The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Question 1

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Aim of paper

Answer 1

• aim of paper: analyse impact of IT on two important attributes of firm –
  1) firm size
  2) allocation of decision making authority among actors in firm

Question 2

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

AGENCY THEORY View of firm:

Answer 2

set of agency contracts (nexus of contracts) under which a principal (entrepreneur) employs agents (employees) to perform some service on his behalf

Question 3

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Agency theory

Answer 3

: agent has his/her objective in mind & pays no regard to welfare of principal or other virtues such as honour, team spirit, integrity, pride of achievement

Question 4

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Agency costs:

Answer 4

costs incurred as result of discrepancies between objectives of principal & those of agents; sum of
a) monitoring cots b) bonding costs c) residual loss

Question 5

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Agency costs: Monitoring costs

Answer 5

principal can hire another person to monitor agent & another person to monitor the monitor etc (monitoring costs)

Question 6

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Agency costs: bonding costs

Answer 6

agent needs to report to principle often (=time consuming)

Question 7

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Agency costs: (residual loss)

Answer 7

but despite monitoring & bonding activities, principal may still experience partial loss of welfare

Question 8

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

shareholder-manager conflict

Answer 8

as result of separation of ownership and management  agents who act in own interest at expense of shareholders

Question 9

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang
Empire building:

Answer 9

common to shareholder-manager relationship – manager makes big investment eg information system (with big office etc) as it shows power, perks, high salary + sign of career success

Question 10

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

manager-employee conflict:

Answer 10

employees may shirk, receive bribes, abuse decision rights + conflicting interests between departmental managers (eg manufacturing & marketing)

Question 11

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

how to solve manager-employee conflict:

Answer 11

• direct monitoring
• contracts available to control agents’ activities: employee compensation linked to performance, profit centres, cost allocation
• outside labour markets proxy fights & takeover risks discipline managers
• institutions help reduce agency costs due to monitoring: banks, auditing firms etc
• cultures & norms nurtured within firm play crucial role in mitigating agency costs: Japan – trust
• human nature is not as evil as agency theories depict it to be

Question 12

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Decision information costs:

Answer 12

costs of (mis-)communication, opportunity costs due to delay + suboptimal decisions; increases as decision right is moved higher
* if all decision made by employees, agency costs would be very high
 increase when right is pushed down

Question 13

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Internal coordination costs:

Answer 13

combination of agency & decision information costs; decision rights should be located where these are minimised
* cost structure varies from situation to situation
* both components from internal coordination costs stem from acquisition of information

Question 14

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Transaction cost theory:

Answer 14

there are costs in using a market as coordination mechanism & firm is alternative mechanism that facilitates economising on market transaction costs

Question 15

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

THE MARVELS OF MARKETS

Answer 15

• markets collect & transmit knowledge of particular circumstances of time & place that may be costly for central authority to capture  market itself is an information system which serves economy
• through price systems, markets provide coordination mechanism which induces individuals to pursue self-interest that benefit society as a whole

Question 16

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

various kinds of transactions costs associated with using markets
ex ante costs

Answer 16

costs of acquiring market information & negotiating deal

Question 17

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

various kinds of transactions costs associated with using markets
ex post costs

Answer 17

associated with preventing and dealing with contract default

Question 18

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Market transaction costs/external transaction costs:

Answer 18

coordination costs involved in using an outside market (eg costs of writing a contract and enforcing it);
must be incurred without adding intrinsic value to the software/product or service in general

Question 19

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

SOLUTIONS TO REDUCE TRANSACTION COSTS

Answer 19

• vertical integration of buyers and suppliers
• producing in-house rather than external sourcing of input factor: communicating, transporting goods, holding inventories etc will be avoided

Question 20

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Market transaction costs/external transaction costs:

operational and contartual costs:

Answer 20

operational: search cost; transportation costs
Contarctual: writing contracts
It can reduce contractual cost drastically

Question 21

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Economies of scale in operations:

Answer 21

: informational economies of scale & network externalities

Question 22

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Informational economies of scale:

Answer 22

technical information can be used in producing output on any scale
 firm possessing technically superior information can justify larger scale of operations; then backed with financial base, fixed costs of system & less exposed to risk, firm can continue investing in R&D to maintain supremacy in information, thus justifying further increase in scale and so on

Question 23

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Network externalities:

Answer 23

whenever a hardware base has more software products available in market, people want to have machines that conform to hardware standard and thus more software will then be produced for the standard
 arise from demand side rather than production site
* network externalities also exist in businesses such as trucking, airlines, railroads where firms achieve gains as they increase their geographical scope of operations

Question 24

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang

Vertical size:

Answer 24

measured by range of value chain which firm spans using its own hierarchy; vertically large firm would produce in-house good which is input to next stage of production process

Question 25

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang Vertical integration: advantages

Answer 25

reduction of market transaction costs achieved by depending more on hierarchy & less on outside market

