Recent experience suggests that many reengineering efforts fail, and that they fail for reasons unrelated to the technical ability of organizations to implement information systems. Our research suggests that the two principal reasons for failure are functionality risk and political risk: respectively, the organization's inability to understand its uncertain future strategic needs, and its inability to make painful and difficult changes in response to these future strategic needs. Recent research in the organizational change literature suggests that these risks are the result of conflict among the organization's current strategy, its espoused degree of change, the actually accepted and generally smaller degree of change, and the generally larger degree of change that would be in some sense optimal. Moreover, the conflicts among these may be unperceived or undiscussable within the organization, exacerbating the risks. We summarize in a few testable hypotheses our experience with managing the risks of reengineering, and use a small set of representative case studies to examine these hypotheses informally.
Researchers have suggested that information technology (IT) can reduce coordination costs, leading to increased coordination and cooperation among buyers and suppliers in an industry. However, improved coordination through IT, and the economic benefits from that coordination, may not be fully realized in practice; this conclusion is suggested by a field study in the consumer packaged goods industry investigating the impact of IT on interactions between manufacturers and retailers. New coordination mechanisms are emerging, driven by checkout scanner systems and IT, that permit more tightly coupled logistics operations in the distribution channel. The potential benefits of this increased coordination, through reduction in inventory and more stable manufacturing, are dramatic. However, we have observed considerable resistance by retailers to these innovations. Analysis of our field study results suggests that this resistance is due to the impact of the new coordination mechanisms on bargaining power; retailers perceive that their bargaining power will be eroded under the new coordination structure, and fear that this will preclude their sharing in the economic benefits.
Investments to increase the level of explicit coordination with outside agents have generally resulted in increased risk to the firm; firms have traditionally avoided this increased risk by becoming vertically integrated or by underinvesting in coordination. This paper argues that information technology (IT) has the ability to lower coordination cost without increasing the associated transactions risk, leading to more outsourcing and less vertically integrated firms. Lower relationship-specificity of IT investments and a better monitoring capability imply that firms can more safely invest in information technology for interfirm coordination than in traditional investments for explicit coordination such as co-located facilities or specialized human resources; firms are therefore more likely to coordinate with suppliers without requiring ownership to reduce their risk. This enables them to benefit from production economies of large specialized suppliers. Moreover, rapid reduction in the cost of IT and reduction in the transactions risk of explicit coordination makes possible substantially more use of explicit coordination with suppliers. The resulting transaction economies of scale, learning curve effects, and other factors favor a move toward long-term relationships with a smaller set of suppliers. We call this combination--a move to more outsourcing, but from a reduced set of stable partnerships--the "move to the middle" hypothesis.
Cooperation is becoming increasingly important in the modern business environment. The resulting emergence of new forms of organizational relationships is challenging managers to understand the fundamental dynamics of cooperation in order to evaluate and restructure their industrial relationships. This paper applies transactions cost economics toward understanding cooperative relationships. Cooperation is viewed as an effort to increase resource utilization and value through higher explicit coordination of economic activities. However, increasing explicit coordination can create transaction risks: exposure to opportunistic behavior by the other party. Transaction risk limits the level of coordination that is achievable. Information technology can reduce the costs of coordination while also reducing the transaction risks associated with increased coordination. These dual effects suggest a move toward tightly coupled, cooperative relationships.
Over the past ten years, Rosenbluth Travel has grown from a regional travel agency with $40 million in annual sales to one of the five largest travel agencies in the United States, with sales of $1.3 billion. Their strategy was based on exploiting the structural changes initiated by airline deregulation in 1978, including growth of the corporate travel market and increasing economies of scale leading to consolidation. Information technology (IT) was a fundamental part of this strategy. The case sheds light on several theories on gaining competitive advantage through IT; these theories feature technology leadership, leveraging critical resources, the role of IT infrastructure, and switching costs. While these theories contribute to an explanation of Rosenbluth's success, a critical factor appears to be the vision to see an opportunity and the ability to hustle to exploit it.
Information systems are strategic business tools, frequently essential to a firm and central to its competitive strategy. Their importance is now acknowledged. But information technology--equipment and services--is available to all firms, and most applications can be duplicated. The copying firm often enjoys the advantages of newer and better technology, learns from the experience of the innovator, and thus can offer comparable services at lower costs. When can an information technology-based strategy confer sustainable competitive advantage? The answer may lie with the role of strategic resources in explaining the allocation of economic benefits from an IT innovation. Specifically, information technology can lead to sustainable competitive advantage when it is used to leverage differences in strategic resources. This may be true even in cases where duplication is relatively easy and there are few dynamic effects, like first-mover advantages, to protect the innovation. An important characteristic of IT is its ability to manage interactions among economic activities; economic theory can be used to establish a link between this characteristic of IT and shifts in resource values. This allows us to identify and examine some opportunities for deploying IT to leverage structural resource differences among firms, including differences in vertical integration and diversification as well as differences in the quality and organization of key resources.