Theoretical Development
Definition of ICTs
Information and communication technologies (ICTs) are typically defined as any technologies used to "store, receive, transmit, and algorithmically transform any type of information that can be digitised - numbers, text, video, music, speech, programs, and engineering drawings, to name but a few" (Brynjolfsson and Hitt, 2002: 2). Currently, the term "ICT" generally refers to electronic information processing technologies such as computers and the Internet.
ICTs as General Purpose Technologies
Computers and the Internet are not the only technologies that process information. Human beings, organisations and markets are also processors of information (Galbraith, 1977; Simon, 1976; Hayek, 1945). However, not all information processors are electronic information processors. Neither is information processing a new concept (Shapiro and Varian, 1999). Information has always been a fundamental component of the co-ordination of production and exchange, and the costs of acquiring and processing information has been a constraint on the quantity, types and efficiency of activities undertaken (Arrow, 1999). However, changes in technology have enabled activities to be undertaken with information that were not possible or cost-effective previously. "The real information revolution is not that information is suddenly becoming important. Information has always been important. The revolutionary aspect of the information age is the treatment of information in ways that would have been unimaginable only a few decades ago" (Perelman, 1998).
Historically, "most of our economic institutions and intuitions emerged in an era of relatively high communication costs, limited computational capability and related constraints" (Brynjolfsson and Hitt, 2002: 3). Thus, the emergence of new technologies, such as computers and the Internet, that have the power to reduce the costs of co-ordination, communications and information processing can be expected to have some fundamental and far-reaching effects upon organisational and institutional form. This effect is in addition to the use of new technologies to create new products and new markets for these new products.
The far-reaching impacts of computers and the Internet mean that they are best considered not simply as traditional capital investments enabling the production of goods and services, but as "general purpose technologies (GPTs)" (Helpman and Trajtenberg, 1996). Such technologies offer economic benefits not just from their own use, but also because they facilitate complementary innovations, both technical (e.g. software) and organisational (e.g. geographical dispersion of specialised production via outsourcing). The effects of the complementary investments may be large in comparison to the initial investment.
Welfare Gains From GPTs 8
Whilst there is some contention about the extent to which ICTs have contributed to economic growth at the macroeconomic level (see, for example, Solow, 1987; Gordon, 2000, Triplett, 1998; Oliner and Sichel, 2000; Jorgenson and Stiroh, 2000), 9 at the firm level, there is a substantial and growing body of evidence linking ICTs with both higher productivity and organisational transformation (see, for example, Brynjolfsson and Yang, 1996; Bresnahan, Brynjolfsson and Hitt, 2000). Brynjolfsson and Hitt (2002: 4) argue that firstly a significant component of the value of ICTs is related to the ability of computers to enable complementary organisational investments such as business and work practices; and secondly, these investments lead to productivity increases by reducing costs and enabling firms to increase output quality in the form of new products or improvements in intangible aspects of existing products such as convenience, timeliness, quality and variety.
However, the accrual of measurable and intangible welfare gains from GPTs does not follow immediately after the development of the technology, or even directly after the deployment of that technology in a firm. Rather, the gains often accrue intermittently (Jovanovic and Rousseau, 2001). Unless the new technology offers an unequivocal and immediate improvement in productivity, firms may opt to depreciate existing investments in physical and human capital first before investing in the new technology (Griliches, 1988). Furthermore, if the new technologies require substantial capital investment, either for the equipment itself, or in developing the human capital (skills) to utilise the equipment optimally, then even though the technology offers immediate productivity improvements to the firm, and welfare gains to society, deployment will be staged simply because of limitations in access to capital or physical limitations in the production of the new technology (Greenwood and Jovanovic, 1998).
Even when investment occurs, accrual of productivity gains is not necessarily immediate. New adopters take time firstly to learn of the nature and benefits of using the new technologies (Arrow, 1962) and secondly to use this learning to experiment and adapt use of the technologies by creating complementary investments (Greenwood and Yorukoglu, 1997). Consequently, in the initial stages of deployment, a firm may actually experience decreases in output per unit of input as this learning is undertaken. However, over time the learning translates into measurable gains. In addition, widespread diffusion of the technology may also be delayed by the time taken for embedded learning and the nature of the complementary investments to spread amongst firms (Atkeson and Kehoe, 2001). Thus, Greenwood and Yorukoglu (1997) find that "a plant's productivity increases by 15 percent over the first fourteen years of its life due to learning effects", whilst Atkeson and Kehoe (1997:1) state that it takes "5-7 years until measured output and productivity begin to grow rapidly... The reason that the transition takes time... is that it requires an economy-wide investment in organizational capital". These findings are consistent with Brynjolfsson and Hitt's (2000) firm-level analyses of productivity gains from investment in computers. This research shows positive gains accrued in firms after lags of between five and eight years following investment.
