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Full text of "Dependent variables for the study of firm and industry-level impacts of information technology"

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NOV 12 1987 




Center for Information Systems Research 

Massachusetts Institute of Technology 

Sloan School of Management 

77 Massachusetts Avenue 

Cambridge, Massachusetts, 02139 



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DEPENDENT VARIABLES FOR THE STUDY 
OF FIRM AND INDUSTRY-LEVEL IMPACTS 
OF INFORMATION TECHNOLOGY 



J. Yannis Bakos 



August 1987 



CISRWPNo. 161 
Sloan WP No. 1923-87 



• 1987 J. Yannis Bakos 

This paper will be presented at the Eigth International Conference on Information 

Systems, Pittsburgh, PA, December 1987. 

Center for Information Systems Research 

Sloan School of Management 
Massachusetts Institute or Technology 



Dependent variables for the study of 

firm and industry-level impacts 

of Information Technology 



J. Yannis Bakos 

Center for Information Systems Research 

Sloan School of Management 

Massachusetts Instistute of Technology 

Cambridge, Massachusetts 

August 1987 



ABSTRACT 

Macro-level impacts of information technology (those at the level of entire 
organizations, industries or the society as a whole) have not been studied in 
the depth accorded to impacts at the individual user level. Furthermore, 
there is a lack of studies that can claim to have successfuly demonstrated 
specific impacts at this level. We believe that a well-defined and 
instrumented set of dependent variables at this level would make a 
significant contribution in this area. /^This paper addresses the issue of 
identifying the appropriate dependent variables for research on the impacts 
of information technology at the firm and industry levels. The role of 
different organizational perspectives is examined, and some implications for 
the design of empirical studies are discussed. | 



Copyrighted 1987 by Yannis Bakos 



INTRODUCTION 

Studying the organizational impacts of information technology is at the core of 
the information systems discipline, as evidenced by the substantial body of 
exising literature on the nature of these impacts at different levels, ranging from 
the individual user to the level of society as a whole. Ever since Mason and 
Mitroff (1973) posed the MIS problem in a task-focused setting, impacts of 
information technology at the individual level have provided the major focus of 
MIS research. Several efforts have been made to establish a number of 
theoretical propositions and build a cumulative tradition. One sign of the relative 
maturity of research at the individual level is the dominance of empirical studies 
and validated methodologies over work based on assertions and speculation. 
Although room for improvement may still exist, research on the impacts of 
information technology at the level of entire organizations, industries, or society 
as a whole is still adolescent by comparison. 

As any area of research matures, it becomes necessary to rigorously formulate its 
theoretical propositions and subject them to empirical testing, thus creating a 
need for the identification and measurement of the relevant dependent and 
independent variables. Issues related to the characterization and operatio- 
nalization of information technology* as the independent variable have been 
addressed elsewhere; in this paper we focus on the identification of appropriate 
dependent variables for the study of the organizational and industrial impacts of 
information technology. Although an agreement on research variables is not a 
necessary prerequisite for research, it would provide several benefits, such as a 
more direct link to the underlying research disciplines, the possibility to transfer 
operationalizations and measures across settings and to generalize and compare 
the results of difTerent studies, and a start toward the building of a cumulative 
tradition of research. 

Research on user information satisfaction (UIS) at the individual user level can 
provide an example demonstrating these benefits. Since UIS was established as a 
generally accepted important variable at the individual level, there has been 
significant improvement in our ability tu understand it, measure it, and design 



proper studies that are more likely to produce rigorous results. Furthermore, a 
lot of controversy was generated about the proper definition, role, importance, 
use, and factors underlying or affecting this concept, which was constructive in 
refining its theoretical underpinnings and clarifying its practical significance. 

This paper reviews the major research approaches related to the impacts of 
information technology at the organizational and industry levels, and argues that 
at this point information systems research should build on, and advance, relevant 
work in organization theory and industrial economic^. One of our primary goals 
is to illustrate how the alternative perspectives on action and different 
organizational views in the underlying disciplines of organization theory and 
economics have different implications for the choice of the appropriate dependent 
variables. We also address some theoretical and empirical problems in studying 
the impact of information technology on these variables.^ 

ORGANIZATIONAL I'KKSPKCTI VKS AND IMPACTS RESEAKCH 

In this section we present a meta-theoretical scheme for classifying the major 
perspectives in the organizational literature, based on three criteria: the level of 
organizational analysis, the dynamics of interaction among organizational units 
at each level, and the underlying assumptions about human nature. 

