Electronic Enterprises: Looking to the Future

May 1994

NTIS order #PB94-180007

GPO stock #052-003-01375-4
Recommended (Nation: U.S. Congress, Office of Technology Assessment, Electronic

Enterprises: Looking to the Future, OTA-TCT-600 (Washington, DC: U.S. Government

Printing Office, May 1994).
Foreword

E

lectronic Enterprises: Looking to the Future takes a strategic

look at the development of electronic commerce and identifies

the characteristics of the infrastructure that will be required to

support it. The report found that, in an electronically networked

economy, the design and underlying architecture of the global information infrastructure will have a major impact on national economic

growth and development. The Senate Committee on Commerce, Science, and Transportation and the House Committee on Science, Space,

and Technology requested the report.

To support U.S. business performance and to ensure a competitive

economic playing field, the information infrastructure will need to be

flexible and open, seamless and interoperable, and evenly and ubiquitous y deployed. How well the infrastructure meets these criteria will depend on factors such as the degree of competitiveness in the communication and information networking industries; the rules governing access

and interconnection; and the availability of standards and software applications to support electronic commerce.

The government can adopt a number of strategies to promote a network architecture that meets these requirements. Several strategies are

discussed in the report. Complementary actions to support business and

the workforce in the effective use of networking technologies are also

identified. If American businesses are to benefit fully from electronic

commerce. infrastructure policy cannot be developed in a vacuum; adequate attention must also be given to the social and economic factors that

govern the use of networking technologies as Congress develops a national infrastructure policy.

OTA appreciates the assistance of the project advisory panelists,

workshop participants, and the interested business, labor, consumer, and

other private sector groups and individuals who participated in the study.

OTA values their perspectives and comments; the report is, however,

solely the responsibility of OTA.

ROGER C. HERDMAN

Director

Ill
Daniel Bell

Panel Chairperson

Scholar-in-Residence

American Academy of Arts and

Sciences

Marietta Baba

Professor

Department of Anthropology

Wayne State University

James Beatty

President

National Consulting Systems, Inc.

Jim Berm

Executive Director

Federation for Industrial

Retention and Renewal

Kathleen Bernard

Director, External Programs

North Carolina Supercomputer

Center

Willard R. Bishop, Jr.

President

Willard Bishop Consulting, Ltd.

Fred Block

Chairman

Department of Sociology

University of California at Davis

Bernard W. Campbell

Vice President, Corporate

Information Services

Sonoco Products Co.

Carl Cargill

Standards Strategist

Sun Microsystems, Inc.

William Cunningham

Founder and Director

Focus: HOPE

Irwin Dorros

Executive Vice President,

Technical Services

Bell Communications Research

Frank Emspak

Professor

University of Wisconsin, Madison

School for Workers

Sara Kiesler

Professor

Department of Social and

Decision Sciences

Carnegie Mellon University

James L. Koontz

Chief Executive Officer

Kingsbury Corp.

Donald R. Lasher

President

Information Services Division

United States Automobile

Association

Scott Loftesness

Group Vice President

Visa International

Glenn Smith

Manager

Strategic Technology Planning

United Parcel Service

Paul Vetter

Director, Information Services

Cone Mills Corp.

Mark Weiser

Chief Scientist and Manager

Computer Science Laboratory

Xerox Palo Alto Research Center

John Wohlstetter

Director, Technology Affairs

GTE Corp.

John Zysman

Professor

Department of Political Science

University of California, Berkeley

/k)&: OTA appreciates and is grateful for the valuable assIsMIcc and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report

and [he accuracy of its contents.

iv
Peter Blair PRINCIPAL STAFF

Assistant Director D. LINDA GARCIA

OTA Industry, Commerce, and Project Director

International Security Division

Stephanie Gajar

James W. Curlin Analyst

Program Director

OTA Telecommunication and

Computing Technologies Sunil Paul

Program Analyst*

Jean Smith

Project Editor

Mark Young

Contractor

OTA REVIEWERS

John Alic

Rob Atkinson

Mark Boroush

Alan Buzacott

Vary Coates

Betsy Gunn

Todd LaPorte

Joan Winston

David Wye

Preject Staff

ADMINISTRATIVE STAFF

Liz Emanuel

Office Administrator

Michelle Smith

Secretary

Karolyn St. Clair

PC Specialist

CONTRACTORS

Richard Bishop

Richard Bishop Consulting Ltd.

Timothy J. Brennan

University of Maryland

Baltimore County

Robert Mittman

Institute for the Future

Abbe Mowshowitz

Rotterdam School of Management

Erasmus University, Rotterdam

Paul E. Teske

State University of New York at

Stony Brook

*Until January 1994

v
contents

EXECUTIVE SUMMARY 1

1 Introduction 5

Purpose and Scope of the Study 6

National Information Infrastructure Initiative 7

Factors Defining Economic Performance 7

The Changing Business Environment 10

Potential for Business 19

Key Findings and Policy Implications 30

2 Issues in Electronic Commerce 37

The Technology to Support Business Needs 37

Increasing Importance of Software 43

Linking Technology and Organizational

Innovations 50

Need For A Flexible Workforce 56

Effects of Technology Choices in a Knowledge-Based

Society 58

Criteria for Evaluating Policy Options 61

3 Regulating the Electronic Enterprise 63

OPTION A: Provide for Open Access and

interconnection by Extending Common Carriage

Requirements 64

OPTION B: Promote Business Access to New

Technologies and Services by Redefining the Notion

of Universal Service 70

OPTION C: Relax Antitrust Constraints and

Cross-Ownership Rules 73

4 Cooperative Networking 81

OPTION A: Foster the Development of Cooperative

Networking Services To Support Electronic

Commerce 82

OPTION B: Provide Greater Incentives and Support for

Cooperative Standards-Setting Efforts 85

OPTION C: Provide Support for Cooperative Research

and Development Efforts 96

vii
5 Promoting Technology/Industry

Developments 103

OPTION A: Use Tax Incentives To Foster Private

Sector Developments 105

OPTION B: Encourage Private Sector Activity by

Providing Grants and Loans 108

OPTION C: Stimulate the Market by Leveraging

Procurement Powers 110

OPTION D: Directly Fund, Develop, and/or Provide

Needed Technologies and Technology-Related

Services 111

6 Educating for Technology Transfer 117

OPTION A: Expand the Program for Extension

Services 118

OPTION B: Promote the Dissemination of

Business-Related Information 127

OPTION C: Provide Greater Support for Business and

Business-Related Education 129

OPTION D: Provide Greater Support for Worker

Training 133

7 Government and Markets 137

OPTION A: Establish a Congressional Commission To

Investigate the Implications of Electronic

Commerce for Future Market Rules and

Regulations 139

OPTION B: Restructure the Organizational Basis for

Communication Decisionmaking 150

APPENDICES

A Workshop Participants 157

B Reviewers and Contributors 160

C Contractor Reports 165

D Boxes, Figures, and Tables 166

E Acronyms and Terms 169

INDEX 173

. . . Vlll
E

lectronic transactions are now commonplace in the U.S.

business environment. Consumers use electronic

technologies daily to transfer funds, make credit card

purchases, buy stock, and browse electronic catalogues.

Businesses, too, rely heavily on electronic technology for recordkeeping, accounting, inventory control, production management,

and purchasing and sales. This use of networked information

technology barely hints, however, at its full potential for improving U.S. economic performance in the future.

Competition from abroad has forced American businesses to

seek new, more productive ways to organize their operations and

carry out their work. These innovative methods include total

quality control, customer-driven planning, lean production, agile

manufacturing, just-in-time manufacturing, and electronic inte-

&grated enterprises. An advanced communication and information

infrastructure, such as that embodied in the concept of a National

Information Infrastructure (NII), could greatl y enhance these new

management and production tools and improve overall U.S. economic performance.

This report identifies and frames the technological, economic,

and social issues related to the use of electronic networks for business and commerce. It focuses on the features that must become

part of an NII, as well as the social and economic conditions needed to support it. In an electronically networked economy, the design and underlying architecture of the global information infrastructure will have a major impact on national economic growth

and development. However, if all American businesses—large

and small, national and multinational, service and manufacturing—are to fully benefit from electronic commerce, national e

Summary

Information technologies

will need to be varied,

flexible, open, and

easily interconnected if

they are to serve

business and the

nation’s needs.

1
2 I Electronic Enterprises: Looking to the Future

infrastructure policy must also consider the social

and economic factors associated with its use.

POTENTIAL IMPACTS OF ELECTRONIC

NETWORKS

Changes in the world economy and the global

business environment require American businesses to adapt through innovation. These

changes include: 1 ) the emergence of a highly

competitive global economy in which multinational corporations play a greater role; 2) the

growing importance of information as an economic resource and basis for competitive advantage;

and 3) a shift from mass production to a system of

customized, flexible production.

Information and communication technologies

are driving and facilitating the adaptation of

American businesses to these changes. Businesses are now using these technologies in nearly

all of their operations: from recruiting to downsizing, from ordering materials to manufacturing

products, from analyzing markets to developing

strategic plans, and from inventing technologies

to designing new uses for them. Early users of

these technologies gain a strategic advantage;

latecomers must eventually adopt them just to survive,

Networked information technologies are especially useful in helping firms to restructure and reengineer their operations to become more competitive. Businesses are using these technologies to

reorganize their activities into more versatile and

flexible networks and teams. Some businesses,

for example, are using networking technologies to

build long-term, integrated business relationships

with their customers and suppliers. Others are

teaming up with outside firms for specific, shortterm ventures. Some of these business relationships, operating through electronic networks,

cross national as well as organizational boundaries. Networking technologies such as wide area

networks ( WANs), videoconferencing, computerintegrated engineering and manufacturing, and

electronic data interchange (EDI) are necessary to

support these flexible business arrangements.

While information and communication

technologies have an impact on how firms conduct their business, they will also affect the size,

structure, and openness of markets. As these

technologies are integrated into reliable commercial networks, more trade will take place in electronic markets, online. How these electronic markets evolve and the form they take will have

significant consequences for the functioning of

the economy as a whole. Electronic markets can

reduce the net costs of doing business, and thus

improve overall efficiency and expand trade.

However, if these networks fail to interconnect, or

are unevenly deployed, they could create technological barriers to trade and restrict competition.

TECHNICAL CRITERIA FOR SUCCESS

The “architecture” of electronic networks will be

critical in determining the impacts of electronic

commerce. Like a sculpture that is fashioned from

Tinker Toys, a network’s structure is determined

by the connections and linkages that give it shape.

How these networks are formed and joined together in a national infrastructure will determine the

size and scope of markets, as well as the gains in

trade, the distribution of costs and benefits

throughout the economy, the nature of work, and

the quality of jobs.

Information networking technologies will need

to be varied, flexible, open, and easily interconnected if they are to serve business and the nation’s needs. Flexibility and choice allow businesses to move quickly and strategically to

respond to changing circumstances and market

demand, and to mix and match network components to develop new products and services. Open,

interoperable systems, which can be easily interconnected, reduce business transaction costs and

barriers to market entry. Technology diffusion

will also occur faster and more broadly because

interoperable components are cheaper and easier

to use. In addition, interoperable systems provide

a standard platform for the innovation and development of new components and applications.
If everyone is to share the benefits of electronic

networks, the technology must also be widely

deployed. The first developer of a commerce network can gain a significant competitive advantage, if investment costs are high and the market is

limited. Potential competitors may be unable to

attract enough users to justify the cost of establishing additional networks. Latecomers in the business network game will also be disadvantaged because they lack the hands-on experience needed

for network development and operation. Although the profits gained from an early competitive advantage may stimulate further network investment, this competitive advantage could lead

to anticompetitive behavior if too many newcomers are discouraged or locked out of the market.

TECHNOLOGY ALONE IS NOT ENOUGH

The most sophisticated technology and the best

designed network architecture will not achieve

their potential payoff unless businesses change

their attitudes and business procedures. Fortunatel y, new communication and information

technologies are subversive; they can serve as

agents Of change, helping firms to make the necessary adjustments. In a networked business environment, cooperation among firms can prove

more rewarding than unbridled competition, and

in formation-sharing more fruitful than information control. Moreover, with the rapid social, economic, and technology changes taking place, the

most successful businesses will 1ikely be those

that use information technologies to adapt to their

changing environment. rather than to control situat i ons and events.

The workplace environment will be critically

important. The shift from mass production to customized, flexible production will require a highly

skillcd and flexible workforce. Information

technologies can affect the workplace in one of

two entirely different ways. Management can use

technology counterproductive y to monitor workers, reduce skill levels, or replace permanent

workers with contingent labor-. Or these same

technologies can be used beneficially to improve

workers skil1s, integrate employees into the deciExecutive Summary | 3

sion process, and encourage team participation. If

the benefits of electronic commerce are to be realized, business strategies will need to foster job

quality, wages to support a high living standard,

and a collaborative work environment.

IMPLICATIONS OF INFORMATION

TECHNOLOGY CHOICES

The age-old adage that “knowledge is power” is

nowhere more applicable than in a knowledgebased society. Whether in work relationships

within a firm, competition in the marketplace. or

trading relations among nations, having access to

information and the ability to use it are the keys to

success or failure.

This has always been the case, of course. What

is different today is the extent to which knowledge

is now embedded in information and communication technologies. As a result, choices about the

design, architecture and structure, or the rules and

regulations of network technologies will be irreversible in the short- to medium-term. Once technological decisions are made, technology develops along a given path. This is particular] y true for

networked information technologies, which require huge amounts of sunk capital and social investment. Thus, this period of rapid technological

advancement provides a rare opportunist y to assess

and direct technological developments and the

economic and social relationships associated with

them. With the stakes high, and the potential for

winners and losers, care must be given not onl y to

the choice of technologies. but also to the participants in the decisionmaking process.

POTENTIAL ROLES FOR GOVERNMENT

With major changes in the world economy, all nations are rethinking their government’s responsibility for maintaining their economies. Russia and

the Republics of the former Soviet Union and

Eastern Bloc are undergoing the most dramatic

readjustment to free markets. Europe is struggling

with the transition to a single, unified market

where national governments play a lesser role. Japan is experiencing similar doubts and reservations about its economic future, while trying to
4 I Electronic Enterprises: Looking to the Future

sort out its government’s role in pulling the country out of a severe recession.

The United States faces its own global readjustment. This will require that the nation move beyond the unproductive debate about whether the

nation should have an “industrial policy” and begin to identify the joint interests of business and

government and how they can mutually support

one another. Government has always had a role—

and cannot avoid its involvement—in structuring

economic relations and outcomes.

In the context of the National Information Infrastructure, the private sector clearly has the primary role for developing, deploying, and operating the NH. For the most part, industry will

develop the technology, provide bandwidth, offer

connectivity, and ensure the availability of services and products in the pursuit of profit. Government, however, cannot stand idly by. In its various

roles as regulator, broker, promoter, educator, and

institution-builder, the government must establish

the rules of the game and the incentive structure

that will help determine private sector choices.

The same is true for electronic commerce. In

government’s role as regulator, it will need to ensure that electronic markets are evenly deployed,

open, and accessible on an equitable basis. Acting

as a broker, the government can bring together potential, but disparate, network users, thereby helping to generate a critical mass. As a promoter, the

government can take steps to overcome market

failures. As an educator, the government can promote electronic commerce by fostering demand

through the effective use of networking technologies. Finally, and most importantly, the government can create an institutional environment that

strives to assure that electronic commerce is conducted in a manner consistent with the nation’s

overall social and economic objectives.
Introduction 1

F

ew businessmen in the late 19th century were aware of

how fundamentally machinery, transportation, electricity y,

and communications technologies would change their

lives. Most people could not foresee the profound social

changes that these technologies would bring—the shift from an

agricultural to an industrial-based economy; the exodus of people

from rural communities to urban areas; the transformation of

work from craft production to mass production; and the decl ine of

small, proprietary business in favor of large, vertically integrated

firms. Although revolutionary in their ultimate effect, the

changes wrought by new technologies took place in an evolutionary fashion. Moreover, these impacts were both positive and negative, requiring considerable time and social and economic restructuring before they could be fully absorbed.

The United States is currently in the midst of a similar transition created in part by advances in communication and information technologies. These technologies have already transformed

the structure, the markets, and the regulation of the communication industry, altering the ways that information is created, processed, transmitted, and delivered to consumers. Similar changes

are taking place throughout the world. New communication and

information technologies are making information products and

services more available across national borders, wearing away the

lines of demarcation between markets and communication systems that are considered domestic and those that are considered

foreign.

These technological developments are radically altering the

U.S. economy and changing the way that business is conducted.

Markets are expanding globally; business organizations are

streamlining: what we normally think of as a firm is becoming

Information and communication technologies

will not only affect the

nature of business

organizations; they will

also have considerable

impact on the size,

structure, and openness

of markets.
6 I Electronic Enterprises: Looking to the Future

blurred; some worker skills are becoming obsolete, requiring workers to be retrained; and production is being carried out “just-in-time” on a

flexible schedule, rather than being mass-produced. These changes are fundamental and far-

-reaching. They challenge some traditional economic notions and definitions of terms such as the

firm, competitive advantage, productivity, and

economic performance.

The implications of these developments for

business and the economy—as well as society as a

whole—may only be fully appreciated by a few at

this time. However, business leaders who take advantage of what these technologies have to offer

will gain competitive advantages, while those

who fail to recognize their potential will likely experience decline. To the extent that policy makers

and businesses grasp the implications of these developments, they can make knowledgeable

choices about how the nation will deal with them

and take steps to offset their negative consequences. Unlike the lawmakers and businessmen

at the turn of the century, who only reacted after

new technologies had restructured their society,

citizens today have an opportunity to comprehend

and prepare for the radical changes taking place.

PURPOSE AND SCOPE OF THE STUDY

The study was requested by the Senate Committee

on Science and Transportation and the House

Committee on Science, Space, and Technology.

The report identifies and frames the technological,

economic, and societal issues related to the use of

electronic networks for business and commerce.

It provides neither cookbook solutions nor simple

fixes for the complex problems raised by rapidly

expanding uses of communication and information technologies by business and industry. The

report is intended to contribute to the discussion

and debate that will take place as the concept of a

National Information Infrastructure (NII) moves

from vision to reality.

This report describes and analyzes how advances in communication and information

technologies will likely affect the future of American business and the national economy. It identifies the new opportunities that these technologies

afford, as well as the technological, social, and

economic conditions needed to take advantage of

them. In addition, it describes and assesses the

policy implications raised by electronic business

networks; identifies where tradeoffs among values and stakeholders will need to be made; develops a framework and strategy that can be used to

advance the debate; and suggests criteria for judging the options that Congress might consider.

This report is the latest in a series of OTA reports that address many of the technical, regulatory, and economic issues that communication and

information technologies have raised. Prior OTA

reports have addressed:

1.

2.

3.

4.

5.

6.

7.

network and personal privacy;

electronic dissemination of government information;

delivering government services electronically;

managing radio frequencies for wireless communications;

protecting intellectual property in electronic

environments;

the technology of advanced network design;

and

the development of technical standards. ]

In addition, OTA has several studies currently

underway that address the use of the National Information Infrastructure for improving health care

I see the followlng” Pub]ica[ions from IJ.S. congress, Offke of Technology Assessment (Washington, m: U.S. Government ~ln@ Office): Informing the Nation: Federal information Dissemination in an Electronic Age (OTA-CIT-396, 1988); Critical Conne~lions: Communicotionsji]r the Future (OTA-CIT-407, 1990); Electronic Bulls and Bears: Securities Markets and Injbrrnation Technology (OTA-CIT-469,

1990); Global Standards: Bui/d/ng Bloeksjtirthe Future (OTA-TCT-5 12, 1992); Findin~ a Balance: Computer Sojh~’are, intellectual Property,

and the Challenge oj”Technological Change (OTA -TCT-527, 1992); The 1992 World Administrati\’e Radio Conference: Technology and Poli~”y

Impl[ca:lons (OTA -TCT-549, 1993); Ad~’ancedNetwork Technology, (OTA-BP-TCT- 101 ), 1993; Protectin~ Prih’acy in Computerized Medi~al

Information (OTA-TCT-576, 1993); and Making Gwernment Work: Electronic De/iL’ery oj’Federal Ser\ices (OTA-TCT-578, 1994).
Chapter 1 Introduction | 7

delivery, the role of wireless technology in the

NII, and maintaining security and ensuring privacy within the NH environment.

This report, the prior OTA reports mentioned

above, and those to be released later in the 103d

and 104th Congresses will provide Congress with

information and policy choices about technologies, problems, barriers, and economic implications of the development and deployment of a National Information Infrastructure.

NATIONAL INFORMATION

INFRASTRUCTURE INITIATIVE

In September 1993, the Clinton Administration

announced an initiative to promote the development of a National Information Infrastructure

(NII):

. . .that would create a seamless web of communications networks, computers, databases, and

consumer electronics that will put vast amounts

of information at users’ fingertips. . ..[That] can

help unleash an information revolution that will

change forever the way people live, work, and

interact with each other.2

The initiative relies on the private sector to innovate and aggressively pursue the deployment of

these technologies. But certain problems in the

deployment of the NH will persist that only the

government can address.

The guiding principles for creating the NII include:

1.

2.

3.

4.

5.

6.

promotion of private sector investment;

extension of universal service at affordable

prices;

promotion of technological innovations and

new applications;

promotion of interactive, user-driven operation

of the NII;

ensuring information security and network reliability;

improving the management of the radio frequency spectrum;

7.

8.

9.

protection of intellectual property;

coordination within government agencies and

with other countries; and

providing access to government information

and improving government procurement.

This report focuses on the implications of the

NII for business applications, and addresses many

other issues related to the broader social and economic issues of the NII.

FACTORS DEFINING ECONOMIC

PERFORMANCE

U.S. businesses are seeking new and more productive ways to organize their functions and activities in the face of increased competition from

abroad. The new approaches have labels such as

total quality control, customer-driven planning,

lean production, just-in-time manufacturing,

agile manufacturing, and electronically y integrated

enterprises. Many of these ideas are inspired by

innovations in foreign countries, some of which

have been successful. An advanced communication and information infrastructure could make

these tools even more effective for American business (see box 1 -1).

These new approaches are based on assumptions about the critical factors driving economic

performance in today’s global economy and about

what constitutes economic success. Some, for example, stress the importance of national industrial

policies; others emphasize the organizational cultures and structure of group relationships within

the firm; still others focus on the use of technology

to improve performance and eliminate unnecessary jobs and activities. But seldom are these factors considered in their entirety or as they relate to

each other. Nor do they spell out in detail how, and

under what circumstances, the communication infrastructure will likely contribute to economic

success.

To ensure that the important factors are taken

into account, it is necessary to consider how

21nf{lm~ati(m Infrastructure Task Force, ‘The National Information lnfrastmcture: Agenda for Action,” Sept. 15, 1993.
8 I Electronic Enterprises: Looking to the Future

■

■

■

■

●

Boeing Corp. has used networking technologies to reduce administrative overhead, speed production, and

enhance product quality. Except for a few critical parts, most of Boeing’s production is now being outsourced

to suppliers throughout the world. Networked together using seven mainframe computers and 2,800

workstations, these suppliers have designed and preassembled the entire new Boeing 777 jet airliner. The

company expects that this networked effort-the largest computer-aided design and computer-aided

manufacturing project yet undertaken—will eliminate 20 percent of the project’s total cost.

Nike, Inc uses information networking technologies to reduce costs and achieve greater flexibility and responsiveness in an Industry that is subject to rapidly changing, global demand. Nike is the ultimate in “flattened” organizations. It “outsources” 100 percent of its athletic footwear production to suppliers. Having no

production facilities of its own, it orchestrates the overall process, focusing on areas in which it has the greatest strength—research, design, and manufacturing.

The discount retailer Wal-Mart uses networked point-of-sale technologies and reformation network tech nologies to Implement a quick response system with its vendors, Cash register data are collected, analyzed, and

shared using electronic data interchange (ED I). This system has Improved Wal-Mart's efficiency, and many

of its vendors have benefited from greater efficiency and increases in sales of up to 30 percent

Computer use in financial markets was first initiated by the National Association of Securities Dealers Automated Quotations (NASDAQ) when it began in 1971 to provide computer Iistings of primary information for

several thousand companies. A decade later, it developed a system to provide information as sales were

completed. More recently, it has developed the PORTAL system, which provides the cross-listing of securities together with an automated trading system. Linked electronically with both the London and the Singapore exchanges, NASDAQ has become an important foreign exchange security market with trade totaling

$6 billion in 1991,

Networked services need not be high-tech for businesses to benefit. For example, toll-free services Iinked

to the public switched network not only enhance business performance; they can also lower barriers to market entry. For example, 1-800 numbers can give small businesses access to a national, and even international, market. Many entrepreneurs, operating on a very small scale, are finding creative ways to take advantage

of this opportunity John M Shanahan, for example, the founder and CEO of Gateway Educational Products,

Ltd , used the toll-free number 1 -800-ABCDEFG to nationally market a musical phonics product, Hooked on

Phonics, which he had originally developed for personal use to help teach his son to read. After 4 years,

Shanahan’s annual sales totaled $85 million, and he is now developing a follow-on educational math program. Shanahan attributes much of his success to his toll free “ABCDEFG” phone number,

SOURCE Off Ice of Technology Assessment, 1994

economic performance is defined and the condi- essential elements: 1 ) an increase in the average

tions that foster high performance. It is then pos- standard of living; 2) sustainable growth; and 3)

sible to examine the role of business as it relates to greater sharing among all groups of the benefits of

these factors. Economic performance entails three growth. 3

3As described by Rlv]in: “mere is no obvious single measure of how well the economy is performing in the hNlg IUn, ~d there is lots Of

room for argument about what aspects are important and how m measure them. At a minimum, Americans ought to want three things from their

economy: the average standard of living should be rising; the improving level of living should be shared by all groups; and the rising standard

should be sustainable. All three elements of this definition are important.” Alice Rivlin, Reviving (he Americans Dream: The Economy, fhe Yafes,

and /he Federal Goternmenl (Washington, DC: The Brookings Institution, 1992, p. 35).
Chapter 1 Introduction | 9

The factors that determine economic performance, as defined here, include:

1.

2.

3. .

4.

5.

major structural changes in society that create

new business opportunities or pose new

constraints;

technological advances that create new possibilities and potential problems;

the ability of business and industry to seize

these opportunities and adapt to their changing

environment;

the impact of business decisions on market

structure, factor resources, and other economic

actors; and

the role of government and other institutions

that support or inhibit business activities and

determine the rules of operation for business

and the marketplace (see figure 1-1 ).

These factors are interrelated and, over time,

account for changes in economic performance.

Technological advances, for example, are a major

source of social and economic change. In economic relationships, technology developments will affect economies of scale, the availability of product

substitutes, the cost of production, and the structure of the market.4 Work relationships are influenced by technological advances, as the history

of automation clearly attests. 5 New technologies

also create new potential and new opportunities

that change ideas about what is possible and what

is not. By challenging conventional ways of thinking, technological advances also provide an opportunity to reassess and reconsider basic socioeconomic values, goals, and choices.6

( Technology

advances

Economic performance IS defined as growth sustainable over time including an Increase m the average standard of living for all groups Economic performance IS a function of a complex lnterrelationship of factors

SOURCE Off Ice of Technology Assessment 1994

Although sweeping in their impacts, technological advances are not without limits. New

technologies are subject to social choice; they are

also regulated by the institutional, cultural, and

organizational environments in which they

evolve. Businesses rarely adopt technological innovations in their original form; rather, they redesign and adapt them to meet their specific needs

— the drivers of competition. a in structural

change. as as m creating new industries. It is also a great equalizer, eroding the competitive advantage of even well-entrenched and

 Many of today’s great firms grew out of technological changes that they were able of all the things

that can the rules of competition, technological change is among the most prominent. ” Michael Porter, 

 Superior (New York, NY: Free Press, 1985), p. 164.

 for instance, id Noble, A (New York, NY: Oxford University Press,

 in Society,” in Albert H. (cd.), and Man’s (New 

Martin’s 1981 and Winner, Autonomous Techniques Theme in (Cambridge,

MA MIT 1977).
10 I Electronic Enterprises: Looking to the Future

and to conform to their organizational cultures.7

Businesses that can take advantage of these technological developments to reduce costs, increase

efficiency, extend markets, develop new products,

or otherwise gain a competitive advantage will

prosper-others will not.

Technologies tend to embody social values and

forms of social organization; thus, their impacts

are felt far beyond the realm of business itself.8

Technology will also have an impact on the nation’s competitiveness, the structure of the marketplace, workplace skills, values, tastes and preferences, and the quality of the environment.

Moreover, if the nation’s economy is to perform

well, it will need to create an environment in

which businesses can be flexible in adapting to

changes in the competitive environment. To do so,

government will need to support the acquisitions

of knowledge and learning, induce innovation,

foster risk-taking and creative activity of all sorts,

and help resolve problems and bottlenecks as they

arise. 9 The communication and information infrastructure supporting these efforts will need to be

widely accessible and flexible.

THE CHANGING BUSINESS

ENVIRONMENT

Today, American businesses and the U.S. economy as a whole are confronted by a number of

changes that require an innovative response (see

box 1 -2). Among these are: 1 ) the emergence of a

high] y competitive global economy in which multinational corporations play a greater role; 2) the

growing importance of information as an economic resource and basis for competitive advantage;

and 3) the shift from mass production to a system

of customized, flexible production.

| Emergence of a Competitive Global

Economy

The integration of the international economy has

been facilitated and fostered by a number of developments. These include:

m

●

■

m

■

■

■

the increasing similarity among countries with

respect to tastes, infrastructure, distribution

channels, and marketing approaches;

the emergence of a global capital market, as witnessed by the large flow of funds between

countries;

declining tariff barriers and the establishment

of regional trading agreements;

shifting opportunities for competitive advantage due to technology restructuring;

the integrating role of advanced information

and communication technologies;

slow and uneven world economic growth that

has fanned the flames of international competitiveness; and

the emergence of new global competitors, prin -

cipally from East Asia. 10

Together, these developments have given rise

to a global economy in which patterns of international trade primarily reflect patterns of international production, Specialization takes place on

the basis of parts and specialized components,

rather than on the exchange of finished products as

in the past. Thus, inter-firm and intrafirm trade is

steadily replacing interindustry trade. 11 Today, for

example, Japan provides approximately 40 per7See, for instance, Philip Anderson and Michael L. Tushman, “Technological Disctmtinuities and Il)minant Designs: A C’yclical MIKICI of

Tcchnfdogical Change,’- Adminisfrali}ie Scierrcc Quarterly, vol. 35, 1990, pp. 604-633; and Wesley M. Cohen and Diini~l A. Lcvin[hal, ‘“Abst~rptlvc Capacity: A New Perspective on Learning and Innovation,” Afiminislralll’e S(vence Qmrtcr/?, w)]. 35, 1990, pp. 128-152.

Xwlck. E. B1j~er, Thomas p. Hughes, and Trevor J. pinch (eds. ), The &wia/ L’orrslru[’lJon O/ 7echno/o<Kl(’~1/ ,$)’.\l~III\: ~~e~~ /~lr~(’liOnY in ~hc’

.\{J~ifj/ot~? and }Iistory oj”7echnologv (Cambridge, MA: The MIT Press, 1987),

‘

) D(mglas N(wth, /ns/i~u~ions, /rr.sti/utiona/ Change and Econonric Perjtirmame (Cambridge, England Cambru-lgc UnlvcIsit) PTcss, 1990).

I IJMl~ha~] po~er (ed ) Conlpe/l[fon in G/~ba/ /ndl/s/ries (Boston, MA: Harvard Business S~hotd pr~ss, I ~~~)). PP. ~)~-~~. .!

I I R()~.r( Gl]pin, 7}te }~o/l/l(a/ ~(,unonly, ~~ /n[erna/iona/ /?e/a/i~ns (Princet(m, NJ: Princel(m University press, 19X7 ), p. 2.38. SIX ~IINJ Jack

N. Behrman. lndu.~(rm/ Pol/cies: International Res[rtwfurirrg and Transnar~on~ils (Lexingt(m, MA I.exin:t{m [3{MIk\, 1984),
Chapter 1 Introduction I 11

L

Business environments change over time because of technology advances, major social and economic events, new ways of thinking about business and evaluating performance, and changes in the

institutional norms and government rules that determine economic behavior These changes may be

abrupt and revolutionary, as in the case of war, famine, and natural disaster More often than not, however, structural changes take place Incrementally, having a cumulative effect over time Even changes

as significant as the demise of the feudal system or the Industrial revolution occurred not at one stroke,

but in an evolutionary fashion as a result of a number of small but Interrelated events 1

Structural changes create both new economic opportunities and new constraints The American CIVII

War, for example, gave rise to both It not only ended slavery, and thereby greatly constrained the mode

of cotton production in the South, it also created new opportunities for textile manufacturing 2 More recently, a vast array of new market opportunities have been created with the sudden collapse of the

governments of the Eastern European bloc

Over the long run, business performance depends on how well businesses react to such changes

Those that respond creatively can gain advantage, while those that fail to adapt wiII Iikely experience

decline 3 The railroad industry is an example In the fifties, when U S railroad companies were confronted by trucking and the airlines, they disregarded them They did not see these technologies as a

threat because they thought of themselves as being in the railroad business rather than the transportation business This misperception was costly, the railroad companies were soon superseded by the

emerging trucking and airline industries

National economies are also subject to such ebbs and flows This rise and fall occurs because the

conditions for success—or competitive advantage—vary according to circumstances What works well

in one case wiII not necessarily succeed in another 4 Thus, for example the U S economy gained advantage over many European economies during the Industrial era because mass production required a

large market which existed only in the United States 5 Similarly, although the British economy was successful in the 19th century, it declined in the 20th in part because, unlike the Germans and others who

invested in science and education, the British failed to anticipate the emergence of new markets and

the growing Importance of knowledge resources 6

‘ As North notes wlfh respect to the feudal structure “The Important point IS that the changes were an aggregation of hterally thousands of speclhc small alferatlons In agreements between lords and serfs, which (n total made for fundamental mstlfutlonal change

Douglas North hsfduflons /nsfWjona/ Change and fconomlc Performance (Cambridge UK Cambridge Unwerslty Press, 1990)

p 89 Braudel describes the mdustrlal revolution In smlar terms “When one IS talklng about social phenomena rapid and slow

change are inseparable For no society exists which IS not constantly torn between the forces working to preserve It and the subversive forces—whether percewed as such or not—working to undermine It Revolutionary explosions are but the sudden and shortIlved volcanlc eruption of thrs latent and long term confllct “ See Fernand Braudel Cwl/lzatlon and Cap(ahsrn 15fh - 18fh CenWy The

Perspec/we of the Wor/o’ VOI (11 (Berkeley CA Umversfy of California Press 1992) pp 537-538

2 See Brodus Mitchel The R/se of Cotton MIs m the Sou(h (Balflmore MD The Johns Hopkins Press, 1921) As the adhor polrts

out the avallabllty of slave labor tended to dlscouragethe development of manufacturing in the South until after the CIVII War when the

textile Industry began to flourlsh

3 Andrew Schotter The Theory of Soc/a/ /nstlfullons (Cambridge, UK Cambridge Unlverslty Press, 1981) pp 1-2

4 As Karl Polanyl notes “A nabon may be handlcap~dm Its struggle for surwval by the fact that Its lnst!tutlons, or some of them,

belong to a type that happens tobeon the down grad+-thegold standard m World War II was an lnstanceof such an antiquated outfll

Countries on the other hand which for reasons of their own are opposed to the slams quo WOUld be quick to discover the weaknesses of the ex6tlng lnstlfullonal order and to anhclpate the creahon of Instltutlons better adapted to their interests See Karl Polanyl,

The Grea[ Transforma[lon The Poh[tca] and Economfc Or/gins of Our Time (Boston, MA Beacon Press 1957) p 28

5 For a dscusson of these factors In mass production see Harold Williamson (ed ), The Growth O( the American Economy (New

York NY Prentce Hall 1951) pp 721-722

6 See James Beckford ‘ Great Brlfam Voluntarlsm and Sectional Interests n Robert Wuthrow (ed ) Between .s[ates and Marke[s The Vokm(ary Sector in Compafahve Perspechve (Princeton NJ Princeton Unverslty Press 1991 ) p 33

SOURCE Off Ice of Technology Assessment, 1994
12 I Electronic Enterprises: Looking to the Future

European Community–36%

IA-. --4 / Other 

Japan-70/0

countries–1 2?40

Eastern Europe

(including former

USSR) --I 

United

States–290/0

SOURCE Institute for the Future, Enterprise,” contractor report prepared for the Off Ice of Technology Assessment, May

1993

cent of U.S. component parts in electronics and

automobiles. 1 2

Patterns of direct investment abroad also highlight this trend toward global economic integration and interdependence. Between 1960 and

1988, for example, direct investment abroad by all

firms in all nations increased by over 10 percent

per year to more than $1.1 trillion. This trend is

especially pronounced in the United States where

foreign direct investment increased during the

same period faster than the world average—from

$9.9 billion to $328.9 billion, or 18 percent per

year. Moreover, foreign direct investment accounted for 3.4 percent of Gross National Product

(GNP) in 1978, compared with 1.8 percent a decade earlier. ’ 4

Multinational corporations are also driving the

trend toward globalization. To compete in today’s

global economy, companies must integrate their

activities on a worldwide basis, allocating activities among a number of countries to gain the greatest advantage. 15 Depending on the particular case,

it might be best for a firm to disperse its production facilities—such as design modification, fabrication, and assembly—to foreign countries, and

to focus its own domestic production on the fab16 or, alternatively, a rication of key components.

firm might decide to manufacture a product domestically, but transfer abroad such downstream

activities as distribution, sales, marketing, and

service. When not fully integrated into multinational corporations, these firms are networking

their activities across global boundaries through a

variety of arrangements such as cross-1icensing of

technology, joint ventures, orderly marketing

agreements, offshore production of components,

secondary sourcing, and crosscutting equity ownership17 (see figure 1 -2).

 Update: Trends in U.S. Department of Commerce, 

Trade Administration, September 1989. The stock investment given here is the position of foreign direct investors, or the value of the foreign

investors’ equity in and offshore For the United States, a foreign direct investor is one that owns or controls at least 10 percent

of a company’s voting stock (or equivalent amount in an unincorporated enterprise)

 cit., footnote 

 Cit., John Managing The 

 (New York, NY: Council on Foreign Relations, 1993). Once generally associated with U.S. industries, multinationals are, themselves,

increasingly global in nature. For example, globally networked Japanese and European firms, while differing somewhat in style 

U.S. have significantly grown in number in the course of the past decade. See Bruce Weijian Shari, and Gordon Walter, “Knowledge in the Network and the Network as Knowledge,” in Grabher, The Embedded Firm: On Socioeconomic’s Net\\ 

 UK: 1992), p. 90.
Chapter 1 Introduction | 13

I Trend Toward an Information-Based

Economy

There is an interrelated trend toward an information-based, network economy. Increasingly, information serves as a primary resource, a key factor of production. Information is becoming a

prerequisite to the development and allocation of

other resources. As such, it is treated less and less

as a free good and more and more as a commodity

to be bought and sold in the marketplace. As the

economic value of information increases, the economic rewards of those who have greatest access

to it grow as well. 18

The trend toward an information-based economy results, in part, from the development and

widespread deployment of information and communication technologies. The emergence of these

technologies has increased: 1) the speed at which

information can be communicated; 2) the quantity

of information that can be collected, stored, manipulated, and transmitted; and the access to information (see figure 1-3).

These technologies provide numerous ways to

improve efficiency and increase productivity, and

thus engender growth. Information is, for example, reusable. Unlike capital resources such as

steel and iron, it requires very few physical resources to produce and distribute it. Information

can be used to substitute more efficiently for labor

and to improve the overall efficiency of the productive process itself. As productive processes become increasingly complex, the largest reserve of

economic opportunities will be in organizing and

coordinating productivity activity through the

process of information-handling 19 (see figures

1-4 and 1 -5).

36,000

32,000

28,000 

24,000-

20,000-

16,000-

12,000-

8,000 -

4,000 -

 Private

 Public

I I I

1980 82 84 86 88 90 92

NOTE The computer version of “electronic (e-ma(l),

IS perhaps the most used and most basic computer network 

 Simpler to use than and a letter, IS installed

on every networked computer and the total number of 

addresses (mailboxes) IS growing exponentially As depicted above,

 addresses installed by the private sector 

it and have grown much faster than their

 counterparts

SOURCE Electronic and Micro Systems Jan 1 1994, PP 1-10

(year-end 1993 figures revised April 1994)

Technology advances have also given rise to

new businesses that specifically cater to business

information needs. Information can now be processed in a variety of new ways, adding to its value

from the point at which it is created or composed

 be measured primarily in terms of ownership of fixed physical assets, rather in 

 and value-added operations. value-added dimension, moreover, will be

the the comparative advantage required industrial This shift in the basis of wealth formation is a 

 past, a that IS driven by accelerating forces of change. One of these factors involves an explosion of technology that

has created I last this knowledge basis is again in 

next 15 years.” D. Alliances Among “ of 

 on and Through 7, 1992, p. 77.

 and / 

Science Publishers. 
14 I Electronic Enterprises: Looking to the Future

Percent

40-

30-

20-

10

0

1950 55 60 65 70 75

SOURCE Morgan Stanley Economics, 1994

I --- Total capital per worker

— High-tech capital per

/ t

160

information worker

140

0

 120

 “ “ “ --““ --- -- “ -- ----: 

60

40

1962 68 71 74 77 80 83 86 89 92

SOURCE Morgan Stanley Economics, 1994

80 85

r

90

r r

-50

40

30

20

10

0

.

to the point at which it is assimilated or used. As

the opportunities for creating new information

products and services have increased, so too have

the number of commercial providers. Responding

to the increased demand for information, the new

technologies have spawned a rapidly growing industry. For example, in 1992, the worldwide market for online services totaled $10.1 billion, a 9.2

percent increase from $9.3 billion in 199120 (see

box 1-3).

| Shift to Flexible, Decentralized

Production

To gain competitive advantage in a knowledgebased, global economy, firms must adopt new

ways of doing business. Customers are now more

diverse and sophisticated, and new, highly skilled

competitors use communication networks to access foreign markets. Success in the global economy no longer depends only on achieving efficien-

 Trends CT: Trends, p. 
Chapter 1 Introduction | 15

cy and cost reduction. 21 Increasingly, it depends

on the effectiveness of businesses—their ability to

innovate, respond just-in-time, focus on quality,

and establish more cooperative interfirm and intrafirm relationships. To enhance their effectiveness, businesses are taking advantage of more

timely and appropriately packaged information to

help them shift from business models based on

mass production to those that center around the

concept of flexible, decentralized production22

(see table l-l).

The system of mass production that developed

in the United States was extremely efficient for its

time. Because it eliminated variability, it greatly

reduced the need for information. With lower information costs, firms could handle greater volume and reap even greater efficiency gains

through economies of scale and scope, The system

was self-reinforcing. Given lower costs, volume

was sustained through price reduction and the

generation of a mass market.23 However, this system of mass production, which took the form of

the assembly-line process, hinged on maintaining

constancy. As a result, everything-parts, processes, tools, products, workers, and tasks—had to

be standardized.24 In addition, this system required a rigid, hierarchical business structure that

would provide adequate control .25 Equally important, it necessitated a tradeoff in favor of efficiency over diversity.26

Such a tradeoff is neither necessary nor appropriate today when diversity is at a premium.

