Table Of ContentNEW INFORMATION TECHNOLOGY AND INDUSTRIAL CHANGE:
THE ITALIAN CASE
NEW INFORMATION TECHNOLOGY
AND INDUSTRIAL CHANGE:
THE ITALIAN CASE
edited by
Cristiano Antonelli
Department of Electronics,
Politecnico di Milano, Milano, Italy
KLUWER ACADEMIC PUBLISHERS
DORDRECHT / BOSTON / LONDON
for the Commission of the European Communities
Library of Congress Cataloging in Publication Data
~ew information technology and industrial change.
Includes bibliographies and index.
1. Infnnnation technology--Econolitic aspects-
Italy. 2. Technological innovations--Economic
aspects--Italy. I. Antonelli, Cristiano.
HC310.1SSN48 1988 338'.06 88-8970
ISBN-13: 978-94-010-7848-1 c-ISBN-13: 978-94-009-300 1-8
DOl: 10.10071978-94·009·3001-8
Publication arrangements by
Commission of the European Communities
Directorate-General Telecommunications. Information Industries and Innovation. Luxembourg
EUR 11379
© 1988 ECSC, EEC. EAEC. Brussels and Luxembourg
Sofkover reprint of the hardcover I $t edition 1988
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TABLE OF CONTENTS
ACKNO~DGEMENTS Vll
NOTES ON THE CONTRIBUTORS IX
CHAPTER 1-A New Industrial Organization Approach
by Cristiano Antonelli 1
1.1. Introduction 1
1.2. Production Functions and Governance Functions 3
1.3. The Effects of Te1ematics on the Governance Function 5
1.4. Te1ematics and Alternative Modes of Governance 8
CHAPTER 2 - The Emergence of the Network Firm
by Cristiano Antonelli 13
2.1. The Adoption of Te1ematics 13
2.2. The Uses of Te1ematics 16
2.3. The Network Firm 21
2.4. A Generalization 26
CHAPTER 3 - Manufacturing Networks: Telematics in the Automotive Industry
by Graziella Fornengo 33
3.1. From Mass Production to Flexible Production 33
3.2. The Fiat Group Case 37
3.3. Telematics in the Logistic Function 40
3.4. Telematics in the Engineering and Production Planning Functions 48
CHAPTER 4 - Networks Between Manufacturing and Demand: Cases From
Textile and Clothing Industries
by Enzo Rullani and Antonello ZanJei 57
4.1. Manufacturing Flexibility and Interaction with Consumers 57
4.2. Manufacturing Networks and Market Networks: The Benetton Case 63
4.3. Internationalization of Technological Assets and Demand Monitoring:
The Miroglio Case 71
4.4. Shrinking Idle Times, Decreasing Working Capital and Growing Flexibility:
The GFT Case 77
4.5. Problems and Perspectives 82
vi
CHAPTER 5 - Area Networks: Telematic Connections in a Traditional Textile
District
by Enzo Rullani and Antonello ZanJei 97
5.1. The Role of Telematics in Industrial Districts 97
5.2. Telematic Experiments in the Prato District 99
5.3. Problems and Perspectives 105
CHAPTER 6 - Interorganizational Networks and Market Structures
by Graziella Fornengo 115
6.1. The Interorganizational Networks 115
6.2. The Impact of Telematics on Competitive Strategies and Market Structures 119
6.3. The Economic Role of Standards 122
6.4. Voluntary versus Compulsory Standards 123
CHAPTER 7 - Supply Conditions of Telematic Network Services and Public
Policy Implications
by Gianni Cozzi 133
7.1. Technological and Supply Push versus Demand Pull in Telematic Diffusion 133
7.2. Information Quality, Supply Conditions and Demand Factors in Telematic
Diffusion: A Matrix 135
7.3. Technological Factors 137
7.4. Institutional Context, Telecommunication Supply and Marketing Factors 139
7.5. The Structure of Value Added Network and Services in Some Industrial
Countries: The Italian Paradox 141
7.6. Conclusions and Policy Implications 146
Index 151
vii
ACKNOWLEDGEMENTS
This book is based on the results of a larger number of empirical and theoretical works
developed by the authors in many years of activity. The research was financed from a
number of sources: the FAST Programme of the European Communities, the ICCP
Division of the Directorate for Science Technology and Industry of the O.E.C.D., the
Research Funds of the Ministero della Pubblica Istruzione, the Research Programmes
of the Politecnico di Milano and of the Bocconi University.
