In today’s fast-moving business world, technology plays a key role in how companies work. One big area of impact is the organization of production chains—how goods are made and distributed.
A new study from Cornell’s SC Johnson College of Business sheds light on how U.S. production chains have changed with advances in information technology (IT). It explores the links between IT investments and how businesses are structured.
How things work
IT advances have brought major changes in how companies design their production processes. The authors of the study looked at what these changes mean for businesses and consumers.
A crucial decision in running a manufacturing plant is deciding how much of the production process to keep in-house and how much to outsource. This choice, called vertical integration, can have big effects on a business. New information and communication technologies, like the internet, have shifted how production flows for many firms.
The researchers used U.S. Census Bureau data from over 5,600 manufacturing plants to see how the internet revolution affected production chains. This data helped them understand the relationships between production units within and between companies and how these relationships changed after companies invested in internet-enabled technology that made coordination easier.
They found that many companies sold products both internally and externally, a mix they call plural selling. The internet’s ability to lower communication costs led to more external sales and less vertical integration.
Reshaping business
Overall, the study shows how digital technology has reshaped production chains, with important consequences for business strategies and market dynamics.
“The internet has made it cheaper and faster for companies to communicate and share information with each other. This means they can work together more efficiently without the need for as much vertical integration,” the researchers explain.
Some might worry that relying on external partners could make businesses more vulnerable, but the research suggests otherwise. Companies already using a mix of internal and external sales before the internet age seem to adapt best to these changes. Production units that were already stretched to capacity were also the ones that made the biggest changes to transaction flows after investing in new technology.
“Technology is continuing to reshape the way companies operate and are organized,” the authors say. “More recently, changes in the use of analytics in companies have been accompanied by changes in organizations, and the same is very likely ongoing with newer investments in artificial intelligence.”
The research underscores the importance of keeping up with technology. Companies that embrace digital technologies now are likely to thrive in the future. While many questions remain about how these changes will unfold, one thing is certain: the relationship between technology and business will only grow stronger in the future.