Flexible, decentralized production systems (also

referred to as mass customization) allow businesses to customize production without sacrificing economies of scope. Using such an approach,

businesses seek to control a particular market

niche rather than maximize market size. As a result, scale economies are no longer such an important factor for success .27

2 ] As noted by Gehani: “F{Jr many years, the dela~ and the C(JSI. .in the devel(~pment of new products did n{~t hurt most c(mlpan]es’ bi~tt(ml

IIne very much. The customers generally waited patiently for nev products to appear in the market. With fev ncw c)rganlzat]<ms entm-]ng an

oligop{~l” istic and mainly domestic U.S. ec(m(~nly, [here was m) significant erosi(m in (he cust(mler base of an (~rganl~a[i(m due to such delays.

But with globalizatitm of c(mlpetiti(m in the i 980s and ease of transc(mtinental movements {)f g(x)ds, rmmey, and infomlati{m, f(weign con]petltors started entering as so(m as some gaps appeared in the highly valued U.S. or European markets. ” R. Ray Gehanl, ‘“Concurrent Product Dm el -

opnwnt for Fast Track Corporations, ” Long Range P/arming, v{)I. 25, N(J. 6, pp. 40-47, 1992.

2ZAS Stlnchctm~be points (WI: “’Structures of t)rganizati(ms, and of parts of organizati(ms, vary according to the s{)rts of uncertaint]cs the)

confr(mt, and acc(~rdlng U) what sources of infom~ati(m they depend (m and to how that infom]atitm is best got to the dcc I si~~n-making un Its. ”

Arthur L. Stlnchctm~be, lnfwrnar~wr fJnd f)rgfzni:afiwrs (Berkeley, CA Umvers]ty of California Press, 1990), p. 3.

23As W]lliams(m notes: “Mass production” was the main sup~wt as it was the prerequisite of mass producti~~n. . . .Thc Ammncan h(mw nuirket, ]n the wtmis of Andrew Cameg]e, is a‘ vast htm~(~gcnc(ws market, and this fact(w t(x) was a major Influence affcctln g the e~ ()! utl(m of Inasf

pr~tiuctl(m. Across the h(m/(mtal plane and its great gcxgraph}cal extend, as well as up and down the vertical s{xIal sca]c, the A n~er-icim market

place underwent a standardization of taste and consurnpti(m that txlrc prof~mnd psychological and cc(m(~ruic signl ticance. ’” Hari~ld WI II Ianmm

(cd.), 7’he Growth oj [he Arnerifan Ecwromy (New York, NY: Prentice Hail, 1957), pp. 721-722.

‘Jlb[d. See also James P. Womach, Daniel T. l(mes, and Daniel Rtn)s, The Ma(hine 7-hat Changed The 14 brid: The .Storj d [.twn Prcd[[([[cm

(New York, NY Harper Pcrcnn]al, 1990), p. 27.

“Janws Benlgm, The Control Re\wlf[tfon: 7iYhndos.v and the Ewnmn[c origins of’the ln]orn~{ltlon .Rxfct.v (Princct(m, NJ Prmcct(m Llnlverslt} Press, I 986).

‘GAs pointed (wt by Boynt(m et al.: “Change in e]ther pr(wss or product works against the mass- pr(}ducti(m f(}m~ula. Changes m pr~duct

make reach incn obs(dete, ffm’c c(}stl} changcf wcr and reduce managerial control. Changes in process c(mlpl icatc ind i \ Idual yh, raise waste

and error, and Increase unit costs. Thus a mass pr(ducti(m t~rganizati(m is intended to respond to and initiate as Ilttle change as p)sslble. This

design for stab]llty requires Iimlting pntiuct varretj as well as process inno~ralion. ’” A.C. B(~ynt(m, B. L’lct(w, B.J, Pine II, ““New Cfm~pct]tl\c

Strategies. Challenges to Organizat](ms and Infomlatl(m Technology,”’” IBM Systems Jourrul, vO1. 1, 1994, pp.43-44.

“According t{) Ayrcs “The key t{) the suggested “new paradigm” for ec(mm]c grow [h is that increasing flex ib]l it] prl]grcssi~ely rcducc~

the cost d] fferentlal between cust(~n]lzed and standardized products. The smaller th]s differential, the greater the demand for dlk crsit) and,

hcncc, flex lblllty. But thts process, In turn, leads to further irnprokcrmmts in the manufacturing process , gcrwrat mg Sakr mgs in tx)th Iatx w and

capital, and In effect, restraining the traditl(mal cost-drlvm cngirw of growth.’” R,U, A} rcs, “’CIM A Challenge to Techn(~logy Managcmcnt,”

Intcrnollmai Joltrnal qj Tcchndo<q.v Mmra~cnwnt, Dixxmber 1992, p. 21.
16 I Electronic Enterprises: Looking to the Future

Online Information—facts, figures, pictures, numbers, and words traveling through telephone and

computer networks, and stored and retrieved from computers—is prevalent and growing throughout the

American economy Businesses and consumers are using this method of information-gathering and exchange to supplement telephone conversations, face-to-face conversations, and paper-based information sources While the most basic services only allow for information retrieval from a database, others

allow communications such as electronic mail (E-mail), electronic bulletin board services (BBSs), and

online chat sessions similar to telephone conference calls.

Looking back in time, the first online service was computer time-sharing that gave businesses access to a central computer from a dumb terminal at a remote site Computer time-sharing allowed companies that could not afford in-house systems to benefit from computing After computer time-sharing

took hold, publishers realized the benefits of distributing information as well as computing resources

through similar shared network arrangements

accessed through personal computers

instead of dumb terminals The installed

base of personal computers is expected to

number about 57 million in the United States

and 148 million worldwide by 1994 1

SIMBA Information Inc , a market analyst, divides the online services market

according to whether businesses or individuals are the customer. The services offered to businesses and consumers,

however, may be similar as individuals

demand business-oriented services,

such as for professional correspondence

or individual investing More specifically,

the business services market includes

brokerage, credit, financial news/research, legal/regulatory, and professional/library services, whereas the consumer

services market includes general interest,

individual investing, and gateways to

more than one service provider

Today, online information and communications are generally

800

0

1983 84 85 86

1 -

87

1 -

88 89

T -

90 91

-F92

SOURCE Gale Directory of Databases, Volume 1 Databases

Gale Research, Detroit, Ml, 1993

(continued)

 Dataquest , San Jose, CA, as Online Trends&Forecast CT ions

Trends, 1993)
Chapter 1 Introduction | 17

I

Brokerage services distribute real-time

market information to banks and financial

institutions Credit services collect and sell

payment histories to credit grantors Financial

news/research services provide news and decision support services for investors Legal/

regulatory services provide access to government information such as laws, corporate

records and real estate transaction histories

Marketing services sell targeted mailing Iists

and other market Information Professlonal/li -

brary services sell scientific, medical, and

technical Information Individual investor services give Information such as stock quotes

and some permit Investors to initiate trades

Gateways are telephone company services

that provide links to many online services

The online services market IS growing

rapidly Worldwide sales in 1992 topped

$101 billion Of this amount, North American-based companies accounted for 60 percent and European-based companies accounted for 32 percent Annual sales growth

was 92 percent in 1992 and averaged 91

percent between 1988 and 1992 Figures

1-6 1-7, and 1-8 depict the growth between

1983 and 1992 in the numbers of databases,

database producers and online services

(vendors who distribute database information) While these numbers are large, they

are only a subset of a much larger information market that Includes the sale of information and services over private networks,

electronic data interchange (EDI), networking offered by value-added networks (VANS),

airline customer reservation systems (CRSs),

real-estate multiple-l listing services (MLSs),

electronic funds transfers (EFTs) and automated teller machines (ATMs)

SOURCE On/me 1993 Trends 

 CT Trends 1993)

 5,000

a

-

 4,000

-r1983 64 85 86 87 88 89 90

-1-

91 92

SOURCE Gale Directory Databases, Volume 1 Databases

Gale Research, Ml, 1993

1983

-r64 85 86 87 1 -

89

-1--

90 91

SOURCE Gale Directory of Databases, Volume Databases

Gale Research, Detroit, Ml, 1993
18 I Electronic Enterprises: Looking to the Future

Old model New model

Mass production, Flexible decentralization,

1950s and 1960s 1980s and beyond — —

Overall strategy

* Low cost through vertical integration, mass production, * Low cost with no sacrifice of quality, coupled with subscale economies, long production runs. stantial flexibility, through partial vertical disintegration,

* Centralized corporate planning, rigid managerial hierar- greater reliance on purchased components and serchies. vices,

* International sales primarily through exporting and dl- ‘ Multimode International operation, including minority

rect Investment joint ventures and nonequity strategic alliances

Product design and development

* Internal and hierarchical, m the extreme, a linear pipe- * Decentralization, with carefully managed division of

Iine from central corporate research laboratory to devel- responsibility among R&D and engineering groups,

opment of manufacturing engineering. simultaneous product and process development

* Breakthrough innovation the ideal goal where possible, greater reliance on suppliers and contract engineering firms.

* Incremental innovation and continuous improvement

values.

Production

* Fixed or hard automation ● Flexible automation,

* Cost control focuses on direct labor * With direct costs low, reductions of Indirect cost be-

* Outside purchases based on arm’s length, price-based come critical

competition, many suppliers * Outside purchasing based on price, quality, delivery,

● Off-line or end-of-line quality control. technology, fewer suppliers.

* Fragmentation of individual tasks, each supplied in de- * Real-time, on-line quality control.

tail, many jobs classifications * Selective use of work groups; multitasking, job rotation,

● Shopfloor authority vested ❉■ first-line supervisors, few job classifications

sharp separation between labor and management. * Delegation, within Iimits, of shopfloor responsibility and

authority to individuals and groups, blurring of boundaries between labor and management encouraged

Hiring and human relations practices

* Workforce mostly full-time, semi-skilled ‘ Smaller core of full-time employees, supplemented

* Minimal qualiflcations accepted with contingent (part-time, temporary, and contract)

‘ Layoffs and turnover a primary source of flexibility,

workers. who can be easily brought in or let go, as a

major source of flexibilitv

workers, in the extreme, viewed as variable csst

, .

* Careful screening of prospective employees for basic

and social skills, and trainability

● Core workforce viewed as an investment, management

attention to quality-of-workmg Iife as a means to reducing turnover —

Job ladders

● Internal labor market, advancement through the ranks * Limited internal labor market, entry or advancement

via senlority and informal on-the-lob training may depend on credentials earned outside the workplace

*

*

*

Governing metaphors

Supervisors as policemen, organization as army * Supervisors as coaches or trainers, organization as

athletic team (The Japanese metaphor organization

as family.)

.-

Training

Minimal for production workers, except for Informal on- * Short training sessions as needed for core workforce,

the-job training. sometimes motivational, sometimes intended to imSpecialized training (including apprenticeships) for prove quality control practices or smooth the way for

grey-collar craft and technical workers new technology

* Broader skills sought for both blue- and grey-collar

workers

SOURCE Off Ice of Technology Assessment, Septembet 1990
Chapter 1 Introduction | 19

Flexible, decentralized systems use information and networking to integrate and compress the

time from product innovation to marketing to

drive demand and to maximize customer responsiveness.

28 With a variable organizational structure, firms can rearrange their activities around

teams and networks that bring together everyone

who is involved in the life cycle of a product.

Working together and sharing the same information, all processes can be carried out in parallel .29

This kind of structure reduces the time involved in

product development and the likelihood of waste.

It also leads to fewer defects and higher quality

products. This is a major benefit because, as production processes become more complex, the cost

of error detection and correction is rising as a frac30 Moreover, flexible teams are tion of total cost.’

advantageous because they can be reconfigured to

respond quickly to changing demand.31

POTENTIAL FOR BUSINESS

| Impact of Technology on Businesses

Information and communication technologies are

both driving and facilitating the adaptation of

business to structural changes in the economy.

Businesses are now applying computer technology to almost all of their activities—from recruiting to laying off workers, from ordering raw materials to manufacturing products, from analyzing

markets to performing strategic planning, and

from inventing new technologies to designing applications for their use. Not only are these technologies being applied to traditional tasks; they are

also being used to reconfigure the nature of the

business process itself. While early innovators

and adopters have often used these technologies to

gain strategic advantage, businesses must take advantage of them over the long term for the sake of

survival alone.

Conducting business on a global scale, for example, creates many new challenges and opportunities. 32 To fully benefit from the availability of

worldwide resources and markets, businesses

must have a truly translational perspective that

harmonizes operations in the service of a single

corporate strategy. Translational corporations

must be able to balance their global operations

with the requirements of local markets—such as

the need to establish special sales channels, service contracts, and work relationships. In addition, as companies spread their corporate boundaries, they will need to make decisions that are far

more complex based on information and data that

2SAS noted by Bessen: “The phrase ‘getting close to the customer’ now has a definite high-tech ring. Farsighted cornpames l]ke American

A[rllnes and R.J. Reymdds have gained a decisive competitive edge by building powerful customer information systems. Through such systems, these ctm~panies not (rely understand individual consumers better but also employ informatitm to develop and market new prxducts.” Jim

Be\sen, ‘“Riding the Marketing lnfomlatiorr Wave,” Har\ard Business Re\’iew, September/October, 1993, p. 150.

20A \ Gchani p)ints out, if such teams are m he effective: “’the organization human resources may have to be trained to share, ctmmwnicate,

and exchange Ideas with team members frtm~ other parts of the organization in a non-confmntory manner. In a traditi(mal ‘serial t)rganizati(m,

pr(duct and pr(wess inn(wati(ms may emerge independently in different parts of the organization. On the other hand, in an integrated “parallel

twgant zatl(m, the prxduct and process innovati(ms in different parts of an organization develop and grow concurrently in a sharing and ‘systemIC llliiflflcr.”’ op. cit., fixmmte 21.

‘OA\ r-es, op. cit., f(x~tm~te 27, p. I 8.

,

~ I AS noted by Gehani “. . .an accelerated product development process produces both internal as well as external benefits to an (~r,ganizatl(m. T%c cxtemal or competitive benefits include market penetration due to faster customer responsiveness, premium pricing, pmtse fh~w f~f

market research ]nf(mla[i(m, and ability [[) incorporate latest technology into a product.” Op. cit., f(wtnote21. See also, B{)yntcm et al, op. clt.,

lootnt)tc” 26.

3JSCC, t’t)r ln~tance, Robert M]ttman, ‘“The Electrxmic Enterprise,” c(mtractm report prepared for the Office of Techntjh~gy Assessment, May

1 [)~~, Src also S[ephen H, Rhlnesrll[th, John N, will Ianlson, David M, Eh]en, and ~ni~e S. Matwel], 7}~/IflI~~ ~~~ /)~i>~/op~lc/?t ./et/rfra/, April

1989, pp. 25-34,
20 I Electronic Enterprises: Looking to the Future

reflect cultural and political disparities.33 Worldwide networks that can support group decisionmaking and information-sharing will be critical

for operating in such a fashion.

If available to them, networked technologies

will also allow small and rural businesses to participate more fully in the global economy .34 For

example, a small business that serves only a single

niche market may be able to greatly expand its operations by using technology to enter similar niche

markets on a worldwide basis. Small companies

may be able to link up with translational corporations as suppliers, value-added providers, or other

market intermediaries. In addition, technology

enables groups of small businesses to operate as if

they were much larger entities, much like consortia, enabling them to compete with large businesses on a more equal footing. When working

with translational corporations, however, small

businesses may require high-capacity/high-quality networking systems comparable to those used

by larger businesses, as well as the skills and expertise necessary to integrate them.

The international communication marketplace

is rapidly responding to this demand for seamless,

worldwide telecommunications services. 35 According to one account, in 1990, 16.3 percent of

worldwide value-added service revenue was

derived from international offerings. Estimates

are that this figure will increase to 28 percent by

1996. 36 To provide service, a full range of providers are engaging in a variety of new cooperative

arrangements-global partnerships, consortia,

joint ventures, and foreign investments.37

The need to apply information and knowledge

to an ever-growing number of complex business

problems—as well as to share and leverage these

resources both within and across organizational

boundaries-will also increase business requirements for advanced applications and networking

technologies, such as wide area networks, databases for information management, groupware,

and electronic data interchange (EDI).38 Sharing

information and data permits businesses to

employ production processes that shorten product

cycles and adopt marketing strategies that are

highly responsive to customers needs. For example, computer-integrated manufacturing (CIM)

improves efficiency and product quality because

the data describing the engineering parameters of

a product, once created and stored electronically,

can be retrieved by any member of a project team

in a form most appropriate for his or her needs (see

boxes 1-4 and 1 -5). Redundancies and discrepancies are avoided because everyone uses the same

information.39 Similarly, businesses can greatly

improve customer service by employing distributed computing systems and relational databases

33 Cre5iencia Tomes and Mary Bruxelles, “Capitalizing on Global Diversity,” HR Magazine, December 1992, pp. 30-33.

Sdsee J.E. Butler and G. S. H~sen, “Network Evolution, Entrepreneurial Success and Regional Development,” Entrepreneurship and Economic Development, vol. 3, 1991, pp. 1- 16; Andrea Larsen, “Partner Networks: Leveraging External Ties to Improve Entrepreneurial Perf(wmance,” Journal oj_Business Ven/uring, vol. 6, 1991, pp. 173- 188; and Torn Peters, “Rethinking Scale,” Cal(/ornia Management Re\ien’, fall

1992, pp. 7-29. See also U.S. Congress, Office of Technology Assessment, Rural America at the Crossroads: Ner}torking,tor the Future, OTATCT-471 (Washington, DC: U.S. Government Printing Office, 1992).

jssee U.S. Congress, office Of Technology Assessment, Te/ecommunicarions Sert’ic”es In European Marke/s, OTA-TCT-548 (Washington,

DC: U.S. Government Printing Office, August 1993); and Cam] Wilson, “Global Ec(m(m]y, Changing Pol itical Scene Play Havoc With Spending,” Telephony, Jan. 6, 1992, pp. 21-26.

36Kagn Lynch, bfj]obat service showdown:” Communlcati(m and Cornpuler C(mlpanies J(xkey T() Redefine Thenlseives as lntemati(~nal

Service Providers,” CommunicationsWeek International, May 11, 1992, p. 22.

37 Cowhey and Ar(lns~ln, 0p. Cit., fOOtnOte 17.

~gsee Berm R. IQmsynski and F. Warren McFarlan, “lnfornlation Partnerships-Shared Data, Shared Scale,” Har\ard Business Re\’ie\t’,

Septen&r-October 1990, pp. I I 4- 120; and Max Munday, “Buyer-Supplier Partnerships and Cost Data Disclosure,’” Management Accounting,

1992, pp. 28-29.

39see Kevin parker, ,-Reenglneefing the Auto lndust~,” Manuja~~urin~ .$ys}ems, January I %3, pp. 40-44; and Laura De !imdis and Marvin Chart(~ff, ‘“CIM Users’ Group Need for Flexible Net Underpinnings,. ’ Nefi\wk World, Mar. 16, 1992, pp. 1, 29-33, 38-40.
Chapter 1 Introduction | 21

I

(

L–

The intensely competitive business environment has drastically shortened time-to-market, Product innovations must occur much more rapidly (see figure 1-9). Shorter life cycles mean that manufacturers need

to be flexible and prolific, efficiently churning out higher quality products at much faster rates Competing

effectively in this environment means that businesses must operate on a “just-in-time bass, ” producing

goods on demand and in response to specific customer needs, To reduce production time, many firms are

Integrating their business functions around processes such as concurrent engineering and computer-integrated manufacturing (CIM) With concurrent engineering, process-oriented teams manage the engineering and

production processes simultaneously, This kind of reorganization reduces costs in two ways it speeds up the

production process itself; it also allows engineers to design for manufacturability. With computerIntegrated manufacturing and design, manufacturing and resource planning are not only Integrated, they

occur online with the use of shared Information systems. CIM permits rapid prototyping enhances quality

control, and greatly reduces waste.

 Off Ice of Technology Assessment, 1994

I

Design

Designer

Engineer

Specifications

Agent

I

Shipping

I

o 0 0

Business — administration

Inventory

Purchasing

CAD system Central Accounting

computer

Factory I

I

0

ProductIon/ Sensor Assembly

fabrication

SOURCE Off Ice of Technology Assessment, 1994
22 I Electronic Enterprises: Looking to the Future

Enterprise integration is greatly facilitated by the use of shared information systems, across groups

and facilities, so that teams can leverage the Information resources of others, wherever they may be To

support enterprise integration, communication must be seamless and reliable so information can be

relayed in a timely manner and without errors

There are a number of technologies that support shared information systems Networking options

include Local Area Networks (LANs), Wide Area Networks (WANs), and Metropolitan Area Networks

(MANs), supported by a vast array of transmission and networking technologies, including Asynchronous Transfer Mode (ATM), Integrated Services Digital Network (ISDN), fiber optics, satellite, and many

radio-based technologies (see figure 1-10) Open systems architecture and object-oriented programming environments wiII enable systems to be built more efficiently and effectively to facilitate information-sharing Client-server architectures that distribute data over a network of desktop workstations (as

opposed to having the data reside in a central mainframe computer) wiII allow departments to own their

own data and make it available to the people who need it Software such as groupware and distributed

databases will provide the ability to store, search, and refine disparate pieces of Information

SOURCE Off Ice of Technology Assessment 1994

This figure Illustrates how the data communications portion of the information superhighway IS composed of a complex network of interconnected networks A firms internal computer network typically consists of several smaller, linked local area networks (LANs), which

in turn are Interconnected to increasingly wider networks, MANs and WANs

SOURCE Off Ice of Technology Assessment, 1994
Chapter 1 Introduction | 23

to integrate, update, and deliver relevant customer

information on demand at the point of sale or point

of customer inquiry. 40

Systematic and creative ways of providing information will also be required to support the

growing number of knowledge-workers across all

sectors of the firm. 41 Fixed, controlled procedures

are being superseded by team-based flexible processes that require discretionary and diverse sets of

capabilities. By learning and generating knowledge on the job, workers will be valued more for

their cognitive than their manual skills .42 With the

blurring of boundaries across hierarchies and organizations, decisionmaking will be distributed

both downward and outward: managers will

spend less time directly supervising, and more

time making strategic choices and orchestrating

and evaluating overall enterprise activities.43 To

enhance their capabilities and maximize their effectiveness, workers and managers will not only

need access to information itself, but also to the

technologies that can help them filter, process, apply. distribute, and further generate it.

Networked information technologies will also

be a prerequisite for enterprise restructuring and

44 Seeking new ways to improve reengineering.

quality. enhance efficiency, gain strategic advantage. and acquire greater knowledge and expertise, many businesses are rearranging their activities to carry them out in networks and teams (see

box 1-6). Some businesses, for example, are entering into highly integrated, long-term relationships

with customers and suppliers; others are setting up

short-term, ad hoc alliances to address a particular

problem at hand. Many of these networks transcend national as well as organizational boundaries. 45 Technologies such as wide area networks.

v ideoconferenc ing, computer-integrated engineering and manufacturing, and electronic data interchange are necessary not only to support such

activities; they also serve as a catalyst for organizational change (see box 1 -7).

| The Impact of Technology on Markets

Information and communication technologics

will not only affect the nature of business organizations; they will also have considerable impact

on the size, structure, and openness of markets.

Networking technologies can greatly reduce the

costs entailed in exchange transactions. As these

costs decline, many business activities previously

carried out within vertically integrated firms will

likely be shifted to the marketplace. In addition,

because exchange transactions will increasingly

be carried out electronically and online. the

network will in many instances serve as the mar-
24 I Electronic Enterprises: Looking to the Future

Networking provides new opportunities for businesses to enter new markets, gain strategic

advantage, and reduce transaction costs These networks are

effective because they cut

across traditional organizational

boundaries, either within or

across firms

Business networks come in a

number of varieties As depicted in section A of figure

1-11, some networks are internal to the firm They generally

cut across traditional business

functions, allowing firms to reorganize around processes that

support team-based work for total quality control and just-intime delivery A wide range of

groupware applications are being developed to support such

networks Businesses may also

set up networks to create new

interorganizational connections,

as can be seen in section B An

electronic data Interchange

(EDI) network might be used, for

example, to connect a firm to its

suppliers Networking can also

be used to support virtual corporations and agile manufacturing, as Illustrated in section C

SOURCE Off Ice of Technology Assessment, 1994

A: Fully-integrated firm

Supplies/

inventory

B: 

C: Virtual corporation

Core firm

L

\ \

r

Core firm

Management

SOURCE Off Ice of Technology Assessment, 1994
Chapter 1 Introduction | 25

I

●

■

■

■

■

■

Technology can help businesses reorganize to achieve greater efficiency, effectiveness, and innovation

However, the benefits stem from the organizational change, not from the technology itself Some examples can serve to Illustrate (see figure 1-1 2),

Mercedes Benz takes advantage of its computer-based communication network to differentiate and enhance its product It not only provides car owners with a toll-free 800 number to call for service, it also

helps drivers locate a service provider, wherever they may be. Networked mobile phone and paging

services also Improve service delivery by linking repair personnel to their offices while they are on the

road With continual access, management can easily learn about schedule changes and hear directly

from clients Improvements of this kind make firms more competitive

The national drug company, McKesson Corp., used its networked Information systems to develop new

products It offered its pharmacy customers a detailed analysis of their sales, including the profitability

and turnover ratios of different items based on their orders over a period of time. The company also

offered to print price labels for pharmacies.

The OTIS elevator company uses its computer-based communication network to provide more efficient

centrally coordinated repair activities, When clients call, they report their problem to a highly trained operator who records the information in a computer and dispatches repair personnel via a telephone/beeper system When the repair IS made, the information IS again stored in the computer so senior management can track repair efforts and deal with special problems as they arise Moreover, the recorded fault

data, which are also immediately available online to the company’s engineers and designers, can be

analyzed by management to identify any recurring problems that might require more general corrective

action

In some companies, research data are now being integrated into other corporate information systems

allowing for their more effective use throughout an entire organization For example, the Integration of

systems at Marion Laboratories Inc allows the R&D department to send the formula for a new drug

along with the engineering process control data, directly to the manufacturing department This same

information IS sent to the sales and marketing department where it IS used to create educational materials for physicians to use when testing the drug.

Using sophisticated databases that track consumer behavior, companies can refine their marketing campaigns Donnally Marketing in Stamford, CT, for example, specializes in providing this kind of service It

gathers and correlates the responses to questionnaires that are mailed to consumers along with shopper

coupons, and then stores the Information in a large-scale database where it can be reprocessed and

retrieved as needed With this system, the company can track the purchasing patterns of more than 90

million households

(continued)

SOLJRCE Off Ice of Technology Assessment 1994
26 I Electronic Enterprises: Looking to the Future

Business

performance Effectiveness:

criteria Enhanced quality, reduced to

market, customer responsiveness,

strategic advantage.

Organizational 

Innovation: Quality of work life, training,

Access to new technology, organizational learning.

technology Implementation,

and product development.

Organizational

responses

I

54?2---. 1

Technology

application

support

k

 numerical control

 Off Ice of Technology Assessment 1994

—
ket. Where this occurs, market structure will depend as much on network characteristics, and the

economies of networks, as it does on relationships

among firms.

The rise of vertically integrated firms at the end

of the 19th century was facilitated by the transportation, communication, and information

technologies of the day—the railroads, the telegraph, and the telephone. By increasing the speed

and control with which goods could be moved,

processed, and distributed, these technologies

made it possible to coordinate and manage production on a very large scale.

A reverse trend is occurring today46 (see box

1-8). In a highly complex and rapidly changing

global economy, vertical bureaucracies are

pushed to their limits. Businesses everywhere are

increasing their flexibility by downsizing and outsourcing. 47 They are increasingly purchasing in

the market what they need, whether preassembled

parts, logistical support systems, customized

communication services, or packaged business information. At the same time, a multitude of new

enterprises, structured to serve a particular business need, are appearing to provide these services.

This shift toward greater market reliance is being facilitated and fostered, as in the past, by technological advances. However, unlike earlier

technologies that diminished the costs associated

with large-scale organizations, today computerbased communication networks and shared information systems are reducing the costs of carrying out market activities.48 These include, for

example, the costs of searching for the right products and best deals, executing transactions, and

Chapter 1 Introduction | 27

monitoring and enforcing the terms of the trade.

Taking advantage of electronic data interchange,

for example, buyers can place orders with appropriate suppliers, execute exchanges, transfer

funds, and update inventories, all automatically

and online (see box 1 -9). Similarly, global corporations such as Chrysler Corp. can outsource the

production and assembly of many parts to a number of suppliers located in different countries,

knowing that these pieces, having been joint] y engineered and developed through computer-integrated engineering systems, will all fit together.

A growing number of technology applications

are designed to facilitate and support various aspects of market exchange (see box 1-1 O). These

include, for example: 1 ) search tools such as audiotext and videotext, online databases, electronic

catalogs, and multiple-listing services; 2) exchange mechanisms such as 1-800 numbers; credit, debit, and smart cards; EDI; automated teller

machines; and computer reservation systems; and

3) electronic monitoring and enforcement systems such as electronic data capture, credit card

authorization, electronic funds transfer, and automated clearinghouses.

As these technologies and their various functions are brought together into integrated and interactive networks, more and more trade will take

place electronically, online. How these electronic

markets evolve, and the actual form they take, w ill

have significant consequences for competition

and the functioning of the economy as a whole.

Because electronic markets can reduce the overall

costs of doing business, they can greatly enhance

efficiency and lead to expanded trade. This may

‘Set T{m] Mahme,J Yates, and R. I Benjamin, “’Electr(mic Markets and Electronic Hierarchies: Effects of lnfom~alion Tcchnt~logy tm Marhct Structure and Ct)rp)ratc Strategies,” Commun[tw[ion.$ oft/le ACM, vol. 30, N(). 6, June 1987, pp. 484-497. See also, Ajit Kamhil, ‘“lnf{~mu\-

tttm Techn(d(lgy and Verttcal Integratmn Evdence from the Manufacturing Sector”; in Steve S. Wildrnan and Margarel Guerin-Cal\ et-(, L“/cc

tronl( Ser}](e$ ,Vemorhs: A Business and Pub/[~ Po/lty L“ha//enge (New York, NY: Praeger, 1991 ); and Stuart Smith, Dav]d Tr;insficld, Jt~hn

Bcssant, Paul Levy, and Clive Ley, “Factory 2000: Design for the Factory of the Future,” International Studies oj’h!flno,qcmerrt and {)r,gan[:{i-

[l~m, L {)]. 22, N{). 4, pp. 6 I -68.

47c3CC Gadl Kaplan, “’Manu fac[ur]ng A La cane. Agile Assembly Lines, Faster ~vel{)pn~enl Cycles. ” IEEE .Spe(’trlfm, Scpllm)k’1” I 993, pp

j4.u, and Gary Hamel, “The Core Conlpetencc t)f a Corporation,’’” }/ar\’ard Business Re\le}t, MayJune 1992, pp. 79-91,

~Sec J. YannloBa~{JS, “A strategic Analysis of Electr(mic Marketplaces,” MIS Quarfcr/~, Septmnher 1991, pp. 295-309. See alst~ Chris

}{olland. Geoff L{wkc[t, and Ian Blackman, “LPlannlng f{)r Electrtmic Data Interchange,” .$~rategic Mana~cmcnt Journal, YOI. 13, 1992, pp.

539-550.
28 I Electronic Enterprises: Looking to the Future

Information is required for all economic activity The exchange of information is at the heart of the

market system A market economy relies on the communication of information to identify buyers and

sellers, allocate resources, and establish prices Within firms, the availability of timely and accurate information is key to decisions about whether to enter or exit markets, how to finance, how to organize

working relationships, and how to distribute and market goods. Where adequate reformation IS not

available, markets wiII fail and economic performance will suffer because of higher business costs

Information and communication technologies are critical in determining the nature of firms and the

structure of markets These technologies reduce the costs of doing business, and can increase economic activity and foster economic growth in several ways To understand the Implications of newly

developing reformation and communication technologies for the future organization of business and

markets, they must be considered from a historical perspective

Once markets were face-to-face exchanges. Commerce took place in town centers where people

congregated to exchange and trade goods. The costs of doing business were small, buyers, sellers,

and the intermediaries who provided capital, credit, and brokered information were all present As

transportation improved, local markets gave way to regional fairs, and later, with the development of

sailing and navigational technologies, to port cities such as Lisbon, Genoa, Venice, Antwerp and Amsterdam 1 But, until the development of the telegraph m the last half of the 19th century, the size of

markets, as well as the extent of trade, were constrained by the slow pace at which goods and market

information could be transported 2

Communication and information technologies also affect how businesses are organized When

transportation and communication over long distances was difficult and slow, merchants had lnsufficient information on which to base sales Prices differed significantly from market to market, so most

merchants avoided Iong-distance trading, When they traded, they relied on merchants in distant trading

centers to sell their goods for a commission To reduce and spread the risks Involved in distant trading,

they sold a variety of products and avoided single product specialization

With the development of the railroads in the 1830s and the telegraph in 1844, the speed and control

needed for specialization and large scale production was in place The speed of communication and

the range of control afforded by the railroad, the telegraph, and later the telephone enabled the growth

of large organizations with modern management structures, a first step in the centralization of production and distribution 3

The impacts of these technologies were cumulative Trade gave rise to more trade As markets expanded, the number of merchant exchange networks using communication technologies and the

amount of available market information increased As a result, distribution costs declined, and merchants were further encouraged to engage in trade Moreover, with larger markets and better information, businessmen faced fewer risks, and they were able to specialize in importing, wholesaling, retailing, or exporting Increased specialization led, in turn, to better coordination of markets and reduced

costs, making trade even more attractive. The information-based networking technologies being developed today will have an equal, if not greater, effect on economic performance

‘ Fernand Braudel, The Perspecfwe o/fkre Wor/d, Cwhzahon and Capj[ahsm 75[tr- 18fh Century, VOI 3 (Berkeley, CA Unlverslfy 01

Callforma Press, 1992), pp 118-119

2 James Benlger, The Corr/ro/Revo/urlon Tec%o/ogyar?d /he EcoflorrrIc Ongms oflhe /nforrnahon Soclely (Princeton, NJ Princeton Unwerslfy Press, 1986)

3 Alfred D Chandler, The V/s/b/e Hand (Cambridge, MA Harvard UfllverWy press, 1977)

SOURCE Off Ice of Technology Assessment, 1994
Chapter 1 Introduction | 29

Electronic data interchange (EDI) IS a notable example of how information and communication

technologies are emerging as Important strategic tools for efficient and effective business operations

EDI IS essentially the modern, computer-based method by which companies order, invoice, and bill

their products and services Such common transaction functions as invoices, shipping notices, and

bills which traditionally have entailed the transfer and processing of paper documents, are replaced by

electronic transfers between the businesses’ computers (see figure 1-1 3)

EDI improves the efficiency and effectiveness of operations by enabling businesses to purchase

supplies and to produce and distribute products precisely when and where they are needed The company’s computer system, for example, wiII initiate a purchase order and execute the purchasing transaction when an item IS requested and removed from the inventory The price, terms, and conditions of

the contract are all stored in the computer In addition to the considerable savings gained as Inventory

costs are reduced, EDI also minimizes human clerical error and the considerable processing costs involved with paper transactions By reducing or eliminating the prolonged and often error-plagued paper

trail large retailers and manufacturers are able to gain a competitive advantage by streamlining transactions with their suppliers and buyers

SOURCE Off Ice of Technology Assessment, 1994

Standardized

purchase order

Computer generates

standardized P.O. form

#&&&_

Expert system Buyer

monitors Inventory

and production, —

and automatically Automatic billing

reorders Inventory

Instant data to:

Sales

Manufacturing

Buyer Seller

Product delivery

SOURCE Reprinted from Mar 15 1988
30 I Electronic Enterprises: Looking to the Future

Markets can be viewed as the web of relationships between buyers, sellers, and products that are

revolved in an exchange While only two basic roles—that of consumer and producer—are essential for

an exchange to take place, more often than not others act as intermediaries facilitating transactions

These might include advertisers, retailers, financiers, bankers, and brokers

There are a number of economic (“transaction”) costs entailed in market operations These include

the cost of searching for products, buyers, and sellers, the cost of arranging and carrying out the exchange, and the cost of ensuring that the terms of the trade have been met

Each of these transactions occurs through some form, or pattern, of communication interaction 1) a

one-to-one connection—as in the case of two parties meeting face-to-face or connected by telephone,

2) a broadcast, or one-to-many connection—as in the cases of the fishmonger, the floor trader, or TV

shopping channel; and 3) many-to-many connections, as in the cases of bazaars, regional fairs, or an

electronic trading market

As depicted in the matrix, (see figure 1-14), communication and Information technologies can be

arranged in each of these three ways to support each of these types of economic transaction In the

past, when such technologies were not available, human Intermediaries carried out these roles For example, before the advent of the telegraph, it was the “jobber” who personally earned market Information

relating to southern cotton to Manhattan where he sought buyers who would match the price The jobber’s role was “to make the market “ On the floor of the stock market, the broker (often referred to as a

jobber) similarly “makes the market “

Many of the same technologies can be used to support different kinds of communication patterns

and activities, and thus they appear within more than one box in the matrix The Important thing to note

IS that, the more that these technologies can be Iinked together to provide more services to more users,

the greater the savings in transactions costs and the closer the electronic network approximates true

electronic markets

(continued)

SOURCE Off Ice of Technology Assessment, 1994

not occur, however, if electronic markets fail to in- tion exchange is the essence of markets. Markets

terconnect for lack of standards, or if large businesses are overly successful in developing dominant, proprietary networks that are used to create

new barriers to market entry.49

KEY FINDINGS AND POLICY

IMPLICATIONS

| Transaction Costs in Determining

Economic Performance

A major part of the cost of business is gathering,

exchanging, and using information.so Informafunction through interactions among trading partners, suppliers, producers, vendors, brokers, and

consumers. In this sense, information is the most

valuable commodity in an economy.

Consider markets in the context of a consumer

buying a high-end stereo system. The buyer mulls

over the features that are most important—wattage, audio performance, appearance, size, speakers, CD player, tape deck, and cost. There may be

hundreds of dealers to choose from. The consumer

reads catalogs, compares specifications, consults

Consumer Reports, calls for price information,

~~)]bld ~cc ~il~() Koout et a] ,)P ~lt f(~)(note 17; Robin Manse]], ‘ilnff)m]ati(m, organ izati(m, and Conlpetltlvcness: Networking Slrategics

., . . 0 .! . .,

in the 1990s,”’ in Cnstiano Armmelli (cd.), The Econormcs oflnjimnalion Nef}torks (Anlsterdam, The Netherlands: North Holland, 1992), pp.

2 17-227; and Stuart Macxhmald, “lnf(mnatitm Networks and Inft)mlati(m Exchange, ” in ibid.

$~} see ()] i~cr E, Wll]lanlson, 7’}lc k’(tmml;~ /n.~/ifu(ion.y of Capila/i.!n] (New York, NY: The Free ~css, 19~5).
Chapter 1 Introduction | 31

Transaction

costs

Mode of Communication

On-line databases

I costs I Audiotext

( - Videotext

Exchange Debit/Smart cards

costs 1-800 service

Electronic data

 interchange

Point-of-sale

I electronic publishing , services

I I (e.g., Prodigy) I Electronic bulletin

I On-line catalogs boards

. ,

I I systems

TV shopping

I I Automated 1

I I

machine

I I ..-. 

I ————— -—.. 1

Monitoring Electronic data I I I Bar-coding devices I American Information 

costs interchange Exchange(AMIX) I I

Credit card product , Clearing and

authorization I settlements

 of Assessment 1994

and visits dealers to compare models and prices.

The search can take hours, days, or weeks. The

time spent in research, comparative shopping, and

making the deal are “transaction costs, ” as are the

expenses for fuel, wear and tear on the automobile, magazine and catalog purchases, and telephone charges.

Manufacturers are also faced with transaction

costs. First. a manufacturer has to read the market

for signals about the size and specific nature of demand. Then he must find the necessary materials

and contract with suppliers; search for the most

suitable workers and managers: negotiate their

wages and salaries: and perhaps even provide onthe-job training. Assembling people and materials

in the right place at the right time, and coordinating and monitoring the actual production process.

is also costly in terms of time and effort. So, too, is

the task of sett ing up distribution channels or dealerships. To stimulate future demand, the manufacturer will also have to promote his product among

potential customers, track customer behavior, and

invest in advertising.

These kinds of transaction costs are on the rise

in today global, knowledge-based economy

comprised of many more players and fewer

standardized, mass-produced products. Now buyers and sellers must explore a multitude of options

and be able to compare costs and values acrossf

languages and cultures and on the basis of differ-
32 I Electronic Enterprises: Looking to the Future

ent currencies. When laws and institutions differ,

special arrangements are required to guarantee

contracts, warranties, and standards. Many American businesses wanting to trade in Europe have

had to make costly arrangements to certify that

their products meet European standards.51

As transaction costs begin to constitute a greater proportion of the total costs of production and

exchange, a firm economic performance, as well

as a nation’s competitiveness, will increasingly

rest on its ability to efficiently process and distribute business-related information. When businesses can access the best available information at

the most appropriate moment in time, they can reduce their costs and enhance their productivity.

Similarly, when buyers and sellers can easily locate one another, and have a good idea of what

they can expect in terms of quality and price, they

are more 1ikely to engage in trade. The result will

be greater economic growth and development.

| Using Networking To Reduce

Transaction Costs

Economic activities are all based on some level of

"social” networks. Doing business is a social activity. 52 Trust, respect, knowledge, and even

friendship are part of any business transaction.

This subtlety is often obscured by one of the

myths of American business—that deals are based

on impersonal, fact-based, hard-nosed business

decisions. In other countries with different cultures the connection between family position,

castes, and friendship and business dealings are

more obvious. The “Kerietsu” of Japan, the “Impannatore” of Italy, and the familial nexus of businesses in Taiwan are al1 examples of the commingling of business and personal networks.

These social networks are extremely efficient

because much of the information that is usually

transferred in the course of doing business is already accepted as a given .53 Thus, transaction

costs are very low. Buyers and sellers are well

known to one another. Shared expectations and an

established level of trust reduces the need to

haggle over prices and wages. In addition, the existence of social sanctions reduces the need to

monitor performance and assure that the terms of

business transactions have been adequately met.54

The benefits of social networks are, however, generally limited in scope. When extended to global

markets, for example, time, space, culture, language, and different legal traditions will likely undercut the basis for a common understanding.

Today, communication and information

technologies can be used to conquer time and

space. With advanced networking technologies

and the growing number of business applications

they can support, buyers and sellers—regardless

of their geographic locations-can interact online

in a virtual, electronic space. Under such circumstances, the network will, in effect, become the

marketplace. Linking buyers and sellers directly,

the need for information—as well as for costly intermediaries to transport, process, and interpret

it—will be significantly reduced.

For example, electronic data interchange (EDI)

is a computer-based system that allows companies

to order, invoice, and bill their products and services electronically. Common transactions such

as invoicing, shipping and billing—which traditionally have entailed human interaction and the

transfer and processing of paper documents—are

replaced by automatic electronic transfers between business computers. Prices, terms, and the

conditions of a contract are all stored electronically. Electronic data interchange networks that allow businesses to operate on the basis of a shared

information system can greatly improve efficien-
Chapter 1 Introduction | 33

cy, triggering purchasing and distribution just

when and where they are needed.

