OutsourcingAnother possible explanation for why IT might lead to smaller firms is that IT might allow firms to "outsource" more of their activities. That is, the use of IT might lead firms to "buy" rather than "make" more of the components and services needed to make their primary products. For instance, when a firm like Ford needs tires for the cars it produces, it has two choices about how to obtain these tires: It can make them internally, or it can buy them from a tire supplier. If Ford produces its own tires, for instance, it will be incurring extra costs, including, the costs of managers, labors, raw materials and machinery. If Ford buys its tires from an outside supplier, it will only incur coordination costs for finding suppliers, negotiating contracts, and paying bills. Coordination costs include information intensive activities such as gathering information, communicating, and making decisions. Since IT is particularly useful in these kinds of information intensive activities it will even reduce these costs that are needed for coordination with external suppliers. IT can make buying things externally more attractive to firms and less likely to need as much internal manufacturing capacity. In this case, the average size of firms should decrease. Reduction of Layers of ManagementThe new technologies will allow managers to handle more functions and widen their span of control. "...information technology is a critical enabler of the re-creation (redirection) of organizations. This is true because it permits the distribution of power, function and control to wherever they are most effective, given the missions & objectives of the organization and the culture it enjoys The way in which Information Technology will be used, will determine the points at which decisions are to be made, shifting these points from the top management to middle management and even clerks. Therefore, if the decision points are changed by technology, th...
