How it Affects Organizational Structure: A Theoretical Perspective

There is a significant body of research that examines the relationship between structure and technology, but the mechanism by which information technology affects organizational structure remains scantily studied and poorly understood. One theory holds that organizational hierarchy is affected by the human inability to attend to more than a few bits of information at once (Simon, 1973). Central to this theory is the idea that organizations obtain or generate more data than any one person can assimilate to make informed decisions. As information flows to the tops of organizations, this "attention bottleneck," as it is called, becomes narrower and narrower. Information technology can theoretically loosen this bottleneck by processing, summarizing, and indexing the information. By contributing to managers' abilities to process more information, IT increases their potential span of control and flattens the management structure.

Bolton and Dewatripont move this theory out of its hierarchical context by proposing that firms organize to minimize the costs of processing and communicating information among its members (Bolton & Dewatripont, 1994). Specialized agents (human or computer) process data creating information with more specificity and relevance to the decision maker. The organizational structure, then, reflects returns to specialization and a trade-off between specialization and communication. This may, in part, explain why Leavitt and Whisler's (1958) centralization forecast has not materialized. As deregulation propels industry consolidation and customer demands fuel horizontal integration, organizations are forced to maintain divisionally localized processing capabilities to effectively manage their expanding product scope. Information technology affects organizational structure by decreasing the cost of creating or automating specialization agents and decreasing the cost of communication and integration.

Another theory holds that information technology affects organizational structure by changing the differential between internal and market transaction and coordination costs (Malone & Laubacher, 1987). The theory is based on the hypothesis that market coordination costs are higher than internal coordination costs. As information technology reduces the costs of market coordination, market transactions should become more desirable relative to internal transactions, thereby reducing firm size and the degree of vertical and horizontal integration.

The implication of these theories is the growth of the Internet should enable partnerships and other virtual organizational forms, and improve their viability relative to more hierarchically controlled structures. As the relative costs of coordination, transaction support, communication, and agent automation change, we would expect to find evidence of structural change among firms in the financial service industry.



Computing Information Technology. The Human Side
Computing Information Technology: The Human Side
ISBN: 1931777527
EAN: 2147483647
Year: 2003
Pages: 186

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