Levels of Analysis 

Organizations can be viewed at different levels of analysis, and efforts to predict 
or understand the impact of information technology are typically focused on one 
of these levels. Most existing literature is consistent with the following five-level 
view of organizations: 

• an individual performing a task 

• a work group including many individuals 

• an organization consisting of several groups 

• an industry with a number of firms 

• the entire economy, or society as a whole. 



i 

Views on interaction 

The hierarchical view presented above assumes that each organizational level 
can be seen as a system composed of relatively independent subunits of the next 
lower level, which may or may not differ in their goals and behavior. This leads to 
two points of view: assuming goal congruence or coherent action among 
organizational units at a certain level, we can focus on the structure and process 
characteristics of organizations; alternatively, assuming divergence in the goals 
and behavior of individual units, we can study the dynamics of their potentially 
conflicting interactions and their effect on the behavior of the composite system 
as a whole. These viewpoints, which we call structural and dynamic, will suggest 
difTerent types of organizational impacts of information technology, and different 
dependent variables. 

Assumptions about human nature 

Three major perspectives on action emerge in the organizational literature, based 
on different assumptions about the nature of people and organizations: 

• The rational (mechanistic) perspective assumes that action is purposive, 
intentional, and goal directed. People and organizations have goals, and 
they take actions to achieve them. This perspective underlies most work 
based on mathematics, systems theory and economics. It has also been 
dominant among information systems researchers. 

• The externally constrained (evolutionary) perspective sees action as 
environmentally driven. People and organizations react in response to 
environmental constraints that leave little room for individual 
rationality, their primary goal being survival perse. 

• In the organismic (process) perspective, action is emergent, almost ran- 
dom, dependent on organizational processes and social structures. Any 
rationality is posterior, and goals often emerge as a by-product of the 
process. 

Organizational perspectives and the selection of dependent variables 

We have identified five levels of organizational analysis, two views of organiza- 
tional systems, and three perspectives on action. Figure 1 illustrates this scheme 
for the organizational levels of interest in this paper, and provides examples of 




structural 

dynamic 



Perspectives 



rational 



constrained 



organismic 



Levels 



society 



industry 



organization 



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impact"! j/^ 
■ market failures/'^ 


■ population 
ecology 


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- ethnoloBiral ,'' 
appronchps ,' 

■ inslitutionalizaufin 
theories y' 


y^ ■ Marvist 

y^ class strueple 

y^ pprspprtivps 


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theories 


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frnnoniics y^ 

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- strntrpic 
alliances 


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• 
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yy - industrial 

yy econniiiic? 

^y Iconrlucti 


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-structural y^ 
continRpncy y^ 

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processing y^ 
view yy 

yy -political 
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^y - coenitivp theories ,'' 
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y^ - institution8li2at4(5n 
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- resource Iheorie- 
dependence - orgaitlzed anarchies 
theories p«Cspective 



Figure 1: Alternative organizational perspectives 

major approaches falling into its subcategories. Ashley and Van de Ven (1983) 
have proposed an alternative scheme, essentially based on the third and the first 
of these dimensions: "(our scheme is based on) two sources of antithesis (which 
are) manifested in structure-action and part-whole dialectics" (p. 245). We 
strongly recommend to the interested reader their discussion of the underlying 
debates on the nature and structuring of organizations, although they conclude 
that these debates, representing conflicting world views, are unlikely to be 
resolved in the foreseeable future. However, 

"an awareness of the underlying values and biases upon which the theory is 
constructed becomes essential. These values and biases act as assumptions, taken 
for granted, in the world views that guide theorizing, and they constitute 
paradigms that channel attention in specific directions and preclude the 
investigation of alternative theoretical, ideological, and practical spheres " (p 270). 



r 

I 

I 

IT 



(1) 



(2) 



Structure and 
Processes 



(3) 



1 

Performance 



Figure 2: Areas for impacts research 



In the context of organizational impacts of information technology, alternative 
perspectives lead to different dependent variables and suggest the use of different 
theoretical tools for the study of these impacts. Studies based on different 
perspectives have used different vocabularies and, as a result, often have talked 
past each other. A simple model for the impact of information technology is 
shown in Figure 2. The technology has an impact on organizational structure and 
process, thereby affecting organizational performance. This model defines three 
areas for impacts research: (1) the impact of information technology on 
organizational performance, (2) the impact of information technology on 
organizational structure and processes, and, (3) the impact of organizational 
process changes on organizational performance. 

The general problem of the link between organizational structure, process and 
performance variables is best left to organization theorists. Information systems 
researchers may occasionally need to extend the available results in certain 
areas, but as Keen (1980) has emphasized, such research is worthwhile only 
when it makes a contribution to the underlying discipline of organization theory. 
The majority of impacts research will belong to one of the first two areas: impact 
of information technology on organizational performance and on organizational 
structure and processes. The difference between the two areas can be visualized 
as whether the structure and process box in Figure 2 is seen as a system that can 
be modeled and probed, or as a "black box" whose inputs and outputs are the only 
observable variables. 



