Organizational forms in the electronic age

Abstract

There is a fundamental shift in economics of information due to emerging information and communication technologies (ICTs). This shift has resulted in what is popularly called the ‘information revolution.’ Most people are quite familiar with arguments that suggested the death of organizations as we know them. While a lot of such writing was hyped, there is a definite impact of the emerging ICTs on fundamental organizing principles leading to some real changes in organizations. This paper attempts to understand and explicate some of these influences by expanding the framework offered by Transaction Cost Theory (TCT). TCT assumes that economic actors (individuals or firms) display bounded rationality and opportunism. Bounded rationality suggests that people cannot be truly rational despite their desire to be so. Opportunism suggests that people often cheat to gain at the expense of the other party in a transaction. Hence, organizations are designed to reduce the impact of bounded rationality and safeguard against opportunism.

Transaction costs are incurred in ensuring efficient and fair exchanges between economic actors. There are three kinds of transaction costs:

information costs related to the search, acquisition, storing, processing, and dissemination of information associated with the transactions

contracting costs which refer to the cost of negotiations and contract development

coordination costs related to the activity concerned with satisfying each party to an exchange that the value given and received is in accordance with the formal contractual agreements and expectation.

The most efficient forms of organizations result when governance mechanisms reduce the transactions costs. Traditionally, TCT suggested that market, hierarchy, and clan were three governance mechanisms that were efficient in three different contexts.

This paper argues that the internet has increased the efficiency of market governance leading to transactions that were not feasible earlier. Large and reputed organizations now have an opportunity to reach out to customers and also increase their participation in transactions. The internet has also led to the emergence of virtual organizations based on a new mode of governance called self-governance. Organizations can now encourage their employees to be part of communities of practice for mutual benefit.

Extranets have enhanced the scope of network organizations by making network governance more viable. They provide a means of developing a reliable vendor network that gives the large organizations the benefits of the market while maintaining appropriate hierarchical control.

Finally, intranets have improved the efficiency of hierarchical governance thus expanding its scope of application. They have improved the efficiency of matrix organizations and facilitated the management of integrated and centralized organizations. Intranets have also made clan governance more feasible. This will allow large companies to build organic solidarity in a geographically distributed team to create new products.

In essence, the emerging information technologies are beneficial for the following reasons:

They have led to the emergence of new modes of governance.

They have increased the opportunity to govern a greater range of exchanges than was possible without them.

They have altered the conditions under which the alternate modes of governance are suitable.

However, organizational designers need to acquaint themselves with the limitations before designing organizational forms.