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Chapter 3 Information Systems, Organizations, and Strategy 119

routine tasks that can be reduced to formal rules that require little judgment
(such as manufacturing auto parts), whereas others (such as consulting firms)
work primarily with nonroutine tasks.

3.2 HOW INFORMATION SYSTEMS IMPACT
ORGANIZATIONS AND BUSINESS FIRMS

Information systems have become integral, online, interactive tools deeply
involved in the minute-to-minute operations and decision making of large
organizations. Over the last decade, information systems have fundamentally
altered the economics of organizations and greatly increased the possibilities
for organizing work. Theories and concepts from economics and sociology help
us understand the changes brought about by IT.

ECONOMIC IMPACTS

From the point of view of economics, IT changes both the relative costs of
capital and the costs of information. Information systems technology can be
viewed as a factor of production that can be substituted for traditional capital
and labor. As the cost of information technology decreases, it is substituted for
labor, which historically has been a rising cost. Hence, information technology
should result in a decline in the number of middle managers and clerical work-
ers as information technology substitutes for their labor.
As the cost of information technology decreases, it also substitutes for other
forms of capital such as buildings and machinery, which remain relatively
expensive. Hence, over time we should expect managers to increase their invest-
ments in IT because of its declining cost relative to other capital investments.
IT also affects the cost and quality of information and changes the econom-
ics of information. Information technology helps firms contract in size because
it can reduce transaction costs—the costs incurred when a firm buys on the
marketplace what it cannot make itself. According to transaction cost theory,
firms and individuals seek to economize on transaction costs, much as they do
on production costs. Using markets is expensive because of costs such as locat-
ing and communicating with distant suppliers, monitoring contract compli-
ance, buying insurance, obtaining information on products, and so forth (Coase,
1937; Williamson, 1985). Traditionally, firms have tried to reduce transaction
costs through vertical integration, by getting bigger, hiring more employees,
and buying their own suppliers and distributors, as both General Motors and
Ford used to do.
Information technology, especially the use of networks, can help firms lower
the cost of market participation (transaction costs), making it worthwhile for
firms to contract with external suppliers instead of using internal sources. As
a result, firms can shrink in size (numbers of employees) because it is far less
expensive to outsource work to a competitive marketplace rather than hire
employees.
For instance, by using computer links to external suppliers, the Chrysler
Corporation can achieve economies by obtaining more than 70 percent of
its parts from the outside. Information systems make it possible for compa-
nies such as Cisco Systems and Dell Inc. to outsource their production to
contract manufacturers such as Flextronics instead of making their products
themselves.

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