Question 26

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang two counteracting forces against large vertical firm:

Answer 26

internal coordination costs & operations costs increase

Question 27

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang determination of vertical firm size:

Answer 27

trade-off between market transaction costs & sum of internal coordination costs and operations costs

Question 28

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang determination of vertical firm size:

Answer 28

trade-off between market transaction costs & sum of internal coordination costs and operations costs

Question 29

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang Horizontal size:

Answer 29

measured by number and corresponding share of markets in which firm sells its final goods and services; positively correlated with geographic scope of firms, with range of product line & with firm’s market share

Question 30

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang Horizontal size: advantages

Answer 30

benefits from scale economies increase = lower operations costs

Question 31

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang Horizontal size: disadvantages

Answer 31

: internal coordination costs increase with firm size, impact on external coordination cost depends on industry (network-type businesses reduced costs, trading business increased costs)

Question 32

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION OPERATIONS

Answer 32

IS improve quality, productivity + reduction of labour costs and agency costs

Question 33

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION OPERATIONS: Late-mover advantage:

Answer 33

favours late-adopting firms with better technology & its accompanying organisational structure  aggressively adopting great technology & thus pre-empting competitors

Question 34

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION OPERATIONS: HOW IT affects operations cost structure

Answer 34

*two ways in which IT affects operations cost structure: 1) intensifying economies of scale by allowing mass production 2) introducing flexibility & thus reducing cost of manufacturing/time needed to deliver goods and services

Question 35

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang TROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: RANSACTION PROCESSING

Answer 35

* large portion of service industry depends on Information Systems for basic business functions (banks, insurance firms) * modern IT has facilitated creation of value-added partnerships (VAP) through which set of independent companies work closely together along value chain  economic benefits through interorganisational information sharing

Question 36

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: MONITORING & PERFORMANCE EVALUATION

Answer 36

* IS (information system) contributes to reducing agency costs: by providing tool to monitor agents’ actions & by keeping track of performance records * optical scanners that allow management to see when agent starts day, inter-arrival times between store etc + track performance at individual level

Question 37

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: DOCUMENTATION & COMMUNICATION

Answer 37

* company status & changes in assets needs to be reported to SH & the IRS + employees must document and communicate their efforts  IS can be used to maintain corporate memory and reduce inconsistencies within orga = decreasing internal coordination costs

Question 38

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: DECISION SUPPORT

Answer 38

* IS function range: from information collection and computation to automated decision making via artificial intelligence techniques (that expand computer capability & can even solve unstructured problems that were thought to be only in human domain) * IS systems have reduced information costs: allowing decision makers cost-effective access to information and powerful tools = decision quality increases operational efficiency

Question 39

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang IMPACTS OF INFORMAITON TECHNOLOGY ON AN ORGANISATION

Answer 39

* impacts based on two attributes of orga: 1) location of decision rights 2) size of firm

Question 40

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang IMPACTS OF INFORMATION TECHNOLOGY ON AN ORGANISATION: IT & DECISION RIGHTS

Answer 40

* decision rights located where sum of info & agency costs minimised * IT enables more cost-effective way of processing relevant info up the stream and improves quality & speed of decision making = should be upper management task then – more centralised * IT enables ability to monitor & measure performance = reducing agency costs – more decentralised  hybrid structure: some decisions centralised, some decisions decentralised = depending on industry and cost structure of firm

Question 41

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang IMPACTS OF INFORMATION TECHNOLOGY ON AN ORGANISATION: IT AND FIRM SIZE

Answer 41

* firm size is determined by trading off external coordination costs, internal coordination costs & operations economies of scale  IT has direct impact on optimal firm size by changing cost structure

Question 42

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang reducing external coordination costs:

Answer 42

cost-effective IT can lead firms to turn to markets rather than integrate vertically with factor suppliers (eg airlines disintegrated reservations from hierarchical control – now bookings are done online over travel agency)

Question 43

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang reducing internal coordination costs:

Answer 43

cost-effective IT can lead to vertically/horizontal larger firms if internal coordination costs can be reduced (eg IT supports managing communication and coordination with subsidiaries)

Question 44

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang increasing degree of vertical integration/scope of firm activities:

Answer 44

in information-intensive industries, certain synergistic activities that were before too costly to govern can now be performed (eg building an integrated travel service – flight, rental car, hotel all with help of CRS)

Question 45

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang increasing scale economies of production and information:

Answer 45

horizontal growth because of reduction of internal coordination costs and market transaction costs that then lead to economies of scale (eg globalisation of classical service business such as auditing, advertising, general trading)

Question 46

The Impact of Information Systems on Organisations & Markets – Gurbaxani & Whang network-type businesses benefit from scale economies in operations & savings in horizontal market transaction costs:

Answer 46

ability to control horizontally large corporation (mergers)