To some extent, communication and information technologies can substitute for some of the

social and cultural “glue” that welds social networks together, giving rise to a number of efficiencies. Reducing transaction costs, they can improve productivity, greatly extend markets, and

thereby generate wealth. Nonetheless, technology

is the medium, not the end in itself. The social and

cultural relationships-the trust, dependability,

and honesty-of those who do business over the

electronic business network will spell its success

or failure in serving American business and the

nation’s economy.

| Designing Networks To Meet Business

Goals

The “architecture” of electronic business networks is critical in determining their economic

impacts. Like a sculpture that is fashioned from

Tinker Toys, a network’s structure is determined

by the connections and 1inkages that give it shape.

How these networks are formed and ultimately

joined together to comprise a national infrastructure will influence the cost of doing business.

Their design will also affect the overall efficiency

of the economy, the size and scope of markets and

the ability to conduct trade, the distribution of

economic costs and benefits throughout the economy, and the nature of work and the quality of

jobs.

To serve business and the nation’s needs, the

network architecture will need to be flexible and

open, Without such versatility, businesses will be

unable to rapidly reconfigure their networks to respond to changing circumstances and market demand. Nor will they have the leeway needed to

customize applications and networks to support

changing business processes and flexible working

relationships. Moreover, with the freedom to mix

and match a wide variety of network components,

businesses can use technology to add value and

develop new products and services.

To fully reap the benefits of communication

and information technologies, networks and network components will also need to be interoperable and open for interconnection. Open, interoperable systems reduce transaction costs.

Proprietary systems with closed standards both

increase the cost of doing business and create significant barriers to market entry, Interoperable

components provide greater network flexibility.

greater ease of use, and reduced network costs.

Technology diffusion will occur faster and more

broadly, and equity of access will be encouraged

as a result. Interoperable systems also provide a

standard platform for the innovation of new components and applications.

In addition. if the economic benefits of networking are to be broadly shared. technology

must be evenly and widely deployed. BUSiness

networks may allow the first developer of a network to gain a significant competitive advantage.

Networks benefit from economies of scale and

scope; therefore latecomers may be at a disadvantage in attracting users and providing services.

Latecomers might also be disadvantaged because

business networking requires not only extensive

expertise, but it also requires considerable “learn -

ing by doing. ” Although the profits derived from

gaining a competitive advantage will likely stimulate network development, if all potential newcomers are locked out of the marketplace, anti -

competitive behavior may result.

| Requirements for Access

The requirements for access will need to be recon -

sidered with the advent of electronic commerce.

To operate on a level playing field in such an envi -

ronment, a business will need to be able to access

the electronic network that serves as the market.

Today, a manufacturer who does not have outlets of his own must find a retailer to sell his products, This is generally not a problem; in any given

geographic area—with the exception of rural

areas—there are a considerable number of retailers who are willing to provide the manufacturer

with shelf space. Bringing buyers arid sellers together, the retailer in effect “makes the market,”

and is thus paid for reducing everone's transaction costs.
34 I Electronic Enterprises: Looking to the Future

In the case of electronic commerce, the situation is 1ikely to be much more complex. Electronic

markets can be costly to establish with respect to

both financial investment and expertise. Thus,

they may be much less ubiquitous than today’s retail outlet, at least initially. Unlike the local grocer,

the profits to be gained from establishing electronic markets depend to some extent on their exclusivity. As a result, electronic markets may become

more restrictive than retail stores in terms of access.

These differences stem from the incentive

structure that is associated with the economics of

networking. 55 If a network vendor decides to establish an electronic market, he must first generate

a critical mass of users. Unless there is sufficient

demand, the vendor will be inclined, at least at the

outset, to pursue an open network strategy. However, given a critical mass, the vendor might

choose an alternative strategy. Under such circumstances, the return on investment will likely

be greater if he adopts a restrictive approach. Users would probably be willing to pay a premium

for exclusive network access to gain in two important ways. First, they will have greater control

over their customers or suppliers, as well as privileged access to market information. Secondly,

they will benefit from the “economies of aggregation”56 (see figure 3-3 in ch. 3) that stem from a

significant reduction in transaction costs. Moreover, the benefits of reduced transaction costs will

become increasingly important with the proliferation of independent electronic markets, as products become more customized and complex and

markets are extended further across time and

space.

| Organizational Change Within Firms

New communication and information technologies are, to some extent, subversive; to be effective, they require organizational change. The most

sophisticated technology and the best designed

network architecture will not be effective without

concurrent changes in business attitudes and procedures. Technology can, however, serve as a catalyst, helping businesses make the necessary adjustments to their changing environment.

In the new business environment, cooperation

may prove more rewarding than competition, and

information-sharing more fruitful than information control. Equally important, given the rapid

pace of social, economic, and technological

change, the most successful businesses will be

those that employ information technologies not to

control situation and events, but rather to enhance

their ability to adapt to take advantage of them.

The workplace environment will be of critical

importance. The overall shift in the structure of

the economy from one dominated by mass production to one that is more flexible and centered

on services will require a workforce that is similarly flexible and increasingly skilled. However,

information technology can provide flexibility in

one of two diametrically opposed ways. For example, shifting the burden of uncertainty onto the

labor force, information technologies can be used

to foster worker monitoring and a greater reliance

on contingent labor. On the other hand, the same

technology can be used to enhance worker skills

and encourage team participation. If the benefits

of electronic commerce are to be widely shared,

strategies will be needed that foster quality jobs,

high standards of living, and collaborative work

environments.

| The Government Role

As the world moves toward a global economy, the

role of government will necessarily change. All

major industrial nations are being forced to rethink their government’s responsibility towards

the maintenance of their economies in this era of

rapid change. Russia and the republics of the forf fse-,, for dlscusslons, Steve S. Wildman and Margaret Guerin-Cal\xn-t, Elc(trorric .!ier~’i~es Ne[b\orks: A Bltsiness and Piibllc” Policy C/lo/-

Icngc (Nw Y{~rk, NY’: Praeger, 199 I ), Bahos, op. cit.. footm~te 48; and Antorwlli (cd.), op. cit., ft}t~tnote 49.

Ihso,l,ct ,,llcs refe~~d II) as “’~~(~nol]]lcs of aggregiitiim. ”
mer Soviet Union and Eastern Bloc are undergoing the most dramatic readjustment to free markets. Europe is struggling with the transition to a

single, unified market where national governments play a lesser role. Japan is experiencing

similar doubts and reservations, while trying to

sort out its government’s role in pulling the country out of a severe recession.

The United States faces its own global readjustment, which will require moving from an unproductive ideological debate misdirected at whether

the nation should have an “industrial policy.” This

kind of dialogue obscures the fact that government has always played—and, in fact, cannot

avoid playing—a role in structuring economic

relations and outcomes.

Take, for instance, the case of the National Information Infrastructure. The private sector clearly has the primary role for developing, deploying,

and operating the NII. Similarly, for the most part,

industry will develop the technology. provide the

bandwidth, offer connectivity, and ensure the

availability of services and products in the pursuit

of profit, Government, however, cannot stand idly

by. In its various roles as regulator. broker, promoter. educator, and institutional builder, the government must establish the rules of the game and

the incentive structure that will help determine

private sector choices.

The same is true of electronic commerce. In its

role as regulator, the government will need to ensure that electronic networks and markets are

evenly deployed, open, and accessible on an equitable basis. Acting as a broker, the government

can bring together potential, but disparate, network users, thereby helping to generate a critical

mass. Serving in the role of promoter, the government can take steps to overcome specific market

failures with respect to advanced research, development, and/or technology deployment. As an

educator, it can promote electronic commerce by

fostering demand and the effective use of netChapter 1 Introduction | 35

working technologies. Finally, and perhaps most

importantly, the government can create an institutional environment that strives to assure that electronic commerce is conducted in a manner consistent with the nation overall social and economic

object ives.

| Impact of Information Technology

Choices

The age-old adage that “knowledge is power” applies to a knowledge-based society. Whether referring to work relationships in a firm, competition in the marketplace, or trading relations

among nations, having access to information and

the ability to package it for a particular use is a key

determinant of success or failure.

Clearly this was always the case. What is different today is the extent to which knowledge is now

actually embedded in information and communication technologies. As a result, choices about

these technologies-their design, architecture,

and structure, or the rules and regulations governing their availability and use—will have far-

-reaching social and economic consequences.

Equally important, many of these choices will

be irreversible, at least in the short and medium

terms. Once a decision is made. technology tends

to become firmly established along a given path.

This pattern is especially evident with networked

information technologies, which require vast

amounts of sunk capital and social investment.

Thus, periods of rapid technological advance provide a rare opportunity to reassess and redirect

both the nature of a particular technology itself.

and the economic and social relationships that are

structured around it. Given the significance of the

moment, and the potential consequences for winners and losers, care should be given not only to

what technology choices are being made, but also

to the process of how, and by whom, they are

made.
Issues

●m

Electronic

Commerce 2

ecognizing the increased importance of computers and

communication technologies for economic growth and

development, many countries have taken steps to assure

that their businesses have access to these technologies

and the skills and other requirements needed to benefit from

them. In contrast, in the United States, there have been fewer

focused efforts of this kind. In assessing what kind of role the government might play in the future, OTA found that information and

communications will clearly be critical factors in determining

business success. However, if American businesses are to take advantage of new technologies to the benefit of the entire nation, a

number of issues will need to be addressed.

THE TECHNOLOGY TO SUPPORT BUSINESS NEEDS

Because advanced information and communication technologies

can reap considerable benefits for both business and the economy

as a whole, the question arises as to whether enough is being done

to assure that these technologies will be available in an appropriate, timely, and equitable fashion. OTA found that technology,

per se. is not likely to be a major barrier to the success of electronic enterprises. Although there is a continued need for investment

in research and development, there is no lack of state-of-the-art

technology. And, with the important exception of software, much

of the technology required for the electronic enterprise or for use

in electronic markets either exists or is in the making, and its cost

is falling precipitously as its capabilities continue to rise. Reaping

the benefits of an increasingly competitive environment, American businesses have access to a wide variety of product offerings,

which will 1ikely increase in the future given industry’s repositioning and realignment to develop new products based on techTechnology alone is not

enough. If the nation

economy is to benefit

from advanced networking

technologies, a number

of technological, organizational, and institutional

criteria must be met.

I 37
38 | Electronic Enterprises: Looking to the Future

nology convergence. Despite such advantages,

the actual diffusion of technology, and more importantly its implementation in economic settings, has been quite uneven. It has also been limited, to a significant degree, to high-tech

businesses that are geographically well positioned.

Electronic commerce can only occur when the

communication and information networks to support it are widely available. ] Technology diffusion, however, is typically a long-term and uneven

process that depends on a number of factors, making it very difficult to assess its likely evolution in

2 As a general rule, the dif- any particular situation.

fusion of new technologies takes the form of an Sshaped curve. This pattern reflects the forces of

supply and demand, and the way in which users

respond to new technologies. Vendors market new

technologies slowly at first because investment

and product development costs are high, while demand and profitability are low. As costs and prices

fall and demand and profits rise sharply, vendors

will greatly increase their supply.3 Users reinforce

this pattern. Their initial reaction to new technologies is very cautious, but their demand will

eventually quicken and reach a critical mass as

prices fall, knowledge of and familiarity with the

technology spreads, and applications multiply

and are adapted and readapted to new and different

tasks.4

Achieving a critical mass is especially important in the case of networks, which are comprised

of a number of interdependent parts.5 Because

these networks represent a large installed base, users are generally reluctant to purchase incompatible components. Instead, they may postpone the

adoption of new, superior technologies until their

entire network can be written off.6 On the other

hand, once there is a critical mass, users will likely

“jump on the bandwagon.” This happens because

network users and network services are, like network components, also interdependent. The value

that users attach to a network will generally increase in proportion to the number of users it has

and the services it can support. Thus, when a critical mass of users adopts a new technology, others

are quick to follow, fearing they will be left behind.7

Even after a critical mass has been achieved,

however, diffusion will continue to be patchy. In

the case of the telephone, for example, the pattern

followed a sequence of connecting ever lower order cities: major trunks linked Northeastern cities

first, followed by lines to smaller towns in their

immediate hinterlands, then connections to major

Midwestern cities, and so forth. Although the tele-

] see Robin Manse]], “Rethln~lng [he Telec{mnrnunications Inframucture: The New ‘Black BOX, ‘ “ Research Policy, vol. 19, 1990, pp.

501-515.

‘For a cross-cultural and cross+ ectoral analysis, see Fabio Arcageli, Giovanni Dosi, and Massirno Moddi, “Patterns of Diffusi(m of Electronic Technologies: An international Comparison With Special Reference [o the Italian Case,” Research Policy, vol. 20, 1991, pp. 515-129.

Schrl$[{)pher Freeman, The E(,ononliC,s oj”/ndusfria/ /rrnovu(ion (Cambridge, MA: MIT Press, 1982); and Edwin ManSfi4 “me Diffusion

of Eight Major Industrial Innovations,” N.E. Terleckjy (cd.), The Slate ofScience and Research: Some New’ lrrdicutors (B(wlder, CO: Westview

Press, I 977).

4Evere[[ M. Rogers, comnlf~nf(,a~ion Tethno/ogy: The New’ Media in Sociefy (New York, NY: The Free Press, 1986), pp. 1 I 6- 149; and Ronald Rice and Everett Rogers, “Reinvention in the Innovation Process,” Kno~led~e: Creation, Diflision, Utilization, vol. 1, N(). 4, June 1980, pp.

499-5 14; see also Paul Attewell, “Technology Diffusion and Organizational l-earning: The Case of Business Computing,” Or,qani:ationa/ Science. vol. 3, N(). 1, February 1992, pp. 1- i 9.

~Sce Crls(lano Antonel]i, ‘-me Ec(m(mlic Theory of lnformati(m Networks! “ in Cristiano Ant(melli (cd.), The Etwnornics oj /njormation

Networks (The Netherlands: N(wth Holland, 1992).

~Joscph Fame]] and Garth Sakmer, “Horses, Penguins and Umming$” H. Landis Gabel (cd)., Product S~andardi:a/ion and Compefi/i\’e

Strategy (N(mth Holland: Elsevier Science Publishing Co., 1987); and Paul A. David, “llre Dynamo and the Computer: An Historical Perspective on the M(dem Productivity Paradox ,“ American Economic Pai)ers and Proceedings, May 1990, pp. 355-361.

‘Ibid,
Chapter 2 Issues in Electronic Commerce | 39

phone was patented in 1876, it did not reach Chicago until 12 years later, and transcontinental service was not inaugurated until 1915. For rural

areas the situation was even worse. As late as

1949, many of these areas were still without service. As a result, favorably situated businesses in

the Northeast enjoyed a headstart of several decades in utilizing regional and inter-regional telephony.8

With deregulation and a highly competitive industry environment, it is unlikely that the deployment of new, information-age technologies will

deviate greatly from this earlier pattern.9 In a competitive, market-driven environment, deployment

will mirror the state of demand. Today, the demand centers around large businesses that have

the financial resources and expertise required to

monitor technological developments, integrate

disparate systems and technologies, and provide

ongoing maintenance and support. These firms

also have a clear strategic vision of the role of

technology, and their organizational structures are

generally directly linked to its use. Most of them

are highly information intensive (see figure

2-1 ). Employing technology in a strategic fashion,

these businesses gain valuable know-how, which

can provide them with both a competitive advantage and the wherewithal to develop and deploy

new technology applications.

In contrast, most small and medium-sized businesses have yet to realize these kinds of technology benefits. Some are simply unaware of them.

Communications

Wholesale trade

Real estate

Retail trade

Banks

Professional services

Insurance carriers

Business services

Chemical producers

Electric utilities

c——. ‘-1 19.2

——-—-

L----- w’

L .-l 10.7

r ‘1 9.4

I—.

I 4.3

L-k

L..-J

 4“0

[23.1

SOURCE Morgan Stanley Econormcs 1994

Others lack the resources and expertise required to

match their organizational needs to what may be

an overwhelming variety of technology choices.

Businesses need to decide whether to purchase

technology; outsource to a third-party prov ider; or

lease a hybrid, virtual private network. Technology and service vendors also need to be selected.

and network architectures and standards options

need to be worked out as well. More difficult still.

all of these choices need to be evaluated and decisions made on the basis of an accurate detemination of the firm’s specific needs for speed, capac -

~Rlchard Kle]~)W icz “Th~ Role of conln~unica(ion” in Building Communities and MarLets,” c(~ntractt)r rcp)rl pr~p:lr~d for Iht ( )t tjcc ~ )t

Technology Assessment, N()\en]ber 1987.

9A~ a[[es[ed [[) by Noan~ “But it will be inlp~ssible to maintain the old traditi(mal rtxiistributit e s)stcm tlf generating subsid]es and transfc>l

ring them internally wlthm the same carriers frtm] (me category of users to am)ther catqyry. Smeral things w ]11 disrupt this arr:in:cn~cnt. in a

network of c(mlpeting carriers, an internal redistribution is not sustainable (mce other carriers with(mi rcd]stnbu[ii e hurden~ f{~rg~’t [hc uscr~

whose price is above cost as the most I]kely customer.’” Eli M. Noam, “Industry Structure in 2000: Frt)m the Nctw{~rh of Nc[w t~rhi t,) [hc S) itclll

of Systems.”’ presented I(J the National Ass(~iatl(m of State Utility C(msumer Advocates, “’Telectmmmnicati [ms 2000 W’hat “s :it St,Ac I{)r CtJm

sunwrs in the Next Century,” Apr. 17, 199.3, p. 9.

Iq.ee Stephen Davies, The Dtffusion of Proce.$s /nno\YIfIorI.f (Cambridge. UK: Cambridge (-~niveril!y Prcs\, 1979), ,ind J~)hn KIIIIbCr)j ‘md

Michael E\ amsh(~, ‘“Organ lzatl(mal Inm)vatiim. The Influence of Indik Idual. organ] zati{~nal, and Contcxlual Factors on HospIIal Ach)ptlt)n of

Techm)log]cal and Admlnlstrat]te lnno~ati(ms,’” Acdemj (!/ ,Wanagcrnen( Jfmrrml, k(~l. 124, Nt). 4, pp. 689-713.

] 1 Stephen RI~ach, “’Anlcrlca’s Technol(~:j Dilemma. A pr(~flle of the lnfomlall(m Ec(m(m)y,”’ A Special Ecxmtm]lc Rcp)rt, M{)rg,in St.m IL’)

Ec(mt)mics, New Y(mh, NY, Apr. 22, 1987.
40 | Electronic Enterprises: Looking to the Future

ity, reliability, and security. Such decisions take

time, expertise, and financial resources, which

many businesses either lack or are unwilling to expend without further assurance of the benefits.

Thus, when small businesses invest in systems

such as electronic data interchange and computerintegrated manufacturing, it is generally not in response to their own business needs, but rather at

the request of their larger trading partners. Although technology transfer can occur under such

circumstances-especially given a trading partner support—all too often technology remains at

the periphery of the smaller firm’s activities, and

additional learning, innovation, and diffusion fail

to take place.

| Interoperability and Standards

Interoperability and standards area matter of considerable importance in any networked environment. However, their role will likely loom even

larger in the future, as networks come to provide

the basic underpinnings for many economic activities. Under such circumstances, standards and

interoperability will affect the cost and technical

characteristics of networks. More importantly,

they will influence the overall efficiency and competitiveness of the economy; the cost, quality, and

availability of products and services; and market

structure. A lack of standards and appropriate levels of interoperability is also likely to be a formidable barrier to businesses seeking to use networks

as a basis for extending their operations globally,

improving their productivity, creating new value-

-added products, and linking up more effectively

with their suppliers and customers. Given the

slow pace of development of standards and open

systems, the failure to achieve interoperability

will likely present a major obstacle to attaining

these ends.

Standards were essential to the success of mass

production, and will likely be critical for the development of new, more flexible production processes. However, whereas mass production required standardized components to meet the

demand for standard processes and standardized

products, flexible production calls for standardized networks that provide the essential platform

for carrying out small-batch production needed to

satisfy a more customized demand.

A case in point is just-in-time production,

which for many industries is rapidly becoming the

norm. 

12 Quick response production requires a

communication network that allows for information-sharing and continual feedback and interaction among manufacturers, suppliers, retailers,

and consumers. To ensure effective communication, however, the partners to such an arrangement

will need to adopt standards for universal product

codes, electronic data interchange, shipping container bar codes, and point-of-sale technologies. 1 3

These standards are extremely difficult to develop, requiring agreement on technical interfaces

and terminology as well as business processes

themselves. Because the stakes are so high, many

businesses are reluctant to adopt standards. At the

same time, opportunities are lost for failing to do

so. Estimates are, for example, that the apparel industry can save $12 billion a year by implementing quick-response systems.

Agile manufacturing, so often touted as the paradigm of the future, also requires interoperable

systems. 15 With agile manufacturing, firms estabI ~Janicc H Hanlnlond, “Quick ReSp)nSe in Retail/Manufacturing ChWIIWIS~ “ Stephen P. Bradley, Jerry A. Hausman, Richard L. Nolan

(cds. ), Globali;aliorr, Technology, and Competition: The Fusion oj” Compilers ond Telecommunications in the 1990s (Bt)st(m, MA: Harvard

Business Schot)l Press, 1993). See also Y.P. Gupta, and S. Heragu, ““lrnplications of Implementing Just-in-Time Systcms,” 72chno\a(iun, vol.

{ 1, N(J. ~, i ~ ] , pp. ] ~~- ] 60.

I ~John s~lbinskl, ‘“AUromare~ lnft)m]ati(m Sharing Cuts Tinle-To-Market,” Manujacruring Systems, May 1992, pp. 60-61.

1 ~}{alllnlond OP Clt f(M)tnotc ] 2. SN a]so, Thomas Bai]ey, ‘“Organizational lnrmvation in the Apparel Industry” lndustria/ Re/afions, vol. ! , .,

32, N(J, 1, winter 1993, pp. 30-48.

I $For ~ discussion (If the inlpact of standards ,Jn aut{)nlated manufacturing Iechnolt)gy, see Gregory Tassey, “Technology” ]nfrastruclure,”

Research Polic)t, vol. 20, 1992, pp. 345-361.
lish relationships with suppliers or other partners

more or less on an ad hoc basis. In this way, they

reap the gains of downsizing and, for each project

team. they can match the best people to the job.

Agile manufacturing is hardly practical, however,

in a closed networking environment. Suppliers,

manufacturers, and retailers would have much

less flexibility in their choice of partners: connectivity instead of efficiency could very well drive

the select ion.

16 In fact, many firms use proprietary

systems when they want to gain control of a partnering relationship: by using closed systems, they

can often ‘block-in” their customers or suppliers. ] 7

If interconnection becomes too costly, electronic markets may also be inefficient. reducing

the efficiency of the overall economy.18 Whereas

highways and railroads fostered the development

of a national market, electronic networks could

have the opposite effect, with some groups and

geographic regions no longer able to fully partici-

.

pate. Moreover. in an electronic environment,

firms can use standards as barriers to entry, if not,

in fact. as restraints on trade. 19 This aspect of networking may present problems not only for the

U .S. domestic economy-as evidenced by continued antitrust suits against computer reservation

systems. real estate multiple-listing services, and

Chapter 2 Issues in Electronic Commerce | 41

automated teller machine providers-but for the

global market as well.20 Thus, for example, although the demand for electronic data interchange

(EDI) is growing rapidly, the international EDI

market barely exists at present.21 This delay is

partly due to the fact that the United States has

adopted one standard (ANSI x. 12) and the Europeans another (EDIFACT). As a result, EDI users

are still unsure about which standard they should

be using to link up with their trading partners.

Standards can also be used as trade barriers, which

increasingly has occurred over the last several

years .22

Although many users have been pressing for

open systems, vendors have been slow to deliver.

They are reluctant to move toward more open sys -

terns because standards 1imit their abi 1 i t y to differentiate their products, and thus can reduce their

profits. There is also the classic “chicken and egg”

problem, which is characterist ic of networked systems. Venders are unwilling to design their products to specific standards until they can be assured

of a market, while users are reluctant to purchase

networked products unless their interoperability

is guaranteed.23

In addition. standards-setting processes are,

themselves, subject to market failures because

17 ~lii, [), }{opw.r .. Riit(llno Siibrc_New Ways to C{m~pc(e on Inf(lml:ltlon,

~ “ }{cJr\c~rdB/4\[ne\.t Rc\ /c\t, May -June. 1990, pp. 118-125, Scc

al v J J anws E. Sh( ~rt and N. \’cnhirtraman, “Beytmd Business process Redesign, Redefining Baxterss Business Netw (rh,” .Yl(xrn Jf[inagenwnf

R.(’\ /( ~t , fall I 992. pp. 7-2 I

I ~Sc.c F, B;ir ~ind ~f, Boml\ “Fr( )111 publl~ A~~~-s to f+-i~ ate C(mnec[itms 11: Network Stratt!gy and Nilti(mal Advantage in U.S. Tclcc(mmunl~atl~~n,” Rcp~r[ for OECD Scmlnar t~n lnfom]i~ti(m Network and Business Slratcgies, Paris, France, Oct(~hcr 1989.

i ‘),4 IIt KaIl~bIl, ‘“ln[{)rnuition Tcchnt)l[)g) and Vertical integration: Evidence fr(m] the Manufacturing Sector,’” In M:irgiirtt E, Gucrin-Cal\ crt

and Stc\ cn S. %’lldman (IA.), t{/c(lrf~nii .Sct-vr(c.r A1cmork.r: A Busirwss and Pub/ic Po//c? Cha//cn(qc (New York, NY Pracgcr Publls}lcrs,

199 I ). pp 22- lx.

~(~(l,s, (’f)ngrc~f, Of fIcc ~~f Tcchn{~l(~g) ,Asscssmcnt, (j/tjba/ .Sfandard.s: Blii/djng [~loch’!,for the Furl/rc, OTA-TCT-S 12 (V’aih]ngton. DC

[IS (;(~;crrlll)crlt prrn[lng office, Miir~h 1992).
42 | Electronic Enterprises: Looking to the Future

they exhibit “public good” characteristics.24 Public goods are those goods whose benefits are available to everyone and from which no one can be excluded, and no one can fully appropriate the

benefits. As a result, public goods are underproduced.25 Standards often fall into this category.

Other market failures may also weaken standardsdevelopment processes. If the most efficient standards choices are to be made, for example, all interested parties must have access to accurate and

timely information.26 However, information

about standards, like standards themselves, is a

public good, and is therefore likely to be underproduced. 27

Compounding the situation, the United States

standards-setting process has a number of unique

problems. Unlike most other countries where governments have entered into formal agreements

with private-sector standards bodies—agreements that recognize and actually stipulate that

these organizations serve public as well as private

sector goals—the U.S. government has made no

such agreements. Instead, private-sector bodies

have been delegated the task of setting standards

on the assumption that, by acting in their own interests, they are bound to act not only in the interest of their user clients, but also in the national interest as well. This has proven to be less and less

the case, however.

As documented in the OTA report, Global

Standards: Building Blocks for the Future, the

U.S. standards-setting process has become increasing y paralyzed from a lack of leadership and

intense rivalry among standards-setting bodies.28

This situation has detracted from the main purposes of setting standards; it has also served to undermine the legitimacy of the system in the opinion of standards bodies at home and abroad.

Impatient with the lack of progress, some vendors

have circumvented the traditional process by establishing special consortia to develop standards

in specific areas. 29 Although these consortia have

been successful in speeding up standards’ development, their membership is purposefully limited; they are established with the competitive

24Purc public goods will not be produced privately. There are only a few pure public g(wds, tme example being nati(mal defense. O[her

goods, I ikc education and standards, are impure public goods. These combine aspects of b)th public and private goods. A Ith{mgh they serve a

private functitm, there are also public benefits associated with them. Impure public goods” may be produced and distributed privately in the

market (w collectively through government. How they are produced is a societal choice of significant consequence. If decisi(ms atxmt impure

public g(~{ds are made in the market, on the basis of personal preferences alone, then the public benefits associated with them may not be efficiently pr[xlucecl (w equitably distributed. See Edwin Mansfield, Mi[’roeconomit’s Theory and App/icalion (New York, NY: W.W. N(mton,

I 970).

25C. Kindelberger, ‘“Standards as Public, Collective, and Private Goods,”” Kylos, vol. 36, pp. 377-395; and Sanf(wd Berg, ’Technical Standards as Public G(wds: Demand Incentives for Cooperative Behavior,” Pub/ic Finance Quarterly, vol. 17, January 1989, pp. 35-53.

~6Ft)r a discuss [(m t)f market failures due to lack of infomlati(m, see Joseph Farrell and Garth Saloner, “Ct~ordinati(m Tt-mmgh Ctmm]ittces

and Marhcts,” Rand Jourrra/ ~1 Economics, vol. 19, summer 1988, pp. 235-252; and Joseph Farrell and Garth Sahmcr, “Slandarciizati(m, C{)mpiit]billt), and innovation,” Rand Journal oj”Ecorromics, vol. 16, spring 1985, pp. 70-83.

‘7Evcn when standards-related inft)mlati(m can be packaged for sale like other commodities, thus yielding an adequate return, its price may

limit its dlstributi(m so that people have insufficient mf(~m~ation to make sound decisi{ms.

281n the United States, most standards are establ ished thnmgh a voluntary, consensual process that is orchestrated and carried out by approximiit~l~ 400 private sector standards development bodies. These groups are organized and function independently, although they all arrive at

declsltms thrxmgh a process of c(msensus and provide s(me level of due process. All have mechanisms for participati(m, ctmlment, and appeal.

OTA, op. ci[.. fotm)te 20.

2’)C{)nsofili~ have been established, for example, 10 set standards for switched muhimegabit data service (S MDS), Fiber Distributed Data

Intcrfacc (FDD1 ) (wer twisted pair, asynchr(mous transfer m(tie (ATM), and frame relay technologies. See, for a discussi(m, Martin Weiss and

Carl Ciirglll, ‘“C~ms(wtia in the Standards Development Process,” Journal oj’fhe American .Wciefyjor lnjorrna[ion S2vence, wd. 43, No. 8, Scptcmbcr 1992, pp. 559-565.
Chapter 2 Issues in Electronic Commerce 43

strategies of vendors in mind, rather than the interests of users or the economy as a whole.

INCREASING IMPORTANCE OF

SOFTWARE

Increasingly, all electronic networks--whether

public, wide area networks that provide essential

transmission services or private networks that

support interorganizational business applications --are software driven and software dependent. Software provides structure and functionality to these networks. determining such critical

features as interconnection, interoperability, ease

of use and rates of technology diffusion.

Given its role in networking, software will also

become a more significant factor determining economic relations. Already software-defined proprietary networks can function as market barriers,

while distributed computing systems can encourage economic activities that are horizontally rather than vertically integrated. Equally important.

software-defined business applications will not

only affect the structure of work relationships;

they will also help to determine the very nature of

work.

Unfortunately, the ability to develop a broad

range of high quality, reliable software to support

business networking applications has failed to

keep pace with software's greatly enhanced role.

This gap can inhibit network development and deployment, and the resultant economic gains. It

also constrains the kinds of social choices that are

available to the nation in determining how to best

structure economic activities and outcomes.

Software development is being driven by

mounting computer sales30 and by the growing

need for more versatile and complex applications. 31 Businesses, for example, need software

that can support: 1) system simulation and integration, not just data processing: 2) distributed

systems as well as centralized computing; and

3) graphics and nultimedia-based systems rather

than simple text-based ones. Embodying the logic

of complex systems, software will also be used to

reengineer business processes. Software can be

designed to affect the way in which people and

machines interact, conceptualize problems, carry

out processes and routines, design jobs and role

assignments, and define authority and power relationships.32 Many businesses are using groupware, workflow software, and distributed computing to empower employees and enhance

team-based work (see box 2-1 ). Software quality

and speed of delivery are also becoming increasingly important. It is estimated, for example. that

software defects and delays can increase business

project costs by as much as 50 percent.33

Internetworking among firms and across markets is also becoming increasingly dependent on

soft ware, which represents an element of network

design and operation that is increasingly more

 The intelligent network, for costly and complex.34

30 It is noteworthy in this regard that, whereas at the end Of the 1980s there were more than 1 million computers in the United States, that

numher is estimated to exceed 100 million by 1995. John Teresko, "Software: (Still) Made in the U.S.A.," Industry Week, Jan. 4.1993. p. 41.

31As described by Rockart and Hofman:"The kinds of information Systcms that are needed to support the process-oriented, interdependent,

. .

and information rich organization of today are vastly different. The organization that works across functional (and sometimes divisional)

bounderies needs to support cross-functional transacting systems. where the focus is on satisfying end-to-end business events or service strategies rather than discrete activities. . . .two implications are clear. First, new systems development, Iong overwhelmed by maintenance of existing

systems, will be necessary if proccess-oriented systems are to be created.The investment will be major. Second, not only the nature of the systems

has changed, the speed with which they are needed and. more important, with which they must be changed, has increased as wall.”” John F.

Rockart and J. Debra Hofman, “Systems Delivery: Evolving New Strategies.”’ Sloan Management Review, summer 1992. pp. 24-25.

32See, for discussions. Shoshana Zuboff, In the Age of the Smart Machine: The Future of Work and Power (New York, NY: Basic Books.

1988); and Thomas H. Davenport and James E. Short,“Thc NeW Industrial Engineering: lnformation Technology and Business Process Redesign.”” Sloan Management Review, summer 1990. pp. I I-27.

33 W. B. Foss, “Software Piecework,” Computerworld, Sept. 23, 1991, p. 69.

. .

34 Mansell, op. cit., footnote 1, p. 510.
44 I Electronic Enterprises: Looking to the Future

“Groupware” IS a general term for

software (and sometimes hardware)

applications that are designed for the

use of collaborate work groups. For

example, basic groupware combines

simple messaging software such as

electronic mail with common databases of work records and memos.

Workflow software allows processes to

be redesigned and streamlined, and

automatically routes work from employee to employee Meeting and conferencing software and hardware facilitates conferencing with audio, video,

or just simultaneous text entry Finally,

scheduling software coordinates

meetings using each colleague’s electronic appointment book

Groupware IS on the rise In 1989,

the Institute for the Future began systematically tracking the groupware

market according to nine categories

as shown. Between 1991 and 1992,

they found the total number of prod

ucts nearly doubled from 77 to 140.

SOURCE of Technology Assessment 1994

Meeting Support

Filtering/Refining

Group Managing

Conferencing

Group 

Screen Sharing

Group Scheduling

I 1992-1993

 1991-1992

-1990-1991

J

I I

I

J

o 10 20 30 40 50 60

Number of products

I

SOURCE Institute for the Future, ‘The Electronic Enterprise, ” contractor

document prepared for the Off of Technology Assessment, May 1993,

p 25

example, could not exist without the support of $60 (expense plus capital) per access line, or more

software-driven switches and databases35 (see than 30 percent of total basic monthly charges.36

box 2-2). Employing such software, telephone How this software is deployed, and where its concompanies now spend $9 billion annually on in- tro] resides, will determine the quality and evoluformation technology, which amounts to about

 databases, with channel signaling, the intelligent network f~nc- 0

 separated from switching This the work select the most appropriate services and 

 and simplified and Among the services that the intelligent can

 call call call queuing, credit and billing, reverse charging, of calls based on data held in a

 database, 

 a Apr. .
Chapter 2 Issues in Electronic Commerce | 45

The advanced Intelligent network, elements of which are currently installed in today’s public

switched telephone network envisions greatly Increased operating efficiency as well as a broad array

of sophisticated network services by separating the call transport (I e , the voice circuit) function from

the signaling and control function and employing the powerful software in the switches

Imagine, for example, an instance where a caller places a call to a family member who, while on

vacation has Indicated that calls from certain numbers are to be rerouted to the new Iocation and given

a unique ring to indicate priority In this illustration, the vacationer would have preprogrammed the priority telephone numbers (other calls might be routed to an answering service or machine) and the new

destination number by dialing into the Intelligent peripheral and inputting these data When the caller

dials the number, the local switch queries the signal transfer point for billing and accounting information It also ascertains from the service control point a clear path through the local network to the point

of presence of the caller’s Iong-distance carrier of choice The signaling networks of the two local exchange companies and the long distance earner Interact to learn the status of the called party and

thus how to set the call up, in this case, the call has been redirected to a telephone address in a new

Iocation, so a third local company IS involved and once again the status of the called party IS learned

(for example if the Iine were in use, the network would direct local carrier A to transmit a busy signal to

the caller) and establishes a calling path Local earner C IS also Instructed to deliver the special ring

SOURCE of Technology Assessment 1994

Long distance carrier

II II

L

A Ill II II II

Local Local earner -.

~& c

II II II

Intelligent

 -

\\- - —

,

Database point

Transport or call-carrying circuit

SOURCE Office of Technology Assessment 1994
46 I Electronic Enterprises: Looking to the Future

tion of networking; it will also affect network providers and their competitive positions vis a vis one

another in the marketplace.37

Because of its increasing importance, software

could easily become a barrier to networking development and business use.38 Rates of innovation and development are already failing to keep

pace with those of other information and communication technologies. Whereas the price/performance ratios for hardware have been falling dramatically for a number of years, the costs of

developing a line of software code is approximately the same as it was 20 years ago.39

Even now, businesses are feeling the pinch of

lagging software development, and the situation

40 The slow pace of devel- will be hard to reverse.

opment stems in part from the lack of unifying

technical concepts and proven software engineering tools and methods. These problems are compounded by the need to customize software tools

to specific business users’ needs.41 Software development costs are also being driven up by the

need for maintenance, upgrades, and documentation, all of which are expensive.

Although software development tools, such as

Computer Aided Software Engineering (CASE)

and object-oriented methods, are advancing and

becoming widely available, the use of these

technologies is still limited.42 Vendors have been

discouraged from developing and marketing software development tools because of the lack of

standards and the high costs entailed in creating

domain-specific interfaces to suit the needs of different users. Moreover, software developers have

not been inclined to adopt these tools because they

require the development of new skills and practices and the abandonment of old systems and

ways of doing things.43

Future efforts would likely yield greater results

if more emphasis were placed on stimulating commercialization, technology diffusion, and the continued innovation that takes place throughout the

entire life-cycle process. 44 The Japanese experience is especially instructive in this regard. Focusing on planning and team development rather than

on the engineering technologies, the Japanese

have made impressive productivity gains. Today,

37 Mansel], op. cit., footnote 1.

38AS ~escnbed by Fichrnan and Kemerer: ‘iThis Imbalance has reached such pro~wti(ms that it has been tem~ed the software crisis. Software producti(m represents the single biggest obstacle m the successful use of IT in organ izati(ms: all precepts such as ‘using IT for strategic

advantage, ‘ ‘reengineering the business, ’ and ‘ infomlating the workplace, ’ become mere slogans if the necessary software is not properly delivered on time.” Robert G. Fichman and Chris F. Kernerer, “Adoption of Software Engineering Process Innovati(ms: The Case of Object

Onentati(m,” Sloan Mmragemerzl l?c~iew, winter 1993.

39John A, A]lc, Janleson R. M Il]er and Jeffrey A. Hart, “Compuler Sof(w are: StrateglC Industry.” Technolog> Anoljsis & Slrategic Management, vol. 3, N(). 2, 1991, pp. 177-190.

Woss, op. cit., f(M)mote 33, p. 69.

41As described by Rosenthal and Salzn]an: ‘The design of effective software is fraught with subtle cornp]exity. seemingly technical decisions about the in formati(m to be c(mtained on a screen, the sequence of screens, and the types and fom]s of data entry can fundamentally influence how workers and cust(mxrs interact. Technical decisi(ms are really decisions ahmt how and what service will be delivered, the structure of

customer-worker interactions, and more generally, the fim]’s operational model of service delivery. These are often not obvious to the software

engineer, who views systems design as a technical enterprise involving the automation of clearly defined procedures.’” Stephen R. Rosenthal

and Harold Salzman, “Hard Choices Ab(mt Software: The Pitfalls of Procurement,” .$/oan Management Rc\ie\\, summer 1990, p. 82.

~2Jonath~ A. More]t, Louis G. Tomatzky, and James Behm, CASE /mp/en]entation: [>~namics 7’hrough /he Technology L.lje CY(’/e (Ann

Arh)r, Ml: Industrial Technok)gy Institute, 1990), and Mary,ann Olavi, ” Making CASE an Organ izati(mal Real ity,’” lnjimnar~on Sys~ems Management, vol. 10, Nt). 2, spring 1993, pp. 15-20.

~~F1chn~an and Ken~erer, op. cit., footm~te 38, p. 8.

~See Edward Yourdon,” The De(/ine and Fa// oj the Ameri(wn Progranvner (New York, NY: Prentice Hall, 1992). AS the author notes:

“Attenti(m to pm)pleware issues can literally cause 10-fold productivity improvement, while inkestrnents in CASE methodologies, or other

technologies,” rarely cause rmwe than a 30-40 percent improvement,” p. 28. See also M(m-ell et al., op. cit., footnote 42.
Chapter 2 Issues in Electronic Commerce | 47

it is said that Japanese programmers produce 70

percent more code than their U.S. counterparts,

and with fewer than half as many defects.45

For best results, users as well as vendors need

to be more involved in the processes of software

development and acquisition.% While user involvement is necessary for the development of all

innovations, it is particularly important in the use

of software, which is itself a process tool that has

far-reaching organizational impacts. Too often,

software fails to measure up to expectations. It

may even give rise to unintended consequences

because, in the early stages of development, design parameters are not carefully matched to organizational needs. 47

| Need for a New Regulatory Approach

There is a growing gap between advances in networking technology and the regulatory framework that governs how these technologies are

brought together to comprise a national infrastructure. Although information and communication

technologies are increasingly being mixed and

matched and used interchangeably to create a variety of networks serving different purposes, national regulators continue to compartmentalize

them, setting economic ground rules as if these

technologies were quite distinct and unrelated.

Moreover, regulators and lawmakers are, at times,

so focused on establishing the appropriate rules

for how the wide range of vendors and serv ice providers should relate to one another that they often

fail to consider the larger consequences that the

ensuing network architecture may have for the

economy as a whole. Even less attention is paid to

the evolution of private networks and network

components that, while falling outside the bailiwick of the Federal Communications Commission’s (FCC’s) traditional regulatory mission, still

constitute part of the infrastructure that supports

and sustains economic activities.

Although the divestiture of AT&T had a revolutionary impact on telecommunications worldwide, its effect on U.S. regulatory policy has been

much more circumspect.48 Despite the convergence of information and communication technologies and the emergence of new complementary and competing networking components, the

FCC continues to deal with each technology-as

it has in the past—according to a distinct set of

rules. Such an approach makes it difficult to develop a comprehensive and strategic picture of

how systems will interconnect and services might

best be delivered in the future.

This regulatory approach has major implications not only for infrastructure development, but

also for business and the national economy. In

economic activities, the value of information and

communication technologies greatly increases

when technologies are effectively networked together, making it imperative that they be considered in relationship to one another. Thus, for example, American Hospital Supply (AHS) (now

Baxter Corp.) did not simply use its EDI network

to reduce the cost of exchanging trade data.

