Christopher Tucci

How ICT affects the firm’s structure,boundaries, (and operations?)

Peter J. BrewsUNC Kenan-Flagler Business School

Christopher L. TucciÉcole Polytechnique Fédérale de Lausanne

LBS/ITU Geneva 2 June 2006

Christopher Tucci

Basic Premise

• We all agree that information and communicationstechnologies reduce external transaction andinternal coordination costs (at least on averageacross industries and the economy)

• But what about the degree to which firms adoptICTs? Does a “rising tide lift all boats”?

• What would happen to a firm if it did not(relatively) adopts ICTs?

Christopher Tucci

Context

• Internetworking adoption in large

companies

• Case studies of some leaders in the field

• Survey of 550 executives

Christopher Tucci

Survey research method

• Survey of executives enrolled in open-enrollment executive developmentprograms in four schools

• 550 responses across a wide variety ofindustries and countries. Average firm size= 45,000 employees

• Factor analysis of responses

Christopher Tucci

Eight key internetworking factors

• Employee Skills Development

• Supply Chain Management (SCM)

• Human Resource Management (HRM)

• Purchasing Integration

• Employee Career Development

• Customer Integration

• Financial Transparency

• Supplier Integration

Christopher Tucci

Transition to deep adoptionDimension Old Economy Intermediate stage IGC

Employee Skills

Development

Traditional corporate

training and

education; visit HR

and look through

hard-copy jobs

Sign up for training

electronically; jobs

posted on web site for

email response

Employees receive

training online; job

posting/recruiting done

online

Supply Chain

Management

Ordering, inventories,

and order status all

done by hand

Electronic supply

chain with key

suppliers (e.g.

exchange inventory

information) via EDI

Manufacturing/logistics

data online using

Internet protocols

HRM All forms, employee

business processes off-

line, often handled/

intermediated by

humans

Online filing of forms Employees change/

update personal

records real time

Christopher Tucci

Transition, continuedPurchasing Integration Decentralized, or

offline purchasing

coordination

Centralized online

purchasing

Customized online

employee-driven

purchasing, with firm

buying policies

integrated into

supplier web pages;

online purchasing

alliances with others

Career Development Traditional method of

preparing career

development plan,

performance review

Online filing of forms Performance review,

annual compensation

coordinated online;

development plan

submitted and

interactively changed

Christopher Tucci

Transition, continuedCustomer Integration No online channels Customers read

electronic brochures

online, but purchasing

online is limited

Customers purchase,

track delivery, do post

sale performance

evaluation online,

receive post sale

marketing information

online

Financial Transparency Financial data is

processed centrally,

distributed

hierarchically weeks/

months after closure

date

Some financial

transparency over

corporate intranet

Real-time financial,

accounting, sales,

performance,

operational data

available online to

managers, employees,

partners/suppliers

Supplier Integration Hands-off arms length

relations with

suppliers

Limited coordination

via network, e.g.,

exchanging design

specifications via email

Deep integration/risk-

sharing R&D alliances

with

partners/suppliers; real

time product/ services

change online

Christopher Tucci

The dimensions of Internetworking

0

10

20

30

40

50

60

70

Max

imum

Sco

reTe

leco

ms

Bank

ing

Ligh

t Mfg

Hea

vy M

fgAut

o Mfg

Utilit

ies

Har

dwar

e Mfg

Oth

er F

in S

ervice

s

Chem

icals

/ Plas

tics

Pack

aging

Met

als

/ Mining

Oth

er S

ervice

s

Oil /

Gas

Ref

ining

IT S

ervice

sIn

sura

nce

Skills development

Supply chain management

HRM

Purchasing integration

Career development

Customer integration

Financial transparency

Supplier integration

Christopher Tucci

Benefits vs. costs of increasing“complexity” (scope, hierarchy)

• Expanding firm complexity is desirable insituations where 'strategic assets' are non-tradable and where the potential exists forhigh transaction costs

• Expanding firm complexity is undesirable ifit is difficult to coordinate the enterprise

Christopher Tucci

Complexity of organizational formdecreases when transaction costs are

reduced

Increasing complexity

Cost / benefit

MB

MC

MB'

S*

Internetworkingadoption reducesbenefits to increasingcomplexity viareductions in:

• Asset specificity• Opportunism

S'*Adapted from Markides (2001)

Christopher Tucci

Complexity of organizational formincreases when coordination costs

are reduced

Increasing complexity

Cost / benefit

MB

MC

MC'

S*

Internetworkingadoption reduces coststo increasing complexityvia reductions in:

• Coordinationcosts

• Bureaucraticinformationlosses

S'*

Adapted from Markides (2001)

Christopher Tucci

Internetworking, transaction andcoordination costs, and structural effects

Increasing complexity

Cost / benefit

MB

MC

MB'

MC'

S*

Reducesbenefits toincreasingcomplexity byreducing needto internalizehigh transactioncosts

Reduces coststo increasingcomplexity byenabling bettercoordination

S'*? S'*?

