Thursday, April 01, 2010

Small firms and information Technologies (I)

It has been quite usual to assume that because there are new information technologies available, it should have a positive impact on management had they are applied. However, the empirical results does not follow the path of a straight line.
A recent research done by Greek economists o(Global Journal of Business Research, Volume NÂș 4 ,Number 1, “An empirical study of Small and medium sized enterprise information communication technologies”,2010), concludes that smaller firms do not consider technologies other than those related to specific functional matters, while larger ones (from 10 up to 250 workers), based on these technologies, try to integrate their processes. Thus the main concern is to support the internal horizontal development( It means to get the organization flatter ) , taking into account internal vertical development (Management requirements to make sure positive financial results. In other words , using information technologies is related with the unification of internal with external environment (markets ).-
What are the implications of these findings?. A better understandings about them, require to take a look at the justification for using information technologies within firms. From the microeconomic theory point of view ,there are two approaches about firms structure :The theory of transaction cost, and The theory of representation.
According to the theory of transaction cost, firms expand up to the point that their organizational internal cost ,are just equal to the external cost of getting the same product from other firms. If these costs are higher, firms will try to reduce it both throughout externalization or better management skills. This management skills, includes new technologies ( not to mention cultural values), whose purpose is to increase productivity such that the expected lower operational cost, keep the organization more efficient that their competitors. In this process, firms substitute labour specially unskilled one. The more skilled labour, is complementary with higher capital value, arising from new information technologies equipment available .Physical Capital stock might also decrease, because what it counts in terms of efficiency is capital flow(information, data, prospective analysis).The design process within the automobile industry is a good example, of this substitution.
These days ,such a process is done mainly using computers simulation which imply less period of time to get the final design( a car) ready to be produced. Quite different to the experience of designing the Ford Mustang in the seventies, even with a highly qualified team, with Lee Iacocca as their leader took more than one year.
The theory of representation ,assumes the firm as a set of contract between different people, with different interests and not necessarily connected with the firm maximization profit purposes. The only way to take control of such disparity and its implications in terms of cost ( these people need to be managed, supervised and controlled) , is using contracts , but these contracts supervision also means higher cost. Thus information technology, allow firms to reduce such a cost, because it allows the implementation of shared values center ,and better contracts management, keeping cost pressures under control.-