Instead, it added value to its product by packaging

the information generated by the system and bundling it for sale together with its hospital supplies.

45 Michitel A. Cusumam), “’A Qumtltatl\c Analys]s of U.S. and Japanese Practice and Perf(mnance in Software De\clt~pn~en[,” ,kf(Jn(Jgc -

rnerrl .$( Jen(e, \ (~1. 36, N“(J, I I, N(J\ mher 1989, pp. 1384-1405, Neil Gross, “N(Jw S(>ftware Isn”t Safe Fr(ml Japan,’” llu$~ne.~s WeeL. Jan. 1 I.

1991, p. 84, !vlarh Crawford, “Softw arc industry Braces for F(relgn onslau.gh[,’” Nc}\’ Te(hno/o~~’ Week, N(m’. 18, 1991, pp. 1,9: and IXmglas

Marden, ‘The Japanese Appr{mch to Software lle~ clopnlent, ’” (’/]ie//<~r~~la~ionon Ojjicer Journa/, tel. 5, N(). 4, March April 1993. pp. 18-21.

.%sce for Instance. Suc Newel], Ja~~\ SW an, an(J Pe[er Clark, “TIN lrnp~t-tance of User Design in the Adoption of New lnfomlatlon”

.

Technologies,’’” international Journal o/ Opcr(Jlton.r and Produ~”tlon Management!, vol. 13, N(). 2, 1993, pp. 4-22. See also, Joan Greenbaum

and M[)rtcn K} ng, f~c.~~,gn cJ/ Whrh. ” Coopcr(llll e /)e.r/gn of Compufer ,$),!fem.$ (Hill sdale. NJ: Lawrence Erlbaum Ass(~’iates. 199 I ).

.$7NCW ~]] ~[ al,, op. cll,, footno[~ ‘.

+For dlsc~l~slons ,,f the ~~st.dll ~$tltllrc rcgul:lt(~b cny Ir[)nn]cnt, see Roh’rt W. Crandall and Kenneth Flanlm (eds. ), (’)lfJnR~n,~ t}lc Ru~e$~

72(’/1no/f},~lfa/ (’hangc, lnlernatl(ma/ C[mlpe[l(lon and Re~u/allon In C’or)It)IIIIII(’(JfIofJr” (Washingt(m. DC’: The Bro(Amgs Institution, 1989), scc

also Barr} Cole (cd. ). A/fcr rhe BrcoA-[ )): A \Jc$\iII,q fhe ,?’cit Po\t-,4T& 7’ D/\ cf~l(urc Era (New )r(~rk. NY C(dumb]a Llnlf erslt) press, 1991 ).
48 I Electronic Enterprises: Looking to the Future

The American Information Exchange (AMIX) IS an example of one of the Innovative new electronic

marketplaces AM IX, which has been in operation since June 1991, is a computerized forum for buying

and selling software, research data, newsletters, and consulting services, according to its operators,

the network IS designed to “shave transaction costs to the bone. ”1 The network facilitates the unbundling of Information, instead of buying one large, expensive report, buyers can access and pay for as

much, or as little, Information as they need. Sellers post their products and services online, and if a

buyer iS interested, the materials are downloaded and the price IS debited from his or her credit card.

The network pays the seller and keeps a commission Buyers can also use AMIX to advertise their data

needs if there is no corresponding seller, the network will provide a mechanism by which buyers and

sellers can negotiate a contract to create customized information To be part of the network, all one

needs IS a personal computer, a modem, a telephone Iine, and AMIX software

(continued)

I Benjaml~ Wright, “High-Tech Juice Keeps Electronic Emporiums Hummmg “ ComlwfeWor/d, OCt 12 1992. P 112 See also

Esther Dyson, “lnformatlon, Bld and Asked, ” Forbes, Aug 20, 199Q Joel N Orr “Join the Information Economy, Cornpu/er Aded

Engmeermg April 1992

SOURCE Office of Technology Assessment, 1994

In this fashion, AHS was able to differentiate its Communication regulations defining vendor

product from its competitors, and thereby gain a

strategic advantage.49

The internetworking of communication and information technologies adds value in the marketplace as well. For example, an electronic catalog

may be useful, but its value is considerably increased if it is put online. It is then accessible to

more users and can be updated in real time. Additional value can be added if this network is linked

to both an intelligent network that offers 1-800

services and a credit card authorization system.

By connecting all these services, an actual exchange can take place. Further benefits can be

derived by connecting to an electronic funds transfer system and/or an automated clearinghouse. If,

as in the case of the AMIX system, multiple buyers and sellers are linked together on a network,

true electronic commerce can occur (see box 2-3).

Whether, and under what circumstances, the appropriate interconnections allowing for electronic

markets will take place, however, will be determined in part by federal and state regulations.

relationships and network interconnections will

also affect the distribution of economic costs and

benefits among American businesses. For example, the FCC regulatory decision to allow interconnection to the public switched network fostered competition and the unbundling of what was

once a single, unified telephone system. At the

same time, however, this decision shifted the

transaction costs entailed in network integration

and management from the supplier to the user.

These costs are considerable, given the growing

variety of technologies from which to choose, the

lack of standards and common interfaces, and the

complexities involved in assembling networks.

Large businesses have thrived in this environment, taking advantage of lower service costs and

the opportunity to customize their networks to

better meet their needs. Because of their size and

resources, large businesses have been able to

achieve sufficient economies of scale and scope,

making it economical] y feasible for them to develop networks of their own. Given their specialized

40H{~pper. op. cit., f{x)tm)te I 7
Chapter 2 Issues in Electronic Commerce | 49

L

Information

m

/

— — Comments, feedback

about report, author

Host computer

Credit agencies —

SOURCE of Technology Assessment 1994

networking capabilities, many of these busi- ple, a small business does not have in-house capanesses—such as Sears and J.C. Penney—have bilities to develop its own proprietary EDI system,

been able to market their communication services it will have to bear the full costs of system integraor use them strategically to their competitive ad- tion by paying a value-added network (VAN) provantage. so vider, such as GEIS or EDS, to provide the serSmall businesses, on the other hand, have often vice. Under such an arrangement, the trading

been disadvantaged by this situation. If, for exam- companies rent EDI mailboxes through which or-
50 | Electronic Enterprises: Looking to the Future

ders and invoices are sent and received. This setup

can be costly, and it is often inconvenient. Because of the high costs of interconnection, many

companies access their mailboxes as infrequently

as possible. Restricting usage, however, can defeat the purposes of EDI, which strives to support

“just-in-time” de ivery. A company that checks its

mailbox on] y once a day could be confronted with

a delivery even before any paperwork has been

done.5 1

The small user could overcome this problem,

however, given a different set of interconnection

arrangements. With software that is now being developed, businesses will be able to circumvent the

VAN and link up their ED] systems through a less

expensive transmission medium. such as an architecture like the Internet. In this case. the mailbox

would reside on the user workstation instead of

with (he VAN provider, Exchanges would likely

take place much more frequently, since the user

would have more control and the cost would be

much less. Equally important, trading partners

would be able to send unstructured E-mail messages along with structured EDI messages, which

would greatly enhance the effectiveness of the

trading partnership. If the Internet were linked to

the X 400 E-mail standard, it would also be possible to transmit binary data, computer-aided design and computer-aided manufacturing (CADCAM) data, and graphics in this fashion.

It was relatively easy to establ ish rules and regulations governing interconnection when there

was a single unified telephone system that was

quite distinct and unrelated to other media, such as

print and radio-based technologies. All were regulated according to a distinct set of principles. The

telephone system operated as a common carrier;

print media in accordance with the first amendment; and radio-based media as defined by the

“public interest standard.”52 As communication

and information technologies converge, and service providers merge accordingly, regulators and

lawmakers will need to determine which set of

principles should apply.

With the growth in competition, the packaging

together of information with communication networks, and the development of private networking, fewer and fewer services are likely to fall

within the traditional realm of common carriage.

While this development may make sense with respect to the changes that are taking place within

the telecommunication and information technology market, it might be problematic with respect to

the economy as a whole. Common carriage rcgulation assures equitable access and interconnection to essential facilities. To the extent that networked information systems come to operate

increasingly as true electronic markets, more and

more issues relating to the principal of essential

facilities will certainly arise.53

LINKING TECHNOLOGY AND

ORGANIZATIONAL INNOVATIONS

Many business and government leaders look to information and communication technologies to
Chapter 2 lssues in Electronic Commerce | 51

help American business regain its competitive

position and adapt to its rapidly changing economic environment. Experience to date, however,

demonstrates that technology alone will not be

enough. In cases where technology has made a

critical difference it has been employed in conjunction with successful organizational change.

Similarly, most obstacles to success have been organizational rather than technological. To develop

appropriate technology-based strategies that are

sufficiently responsive to the fundamental

changes taking place around them, businesses will

need to reengineer their business relationships and

their ways of thinking about the nature of the business enterprise itself.

Over the past two decades, American business

has invested heavily in information and communication technologies to boost productivity. Between 1970 and 1988, for examp]e, the share of information technology as a percentage of stock of

capital equipment increased from 16.4 percent to

20.7 percent in the service sector, and from 1.6

percent to 10.6 percent in manufacturing.54 In

1990 alone, American businesses spent over $61

billion on hardware, $18 billion on software, and

over $75 billion on data-processing and computer

services. 55

In spite of the enthusiasm with which American businesses made these sizable investments.

the results to date have been disappointing. Although U.S. business investment in information

technology has exceeded that of all other major industrial countries, U.S. productivity has not followed suit.56 Until very recently, productivity

gains have been essentially stagnant in services.

the very sector in which information technology

57 only very recently investment has been highest .-

has this trend begun to reverse, with productivity

gains in services averaging 2.6 percent over the

last seven quarters.58

Economists and other business analysts have

explained the elusiveness of technology benefits-the so called “productivity paradox’’-in a

variety of ways.59 Some have argued that existing

productivity measures are out of date. They point

out that, while the ratio of output to inputs may

have sufficed to measure growth rates in an era of

mass production, such a measure is inadequate in

a service economy where time. convenience, and

customized production are so highly Valued.

Others caution against confusing cause and effect,

noting that, had investment in information

technology not taken place, productivity gains

$.tD~i\,~ L, Schrllltt .. Rccn:lnccrlng the organ lzaticm Using ]nf(mlali(m Technol~w, ‘“Journal @S?I.V1cn~s ,Mana,gcnlcnt, Januar) 1997, p.

4,

‘Xl bid,, p, 5.

“)Ftm (N crall dlscuisl(ms, see Martin Neil Bally and Robert J. Gor(.hm, ‘The Productivity Slowdown,” Measurement ISSUCS. i]nd the E\ pit)-

s]{m of C( mlpu(er Pow cr, ” Br(x)klngs Papers on Ec(mornic Activity, vol. 2, 1988; Gordon and Bally, op. cil., footnote 56, PiiL]l Strilssman, The

BI~\~nc\ \ \2J/J/ci o/ ~’ompuierr (New Canaan, CT” Tle lnformati(m Ec(momics Press, 1990): and Paul Attewell. “Llnf{lrrnat}on Tcchn(~l~~g) and

the Pnductlj Ity Paradt)x ,“ \ crs]on 3.1, Jul~ 1992, funded in part by a grant #1ST 8644358 fr(ml the Infom]ation” Tcchm )l~~g> and ( )rgiln I / iitl( )ns

progriln] of the Nat]t)nal Sc]ence Ftmndation. For an alternative point of view, see Erik Brynjolfsstm, “1s lnfornliltlon” S) Slclll\ Spendlny Pr(xiu~-

t]vc ,Ncw Evidence and New Results.” MIT Sloan School, Working Paper #3S71 -93.

~JOT,~ ~’orhsh(lp on the pr(~l]c[ikitp paradox, Harvard Uni\ erslty, Ma\ 10, 1993. See also, Peter R. Richiu-ds(ln and John R .hf. G~)r~(~n.

.

‘“MCiiSLII_ln~ Total Manufiictur]ng Perf{)mlancc,’” Management Rc\ icw, winter 1980, pp. 47-57, Yt~ung Kyu Son i]nd Chiin S. Park. ‘“E~’(m{mllc

Measure of pr(ducti~ ]ty, Qualit~ and Flex ih]lity m Advanced Manufacturing Systems,’” Jollt-nal ~~~ ,k~an[i~(j(l~~rlt~,q .!} f[cnif, \ {)1. 6, Nf). 3. iind

Tlrnothy Brcsniihim, “Mcasurlng Splll(lvers from Tcchn]cal Advance: Mainframe C[m]puters In Financial Scn Ices.” ,lmcrl([in E( fvl(ml(h’(f-

\1[’ti . k ( ~i. 76. N{). ~, ] 986, pp. 742-755.
52 I Electronic Enterprises: Looking to the Future

may have been even lower. 61 Still others question

the existence of a productivity paradox, noting

that it can take a number of years to reap the benefits of a new technology, especially in cases involving networked technologies.62

Although differing in their assessments of the

productivity paradox, many analysts agree that information and communication technologies will

not yield substantial gains unless American businesses use them to instigate major organizational

change. 63 Embodying social relations and supporting social interactions, communication and

information technologies are indeed powerful

forces for change. However, if they are to have

their intended effect, new technologies will need

to be carefully integrated into their organizational

environment, taking full account and advantage of

the “way people work, learn, and innovate.”64

These technologies will also need to revolutionize

the mind-set of those working within business organizations, awakening them to the full range of

new organizational possibilities.6s The lack of

mutual adaptation will serve to undermine these

efforts66 (see box 2-4).

Problems of this nature have already become

apparent, for example, in the case of business networks. Cooperative partnerships offer a wide

range of benefits.67 In a rapidl y changing environment, they permit firms to enjoy a measure of stability without sacrificing all their flexibility.68

Partnering benefits can be distributed in two

ways. Linked to a large customer or supplier, for

example, a small firm can gain access to new markets; share in cost reductions resulting from greater economies of scale; reduce the time required to

develop new products; gain access to technology

and process innovations; improve quality; provide mutual assistance in a crisis; receive greater

market feedback; and receive better financial

61 William B[)utm, ‘The Puny Pa)t)ff fnml Office Aiittmlatitm,” Forrurre, May 26, 1986.

62 David, op. c‘II . , f(x)tnotc 6.

6~A~ H:i},e~ ~n~ Jal~un~ar note ‘“SIIII, most U.S. managers arc having difficulty reaping these advantages. For ye:irs, r]~iirll]f’iictL] rers have

acqu Id new equ ipmtmt much i n the way a fan) i ly buys a new’ car. Drive tmt the old, drive in [he new, tmj(~y the faster, sn~( N)thcr, n~ore ec[)nt)nllcal ride—and go (m with Ii fc as before. With the new technology, however, “as bef(we”’ can mean disaster. Executi\cs iirc dlscovcrl ng that acquiring an FMS [flex ible manufacturing systcm] (w any of the other manufacturing sy stems is nlt~re I ike replacing that old car ~’litl a Iwiict)plcr.”

R(krt H. Hayes and Ramch;imfran Jalhurnar, “’Manufacturing’s Crisis: New Technologies,” obsolete” Organizati(ms,” fl(ir\cird f]u,5inc\.5 ReIien, Scpter~lh’r-octoh>r,” 1988, pp. 77-85.

~~As Brown ~d Duguid no[e: “organ ilatl(mal survival may far less depend on nl(we sophisticated techmjlog) dev]ccs lh~in (m ii more M)-

phlsticattxl understanding of the way people learn, work, and innovate,” John Seely Brown and Paul Duguid, “Innovation” in the Workplace A

Perspective (m organizati(mal Learning,” pap>r prepared for the Carnegie Mellon University C(mfcrence (m organizatlontil” Lcm-nlng, Ma)

1989, p. 3. See als(l S[cvcn S[ant(m, Michael Hammer, and Br:idford power, “Reengineering: Getting Everyone (m Board,’” /T,tfaq(i:Inc. April

1993, pp. 22-27.

651 bitf., p. 7.

66 Henry Mlntzberg and Fran~~s wes[]~y, “cyc]cs of Organlzationa] Change, “ .5trotegits Man[igentcntJ<~ldrn{il, vol. 13, 1992, pp. 39-59, As .

the authfws point (nit, organizational change can take place from tx)th the top down and the hmm up. But, as in the case {)f al I inno\ :itit)ns,

(wganizatitmal changes will be redeveloped and reinterpreted to address the situation at hand.

67Mar~ D,)]] in~~r and pegg)’ Gold~n> “ln[crorganizalional” and Ctdlective Strategies in Small Firms: Envir(mrnental E; ffccls :incf Pcrf(mnlancc,’’Joidrna/ oj Man~igenlent, v(d. 18, N{). 4, 1992. As the authors p)int trot: “The future looks more cooperative than wc belie\e. Perhaps

the sun i\ (~rs t~f the competi[ivc game are the (mm who m~w participate in the cooperative game. As (he global ecomm~y evoltcs, stratc:lc

alliances are the future and c(m~petititm will primaril)’ take place among alliances. The advantage of participating in these alllimccs are multiple

;ind manifest and fh-rns scramble to be members. In other words, firms compete to cwprate. ”

~~Andr~a Ltirson ‘bpa~ncr Network: ~~veraging External Ties T() ] nlprx)ve Entrepreneurial perfomlanC~, ’” Jowmal of B14s1ne.\.\ l’enturin~.

wd. 6, 1991, pp. 173-188. See also, Peter Srni th Ring and Andrew H. Van de Ven, “Structuring Cooperative Relatl(mshlps Be[wctm org:inl~att(ms,” .$fr(ife<:~( Managcnten/ Joiwnai, vol. 13, 1992, pp. 483-498.
Chapter 2 Issues in Electronic Commerce | 53

I

I

The great successes in recent years of foreign-based automobile manufacturers in the American

small-car market have led the big three American automakers to reassess managerial approaches and

production processes Faced with declining market share and well publicized management troubles,

General Motors (GM), the nation’s largest automobile manufacturer, launched the Saturn Corp in 1983

to compete in this Important segment of the market

The Saturn Corp was created from scratch as a subsidiary of GM, but with sufficient distance from

the parent company to allow a new corporate philosophy. In order to compete against Honda, Toyota.

and Nissan, Saturn IS experimenting with markedly new ways of designing, building, and even selling

cars The company’s hallmark IS its reemphasis on people—both its workers and customers Instead of

a dichotomy between management and labor, Saturn organizes the company in teams, each of which IS

responsible for its performance, budget, and hlring, further, the involvement of team members in decisions about production and the product IS a significant departure from normal practice and IS often

credited with Improving the quality of the work environment and the product itself A second innovation

IS the integration of computers into the design and production of Saturn cars With support from GMs

EDS subsdiary, Saturn electronically connects the various departments—for example, directing purchasing to order parts to match a production schedule—as well as Important suppliers the network

even Iinks with dealers to track information on customer preferences and automobile maintenance

The Ford Motor Co , in 1926, faced an analogous predicament declining market share was proof

that the philosophy and manufacturing process that had worked so successfully for the Model T had

become obsolete In order to build a new product line, it was necessary for Ford to rebuild its company

During the first two decades of the 20th century, Henry Ford and his motor company revolutionized

manufacturing with the introduction of assembly -line mass production for the flagship Model T Ford and

emphasized maximum production at minimum cost, though there were numerous refinements of the

process in the course of the Model T's illustrious 20-year history, the product itself remained remarkably

similar Ford’s hallmark was to build cars in very large quantities using machine tools specifically designed for a single task similarly, Ford realized significant Improvements in productivity by breaking

down human tasks into very small pieces Ford refined the assembly-line system of production to such

a degree that no competitor could match Ford on price however, this great efficiency came at the expense of Innovation, and GMs Chevrolet division Instead won over consumers in Increasing proportions

on the basis of more modern styling and a greater variety of features and options, such as colors other

than black

By 1926, when the 15-millionth Model T came off the assembly Iine, Ford’s market share had slipped

to 30 percent from a peak of over 50 percent in 1921 In that year, Ford announced that it would stop

making the Model T and Introduce a new car, the Model A. In doing so, Ford largely revamped its own

organization, purging the company of the old management, the company also relocated to a new facility and redesigned the production tools and process in preparation for the new Model A

SOURCES David A Hounshell From fhe American System [o Mass ProducOon 1800-1932 (Balllmore MD The Johns Hopkns Un -

versty Press 1984) pp 217-301 Kevin Doyle “Can Saturn Save GM?” /ncerNwe. December 1992, pp 30-37 Keith A [ In[on and

L sa W Churltch Managing and Measuring the Performance of Vehicle Design at Saturn, ’ 1993 AACE Trar?sac[/ons Jeremy Mac

Computers of the World Unltel Fodune Sept 24, 199(, PP 115-122, John Teresko “Englneermg Where Competltlve Success Begns Indus(ry Week Nov 19 1990 pp 30-34
54 I Electronic Enterprises: Looking to the Future

terms.69 Larger firms that are parties to such arrangements also gain; most important, small firms

can help them gain access to future markets as

well as provide a stimulus for innovation and .

change .70

Establishing such arrangements is not without

difficulties, however. Above all, successful networking takes time and continued effort; it requires that trust be established over time through a

process of repeated successful transactions.71 It

also requires a commitment and willingness to

share all forms of information among business

partners 72 (see figure 2-5). Having been steeped in

a bureaucratic and competitive mentality, many

businesses have found it difficult to shift from an

adversarial approach to a more cooperative one.

For example, many manufacturers find it difficult

to commit to a specific set of suppliers.73 And,

even after making such a commitment, they are reluctant to share proprietary product data. At the

same time, suppliers have been unwilling to let

their customers, or other competing suppliers,

share their cost data.74 Failure to share information within firms also inhibits partnering, since effective interorganizational relations require cooperation across all sectors of both firms.75

Total quality management (TQM) groups have

encountered similar problems. The concept of

TQM, which traces its early roots back as far as the

1920s, gained considerable popularity in the late

1970s and early 1980s when American manufacturers learned from their successful Japanese

counterparts that it is quality, and not just cost,

that drives sales in a post-industrial economy.76

Fundamental to total quality management is the

assumption that, when things go wrong, the problem generally stems from organizational rather

than human failures. To solve such organizational

problems, TQM calls for employees, working in

teams and closely with management, to identify

the problems and find ways to overcome them.

Work teams also need access to company-wide information to properly analyze issues and solve

problems. 77

Although American businesses have taken

many formal steps to adopt team-based, quality-

‘glbid,, p. 179

‘“Ibid., p. 180.

7 I AS &scrl&d by Ring and van de Ven: “Re]iance on trust by organizations can be expected to emerge between business paflners only

when they have successfully c(mlpleted transacti(ms in the past and they perceive one another as complying with norms and equity. The rmwe

frequently the parties have successfully transacted, the more I ikely they will bring higher levels of trust to subsequent transacti(ms. As the level

of trusl increases, greater reliance may be placed on the actions of the trusted party. ” Ibid., p. 489. See also R.G. Eccles and D. Crane, “Managing

Through Networks in Investment Banking,” Calijiwnia Management Re~’iet+’, vol. 30, 1987, pp. 176-195.

‘zMark Dodgs(m, “’Lcaming, Trust, and Technological Collaboration,” Human Re/a(ions, vol. 46, No, 1, January 1993, pp. 77-95.

7~A$ noted by Richardson: “&ve]oping ]ong-tem~, tightly integrated relationships with fewer Suppiiers, eSpeCia]]y with a sole sOUrCe, conflicts with c(mventi(~nal wlsckml and historical U.S. practice. ’’James Richardson, “Restructuring Supplier Relationships in U.S. Manufacturing

for improved Quality,” Management /nternaliona/ Ret’iewt vol. 33, Special Issue, January 1993, p. 55. See also, Martin Everett, “why Partners

Sometimes Part,” Sales and Marketing Management, April 1993, pp. 69-74.

74~ee Max Munday, “Buyer-Supp]ler Pannerships and Cost Data Disclosure, “ Management Accounting, June 1992, pp. 28-36.

7fsee Morels M K]einer ~d Marvin L. Bouillon,” “information” Sharing of Sensitive Business Data With Employ ees,” lndustr/a/ Relations,

vol. 30, fall 1991, pp. 480-491. M(m~hiro Mtmishima, “’lnforrnation Sharing and Firm Performance in Japan,” /ndustria/ Re/ations, vol. 30, No.

1, w Inter 1991, pp. 37-61. See also M(m)hiro Morishima, “information Sharing and Firm Performance in Japan,” lndus~ria/ Re/afions, vol. 30,

N(). 1, winter 1991. pp. 37-61.

7~For a ~l~cu$~ion . . of the his[ory and philosophy” of TQM, see Stephen J. Harrison and Ronald Stupak, “Total Quality Management: The

organizatitm;il Equivalent of Truth in Public Adminlstrati(m Theory and Practice,” Public Administration Quarterly, pp. 420-429.

771 bid., p. 424.
Chapter 2 Issues in Electronic Commerce | 55

Market

exchange:

■ Arms length

 based

 Short term

■ Adversarial

m● Evaluation

● Trial & error

● Incremental

risk taking

● Ground rules

—

Stage 2:

Partnership

● Reciprocity

● Investment

● Integration

Network

dyad:

■ Closely coupled

L

● Trust based

● Long term

■ Cooperative

I 2 Years

SOURCE Andrea Networks External Ties to Improve Entrepreneurial Performance of 

May 1991

oriented approaches, many old behavioral pat- on the other hand, must not only be willing to learn

terns persist. 78 TO implement TQM, management new skills and adapt to different incentives and re -

must renounce its traditional hierarchical style— ward structures; they must also trust managebased on the specialization of tasks, workplace ment's intentions. This will be hard to do, given

stability, product iv it y, obedience, and control--in years of adversarial relations. It is even more diffi -

favor of a more trust-oriented approach that calls cult when TQM groups are established as part of a

for leaders who can inspire group motivation, loy - total business reengineering process. in which

alty, commitment, and worker pride.79 Workers, case jobs might be at stake .80 Under such circum-

 styles, and 

 results rather than y, they make in a less participate\ than Japanese.

Individual and n making appear common features the Americans} the -

 a and an explicit patter n.” Mailing 

 Management In Japanese and Operating in the United States: A Comparative Study of 

 /r] Issue, January 1993, p. See also David Graves, Get 

 in 

 1, winter I pp. 

79}+ 16“429

 , June 1993. p. 
56 | Electronic Enterprises: Looking to the Future

stances, it is not surprising that many quality management programs have yet to show clear-cut positive results.81

Technology, although by no means a panacea,

offers one way of breaking out of this organizational impasse. As Michael Hammer, a leading

proponent of business engineering, has pointed

out, “The power of the new technologies is that

they allow you to redefine what your problem

is. “82 And there are clearly many who agree. According to one estimate, the work flow software

market in the United States will grow tenfold by

1996, when it will constitute a $2.5 billion industry.83

There is a major problem is viewing technology in this way, however. Like organizational innovations, technology is viewed all too often as a

“fix” to be implemented from the top down. Although technology plays a major role in structuring human relations, rarely do businesses, or the

people working in them, play a major role in its

design. The real choices about technologies are

not made when vendors put them up for sale on the

market, but when the problem to be solved is first

defined. As experience with TQM groups demonstrates, the task of identifying problems is often

performed best by those who are doing the

work. 84

NEED FOR A FLEXIBLE WORKFORCE

Over the last several decades, the U.S. workforce

has undergone tremendous change as businesses

implemented information technology. With new

advances in the technology and new organizational forms emerging to use them, workforce changes

will likely continue. Furthermore, the overall shift

in the structure of the economy from one dominated by mass production to one that is more flexible and centered on services will require a workforce that is similarly flexible and skilled.

Experience indicates that information technologies can both upskill and deskill jobs. Recent advances in information technology, however, will

likely have more significant impacts because they

can increase the levels of both cooperation and

control in workplaces. These changes are not understood nearly as well as the role of information

technology in affecting skill levels.

The demands for increased flexibility and lower costs are forcing American business to reconsider traditional management techniques. The

success of Japanese workplace practices has motivated American businesses to emulate them. Continuous improvement (kaizen), lean production,

and just-in-time (kanban) manufacturing are the

new standards of performance in production, distribution, and retail. Similarly, the forming of

worker teams and quality circles to motivate employees is gaining adherents. This approach to

work sees cooperation as a central goal. Employers recognize that encouraging employees to share

the firm’s goals is not only profitable in the long

run, but also necessary for the development of

flexible response processes.

Information technology supports these shifts to

new ways of managing. EDI, for example, is a

critical component in just-in-time distribution because it allows suppliers and customers to coor8 Ism John Iacovlnl, “me Human Side of Organizational Change,”’ Training and Det*elopntent, January 1993, pp. 65-68. As (he author

notes: “Research has shown that few quality-improvement efforts go beyond lip service. Examined more closely, most quality failures result

from some fundamental imbalances between the human and business sides of change.” I bid., p. 65. See also Richard S. Belous, “Hun~an Resource Flexibility and Equity: Difficult Questions for Business, Labor and Government,” Journa/ oj”bbor Research, vol. 10, No. 1, winter

1989, pp. 67-72.

glMlchae] Han~mer, “Reengineering,” Across the Board, June 1993, p. 32. See Also Ram Charan, “How Networks Reshape Organizations-for Results,” Harvard Business Review, September-October 1991, pp. 104-115.

8~John Gantz, “Su~iving the Re-engineering Revolution,” Networking Mana~ement, January 1993, pp. 20-21.

84R()&fl j. ~onlas, what &fa(.hlnes Canrf Do: P()/j(lc.s and Tec,hn~/o~~ in rhe /nd//s[rla/ Enterprise (Berkeley, CA: university of Caiifornta

Press, in press). See also John Alic, “who Designs Work? Organizing Production in an Age of High Technology,” Technology and Socwy, ~ol.

] 2, ]990, pp. 301-317.
Chapter 2 Issues in Electronic Commerce | 57

dinate the flow of goods. “Concurrent” or “simultaneous” engineering is largely a computerized

approach to team-oriented design. Manufacturers

find lean production easier to implement with the

development of computerized numerically controlled (CNC) machines.

There are other ways to achieve a flexible

workforce, but these reduce the quality of work

life and can have serious national implications.

Layoffs, downsizing, and shifting to contingent

workers (such as temporary employees) are also

responses to demands for flexibility85 (see box

2-5). By hiring temporary workers, employers

avoid paying fringe benefits and can release workers in economic downturns. Such firms have less

incentive to train their employees and upgrade

their skills because the chance of recouping their

investment is small. Indeed, in this respect, the

United States already has a very flexible workforce because of the high rate of labor mobility—

the willingness to work for different companies.86

The experiences of Japan and Germany, however,

indicate that achieving flexible workers by improving training and skills also results in higher

productivity. 87

Despite the potential value of the new management techniques, information technology can perpetuate the vestiges of the work-flow-control

model typical of the industrial era. Electronically

The workforce IS undergoing a long-term structural change in which workers are more fragmented

from the workplace The traditional employee worked for one employer for life with an understood relationship, exchanging loyalty of service for salary, benefits, and career mobility. Today, however, more

people work in a variety of settings—home, satellite offices, rented or temporary offices, or the offices of

suppliers, partners, or competitors—and through different arrangements with their employers—parttilme, contractual, temporary, or other individually negotiated arrangements For years, such ad hoc and

contingent workers were at the margin of organizations and in the workforce. With the restructuring of

organizations and the continued outsourcing, downsizing, and rightsizing that characterizes the current

business environment, these workers are Increasingly in the mainstream In the near future, the terms

part-time, contract, temporary, and so forth may be replaced by new terms that focus less on working

conditions and more on the culture of work and the predominant activities performed by workers and

their electronic tools

SOURCE Off Ice of Technology Assessment, 1994

8SSee L, Lynne Pullnlan, .’TemP)raV Emp]oyees: what Are An Employer’s EEO Responsibil ities?” Emplovee Re/arwn$ lm~t Journai, vol.

18, N(). 3, winter 1992, pp. 533-538. See also G. Pascal Zachory and Bob Ortega, “Workplace Revolution Bm)sts Productivity at Cost of Job

Security,” Wall Street Journal, Mar. 19, 1993,

~bsee U.S. Congress, Office Of Techno]~)gy Assessment, Technology and Structural Unemployment: Reemploying DispialedAdult.~, OTAITE-250 (Washingttm, DC U.S. Government Printing Office, February 1986), page 144.

~T]n what was one of [he nlos[ comprehensive studies of its kind, researchers compared the use of CNC equipn~ent in the United Kin~d(’nl

and Gemlany. GemIan plants had productivity rates 60 to 130 percent higher than the U. K., and Gem~an machinists c(wld reach t(~p-speed

pr(ductl(m In 2 days (m equipment the British machinists took” weeks to master. The results were attributed to differences in tra]ning. British

management practice tradili{mally is similar to that of the United States. See, for example, A. Serge et al., Mi(ro-e/e(fronl(.~ and Manp(nt er in

Alanu/a~ furin~: App//f atlon.f oj Conlpu/er Numerica/ Conrro/ In Grea/ Britain and M’es/ Germany (Aldersht~t, UK: G(~wer, 1983).
58 I Electronic Enterprises: Looking to the Future

monitoring clerical workers, operators, and others

working at computer terminals is an example .88

New technologies can track areas of work that

have traditionally been immune to monitoring.

For instance, the location, status, and activity of

workers, delivery personnel, and truckers can be

more closely monitored. Another example is employer access to employees’ electronic mail to

monitor workers. The courts are currentl y evaluating employee and employer rights with respect to

e-mail monitoring in a case involving the employees of Epson America. 89 Another example is

Cypress Semiconductor corporate software. Every 4 hours it scans manufacturing inventory. If a

part remains on the shelf beyond a predetermined

time, the software shuts down the inventory system, stops manufacturing operations, and notifies

the rest of the company through the corporate network. Other departments within the firm face similar performance standards that are tied to corporate goals.90

Information technologies support a broad

range of employer-employee relationships. The

interaction between employee and employer is

one balanced by trust, cooperation, and delegation

of authority on the one hand, and monitoring and

accountability on the other-, Depending on the

work environment, information technology can

shift the balance in either direction. Workplaces

that develop trust and delegate authority tend to

implement information technology with a vision

of worker participation and cooperation. However, technology is sometimes used to monitor activity, control behavior, and restrict choices.

A strategy that pursues high-wage, high-skill

jobs and fosters cooperative, collaborative work

environments will improve both the work environment and the standard of living for employees.

Policies that work toward that goal recognize the

enabling role that information technology can

play. Information technology can also be used to

deskill jobs and enhance the employer’s ability to

control and monitor employees. Information

technology alone is clearly not a panacea (o improve the quality of work life, It must be linked to

enlightened management and a nurturing culture

to be successful.

EFFECTS OF TECHNOLOGY CHOICES IN

A KNOWLEDGE-BASED SOCIETY

The age-old adage that “knowledge is power” is

nowhere more evident than in a knowledge-based

society. Regardless of whether referring to work

relationships in a firm, competition in the marketplace, or trading relations among nations, having

access to information and the ability to package it

for a particular use is a key determinant of winners

and losers. While this was always the case, the difference today is the extent (o which knowledge is

embedded in information and communication

technologies. As a result, choices about these

technologies—their design, architecture and

structure, or the rules and regulations governing

their availability and use—will likely have far-

-reaching social and economic consequences.

Many of these choices will be irreversible, at

least in the short and medium terms. Once a decision is made, technology tends to become firmly

fixed to a given trajectory. This pattern is especial -

ly evident with networked information technologies, which require vast capital and social investment. Thus, periods of rapid technology

X~See for ~kall,p]e, us congrc~~, office of T~(:hno]ogy” As~~ssn)~n[, 7’hp E/eitronlf .Yipcr)’iror: Ne}~ 7&’hr10/og]I, Nf’~~’ ~~n.ll{ms, OTACIT-333 (Washmgttm, DC U.S. G()\ emment Prvnting office, September 1987). See also Paul Attcwell. .’Big Br~Jther and the Sweatshop. C(~nlputcr Sur\e]lliinct! In the Airt(m~atcd office,’” .SoCIoloRIcal Them-?, vol. 5, 1987, pp. 47-69.

Xc)ln ~ ~:i~c ~umcn[l} ,n ~pP,al the ~lllployecs of Epson An)~rica ]n~, are suing the firm for allegedly Ct)pylng and rc:idlng th~lr ~-n~all n~~sstigcs. See, for e~;in~ple, Da\ Id Bjmklic. “E-nlail: The B(MS is Watching,” 7}(hno/ogy Re\/eH, \ t)l. 96, N(). 3, April 1993. page 14.

‘Nj~-or ~.xarllple ,f the purchasing dcpa~lllenl docs no( recvalua[e cases of cus[onlers wht)sc crcdlt was rt!\ old R Ithln 6 rmmths, the pr( )griirn

rcst(ms credit. If a shipper is I:ite for dcl]vcr} w ith(mt warning (w adequate cxplana[i(m, the sh Iprrwnt is refused. See S[cphcn G(j\{ml, “Liccnsc

[t) K] II ,.’ l?~tormalion N’cek, Jan. 6, 1992, page 22. Sce also Thmlas Valovlc, C’orixjratc Net\iwrh.\: The Sfratc~l( U,~e (!/ 7i’/(>(ot?rnriln\ ([]tiotl.\”

( B{~\t(m. MA ~rtcch Iloirsc, 1993), pp. 124-125. For sinlllar ex:imples, see Zuboff, op. CII., footnote 32.
Chapter 2 Issues in Electronic Commerce | 59

advances, such as are occurring today, provide a

rare opportunity for reassessing and redirecting

both the nature of a particular technology itself,

and the economic and social relationships that are

structured around it. Given the significance of the

moment, and the potential consequences for winners and losers, consideration should be given not

only to what technology choices are being made,

but also to the process of how, and by whom, these

choices are made.9

1

Economic outcomes and performance have always been greatly affected by those who had control over information and the networks that supported and channeled its circulation. Civilizations

spanning centuries have recognized the power of

information. For example, the city of Venice—at

the height of its economic power—sought to control all trade-related information, going so far as to

segregate and conduct strict surveillance over all

foreign merchants.

92 Similarly, in the bazaar

economies of the Middle East, it is the fierce competition for privileged information that drives

events. As described by anthropologist Clifford

Geertz:

. . . bazaaris [participantsl are as interested in

making search fruitless for others as they are in

making it effectual for themselves. The desire to

know what is really occurring is matched with

the desire to deal with people who don’t but

imagine they do. The structures establishing

search and those casting obstructions in its path

are thoroughly intertwined.93

New communication and information technologies have led to the redistribution of economic

power, and a shift in economic advantage. The

history of the printing press is a case in point.94

Before the development of printing, inventors retained their ideas under their personal control and

did not concern themselves with the prospect of

others unfairly profiting from their work. They

went from town to town selling their intellectual

wares, But once their ideas were printed and made

public, inventors lost control and, with it. their

bargaining power.95

The invent ion of the telegraph also served to redistribute economic power. In the early history of

the United States, for example, New York City

was able to capitalize on its position as a national

in fro-mat ion center to become the center of worldwide trade.96 News continued to flow faster and

more fully in and out of New York than any other

city, giving it a strong economic advantage.

Southern cities, in fact, communicated faster with

New York City than within their own region, a fac -

g‘ As cmphaslrcd b} Thomas ‘“. . .[( IS not enough to claim that technology” ‘Impacts organizations, it is essential to also ask h(~w and w h>

piirtlcular tcchnf~l(~glcs arc chtnen ((jr refused) such that [he) have [he impacts [hey d(~. Scc(md, it is not emmgh to claim that tcchn~~l~)g) IS the

slrnplc product i)f socla] ch[))ce, it JS essential to ask how technological” altemati\ es were themsel\ m framed, h~)w the [d-tp>ctl~ cs or intcrc\t ~ of

dlffcrtm[ (~rganl~at Ional actt~rs shape [he range of p)ssibil ities c~msidered, and most lrnpwtantly, h{~w dlff”erences In ohIecII\ cs t~r lntc’rc\t\ lniluencc the outct)nws ~~f change. ” Thomas, op. cit., f(N)tnote 84. See also Jos Hu igen, ‘“lnftwnlati(m and Ctm~nlunlcatl(~n Tcchm)logws In [hc C[m

text of Pf)llcy Nctwt~rhs.” ‘12(hrro/o<zy In So{ Icf), vol. 15, 1993, pp. 327-338.

‘)2As dcscnbcd b) Brau&l “’AI] trade t{) and from the Terra Firma, all ex~ms fr(ml hcr Islands in the Le\ ant or cltlcs In the Adrlatlc (c\ en

g~)tds tru\ c I I In.g to SIci Iy or England) were {)bligut to pass through the prt of Venice. Thus Ven ICC had quite del ihcr:itel> ensnared al I the \urr[ )und Ing subject cc(m( )rn ICS, inc ludl ng the Gu-rnan ec(m(~my, for her own pr(d_it; she drew her I IV ing from thcrn, pre\ entmg thcrn frf ~rll actln g

freely and acc(mflng to their (~wn lights. ” Femand Braudel, 771e fcrspecfi~e of fhe Wb-/d, C[lfl{mwn and CcIpI[a/ism /.$ I/I- /8 I/I (’en]ur}. Yol. 3

(Bcrhclc>, CA Llnl\crslty (}f Callf(~mla Press, 1992), p. 228.

‘)~Cllfford Gcertz, ““The Balaar Ecf)n(~nly lnft~mlati(m and Search in Peasant Marketing,” i n Marh (3ram )\ etter and R Ichard S w c’dberg

(cd~. ), The S(N 1()/(M} (!/ F;(vrrmu( /.I~c (Bf~ulder, C(): Westview Press, 1992), p. 228.

‘)4Sec Elizabeth L. Etscnsteln, The frr’rrtin~ Press os on Agent @Charrgc: C’onlnrldni(c]tions and C“ultural Tr(it7\/ort~](iriotl” In !Iarl} ~!(dcrn

F:[[rope. \ OIS. I and 2 ( Carnbndge, UK Carnbrlclge Urri\ erslty Press, 1982).

1)$Sce Bruce W’. Bugbee, (;errerlr (// An]cri( an Pa[enf and Cop-yrig}lt f.alt (Rrashingt{)n, DC Publ]c Affairs Press, 1967)

‘)6SCC Ronald F. Abler, ‘The Gcograph? of C[~mn~unlcatitms,” Michael Eliot Hurst (cd. ). 7kflrrspor(atl(m Ge{~,qraphj: (’{m~nlcnf f~nd Rc<I{/-

In ~\ ( !NCW }’th,, NY hlcGraw-Hill, 1874].
60 I Electronic Enterprises: Looking to the Future

(or that engendered increasing resentment in the

South for cultural as well as economic reasons.97

With the invention of the telegraph, however,

New York central position in the national market began to erode. The opening of the New

York-Philadelphia Line, for example, enabled

brokers in one city to learn prices in the other, and

to place orders before the market had closed. Similarly, prices in other distant markets, such as

western grains, also became items of trade

through instantaneous communications.98

Current technological advances will likely

have equally profound effects. Much of the information and knowledge that once was held personally is now embedded in electronic components and networks, where it can be used to

support a wide range of economic activities. Information can be programmed in software that

performs work routines; stored in databases where

it can be updated, processed, and randomly accessed as needed; or even incorporated into information gateways or communication switches

to provide network intelligence. To leverage information for economic advantage today, therefore, requires having some control over the access,

uses, and design of the technologies in which it is

embedded.