IDENTIFYING FIKM-LEVEL VARIABLES 

In this section we review the literature on organization-level impacts of infor- 
mation technology and use the alternative perspectives on action (rational, 
constrained, and organismic) to identify relevant dependent variables. 



Rational approaches 

Research employing the rational perspective has focused either on organizational 
performance or on structure and process variables. The major research problem is 
to identify the impacts of information technology on organizational structure and 
processes, and to determine how they can be predicted, controlled or mediated to 
fit organizational goals. Two major views have emerged in the non-political 
literature. Structural contingency theorists like Chandler (1962) postulate that 
organizational structure affects organizational performance, and they attempt to 
determine the nature of this relation. The information processing view focuses on 
the information processing capacity of organizations and their effort to cope with 
the constraints of individual bounded rationality and environmental uncertainty 
(Galbraith 1973, Tushman and Nadler 1978). 

Political models of organizations generally assume rational, intentional action 
among organizational subunits, to achieve their divergent goals and objectives. 
Coalitions of organizational subunits have been the main unit of analysis in 
political approaches (Cyert and March 1963). Two central organizational 
variables have been proposed: coalition structure, focusing on the process of their 
formation among eligible participants (Pfeffer 1978, 1981), and coalition power, 
most often defined in terms of the capacity to overcome opposition (Blau 1964, 
Salancik and Pfeffer 1977), or as the ability to influence organizational goals 
(Cyert and March 1963). 



Environmentally constrained (evolutionary)approaches 

Population ecology is the major approach employing this perspective from a 
structural point of view. It focuses on the characteristics of environmental 
selection (evolutionary change). Its underlying assumption is that organizations 



are subject to environmental constraints to a much larger extent than the ratio- 
nal view will concede, leaving little room for rational action (Freeman 1982). 
Variables that have received attention are organizational type, such as specialist 
us generalist; environmental characteristics, such as a fast or slow changing, 
finely or coarsely grained environment; degree of competitiveness, characterized 
by its institutional framework or by the resulting organizational mortality; and 
organizational adaptability, such as learningcapacity. 

In the dynamic view, resource dependency theories focus on managing external 
dependencies. They are similar to rationalist political theories as they start from 
a coalition model of organizations, but the emphasis is on the type and importance 
of environmental dependencies. Power is assumed to accumulate to coalitions 
managing these dependencies, which may arise from environmental constraints, 
contingencies, resources, or uncertainties. 

Organismic appioaches 

The organismic perspective employs an emergent, almost random, process- 
constrained view of action, and is not as homogeneous as the other two. There is 
no clear distinction between structural and dynamic views, because conflict 
among subunits is not a central concept. The view of organizations as organized 
anarchies (Cohen, March, and Olsen 1972, March and Olsen 1976), stresses the 
sequential, unfolding nature of organizational action. Behavior cannot be predi- 
cted either by the preferences of individual actors or by environmental conditions. 
Instead organizations are seen as "garbage cans" in which people, problems, solu- 
tions and opportunities for action are mixed together, the results largely 
depending on the process of interaction of the ingredients. Rationality and prefe- 
rences are seen as emerging retrospectively from action, rather than guiding 
action (March 1978). 

Cognitive perspectives see organizations as providing paradigms (models of the 
world), myths (perceptions of the world), and a common language that give 
meaning to the life of individual participants (Weick 1979). These approaches 
emphasize the importance of harmony between the technological and social 
components of an organization (Trist 1981 ). or focus on quality of work life issues. 



• structure 

- goverance mechanism 

- centralization/decentralization 

- integration/differentiation 
-coalition formation 

- power distribution 

- specialization, niche creation 

• process 

-efficiency 

- production costs 
-coordination costs 

- flexibility 

- information processing capacity 

- political friction 

- coalition structure 

- coalition power 

- adaptability 

• performance 

- economic returns 

- survivability 



Table 1: Organization-level variables 

In this perspective information can be seen as a symbol rather than an 
instrument (Feldman and March 1981). 

Table 1 summarizes the major structural, process and performance variables 
suggested by the rational and constrained perspectives, which are likely to be 
affected by information technology. The organismic perspective is too fragmented 
to allow us to abstract a concise set of variables, and although there is a 
substantial body of literature looking at the links between organismic processes 
and performance at the individual level, such as the relation between job 
satisfaction and performance (Vroom 1964), these results have not been extended 
to the organizational level. We are not trying to diminish, however, the signi- 
ficance of the constraints of social and organismic processes for the design and 
implementation of information systems, as several failed system implement- 
ations could attest to their importance. 



