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

1
Q

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

Aim of paper

A
  • 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
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2
Q

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

AGENCY THEORY View of firm:

A

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

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3
Q

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

Agency theory

A

: 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

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4
Q

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

Agency costs:

A

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

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5
Q

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

Agency costs: Monitoring costs

A

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

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6
Q

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

Agency costs: bonding costs

A

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

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7
Q

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

Agency costs: (residual loss)

A

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

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8
Q

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

shareholder-manager conflict

A

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

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9
Q

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

A

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

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10
Q

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

manager-employee conflict:

A

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

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11
Q

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

how to solve manager-employee conflict:

A
  • 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
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12
Q

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

Decision information costs:

A

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

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13
Q

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

Internal coordination costs:

A

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

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14
Q

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

Transaction cost theory:

A

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

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15
Q

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

THE MARVELS OF MARKETS

A
  • 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
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16
Q

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

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

A

costs of acquiring market information & negotiating deal

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17
Q

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

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

A

associated with preventing and dealing with contract default

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18
Q

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

Market transaction costs/external transaction costs:

A

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

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19
Q

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

SOLUTIONS TO REDUCE TRANSACTION COSTS

A
  • 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
20
Q

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

Market transaction costs/external transaction costs:

operational and contartual costs:

A

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

21
Q

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

Economies of scale in operations:

A

: informational economies of scale & network externalities

22
Q

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

Informational economies of scale:

A

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

23
Q

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

Network externalities:

A

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

24
Q

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

Vertical size:

A

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

25
Q

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

Vertical integration: advantages

A

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

26
Q

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

two counteracting forces against large vertical firm:

A

internal coordination costs & operations costs increase

27
Q

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

determination of vertical firm size:

A

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

28
Q

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

determination of vertical firm size:

A

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

29
Q

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

Horizontal size:

A

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

30
Q

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

Horizontal size: advantages

A

benefits from scale economies increase = lower operations costs

31
Q

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

Horizontal size: disadvantages

A

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

32
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION
OPERATIONS

A

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

33
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION
OPERATIONS: Late-mover advantage:

A

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

34
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION
OPERATIONS: HOW IT affects operations cost structure

A

*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

35
Q

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

TROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: RANSACTION PROCESSING

A
  • 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
36
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: MONITORING & PERFORMANCE EVALUATION

A
  • 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
37
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: DOCUMENTATION & COMMUNICATION

A
  • 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
38
Q

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

ROLES OF INFORMATION SYSTEMS IN AN ORGANISATION: DECISION SUPPORT

A
  • 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
39
Q

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

IMPACTS OF INFORMAITON TECHNOLOGY ON AN ORGANISATION

A
  • impacts based on two attributes of orga: 1) location of decision rights 2) size of firm
40
Q

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

IMPACTS OF INFORMATION TECHNOLOGY ON AN ORGANISATION: IT & DECISION RIGHTS

A
  • 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
41
Q

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

IMPACTS OF INFORMATION TECHNOLOGY ON AN ORGANISATION: IT AND FIRM SIZE

A
  • 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
42
Q

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

reducing external coordination costs:

A

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)

43
Q

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

reducing internal coordination costs:

A

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)

44
Q

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

increasing degree of vertical integration/scope of firm activities:

A

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)

45
Q

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

increasing scale economies of production and information:

A

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)

46
Q

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:

A

ability to control horizontally large corporation (mergers)

MIS (32 decks)

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