The Research team has greatly benefited from the lively working environment
offered by the Division Economics and Technology of IEFE directed by Professor
Sergio Vacca at Bocconi Universtity. The authors have benefited from critical com
ments and suggestions by many readers of earlier drafts including Alfred Chandler,
David Allen, Barbara di Bernardo, Richard Caves, Fran<;ois Chesnais, Henry Ergas,
Alfonso Gambardella, Hans Peter Gassman, Dieter Kimbel, Charles Jonscher, John
Legates, Roger Noll. At the same time all authors benefited greatly from the frequent
exchanges with J ean-Luc I wens of the FAST team.
The editor of this book owes a particular debt to Daniel Roos and Russell Neuman
for their hospitality at the Center for Technology, Policy and Industrial Development
of the Massachusetts Institute of Technology which helped the revision of the final
draft. Nevertheless, the editor and the authors take full responsibility for the book's
content.
ix
NOTES ON THE CONTRIBUTORS
C. ANTONELLI, is Associate Professor of Economics, Department of Electronics,
Politecnico di Milano.
G. COZZI, is Professor of Business Economics, University of Genova.
G. FORNENGO, is Associate Professor of Industrial Organization, Laboratorio di
Economia Politica, University of Torino and Visiting Professor of Economics,
University of Urbino.
E. RULLANI, is Professor of Business Economics, University of Udine.
A. ZANFEI, is Researcher in Business Economics, IEFE, Economics and Technology
Division, Bocconi University, Milano.
A NEW INDUSTRIAL ORGANIZATION APPROACH
by Cristiano Antonelli
1.1. INTRODUCTION
New Information Technology is the result of technological convergences in telecommunica
tions, electronics, satellite brodcasting, electrical engineering and mechanical engineering.
The first computers consisted of very expensive large mainframes with low levels of
accessibility, reliability, and versatility.The introduction of microelectronics greatly improved
memory capacity, reliability and above all cut down costs. The introduction of computer
peripherals and terminals led to greater accessibility. The combination of telecomunication
and computers made the remote use of mainframes possible. The replacement of
electromechanical switching with electronic exchanges meant that the telephone network
could easily transmit electronic data. Further technological changes in transmission increased
telecomunication capacity so as to cope with the needs of electronic communication.
As a result, the volume of electronic transmission expanded continuously during the 70s
and is expected to continue to expand in the 80s. This worldwide telematic infrastructure will
eventually enable a large number of firms and individuals to have remote access to large
scale computers with enormous capabilities at low costs. Moreover a flow of incremental
innovations, such as packet switching, timesharing, distributed networking, telesoftware, etc.
further reduced the cost of using large-scale computers.'
The application of computers has expanded from its original use in rapid calculation to a
wide range of tasks in which retrieval, treatment and storage of data cover all possible aspects
of economic activity within firms. The linkage of communication networks to productive
plants, the accrued interface between process computers and informatic equipment has
facilitated the interaction between computer assisted design, and computer assisted manufac
turing, with the final result of radically changing the features of production activities.
Flexible manufacturing systems, computer controlled machining centers and on-line in
tegrated manufacturing have been developed to take advantage of the rapid availability and
divisibility of computer generation and on-line communication of information concerning
price, demand and quality fluctuations as well as new technical requirements.
The information content of the production process is growing. Information is more and
more becoming a complementary asset to the management of the production process and to
the design of new capital goods.
In sum New Information Technology can be defined as a set of latent technological and
organizational innovations characterized by more communication-intensive techniques of
production and governance of transactions.
By radically changing the costs and condition of retrieval, treatment, evaluation and
storage of information necessary to coordinate separable activities such as plants and produc
tive units, as Simon (1960) argues, New Information Technology is having important effects
on the organization of firms.
2 CRISTIANO ANTONELLI
By changing the cost and condition of use of information necessary within the production
process to coordinate different machines, New Information Technology is also having
important effects on the features of productive units.
For these reasons the economic analysis of the impact of New Information Technology on
fIrms and industries requires a specific framework. New Information Technology in fact is a
major technological innovation, with dramatic organizational and productive features and
both of these aspects must be considered.
With reference to the organizational features, New Information Technology can be
described as an innovation in the use of information in the governance of transactions among
production units. It seems clear that New Information Technology has important effects on
the strategy and structure of firms and industries especially by changing the information
environment and the institutional boundaries between markets and organizations.
With reference to the productive features New Information Technology can be described
as a radical innovation in the use of information within the production process. In this respect
it seems clear that New Information Technology has important effects on the size of plants
and productive units by changing the minimum effIcient size of production.
To appreciate the complex and subtle chain of organizational and productive changes
induced by the introduction of New Information Technology a new industrial organization
approach such as the one developed by the merging of industrial economics and transaction
cost economics seems to be the most suitable.2 Within such an approach this present study
aims at analyzing the effects of New Information Technology on fIrms' strategies and market
structures focusing attention on the changes in the modes of governance of transactions and
in the organization of production processes which parallel the adoption of New Information
Technology in a number of Italian firms.