Although new technologies have the potential

to expand economic opportunities and ease the nation adaptation to a radically changing economic

environment, a successful outcome is not assured.

Just as the Venetian merchants and Middle Eastern bazaars tried to secure their economic advantage by controlling information access, the powerful economic interests today are likely to attempt

to do the same. Thus, a CEO might adopt new

computer-based manufacturing technologies for

the purpose of gaining greater control over jobrelated knowledge. Similarly, manufacturers

might seek to lock in customers and suppliers by

controlling database access through proprietary

network standards. Likewise, vendors of information and communication services might try to 1imit competition by restructuring access to the information gateway or intelligent network switch.

How, and to what effect, new communication

and information technologies will be employed

depends to a large extent on the future role of

business. Ironically, precisely at the moment

when technological advances provide a unique

opportunity for the United States to rethink its

technological and socioeconomic choices, the locus of decisionmaking is being transferred from

the public to the private sector. With deregulation

and the shift of network intelligence and control to

the user, many network components that are needed to support electronic commerce now fall outside the government’s traditional purview. If new

technologies are to generate social and economic

changes, therefore, many of these changes must

originate within the business community itself.

Finding themselves operating in a highly competitive and rapidly changing knowledge-based,

global economy, American businesses are now

faced with a number of inducements for change.

New ways of conducting business will be required. Cooperation may prove more rewarding

than competition, and information-sharing more

fruitful than information control. Given the socioeconomic changes taking place, businesses that

succeed will be those that are flexible in adapting

to take advantage of new situations and events.

New information and communication technologies can help businesses to make the necessary

adjustments. However, barring fundamental

changes in the way businesses operate, new

technologies will more likely be used to bolster

971=+. R()~.~ A]bion, T}IC Rf.$e ~j’jVeM }~jr~ p~rf, 18/5- /939 (flew York, NY: Charles Scribners S(ms, 1939). and Al Ian prd, “Urban SY’Stcms Development and the L(mg Distance Flow of lnfomlation Tlmmgh Preelectronic U.S. Newspapers,” Etwum]lt (;eograph-v, ~ol. 47, Ckxober 1971, pp. 498-524.

‘)xSee Kenneth D. Garbade and William L. Silber, “’Technology, Communicati(m, and the Perft)mlance of Financial Marhcts 1840- 1975,”

Jourm/ q/’ FinamY, \ol. 33, June 1978, pp. 8 19-983; and Richard DuBoff, “The Telegraph and the Structure t)f Markets in the Llntted States,

1840- 1890,”’ Research In Etonon]/t lli.sfor}, vol. 8, 1983.
existing power relationships and perpetuate the

status quo.

CRITERIA FOR EVALUATING POLICY

OPTIONS

As defined in this report. economic performance

entails three essential elements: 1 ) an increase in

the average standard of living; 2) sharing of the

benefits of growth among the groups; and 3) sustainable growth. Based on this definition, it is

clear that communication and information

technologies can contribute to greater economic

performance. However, it is also obvious that

technology alone is not enough. If the nation

economy is to benefit from advanced networking

technologies, a number of technological, organizational, and institutional criteria must be met.

To the extent that policy measures fail to address

al1 of these criteria, the chances for success will be

diminished. The outcome” will resemble less a

“positive sum game” where all are winners, and

more a “zero sum game” in which many tire losers.

| Technological Criteria

Versatile and Open Networks and

Applications

Versatile networks and applications will be increasingly critical in a global economy characterized by rapid technological and socioeconomic

change and a greater variety in preferences, products, and business processes. To perform well,

businesses will have to rapidly reconfigure their

networks in response to changing circumstances

and market demand. Versatile networks will provide the leeway needed to customize applications

and networks to support redesigned business

processes and flexible working relationships.

With the freedom to mix and match a variety of

network components, businesses can use technology to add value and develop new products and

services.

Chapter 2 Issues in Electronic Commerce | 61

Interoperability and Seamless

Interconnection

To reap the full economic benefits of communication and information technologies, networks and

network components will need to be interoperable

and open for interconnection. Such networks can

reduce transaction costs, whereas closed systems

increase the cost of doing business and can create

significant barriers to market entry. Interoperable

components provide greater network flexibility,

are easier to use, and reduce network costs. These

capabilities encourage technology diffusion and

equity of access. In addition, interoperable systems provide a standard platform for new components and applications.

Ubiquitous and Even Deployment

If the economic benefits of networking are to be

broadly shared, technology must be deployed in a

time] y and ubiquitous fashion. Business networks

can give rise to a significant “first mover” advantage. Networks benefit from considerable economies of scale and scope; therefore, latecomers

may be unable to generate the critical mass of users and services to develop a network. Latecomers

will also be disadvantaged because business networking not only requires extensive expertise, but

also considerable “learning by doing.”

| Organizational Criteria

Technology Deployment Matched to Business

Needs

Technology will not enhance business performance if it does not match business needs. Where

technology has been introduced independently of

a business plan, efficiency and effectiveness have

often declined. Experience suggests that technology and businesses’ needs will be most closely

matched when: 1 ) business management takes the

initiative in applying technology; 2) technology

experts understand and practice business principles and participate in developing the technolo-
62 | Electronic Enterprises: Looking to the Future

gy plan; and 3) technology users, at all levels,

have an opportunity to influence the technology

design and deployment strategy.

Versatile Organizational Structures and Role

Relationships

In the future, business organizations and processes will need to be more flexible to take advantage of the new opportunities available in a global,

knowledge-based economy. Although information and communication technologies can foster

and support such organizational change, they cannot substitute for it. Organizations can more easily

employ technology to bring about organizational

change when roles and routines are broadly defined, resources (especially knowledge and information) are widely shared, and relationships

are flexible and loosely coupled.

Supportive and Adaptive Organizational

Cultures

Organizational cultures—like organizational

structures—need to be adaptable and innovative if

technology is to yield positive economic results.

Relationships will need to be defined and reinforced less by contractual arrangements and rigid

hierarchical rules and regulations, and more by

consensual group norms and trust. Interorganizational relations will need to be oriented as much

toward cooperation as competition. In addition,

businesses will need to develop new and more

broad-based criteria for assessing the performance

of both individual employees and the enterprise

itself.

| Institutional Criteria

Regulation Geared to National Economic and

Social Goals

Electronic commerce can only occur once the

communication and information networks to support it are widely in place. If these networks are to

be deployed in a timely fashion, and with an appropriate architecture that will support improved

economic performance, regulatory policy will

need to be more responsive to, and consistent

with, national economic and social goals. To do so,

government will need to broaden its perspectives

beyond the communication industry, which to

date has been the major focus of regulatory policy,

and pay greater attention to the economic impacts

of technology choices. In addition, as information

and communicant ion technologies converge, greater attention must also be paid to the information,

or content, aspects of networking technologies.

Need to Reevaluate and Revise the

Marketplace Rules

Rapid advances in information and communication technologies, together with business responses to new technological opportunities and

constraints, are challenging many of the traditional notions that have governed the marketplace

rules and practices of the industrial era. Tensions

in the system have already emerged, especially in

the areas of antitrust, intellectual property rights,

and other laws governing the ownership and use

of information. For electronic commerce to flower, and its benefits to be equitably distributed, the

rules governing it will need to be brought into line

with the fundamental socioeconomic changes taking place. Given a global economy, a consensus

regarding these rules will need to be developed on

both national and international levels.

Support for Long-Term Resource

Maintenance

It will be essential to maintain national capabilities in a global economy where knowledge and information, capital, and labor are not confined to

national borders. Support for science, research

and development, and an educated workforce will

be important. If, for example, care is not taken to

develop and maintain a highly educated and

skilled workforce, global networks will likely facilitate the substitution of offshore labor for U.S.

workers. Similarly, unless efforts are taken to diffuse and commercialize new information technologies more rapidly, their benefits will be realized

elsewhere, On the other hand, if communication

and other infrastructure are maintained, global

networking can attract foreign capital to the

United States.
I

n the United States, most communication goals have been

pursued by private industry through a regulatory framework. This is a decidedly American approach. While fostering the private sector. this approach provides government

some control over the negative impacts of the single-mindedness

of the market. 1 It has proved highly successful in the past. However, with the advance of technology and the expansion of competition across industry lines, determining the precise role for regulation and which goals are most appropriately sought in a

regulatory arena has become increasingly difficult.

The past 10 years have witnessed the breakup of what was once

an integrated and unified Bell telephone system in favor of an increasingly diverse and highly competitive communication/information marketplace. This trend has been fueled by both

technology” advances and procompetitive regulatory policies.

Since 1959. when the Federal Communications Commission

(FCC) approved the “above 890’” decision allowing MCI to offer

discount private 1ine service, the advance of competition has continued relat ively unabated. 2 Today, it is marked by the emergence

of new wireless technologies, the rise of competitive access providers. and regulatory policies—such as collocation and reRegulating

the

Electronic

Enterprise 3

How these electronic

markets are deployed

and interconnected,

and the rules by which

they operate, will be

critically important.

| 63
64 I Electronic Enterprises: Looking to the Future

laxed cross-ownership rules—that aim to extend

competition to the last stronghold of monopoly,

the local exchange.3

Business users have been the major beneficiaries of these developments. Competition has not

only driven down the costs of business-related

products and services; it has also spawned a variety of highly innovative vendors and service providers eager to meet the mounting, and increasing1 y diverse, communication and information needs

of business. Competition has also fostered the unbundling of communication systems and networks, thereby allowing business users much

greater flexibility and control.

Despite these gains, however, it is unlikely that

the future needs of all businesses will be adequately met through competition alone. Competing

providers of communication and information networks will not necessarily volunteer open access

to business users. Consider, for example, a situation in which there are three competing local exchange carriers that are vertically integrated. Each

may offer an alarm service. There are no guarantees that a fourth alarm service provider will be

able to get connected to customers through any of

the three carriers. Some form of government regulation may, thus, be required.4

In an economy based on electronic commerce,

businesses will also require new forms of access.

Having access to a variety of advanced communication and information technologies, although

necessary, will no longer suffice. Equally important will be the ability to gain access—in real

time—to these technologies as they are configured and reconfigured into electronic networks of

buyers, sellers, and information that together

comprise a “virtual” marketplace.

How these electronic markets are deployed and

interconnected, and the rules by which they operate, will be critically important. If they are

deployed unevenly, or fail to interconnect, those

who can gain access most easily and/or negotiate

among them will enjoy a considerable—and in

some cases unfair-competitive advantage. The

national economy will also suffer to the extent that

trade and economic growth are constrained, and

resources poorly allocated as a result. To avoid

such an outcome, a number of regulatory options

could be considered.

OPTION A: Provide for Open Access and

Interconnection by Extending Common

Carriage Requirements

The principle of common carriage seeks to assure

that certain services, considered to be critical to

the public, are provided on an open and nondiscriminatory basis to all who are willing and able

to pay for them.s In the United States, the notion

of common carriage was first used to provide

farmers equal access to grain elevators. Later it

was extended to infrastructure-related services

such as transportation and communication.6 The

obligation to provide communication services on

a common carrier basis is embodied in the Communications Act of 1934.

3see R(J~n M. Ent~an and Charles M. Firestone, “Local COmpeIi[iOn: @tiOnS for Action, “ Forum Report of the Eighth Annual Aspen

Conference on Telecommunications Policy, Aspen, (;0, Aug. 8-12, 1993.

4see for a fu~her description, Fr~cis Dummer Fisher, “Identifying the Potholes in the information Superhighway: A ~blic Jnteres[ Perspective,’” Telecommunications Magazine, vol. 28, No. 4, April 1994, p. 23.

Sne ~)ngin~ ~)f Conlmon” Cmiage cm k traced back to the Roman Empire when shipowners, innkeepers, and Slablekeepers Were held accountable for such public service obligations. As the notion of common carriage evolved under English common law, it was applied to public

occupa(i(ms such as “bakers, brewers, cabdrivers, ferrymen, innkeepers, millers, smiths, surgeons, tailors and what-f ingers.” Eli Noam, “The

impending Doom of Common Carriage,” prepared for the Aspen Communication Council’s Forum, Jan. 7-9, 1993, Wye River House, Wye,

MD, revised July 1993, pp. 4-7. See also William K. Jones, “The Common Carrier Concept as Applied to Telecommunications: An Historical

Perspective.” submitted to the Federal Communications Commission as Appendix to the Rep] y Comments on lntemational Business Machines

Corp. in 4’Cmnpetitive Carriers Rulemaking,” FCC Docket NW 79-252 (filed Apr. 4, 1980).

61bid.
Chapter 3 Regulating the Electronic Enterprise | 65

Despite its long tradition, the principal of common carriage, as it applies to communication

today, is invoked less frequently and its scope has

become more narrowly defined. For example,

based on the distinction made in Computer Inquiry 117 between basic and enhanced services, value-

-added network providers—such as system integrators or electronic data interchange (EDI)

service providers—are not subject to common

carriage principles. 8 The principle of common

carriage may erode even further in the future because of the growth of the value-added services

market and the emergence of new technologies

and providers who are often exempt from common carriage responsibilities.9 In fact, common

carriage may not be economically sustainable

over the long term, given the separate systems of

contract and common carriage. Contract carriers,

having fewer public obligations than common

carriers, have a significant competitive advantage. 10

The waning of common carriage has not been

greatly lamented in the post-divestiture regulatory

environment. On the contrary, viewing common

carriage primarily as a mechanism for encouraging competition, most regulators have seen no

need for it in today’s more competitive communication marketplace. It is assumed that, with

competition, prices will be held in check and government kept to a minimum; it is also assumed

that access will no longer be a problem because of

multiple and competing providers. Thus, for example, the FCC held—until recently challenged

by the Federal District Court-that interexchange

carriers competing with AT&T (e.g., MCI, Sprint,

etc.) were no longer obliged to publicly file their

tariffs.

New service providers have also played a role

in restricting common carriage. Not wanting to

bear the obligations of common carriage, they

have lobbied, often successfully, to differentiate

~~e F(IC, In 1[s 1980 Conlpu(er ]nquiV II decisi(m, maintained (he regulati(m of basic services, but deregulated enhanced services. AT&T

C(NIICI c~mlpetc in the enhanced services and custtm~er premises equipment markets only by establishing a fully separate subsidiary.

Rsec for a ~iscusslon ,Jf this sequence ~)fevents, ]thiel de S{)ia Pool, Technologies oj’Freedom (Cambridge, MA: Beiknap press of Harvard

LJni\ersity, 1983), pp. 220-223.

‘)l’[m example, the Cable Act of 1984 explicitly prohibits the regulation of cable as a common carrier or public utility. Nor is the Internet

cxmsidcred t[~ be a ct)mrmm carrier. Most recently, the Omnibus Budget Reconciliation Act of 1993 amended Sec. 332 of the Communications

Act to create a special class [) fcommcrcial mobile services subject 10 common carrier regulation under Title 1[ of the act. However, it also pro-

~ icks that the FC’C can exempt such services from certain obligations, including the tariffing requirement.

I ~N{Jan] ,)P, Clt, footnote S. The c[~nlrmm carrier will not (rely be singled out to pay a subsidy. Unlike the contract earner, he will n(~l have the

benefit of being able to select hls customers so as to maximize profits or to price discriminate. Despite this unstable situation, the answer is not

necessarily to c1 Imlnate common carriage obligati(ms andlor to establ ish a mechanism for sharing the costs of subsidy among all providers. The

questl(m of whether (~pcnness sh(mld be irnpmed by regulatory authority still must be addressed.

I I See, ~~~ ,)j the C~, )rl)rllunlcatl{)ns Act of 1934 requires a]] c[)mm(m carriers m file all of their charges for interstate services. 1n keePing with

Sec. 203(C), they must not “charge, demand, collect or receive c(mqxnsation other than the charge specified.” In an eff(m to streamline regulatl(ms. the F{’C, In 1980, declared that all rates that were filed by nondominant carriers would be presumed to be lawful. In a second report,

adt )ptd In 19X2, the FCC In itiatecl a policy of forbearance that exempted many resellers from procedural illing requirements. !n 1983, it ex -

tended this p)llcy to all resellers and ““specialized carriers,” leaving AT&T as the (rely company that had to file tariffs. Responding to a law suit

lnl[iatccl by AT&T, the U.S. Ctmrt of Appeals ruled in October 1992 to vacate this p)llcy. See David Irwin and Kevin Walsh, “’Understanding the

FCC’s Forbearance P[~licy, 7ti/c(or?ln~i~nl(ar[on.$, September 1993, pp. 41-42.
66 | Electronic Enterprises: Looking to the Future

themselves. As in the case of the cable industry,

emergent providers have often claimed that, if precl uded from providing content as well as carriage,

they will be unable to generate sufficient revenue

to deploy new technologies. 12 They emphasize

that because they are not the dominant providers,

they pose no competitive threat to common carriage.

Notwithstanding the growth in competition,

there are a number of reasons for reconfirming the

principle of common carriage at this time. Common carriage serves not only to enhance competition, but also to facilitate interconnection and reduce transaction costs. When regulators view

common carriage solely in terms of competition,

these other values are not sufficiently taken into

account.

Recent alliances and proposed mergers among

communication vendors and service providers

(e.g., AT&T and McCaw) also raise fundamental

questions about just how competitive the future

communication marketplace will be (see figure

3-1 ). Such alliances will likely increase, given

converging technologies and recent court decisions challenging the constitutionality of regulatory prohibitions of cross-ownership. If the future

marketplace is made up of a limited number of

vertically integrated firms, instead of a market

consisting of a number of independent vendors

competing head-to-head with one another to provide a variety of communication and information

services, the notion of common carriage will take

on a new, prominent significance.

The scope of common carriage may also need

to be expanded to include not only the providers of

transmission facilities, but also those who provide

networking services. The traditional definition of

common carriage fails to give due credit to the fact

that—in a knowledge-based, global economy—

being able to access information from a variety of

sources or to transmit it from one point to others is

not sufficient (see figure 3-2). It is essential to be

able to interconnect in a timely fashion to the entire interactive network of buyers and sellers, together with the information that constitutes an

electronic marketplace. Only by operating within

such a networked environment are transaction

costs minimized and “economies of agglomeration”] 3 achieved (see figure 3-3). Losses due to increased transaction costs will be especially high in

an economy in which competing in time and on

the basis of information are more important than

ever before. Despite the increasingly essential nature of networking services, they are currently presumed to be enhanced services and, hence, excluded from public service obligations.

One way of providing for greater access to, and

interconnection among, future electronic networks would be to apply common carrier obligations not only to the providers of the “public

switched telecommunication network” and to any

monopoly conduit providers, but also to all who

take advantage of common carrier access to provide value-added services. 1 4 This would create a

mixed system in which all vendors could provide

both common and contract carriage, as long as

those claiming common carriage in a downstream

direction provided equivalent services upstream.

All common carriers would provide unrestricted

communication services, which are neutral with

12Throughou[” cable’s his[ory, a nurnkr Of people have suggested that it be treated as a common carrier, an idea that cable conlpanies have

fiercely resisted. In 1970, fore xample, the Sloan Commission on Cable Television toyed with the c(mmmn camera pproach, but concluded that

if cxible c(mlpanies were given comrmm carrier status, they would not have enough economic incentive to develop their systems. See Ithiel de

Sola P(Nd, op. cit., fmmmte 8, p. 169. A similar argument is being put forward today with respect to set-top boxes and whether-or not their architectures should h’ open. For cable’s argument as to why it should enjoy first amendment rights, see G. Shapiro, P. Kurland, and J. Mercurio,

Cab/c.speech: The Casejiw Firs/ Amendment Profeeliun (New York, NY: Harcourt Brace Jovanovich, 1983).

1 lsolllctlrl}e~ re fcmed to as “ec(momim of aggregilti(m. ”

I ~This (Jptlon is derived from Eli Noam, The Superstructure of Infrastructure: Thinking Atxmt a Future Without a Public Network,’” C()-

lumbla ~Jnlvmsity Working Paper, Series 1992, #476, pp. 5-7.
Chapter 3 Regulating the Electronic Enterprise | 67

●

v

—
68 I Electronic Enterprises: Looking to the Future

Warehouse

I

I Information infrastructure Physical transportation infrastructure I

All markets need to be arranged At the very least, a site needs to be determined where buyers and sellers can come

together and space needs to be allocated These arrangements have traditionally been made by middlemen—wholesalers, retailers, financiers, advertisers, etc —who transmit price and product information and establish the link between buyers and sellers Because “market makers” control critical market reformation, they can create bottlenecks

With electronic commerce, the market maker might be a value-added network provider, or it might be embodied in

technology, as in the case of a home-based “market choice” or “set-top” box

SOURCE Robert Consultants, 994

4

SELLER

receive

pay

order

/

BUYER I

SELLER

Computer

network

■ search

■ negotiate

● order

 pay

BUYER ■ receive

$

Much like a medieval fair or a marketplace, electronic networks permit “economies of agglomeration ’’—different transaction functions (for example,

searching, ordering, and paying) can be done in one place by one provider In the past, this place was, in fact ,a physical space An electronic

market accomplishes an analogous agglomeration without being confined by spatial dimensions This agglomeration creates value by reducing

transaction costs

SOURCE Off Ice of Technology Assessment, 1994
Chapter 3 Regulating the Electronic Enterprise | 69

‘\ \

\ \

 - - ——. .-—.. 

respect to content. use, and users. In turn, they

would not be held 1iable for the content transmitted over such networks. All private carriers not

linked to a common carrier would be exempt from

common carrier obligations. In this way, the principles of private property and freedom of association would be held inviolate. Such a system would

create common carriage “brights-of-way” that

would ● .fLlnction like public roads and highways

that pass private property, or like easements that

allow public passage through private land. ”l5

(See figure 3-4).

one problem with such a solution is that it does

not answer the persistent question of how far to

extend the right to interconnect. Every information activity-even those wholly between parts of

a firm-’ ’connects” in some manner to the activities now conducted by common carriers. A telephone instrument connects, for example, but does

not require enforced interconnectivity because

standards suffice. At the same time, there are networks that do not connect with common carriers—such as cable television—which, some

people would argue, should nevertheless be subject to interconnection and openness requirements. 16

A new common carrier policy, which calls for

revamping the existing system of common carriage, might be very difficult to implement and administer. The current system is bound together not

only by an extensive history, but also by the entire

regulatory structure that has evolved to execute it.

Most people tend to associate common carriage

not only with interconnection, but also with regulation and---depending on one’s perspective—all

of the costs and benefits associated with it. Those

 described permit the unimpeded and services across the various 

 and enable on the bandwidth a transmission, Some be

while be but lanes, ” p. 6.
70 I Electronic Enterprises: Looking to the Future

seeking to minimize government regulation

would likely oppose a new common carriage

policy on the grounds that it would undermine

competition and all of the benefits that deregulation has already achieved. On the other hand,

those who have viewed common carriage as a way

of promoting social as well as economic goals

may be unwilling to accept the confines of a pol icy

such as this, which would be focused primarily on

developing an open network architecture.

Strong opposition to a revised common carriage policy can also be expected from the many

stakeholders who have an interest in maintaining

the current system. For example, large business

users, who can now directly access the local exchange provider’s central office switch, will not

be willing to lose control over their networks. Nor

is it likely that the growing number of value-added

providers will be willing to relinquish control

over how they price and to whom they prov ide services.

Despite the potential problems of extending

common carriage, the time is ripe to consider this

option. The present regulatory regime is stretched

to its limits. Increasingly, it is the courts, rather

than Congress, that must grapple with––and often

decide—fundamental regulatory issues. Reformulating common carriage policy would also be

timely, given the convergence of technology and

the rash of industry alliances and mergers. Unable

to predict what services they will be providing in

the future—and thus which team they will be on—

stakeholders will likely be more inclined to make

concessions and agree on what constitutes a level

regulatory playing field. If Congress fails to act

now to redefine common carriage, its opportunity

to do so may be overtaken by the avalanche of

technology change, the hardening of stakeholder

positions and alliances, and the force of international developments and events.

OPTION B: Promote Business Access to

New Technologies and Services by

Redefining the Notion of Universal

Service

To support technology deployment for business,

as well as equitable access to the services and economic opportunities that advanced communication

and information technologies offer, Congress might

extend the notion of universal service to take into

account the social and economic changes taking

place today. A revised definition of universal service would need to be based on some agreed-upon

criteria for determining which services are essential and should be made available at reasonable

costs and on a universal basis. Any expansion of

universal service would also need a new financing

mechanism because the traditional system based

on cross-subsidies is no longer viable in a competitive, deregulated environment. 17

The concept of universal service has always

been a vague term whose meaning was never formally defined. 18 First described by Theodore Vail

in the Annual Report of 1910, as part of his vision

of the telephone industry, the goal of providing

universal service was incorporated in its essential

intent in the Communications Act of 1934, which

states:

[T]o make available, so far as possible, to all the

people of the United States, a rapid, efficient,

nation-wide and world-wide wire and radio

communication service with adequate facilities

at reasonable charges. . .

The mandate for universal service reappeared

more concretely in the 1949 law that directed the

17SCC for ~ ~l~cusslon of [he prob]enls and a potential solution, Eli Noan~t ‘“NetTrans Accounts: Refomling the Financial Suppwt System

f~~r ~)nl\ Crsal Service in Telectmmmnicati( ins,” second draft, Columbia Instttute for Tele-lnf~)m]ation, Columbia University, New Y(wk, NY,

Scptcmbcr 1993.

I ~,~s noted by Gordon” and Haring “me teml ‘univema] service’ appears in no public law and there is no publ ic law defining pWCi Se]y what

ii means. .It IS a shimthand expressi(m generally used to refer to [the policy articulated in] Title I t~f the Communicati(ms Act of 1934.” Ken

G(wdim i\nd J{~hn Hanng, “The Effects {)f Higher Telephone Prices (m Universal Service,” FCC office ~~f Planning and PtJl icy, Working Paper

Scncs, I 984,
Chapter 3 Regulating the Electronic Enterprise | 71

Rural Electrification Administration (REA) to

promote nationwide telephone service.

Defining universal service more specifically

was not necessary when there was one uniform

service provided by AT&T and users essentially

had the same communication needs. Businesses

and households used the telephone for voice communication in the same ways. The FCC and state

regulatory commissions were charged with ensuring that overall costs were equal to overall prices,

and that rates and profit levels were kept within a

reasonable range regardless of use. To carry out its

mandate. AT&T adopted a subsidy system that set

prices on the basis of value of use rather than cost

of use. 19 These subsidies served well as a means

of expanding telephone service. By 1952, AT&T

operated almost entirely under a nationwide price

averaging system. and by July 1989, 93.3 percent

of Americans had a telephone in their home.20

With technology widely available and universal service ostensibly achieved, many began to

question the rationale behind the traditional telecommunications regulatory framework.21 Government, it was believed, needed only to ensure

that “plain old telephone service” would be affordable to all. This objective could be accomplished either by providing direct subsidies to the

poor-as in the case of lifeline service-or by

adopting special pricing schemes that capped, or

limited, price increases for basic services. These

approaches were particularly appealing because

they were compatible with the stereotype of a deregulated, competitive. telecommunication environment, whereas the traditional way of financing

——— ——

universal service through cross-subsidies was not.

With competition, nonregulated providers, with

no obligation to cross-subsidize, could undercut

regulated providers by pricing their services closer to real costs.

The issue of universal service could not, however, be settled so easily or permanently. Universal service is a relative term whose meaning is

bound to change over time and in different circumstances. In the early years of the United

States, the goal of universal service was to provide

equitable access to the postal system. The concept

had to be redefined repeated] y to take into account

changes in the social and economic environment,

as well as the development of new means of information delivery-the public school system,

mass media, telegraph, and telephone .22 Once

again, as the United States moves from the industrial era into an age where knowledge and information play an enhanced role, and the variety

of information and communication services is

continually evolving, the term “universal service”

must be revisited.

Technological advances, realignments and restructuring in the communication and in formation

industries, and the Clinton Administration vision for a National Information Infrastructure

(NII) 23 are creating a need to reexamine the notion

of universal service and the mechanisms for financing it. To this end, for example, the National

Communications Competition and Information

Infrastructure Act of 1993 (H.R. 3636) would

create a joint federal-state board that is charged

with assuring universal high-quality telephone

I ,)$CC ~nthony (ktting~r. ““The Ft~m~ula 1s Everything C(~sting and Pricing m the Telcc(~l~~r~~unlcatl(~ns Industry,” PrtJgran~ (m lntom~ati(m

Resources, Center f[w lnf(~mmtion Pt)llcy Research, Harvard University, Cambridge, MA, P-88-2. octoher” 1988.

~°Fcxtcral [“(mm~unwatl(ms Ctmmllssl{m, Common Carrier Bureau, Industry Analysis Dlvlsi{m, “LTcleph(me Subscribershlp in the Unltcd

St:ihx,” 1990.

