INFORMATION TECHNOLOGY AND INFORMATION GOODS INTENSITY AS PREDICTORS OF ORGANIZATIONAL EXPANSION ACTIVITY
Virginia
Franke Kleist, Ph.D.
University
of Pittsburgh, 2000
ABSTRACT
The electronic markets hypothesis
(EMH) holds that information technology (IT) use will influence the dismantling
of fixed vertical firm boundaries by reducing the cost of transaction for the
acquisition of input goods between firms.
According to the EMH, firms will use technology in the value chain in
place of firm ownership. Thus, the EMH
predicts a rise in electronically coordinated vertical markets as a result of
information technology deployment. It
is possible that an evolution toward electronic markets will be empirically
evident via increases in network alliance agreements between vertically allied kinds
of firms (Malone 1987).
Yet, anecdotal
evidence of intense vertical and
horizontal merger and alliance boundary expanding activity for information
goods producing firms seems to be only partially explained by predictions of an
IT-driven rise in electronic vertical market coordination structures. This dissertation blends transaction cost
economics with information economics to yield a research model that may more
thoroughly explain and predict vertical and horizontal boundary change behavior
for information goods intense producing firms (IGIPF) and non-information goods
intense producing firms (non-IGIPF) with differing amounts of information
technology deployment.
The dissertation
research model separates the economic effects of a firm’s use of information technology in production on the internal
governance of the production and distribution sequence (vertical organizational
boundaries) and external market structures (horizontal organizational
boundaries), from the economic effects of the degree of information in the firm’s product line on internal
governance and external market structures.
The research reported here explores if firms that produce higher levels
of information goods have different vertical and horizontal organizational
boundaries when compared to non-information goods intense producing firms, even
when these firms have similar levels of IT deployment.
Two
years of horizontally and vertically coded event study merger and alliance data
for 317 of the 1,085 largest, publicly traded, U.S. headquartered firms
indicate that the model and some of the research hypotheses are supported. Experts used firm product sales information
and the North American Industry Classification System (NAICS) taxonomy to
reliably define the information goods production intensity of the firm. Information technology expenditures for the
firms were obtained from a Computerworld, Inc. survey. There were 936 horizontal alliances across
161 firms, and 645 horizontal mergers for 196 firms. For the 317 firms, 19 vertical mergers were reported for 12
firms, and there were 102 vertical alliances for 31 firms.
In general,
empirical support for the research model indicates that the information good
intense producing firm organizational boundary structures may be guided by
horizontal drivers (unique economies of scale and scope, network externalities
and increasing returns associated with the large-scale production, distribution
and marketing of information products), as well as vertical drivers (e.g., the
transactional effects of using information technology in the production value
chain). The data indicate that firms
which are dominant information goods producers seem more likely to enter into
alliances both horizontally and vertically at all levels of information
technology, as compared to non-information goods intense producers, when
controlling for overall firm size. This
significant information goods intense firm to vertical alliance relationship
may be evidence of alliance formation designed to alleviate higher transaction
costs of the inputs to production for these kinds of firms.
Further, the
research lends weak support to the Electronic Markets Hypothesis, finding that
differing levels of information technology expenditure have different effects
on the formation of vertical alliances.
There was a significant, main effect difference between high IT firms
and low IT firms in the formation of firm vertical alliances when controlled
for sales. This significant difference
may offer some confirmation to the EMH hypothesis, indicating that firms are
using IT to assist in the shift from hierarchies to markets by way of vertical
alliances, for the acquisition of production inputs.
The electronic
markets hypothesis predicts the emergence of IT-assisted vertical electronic
markets, but does not explain or predict horizontal
electronic markets. Yet, these
findings show that information technology seems to have a positive role in
enhancing the formation of not only vertical network alliances, but also
horizontal network alliances in lieu of horizontal mergers. There was a significant, main effect
difference for higher levels of IT for increased numbers of horizontal
alliances, when controlled for firm sales.
Yet, an interesting result was that higher levels of IT had a
significant main effect difference for lower levels of horizontal mergers, when
controlled for firm sales. Furthermore,
when firms were high information goods intense producers, firms with higher
amounts of IT were less likely to enter into horizontal mergers than firms with
low IT. These unusual results imply
that IT may have some influence on horizontal firm expansion by reducing search
costs and horizontal coordination costs by enabling network alliances between
firms. Similar to the EMH predictions
of less mergers and greater alliances with high IT in the vertical dimension,
IT may contribute to mechanizing horizontal markets by lowering customer search
costs and reducing information asymmetry, and these horizontal markets appear
first as alliances before they are consolidated into fully neutral horizontal
electronic markets. IT also may
influence the reduction of firm external coordination costs, such as
transportation costs or inventory holding costs, yielding a capability to
better control larger firms in a horizontal sense (Gurbaxani and Whang 1991).
Among other
interesting issues that are illuminated in this study are exploratory data
indicating that there may be increasing returns on the margin for information
goods. The information goods intense
producing firms seem to have higher sales per employee than non-information
goods intense producers. The study
results may also contribute to a greater understanding of the economic motivations
underlying information goods intense producing firm boundary expansion trends
that have been targeted by recent U.S. Department of Justice horizontal
antitrust activity, such as the Microsoft decision. Other research results may be helpful in explaining the emerging
firm boundary structures of the new business models of electronic
commerce. Electronic, neutral vertical
alliances for supply chain management between competitors like General Motors,
Ford, and Daimler-Chrysler AG fit the traditional EMH theory and research
model. Yet, a new contribution of this
research may be a prediction that neutral electronic horizontal markets
may be forged between direct competitors, such as the innovative airlines
booking website agreement between UAL, Delta Continental and 23 other carriers,
designed to reach customers by reducing search costs and information asymmetry,
as predicted by information economics.
Ó Virginia
Franke Kleist, Ph.D. 2000