A case study methodology has ben considered the most appropriate to analyze the evolv
ing character of the introduction of telematics and its effects on frrms.3
Data and information on twenty-one firms which had already adopted New Information
Technology have been collected in the period 1985-1986. The cases have been selected
bearing in mind the fact that a proper evaluation of the impact of telematics should make
careful allowance for the variety of institutions involved. In fact it is to be expected that New
Information Technology will cope differently with large multinational firms and small firms.
Moreover because of major differences in the use of New Information Technology and its
varying effects, due to the specific sector of activity, most firms have been selected in clearly
different groups of industries. Mass production industries involving the assembly of inter
mediate products and extensive networks of distribution of products to final consumers, e.g.
the automobile sector were studied as well as the textile and garment industries which are
characterized by small scale production processes and differentiated products. It is worth
noting here that these industries together with the food and engineering industries, which
were also the subject of case-studies, represent the bulk of Italian manufacturing industry.
Finally, special attention has been paid to assessing the uses and effects of New Information
Technologies within the firms pushing the analysis at a microanalytical level where each
function which appeared most sensitive to the uses of New Information Technology, such as
marketing, procurement, manufacturing management and logistics has been considered
separately.
The evidence collected has then been analyzed both within each firm and on a inter-firm
basis. The information gathered in this way enabled us to sketch out some important "stylized
facts" about the introduction and diffusion of New Information Technology in the firms and
to asses the 'economic and organizational impacts of New Information Technology within
firms and between frrms.
A NEW INDUSTRIAL ORGANIZATION APPROACH 3
1.2. PRODUCTION FUNCTIONS AND GOVERNANCE FUNCTIONS
According to Arrow (1969) information has a strategic role to play in assessing the optimality
of economic activity in a market system. The possibility of using the price to allocate, coor
dinate and monitor economic activity in optimal conditions, is determined by the differen
tiated access of economic agents to information. Arrow has also shown that uncertainty is
compatible with a competitive equilibrium system when all individuals have access to the
same information under the same conditions. The price system fails when these conditions
are not fulfilled and access to information is differentiated among the economic agents. Thus
transactions have a cost, since markets and prices are both costly and imperfect.4
Consequently, when the administrative integration of information exchange, in spite of the
disadvantages of centralization, reduces these costs, organization takes the place of markets.
Markets and "Hierarchies" of fIrms can be considered as alternative modes of supplying that
coordination, allocation and monitoring of productive inputs necessary to organize economic
activity.Economic activity is organized either within or outside the fIrm depending on the
characteristics of governance costs i.e. the relative weight of hierarchical (coordination) and
market (transaction) costs.
Coordination costs have always been considered a major factor in limiting the size of
firms. Simon (1947) argues that they counter-balance productive costs when defining the
optimum size of the fIrm, for they limit the continuing growth of the fIrms, even if technical
economies of scale are profItable.s However, as Chandler (1977) shows in his study based on
a large amount of empirical evidence, it is time consuming to locate trading partners, to
establish contracts and to enforce them. Chandler has also pointed out that a trade technology
is necessary and that such a trade technology exhibits increasing returns to scale. Conse
quently the larger the size of coordination activities the smaller the average coordination
costs and therefore larger coordination units have clear advantages.
According to the new industrial organization approach the size of a firm and its strategy
are determined when the production costs and the governance costs are jointly taken into
account. The size of fIrms depends not only on technical economies of scale but also on other
organizational forces which are at work and most effective when uncertainty and information
imperfections playa strategic role.6 Production costs and governance costs are thus regarded
as the two classes of determinants of industrial structures. The features of production costs
shape the minimum efficient size of production activities. The features of governance costs
shape the minimum efficient size of firms.?
More specifically we see that the features of production costs depend upon the correspond
ing production functions and the technologies they are based upon i.e. the sets of productive
techniques available, and their characteristics, with special reference to indivisibilities and
consequent economies of scale. In this respect it can be stated that the features of production
technoiogies determine the minimum efficient size of production activities. Economies of
scale are thus the shaping force behind the size distribution of production activities. An
industrial structure with no governance costs would be characterized by firms which are
never larger than the minimum efficient size of production units. No discrepancy would be
possible between the level of technical concentration and the level of economic concentra
tion. So far economies of scale shape the size of firms and for given levels of demand the
features of industrial structure. Firms in fact would have no interest in running productive
plants larger than the efficient size. Consequently the size distribution of firms would be
governed by the nttio between minimum efficient size plants and demand.
Empirical evidence, however, shows that firms are usually larger than efficiently sized
plants, and that economic concentration is much greater than technical concentration.