Widespread diffusion of the technology may also be delayed by the time taken for embedded learning and the nature of the complementary investments to spread amongst firms (Atkeson and Kehoe, 2001). Thus, Greenwood and Yorukoglu (1997) find that "a plant's productivity increases by 15 percent over the first fourteen years of its life due to learning effects", whilst Atkeson and Kehoe (1997:1) state that it takes "5-7 years until measured output and productivity begin to grow rapidly... The reason that the transition takes time... is that it requires an economy-wide investment in organizational capital". These findings are consistent with Brynjolfsson and Hitt's (2000) firm-level analyses of productivity gains from investment in computers. This research shows positive gains accrued after lags of between five and eight years following investment.
The timing of investment in complementary technologies is also significant in the accrual of gains. Where learning is required for a technology to become fully productive, then it is possible to invest too early in the costly technology requiring learning, meaning that capital lies under-utilised whilst learning occurs, at a cost to both the firm and society (Jovanovic and Stolyarov, 2000; 1997). As investments in computers require learning to create the complementary applications and organisational structures and processes, then until such complements are developed, premature investment in ICTs may occur, leading to significant levels of under-utilised ICT capital. Such investment has consequences on societal welfare, as the capital may have been more productively employed in other investments (Howell, 2003).
Environmental Factors
As the ability to accrue productivity and welfare gains from GPTs relies upon the ability to learn and experiment to develop complementary investments, then the extent of their accrual is also dependent upon the ways in which the environment enables and encourages the development of these complementary investments. As the complementary investments from ICTs appear to be very strongly contingent upon the ability of firms to restructure internal processes and external relationships (Brynjolfsson and Hitt, 2002), then the nature of the wider commercial environment is critical. The OECD recognises the role played by environmental risk and uncertainty in the accrual of welfare gains. In particular, the effect of government policies encouraging innovation, and the ability of labour and product markets to enable flexible restructuring as a result of the learning acquired from the use of new technologies, are highlighted as key factors in either encouraging or impeding the accrual of gains (OECD, 2003: 14).
Information and ICTs
ICTs provide new ways to create, store, transmit, receive and utilise information. However, it is also helpful to conceptualise information as either a stock or a flow, independent of the technologies that process it. ICTs can seen as influencing the accrual of welfare by enabling the development of new products and services using information, as well as providing lower-cost methods of undertaking its creation, storage, transmission, reception and utilisation. Furthermore it is possible to identify not just new ways of using the technology, but new ways of substituting existing information processes more efficiently. Just as the use of the electric motor as a GPT could be analysed in relation to the development of new organisational forms that it enabled in businesses that required motive power by examining the ways in which firms use motive power (Greenwood and Yorukoglu, 1997), so can insights be gained into the ways in which firms develop new organisational forms and processes based upon the ways in which they use information (Howell, 2002).
A defining characteristic of information is that it is intangible, has increasing returns, and exhibits non-rival and non-excludable properties (Arrow, 1999). Furthermore, it can be cheaply reproduced, its value does not decline with use, its use by one person does not limit its usefulness to others, and its value is often determined by its use (Shapiro and Varian, 1999). Traditionally, information has been bundled with tangible, rival and excludable carrier media, such as paper or human beings. Reproduction has been either extremely costly or physically impossible. Hence, its characteristics and measurement have been defined not by the value of the information itself, but by the characteristics and measurement of the media with which it is bundled.