8 



FIRM-LEVEL IMPACTS KESEAKCH 

In this section we address the problem of identifying dependent variables for the 
firm- level impacts of information technology. We look into three areas, organiza- 
tional structure, organizational processes and organizational performance. 



Organizational Structure 

The impact of information technology on structural variables has received 
significant attention in the literature. Kling (1980) surveyed several theoretical 
and empirical studies of the relation between computers and organizational 
structure, primarily in the period 1970-1979. Most early studies, however, used 
information technology as the dependent variable, as they tried to explore the 
factors influencing its adoption by organizations. Carter (1984) and Robey (1981) 
conducted studies using organizational structure as the dependent variable. 
They looked at authority relationships, centralization of control, differentiation, 
and horizontal relationships among departments, with generally inconclusive 
results. Attewell and Rule (1984) reviewed theoretical and empirical evidence on 
the impacts of information technology on centralization, differentiation of organi- 
zational subunits, and vertical and lateral communications. They concluded that 
the evidence was fragmentary and mixed. Kriebel and Moore (1982) suggested 
that the technology will affect the centralization of organizational structures and 
the mechanisms for control and resource allocation. 

Thus no direct link has been established between information technology and 
organizational structure or performance, and the evidence from the organization 
theory and strategy disciplines suggests that any such link would depend on the 
particular organizational and environmental contingencies. This would explain 
theconOicting results of Attewell and Rule (1984) and Robey (1981), who reported 
that the technology is likely to either centralize or decentralize, differentiate or 
integrate, and promote functional or less centralized hierarchies; a fact which 
organizational theorists pointed out several years ago (Zannetos 1970). 



Organizational Processes 

Process variables combine the advantage of a direct theoretical link to organiza- 
tional performance, and the potential for study at the level of organizational 
subunits, subsequently aggregating the observed impacts. Unfortunately there is 
little empirical research in this area to guide us in building and testing specific 
theoretical hypotheses and in the operationalization of the underlying constructs. 
The role of information technology in relieving constraints in the storage, 
processing and communication of information caused by bounded rationality 
(Bakos 1985), and in increasing organizational flexibility (Malone and Smith 
1984), can provide the basis for the identification of organizational variables 
susceptible to impacts from information technology. 

Malone (1985) and Malone and Smith (1984) suggest that organizational 
technology can be characterized in terms of production and coordination 
technologies. Thus efficiency at the organizational level can be viewed as 
dependent on production costs and coordination costs. Frequently this distinction 
depends on the level of analysis employed, since what may appear as a production 
cost at a certain level of analysis, can often be decomposed into production and 
coordination costs at a finer level of detail. Since coordination costs come from 
processing and communicating information, they provide a definite basis to 
establish a theoretical link between information technology and efTiciency. The 
accounting discipline has addressed the problem of measuring efficiency gains of 
organizational subunits, but their approaches are geared toward the 
measurement of production costs. Research on impacts of information technology 
would greatly benefit from the systematic development of tools to help us assess 
coordination costs, since they seem to be a primary beneficiary of the technology, 
at least for some types of systems (Crawford 1982). Moving in this direction 
Ciborra (1985) used transaction-cost theory to discuss the impact of the 
technology on the costs of coordination and control, and on the organizational 
governance mechanism. 

Organizational flexibility provides a measure of long-term efficiency in a 
changing environment. Malone and Smith (1984) defined it in terms of 
vulnerability (the cost of expected failures) and adaptability (the cost of 



10 



adjustment). Williamson ( 1975) employed the related concept of asset specificity, 
i.e., the best alternative use of an asset outside its present economic engagement. 
We would prefer a definition comparing the expected efficiency in a stable 
(although not necessarily deterministic) environment with the expected effici- 
ency under varying degrees of environmental uncertainty. The performance of 
flexible systems would be subject to less relative degradation as uncertainty 
increases. Using results from queuing theory, Malone and Smith were able to 
compare the relative efficiency and vulnerability of several simple organizational 
forms. Similar approaches could be used to derive theoretical predictions for the 
link between information technology and organizational fiexibility (for a rational 
perspective) or adaptability (for an environmentally constrained perspective). In 
relation to adaptability, Argyris (1982) has pointed out the potential of 
information systems to reinforce different types of organizational learning. 

The notion that information technology will increase the information processing 
capacity of organizations has probably been an assumption for researchers in the 
information systems discipline, and hence there exists no empirical research to 
test it. Malone and Smith (1984) looked at the impact of information technology 
on vertical and horizontal information fiows, the structure of organizational 
networks, and alternative coordination mechanisms. Related measures could be 
provided by looking at the quantity and quality of decisions or other outputs of 
subunits, and reaction times to expected and unexpected contingencies. 