~‘ See, for lnstancc, Gerald Faulhalh>r, 7c/ctt~nlnr~{n~talrf~n.$ In 7hrmol/.’ Tichrro/o<q.v andPu/~/1( Po/J( \ (Can] hridge. MA Ballmgcr Puhllshing (’{)., 1987 ), ~\p. ~h. 3.

~~~l,s. ~’{~ngr~~s. office of T~~hn{~lt~g~ Ass~ssnl~n(, ~r/ll{a/ (’onnp[[;~~nf: (’[JI~lr)iI{rI/[aIJ~~n ~[~r IIic P-rt/l/rc, OTA-clT-407 (Wrash[ng[tm,

DC ~’, S. G(~\cmrlwnt Prrntlng office, Janua~ 1990).

2 IThc Cllnl{m Adn~inl\lratl(m first presented its vision of a new Nati(mal lnf~mmitr{m infrastructure in Fetm-uary 1993 in a white paper entltlcd “’Techn~~l~)g> for Amerrca’j Ectmt)nlic Growth: A New Direction to Build Ec(monl]c Strength “ This \ lsttm was updated in Scpten~h>r

199< in lhc NTIA r-cp)~,’~e N:illonal lnff~mlati(m Infrastructure Agenda for Actl(m.”
72 I Electronic Enterprises: Looking to the Future

service and determining the exact nature of the

universal services that the telephone company

must provide. Similarly, as part of the NII Agenda

for Action, the National Information and Telecommunications Administration (NTIA) will

hold public hearings on universal service, and

work with the state regulatory commissions to

“determine how the universal service concept

should be applied in the 21st century.” Added to

these government initiatives are a number of private and nonprofit sector proposals for a new look

at universal service.24

This growing awareness of the need for updating the notion of universal service is not accompanied by any agreement about what a new vision

entails. Some contend, for example, that universal

service should apply only to touch-tone digital

service; others call for an open platform, allowing

for two-way switched access to voice. data, and

video service; still others would require two-way

switched broadband services to the home bundled

with certain kinds of “public” information such as

essential health services and/or K-12 educational

services. In other cases, the problem of definition

has simply been postponed or circumvented

through the use of vague references such as “affordable, advanced communication services.”

In the current deregulated, competitive market

environment, it is particularly important to agree

on a definition of universal service and to devise

an efficient and equitable means of financing and

administering it. Whereas the subsidies that financed universal service in the past were indirect

and hidden, future subsidies will be subject to

public scrutiny and increasingly will be forced to

compete with a variety of other social and economic priorities. Moreover, in a competitive environment, issues will likely arise with respect to

how, and to what extent, the responsibility for

meeting the goal of universal service should be

shared among communication and information

providers. Care will be needed to assure that funding mechanisms do not favor some providers over

others.

Efforts to redefine a universal service policy

befitting the 21st century may also founder if the

term “universal service” becomes a catch-all

phrase with too many demands placed on it. Many

people have already called for a definition of universal service that incorporates the goals of common carriage, privacy, security and survivability,

and intellectual property protection. While such

goals may have merit, it is not clear that a single

policy, which is designed primarily for promoting

deployment and enhancing access, will be the

most suitable and cost-effective mechanism for

achieving all of these objectives. In the past, it was

possible to reconcile multiple goals within a

single policy framework because there was a

single, unified service provider. However, when

there are many different players capable of prov iding, accessing, and controlling parts of the infrastructure, a broader based and more highly targeted policy strategy is called for.

While this report cannot provide a definitive

answer to the question of what should constitute

universal service, it can shed 1ight on the factorsgiven the growth of electronic commerce—that

must be considered when developing an operational definition. OTA identified four major factors:

1. A greater overlap between business and residential communication needs. Although the communication needs of businesses and residential

users diverged greatly since the breakup of the

Bell system, they will overlap more in the future.

High capacity, advanced technologies will need to

be widely dispersed if vertically integrated businesses downsize and distribute their operations

horizontally, and if there continues to be an inZASW for instance, 

, Benton Fmmdati(m/C()]umbia University Seminar on Universal Service; Susan Haddon, “Extending Universal Service

Through the Nil,”’ testifying on behalf of the Alliance for Public Technology, at the New Mexico Public Hearing on Universal Service; C(Jnlputer Professionals for Social Responsibility, “Serving the Community: A Public Interest Vision of the National Infimnati(m Infrastructure”, and

Electronic Frontier Foundation, “Open Platform Campaign, Public Policy for the In fornlation Age.”
Chapter 3 Regulating the Electronic Enterprise | 73

creased reliance on contingent workers and telecommuting. Under such circumstances, “plain old

digital service” will likely prove inadequate as a

basic service.25

2. The role of “electronic” transastion costs.

There are economic transaction costs associated

with accessing knowledge and information. In an

economy in which knowledge, speed, and flexibility are critical for success, how transaction

costs are distributed will be very important. As

more and more commerce takes place electronically, network architecture (as determined, in part,

by those providing networking services and the

structure of the market) will be an increasingly important factor accounting for such costs, and technological expertise will become a measure of

one ability to bear these costs. To minimize

transaction costs, economic players must be able

to access and share information both within and

across electronic networks (markets). If, in such

an environment, all businesses and consumers are

to operate on relatively even playing fields, gateways will need to be open, navigational tools will

need to be available, and some basic level of systems integration will need to be guaranteed.

3. The critical role of the network administra -

tor and network market information. Markets do

not exist in a vacuum: they must be “made” and

administered in one form or another. Administrative tasks might include, for example. ordering,

shipping. billing, and funds transfer. To participate in electronic commerce. therefore. economic

actors will need much more than simple network

interconnection: they must also have access to the

substantive in formational and administrative infrastructure that supports market transactions. In

most cases, the network administrator will both

provide these services and control this information. As electronic commerce becomes more prev -

alent, the network administrator may gain so

much economic leverage that rules and regulations will be required to assure equitable access,

not only to networks but also to essential marketing services and marketing information.

4. The shift of control and equipment costs to

the user The greatly improved performance of

computer technologies and their convergence

with communicat ion technologies have facilitated

the dispersal of intelligence and control throughout communication systems and toward the user,

This development will make future information

and communication technologies and systems

more flexible and versatile. At the same time,

however, it will shift some of the equipment costs

to the user. If these costs are beyond the means of

some people, regulators may need to expand the

definition of universal service—and the subsidies

that support it—to take customer premises equipment into account. This is, in essence, the kind of

policy that the Government of France pursued

when it subsidized the distribution of Minitel receivers (see box 3-1 ).

OPTION C: Relax Antitrust Constraints

and Cross-Ownership Rules

A third way the government might seek to meet

the technology criteria would be to relax antitrust

constraints and allow for greater market entry. If

companies were permitted to enter new markets

and vertically integrate, they could benefit from

greater economies of scale and scope; thus, they

would have greater financial and technical resources available for technology innovation and

deployment. Although regulatory agencies, the

courts, and Congress have been moving in this

direction, they have been unable to keep pace with

the convergence of technology and the market and

~<A rc(cn[ P~icttic Bcl I stud}, ftlr e\;inlplc, dlfferentlatcs between four types of telecommuters and their needs I ) voice c{)mmunicat(ms who

ch) MIc5. rcwarch. and consulting, 2 ) ch)cunwnts e~changcrs, such as lawyers, acc(mn[ants, and real estate agents, who use fax and electr(mic

nla] 1, ~ ) bai)~ data ctllllrllllnlcat(lr~, including financial managers, c~~rnputer pr(~grammers. and telemarketers who need to access data from host

c{~n~pu[cr\, and 4 ) ad\ antcd data cor~~r~lllnlcators,” such as englnwrs, scientists, and industrial designers who require advanced multimedia

tc~hn{)logtc~. As rep)rtcd In “Pacific Bell Tailors Ser\lces to Telecx)mmuters, ” 7eletontnlttni{att[~ns Reporls, vol. 59, N{). .34, Aug. 23,

I 993. p. I I
74 I Electronic Enterprises: Looking to the Future

To assure widespread access and promote

the use of information services, the French Government played a major role in the initial financing and deployment of the Minitel system. As of

January 1992, 6,000 terminals had been

deployed and French consumers and businessmen had access to more than 2,500 videotex

services, 70 percent of which were commercially

oriented In recent years, Minitel use has begun

to shift from personal communications to more

business-related services, approximately 30 percent of the time spent online is now devoted to

professional applications. Minitel also provides

access to major databases, a service that grew

187 percent between 1989 and 1990 This trend

toward business applications is also reflected in

home use, Increasingly, individuals are using

Minitel to carry out transactions such as banking

and home ordering Minitel services are, moreover, global in scope, among the countries that

can access the system, for example, are Italy,

Germany, the United States, the Ivory Coast, Korea, Japan and Singapore,

SOURCE Wallys Conhalm, “Maturing French Videotex Becomes Key International Busness Tool, ” lnfovnaoon Today, VOI

9, No 1, January 1992, p 28

merger opportunities that technology advances afford.

The regulations that constrained integration in

communication industries were aimed at promoting information access and diversity in the marketplace of ideas. These prohibitions were implemented through antitrust law and consent decrees,

as well as by regulatory limitations on ownership

rights. Thus, for example, in the case of the mass

media, the FCC prohibits one entity from owning

a newspaper and a TV station in the same market.

Until 1984, the government prohibited the common ownership of three commercial AM, FM, or

television stations where any two stations were located within 100 miles of the third, and where the

primary service areas of any of the stations overlapped. In like fashion, local telephone companies

were, under the 1984 Cable Communications

Policy Act, prohibited from providing video programming within their service areas. The Modified Final Judgment (MFJ), which led to the divestiture of AT&T, also restricted the line of

businesses in which the Regional Bell Operating

Companies (RBOCs) could engage (see box 3-2).

This regulatory approach was based on two major assumptions. First, with spectrum scarcity and

the potential for monopoly in delivering telecommunications services, regulators acted as though

the means of communication were limited and

competition had to be promoted and enforced.

Secondly, they assumed that each technologyprint, telephony, or radio-was technologically

restricted in the services that it could provide.

Thus, they believed that it was possible to insulate

services, as well as service providers, from one

another.

With technology advances, both of these assumptions have proven false. For example, new

technologies such as digital radio and fiber optics

provide many new transmission pathways. Others, such as spread spectrum and high bit-rate digital subscriber lines, are being used to make more

efficient use of existing communication channels.

Moreover, with the shift from analog to digital

technologies, it is increasingly difficult to differentiate among technologies, much less set legal

boundaries between communication services.

Responding to these changed circumstances,

and viewing these restrictions as impediments to

the development of the U.S. communication infrastructure, government policy makers have

called for their relaxation or elimination. As part

of this strategy, the FCC, for example, adopted an
Chapter 3 Regulating the Electronic Enterprise | 75

LA consent decree entered into by the American Telephone & Telegraph Co (AT&T) and the Justice

Department in 1982 settled a decade-long antitrust suit. AT&T was broken up into eight companies the

reorganized AT&T and seven regional holding companies Local service was assigned to the newly

formed holding companies under certain restrictions, developed and administered by Federal District

Court Judge Harold Greene The basic premise of this divestiture settlement was that the Bell system’s

competitive markets should be separated from their noncompetitive monopoly markets in order to prevent unfair monopoly abuses, such as AT&T forcing captive local ratepayers to bear the burden of subsidizing equipment and Iong-distance service against emerging rivals. The competitive markets had

begun with MCI’S challenge to AT&T’s monopoly on Iong-distance service, starting in 1968, and the entrance of competing manufacturers of customer premises equipment

A Modified Final Judgment (MFJ) went into effect at the beginning of 1984, clarifying and expanding

the terms of the 1982 consent decree The Bell system’s 22 local telephone operating companies

(BOCs) were separated from the parent company (AT&T) and grouped into seven regional Bell holding

companies (RBHCs), which were entrusted with providing local services The seven regional Bell holding companies (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U S

West) were specifically prohibited under the MFJ from entering the three Iines of business deemed

competitive and therefore assigned to AT&T 1 ) designing and manufacturing telecommunications network and customer premises equipment, 2) providing Information services (such as electronic yellow

pages), and 3) providing Iong-distance service

The Information-services ban was to prevent RBHCs from using their control over the local loop

“bottleneck” to engage in anticompetitive conduct toward other information services providers The prohibition was subsequently amended at the triennial review in 1987, and later reversed and remanded by

the U S Court of Appeals for the District of Columbia The other two provisions of the MFJ are the subject of intensifying congressional activity

SOURCE Off Ice of Technology Assessment, 1994

open network architecture (ONA)26 pol icy requir- tage. With the Cable Act of 1992, Congress also

ing that RBOCs unbundle their services and pro- authorized the telephone companies to enter into

vide competitors equal access to the local ex- the cable business, a decision that gained legal

change. Deregulation, it was argued, could support in the recent federal court decision ruling

proceed once the local telephone companies were it unconstitutional to prohibit Bell Atlantic Corp.

no longer able to leverage their control of local from providing cable service because it violated

switching to gain an unfair competitive advan-

~hopen Nctw{)rh Architcc[urc ( ONA ) is [he network design ctmcel\ed by the FCC ti~ assure that c(mlpetltlvc scm ice prt~\ Idcrs c{)uld gain

equal access t{) exchange carriers’ networks for the purpose t~f lmplcnwntlrrg ncw services. The underlying Idea is tha[, If [he Bell opcratlng

C(m~panles pro\ de their ctmlpetitors equal access to thclr nctw(~rhs, they will ml kmgcr need to hc suhJcct tc~ line-of-buslnc~s rcstrictii~n~. In

N(~\wn~hcr 1993, the FCC ruled that, to fulfill this requirement, the Bell operatln: C(mpanks w(mld hak c h) alltw c(mqxtil(m ti) ct~lltw;itc thc]r

(~~’ratlon~ at the teleph( )ne c(mpan Ies central sw itch Ing fac II it]es.
76 I Electronic Enterprises: Looking to the Future

the company’s first amendment rights.27 There are

a number of bills pending in the 103d Congress

that would, to a greater or lesser extent, free the

Bell operating companies from line-of-business

restrictions. The Clinton Administration has generally favored these developments, announcing its

own intent to work toward the eventual elimination of all cross-ownership regulations.28

Despite these initiatives, policy makers have

been hard pressed to keep abreast of technology

advances and market developments. Taking advantage of technology convergence and the globalization of the communication marketplace, for

example, many companies have found ways to

proceed with their long-range plans to develop the

technological and financial capabilities to provide

advanced, integrated services. Similar to what is

occurring in other sectors of the economy, communication and information technology vendors

and service providers are entering into a rash of

new mergers, alliances, and joint ventures that

often span the globe. Virtually every kind of information-related business is getting into the act,

pairing up with partners that a few years ago

would have been considered unlikely. Thus, joint

ventures and alliances are occurring between

cable and telephone companies, cable companies

and internet providers, and telephone companies

and providers of electronic data interchange services. Equally striking is the extent to which this

integration is occurring at the international level.

The international telecommunications market is

currently comprised of five major multinational

groupings (see figure 3-5).

This trend toward integration will likely continue in the future as a result of the mutually reinforcing conditions driving it. These include, for

example: 29

the very high costs and uncertainty entailed in

performing R&D and the need to share resources and risks;

the rapidity of technology change and the need

to monitor, explore, and strategically exploit

new markets and product niches;

the need for technology transfer among complementary and converging technologies;

the need for interoperability in networked systems; and

the need to circumvent trade barriers and regulatory policies.

Acknowledging such imperatives, Raymond

W. Smith, Chairman of Bell Atlantic Corp.,

claimed that the companies that will be most successful in delivering future interactive multimedia

services will be those that can “put together the

right combination of programming, packaging,

and distribution platforms,” and that recognize

z70n Aug. 24, I WS, U.S. District court for the Eastern District of Virginia ruled that the statutory prohibition barring telephone companies

from providing viewer programming directly to subscribers in their service areas is unconstitutional. The Justice Department subsequently

asked the coutt to clarify its decision by limiting its scope to the plaintiffs in the case (Chesapeake and Potomac Telephone of Virginia and Bell

Atlantic Telephone Corp.,) and to enjoin enforcement solely of section 533(b) of the Communications Act, rather than the entire section. The

other Bell regional holding companies, as well as GTE Corp. and Rochester Telephone Co., have tiled a joint motion to allow them to intervene

in the case, on the grounds that the court’s decision should apply to them as well. In a subsequent ruling, U.S. District Judge T,S. Ellis 111 ‘reluctantly” denied thej)int motion, thereby limiting the scope of its decision to the Bell Atlantic case. The othercompanies may still file lawsuits (m

their own behalf. See “Judge Rules Video Programming Decision Applies Only to Bell Atlantic Companies, Denies Intervention Plea,’” Tc/ecommunicufions Reporn, vol. 59, No. 40, Oct. 4, 1993, pp. 4-5.

zgAccording t. Administration s~)kesmen, the Administration will try to put together such legislation by the end of 1994. See “white

House Hope Telecom Bill Will Pass in 1994,” Te/ecommunicafions Reporls, vol. 59, No. 46, Nov. 15, 1993.

Z$’see, for discussions, John Hagedom, “Strategic Technology Alliances and Modes of Cooperation in High-Technology Industries,”’ in

Gemot Graber (cd.), The Embedded Firm: On fhe Socioeconomic ofIndusrria/Net-works (London, UK: Routledge, 1993), pp. 116- 137; Peter

Cowhey and John Aronson, Managing the World Economy: The Consequences oj” Corporate A/liances (New York, NY: Council on Foreign

Relations, 1993); and Jay Blumer, The Ro/e of Pub/ic Po/icy in /he New Te/e\’ision Markerp/ace (Washington, DC: The Bent(m F(mndati(m.

I 990).
Chapter 3 Regulating the Electronic Enterprise | 77

-x— --,

I I

‘.+ . . . . . < .

. 

 t /

I

.’

. ,

.

I I I
78 I Electronic Enterprises: Looking to the Future

that “market leadership in the multimedia era will

require capabilities that transcend any one industry segment.”30

Pointing to this rapidly changing business environment, many in industry argue that, if they are

to participate, the government must move quickly

to eliminate the remaining cross-ownership rules

and line-of-business restrictions. They claim that

deregulation would not only encourage greater

technology innovation and deployment; it would

also create new opportunities for growth and employment. 31 Not surprisingly, the RBOCs are

among the chief proponents of this point of view.

They contend that regulatory safeguards to assure

local competition are unnecessary, citing the development of wireless technology, the growing

success of competitive access providers, and collocation rules as evidence that sufficient local exchange competition already exists. 32 This perspective is increasingly shared by those in the

cable industry who are now looking to partner,

rather than to compete, with the local exchange

telephone companies.33

Others are less sanguine. While agreeing that

local competition may emerge over the long term,

they contend that it is currently insufficient, and

call on government to retain safeguards against

the potential abuse of the persistent bottleneck in

the local exchange. As a prerequisite for lifting restrictions, they would require a test to prove that

competition exists and that customers have real

choices. It is a mistake, they argue, to equate competition with deregulation, adding that even where

competition exists, government action may be required to assure that competition continues to

flourish in an environment of rapidly changing

technology. These views are prevalent among

long-distance carriers, competitive access providers, value-added network providers, and business

users who depend on the local exchange for access.

34

Parties have aligned differently regarding the

prospect of large-scale mergers cutting across

traditional industry lines. For example, while favoring cable/telco integration, the RBOCs looked

askance at the proposed AT&T-McCaw Cellular

merger. They claim that the creation of a vertically

integrated company that can bypass the local exchange will serve only to undermine competition.35 On the other hand, long-distance carriers

and/or wireless operators, who advocate a slow

pace in relaxing the MFJ prohibitions, have generally welcomed mergers that involve themselves.

In these cases, they minimize the prospect of anticompetitive impacts, pointing out that it is almost

always the local carrier that hauls cellular traffic to

the interexchange carrier’s switch.36

WAS ~l[ed in “Marketing, Sen ices Seen as New Ba[[legrflund for Telcos, Cable TV as Barriers to Entry Fall ,“ Te/e(-omml/ni(afionsRewf.f.

w)]. 59, N(). 39, Sept. 27, 1993, p. 21.

31 Acc{)rdlng 10 a recent study conduc[ed on behalf of the RBOCS, the lifting of the line-of-business reslrktions would generate aPPr(Jx imately 3.6 millitm high quality jobs. As reported in Te/efonlnluni(a~ions Repor[s, vol. 59, N(). 48, Nov. 29, 1993, p. 14.

~ZSee, for discussions, “Local Competiti(m Debate D(mlinates Senate Hearing; lmmye Calls f(m Third Hearing, Suggests Clint(m Official

Attend,” Tc/e(c~n~nt~in~(alif~ns Reporrs, vol. 59, N(). 37, Sept. 13, 1993, pp. 3-6; and “Weiss Says Entry Bamiers Are Blocking Info Highway,”’

72/ctonlnll~nllation.$ Reports, vol. 59, N(). 47, Nov. 22, 1993, pp. 37-38.

~~cable Con)panlcs which are high]y ]everaged, arc looking to the telephone companies for the capital they need k) devek)p adv~ced nel-

,

work plalfomls.

~+.conlnlcnters Urge Safeguards for [n[er. LATA Ent~,” 7ti/et.~~nInllini~arit~ns Reports, vOI. 59, N(). 37, Sept. I ~. 1993, p. 30; and “’ATAT

Wants Stiff ‘C(vnpetiti(m’ Test for RHC Entry Into Long Distance: RHCS Urge Immediate Relief,” Te/et’ontn]lini(a/ions Reports, vol. 59, N{).

44, N[J\. 1, 1993, pp. 16-17.

~sSee, for a discussitm, “’Proposed AT& T- McCaw Cellular Merger Revives Significant Questions A&mt Local Loop Competiti(m,” Te/ec(>t?tl?]l~nl(’o!i(]n.~ Reports, vol. 59, N(). 34, Aug. 23, 1993, pp. 3-7.

Mlbld See a]so .-AT&T Sa)s McCaw Merger W’(m ‘t Hurt Colllpetltlf)n,’” Te/econtn]ltn/(utic]n.~ Reports, w)l. 59, N(). 38, Sept. 20, 1993, pp.

2?-23.
Chapter 3 Regulating the Electronic Enterprise | 79

Of course, no merger has brought these issues

into greater focus than the short-lived deal between Bell Atlantic, TCI, and Liberty Media

Corp.37 This merger, much larger than any other

telco/cable agreement to date, was outlined in a

letter of intent dated October 12, 1993. It would

have given rise to one large Bell Atlantic company

with a combined cable and telephone subscriber

base of 22 million customers.38 Seeking to allay

any antitrust concerns, John Malone, President

and CEO of TCI, promised that the company’s

full-service networks would maintain an open architecture. Many remained skeptical, however.

They feared that instead of the hoped for competi -

tion between cable and telephone companies there

would be the reincarnation of monopoly. A number of consumer-oriented groups were concerned

that consumers would be forced to pay higher

39 on the other hand, the pro- prices for less access .

posed merger received support from key players,

including the tacit approval of the Administration,

on the grounds that it would lead to greater infrastructure investment and deployment. 40

In sorting out precisely where to draw the line

among businesses, it is important to remember

that there are no easy or permanent solutions. If

nothing else, the recent merger activity should be

a reminider that the technology and market environment is in a state of flux. Thus, the policies and

policymaking processes will need to be flexible

and devoid of ideology. In addition, choices about

the communication market structure will necessarily affect the appropriate rules for interconnection and the definition of universal service. Equally important, policy choices will need to take into

account the globalization of the communication

marketplace; hence the need to look also to the international arena in developing potential solutions.

Market regulation, moreover, cannot solve all

bottleneck problems. There will always be bottlenecks; they will simply occur in different guises

and places depending on the situation. In a highly

competitive market environment, for example,

the sheer number and variety of prov iders and networks may present a bottleneck, requiring the development of gateways and navigational tools.

Even on the Internet,41 often characterized as the

ultimate in democratic networking, bottlenecks

are 1ikely. In such a loose and user-oriented environment, the organizational culture and the need

for special skills will constitute a bottleneck to

usage, at least for some. Administrative bottlenecks will also be likely when increased usage requires making decisions about access priorities,

payments and settlements, and rules governing security and intellectual property rights.

“SW, tt}r dlwusslt~ns, “Bell Atlant]c’s Smith Defends Pr(qxmd TCI Merger Against Charges of An[ict)nlpetitive Beha\ itw,” 7e/c(onln11/-

f)/( (/f/on\ Rep(w[\. \ 01. 59, N(). 44, Nov. I , I 993, pp. I -s.

W,, B It ,c~buslcr ~{ ,P)scd Merger BetM cen Be] I Atlantic, TCI Liberty Media Raises Media C(mcentrall(m I ssu~ ,’” 7?/c((jtr~ol[~n{(otion.~ Re -

/N)rl\. \()], 59, N(). L$z, oct. I 8, 1993, pp. 3-8.

{~),,~j ~f:irh ~, ~I[}t)p.r fr{)nl the Cf)nsurller Fe~~ra(ll)n ~)ln[ed out: “T() k] ieve that these [w() companies ~ould suddenl~ be ~~)n~’~rt~d }nto

\ I:( ~n~u~ c{ )n~p.tit{)rs requires a leap of faith that resp{msible publ IC p)llcy makers cannot make. In u-uth, the merger can (rely m;ike rua[ters

u < )r\c. ” ,A\ c I ted In “Mctztmbaun~ Plans Bill T() Change Cable TV Act: Allen Qucsti(ms Pending Bell Atlantic-TCl Merger,” Tc/c(on~~?]~in~(aIIon \ h’(>pm \ , \ (~1 59, N~J. 47. N()\ ~~, 1993, pp. 16-17.

~)~:( ,r ,rl JI:lncc Bell A[]an(lc s~)kesnl~n Said [hat the n)erger would lead t{) a $15 mi II i(~n in\’estrrlent over planned Capltd e~pen~itUr~S for a

5 y ~’,ir Pcrl(d. w Illlc TCI clalmcd that It w{)uld spend $1,9 bll ll(~n (~vcr the next 4> ears bulldlng regitmal fiber {)ptic “’hubs.’” [bid., p. 2.
Cooperative

Networking 4

A

mericans often turn to each other for help. Early in the nation’s history, Americans were already well known for

forming associations. Visiting the United States in the

mid- 1800s, Alexis de Tocqueville noted that:

. . . Wherever at the head of some undertaking you see the Governmnt of Francc, or a man of rank in England, in the United States you

will be sure to find an association. 1

Although cooperative action is instinctive for Americans, it

often requires encouragement and, at times, a decisive push.

People may not know of others with common interests, and when

they do, efforts may be needed to establish a basis for trust. Or

people may fail to cooperate because they are unaware of common solutions to their problems. Often the costs of cooperating

may seem too high and the benefits too uncertain. Similarly, the

cost of cooperative for an individual may not reflect the larger

group benefits to be gained, so everyone holds back.2

The government may serve as the catalyst for cooperative ventures, especiall y when major social benefits are at stake. Government might provide information and expertise, broker relationships among actors, or extend limited, temporary financial

support. The cost of such intervention will generally be small

If small and mediumsized businesses are to

share the benefits of

cooperative research

ventures, government

may have to become

more active on their

behalf. 

| 81
82 | Electronic Enterprises: Looking to the Future

compared with the potential gains. Policies based

on such a strategy are also in keeping with the

American preference for private, pluralist solutions.3 By supporting cooperate private sector efforts, the chances are less that government action

will interfere with the market.

Communication-related, networked activities

are suited for this kind of government support. Being interdependent, net works require cooperation.

Cost-sharing is often necessary because networking is capital intensive. In addition, although financial support may be needed in the early stages

of network development and deployment, its need

is 1imited because networks are general 1 y self-sustaining once they reach a critical mass. A number

of policies based on a cooperative strategy might

be adopted to provide for versatile and open networks, as well as widespread deployment and equitable access.

OPTION A: Foster the Development of

Cooperative Networking Services To

Support Electronic Commerce

Traditional regulatory policies may prove inadequate in assuring the rapid, even, and ubiquitous

deployment of advanced networking technologies. Some form of demand pooling, cost-sharing,

or cooperative arrangement among users may be

required. Government could support such efforts

in a variety of ways.

Some industrywide organizations already operate cooperative joint networks. The insurance

industry, for example, supports a number of cooperative efforts. The 10-year-old Insurance Value

Added Network Services (IVANS) is a nonprofit

organization that links agencies and property/

casualty companies to promote efficient, lowcost, insurance-related electronic communications. 4 Over the past 10 years, members and

subscribers have saved more than $72 million on

voice and data communication services based on

discounts of up to 48 percent. Even greater savings are expected in the future as the network

expands to include the life/health insurance businesses. A second network, RINET (the reinsurance and insurance network) operates globally to

foster the development of international electronic

data interchange (EDI) standards for reinsurance,

and to provide EDI service support for its members. RINET members are able to reduce their EDI

costs by taking advantage of centralized resources

that are specifically designed to meet the needs of

a wide range of users with different levels of expertise. American subscribers are also eligible for

rate reductions through IVANS.5

Firms in the textile industry are cooperating

among themselves and with the federal laboratories to develop industrywide networking. In

March 1993, leading firms from the textile/apparel industry joined with eight Department of Energy (DOE) laboratories to create the American

Textile Partnership (AMTEX), a Cooperative Research and Development Agreement (CRADA) as

provided for under the Technology Transfer Act of

3 In the United States, the suppwt for voluntary, private sector assoclati(ms was reinforced by a general suspicifm of the state and preferences

for market-based solutions. Althtmgh these values were often supported more by rhetoric than practice, they were greatly popularized by the

progressive rmwement, which had its heyday in the late 1800s just at the rm)ment when industrialization was primed to take off. Whereas in

many other countries government actively sponsored [he growth and development of business, in the United States industrial devch)pment was

managed, directed, and financed primarily by the private sector. See, for discussions, Annemarie Hauch Walsh, 7’/re Pub/ic’s Business: 7-/~e

Po/iti~sandPrat”/ites ojGo\’ernnlcnt Corimralions (Cambridge, MA: The MIT Press, 1978), pp. 25-26; and David Vogel, “’G(wemment-lndustry Relations in the United States: An O\ m Iew, “ in Stephen Wi Iks and Maurice Wright (eds. ), Cwnpora!i\’e G(~\’crnnlent-lntfl~.~tr> Relations

(Oxford, UK: Clarend(m Press, 1987), ch. 5.

Jsee Charles C, Ashley, “IV ANS: A Vig(mms n.cade, “ Besl’s Re\ie\~, May 1993, pp. 67-72.

5RINET is also ]lnhc~ [() the Brokers and Reinsurance Markets Asst)cia[i(m, the Reinsurance Association of America, and the Lmdon insurance Market Netw t)rk through Joint Venture, an in itiati\)e that seeks to deveh~p a common set of standards for the transm issi(m of reinsurancc

infomlati(m based (m the ~l. N. Elcctnmic Data Interchange for Administration, Commerce and Transpwt (EDIFACT) c(mventi(ms. RI NET

will work with I VANS In the IJnlted States to implement these standards. See Kathrine Huelster, “ED] Initiative Launched for Reinsurers and

Br(Aers,” Be.il’s Re\[e\+, May 1993, p. 68.
Chapter 4 Cooperative Networking |j 83

1986. 6 One of the five undertakings included in

this collaborative venture is the Demand Activated Manufacturing Architecture (DAMA) project. This project will use the expertise, technology, and demonstration/prototyping capabilities

available in DOE’s national laboratories to design, develop, and implement an information

technology infrastructure for the 26,000 companies comprising the textile industry. Using this

network to share and access industrywide production and sales data, the industry hopes to enhance

its competitive position in the global marketplace. 7 The federal laboratories are considered essential to the program not only because of their expertise, but also because they are nonpartisan,

allowing an industrywide focus. In addition, the

project will benefit from $25 million in funding

from DOE.

Several major banks are also taking advantage

of the opportunity to establish CRADAs with the

federal laboratories.8 Through the Financial Services Technology Consortium, a nonprofit organization that includes a number of universities,

these banks will collaborate with four major laboratories to develop standards and technologies to

support online banking. Priority items include

network security and the response-rate and bandwidth issues associated with large-scale file transfers. For banks, the cost of participating is

$30,000. Project funds will be matched by federal

funding. 9

To date, small and medium-sized firms have

benefited far less from these kinds of collaborative

initiatives. These businesses often lack the financial and administrative resources and leadership

necessary to rally participants, locate the expertise, package a project proposal, and pilot it

through the appropriate channels to gain government approval. Even large businesses, for example, have found that the road to a CRADA is costly

and paved with bureaucratic obstacles. 10 Moreover, with the laboratories’ focus on advanced

technology applications, they may be unsuited to

meet small businesses’ most pressing needs.

Small businesses may also have less incentive to

work together than large ones, Because there are

fewer to share the rewards. a few large businesses

are more likely to see a return on their investment—and hence take action—than are many

small businesses. 11

If small and medium-sized businesses are to

gain the benefit of collaborative networking. incentives and brokering will be required. In some

cases, large firms within an industry can provide

sufficient leadership. However, where the sharing

of proprietary data is involved and there is a potential for small firms to become “locked into” a net6 [ncludcd In the Industry ctmst)rtla, for c~ample, are C(m(m Inc., (TC)2, and the Natitmal Textile Center. Ftm cilscussl(ms. scc J:ich Schult/.

“A L{NA at AMTEX, ” .S[<m.t, May 1993, p. 10, ‘“AMTEX Announces First Funding and project,”” 7“.\I//c 141~r/d, Y t)]. I -1~, Nt). 9. Scptcmher

1993, Law rcnce A, Chrlst]anscn. Jr., “CWP. QR and now AMTEX,” Te.rrl/e Wor/d, vol. 143, N(), 4, April 1993. p. 15,

7 The pr(~~xd tasks Include 1 ) dek eh)pnwnt t~f the [~\ crall c(mcept and visitm for the industry’s dcnland-acll\ atcd nuinuf:ictunng :ir~llltcc

turc: 2) de~ elc}pnvmt and In]plenlenlati[mt)t’ a c(m~nlunlcati(m infrastructure to serve as the backtx~ne: 3 ) definition :ind ]n~plenlcnt;i[i~~n t)f industry access t(~(ds, 4) ckfinlthm and ]mplenwrtati(m of lndusl~ analysis lmls, 5) detiniti(m and implenwnt[iti~)n of an “lndustryw iclc” model.

and 6) pi]hl IC (mtreach to the industry.

x Armmg [he hanks are Citibank, Chase Manhattan, Chemical Bank, Bank of Boston, Bank of America, Huntlngd{~n Banc~hares {}1 C(~lur~~

t-m, 0}{, and Nati(mshank of Charh)ttc. NC. The labs participating include Lawrence Livemlore, Los Alarmls. Sandia, ;ind oiih RIdgc N;ititm,i]

l.aboriit(m~s. See “Banks Eager T() Particlpatc in Interactive lnf(mnati(m Highway,’” Meal/a Wceh, Jan. 19, 1994, p. 8.

9 lhld,

I () see, f{~r a dlscllsslon, ~J.S, Cong-~ss, Office of Techn(~]ogy Assessn~ent, De/enw Corr]er$ion: Rcdlre~’l)n<r RAl~, (~T,+4-lTE-55~ (W~.$lllngtt~n, DC (J. S. CJovernrnen[ Printing office, May 1993), esp. ch. 4. AS the OTA study p)ints out ‘Though there arc ml :(NA stiit]~t]~~ ~m how

l~mg It takes t~~ put a CRADA into ~qwrat]tm, nearly eferytme lnwdk ed, inside the agency and Iahs and in the pri\ atc wctt~r. agrees th:it the

pr~)ccss has been much too” sI(M, espwally earl) tin.” Ibid., p. 107.
84 | Electronic Enterprises: Looking to the Future

work, working through a third party may be preferable.

To help small businesses establish better commercial networking arrangements, the government could set up a program modeled after the Rural Electrification Administration (REA).

Established in 1935 under the Roosevelt Administration, the REA was designed to help extend

electricity to rural areas by providing low-cost

loans to local electrical cooperatives. Although

the government first sought to encourage private

and municipal utilities to provide such service,

these groups continued to bypass rural areas, explaining that demand was too low and the technical problems too high. The REA, in contrast,

proved quite successful in achieving the goals of

universal, high-quality service and rapid deployment at low rates. Although fewer than 12 percent

of all farms had electricity in 1935, by 1959, 96

percent were equipped. Few rural cooperatives defaulted because usage rose so quickly.

Having completed its mission by the late

1940s, the REA assumed the task of deploying

telephones to rural areas, which were still largely

12 By providing lOW-COSt

unserved at the time.

loans and technical support, the REA was able to

achieve high-quality, state-of-the-art telephone

service, working mainly with the “independents. ”

REA pioneered technology to reduce the size of

wire, its installation cost, and its vulnerability to

lightning and icing. REA borrowers replaced

party lines with one-party service. Rates were

standardized and comprehensive “area” coverage

was provided. By 1980, 94 percent of all rural

households had telephone service. ] 4

Adapting this model to current needs, the government might establish a program to support the

pooling and sharing of networking resources

among small and medium-sized businesses that

lack the financial and technical wherewithal to

fully benefit from electronic commerce. Taking

advantage of the flexibility inherent in networking

technologies, such a program could support virtual small-business communities rather than geographically based rural areas. 15 At a minimum, a

government program might assist business-users

in pooling their demand for services to reduce

their costs and enhance their market power. Or, it

might provide assistance in developing nonprofit

third-party providers catering to small-business

needs and/or the establishment of small-business

service cooperatives. On an even greater scale, a

cost-sharing program could link technology deployment and technology transfer, helping small

and medium-sized businesses to set up shared networks and networking services and use them to

their economic advantage.

Such a program might be administered under

the auspices of the Department of Commerce’s

National Institute for Standards and Technology

(NIST) through the seven regional Manufacturing

Technology Centers (MTCs) (see box 6-1 in chapter 6 ) and the Manufacturing Outreach Centers

that were established under the 1988 Trade and

Competitiveness Act. These centers, which are

supported by federal, state, and private funds,

were designed to assist small and medium-sized

businesses by providing them with technology

analysis, information, and access to management,

\ ~~ i~latlon ~mlitl ing REA t,, P]ay such a ro]e was first introduced in C(mgress in 1945, v here there was c~}nsld~r:ihk sup~)fl. ~~t)~’~~ ~r,

g

smmg {)pp~sititm from the independent telephtme c(m~panies and private utilities prevented its passage. A ctmlpr(m~ise bill was passed In 1949

al hwing REA to f(wm rural telephone cm)peratives as had been used in rural electrificati(m, but charging them to give the ‘“independent” lelephtme c(m~panies [he right of first oppmtunity. As it turned out, most REA loans went to the independents. S(~nW tclcpht)nc cxJoperilll\ cs were

also undercut by Bell c(m~panies, which moved quickly to offer modem services in ctmtcsted areas.

I \m)n F. Hadw ijyr and Cla) C~)~hran, “Rural Telephones in the United States,” Agrl(ul(ure lii.itor>. it)]. 58, I 984, p. 232.

1.$u.s. ~paflll,ent of Agriculture, RuraI E]ec(rlfica(lon Adnllnls(rat]on, A Brl~~ }]l,$l(jry O/”Rllr~/ fi’/e~/r/c [in~ 7tJ/el~/wnc I)ro{qr(jni,y ( WashIngt(m, DC: USDA, REA, 1989), p. 7.

I ~For a discussion ~)fhow [his concept mlgh[ ~> ;Ipp] ied to rural areas, sce U.S. C(mgrcss, ()(llcc of Technolt)gy Assessment, Klir(// America . .

al (he Cro.$sroad.$: Ner\\orklng/(~r Ihe F“u(ure, OTA-TCT-47 I (Washingt(m, DC: U.S. G()\ cmmcnt Printing ofticc, April 199 I ).
Chapter 4 Cooperative Networking | 85

financial, marketing, and training services, With

their expertise in manufacturing, telecommunications networking, and business, the regional

MTCs are well situated to carry out such a program. They are also linked electronically so they

can operate, and draw on other resources, on a nationwide basis. The funding for such programs

might well be available because the federal budget

for these manufacturing outreach programs is

slated to increase from $32.2 million in fiscal year

1994 to $90.2 million in fiscal year 1997.16

Although a government-sponsored networking

program for small and medium-sized businesses

would promote technology deployment and small

business development, it would not be equally

well received by all. In the past, private and municipal electric utilities and independent phone

companies viewed REA as a threat; today, value-

-added network service providers might react to a

similar program in the same way. Large businesses that partner with small businesses might

also be opposed. Large business can generally call

the tune: for example, they have sometimes made

doing business contingent not only on the use of

electronic data interchange or computer-integrated manufacturing, but also on the use of a preferred value-added network provider. By linking

smaller firms into their own networks, large businesses are often able to exploit the combined

transactional data to their sole advantage. If small

and medium-sized businesses were served by providers that were especially attuned to their needs,

they might be able to strike better bargains for

themselves.

OPTION B: Provide Greater Incentives and

Support for Cooperative

Standards-Setting Efforts

Standards are essential to the open access and

seamless interconnection required for electronic

commerce. To promote these objectives, the government might play a greater role in fostering the

cooperative development of standards. Government can undertake standards research, identify

critical standards, help to lay out a standards agenda, create appropriate incentives, and, when necessary, provide financial support, 17

Standards are generally established in three

ways. They are set in the marketplace on a de facto

basis; developed through consensus in formal

standards-setting bodies; or established through

administrative or regulatory processes. Each

process has its unique strengths and weaknesses.

and each is more effective in some circumstances

than others (see box 4-1 ).

For many electronic commerce standards, the

voluntary consensus process will work best. By

reducing transaction costs and facilitating information exchange, standards organizations can

often outperform the market in coordinating standards activities.

18 Such an outcome can be expected when—as in the case of many networking

and product data exchange standards—there are

significant network externalities; there are repeated interactions among the players involved;

the level of uncertainty is high: and information

exchange is complex (see box 4-2). 19Consensusbased processes are generally more effective than

‘6W’11 I l.cph~~w ski, “NIST Accelerates Its New Missitm Under First W(mmn Direct~m,” Chcn~ifa/ and Englnecrinfq ,?’cM j, Scp[. 6, 1993, p.

20.

17scc J,)n:lthan A. Mtm?l I et al., “lmpr{wfing the Dcpk)yment of Open System Techn(d(~gy: Less(ms From the Manufac[unng Aut(unalltm

Prf)toc,)l.’” Industnal Tcchnt~logy Institute, Ann Arh)r, MI, Sept. 17, 1992.

I ~~jc{)n{ ,Illlc research and ~a]ysis (m standards and pas( experience suggest that this market approach IS rllost I ILCIJ to r’csull In stand:mil/~itl~ln \\ hen all Intcrcstccl piirtlcs 1 ) prefer the s:inw standards, -?) ha~e Sonlcthing ~~si[i~,e (() gain frfjnl st:in(l:irc~ii:iti(~rl, and ~ ) h:~~ c :tdc(]uat~

lnlorrl~atl~~n :ib(~ut the ln[enl t~ft~thcr parties. This optimal sttuatl(m f~ccurs (ml} rarcl), h{~\kc\ cr. SW St;inley M. 13cscn and CJiirth S:il(~ncr, “(’{)n~-

p,itlbtllty Standiird\ ;ind the Nfarhc[ f(w Telcc{~Tl]l~]unications Ser\ices,” The Rand Corp.. Fehruar) 1988; and Stanlc) hl. Bcscn :ind Lcliind 1..

J{)hn\t~n, ‘“(-(~r))piitiihilit~ Standiird~, C~m~pctit]{m, and lnn(~\iiti(m In the Br(mlcast Industry,’” The R;ind Corp., N()\cn~lwr 1986.
86 | Electronic Enterprises: Looking to the Future

The three kinds of standards and three kinds of standards processes can be paired to form a matrix

that scopes the standards universe and the standards-setting process (see figure 4-l),

Standardization Control Product/quality Process/

mechanism interoperability

De facto Warner-Amex VCR standards Language customs

database- privacy

standards Bills of lading

Computer interface

standards

Regulatory Auto safety NSA encryption Open network

regulations standards architecture

standards

Fuel economy Department of

standards Agriculture ETSI standards

for European

Product classification telecommunication

standards standards

Voluntary Standards for Refrigerator Map-top protocols

consensus medical devices standards for OSI/ standards

process

Pressure vessel Standards evolving

standards legislation

Petroleum standards Electronic data

interchange

standards

—

SOURCE Office of Technology Assessment, 1994

(continued)
Chapter 4 Cooperative Networking | 87

STANDARDIZATION PROCESSES

De Facto Standards-Setting Process De facto standards are set in the marketplace through the

process of exchange They evolve from the bottom up, in accordance with the forces and mechanisms

that drive the market When the market operates effectively, appropriate standards wiII emerge at the

right time through the process of supply and demand Producers wiII agree on the “best” standard for

the product in the face of competition from other suppliers and the demand of users Producers may

press for the adoption of their own standards Or they may select strategically from among other competing standards evaluating each in terms of its potential impact on the costs of production profitability and market share Users wiII demand standards that reduce purchasing prices, Improve utility, and

are easily integrated with other products and systems

Regulatory Standards Processes Standards can be mandated from the top down as a result of political choices Standards might be set In the political arena for a number of reasons For example if the

market structure for standards-setting IS uncompetitive, economic outcomes wiII be inefficient Some

market decisions might fail to Incorporate or account for environmental, safety, and other social externaIities In some cases standards decisions entail conflict of values and policy tradeoffs Their resolution

may require a broad-based consideration of values Timeliness may also be a factor

Voluntary Consensus Process Standards can also be set through organized negotiation processes

that reduce transaction costs and facilitate Information exchange among key players Such processes

can provide for better coordination than the market when levels of uncertainty are high when there are

frequent recurring exchange activities among the parties, and/or when Information exchange is complex People participate in the voluntary standards-development process for a number of reasons They

may for example want to Influence the development of standards, or they may simply want to keep

abreast of technological developments

SOURCE Off Ice of Technology Assessment 1994

—

government efforts to set standards. Organized The formal, voluntary. consensus-based stanand carried out by private sector players with ma- dards process is not, however, devoid of serious

jor stakes in the outcome, they are more attuned to problems, especially in the case of information

market forces and, hence, will more readily have a networking technologies.22 Relying on the slow

real impact. 20 There is also a strong preference in and often arduous process of consensus-building,

the United States for consensus-based standards- standards bodies have generally failed to keep

setting, which is reflected in a long historical pace with the rapid advances in communication

tradition and reaffirmed in recent public policy.2l
88 I Electronic Enterprises: Looking to the Future

As manufacturers use computer networking to integrate their internal operations and link up with

suppliers and customers, they are faced with numerous incompatible ways to exchange information

about products, Product Data (PD) describes every aspect of a product related to its design, analysis,

characteristics, and support. Incompatibilities exist because of the many ways in which products are

described. For example, a simple circular part can be described equivalently by its radius, diameter,

circumference, or even its area. This means that different manufacturing systems cannot readily exchange data,

Product Data standards are a critical component of operations and commerce in the manufacturing

sector. Increasingly, teams of geographically dispersed engineering, manufacturing, and service firms

must work together to design, manufacture, and support products, Incompatible PD systems lock corporations, large and small, out of profitable national and international collaborations because of the expense and time penalties involved in translating the data Using a single PD standard would best facilitate the flow of information and enable manufacturing techniques such as concurrent engineering and

computer integrated manufacturing (CIM)

The problem of coordinating agreement for a single PD standard, however, is immense because of

the many levels at which incompatibilities exist—between individuals, departments, corporations, industries, and countries, The problem is generally that corporations have sunk costs in computer applications that may be difficult or impossible to convert to new PD standards

In the United States today, there are at least 400 ongoing product data standardization, implementation, and education efforts underway, accounting for $50 million to $70 million of annual corporate and

government expenditures, The National Initiative for Product Data Exchange (NIPDE), an Industry -led,

government-facilitated partnership between the private and public sectors, was set up to coordinate

this activity 1 Industries such as aerospace, automotive, electronics, textiles, shipbuilding, and

construction are heavily involved. Activities largely concern the emerging international standard, the

Standard for the Exchange of Product Model Data (STEP)

The government plays two roles in NIPDE The Department of Commerce’s NIST acts as a broker

and facilitator of the standards and coordination processes by providing a headquarters and administrative services In addition, a number of government agencies act as stakeholders in partnership with

other NIPDE members Because government is both a direct stakeholder and a representative of the

public interest it has assumed these two roles Industry, faced with coordinating such a vast undertaking, instigated NIPDE and subsequently has worked effectively with government agencies 2 With some

exceptions, industry generally acknowledges the leadership role that government may be called on to

play in the international arena

1 Members include, for example, Boeing, Digital Equipment Corp General Motors, IBM, Martin Marietta Westinghouse, the Departmentsof Commerce, Defense, and Energy, NASA, CALS Industrial Steering Group, Auto Industry Action Group, STEP Tools, Inc ,

PDES Inc Electronic Industries Assoctahon, the Industrial Technology Inshtute, the Institute of Electrical and Electromc Engineers,

IGES/PDES Organlzatlon of the U S. Product Dala Association, Petrotechnical Open Software Corp , Microelectronics and Computer

Technology Corp , National Center for Manufactunng Sciences, and the SOclety of Manufacturing Engineers

2 lmpo~antly, the Implementation planfor NIPDE called for no new independent watchdog Organlzahon AIso, NlpDE unllkeother

national Inltlatwes, IS a Ilmited term (3-year) rutlatwe slated to end m February 1995

SOURCE Prwate commumcation, Merrill Hessel, Deputy General Manager of the National Imliatwe of Product Data Exchange, National Inshtute of Standards and Technology, March 1994
Chapter 4 Cooperative Networking | 89

and information technologies. To encourage

agreement, make allowances for technology

change, and facilitate interoperability among an

increasing number of interdependent parties, networking standards are often incorporated in elaborate reference models and defined in overly broad

and generic terms23 (see box 4-3). Thus, even after

standards have been formally set, users still have

to specify the particular uses to which these standards will be applied; vendors have to implement

compatible technologies that meet standards and

specifications; and products need to be certified as

to their compatibility with one another.24 The

process can be so complex and time-consuming

that the window of opportunity sometimes closes

and those standards are overtaken by new technologies and events (see box 4-4).

Discouraged by the lagging process, many vendors and users have begun to circumvent the traditional standards-setting process by developing

standards consortia.25 Operating in a relatively

closed environment, these groups are said to have

greatly simplified the standards process. Unlike

traditional standards organizations, consortia are

not bound by rules guaranteeing openness and

consensus. In fact, so long as consortia remain

within the bounds of antitrust law, they are free to

set up their own requirements for membership and

publication. Membership is generally restricted,

and fees can reach as high as $650,000 per year.26

Given such exclusivity, consortia often replicate

the dynamics of the market.27 Instead of consensus, they can lead to competing vendor alliances,

each supporting a different standard. In such

cases, consortia may serve to reduce the total

number of technology alternatives, but they offer

little in terms of developing open systems.

One standards body that stands out for its success in achieving both openness and speed is the

Internet Engineering Task Force (IETF), responsible for developing standards for the Internet**

(see box 4-5). The IETF’s open process owes

much to the Internet unique history. Like the network itself, Internet standards evolved in a very

informal way as part of the efforts of the Defense

Advanced Research Projects Agency (DARPA) to

establish computer networks linking researchers

across the country. The original participants were

few and were bound together by a common research purpose. As described by one participant:

RFCs (Requests for Comments) were explicitly viewed as working documents to be used

within a relatively small community. They

ranged from casual ideas to detailed specifications and from expressions of operations concerns to whimsical fantasy. If an idea seemed attractive, an individual might spontaneously

specify a protocol or a group might meet to disz~~ese standards are refereed [() as an[lclpa/tJV s[andards because the process of setting the standard anticipates the creatitm Of the product.

See, for a discussion, Carl F. Cargill, /njiwmation Techno/o~y Sfundardiza/ion: Theory, Process, and Or~ani:ulions (Cambridge, MA Digital

Press, 1 989).

241bld.

Zsvendor Corsotila” have ken established, for example, I() set standards for Switched Multimegabit Data Sew ice (s MDS), Fi~r Distributed

Data Interface (FDDI ) (wer twisted pair, asynchronous transfer mode (ATM), and frame relay technologies. The major user c(ms(mtia include

the Corfx)ration for Open Systems (COS), Manufacturing Automation Rotocol (MAP), and the Technical Office Rotocol” (TOP). F(w a dlscussi(m, see Martin Weiss and Carl Cargill, “Cons(wtia in the Standards Development Recess,” Journa/ oj”(he Ameritwn .’$oile?jor /njiv-nl{~/ion

S(ieme, September 1992, vol. 43, No. 8, pp. 559-565.

‘blbid., p. 560.

27As described by Weiss and Cargill: “Application consortia are usually the creation of a group of vendors who want m use collective actl(m

to accomplish a result that cannot be agreed to in an SDO [Standards Development Organization], due to confllcts, opti(ms, or basic d]sagrccments (m the nature or intent of the technology” being standardized. On occasi(m, a c(ms(wtium is f(wrned by a gnmp that is trying to avoid the

standards prt)cess and go directly to market with a product.’” Ibid., p. 261.

28Tbe Internet Activities Board, which manages the Internet, established the IETF in 1989 to “provide near-tem~ soluti(ms to technical difficulties in Internet (yxrati(ms and to develop near-term enhancement for the Internet.” D. Cr(wker, “Making Standards the IETF Way,” Sfandar(fV~ew, vol. 1, N(), 1, September 19W, p. 50.
90 | Electronic Enterprises: Looking to the Future

Open systems Interconnection

(0SI) Is an architecture for computer

networks and a family of standards

that permit data communication and

data-processing among diverse

technologies OSl-based standards

are anticipatory, in the sense that

they are developed prior to any applications or products They provide

a reference model that defines and

categorizes seven layers of function

that need to be performed in any

computer network if effective communication IS to take place, as well

as the protocols and services at

each layer (see figure 4-2) These

layers are designed to be independent of one another so that altering

one layer will not require alterations

In others These several layers are,

themselves, generally divided into

three groups

■

■

the four lower layers (physical,

data Iinklng, networking and

transport), which handle the interconnection of end systems,

layers 5 and 6 (session and presentation), which support the

exchange of information between

end systems using data transfer

facilities provided by the transport service, and

layer 7 the applications layer,

which provides for interworking

between applications processes

in end systems

Layers

User

Program

—

Layer 7

Application

Layer 6

Presentation

Layer 5

Session

Layer 4

Transport

Layer 3

Network

Layer 2

Data Link

I Layer 1

 Physical

 ‘- >

Function

Application Programs

(not part of the 0SI

model)

Provides all services

directly comprehensible

to application programs

Transforms data

to and from negotiated

standardized formats

Synchronizes and

manages dialogues

Provides transparent

reliable data transfer

from end-node to end-node

Performs message

routing for data

transfer between nodes

Detects errors for

messages moved

between nodes

Electrically encodes

and physically transfers

messages between nodes

Physical link

Layers

User

Program 

1. . . . . . –

Layer 7

Application

Layer 6

Presentation

I Layer 5

Session I

I

I

Layer 4 !

Transport

Layer 3

Network

Layer 2

Data Link

Layer 1

Physical I

 National Standards and Technology (formerly Bureau

of Stand. 

0SI standards are International in scope and are being developed by the Joint Technical Committee 1 (JTCI)

of the I SO and the International Electrotechnical Commission (l EC)
Chapter 4 Cooperative Networking | 91

Integrated Services Digital Network (ISDN) is a public switched service that allows the digital transport of

voice, data, and image communication over a single network Although originally lauded for its ability to provide

advanced services on a ubiquitous basis over the public network, its prospects seem much less promising

today After 10 years of development ISDN iS still not widely deployed

ISDN's poor showing iS the result in part, of Ineffective marketing, regulatory barriers, and poor pricing 1

However, these problems might have been more easily overcome had it not been for the problem of interoperability Like all networking technologies, ISDN required a critical mass for the market to take off but such a

market could only develop if vendors” systems could Interconnect. However, the momentum to create the requisite standards for Interconnection was lacking, given the competitive environment.

Notwithstanding years of considerable effort to develop ISDN standards, vendors continued to create

products that, although they were said to conform to these standards, were Incompatible Even when

AT&T, Northern Telecom Inc , and Siemens Stromberg-Carlson agreed to modify their switches to conform

to a single standard, the Regional Bell Operating Companies (RBOCs) continued to deploy ISDN at varying rates Even Bellcore's effort, ISDN1—which sought to produce a standard basic rate Interface protocol—was a disappointment Within a week of Transcontinental ISDN Project Trip 92, a major industry-sponsored event designed to demonstrate coast-to-coast ISDN interoperability two RBOCs----Southwestern Bell

and U S West—announced that they would not, in fact, adhere to the new standard

1 Focusing on [he technology rather than on appllcat[ons the RBOCS had a dlfflcult Irme conwnclng users that ISDN was something they wanted Inltlally they focused their marketing efforts on large users But these users wanted more functionality so they

looked to alfernatlve technologies and either butll thelrown prwafe networks or leased hnes from alternate providers More recently

the RBOCS have begun to concentrate on small businesses where their real market may lie Prlclng also presented theclasslc chlckerl

and egg problem As long as the market remained underdeveloped prices were too high Dwergent stale regulatory pollcles also

served as a barrier because they undermined the whole notion of ubiquitous service

SOURCE Off Ice of Technology Assessment 1994

cuss it further. If a protocol seemed interesting,

someone implemented it, and if the implementation was useful, it was copied to similar

systems on the net.29

Although the Internet has subsequently grown

by leaps and bounds (recently estimated to comprise about 40,000 networks and 30 million users

worldwide), the IETF has held to its tradition of

openness and inclusivity. There are, for example,

almost no financial barriers to participation, since

standards forums are conducted online. In addition, access to standards and standards-related

materials—also provided online—is free. Because formal membership does not exist, conflicts

are resolved on an informal basis without voting.

Such an approach depends on maintaining the integrity and legitimacy of the process, as well as a

shared sense of “good will .’’30

This open process does not occur at the expense

of timeliness. For example, electronic delivery

greatly improves response time. Timeliness also

is achieved by limiting the standards agenda to

specific problems requiring immediate solutions.

Equally important, the IETF process avoids the

