Page 55 - Electronic Commerce

Chapter 1

increased the efficiency and effectiveness of hierarchical monitoring activities. Assembly
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lines and other mass-production technologies allowed work to be broken down into small,
easily supervised procedures. The advent of computers brought tremendous increases in
the ability of upper-level managers to monitor and control the detailed activities of their
subordinates. Some of these direct measurement techniques are even more effective than
the first-line supervisors on the shop floor.
During the years from the Industrial Revolution through the present, improvements in
monitoring became commonplace and the size and level of vertical integration of firms
have increased. In some very large organizations, however, monitoring systems have not
kept pace with the organization’s increase in size. This has created problems because the
economic viability of a firm depends on its ability to track operational activities effectively
at the lowest levels of the firm. These firms have instituted decentralization programs that
allow business units to function as separate organizations, negotiating transactions with
other business units as if they were operating in a market rather than as part of the same
firm. Economists argue that large companies decentralize because they have grown too
large to be managed effectively as hierarchical structures, so their managers need the
information provided by market mechanisms.
To expose their decentralized operations to market mechanisms, these companies
allow their divisions to operate as independent business units. A strategic business unit,
or simply business unit, is an autonomous part of a company that is large enough to
manage itself but small enough to respond quickly to changes in its business environment.
Strategic business units have their own mission and objectives; therefore, they have their
own strategies for marketing, product development, purchasing, and long-term growth.
General Electric, one of the largest companies in the world, has used strategic business
units to organize its diverse business operations since the 1960s. For example, General
Electric makes both jet engines and light bulbs. These two businesses have different
products, distribution channels, and customer types; therefore, they require different
objectives, product development strategies, marketing plans, and manufacturing
operations. General Electric’s Jet Engine Division and Light Bulb Division operate as
separate strategic business units. Although a strategic business unit operates as a
participant in a market (rather than as part of the hierarchical structure of the owning
company), the strategic business unit itself is organized internally as a hierarchy.
Exceptions to the general trend toward hierarchies do exist. Many commodities, such as
wheat, sugar, and crude oil, are still traded in markets. The commodity nature of the products
traded in these markets significantly reduces transaction costs. There are a large number of
potential buyers for an agricultural commodity such as wheat, and farmers do not make any
special investment in customizing or modifying the product for particular customers. Thus,
neither buyers nor sellers in commodity markets experience significant transaction costs.

Using Electronic Commerce to Reduce Transaction Costs
Businesses and individuals can use electronic commerce to reduce transaction costs by
improving the flow of information and increasing the coordination of actions. By reducing
the cost of searching for potential buyers and sellers and increasing the number of
potential market participants, electronic commerce can change the attractiveness of
vertical integration for many firms.

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