Theories on the determinants of organizational power have proposed a number of 
variables explaining the accumulation of power to certain organizational 
subunits, like coping with critical uncertainties (Thompson 1967), or control of 
information or other resources (Salancik and Pfeffer 1977). Game theoretic 
approaches would suggest a focus on the goals and objectives of the individual 
participants, the structure of the payoffs under different outcomes, and the costs 
of coalition formation. Allocation of budgets, succession to administrative 
positions, policy decision patterns, choice of information systems, have all been 
studied as power-related dependent variables. In the MIS literature, Markus 
(1983) has pointed out the potential of information systems to affect the 
distribution of intraorganizational power, and has identified resource dependency 
considerations as relevant for the implementation of information systems. 



11 



A number of authors have adopted an organismic perspective in looking at the 
impacts of information technology. Kling (1980) reviews a number of articles 
with a similar "segmented institutionalist" perspective. Bostrom and Heinen 
(1977) focus on sociotechnical considerations in the design of information 
systems. Markus (1983) looks at the interaction between the information system 
and the organizational setting. Attewell and Rule (1984) cite controversial 
evidence on the role of information technology in the humanization or 
dehumanization of work. 



Organizational Performance 

Firm-level performance has been proposed as a dependent variable as well 
(Crowston and Treacy 1986). A number of MIS researchers have used dependent 
variables from the accounting literature for the assessment of economic 
performance, such as the productivity of the firm or the information system per se 
(Kriebel and Raviv 1982), return on assets and investment (Cron and Sobol 1983), 
or cost/benefit assessments of the value of information systems (Crawford 1982). 

It should be realized, however, that empirical inquiry into the direct link between 
information technology and organizational performance is a particularly difficult 
task: there are too many confounding factors and sources of extraneous variance, 
necessitating accurate operationalizations of the independent variable, as well as 
use of methodologies allowing for controlled settings, such as field experiments. 
Carrying this sort of experimentation with entire organizations is next to im- 
possible, therefore we must focus on the variables that will allow us to look at a 
finer level of detail, i.e., organizational structure and process variables. 

IDENTIFYING INDUS IRY-LEVKL VARIABLES 

Industrial economics and corporate strategy provide the theoretical disciplines for 
the study of the impacts of information technology at the industry level. The 
notion of conflict coming from the divergence in the goals and objectives of 
individual organizations, is central in this literature, and consequently this level 
of analysis is dominated by the rational and environmentally constrained 
perspectives, which pay attention to preferences, goals and objectives, and thus to 



12 



potential conflicts. We shall use the more popular terms "industrial structure" 
and "industrial conduct" to refer to the strutural and dynamic views as applied to 
the industry level. 



Rational perspective 

Rational approaches have focused on conflict among firms in the study of 
industrial conduct, and the comparative dynamics of entire industries in the 
study of industrial structure. Economic theory has provided the primary 
reference discipline, and some measure of economic returns relative to the rest of 
the industry or the rest of the economy is the prevalent indicator of performance. 
The existence of an underlying analytic discipline has led to a focus on explana- 
tory and causal, rather than descriptive, variables. On the other hand the 
validity and relevance of these variables, the related approaches, and the under- 
lying assumptions, have been often questioned (Kuttner 1985). 

Three major concepts underlie the rational industry-level approaches: efficiency, 
market power, and sustainability, which appear both at the industrial structure 
and industrial conduct levels. Efficiency refers to the ability to maximize outputs 
for a given set of inputs. Power refers to tht ability to resolve conflicting situa- 
tions to one's advantage. Industrial economics has examined at length the link 
between comparative efficiency, power and superior economic returns for 
individual firms or entire industries. Sustainability refers to the ability to 
preserve these superior returns over time. The balance of power at the 
boundaries between entire industries is determined by the collective power of an 
industry against its customers (monopoly power), its suppliers (monopsony 
power), and the degree of collusion among industry participants (rivalry among 
industry competitors). The sustainability of superior economic returns is 
determined by the threat of substitution, and by the barriers to new entry, such 
as the existance of potential entrants, the cost of entry, the likelihood and 
credibility of retaliation by current competitors (Porter 1980). 