implementation and conformance-testing prob201h Id, F{~r ii full dcw’rlp[lt)n of the slandards pr~wss, see also ,A.L, ChapIn, ““The Internet Standards I%wL’s$, ” RF(’ 13 I (). lntcmic (AT&T)

fxlnl[n@ld\ lrrlcml~.ntt ). Nl:irch 1992.

w hid.
92 | Electronic Enterprises: Looking to the Future

An internetwork iS a computer network of interconnected computer systems and networks that can

seamlessly communicate, The Internet IS the U.S.

portion of the largest such global internetwork, estimated to have about 30 million users in more than

146 countries (electronic mail connectivity). The

global internetwork has many names such as the

Global Internet, the Net, the Matrix, or Cyberspace.

In 1993, more than 20,000 networks (2,5 million computers) worldwide comprised the Global Internet

(see figure 4-4). The current estimate IS over 30,000

networks

The story of the Internet begins in 1969 with ARPANET, the first wide area network (WAN) that was a

project of the U.S. Department of Defense’s Advanced Research Projects Agency. ARPANET was a

defense prototype to demonstrate uninterrupted

communications with packet switching technology,

as might be necessary during wartime, The story

continues in 1985 with the Installation by the National

Science Foundation (NSF) of a new national backbone (I.e. , ahtgh-capacity Iink between regional net25,000

■ Networks outside the U.S.

20,000 - ❑ Networks in the U.S.

15,000-

10,000-

5,000-

0 - 1

1988 1989 1990 1991 1992 1993

SOURCE Internet Society, 1993

works) For several years, the Internet primarily served the information, computing, and communications

needs of scientists and engineers, The first applications were remote use of computers, file transfers, and electronic mail (e-mall)

Since 1985, NSFs open interconnection policy has catalyzed network expansion beyond defense and research networks to Include government, education, and commercial networks, and beyond the United

States to include the whole world. This expansion was fostered by an established transmission protocol, the

Internet Protocol (1P), that all new entrants agreed to use (72 countries now have full IP backbone connectivity)

Today, there are many lP internetworks in addition to those that comprise the Global Internet While most Global

Internet networks are research networks, the bulk of IP internetworks, in general, are commercial (see figure

4-4).

Today, large on line Information databases—such as the Library of Congress card catalog and the Security

and Exchange Commission’s EDGAR database—and database search tools, such as Archie, Veronica, Gopher, World-Wide Web (WWW), Wide Area Information Servers (WAIS), and Mosaic are available and their use

iS Increasing precipitously During March 1994, the Internet Society recorded astounding new traffic records

Traffic on the NSF backbone alone Increased 20,7 percent for a total of 11.226 Terabytes (1 Terabyte = 1012

bytes) Use of the Gopher and W search tools increased 17.6 and 32,9 percent, respectively.

Altogether there are thousands of individual applications running on the Internet and dozens of application categories (groups of similar applications). The slx most used applications, in terms of percent of

total bytes of traffic in March 1994 on the NSF backbone, are the Gopher and WWW search applications

(3 4 and 37 percent, respectively), telenet remote computerese (5 percent), smtp electronic mail (7 percent), netnews news service, (9 percent), and ftp file transfer (37 percent)

(continued)
Chapter 4 Cooperative Networking | 93

In the future more growth can be expected, most of it from new commercial traffic Business applications

such as electronic data Interchange (EDI) are newly available, and prototype commercial networks such as

Commercenet in SiIicon ValIey, CA, are being developed. This change in orientation from research to commerce

wiII present new challenges, but has the potential to turn the Internet into the nation’s premier economic resource, serving government, academia, and Industry.

SOURCE Anthony M Executive Director, The Internet Society, Reston, VA, April 1994

53 ”/0

 00/0

Internet Networks, July, 21993

44”/0

 Research (including commercial) Defense Government

 Commercial Educational I

SOURCE Internet Society 1994

lems associated with anticipatory standards; ternet standards are—in contrast to many anticibefore becoming a draft standard, all specifica- patory standards—timely and put to immediate

(ions need to be implemented and demonstrated to productive use.

be interoperable. Similarly, to become a full stan- The challenge for the IETF—and the ultimate

dard, a draft standard must be field-tested and test of its usefulness as a model for other standards

proven capable of maintaining a community of in- development efforts—will be to sustain this proc -

terest over time. Given this iterative process, In- ess as the Internet becomes more complex and the
94 | Electronic Enterprises: Looking to the Future

number and diversity of its participants

increase.3l Many of its past successes can be attributed to the unflinching efforts of a small number of dedicated individuals working together to

achieve common goals. Government funding has

also been critical; because government has no financial stakes in the outcome, standards can be

distributed widely and gamesmanship kept to a

minimum. As the Internet expands to incorporate

new users with decidedly commercial agendas,

and to the extent that it becomes increasingly dependent on these players for financial support, it

will have to deal with more and more issues similar to those faced by traditional standards bod-

’32 ies. -

Drawing on the experiences of the Internet, as

well as those of other voluntary standards-development organizations. there are four specific areas

that, for the purposes of electronic commerce,

would 1ikely merit and benefit from greater federal support: 1 ) sponsorship of open standards development; 2) standards dissemination; 3) broadbased standards efforts; and 4) support for

ongoing trials to test for conformance.

| Sponsorship of Open Standards

Development

Vendors try, where possible, to avoid open standards. As a result, some of the most important

open standards have been developed by those who

have little or no proprietary interest in them. For

example, the operating system standard, UNIX,

was developed at Bell Labs at a time when they

were prohibited from selling computers, and the

networking standard Transmission Control Protocol/Internet Protocol (TCP/IP) was the result of a

government research effort. Having nothing to

gain by withholding, these standards’ developers

were quite willing to disperse them liberally.33 In

similar fashion, to foster openness and interoperability where they are considered essential for

electronic commerce today, the government may

want to limit the proprietary gains to be made by

sponsoring cooperative standards efforts among

competing vendors to support standards development.

| Standards Dissemination

The high cost of standards can be an important

factor affecting their dissemination and use. In the

cases of UNIX and TCP/IP standards, for example, rapid dissemination can be attributed, in part,

to their relatively free distribution. Similarly, the

general lack of appeal of open systems interconnection (0SI) (see earlier discussion) is due in part

to its high price, especially compared with that of

its chief rival—TCP/IP. Equally important, early

standards choices based on cost can have significant long-term results. Because networking standards are—like networks themselves—highly interdependent and subject to externalities, their

adoption requires a critical mass of users. Once a

given standard has gained a critical mass, alternative standards may no longer be able to compete.

To foster the deployment of open standards, therefore, the government may choose to support and

perhaps even subsidize their widespread dissemination, especially early on. One way in which

~ t As de~crl~.d by Chapin: “me rapidly expanding market for hardware, software, and services inspired by the 1nlemel and its techn(@y

has attracted the attention and investment of the world’s largest companies, The financial consequences to these companies of decisi(ms that

affect the ctmrse of Internet evolution will be enormous. It is naive u) imagine that they will leave those decisions entirely in the hands of engi -

ncers—m)twiths( anding the extent to which the present Internet’s success is due to the strong preference of those engineers for decisi(ms based

on technical nwrl t rather than ecomm~ics. ” A. Lyman Chapin, “The State of the Internet, “ 72/econ]ml/ni($afi[)ns,vol. 28, N(). 1, January 1994, pp.

13-16.

?Z~e Cow)ralion ” for Na[lonal Research ]ni[latjves (CNR1) currently serves as the Secretariat for the IE~. Funding is Provided bY ~ev~ral

us ~ovemn)ent ag~ncies and the Internet Society. This SUppMI, however, is scheduled to diminish over time and be replaced by funding from a

broad range of natl(mal and intemati(mal, private and public organizati~ms.

3 ~Maflin c. Libichi, ~“)lc Conlnlon” B}te ~r, Why E.\(e//en[ lnjormotion Te(}lnolo~y” Standards Are Absolu!elj’ hcntio/ and Ullerl.v inlpo.Lflb/e (Cambridge, MA Harvard University)’, Center for Infornlation Policy Research, f(mhc(mling), pp. 43-47.
Chapter 4 Cooperative Networking | 95

the government might do this, for example, is to

support standards dissemination online.

| Broad-Based Standards Efforts

As a major user of networking technologies, the

federal government can support efforts to foster

open systems through the use of its market power.

To be effective, however, the government must

foster standards that havc a broad appeal. Although the government market is sufficient to ensure vendor support for a particular standard, it is

not large enough to forestall and may in fact serve

to perpetuate ) the emergence of two or more com34 This lesson has particular relevance peting ones.

today in the case of the standard CALS (Continuous Acquisition and Life-Cycle Support ) (see figure 4-5 ). Care will be needed to ensure that CALS

and related Department of Defense (DOD) standards efforts, which are designed primarily to sup -

port defense logistics and procurement, work in

conjunction with broader based national efforts to

develop standards for electron ic commerce. 35

| Support for Ongoing Trials To Test for

Conformance

As Open Systems Interconnection (0SI ) and Integrated Services Digital Networks ( ISDN ) illustrate, the lack of interoperable products haS been

a major factor in the delay of standards development and the adoption of open standards. Vendors

hesitate to implement standards until there is an

established market. and, even then, may differ significantly in how they implement them. In turn,

users are unlikely to buy new products without

some assurance that they will work together with

Knowledge

Infrastructure:

intellectual

property , ‘- 

, /

“ presented

/ information

I /“ /

I

Integration

Infrastructure:

standards

Infrastructure.

networks

other system complements. One way of dealing

with this problem has been to establ ish consortia

such as the Corporation for Open Systems (COS )

and X/open, which develop test suitcs and test

vendor products for interoperability. While helpful, these efforts have not entirely solved the problem. The Internet experiences suggest another approach that might go even further to compress the
96 | Electronic Enterprises: Looking to the Future

standards process. Instead of performing tests

only after products have been developed and standards implemented, vendors and users could work

together to field-test standards as they are developed. In this way, standards can, themselves, be

judged partially on the basis of how well they can

be implemented to work with other parts of the

network. 36 To generate such cooperative efforts,

greater government leadership, as well as incentives (and possibly sanctions), will likely be required.

There are many in the U.S. standards community who would likely oppose any options that call

for a major role for government in standards-setting. They contend that the private sector voluntary consensus processes work well as they are

currently constituted. At hearings held in 1990 by

NIST to determine whether the government

should become more active in standards-setting,

especially in the international arena, the response

of those testifying was an emphatic “N0.”37 Government, they argued, should participate in standards-setting as a user, and contribute funding in

proportion to these activities.

To narrowly cast the government in the role of

“user” is, however, a mistake that could have serious consequences for the national economy. Participant users, who are essentially consumers of

standards, are generally interested in the availability of standards and the particular form they take.

And, as noted above, all too often the standards favored by one large user agency, such as DOD, conflict with the standards needs of other agencies

and/or the nation as a whole. Moreover, the government has a stake in the outcome of the standards-setting process not only because it uses

standards, but because the government alone is responsible for ensuring the well-being of the nation’s economy.

Networking standards are especially important

from the national perspective. In a global, information-based economy, networking technologies provide a basis for productivity and economic

growth. These technologies will provide the infrastructure for all economic activities. If networks

fail to interconnect for lack of standards, the nation could suffer considerable economic loss. Although government may have a relatively small

interest in the development of some product standards, its stake in standards for open systems and

for ensuring interoperability is very high.

OPTION C: Provide Support for

Cooperative Research and Development

Efforts

A strategy for the government to broker and support collaborative research for electronic commerce also merits consideration. Cooperative research facilitates technology transfer and allows

vendors to share research and development costs,

which continue to grow. 38 Cooperative efforts can

improve networking quality because interdependent components of a system can be developed

jointly, which will ensure accountability. Government support for such research and development

may also induce business to address technology

problems that otherwise might not be addressed.

Technology consortia can be used to accomplish cooperative research.39 The goal of these research consortia of businesses, universities, and

3sOne ~)rganlzatlona] m{)del that might be followed, forexample, is that of the High Performance Computing and Communications (HPCC)

testbed program, which is described under option c, below.

37see ~(xe~ing~, National Institute for Standards and Technology, Public Hearings, “Improving U.S. Ptiicipation in Intematit)nal Standards Activities,” Apr. 3, 1990.

J80EcD, TeC.hn~/o~y ad fhe ECOnOOIy: The Key Re/arionships (Paris, France: OECD, The Technology/Economy %(~gram, IW2), p. 32;

and David C. Mowery and Nathan Rosenberg, Technoh)gy and the Pursuif oj’Economic Growh (Cambridge, UK: Cambridge University Press,

1989), p. 21 ~.

3%3& for a genera] discussion, Miche]le K. Lee and Mavis K. Lee, “High Technology Consortia: A Panacea for America’s Technological

Competitiveness Problems?” High Technology l.a~’ Journal, vol. 6, No. 2, 1991, pp. 335-363.
Chapter 4 Cooperative Networking | 97

government is to improve industry performance

and U.S. competitiveness through technology

transfer and cost-sharing. Taking advantage of a

greatly relaxed antitrust environment, high

technology research efforts have become more

popular in the United States over the past several

years. 40 The 1984 National Cooperative Research

Act, which frees joint research ventures from

many antitrust constraints, has reinforced this

cooperative climate,41

One of the first, and by some accounts most

successful, consortia to have been established is

SEMATECH, a partnership between DOD

(through ARPA) and 11 private semiconductor

companies. who together account for about 75

percent of U.S. microelectronics manufacturing

capacity. SEMATECH was created in 1987 to revive the U.S. semiconductor industry, which was

losing out to the Japanese. 42 Viewing a healthy

semiconductor industry as being critical to U.S.

military efforts, DOD chose to partner with the industry in a joint venture, contributing approximately half of SEMATECH’s funding.43

With the resurgence of the semiconductor industry, many look to SEMATECH as a model for

other government/industry joint ventures.44 A

1992 General Accounting Office evaluation, for

example, praised SEMATECH’s organizational

structure, attributing the joint venture’s success to

the primary role cast for industry and the emphasis

placed on industry needs. Although DOD helps to

establish program objectives, SEMATECH’s

management and staff are drawn entirely from industry. 45 SEMATECH also received acclaim for

its success in linking its program with the university research community and working jointly with

equipment manufacturers.%

Praise for SEMATECH has not been universal,

however. Some analysts, for example, oppose

such joint ventures in principle, Joint ventures,

they contend, are not only subject to pork barrel

—

~FtJr one dlscllsslt)n of the impact of antitrust law and its impact (m R & D and U.S. competitiveness, see Thomas M. J(~rden md David J.

Teece, “lnmwati(m, C~xy_wratitm, and Antitrust Sttiking the Right Balance,”’ High Technology l~u’ Journal, w)]. 1, N(). 3, 1989.

4 I In acc{)rd:ince with this law, joint research and development ven[ures are no longer considered to be illegal per se. M(~re(~ver, so long as a

cfms(wtium is registered, it will no longer be subject to treble damages. See Lee and Lee, op. cit., footnote 39; see also Donald K. Stoekdale, Jr.,

“Antitrust and International Competitiveness: IS Encouraging production Joint Ventures Worth the Cost’?” High Technology Lu\~’Journa/, vol.

7, N(), 2, 1993, pp. 270-296.

4~The industry was, at the time, in very bad straits. When [he Japanese began m fhwd the American memory chip market in the mid- 1980s,

many U.S, c[mlpanics began to withdraw from the producti(m of mermmy products. By 1987, Japan, selling chips below cost, c(mlpletely d(Jminated the world semictmductt)r market. Lee and Lee, op. cit., foornote 39, p. 346.

4~~fcnse [~.pa~lllent SUpp)rt for SEMATECH was critical. AS Cohen and Nell point out: “. . .Sematech failed to win congressional appr(~\ al as a Commerce Department activity, although in the next year it emerged successful (and unchanged) through DARPA as a national

security imperative. DARPA suppmts a score of programs with immediate commercial applica[i(ms; however, from 1987 to 1992, attempts to

establish a civ II iim counterpart agency all failed.” Linda Cohen and Roger Nell, “R & D Policy,” Center For Economic Policy Research, No.

298, Stanford University, Stanford, CA, pp. 15-16,

~As SP.nccr ~d Grlndley ~)lnt out: ‘t~e establishment of SEMATECH has coincided with a resurgence in the U.S. senliconductor. In

1992, the U.S. wtm a larger share of the world market than Japan for the first time since 1985 and U.S. firms took the leading positions in txnh the

sem]c(mductt)r and equipment markets. Though much of this may be due to market dynamics beyond SEMATECH’S influence, there seems to

h’ widespread recognition that it has helped with some of the industry’s problems. “ William J. Spencer and Peter Gnndley, “SEMATECH After

Flvc Years. }Ilgh Tcchnf)l(lgy C(ms(wtia and U.S. C(mlpetitiveness,” Cal florrria Management Ret’ien, summer 1993, pp. 9-32.

~$u,s. General A~~[)unting office, SEMATECH’s 7echnolo~ical Pro~ress and Proposed R&D Program, GAOIRCED-92-22SBR (Washlngt(ln, ~us, G[lvernnlent printing Office, July ] 992). For the mite House’s p(~sitive evdua[i(m, see Te(”hno/ogyjbr America’s Economic

(;rcj)~th: A ,?’e\i Dirc(rlon 7i) llul/d Econormc Strength (Washington, DC: White House Press Office, Feb. 22, 1993).

46sF.nccr and ~rind]~y, op. cit., f(~)tnote 44.
98 | Electronic Enterprises: Looking to the Future

politics; because they shield businesses from

competition, they may actually inhibit innovation

in the long run.

47 Viewed from this perspective,

the recent growth in the semiconductor industry

should be attributed not to SEMATECH, but rather to a troubled Japanese economy and the poor investment choices made by the Japanese semiconductor industry. Equally important has been the

rallying and aggressive competition of a number

of small, innovative firms, many of which are not

even associated with SEMATECH.48 Others have

criticized SEMATECH for its total emphasis on

industrial needs. These critics are not opposed to

joint ventures per se; rather they believe that such

efforts, which are funded by taxpayers, should be

related to broader social goals.49 For example,

they would urge that more attention be paid to

meeting the needs of the environment, small businesses, and workers.5o

These differing views of SEMATECH illustrate how difficult it is to generalize about the

costs and benefits of cooperative research ventures. For example, consortia that are mission-oriented and designed to achieve a certain social goal

will need to be evaluated by different criteria than

those used to evaluate joint ventures that are designed to overcome market failures.

Judged on economic grounds alone, joint ventures can be said to be beneficial when the social

rate of return on investment exceeds the private

rate of return, giving rise to knowledge “spillovers.” These spillovers can be significant in the

case of R & D expenditures, since research and development results—like information itself—are

inherent] y leaky. Thus, they cannot be full y appropriated by the original investor, but are available

for use by others. 51 The magnitude of these spillovers will vary depending on the industry, the

structure of markets, and the rules governing intellectual property rights. Generally speaking,

knowledge spillovers are like] y to be greater to the

extent that participation is broadbased, markets

are competitive, and intellectual property rights

52 organizing joint ven- are not too constraining.-

tures to maximize spillovers may be difficult,

however, since industry will be incl ined to support

such efforts only when they can increase their return on investments in innovation.s~

J7sCC for instance, Cohen and Not], op. cit., footm~te 43; Murray Weidenbaum, “A New Technology” Policy for the United States,” L’.recufi~’e Spee(”hes, June-July 1993; and Richard R. Nelson, Mert(m J. Peck, and E. D. Kolachek, Technology. E(onomtc <jrowth, and Public Policy

(Washingt(m, DC: Brtx)kings Institutitm, 1967).

.WSce, for exanlp]e, tes[irmmy of T.J. R{~gers, ‘The American Semiconductor Industry: Winners or Whiners.‘)” in U.S. Congress, Legislati(m Concerning Production Joint Ventures, Hearings before the Subcommittee on Antitrust, M(mopolies and Business Rights of the Senate

C(mm~ittee (m the Judiciary, 101st Congress, 2d Session. See also Michael Marks, “Industrial Policy at Work. . .or True Grit’?” Technology

Trans/er Business, summer 1993, pp. 29-33.

49 See Tracy Cohen, “A Model—But What Kind’?” Technology Ret’iew’, January 1993, pp. 16-18.

fl~)]bld,

5 I ~us as Mansfield ~d hls ass(xlates ~~jnt out, even in cases when s(~ial returns are very high, the private returns n~aY be so low ‘hat ‘he

firm would not likely have made the original investment with the advantage of hindsight. See E. Mansfield, J. Rapport, A. Romeo, S. Wagner and

G. Bcardsley, “’S(wial and Private Rates of Return from Industrial Innovations,” Quur/er/y Journa/ oj Economics, vol. 77, No. 2; and E. Mansfield, “HOW Rapidly Does New Industrial Technology Leak Out’?” Journa/ oj’/ndus(ria/ Economics, December 1985. See also R.R. Nelson,

“The Simple Economic Basis of Scientific Research,’ ’Journa/ ofPo/ilica/ Economy, 1959, pp. 297-306; and K.J.K. Arrow, ’’Economic Welfare

and the Allocati(m t)f Resources for Invention,” Universities-National Bureau Committee for Ec(momic Research, The Rate and Direclion of

/n\en~ite Acli}ily (Princeton, NJ: Princeton University Press, 1%2).

‘20ECD, op. cit., footnote 38, pp. 61-63.

53sCC Cohen ~d No] I who point out. ~ “Our most important conclusions are [hat RJVS (Research Joint Ventures) are not a generally appl icahlc panacea t(w curing problems of international competitiveness, and that, in particular, RJVS can be expected to enhance inm)vati(m (rely

under cm-tain c(md it ions. Moreover, because these conditions usual Iy make RJVS unattractive either h) firms in the industry or to the govcmnwrrt. we scc a very Iimitcd useful nde for them in United States R & D policy. ” Op. cit., f(wtnote 43, p. 27. See also Linda R. Cohen and Roger G.

N{)ll, “’prlvatlzing Public Research: The New C(mlpetitive Strategy,” .Xlenttiic Anwri(an, f[}rthc(m~ing.
Chapter 4 Cooperative Networking | 99

One program that has struck a workable balance between public and private returns is the

High Performance Computing and Communications Program (HPCC).54 The HPCC program is a

multiagency project that supports research on advanced supercomputers, software, and netWorks. 55 Although its major focus is on technology, the HPCC program was designed, in part, to

address the “Grand Challenges:” science and engineering problems in climate change, chemistry,

and other areas that can only be solved with the use

of powerful computer systems.56

Cooperation with industry and universities is

also an integral part of the HPCC Program. It is

being conducted at six testbeds, using high-speed

fiber optics to link three or four sites—universities, industry laboratories, supercomputer centers,

and federal laboratories. Administered and

funded for 3 years by the National Science

Foundation (NSF) and the Advanced Research

Projects Agency (ARPA) under a cooperative

agreement with the Corporation for National Research Initiatives (CNRI), the testbed teams are

responsible for demonstrating emerging highspeed network technologies and identifying and

investigating outstanding research questions relating to them.57

This kind of program has a number of benefits.

Federal funding has helped to leverage industry

support even though the research is not always directl y related to commercial needs.58 Virtually the

entire cost of building the networks has been

borne by industry participants in the form of contributions of transmission capacity, prototype

switches, and research personnel .59 Industry’s expertise is critical to the development of many of

the components needed for high-speed network

research. The fabrication of these components is

extremely complex, requiring customized integrated circuits and high-speed circuit design. An

equally valuable aspect of the program is its interdisciplinary and interorganizational design. Each

research group, for example, involves both network and applications researchers. The applications researchers have experience with supercomputers, visualization, and graphics in a variety of

scientific disciplines. Network researchers draw

on their expertise with switches, transmission

equipment, protocols, signal processing. and

computer architecture. Working together, these

scientists and engineers not only promote technology transfer, but also improve overall network design and performance.

The federal Digital Library Initiative is similarly structured to assure both a broad range of participants and support for different agency needs. Administered through NSF in conjunction with

NASA and ARPA, this program will fund research, prototyping, and testbed activities in support of digital libraries. Approximately six grants

will be awarded, each totaling up to $1.2 million

and lasting for up to 4 years. Research areas insq~is discu~slon draws fr(~nl U.S. C(mgress, Office of Technology Assessment, Ad\an(cd Nemw-k TeClinO/OirJ, ~TA-Bp-TCT- 1 ~ I

(Washingt(m, DC: U.S. G(wemment Printing Office, June 1993).

~sH1gh.pe~oml~ce C(mlpu[ing Act of 1991 (HPCA), I%blic Law 102-194, Sec. 102 (a).

56AS one ,)f its four basic Conlp)nents, ne[work research receives appn)x imately 15 percent of the $ I bl II i(m annuat pr~~gram budget. offi~~

of Science and Techn~Jl(Jg} Policy (OSTP), “’Grand Challenges 1993: High Perf(mrnance C(m~puting and C(~nln~unlcatltJn\.” 1992.

~7me princlpa]5 of CNRI, a nonprofit” organization, played significant r(des in the development of ~)th the ARpANET and IIle In[em~(.

CNRI IS responsible for organizing the testbeds and coordinating their progress.

~8Much ,Jf the ~esearch, for exanlple, centers on higher bandwidth and n~ore specialized app]icati(ms than are e~pcc’ted l{) hat ~ n~ar-t~ml

c(mmlerclal significance for the tclec(mmmnications industry. industry planning is oriented more toward medium-bandwidth multimedia appllcati(ms-appl icati(ms that require nxwc bandwidth than can be supported by cument netw(wks, but significantly less than the gigablvsec(md

rates required by the supercimlputer community. For example, the telecommunications industry ATM-based Broadband In[cgrmd Ser\iccs

Digital Network (B-ISDN ) standard envisions 155 megabib’second channels [(~ each cus[(mler in the near term. Furthermore, many of the interesting Issues related [o the (qxrati(m of fast packet networks can be studied with lower bandw id[h nctw(lrks, although a few problcms ma> (ml>

bec(m]e apparent at gl:]blt sec(md speeds. See OTA, op. cit., ft)~nnote 54.

‘91bid.
100 I Electronic Enterprises: Looking to the Future

elude data capturing and formatting; advanced

software and algorithms for browsing, searching,

filtering, abstracting, and summarizing; and the

utilization of nationally and globally distributed

databases. 60 To qualify for funding, applicants

must contribute at least 25 percent of the project

costs, and they are required to allow participation

of all stakeholders. These key players might include, for example: 1 ) client groups (e.g., specific

research communities or other users); 2) commercial enterprises that would be involved in the commercialization of a digital library system (e.g.,

publishers, software houses, stock exchanges,

equipment manufacturers, and communication

companies); 3) archival establishments, either private or governmental (e.g., libraries, data repositories, clearinghouses, and government or private

information or data services); and 4) relevant

computer and other science and engineering research groups (e.g., academic departments, supercomputer centers, and industrial laboratories) .61

Because government-sponsored joint ventures

often require an industry initiative as well as

matching funds, large businesses and large-scale

projects have been the major beneficiaries to

date. 62 Large businesses generally have greater

economic, technological, and scientific resources,

which are essential for R&D.63 Equally important, they are likely to have the necessary contacts

and networking skills needed to assemble research coalitions. In addition, the larger the project and the more prominent the participants, the

greater the chances that it will gain adequate political support.64

If small and medium-sized businesses are to

share the benefits of cooperative research ventures, government may have to become more active on their behalf. Because innovation and

technology transfer entail learning by doing, using, and interacting, these businesses can only

gain the full benefits of research and development

if they participate in the process.65 However, to

become actively involved, they will need help

identifying joint problems, developing smallbusiness networks, developing proposals, and

providing up-front financial support. 66 Although

requiring a more proactive federal role, such programs can have a high payoff because small businesses are generally more innovative than large

firms. 67 Because small businesses are numerous

~Digila]Library ]ni[ia[ive, FY 1994, NSF 93-141.

6 t Ib]d.

62 Brtan Robinson, “promises, Promises: Clinton and the Technology Programs He Now Fosters,’” Technology Tronsjer Buslne.ss, winter

1994, pp. 35-38.

63A$ the OECD has ~)lnte~ out: ‘“Firn]s below a certain size cannot bear the cost of an R&D team. The Crltlcal SIZe has been ~al~lJlalcd 10 ~

(m the order of one thousand emph)yees in low technoh~gy industries, and 100 employees for high technology using simple indicators such as

the share of tumt)vcr devoted [o R&D activities, and the average cost of an industrial researcher. . .“ OECD, op. cit., f(mtnote 38, p. 27.

~~E~p]a]nlng S(jrlle of the al]ure of ]arge-sca]e projects, Cohen and Nell point out, for example: “Larger, more concentrated projects exhibit a

f(mn of p)litical ec(m(mlies of scale. A large project not only will provide visible economic benefits to a large number of citizens in a c(mlnlunlty, but will c(mw about through a visible pol itical pr(~ess in which the role of political representatives will be easy to obser\’e. In c(mtrast, small

grants are not likely to receive any public attenti(m, and are not likely to have been influenced much by elected politicians, so that the l(wal

community is not IIkely to base pot itical support on whether it receives them.” Op. cit., footnote 43, pp. 24-25.

6.$A$ R()~en~.rg and Mowery Point (N.lt,

. . ‘The fruits of research do not consist solely of infom~ati(m that can be ut il ized by others al mlnlmal

cost for innova[i(m. transferring and exploiting the technical and scientific infomlation that is necessary for inm~vati(m cxmstltute a costly

pr(~ess that itself is knov ledge intensive.“ Mowery and Rosenberg, op. cit., footnote 38. See also, OECD, op. ci[., fwm(m 38, pp. 17, 27: and

S.J. Kline and N. Rosenberg, “An Overview of Innovation, “ in Nati(mal Academy of Engineering, The Poslfii’e Sum S(ra(e,~?: }Iarnc.sslng

7i(hno/o~,Y ji)r Elwwni( Grmt[h (Washington, DC: The National Academy Press, 1986).

66As descrl~.d by Robinson:” “[Matching.fund partnerships between govemnlent and Industry].

. can be a c(msiderable burden to smaller

cxmpanies, particularly since indirect costs associated with the programs cannot be laid off against program funding. That means many small

c(mlpanies have u) find parlners before they can apply for federal funding in these programs or riot apply at all.” Op. cit., footnote 62, p. 38.

b7Snlall Colllpanles, for exanlp]e, have hen found to account for a disproportionate share of significant inventions, and their rate of inn(watitm per cmphye is tw o and (me-half times greater than in large flmls. See “SBIR Accolades,’” 7echno/ogy Transjer Busine.$s, winter 1994, p. 6.
Chapter 4 Cooperative Networking I 101

and hold little market power, the knowledge spillovers in joint undertakings may be high, while the

dangers of anticompetitive behavior are likely to

be low.

One recently established program designed to

broker small-business relationships is the Small

Business Technology Transfer Grants Program.

With funding from the Departments of Defense,

Health and Human Services, and Energy; NASA;

and the National Science Foundation this 3-year

pilot project matches small companies with researchers from universities, federally funded

R&D companies, and other nonprofit research organizations, including federal laboratories. Inspired, in part, by the success of the Small Business Innovation Research (SBIR) grants program,

this new program will receive $24 million in

1994, to be increased to $72 million in 1996.68

The social payoff from federal investments in

cooperative research may be further enhanced to

the extent that these programs can be networked

together, allowing them to build on one another.69

A number of federally funded programs take advantage of the Internet, which owes its existence

to federal support. For example, CommerceNet, a

3-year pilot project funded by a grant under the

Technology Reinvestment Program,70 will develop software applications for use over the Internet

to electronically link companies with their customers, suppliers, and development partners.71

Similarly, Microelectronics and Computer

Technology Corp. (MCC), a government-supported consortium made up of approximately 80

companies, is in the process of developing the Enterprise Integration Network (EINet), a business

network that will run applications over the Internet.

72 The high-speed data networking services

will be provided by Sprint; directory and encryption, and eventually electronic funds transfer, services will also be available .73 In like fashion, the

Technologies for Effective Cooperation Network

(TECnet) will use the Internet to link and provide

business information support to the Manufacturing Technology Centers (MTCs) (see box 6-1 in

ch. 6).

~xlhld,

~,)$ce f( ,r ~Jn~ dI SC USSII m,

., Brian Kahln, “’CALS in C(mtext,”’ Ca/s .lourmd, spring 1993, pp. 27-29.

7(~h15 ,nlcr:igcnc., ~rograrll Is j(~ln(]y sp~nsorcd by the Advanced Research projects Agency (ARPA) of the Deparlnlent of Defense. [he

Ek>part mcnt 1~1 Encrg~ Defense Pr[~gran~s ( DOE DP), the Department of C(mmwrce Nat ifmal Institute of Standards and Technology (N IST),

the National Sclcnce F(~undatit)n (NSF), and the Nati(mal Awmautics and Space Administrati(m (NASA). Its missitm is “lo slimu]ate the transi -

tlf m t{ ~ a grow Ing, lntcgrated, natlfmal mdustrlal capability which provides the most ad} anced, aff(~rdable, military systems and the rm)st c(mlpctltlyc ctjn~mcrclal products. This w III be acc(m~plished through the application of defense and commercial resources [(J develop dual-use

tcchn{~loglcs. manufac[unng and technoh)gy assistance to small fimls, and education and training programs that enhance U.S. manufacturing

\h I I I \ and [argct displaced defense Industry workers.’” ARPA, “’l%)gram Inft)mlatitm Package for Defense Technology” C~mversi(m, Reirr\estnwnt and 1 ran$lli(~rr ,Assl stance,” Mar. 10, 1993, p. I -1.

~ I ~lf~y{)fl ~ 11] ~. ~dnllnlstcred by Enterprise ]n[egra[i(m Technologies w i[h supp(wt from WestRen, the operator of the Bay Area Regi(}nal Rcwar-ch Nclv.(~rk (B ARRNET), and Stanf(wd University’s Center for lrrfomlati(m Technologies.” The federal government will pro~ ide $4

mrllr{m in funding, which w t]] be matched by the Stare of California’s Trade and C{mm~erce Agency and 20 participating c{mlpanies, includlng

,Applc Cf)nlpuler, Hew lctt-Pachard, Lochhecd, Natl~mal Semiconductor, Pacific Bell, and Sun Micr(~systen~s. Local c(~nln~unltics, although

ln~ 01 \ cd, w ]11 ni ~t cf)nlrlbutc funds.

72NICC was c\tahli\hcd In 1982 In rcspmse u) Japan ”s Fifth Generation C(m~puter effort. Ten milli(m dollars of the Departnwn[ of Defense

appr( lprlat I( m\ 1( )r fiscal y car 1993 ha\ e been earmarked for El NCI. A number of pik~t programs to test appl icati{ms are presently’ underw ay.

These Include, for e\arl~ple, Elcctrtmct, a cfmcurrent-engineenng effortto develop printed w i ring boards f(w avi(mics equipment, an electr(mic

bidding nc[~ ork t{) Ilnh L’S, wt{) manufacturers and their suppliers, and a utility network to link the 800 member companies t~f the Elec[rIc

P{lwcr Research I nstltute (EPRI ). The netv. (~rk is intended (O pr(wide fully encrypted electr(mic data interchange services at a cost t~f appr~~xirnatcly ‘$20,000, plus t)peratlng expenses.

7~Sce Gary Anthes, ““lntcmcl Conlnmclal Uses Bl{xml,” Cornpuler\ior/d, June 28, 1993, pp. 71, 73; Bill Burch, ‘“Sprint T() Resell EDI,

E-~lall Bu\lness Scr\ ice, ” ,Vc[lt ~}rh )$/jr/(j, June 28, ] 993, p. 29, and “Expanding the Horiz{ms of Elcctr(mrc Commerce, ” Indu.$lr}’ ~keh, APT.

18, 1993, p 46.
Promoting

Technology/

Industry

Developments 5

I

f innovation or commercial activity are lacking in an area

that is important for the public, the government can promote

such activities itself. For example, the government might:

1 ) provide tax-related incentives to stimulate private sector

activity; 2) provide private sector grants and loans; 3) stimulate

the market by leveraging government procurement powers; and

4) directly fund, develop, and/or provide needed technologies and

technology-related services.

Although government has always played a role in promoting

technology development. its actions have sometimes been

controversial. Conflicts surrounding government promotion of

technology and economic development are as old as the Republic

itself, providing fuel to fire the political debates between the Jeffersonians and Hamiltonians and the Jacksonians and the Whigs

for almost 100 years. 1 Avoiding such controversy for the most

part, the government has generally reserved the role of technology promoter to one of last resort. It has assumed a major role only

when—as required in basic research, defense, and mission-oriented objectives such as space exploration—it was clear that the

1 Jcfferstmians and Jacks{ mians, for example, rejected plans put forward by Secretary

(}J the Treasury, A Icxander Hamilt(m, [() build a national banking system and other infra-

~truc[urc hcl ievlng that it wtmld favor the gentry class. Later they opposed national devel -

( jpmcnt plans put forward by Whig party leader, Henry Clay, Speaker of the House. Clay

w antcd to cxmstruct natl(mal roads and canals and, ultimately, national railroads as well.

Jeffcrs(m and Jacks(m, in denying these initiatives, encouraged state and local g(wemnwnts to undet-take this devel(~pmen[; thus state and local governments assumed the critical rc~le. Scc EXm Hadwiger, “A History of Rural Economic Development and Telec(~nlmunlcatl(ms Policy,”” c(mtrac[or paper prepared for the OffIce of Technology Assessment,

January IWO, p. 7.

Policies promoting

information networks

will need to reflect a

greater understanding

o~ and apprecla[ion tG,~

the complex and

iterative nature of both

diffusion and innovation

processes.

I 103
104 I Electronic Enterprises: Looking to the Future

private sector would not do s0.

2 Even when providing the funding and setting the research priorities, the government has generally delegated the

task of actually performing the work to private

sector organizations.3

Today, the federal government invests more

than $70 billion in research and development.

This investment is comparable to, and sometimes

higher than, the amounts spent by other countries. 4 Most other governments, however, conduct

R&D to achieve commercial goals; in the United

States, approximately two-thirds of all government-sponsored R&D is for military purposes.s In

a knowledge-based, global economy, this difference in emphasis may greatly disadvantage the

United States. As a result, efforts are now underway to shift the R&D orientation from defense to

economic growth and competitiveness, from basic to applied research, and from public to private

sector involvement.6

Moving toward more commercially oriented

R&D will present a number of challenges, however.

7 Better criteria will be required for determining

why some technologies merit greater support than

others.8 Decisions must also be made about the

appropriate amounts of funding and how funds

can be most effective1y deployed. These quest ions

will likely be difficult to answer because the relationships between R&D, technology diffusion,

and innovation are not well understood.9 More

often than not, choices about the type and amount

2 Road.bui]ding is~ examp]e. Dufing presi&n[ Truman’s Achninistmtkm, road-building failed to keep paCe with increased road use. There

was no consensus about the federal role. Rural Senators Milton Young (ND) and John stennis (Ms) s~)nsored Increases inroad WPr@atlOnST

including $100 million for farm highways. However, at the same time, the U.S. Chamber of Commerce opposed faml highways, characterizing

them as “national socialism.” President Truman cutback on road construction during the Korean War, even as road use was sharpl y rising. It was

only after President Eisenhower justified federal support for highway construction on nati(mal defense grounds that a federal road-building

program really took off. See Mark H. Rose, Imerstate Express Highway Po/itics, 1941-1956 (Lawrence, KS: The Regents Press of Kansas,

1979).

3 David Mowety and Nathan Rosenberg, 7echno/ogy and Ihe Pursuit oj Economic Grow’[h (Cambridge: Cambridge University Press,

1989), p. 128.

4 Acco~lng t. Cohen ~d Not]: “Government now accounts for a&)ut 45 percent of total R&D in the United States; in nlost other advanc~d~

industrialized economies the share of government in total R&D varies from 36 percent (Germany) to 54 percent (Italy). The primary exception

is Japan, where only 20 percent of national R&D is paid for by government; however, this figure is misleading because of the cx)(miinatin.g

function of the government.” Linda R. Cohen and Roger G. Nell, “R&D Policy,’” Center for Ecommlic Policy Research, Publica[l(m N(). 298,

Stanford, CA, August 1992, p. 11.

5 see Hafioff Gmpp, “Efflclency ~,f G<}vemment [intervention in Technical Change in Telecommunications: Ten Nati~mal Ec(~n(~mics

Compared,” Technuvufion, vol. 13, NW 4, 1993, pp. 192-193.

6 See ~wis M. Bransc~mb (cd.), ErnpOnerfn8 17e(,hn0/~~y: Implementing a U.S. Stra!e~y(Can~bridge,MA: The MIT Press, 1993),P. ~ See

also, Linda R. Cohen and Roger G. Nell, “Privatizing Public Research: The New Competitiveness Swategy,” Scicntijic America, f(wthcoming,

1994. With respect to the need for such a policy shift, see John Alic et al., Beyond Spinofl:. Military arrd Commercia/ Techrtologte.s in a Chan~irrg

Wor/d(Boston, MA: Harvard University Press, 1992); and Nathan Rosenberg and W. Edward Steinmueiler, “Can Americans Learn To Become

Better Imitators,” Center for Economic Policy Research, CEPR Publication No. 117, Stanford University, Stanftwd, CA, lanuary 1988.

7 For an in-depth di~ussion, see U.S. Congress, Office of Technology Assessment, Dejinse Conl’er$ion: Re~irelf@ ~cfcl~, OTA-ITE-552

(Washington, DC: U.S. Government Printing Office, May 1993).

8 Responding, in pm, t{) the% problems, the National Com@tiVeneSS Act of 1993 includes a title, Called “critical TeChn(@ieS,”which

authorizes the Department of Commerce to develop a formal process of techmdogy ‘benchmarking’ whereby the scientific and technological”

capabilities of American firms would be compared to those of other nations. Branscomb, t)p. cit., footnote 6, p. 20.

9 As noted by Cohen and Noll: “. . designing efficient R&D policies is quite difficult and requires trading off several c(mllicting objectives.

There is a relatively strong case for supporting fundamental R&D that broadens society’s broad technological base and widely disseminating

the results to maximize their spillover value; however, one must guard against policies that are too disconnected fr{wn technical appl icati(m or

that, due to lack of profitability to the innovator, are not attractive to those who might apply the results. Likewise, substantial efficiencies are

theoretically possible from targeting particular types of technologies for assistance; however, as a practical matter, the government may not be

able to identify them to confine support to the rm)st promising areas and [() manage them efflcicntly, ’” op. cit., f(~)tnote 4, p. 8.
Chapter 5 Promoting Technology/lndustry Developments 105

of R&D and support for technology diffusion will

need to be determined on a case-by-case basis.10

In these circumstances, there is a danger that such

choices will be based on political rather than economic rationales. 11

Communication and information technologies

have genrally been high on the list of technologies meriting government promotion. Viewed as

essential to defense efforts, these technologies

have benefited from consistent Department of Defense (DOD) support since World War II. Recognizing that communication and information

technologies constitute a national infrastructure,

the government has also backed their development, providing venture capital and other incentives when private capital was unavailable. When

required, the government has even done the job itself. 12

In the past, the government fostered the building of canals, railroads, and highways. Today,

many people believe it should more aggressively

promote the information networks required to

 Policies designed support economic commerce.13

to meet such objectives should not necessarily be

modeled on the past, however. Today, such policies will need to take into account the many technological, economic, and social changes that have

taken place - in particular, the advances in and

convergence of communication and information

technologies, the conversion from a defense economy to a peacetime one, the privatization of the infrastructure, the globalization of the economy, and

the rise of multinational networking providers.

Policies promoting information networks will

also need to reflect a greater understanding of, and

appreciation for, the complex and iterative nature

of both diffusion and innovation processes.

OPTION A: Use Tax Incentives To Foster

Private Sector Developments

The government can stimulate electronic commerce by encouraging the development and diffusion of innovative technologies and business processes through the use of tax incentives such as tax

credits, tax writeoffs, and/or accelerated depreciation schedules. By lowering the costs of technology research, development, and deployment, such

mechanisms are intended to stimulate private sector activity.

Unlike technology-push strategies, which rely

on government promotion of technology to create

a market, tax-related incentives are designed to

work indirectly through the marketplace. These

measures allow private firms to control their own

investment decisions. Because they are relatively

simple to administer, they require little government bureaucracy.14 In a market-oriented society

10 See Nathan Rosenberg, Inside the Black Box--Technology and Economics (New York, NY: Cambridge University Press, 1983).

11 As Roger Nell and Linda Cohen pointout:". . most programs are not clearly a waste of money, especially in early exploratory research.

The problems arise because mid-project managerial decisions are directed from matters of economic efficiency by a host of political factors;

impatience to show commercial progress, distributive politics, the inability to commit to long-term, stable programs, and a mismatch between

the types of industries that are most likely to underinvest in research and those that are most attractive politically to subsidize. "Roger G. Nell

and Linda Cohen. “Economics, Politics and Government Research and Development,”’ Working Papers in Economics, E-87-55, The Hoover

lnstitute/Stanford University. Stanford, CA, December 1987.

12 Highway promotion illustrates the flexibility of the government’s approach and rationale. The federal government became involved in

highway building as early as 1932. when Congress enacted a penny-per-gallon gas tax. The rationale and the means of financing the nation’s

highway system were distinct from other infrastructure projects. Presidents Hoover and Roosevelt both believed that massive spending for road

construction would provide jobs during the depression. President Eisenhower justified federal support for highway construction on national

defense grounds. To finance this road building program, he set up a Highway Trust Fund to be replenished from increased highway user taxes.

See Rose, op. cit., footnote 2.

13 The Clinton Aministration, for example, has singled out communication technologies, automobiles, and high-speed rail for special

attention.
106 I Electronic Enterprises: Looking to the Future

such as the United States, this approach has proven especially popular. In some other countries,

however, it is much less in vogue. 15

Preferential tax treatment to subsidize private

sector R&D was first provided for in 1981 with

the passage of the Economic Recovery Tax Act of

1981.16 As described in the 1981 House Report

4242, this tax credit was intended to “reverse [a]

decline in research spending by industry” as well

as “to overcome the reluctance of many ongoing

companies to bear the significant costs of staffing

and supplies, and certain expenses such as computer charges, which must be incurred to initiate

or expand research programs in trade or business.” 17 In addition to the tax credit, the Economic

Recovery Tax Act also created an accelerated cost

recovery system for capital expenditures. Unlike

tax credits, which are applicable to all aspects of

R&D, accelerated cost recovery is limited to capital expenses alone. 18

Today, firms can receive a credit of 13.2 percent

(or a 20-percent credit, 50 percent of which is

treated as taxable) for the excess of R&D over the

base amount for that year. 19 The cost to government constitutes a relatively small proportion of

total federal R&D funding. (For one estimate of

this cost see table 5-1.) Few begrudge these expenditures, and many have called for an increase

in the amount.20 Tax incentives also have the support of the Clinton Administration, which has announced that it plans to implement a permanent

R&D tax credit, selective investment-tax credits,

modification of capital gains taxation, and similar

macroeconomic incentives.21

Notwithstanding the popularity of tax incentives, there is no definitive evidence to show that

they have had their intended effect.22 Although

most analysts agree that R&D spending increased

after 1981, this increase is not necessarily attributable to tax incentives alone.23 For example, some

analysts have argued that, instead of undertaking

new areas of research and development, businesses merely shifted their focus to take better advantage of government incentives. Measuring the

impact of tax incentives on innovation itself is

also extremely difficult. Innovation is multidimensional, depending for its success on a wide

range of inputs such as management structure,

quality control, marketing strategy, and the level

of employee creativity. 24 Weighing any benefits

against the cost of employing this approach is also

15 see ~nnl~ pa~ick ~yden and A]befi N. Link, “’Tax policies Affe~(ing R&D: An In[emati(ma] comparison,’’” Tcchno}wtion, Vol. I ~,

N(). 1, 1993, pp. 17-25.

lb Cohen and Nell, op. cit., fo{)tnote 4, p. 12.

17 See U.S. ~p~ment of C(>mmerce, OftIce of Technology Policy, “Analysis of the Research Tax Credit,’” Minlew, Apr. 6, 1990

18 See ~yden and Link, op. cit., footnote 15.

19 Committee on Techn~J]~~gy p(~]icy options in a Global Emmomy, Prospering in u Global Economy: Mastering a Ne~\ Role (Washingt(m,

DC: National Academy Press, 1993).

20 Committee on Technology Policy Options in a Global Economy, Mastering a Ne}t Role: Shaping Technology Po/icy jiw National L“conomic Perjtirmame (Washington, DC: National Academy Press, 1993).

2

1 Ibid.

22 me f{,ur “la~,r tlnle series studie5 that have exall]ined the impact of tax incentives conclude that there has ken a si~nlfi~~nl ~’nefit. ‘n

the other hand, this conclusion is at odds with studies that focus at the n~icroeconomic level. Ibid., p. 20.

23 Ibid,

24 Innovation is not a linear process; rather, it is an (ingoing process that entails a number of feedback loops. As described by Dominique

Foray: “. . . the diffusion process itself is fundamentally dynamic and will generate, via a series of mechanisms, the c(mtinual improvement of

the given technology.” Dominique Foray and Christopher Freeman, Technology and [he Weahh oj”Natwn.\: The Dywnics oj Con.}trli(fcdAJ

i’anfage (L(mk)n, UK. Pinter Publishers, 1993), p. 3. See also, OECD, The Techn(~lc)gy/Econ{~n~ic l%~gram, 7echno/og.v and the filcon(mlj’: The

Key Re/alionshlps (Paris, France: OECD, 1992). esp. ch. 2, ‘“Technology Diffusion.”
Chapter 5 Promoting Technology/Industry Developments I 107

problematic because the total cost of such programs is similarly subject to debate.25

Tax incentives to encourage the diffusion of

networking technologies for electronic commerce

might well be designed to play a more decisive

and definitive role. Whether or not diffusion and

innovative changes occur depends as much on the

ability of an organization to ‘*absorb” change as it

does on the nature and quality of the technology to

be deployed. Firms are likely to absorb more if investments in intangibles—such as in-house R&D,

worker training, patents, and software development—match investments in capital equipment.26 Thus, the government might enhance the

overall benefits to be derived from tax credits if it

were to incorporate intangible investments in its

tax-related provisions to a greater extent.27

Such a policy would be particularly beneficial

to small firms that generally are less able to respond positively to technology change. Over the

long term, the national economy will also benefit

from increased productivity. American firms are

often less apt to invest in intangibles, especially

workforce training, than are firms in other countries. Thus, in a comprehensive survey of the use

of computerized automation in metal-working industries, it was found that, in 84 percent of the

cases examined, workers were not given any trainOutlay equivalent of

Year federal tax credit Revenue loss

1981 220

982 640

983 696

984 3106

985 2,179

986 200 4

16

415

590

,276

,493

594

1987 2,300 1 580

1988 1,020 740

1989 1,255 903

1990 1,233 846

1991 1,220 839

SOURCE Science and Englneermg indicators–1991 p 334

ing to upgrade their skills.28 Yet studies show that

such investments can yield five times the benefits

from deploying new technology.29

OPTION B: Encourage Private Sector

Activity by Providing Grants and Loans

The government can also provide financial incentives through grants and loans to the private sector.

This option is very much in keeping with the recent shift in technology policy to favor research

and development that aims to support commercial

2S For stmle of these differences, see U.S. General Acc(mntmg Office, Tax Po/Icy (In(iAdr?~/ni.flrallo~l: The Rescar(h T(J \ [’re(fl( }lar .StItm(-

/ate(f .S(vne AddffIona/ Rc$earch Spcruhng ( Washington, DC: The U.S. Government Printing Office, 1989), as compared w IIh J.J. (’tmtes, ‘“Ta\

Incentives and R&D SPemhng A Re\ww of the E\idence,”Research Policy, vol. 19, 1989, pp. 119-133.

26 AS described In a recent OECD anal) sis “if the full value of investments in new equipment is (o be gained, then ph!slc>al :ind intanglhlc

in\ estment sh(mld be cl{)sel~ I inked. In-firm training and in~esmnenls in the reorganization of w ork and in s(~ftwfare sh~mld acc~lnlpan) ph) SIC:II

ln\ estmcnt at the firm le\ e]. to ensure that equipment is used effectively and that the productik ity polentialof [he equipment is rcapL>L!. ” f )ECD.

op. cit.. ft)flmote 24, p. 1 I 9.

27 According to the OECD “’. . . a number [~f c(~unlries are now I(x)king carefully at training incentives and Incentik es to lmpro\ c hun]:in

rcs.(~urce management. In s(mle cases, incentives have been introduced 10 widen firm-based training. Most ( }ther expenditures (m Intan glhlcf

({)rganizallt~nal costs. engineering, and marketing) can be deducted from taxable inc{mw as they are Incurred, and they are mnv fa\ (~red [~\ er

ph~s[cal [n~estment. Hf]wcvcr, as fiml strategies gi)c m(we emphasis (o a whole range of intangibles, the qucsti~m of whether the halancc t)f

g~)vemmcnt pol Ic> lm estmtmt inccntrves and dlsrncentl vcs is correct must be ackirtxed. ” I hid., p. 133.
108 I Electronic Enterprises: Looking to the Future

needs. Like tax incentives, it relies for the most

part on “demand-pull” rather than “technologypush” to achieve its ends; in many cases, it is the

private sector that initiates, and the government

that responds to, funding proposals.30 To assure

an appropriate balance between public and private

sector goals, financing is provided on a matching

basis.

The Advanced Technologies Program (ATP),

administered through the National Institute for

Standards and Technology (NIST), provides a

good example of this type of research arrangement. ATP, which was established by the 1988

Omnibus Trade and Competitiveness Act, provides small grants to companies or groups of companies to undertake “high-risk, high-return research on precompetitive, generic technologies”

that have a good chance of being commercialized.

Proposals are generated by the private sector. In

evaluating proposals, NIST favors neither specific industries nor technologies; instead, it evaluates

projects on the basis of whether or not they are technically superior and show business promise.31

However, in the projects funded to date, there

has been a clear bias in support of proposals

from “high-tech” industries such a microelectronics, superconducting materials, and biotechnology .32

The ATP has had a promising start. However, it

has not yet demonstrated whether or not the highrisk projects will have enough upstream support to

successfully make it to market. One possible

constraint may be a lack of funding.33 To date,

ATP funding has been increased from $10 mill ion

in fiscal year 1990 to $68.9 million in fiscal year

1993.34 However, had Congress enacted the NIST

authorization bill for fiscal year 1994, the program

would have received $1.5 billion over a 5-year period. 35

The Technology Reinvestment Program (TRP),

while similar to ATP, is more technology directed.

Its aim is to ● ’stimulate the transition to a growing,

integrated national industrial capability which

provides the most advanced, affordable, military

systems and the most competitive commercial

products.” Although supported by five departments and agencies, TRP is administered through

the Advanced Research Projects Agency (ARPA),

formerly the Defense Advanced Research Projects Agency (DARPA).36 TRP’s focus is dual-use

technologies, but the criteria for project selection

~~ Describing [hjs ra[lona]e, Bransc(mlb and Parker note: “In a well-designed program there should be an industry role In ch(x)sing, executing and funding pro~cts. Since it is industry that has the ultimate respmsibil ity to bring a technical product to fruiti(m, any program that is to

succeed in helping industry must be oriented toward industry needs. There is no rmwe effective way to do this than to have industry’s input into

the decisions that determine the choice of projects.” See Lewis M. Bransctm~b and George Parker, “’Funding Civilian and Dual-Use Industrial

Technology,’” in Branscomb, op. cit., footm)te 6, p. 79.

31 Ibid., pp. 82-84.

32 Cohen and NoI1, op. cit., footnote 6, p. 2.

~~As assessed by [he Comnlittee on Science, Engineering, and public Policy: The ATP program has had a promising start. It 15 not p)ssiblc,

at this early stage, to determine the program’s success; nor should congressional or executive branch pol icymakers expect to see immediate,

dramatic results. The panel has concluded, however, that the ATP’s budget in the past has been insufficient to have a significant impact on U.S.

technology commercialization efforts.” Committee on Science, Engineering, and Public P(dicy, The Gn’ernrnent Ru/e In Ci\)i/m 72chno/o,qv:

Bu~/ding a New A//iance (Washingt(m, DC: National Academy Press, 1992).

~~ C{)nlnllltee on Technology” po]icy Options in a Global Ecommly, Mas/cring a Ne}~ Role: Shaping 72chno/ogy Po/l(”Yjor Narl~~nd k-(’onornic Perjimnance, op. cit., f(wtnote 20, p. I 06.

35 Ibid., p. 107.

~~ese agencle5 inc]ude [he ~pa~ments of Defense, Commerce, and Energy, as well as the National Science Foundation and the National

Aer(mauttcs and Space Administration. In addition to the technology development programs within TRP (which receive 45 percent of all

funds), there are prt)grarns for technology deployment (which receive 45 percent of all funds), and manufacturing educati(m and training

(which receive 10 percent of all funds).
Chapter 5 Promoting Technology/Industry Developments | 109

are flexible and in keeping with DARPA’s well

known and highly commended style of project

management. 37 Projects may be joint commer-

-

cial-military in nature, or they may focus on private technology development and/or engineering

education. In all cases, participants are required to

contribute 50 percent of the costs. In fiscal year

1993, the TRP received funds totaling $472 million. President Clinton has announced his intention to increase funding to $600 million for fiscal

year 1994.

There are a number of advantages to programs

that encourage greater private sector participation

in the funding, selection, and execution of research and development tasks. Studies have

shown, for example, that research and development is more likely to enhance economic growth

and productivity when businesses, themselves,

play a major role.38 This is not surprising because

R&D is an intangible investment; when businesses conduct R&D, they have greater capacity

to innovate and absorb technological advances.39

A greater role for business is also called for, insofar as R&D is intended primarily to achieve a

commercial goal. As the history of U.S. government technology policy makes clear, the federal

government has a poor record of anticipating

which technologies are 1ikel y to become commercial Successes .x)

One aspect of these programs that merits greater scrutiny, however, are the provisions for intellectual property rights. Unlike previous government R&D programs, which provided that the

results remain in the public domain, many new

programs transfer all of the intellectual property

rights to the participating businesses.41 This trend

may be counterproductive. One of the reasons

why government invests in R&D is to reap the

gains that result from “knowledge spillovers.”

The gains may be less, however, if the knowledge

generated by R&D is kept proprietary.42 Establishing intellectual property rights is especially

important in the development of networking

technologies. These rules will not only have an

impact on firms doing research; they may also

have a negative affect on standardization and network interoperability.43

OPTION C: Stimulate the Market by

Leveraging Procurement Powers -

Government procurement combines the effects of

“technology push” and “demand pull.” Because

the federal government is one of the largest purchasers of both communication and information

technologies, it has considerable leverage in these

markets. Using this leverage, the government can

influence the design, development, and deployment of technologies to support electronic com-

~T D ~ R pA ~ ~is ~ft:lbl I ~h~d ~ I[h In [he ~,Partnl~nl of Defense in 1958 in respmse I() the Sputnik Crisis. [[S goal wiIS to f~~stcr “:d\’anWd

pro]cc t\ usscntlal to the Dcfcn\c Dcpartnwnt’s resp)nsibillties In (he field of basic and applied research and development which pertains to

w cap ~ns $) s[cms and ml] I[iir> projects. ” A~ dcscnhed b) John AlIc et al,: ‘“DARPA is un]que within the Ilefcnsc Department in that It has a

nlln]n~unl of adn]inl\[r;itl\ e lay cnng and .gi\ es Its prx)gram managers wide discre(i(m to supp(m technol(~gles the> c(mslder prtm]ising, It operate’s no I ah{ lrat( )r]cs I ~f Its ( JW n, and unt] I I 987 did m~t e\ en have the ahil it} t{) execute i [S own c(mtracts. relying instead (m the sin-\ ices t( ) ac’t as its

C( mtractlng agcn[s. ” A IIC ct al.. op. cit., footnote 6, p. 138.

{8 See OECD, ~)p, cit., fo(m)tc 24, p. I ~7.

lo lhld, ~cc ~ilso NIOW ~r\ and R(~senherg, ~Ip. cit., fo(~tn(~t~ 3