If the carrier medium is costly compared to the value of the information, then using the characteristics and measurements of the carrier medium as a proxy for that of the bundle may be sufficient. However, as the cost of the carrier medium decreases relative to the value of the information, then this proxy becomes less satisfactory, both in terms of assessing the value of the bundle, and the economic laws that the bundle obeys. Electronic technologies have enabled substitution of the tangible media with which information has previously been bundled (e.g. paper, human beings) by an intangible medium (i.e. digital representation) with much lower costs of storage, duplication, transmission, reception and processing (Quah, 2003). New, intangible bundles have emerged for existing information products - for example, digital representation of movies previously bundled with film, and electronic transmission of letters previously carried by physical means (email). Thus, a part of the ICT productivity story lies in understanding how these substitutions have changed the form and economics of information bundling, and the ways in which cheaper media have enabled the creation of new information products and services previously conceptually feasible, but not undertaken due to the costs exceeding the benefits accrued.
Just as information (or rather, the costs and benefits of acquiring, storing and processing information) has been fundamental in the determination of organisational forms, then the ways in which information contributes as an input, and information products (e.g. software) act as processors in the production of goods and services and the facilitation of exchange (that is, information sources, flows, processes etc), provide further dimensions for analysis. Recognising that information can play a role as both a stock and a flow in a production process, as well as contributing to the quality of other stocks (e.g. its embodiment in physical and human capital) (Malmgren, 1961; Howell, 2001) in addition to its role as a determinant of organisational and transactional forms means that any analysis of the impacts of the technologies that create, store, transmit and process this factor has a richness and complexity beyond even that of the "classical" GPTs such as the steam engine, electricity, the electric motor and the telegraph. . It must also be recognised that the intangible nature of information, and the effects that changes to the costs of creating, storing, processing and transmitting information have upon organisational form and product type, mean that the welfare gains from the increased use of electronic ICTs may not be easily measurable, or may accrue in sectors of the economy that are not captured in traditional national statistics (e.g. the value of increased choice to the consumer, and the value deriving from the flexibility of being able to undertake activities 24/7 rather than just within traditional business hours) (Bosworth and Triplett, 1998).
Operations Strategies and ICTs
The world of the future will be an ever more demanding struggle against the limitations of our intelligence, not a comfortable hammock in which we can lie down to be waited upon by our robot slaves.
(Norbert Weiner)
Operations managers are responsible for producing the supply of goods and services in organisations, thus they make decisions regarding the operations functions and the transformation systems used. The operations strategy of a firm is the what and how of activities directed towards distinctive operations competence that evaluate potential impacts of situations and alternatives in structured time dimensions, and integrate a pattern of decisions to balance the resource commitments, output requirements, and risks in various focused transformation efforts (Stonebraker and Leong, 1994). In the field of operations strategy the resource commitment decisions are generally categorized as those around the elements of capacity, facilities, process technology, sourcing, workforce, quality, work planning and organisation structure (Hayes and Wheelwright, 1984).
There is a growing competitive importance for using ICTs successfully in operations because of the pressures arising from increasingly shorter product life cycles, the demand for more customized products, services or solutions, the need for quick response by producers, and the distributed nature of the operations of some organisations. For operations managers, this means there is more information to be managed and greater advantage to those that do it well.
ICTs have also become more central to the operations function within organisations because of the increasing decentralization of Information Technology (IT). Distributed architectures, networking and open standards permit more local control, configurations and innovation. More and more responsibility is being placed on operations managers to manage ICTs and this entails a new skill set for traditionally trained managers. In small businesses, the operations manager may well also be the owner-manager. This is important because it allows those people charged with building operations advantage and distinctive competence to have access to information and tools with fewer intermediaries (Upton, 1995).
ICTs in operations can operate at various levels from the most straightforward, the process level (what lot is run next? Is the process under control?), to the most complex, the industry/network level (is there a supplier that can make this?). ICTs in operations also have a competitive role or purpose, viz. to reinforce an existing "order winner" or to change the way the operation competes. A change in the competitive advantage the operation aims to deliver will certainly mean a reexamination of other elements of the operations strategy (Upton, 1995).
The figure below combines these dimensions of level and purpose into one framework (Upton, 1995) and it shows where the case writers think the ICT application in each case fits.
