r e e m p t e d earlier movers
in their industries [42, 70]. 11
In this regard, I T has affected
the operations cost structure o f a
firm in two different ways. First, I T
has intensified economies o f scale
in operation by allowing mass production on an u n p r e c e d e n t e d scale
and facilitating the availability o f
informational
scale economies.
Further, I T has introduced a high
degree o f flexibility in production
(for example, t h r o u g h flexible
manufacturing systems) and significantly r e d u c e d the cost o f manufacturing a b r o a d p r o d u c t line. T h e
benefits o f flexibility have been felt
not only in the mass customization
o f products, but also in the speedy
deliveries o f goods and services
[37].
Transaction Processing. A large
portion o f the service industry,
which represents an increasing portion o f the American economy,
HFor example, the new K w a n g y a n g plant, a
highly a u t o m a t e d K o r e a n steel mill, t u r n s out
933 tons of steel per worker a year, as comp a r e d to a n average of 528 tons in J a p a n a n d
262 tons in the United States [42].
d e p e n d s heavily on information
systems for its basic business functions. Commercial banks, investment banks, insurance companies
and credit card companies spend
u p to five percent o f their revenue
on IS-related activities. Many employees in this industry are simply
m i d d l e m e n to link customers to information systems. T h e Automatic
Teller Machine, Shelternet (a computer-based mortgage network
built by First Boston, [70]) and
Eaasy Sabre (a scaled-down version
o f AMR's Sabre reservation system,
[70]) represent examples in which
even this m i d d l e m a n is eliminated.
Recent advances in I T have obviously introduced a great deal of
operational efficiency in the market
economy by providing more efficient market mechanisms and thus
lowering the associated market
transaction costs [43]. In particular,
m o d e r n I T has facilitated the creation o f value-added partnerships
(VAPs) through which a set of indep e n d e n t companies work closely
together along the value chain [35].
McKesson Corporation, one o f the
largest distributors o f pharmaceuticals, introduced a sophisticated
order-processing system into its
business with i n d e p e n d e n t drugstores [17]. A retailer makes a
r o u n d of her drugstore to check if
any items are out o f stock. Using a
special optical scanner, the magnetized characters o f every out-ofstock item are scanned; this is the
o r d e r entry process. T h e o r d e r e d
items arrive the next day packed in
the sequence of the o r d e r entry.
Hence, a single r o u n d t h r o u g h the
store aisles is enough to restock the
items. This new system helped retailers to reduce inventory and
labor costs. With cost-effective IT,
market transaction costs have been
driven down considerably, and
many firms now seek to r e a p economic benefits t h r o u g h a variety o f
similar interorganizational information-sharing arrangements.
Monitoring~Performance Evaluation. From the perspective of
agency theory, the availability o f
6~
68
systems help Hertz in fleet scheduling [20] and Avis with its fleetpurchasing plan [6]. The airline
industry is dependent on computer
programs for its pricing decisions, a
practice known as yield management [70]. Homart, a subsidiary of
Sears, runs a mixed integer program to determine the tenant mix
within a newly developed shopping
1991/Vol.34, No.1
69
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users of IT. Another such example is the Limited, a leading clothing manufacturer with sales of
$4.6 billion, which pioneered the
use of I T in the garment industry. Using a global telecommunication system, the Limited manages a highly integrated chain of
design, manufacturing, marketing, distribution and retailing
that spans the world [70].
In some information-intensive
industries, certain synergistic activities that were previously too costly
to govern and were therefore not
performed, may now be amenable
to hierarchical governance. In this
case, I T has contributed to increasing the degree of vertical integration or
COMMUNICATIONS OF THE
71
Acknowledgments.
T h e authors have greatly benefitted from the constructive comments o,f Cynthia Beath, Chuck
Holloway, Evan Porteus, Neal
Stoughton, Nick Vitalari and the
anonymous referees and the editor.
T h e research was supported in part
by the UCI Committee on Research
and the ]Fletcher Jones Foundation.
References
1. Ackoff, R.L. Management misinformation systems. Manage. Sci. 14,
4 (Dec. 1967), BI47-B156.
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