Impact of Information System
The Impact of
Informatuon
Systems on Organizations and Markets
Vijay Gurbaxani and Seungjin Whang
Z Z LU 0 Z 0 f-
3 .J
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,
we analyze the impact of I T on two i m p o r t a n t attributes o f f i r m s i f i r m size and the allocation of decisionmaking authority a m o n g the various actors in a firm. To this end, we start with economic theories o f organization as the foundation for o u r analysis. Two such theories are relevant to o u r analysis: agency theory, inkially advanced and devel~ o p e d by Wilson [68], Ross [54], AIchian and Demsetz [2], and Jensen and Meckling [34], and transaction cost economics, whose development is due mainly to Coase [18], Klein, Crawford and Alchian [38], and Williamson [65-67]. Agency theory [34] rejects the classical view o f the firm as a unified profit-maximizing identity and proposes an alternative model o f a firm as an agency relationship built on a set o f contracts a m o n g selfinterested agents (employees). As a consequence, when
Informatuon
Systems on Organizations and Markets
Vijay Gurbaxani and Seungjin Whang
Z Z LU 0 Z 0 f-
3 .J
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,
we analyze the impact of I T on two i m p o r t a n t attributes o f f i r m s i f i r m size and the allocation of decisionmaking authority a m o n g the various actors in a firm. To this end, we start with economic theories o f organization as the foundation for o u r analysis. Two such theories are relevant to o u r analysis: agency theory, inkially advanced and devel~ o p e d by Wilson [68], Ross [54], AIchian and Demsetz [2], and Jensen and Meckling [34], and transaction cost economics, whose development is due mainly to Coase [18], Klein, Crawford and Alchian [38], and Williamson [65-67]. Agency theory [34] rejects the classical view o f the firm as a unified profit-maximizing identity and proposes an alternative model o f a firm as an agency relationship built on a set o f contracts a m o n g selfinterested agents (employees). As a consequence, when
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VIJAY GURBAXANI is an assistant 60. Stoddard, D. OTISLINE. Harvard professor of information systems and computer science at the Graduate Business case 9-186-304, Harvard School of Management at the University Business School, 1986. 61. Tirole, J. Hierarchies and bureauc- - of California, Irvine. His primary reracies: On the role of collusion in search interests are in the application of microeconomics to the study of manaorganizations.J. Law, Eco., and Org., 2 (1986), 181-214. gerial issues in the information systems context. Major foci of his research in62. Wall Street Journal. Dow-Jones & Co., telerate approve definitive clude information systems budgets, the diffusion of information technology, merger. Nov. 6, 1989. 63. Wall Street Computer Review. Trading and the organizational impacts of information technology. Author 's Present systems: To build or to buy. (Jan. 1989), 36-44. Address: University of California, Ir64. Waterman, D.A. 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