At the industrial conduct level, comparative efficiency refers to the ability of a 
firm to produce a product using fewer inputs relative to other products considered 
as equivalent. Comparative efficiency can be achieved through improved 
internal (intraorganizational) efficiency, or through the identification of 



13 



interorganizational synergies. Market power reflects the ability of a firm to 
resolve conflictual situations against its customers and suppliers to its own 
advantage. The major related variables proposed in the economic and strategic 
literature are market share, power against suppliers, power against customers, 
unique product features, positional advantages, and asset specificity (defined as 
the best alternative use of a firm's assets). Variables that seem to determine the 
ability of some firms to sustain superior economic returns relative to their 
competitors include the capability for continued innovation, the ability to make 
credible threats of retaliation against acts that might erode their competitive 
advantage, and the quality and timing of their strategic moves. As discussed in 
the next section, several of these variables could be affected by information 
technology. 



Constrained perspective 

This perspective has been underlying much of the traditional strategic literature, 
especially theories related to the identification of generic strategies. Population 
ecology and resource dependency theories provide the major concepts. Their 
theoretical imperative is that in the long run well focused, specialist strategies 
outperform unfocused, generalist ones, and that firms strive for the control of 
critical environmental resources in an effort to negotiate the uncertainty and 
hostility of their environments. 

At the industrial structure level, relevant variables that could be affected by 
information technology include the rate of environmental change, net mortality 
(births and deaths) of organizations, and changes in industrial boundaries to 
reduce uncertainties coming from the technology, e.g., vertical information 
integration. At the industrial conduct level, variables likely to be affected by 
information technology include the ability to adopt major specialization 
strategies, such as low cost leadership, differentiation, or focus on market niches, 
the creation, restructuring or dissolution of organizations, and mergers, 
acquisitions, or strategic alliances to control critical information dependencies 
and to exploit opportunities created by information technology. 

Table 2 shows the major variables in the literature used to characterize the 
structure of industries which may be affected by information technology. Table 3 



14 



• efficiency 

- procJuction economics 

- economies of scale 
-economies of scope 

- economies of specialization 

- internal efficiency 

- production costs 

- coordination costs 

- interorganizational synergies 

-coordination costs 

- transaction costs 

• market Structure 

- market form 

- market efficiency 

- market power 

- competitive rivalry 

• sustainability 

- barriers of entry 

- threat of substitution 

- credibility of retaliation 

- rate of innovation 

• survivability 

- net mortality 

- strategic alliances 

- M&As, vertical information integration 

• performance 

- economic profits 

- excess returns 



Table 2: Industrial structure variables 

shows the five major variables identified as determinants of a firm's conduct 
within an industry. As discussed earlier, the former three come from rational 
(economic) approaches, while the latter two are suggested by environmentally 
constrained (evolutionary) perspectives. 



INUUSTRY-LEVEL IMPACTS RESEARCH 

Identifying the industry-level variables which are likely to be affected by 
information technology, and understanding the nature of these impacts, is at 
least as difficult as the corresponding problem at the organizational level. 



15 



• comparative efficiency 

• market power 

- market share 

- unique product features 

- customer and supplier switching costs 

- asset specificity 

- positional advantages 

• sustainability 

- product and process innovation 

- threat and credibility of retaliation 

- timing 

• survival strategies 

- niche creation 

- differentiation 

- cost advantage 

• control of critical resources 

- strategic alliances 

- vertical information integration 



Table 3: Industrial conduct variables 



Industrial structure 

The main focus of the traditional MIS literature has been on efTiciency-related 
impacts of the technology. As Kriebel and Moore point out (1982), information 
technology will affect industry-wide efficiency through its impacts on the 
economics of production, most likely by changing the economies of scale, scope, 
and specialization. Another type of efficiency-related impacts is likely to come 
from interorganizational synergies, primarily through coordination efficiencies 
(Cash and Konsynski 1985, Malone 1985) and reduced transaction costs (Ciborra 
1985). 

More recently, Ives and Learmonth (1984) and Beath and Ives (1986), used the 
efTiciency of internal processes as their dependent variable. Parsons (1983) 
pointed out the potential impact of the technology on competitive forces (buyers, 
suppliers, substitution, new entrants, competitive rivalry) and industry-wide 
economics of production. Cash and Konsynski (1985) elaborated on Parsons' 
variables to suggest a more detailed set (capacity, cost structure, prices, entry 



16 



barriers, quality, services, competition), and Bakos and Treacy (1986) identified 
search costs, unique product features, switching costs, bargaining power, internal 
and interorganizational efficiency, as variables which could be affected by the 
technology. 

