Tutorial 3 Flashcards
Transaction cost theory
Search and information costs & Bargaining and decision making costs & Monitoring and enforcement costs
==> Suggests that firms should internalise activities when transaction costs are high and outsource when transaction costs are low
Agency costs
Arise due to misalignment between managers (agents) and owners
(principles)
Effects of ICT adoption:
Lowers both internal and external coordination costs, affecting firm boundary decisions
Internal coordination costs
Communication and monitoring expenses within the firm
External coordination costs
Cover supplier searchers, contract management, and market procurement costs
ICT can…
… reduce agency costs by improving monitoring and control, leading to greater centralisation
ICT can simultaneously lead to…
…centralization (due to better data aggregation) and
decentralization (due to improved local decision-making capabilities)
Vertical Integration
Firms keep production in-house when coordination is critical and
requires complex ICT systems
Horizontal Expansion
ICT enables firms to outsource and fragment production
across global supply chains
Operational costs
Costs related to internal firm operations such as manufacturing
and logistics
Contractual costs
Costs related to market transactions, such as negotiating supplier
contracts
=> It enhances contract enforcement through automated compliance tracking
Economies of scale
ICT adoption enhances economies of scale by enabling greater eternal efficiency and reducing redundant processes
=> allows forms to lower operational costs and increase intra-firm trade rather than outsourcing
=> intensifies economies of scale by allowing greater automation and real-time data-driven decision-making
Chen & Kamal and Gurbaxani & Whang => Hypothesis 1
Hypothesis 1: More complex ICT adoption leads to greater internal integration
Chen & Kamal and Gurbaxani & Whang => Hypothesis 2
Hypothesis 2: Industries with codifiable production processes are more likely to outsource after ICT adoption
Single IT
Simple technologies like basic internet use, which provide general benefits
but don’t significantly alter firm boundaries
Complex IT
Technologies like LAN, intranet, extranet, and e-commerce platforms,
which require higher investment and greater coordination within firms
IT Hype Cycle (Stages)
- Technology Trigger (New innovation is announced and gets attention)
- Peak of Inflated Expectations (News spread & unrealistic expectations are created)
- Through of Disillusionment (Dissapoinment: early adopters struggle with implementation)
- Slope of Enlightenment (Real use cases begin to emerge: firms learn from mistakes)
- Plateau of Productivity (Technology becomes mature: realistic expectations & stable implementation)
Stages and Waves of IT complexity:
- breaking the surface
- sending out ripples
- causing a squawk
- building the swell
- riding the crest
Distinguishing hype from reality:
Managers must differentiate between public
enthusiasm (the “attention wave”) and actual adoption and implementation success
Common IT adoption issues:
many organizations announce adoption but struggle
with implementation ⇒ creating a gap between expectation and realization
Beware of IT fashion bubbles:
Many innovations gain traction due to social
influence rather than genuine business value
Mindful IT adoption:
successful managers assess real-world impact rather than
blindly following trends
Centralisation
IT reduces communication costs, allowing top management to retain
control
Decentralisation
IT improves monitoring, enabling lower-level manager to make
more independent decisions
Firm size is influenced by IT-driven cost reductions:
-External coordination costs go down ⇒
==> firms use market more, leading to
smaller firms
Firm size is influenced by IT-driven cost reductions:
-Internal coordination costs go up ⇒
==> firms manage larger structures effectively,
leading to larger firms
Wang (2010) Hypothesis 1:
Organizations gain in reputation when they are informationally
associated with IT in fashion
Wang (2020) Hypothesis 2:
Organizations gain in reputation when they adopt and implement IT
in fashion