Adapted from Markides (2001)

Christopher Tucci

HIERARCHY

REDUCTION

HIERARCHY

REDUCTION

INTER-

NETWORKING

DEPTH

INTER-

NETWORKING

DEPTH

EXTERNAL

PARTNERING

EXTERNAL

PARTNERINGSCOPE

SPECIALIZATION

SCOPE

SPECIALIZATION

Firm SizeFirm location

(how "developed") DurationIT

performance

Firm global

reach

Overall firm

performance

Variablesindependent

dependent

control

Christopher Tucci

HIERARCHY

REDUCTION

HIERARCHY

REDUCTION

INTER-

NETWORKING

DEPTH

INTER-

NETWORKING

DEPTH

EXTERNAL

PARTNERING

EXTERNAL

PARTNERINGSCOPE

SPECIALIZATION

SCOPE

SPECIALIZATION

Firm SizeFirm location

(how "developed") DurationIT

performance

Firm global

reach

Overall firm

performance

OLS resultspositivenegative

Christopher Tucci

HIERARCHY

REDUCTION

HIERARCHY

REDUCTION

INTER-

NETWORKING

DEPTH

INTER-

NETWORKING

DEPTH

EXTERNAL

PARTNERING

EXTERNAL

PARTNERINGSCOPE

SPECIALIZATION

SCOPE

SPECIALIZATION

Firm SizeFirm location

(how "developed") DurationIT

performance

Firm global

reach

Overall firm

performance

3SLS resultspositivenegative

Christopher Tucci

Summary

• Firms that were more deeply internetworked weremore likely to have become less complex inorganization structure

• We infer that while internetworking may reduceboth the marginal benefit and marginal cost ofexpansion, it reduces the marginal benefit more

• Or, external transaction costs tend to be reducedmore than internal coordination costs

Christopher Tucci

Managerial implications

• Internetworking investments do enable managersto reduce the scope of their firms

• We find (in later work) that firms that have higherIT performance outperform firms that have lowerIT performance

• Is this investment "table stakes" or can it lead torelatively enduring advantage?

• We give examples (in another paper) of firms thathave gained an enduring advantage and others thathave not

Christopher Tucci

How ICT affects the firm’s structure,boundaries, (and operations?)

Peter J. BrewsUNC Kenan-Flagler Business School

Christopher L. TucciÉcole Polytechnique Fédérale de Lausanne

LBS/ITU Geneva 2 June 2006

Christopher Tucci

Thank you!

Christopher Tucci

Complexity of organizational form

• Refers to level of diversification (orinversely, focus), as well as degree ofhierarchy and bureaucracy

• Scholars (e.g., Grinyer & Yasai-Ardekani,1980, 1981; Pugh et al., 1968) have found astrong association between the variousdimensions of organizational complexity

Christopher Tucci

Independent variable

Variable Description

Internetworking

depth

Composite score

representing electronic

interface with

customers, suppliers,

complementors, and

employees; measuring

both richness and reach

Christopher Tucci

Dependent variables

• Business scope specialization: scopenarrowing, specialization deepening, non-core activities being outsourced, and lowervalue-added jobs being eliminated

• Hierarchy reduction: decrease inmanagerial levels, hierarchy andbureaucracy

• External alliances: more external strategicpartnerships/alliances/joint ventures enteredinto

Christopher Tucci

Control variablesVariable Description

Internetworking

operating performance

Composite score comprising satisfaction

within firm with IT, as well as IT-

enabled cost reduction, headcount

reduction, employee empowerment,

customer reach

Internetworking duration Scale of seven levels from "less than a

year ago" to "more than ten years ago"

Firm size Scale of seven levels from "less than 100

employees" to "greater than 100,000

employees"

Overall firm performance Composite score of stock price,

profitability, and overall performance

relative to peers

Firm location (how

"developed" the home

market is)

NA = 1, Western Europe / Japan /

Tigers = 2, Developing countries = 3

Firm global reach Scale of four levels from a single,

domestic, focused business to a

multidivisional, multibusiness, global

business

Christopher Tucci

EXECUTIVE

IT

LEADESRSHIP

EXECUTIVE

IT

LEADESRSHIP

IT

PROJECT MGMT

IT

PROJECT MGMT

INTER-

NETWORKING

DEPTH

INTER-

NETWORKING

DEPTH

COMPETITIVE

PERFORMANCE

COMPETITIVE

PERFORMANCE

IT

PERFORMANCE

IT

PERFORMANCE

.52

.68

.95

SRMGPRTY

ALLMGPRTY

BiZMGRCIT

.58

.60

.66

STDMTHD

CLRTIME

ITMETRIC

.89

FX

PE

RF

ST

CK

PE

RF

OV

ER

PE

RF

GR

OS

SO

P

EM

PE

NA

B

EM

PC

US

T

RE

DC

OS

T

RE

DC

OU

NT

.82 .87.85

.51

.60.78

.72

-0.03.24

.20

.34

.11

2 =375***

GFI = 0.92

AGFI =0.89

CFI = 0.68

Duration

Firm Size.24

.10

Christopher Tucci

Contribution of this work

• First paper to propose a firm-levelmeasurement of internetworking

• Compares and tests perspectives on differenttypes of transaction costs

• Takes a first step in understanding contingentnature of internetworking adoption and theirperformance implications