Research Note—Do Large Firms Become Smaller by Using Information Technology?

Abstract

T he relationship between information technology (IT) and a key organizational design variable, firm size, is an important area of study, particularly given the ongoing transition to an information-based economy. To better understand the more nuanced aspects of the relationship, we formulated a bidirectional and time-lagged model that incorporates different perspectives from organizational theories and transaction cost economics. Our two models-the bidirectional and one-year lagged model and the bidirectional and two-year lagged model-were tested using nine-year panel data on IT spending, IT stock, coordination costs, firm size, and relevant control variables for 277 manufacturing firms. We found a sequential interaction between IT and firm size in both of the two models: as a firm grows in size, its coordination activities increase; the firm then uses more IT to handle the increased activities of coordination; this increased use of IT, in turn, decreases coordination costs, and eventually, the size of the firm decreases. It was also found that the presence of coordination costs is necessary for the sequential interaction between IT and firm size, indicating coordination between and within firms is a major reason for firms to invest in IT and for IT effect to take place on firm size. This study has taken an initial step by attempting to empirically examine dual causality and longitudinal effects between IT and firm size, and to reconcile different theoretical perspectives on the relationship between them. We hope this work can act as a catalyst for developing a better understanding of the complex relationship between IT and organizations, with the ultimate goal of offering robust prescriptions for successful structural change.

The effect of information technology on IT-facilitated coordination, IT-facilitated autonomy, and decision-makings at the individual level

“…Subsequent studies have provided empirical support for this theoretical argument by linking greater IT investment to operational and strategic coordination (Sanders 2008), smaller firm size and to information exchange and integration (Dennis 1996). Moreover, Im, Grover, and Teng (2013) went further and showed that this IT-firm size linkage can be explained by the negative relationship between IT investment and coordination cost. Recent explosion of the use of mobile devices, such as smart phones, becomes part of the Bring Your Own Device (BYOD) movement, providing further momentum for better IT-facilitated coordination in organizations (Wirthman 2013).…”

Effect of Customer-Centric Structure on Long-Term Financial Performance

“…In essence, organizing divisions (internal to the firm) around customer groups (external to the firm) should better position the firm to improve customers' experience and thus increases satisfaction, though at the expense of internal simplicity (Gulati 2007, Homburg et al 2000. Coordinating costs, defined as the expenses incurred from managing interdependent functional activities across internal units, suppliers, and customers (Ray et al 2009, Bendoly et al 2012, Im et al 2013, are higher when external, front-end, customer considerations are prioritized in organizing back-end functional activities.…”

“…A customer-centric structural design prioritizes communication about and knowledge of specific customer groups over clarity in internal and back-end functional operations (Day 2006, Gulati 2007. We argue that a customer-centric structure will increase a firm's coordinating costs, or the expenses incurred from managing interdependent functional activities across internal units, suppliers, and customers (Ray et al 2009, Im et al 2013. First, a customer-centric structure employs more resources in communication and decisionmaking processes, because complex reporting relationships arise between front-end (customer-facing) and back-end (product-producing) operation centers.…”

“…Subtracting expenses for advertising, R&D, software, bad debt, and pension and retirement from selling, general, and administrative expenses (billions of dollars) (Im et al 2013, Shin 2003, Ray et al 2009). …”

“…Consistent with prior studies employing coordinating costs to capture the expenses incurred from managing interdependent functional activities across internal units, suppliers, and customers, we operationalized coordinating costs with reported selling, general, and administrative (SG&A) expenses, which capture nonproduction overhead expenses due to customer-supporting activities, business inefficiencies, or other administrative labor costs (Im et al 2013, Shin 2003, Ray et al 2009). …”