Figure 1: Level and Purpose of ICTs
→ Full Size Version of Figure 1 [28KB GIF file]
Developing a Framework for Analysis
A comprehensive analysis of the accrual of benefits from ICTs, in order to develop some normative guidelines for both managers and policymakers, requires an understanding of both the substitution effects (both of processing technologies and carrier media) and the need for both complementary innovation and learning. In this sense, ICTs themselves (e.g. computers, the Internet) can be conceptualised as infrastructures, requiring complementary applications (e.g. software, processes, organisational constructs) to yield maximum benefits. Learning enables both the development of the complementary investments in the GPT sense, and the accrual of other learning-based benefits as occurs with investment in any new technologies, whether of general purpose or not. However, both the substitution and the investment in innovative learning are driven by the desire to extract greater efficiency from the use of a new physical or organisational technology. The result is a complex interaction of infrastructure, applications, learning and utilisation.
Consumers desire benefits from new technologies, and purchase new products and services based upon receiving a greater level of welfare from the purchase, within budget constraints. Businesses purchase new technologies and produce new goods and services that enable a greater level of return, in the long run, for a given level of inputs, or the same return for fewer inputs. The actual demand for the technology is derived from the demand for applications utilising the technological infrastructures. Without a demand for the applications, and the necessary learning in how to achieve the gains from the applications, no matter how available the technology may be, its utilisation will not occur. Hence, demand for the technology is itself a derived demand. For information communication technologies, the extent of their uptake will be determined by the extent to which information plays a part in the production and exchange processes of potential users of those technologies. As information is ubiquitous and fundamental to all production and exchange processes, then the potential exists for electronic ICTs to become part of all such processes. Moreover, the extent to which electronic ICTs substitute for non-electronic ones, and the nature of the complementary investments and innovations required, will be contingent upon the types, quantities and natures of information required to undertake the processes.
The ability to generate welfare gains is further influenced by the ways in which the policy and commercial environment encourages development and investment in each of infrastructures, applications and learning, and the willingness of firms to undertake these activities, given that the benefits can be expected to take some time to amass. When future benefits are uncertain, investment in any of connection to infrastructure (technology investment), application development and purchase, and learning occurs based upon the expectation of future gains. However, these do not always accrue. Unsuccessful firm-level developments will fail, whilst successful ones will survive. Presuming no or low barriers to sharing information, successful infrastructures and applications will diffuse throughout the economy (Jovanovic and McDonald, 1993). The result is societal welfare gain.
This inter-relationship is schematically represented in Figure 2.
Figure 2: Welfare-Enhancing Technological Diffusion
→ Full Size Version of Figure 2 [22KB GIF file]
The New Zealand Context
Whilst the foregoing discussion identifies key theoretical issues underpinning productivity, efficiency and welfare gains from business implementation of ICTs, and references empirical evidence of such gains in, principally, the United States environment, the literature on empirical evidence in the New Zealand environment is sparse. Surveys of specific technology adoption by businesses have been conducted (e.g. MED, 2002; Clark, Bowden and Corner, 2003). However, due to their e-business frame and the importance given specifically to the use of the Internet, these surveys have focused principally upon the use of ICTs to co-ordinate transactions between companies (e.g. email, use of websites, websites capable of receiving payments, on-line products, on-line purchases. These studies are less informative about the use of ICTs within businesses, for example the use of computerised management of production, accounts processing and the use of cell phones and text messaging. Thus, the literature does not capture either the economy-wide or firm-specific performance of New Zealand's investment in ICT capital. This is a significant omission, given that for nearly a decade, New Zealand has led the OECD in the proportion of GDP spent on computer and communications technologies (OECD, 2002: 48).
Given New Zealand's high levels of ICT spending relative to other investments, and the period over which these investments have accrued, the Brynjolfsson and Hitt (2002) findings imply that at the firm level at least, increased measurable productivity returns to these investments should be becoming apparent, providing the necessary complementary investments in firm-specific implementations applications and learning have been made. Indeed, it cannot be discounted that some of the strong productivity growth Buckle and McLellan (2004) find in New Zealand in the mid to late 1990s may be attributable to the level of investment in ICTs beginning in the early 1990s.
However, the findings based upon United States empirical research may not necessarily be transferable directly to the New Zealand context given New Zealand's very large percentage of small firms (Locke, 2003), 10 the small size and open nature of the New Zealand economy, the New Zealand economy's reliance upon primary products, and the physical distance of New Zealand from both the rest of the world and its major trading partners (Evans and Hughes, 2003). Research to ascertain the extent to which New Zealand business investment in ICTs and their complements are delivering productivity improvements and welfare gains within the New Zealand commercial and policy environment, at the firm level is indicated.
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