Furthermore, information technology can affect the monopoly or monopsony 
power of an industry and the competitive rivalry among industry participants, 
e.g., by requiring substantial non-recoverable investments, changing the costs of 
exit, and altering the relation between fixed and variable costs. It can also affect 
the sustainability of superior economic returns enjoyed by an industry with 
market power. All four variables in Table 2 related to sustainability (barriers to 
new entry, threat from substitute products, likelihood and credibility of 
retaliatory action against new entrants, and rate of innovation in the industry) 
are potential candidates. At this level of analysis the net effect of the technology 
is uncertain and highly dependent on industry characteristics, and thus more 
detailed variables will be necessary for a normative model of the relevant 
impacts. Empirical reseearch beyond the case-study level is suspect, because of 
confounding variables, extraneous variance, and difficulty in the 
operationalization of the underlying variables. 

From an evolutionary perspective, information technology is likely to affect 
variables related to the ability of an industry to survive and evolve in a changing 
environment, as well as the rate of environmental change faced by that industry. 
Related variables include net mortality, strategic alliances to meet the 
challenges introduced by information technology, and restructuring or merger 
and acquisition activity directed toward the control of critical information 
resources, such as vertical information integration. Although there is a lot of 
anecdotal evidence on these impacts, there is little rigorous research in the area. 

Industrial conduct 

Research on efficiency-related impacts at this level would focus on comparative 
efficiency, seeking to establish that technology adopters show efficiency gains 
relative to their competitors, and on interorganizational synergies, attempting to 
establish efficiency gains at the boundaries between organizations. Despite the 
similarity to the study of efficiency impacts at the organizational level, the need 



17 



for a comparative emphasis, the consideration of inter-firm transaction costs, and 
the extention of the unit of analysis beyond a single organization, complicates the 
problem of the design of appropriate studies. 

Although some of the variables underlying market power or sustainability have 
been the subject of econometric studies (e.g., market share), and thus have 
existing operationalizations, the majority requires the development of both 
theoretical models for the impact of information technology and adequate 
measures. Similarly, although the potential of the technology to promote 
strategic alliances or mergers and acquisitions, and to afTect the ability of a firm 
to adopt specific strategies is well recognized, we are not familiar with any efforts 
to theoretically predict or empirically establish the nature of these impacts. 

MEASURING THE UKi'ENUENT VARIABLES 

Measurement and operationalization of theoretical variables is a self-contained 
problem, as the development of appropriate instruments is closely related to the 
theoretical and construct validity of the models tested. A discussion of these 
issues extends beyond the scope of this paper, but Bagozzi (1979) provides an 
excellent discussion for the interested reader. In the rest of this section we review 
representative measures for the dependent variables identified earlier, and which 
may be applicable to the study of organizational impacts of information techno- 
logy. 

Firm-level variables 

A number of structural variables at the firm level have been used in empirical 
studies. Organization theory provides classification schemes for organizational 
forms, such as functional vs. product hierarchies vs. matrix forms. Vertical 
integration has been measured as the ratio of value added to sales, although this 
measure is biased towards raw materials producers. Several measures of 
centralization have been used based on the locus of decision making, such as 
profit vs. cost centers, budgetary authority, and number of reporting levels. The 
number of job titles has been used as a measure of differentiation. Diversification 



18 



measures in the strategic literature are primarily based on the ratio of dominant 
product line sales to total sales. 

Process efficiency has been measured by using frontier analysis or DEA (data 
envelopment analysis) on production cost data, which at closer scrutiny often 
include coordination costs as well. Stabell ( 1983) and Chismar and Kriebel ( 1985) 
conducted representative studies in the MIS literature. Other process variables 
do not have existing operationalizations, and thus empirical researchers will 
have to start from the reference discipline of organization theory and the MIS 
literature surveyed in the previous sections. 

There are several performance measures in the literature, ranging from financial 
returns on investment and assets, to the value added as refiected by a firm's 
market valuation, to direct cost/benefit assessments of the value of information 
systems. These measures have the advantage of high validity, but as discussed 
earlier, confounding factors and extraneous variance make the task of estab- 
lishing an impact due to information technology extremely difficult. 



Industry-level variables 

Internal efficiency at the industrial structure level can be measured similar to 
firm-level efficiency. Comparative measures of the efficiency of multi-product 
and different size firms have been used to estimate the economies of scale and sco- 
pe for individual industries, while inter-process inventories, delivery times and 
purchasing costs have been used as a measure of interorganizational synergies. 

The study of the structure and efficiency of markets has been an area out of the 
mainstream of economics and organization theory. Market power and the degree 
of collusion have been studied extensively, however, with empirical proxies such 
as concentration ratios, existence of price wars, price stability, ability to price 
over marginal costs, and competitiveness in advertising. Yet recent advances in 
industrial economic theory have cast doubt on the ability of these measures to 
capture tacit collusion. 

Industrial organization theory is actively developing new theoretical models for 
the barriers of entry, substitution and the role of reputation, which may lead to 



19 



related empirical measures. The rate of innovation has been typically measured 
by patent counts and the number of new product introductions, measures often 
unreliable and inappropriate for inter-industry comparisons. Macroeconomic 
data is available on firm mortality in different industries and on mergers and 
acquisitions, while industry performance measures are similar to the ones used 
for individual firms. Once again, while the measures available are quite reliable, 
they are not sensitive to the impact of information technology. 

For variables specific to industrial conduct, market power has been measured in 
terms of market share, excess profits, and ability to price over marginal costs. A 
number of empirical studies have looked into asset specificity and customer 
switching costs in specific settings to test the predictions of transaction cost 
theory, but we are not aware of any generally applicable measures. Measurement 
of innovation and vertical integration were discussed earlier, and we are not 
familiar with applicable measures for the remaining variables in Table 3. 
Interested researchers will have to develop appropriate operationalizations 
starting from the theoretical literature. 

CONCLUDING REMARKS 

Not enough of the existing literature on the impacts of information technology at 
the organizational and industrial levels consists of rigorous theory building or 
empirical studies. Research results are fragmented and conflicting (Attewell and 
Rule 1984). Most important, we cannot claim substantial progress in our 
understanding of the organizational and industrial impacts of information 
technology and in our ability to establish their existance and quantify their 
nature, compared to early work in the organizational and strategic disciplines 
(e.g., Zannetos 1968, 1970). We believe that an agreement on the appropriate 
dependent variables will make a contribution to research in this area. The 
underlying theoretical disciplines of organization theory, microeconomics and 
industrial economics can provide us with sets of organizational variables, among 
which the ones relevant to information systems research can be identified. We 
used the framework shown in Figure 1 to organize the major firm and industry- 
level approaches in these reference disciplines and to propose appropriate 
variables. 



20 



By choosing appropriate explanatory theories from the underlying disciplines, 
information systems research can focus on the process-related impacts of the 
technology, relying on existing theory to link these impacts to organizational 
performance (see Figure 2). There are a few salient characteristics of information 
technology that can be used as the basis to study its process impacts and to 
identify these variables that the technology is most likely to afTect. It has been 
proposed that bounded rationality can provide such a basis from a rationalist 
perspective of individual and organizational action, while organizational 
flexibility is most relevant from an evolutionary perspective. 

Weick (1984) pointed out the importance of proper methodology in studying the 
impact of information technology on organizations, but he also cautioned us about 
the dangers involved in trying to distinguish between independent and dependent 
variables. In particular, as Markus and Robey (in press) explain in detail, there 
are many bi-directional interactions in organizational systems. Causal models 
will be inadequate if they do not include the appropriate feedbacks, and cross- 
sectional data will be unable to show the interactions among the variables; hence 
longitudinal approaches will be necessary. 

As the level of analysis becomes more general (from the organizational unit to the 
industry, to the economy and society as a whole), the links between independent 
variables related to information technology and the dependent variables of 
interest become more indirect, introducing a large number of confounding 
variables and extraneous variance that reduce our ability to observe the impact of 
information technology. In most industries the participant firms employ similar 
types of information technology, thus reducing the variance of our independent 
variables. Furthermore, several empirical studies in the past were based on data 
from the impact of older technologies, such as accounting or payroll systems, 
whose impact on organizations and industries is likely to be quite different from 
modern user-friendly applications emphasizing analytical tools, communications 
and specialized areas of strategic importance. 

Developing valid operationalizations and instruments for any of the variables 
proposed in this paper is a formidable task by itself. Providing empirical research 
guidelines for the entire set we identified goes beyond the ambitions of this paper; 
our goal was to point in the right direction. We conclude with a list that may 



21 



prove useful in addressing the complexities of empirical research into the 
organizational and industrial impacts of information technology: 

• We need to build a cumulative research tradition on the impacts of 
information technology on different organizational variables and at 
different organizational levels. 

• We need more sophisticated theories (models), and methodologies (instru- 
ments) to overcome the problem of confounding variables; industrial 
economics can suggest apprpriate models, but to this date organization 
theory does not offer sufficient assistance, as it is not able to provide 
adequate opera tionalizations for several of its constructs. 

• We must identify the variables on which the technology is likely to have 
more direct impacts, e.g., variables that are closely affected by bounded 
rationality at the individual and organizational levels. 

• We should use methodologies that allow us to control or compensate for 
the contextual variables when it is feasible; thus we can hope to better 
isolate the impacts of information technology. 

• We should study technology innovators and collect longitidunal data, so 
that we can achieve more variance in our independent variables. 

• Finally, we should study organizations in which information technology is 
closely related to their core technology, and thus is more likely to result in 
impacts easier to observe, as is the case in several service industries. 



22 



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