~~~,)hen and N()][, {)p. CII., f{)otnot~” ~.

~ I ( Ijlno Ihc A~i ~incc~ T~~.hn{)l[)~~ pro~rarll as an Cxamp]e, Cohen and Nt)ll ~)int out: “ATT originally enlphasized ‘generic Pre-c(~n~P’tl-

. . @

t]\c’ research. ho\\ c\ u, the cmphasls 1$ n(m (m ‘high risk’ research. In line with its c(mpetitiverwss angle, ATP keeps the details t~f its prt~jects

pr(jprlcttirj, An) rcsultmg patcmts arc (m’ncd by partictpatlng ctm]panies, alth(mgh the g(~\emnwn( re(ains ‘-march-[ n-rights”’ (i.e., It can take

au aj paten{s if the contractor” fat Is t{) c(lnlnwrciai im the tcchn(~h)gy within a specrficd period of time) and can require the c(mtractor to Imnse its

new tcchn~llt~g) .“ C( )hcn :ind Nol 1, f ~p. c It,, fi}(ltn(m 6, p. 3.

47 Ihld.

‘{ J()\cph Far-wll. “SI:tnd;irdl/:ltl(~n and Intellectual Prtywly,’” H(M~\er lnstltutc W(whlng Pap,r N(}, ED-89-25, August 1989.
110 I Electronic Enterprises: Looking to the Future

merce, The government’s demand can have an impact either directly, through the creation of new

products and industries, or indirectly, through the

knowledge spillovers that occur when new products and processes are more widely diffused

throughout the economy.44

The impact of government procurement on the

development and evolution of communication

and information technologies has been greatest in

the area of defense. It was, in fact, to meet its wartime needs that the federal government first turned

to the private sector to develop technology.45 Mirroring defense needs, funding was concentrated in

specific industries, such as aircraft and missiles

(50 percent) and electrical equipment (25 percent ). This allocation favored communication and

information technologies, which account for almost the entire electrical equipment category.%

Leveraging DOD’s procurement power has

proved especially effective in the case of new and

rapidly advancing communication technologies. 47 Had emerging businesses not been able to

count on the DOD for a large, guaranteed market,

many industries would have been unable to rally

the sizable investments required to develop such

state-of-the-art technologies as early satellites,

computers, and semiconductor chips. 48 Having a

large market in the early stages of product development may also have helped to lower the barriers

to entry, increasing competition and allowing

many small and innovative companies to share in

the defense contracting market.49 Knowledge

spillovers were also greatest in the earliest stages

of technology development when military and civilian needs overlapped.

With the shift in the focus of national priorities

from security to economic competitiveness, defense procurement has become an increasingly inadequate mechanism for promoting communication and information technologies. As these

technologies have matured, civil and defense applications have diverged. Greater tradeoffs between them are now required and there are fewer

knowledge spillovers. Moreover, high-risk, advanced technologies—the area of development in

which DOD has excelled the most-do not constitute a major barrier to the evolution of electronic

commerce. There is, however, a need for more

44 Cohen and N()]l, t~p. cit., f(M)lllole ‘$, p. 16.

~5AS IW)wev ~n~ Rosenberg point out, until 1940, most government research and development was carried out by the Civil ServiCe in Ulencies such as the Nati(mal Bureau of Standards, the Department of Health Services, or by state institutions financed by federal grants such as

agrlcultura] experiment stati(ms. Op. cit., footnote 3, p. I 23.

46 Recently,, however, there has ~,en a Shift from public sector funding to private sector funding of [hese technt)logles. Ibid., p. 137.

.$7 see A] ic et a]., op. cit., footnolc 6.

~ Describing the case of in(egratcd circuitry, Mowery and Rtmenberg note “’The large procurement needs of the military and NASA and the

increasing ctmcem with the irnpwtance of miniaturization were vital in the early years of new product development in electr(mics. The Signal

Corps was the largest military purchaser of semiconductors in the early and mid 1950s. . . . In the first year of integrated circuit producti(m, the

federal g(wcmment purchased the entire $4 million of output. It remained the largest buyer for the first 5 years, although the government share

declined rapidly. . . . By the end t)f the I %0s, the rapidly growing computer industry displaced the military as the largest end user market for

Integrated circuits. ” Mowery and Rosenberg, op. cit., footnote 3, p. 145. See also, Richard R, Nelson (cd.), Gcn’ernment and Technica/Progress.”

A ~’rc~,~.s-ltl~lli.sir? Ana/~rl.\ (Elmsf(mi, NY: Pergarmm Press, 1982): and Kenneth Flamm, Creating the Cornpllter: Go\ernnwnt, Indmtry, and

}ll,~h 7i’(hnolo~j (Washtngt(m, DC: Bro{)kings lnstituti(m, 1988).

‘9 Ibid.
Chapter 5 Promoting Technology/lndustry Developments | 111

rapid and effective technology diffusion within

commercial settings. In this area, DOD’s record is

not particularly strong.50

This is not to say that DOD has no role to play

in the promotion of electronic commerce. As a

major government buyer, DOD can lead the way

in using networking technologies for both product

development and commercial exchange. Within

DOD, efforts are already underway to promote a

commercial infrastructure to support electronic

commerce through the Continuous Acquisition

and Life-Cycle Support (CALS) initiative. Originally fashioned to provide DOD computer-aided

logistical support, this effort has recently been expanded and reconceived as a technical, standardsbased platform to support enterprise integration

51 Linking DOD to its and electronic commerce .

suppliers and its suppliers to one another, CALS

fits well into the technology policy shift from defense to dual-use technologies.52

In like fashion, the General Services Administ ration (GSA), which is responsible for $10 billion

in annual purchases, can take advantage of networking technologies to enhance its procurement

process. Network technologies for electronic

commerce are coming on line at the precise moment when many people are proposing new ways

to restructure GSA’s procurement operations. Just

as many businesses are using networking technologies to help them reengineer for higher performance, GSA could employ these technologies as a

catalyst for organizational change,53

OPTION D: Directly Fund, Develop, and/or

Provide Needed Technologies and

Technology-Related Services

Government can also help to stimulate electronic

commerce using a “technology-push” strategy.

Although such an approach was common in the

past, it is likely to be less applicable in the future.

There is no longer a single communication “network” to support. Instead, networks are comprised of a variety of converging digital technologies that are being unbundled and repackaged for

sale by a wide variety of competing industry players. As past experience indicates, when widespread diffusion and continuing innovation are the

goal, a technology-push strategy will not suffice.

However, with these limitations in mind, such an

‘OA\ dc\crlhecI by J[~hn Al IC “Defense’s w a] of dt~ing business prc)vldes little guidance for cc~ping with the pressures ~~f the new lntematit~n-

:il CC( ~m }m). Defense tcchn( )Ioglcs tahe their cues t’rom g(J\ ernnwnt “requirements, not fr(m~ a c(mqxtitive market. D{JD emphasizes functi(mal

Pcrt(mnancc oblecti\cs (~vcr schedule and c(~st. (me c(mscquence is that it spends five times more {m R&D. as a fracti(m t~f total system costs,

than ctmmwrclal fimls do. M:i]or iiefcnsc pro)ccts extend (j\cr a decade or m(m, much hmger than in civilian industry. Defense programs tend

[() f’t~llow ii ‘ plpcline prt)gressl(~n, In which a separately funded and managed R&D phase precedes pr(~ducti(m. [n c(mtrast, commercial businesses are c(mstantly lnlpro\ lng their products, pursiilng R&D in parallel with prt)ductiim and feed in new techn(~lt~gy incrcmentall} ,’” Al ic et

al., op. cit., fo{)tn{)tc 6, p. I 7.

$ I ~qs descrlbcd In the cAL!j Slratcglc plan” “. (~fficial definitlt)ns of CALS have had a difficult time kecpin~ up with “CALS. the c[mcept,

Inl(lall), atx)ut i 985, CALS focuwxi (m /oglfti(r as c(m~puter-aided logistics supp)rt. ” Over time, C’ALS technologies were extended to include

w c:ip)ns acqulsl[i(m s} stems, so that by 1988 CALS came to be defined as a “computer-aided acquisition and logistics supp)rt.” Later, when

dc\lgn prf)ce~sc~ were Included together with wcapm systems productl(m and supp(wt pr(msses, giving rise to the dlscipllnc (}f c(mcurrent

~n ~1 ncerlng< (’A [2S ~ as r~narll~d CA [.S CE, Most r~ccn[ly, (’ALS has been redefined as ‘“conlpu[er-aided acqu Islt](m and l{)glstics suppwt” to

talc Into account ad\ anccs In t)ther lnf~mnalitm tcchm)h)gics, such as electronic data interchange. DOD, ‘“CALS Strategic Plan, ” Final C(mrdlnatl(m Draft, (kt. 28, 1993.

‘~,~~ dcscribccl h) Brl~in Kahin “’CALS enc(mlpasscs a broad set of standards development activities undertaken in c(mjunc(i(m w ith NIST

;ind [hc pr] \ ate scc[t)r. CA LS seeks to de\ clt)p dual-use standards that WIII I enable DOD to build (m the civilian tcchn(~logy b;isc w h ile ln\ple -

n~cntlng a DO D-W idc pliitf(~m] for aut(mlaling w eapms design, procurement, depk}yment, and maintenance. Thus CALS supp~rts integrati(m

bc’tw ccn the dclcnw ccxmomy and the clvlllan ec(mtmly, between DOD and its c(mtract(ws (and subc(mtract(~rs), and ar-mmg the fragmented and

hur~’iiucr;itl~~d procurement and logistics (~fficcs w ithin the different services of the United States milltar>,” Brian Kahln. “lnfom)ation

‘lc~hnoltlgy and Int’(mniitl(m Infrastructure, ” In Branscxmlb, op. cit.. f(~(m)tc 6, pp. 141-142.

~ ‘Ft~r a discils$lon t~f GSA’\ role In pr(}curement :ind its use of inf[)mla[i(m tcchnc~loglcs, see U.S. C(~ngress, Office of Techn(~l{~gy AssessIIlcn t, tfak {n~~ {;oternmerrf 14t)rk.” E/c((rwr[( De/II er}’ ()/Federal .krt’i(c. ~, OTA -TCT-578 (Washington. DC LI. S. Gt)vcmment I%ntlng office,

Scpttnl}x’r I 993).
112 Electronic Enterprises: Looking to the Future

approach can serve to “prime” the development

and deployment processes at the outset, demonstrate the viability of new technologies and applications, and meet social needs for which a market is unlikely to develop.

Technology-push strategies are generally mission oriented and often closely linked to the agencies charged with executing a specific goal. Thus,

the goal of fuel efficiency is associated with the

Department of Energy, space exploration with the

National Aeronautical and Space Administration

(NASA), and weapons production with DOD. In

contrast, because communication and information technologies are used to support so many different kinds of activities, a number of agencies

have supported their development. These include

NIST, the National Science Foundation (NSF),

NASA, ARPA, several government laboratories,

the National Library of Medicine (NLM), and

more recently the National Telecommunications

and Information Administration. With the recent

emphasis on competitiveness issues and defense

conversion, however, many now look to ARPA to

play a lead role.54 This tendency will likely be

even more pronounced in the case of electronic

commerce because ARPA has strong programs to

support the development of both networking and

manufacturing technologies.

One ARPA-originated program that is often

held up as a model for “technology-push” strategies is the Internet (previously ARPANET). Although government provided the initial funding,

the private sector will be able to assume more of

this responsibility as the network gains critical

mass. While clearly a model of success, the case of

the Internet also points to some policy issues that

can be associated with technology-push strategies.

The Internet is a global computer network that

provides technical compatibility and transparent

connectivity based on a widely used suite of protocols-TCP/IP55 (see box 4-5 in chapter 4). It is

currently comprised of approximately 5,000 networks to which 500,000” computers are connected. 56 Originally funded through ARPA, and

later NSF, to support defense communication and

research, the Internet today serves as a worldwide

communication network that provides a platform

for the del ivery of a wide range of services, a number of which are now being provided on a commercial basis.

As the only nonproprietary global network capable of providing technical compatibility and

transparent connectivity, the Internet rapidly grew

in size. By the late 1980s, the university market

had reached a saturation level and commercial de-

$$For ~ detai Ied description of the h ist(wy and activities of ARPA, see “ARPA A Dual-( ISC Agency,” In ()”rA, IIcjetlsc <-(wr\ers\(m, op. cit.,

footnote 7. Describing ARPA’s growing popularity, the OTA report notes: “ARPA’s reputatlfm for successful!> )dentlf) lng and supp{wting nshy

technologies with significant king-term benefits has led some people to suggest that Ihe agency bc gi\cn Immicr pun iew t)\er technology”

development, While some prop)sals have called for removing ARPA from DOD and giving it a cI\ i] um missl(m, nNMI hii\~ pushed for a rmwc

explicit broadening of ARPA’s dual-use responsibility while keeping it within DOD. . . . Tk 1993 Defense Auth(mzatl(m Act also expressed a

sense of the Congress that DARPA be renamed ARPA, with responsibility for research in.g Innfn iiti\~ techn(dog ies appl Icahlc to both dua-usc

and military missions, and for supporting development of a national technology kc. President Cllnt(m implcmcntcd the tirs[ pwt]tm (}f this

recommendation, renaming the agency ARPA in March 1993.” p. 142.

55As descrl~d by Brim Kahln: “’me 1ntemet is defined functi(ma]]y rather thtin inslitutionall), ]( Is [he set ot llltt.TC(JllnCC’ [L’d nct~ orks lh~~t

support the interoperation of three basic functions: remote kg-in, electronic mall. iind file mmstw. II is n{)t I]mltul to TCP 1P nctw tml+ networks

supporting 0S1 or other protoc[ds are part of the Internet if they interoperate with the prdt)nliniint TCP 1P Intcrnc[ through prtmw)l ctm\ crsion,” Brian Kahin, “In fom~ati(m Technology and lnfom~ation Infrastructure,” ch. 5, in Brimscomh, t)p. cit., t(x)tnotc 6, pp. 135-167 .

56see Toni Vaiovjc, Corllordle Ne(\t(jrk.~: The ,$trategic Use (~’ Te/econlI/tllnltcll/( }n.\ (B~)swn, MA Artcch H(NIW, IIIC., 1‘~~~). pp. 116-1 ~~.

The Internet is or:anized hierarchically. At the top are the backbone networks, the largest i~f which IS NSFNET. AI the not let’el d(}w n iir~ the

mid-level network, which suppwt regional c(mnectivity. At the hmom are hxal networks, based In specltic Institut]tms. ~c lntcmct aulhtmty

structure is very loosely coupled. Although each network IS responsible for c(mncctii lty 10 the next higher level, adllllnlstra~li c dcclsltms arc

decentralized and individual networks are therefore highly diverse. See Hay Habeggcr, “’~lr]d~rs[iindlng [he Tcchn]cal iij]d Ad]] )lr]]s(riit]t c organiz.ati(m t~f the Internet,”’ 7e/t’c’~~~)l~?l l/ni(fllit~n.s, February 1992, pp. 12-13.
Chapter 5 Promoting Technology/lndustry Developments | 113

mand was on the rise .57 Once demand had reached

this critical mass, firms entered the market to meet

it.58 one key player, for example, was Advanced

Network Services (ANS)—a nonprofit joint venture between IBM, MCI, and Merit Networks—

which was established in 1990 to operate the NSF

backbone. In May 1991, ANS spun off a for-profit

subsidiary, ANS CO+RE Inc., to develop a T3 Internet backbone. The subsidiary would be allowed

to sell the excess capacity to commercial users.

Equally important, in 1991, Performance Systems

International (PSI), BARRNET, CERFnet, and

UUNET Technologies (later followed by Sprint)

joined together to form the Commercial Internet

Exchange Association (CIX) to provide interconnect ion between their commercially oriented services. Today, 60 percent of all registration domain

names on the Internet are those of commercial organ izat ions .59

While allowing the government to reduce the

level of its financial support, commercialization

of the Internet also raises a number of issues. For

example, some people in the research community

began to protest that their networking costs were

likel y to increase. Others were alarmed that the decentralized, collegial structure. which has characterized the administration of the Internet, could

not survive in a commercial environment. They

questioned how researchers’ needs for openness

and accessibility would be traded off against business needs for data security, and whether—in a

cost-based, commercial environment—significant emphasis would be placed on deploying the

most advanced, cutting-edge technologies.60

The commercialization of the Internet also

raises a number of regulatory issues. Because the

Internet now functions as a ubiquitous worldwide

data network, decisions must be made about its

relationship to other aspects of national communication policy. 61 Issues will also need to be resolved with respect to the providers of services.

Because of ANS’s early role in managing the Internet, some have accused NSF of favoritism in its

selection of providers. 62 As commercialization

makes Internet traffic increasingly more lucrative,

competition—and the debate over the rules that

govern it—will also become more and more intense.

The Internet experience may prove to be much

less transferable than many have surmised. Its

rapid growth was due not only to common standards and government support, but also to the

‘7A Ilt)n II(N)J cr, “’StXnilrlo~f{lr Internet Corlllllcrcial17ation,”” Tele({~nln]l~nil{lt/ens, February 1992, p. 19.

>~ ~cc ~, ,r dl \c.ll~f I( )rl~, WI I I Iiil]l Sc hradcr anti M il~h K~IPtw~ . . “The Significance and Impact of the Commercial Internet,” Te/ecommunica-

/1~/n \, I:t’hm,iry 1992, pp. 16-17, H(~)vt>r, t)p. cl!., fo~)tnotc” 57, pp. 18- 19; Gary H. Anthes, “C(~rnmercial Users Move (into Internet,” CompuferLt {)1 /d, h“{ JL. 2.5, 1991, p. 50. and El Ien Messn~cr, ‘“lndust~ Ashs for NREN T() Supp)rt Ctmm~ercial Needs, ’’Nerww-k Wor/d, Oct. 9, 1991, pp. 4,

47.

‘

() Schr,iticr iind Kap)r, op. cit., fot~[n[w 58, p. 17.

~) see s~l~an Nf ~]drcd and Ml~h;i~] M~[;Il], ‘.CO1llrllcrcla]lzat]i)n of the lntcmet)NREN. lntr{xiucti(m,” E-/e[lronit”N eni”orking: Research,

@//corIon \ and })()//(’}’, v{)], q, N{). 1, fall 1992, pp. I -~.

~ i ,! ~ dc\C r]be~ b} K(~/~1 “H(m the nl(wc c(mm]crclall~cd Internet will be regulated is itself being debated. The Internet has evolved with

IIIIIC regulation ~)ther th:in the :(NxI manners lmpi]c]t m peer pressure and self-policing among equals. This system may not hold up in an era

w hrn c OI])J])NL 1A users paying ft)r service )ne\ltably have problems that need [o be arbitrated. C’lt~sely m(mitored FCC-Iype regulation is not

IIhcly, ycI knwd for an authority to res(d\e such problems is already at hand.’” Edward R. Kozel, “Comnlercializing the Internet: lrnpact tm

C{jrptll atc [’\cr\,” T(’/e[(~t~jt))l/nf {f]ll{j~l~, J:inua~ 1992, p. I I.

67 Shmm Ftsht!r, ‘“AC’CCSS Pr{n ldcrs. ANS Has Unfair Edge,” Con~municotlonsWeek, Dec. 23, 1991, p. 5. As Bransconlb and Parker have

p~~lntcd ~Jut, falmcss IS espccla]ly ln~p(man[ In rnission-(mlented research and dcvclt)prnent. As they note: “In these cases the assumption is

u\uaIl> nmtle that the desired acl]\ IIICS w Ill ultimately he carried [mt by the private sector. The justification for such R&D is compensation for

c\tcm;illlws the marhet does mlt atiequatcly address. The constraint (m [he apprt)priateness of federal R&D investments, once Congress has

auth( )rizd the pr( ]gram, ts supplwd b) standards of ef(ecti} mess and fairness.”’ IXWIS Branstxmlb and George Parker, “Funding Civilian and

Du;il-[lw lndustnal Tcchm)logy, In Brmscon)b, (Jp. c](., footnote 6, p. 68.
114 I Electronic Enterprises: Looking to the Future

unique environment in which it blossomed.63 The

first community of users were highly skilled, technical people who tend to be early adopters of new

technologies. These users were also contributors

to the design and development of the Internet, an

ongoing and innovative process that continues

today. Although this factor was probably essential

to the Internet’s success, it may also be the most

difficult aspect of the Internet model to replicate.

Building on its past efforts to promote the Internet, the government is now supporting a number

of projects that are designed to develop applications that will run over the Internet or other value-

-added networks. Many of these relate to electronic

commerce. For example, in 1991, the Air Force

initiated a program to develop an electronic procurement system called Government Acquisition

Through Electronic Commerce (GATEC). This

project is part of a larger ongoing joint effort

started in 1989 by DOD and Lawrence Livermore

National Laboratory (LLNL) entitled “Electronic

Commerce through Electronic Data Interchange

(EC/EDI).” 64

GATEC capitalizes on LLNL’s complex systems integration and computer security expertise

and successful technology transfer. The technology, now fully deployed and in use with hundreds

of vendors at Wright-Patterson Air Force Base, is

wholly government-owned and employs the services of seven value-added networks (VANS). It is

interesting to note that VANS were used for the

convenience of small suppliers who could neither

afford the cost of direct Internet access nor handle

its complexity. GATEC’s innovative design with

off-the-shelf gateways and personal computers

permits the exchange of e-mail-based electronic

data interchange without regard to the specific

hardware and software systems used.

Government may also choose to develop products and services that meet specific social goals to

which the market is unlikely to respond. One such

project, for example, is the Visible Human Project. This project is funded through the federal

High Performance Computing and Communications Program as one of its Grand Challenges. Participants will create an electronic “image library”

consisting of three-dimensional images of the

male and female body, which will be accessible

through computers and computer networks.65

Over the longer term, it will link the structuralanatomical data depicted by images to the functional-physiological knowledge that exists in

text-based databases.

The designers of the Visible Human Project deliberately chose to have the government fund the

database development costs in their entirety. Four

principles governed this decision: 1 ) medical information is a public good and should be readily

accessible; 2) the quality and integrity of NLM’s

data must be protected at all times; 3) American

health professionals should have equal access at

equal prices to this information; and 4) to the degree possible, the costs of gaining access should

be shared appropriately by the biomedical community. 66 To assure Widespread availability, users

IS H(){)v~r, op. cit., footnote 57.

64 DOD has inve5[e~ about $ ]s Inl]]lon in the EC/EDl prt)jects over 4 years, with ahmt 20 percent of it having ken spent (m the GATEC

pilt)t site.

65 ]n the firS1 phase, the unlver51ty of C()]()rad(), under contract, will supply Computerized Tomography (CT), Magnetic Resonance I n~a~-

ing (MRI), and cryosec[i(m images of a representative male and female cadaver at an average of one mill imeter intervals. This data will (xcupy

ahmt 70 to 80 CD-ROMs and wi II I ikely be made available via the Internet. Nati(mal Library of Medicine, “The Visible Human Project,’” Fact

Sheet, April 1993.

66 Natlona[ Libra~ of Medicine, “’NLM Polky on Database Pricing,” January 1993.
Chapter 5 Promoting Technology/Industry Developments | 115

will be charged an access fee that is set at “the lowest feasible price.”67’

Even when serving the interests of the publicat-large, government funding of these kinds of information services can create problems with the

private sector, especially if the information has

economic value. Although the government has

met with little resistance in the case of the Visible

Human Project, it has encountered problems in

developing other medically related databases that

contain information about medical devices or

drugs that might be considered proprietary. Concerns about proprietary rights in information

have, for example, forestalled efforts by the NLM

to begin a clinical trials database. Many of these

trials are sponsored by drug companies who consider even general knowledge about the existence

of the trial to be proprietary.

When funding social programs, issues will necessarily arise with respect to making choices between social goals. Because there are no formally

agreed-upon criteria, decisions are often politically based, depending on which constituencies have

the most financial resources and political power.

As a result, some groups have been underfunded

compared with others. Among them are small

businesses, nonprofit organizations, and labor.

Although NTIA has recently established a grant

program to help nonprofits establish interconnection through the national information highway,

this program calls for matching funds of 50 percent. This requirement may well be beyond the

means of many organizations, and may defeat the

program’s purpose.

67 ]n ] 989 the Board of Regents, the ~lvl]lan ~)~erslgh[ ~~y for NLM, put [(~ge[her a blue-ribbon pane] on electronic imaging, This pan~!

rec(mlmended that the pr(~ject be c(~mpletely funded by government (m the grounds that medical infomla[i(m sh(mld be readily accessible to all.

Nati(mal Library of Medicine, Board of Regents. “Electronic imaging: Report of the Board of Regents,” U.S. Department of Health and Hunliin

Services, Publlc Health Service, National Institutes of Health, NIH Publicatkm 90-2197, 1990.
Educating

for

Technology

Transfer 6

T

he federal government’s role in promoting information

dissemination, science and technology, and education

has its origins in the Constitution: the first amendment

guarantees freedom of speech and press; article I, section

8, authorizes the federal government to grant intellectual property

rights: and article I, section 8, paragraph 7, permits the government to build postal roads. 1 The federal government used the

postal provisions to subsidize the distribution of news in the late

1700s. 2 After the Civil War, the federal government played a major role in the development of libraries and the American public

i The American att]t Lde low ard Inftmnall{m disseminat](m differed radically fro m

that In Europe w here [hc ml I ng monarchs regarded it with ctmsiderable alaml. However,

hul Idmg a nat I(m rcqulrccl the cstabl lshmcnt of cx)mmun]cat](m I inks, the deveh)pmcnt of

a unl ficd marhcl, the I_orgl ng t)f a c(mm~tm culture, and the bu i Iding of a derm~ratic P)I Ity.

The w Ide\prc:id flow of inft}mlatl{~n was ctmsidered essential h) acctmlpllsh these tasks.

2 Sce Richard B. Klelh)w Ic~, ‘“New slathering by Printers’ Exchanges Bef(~rc the

Telegraph,” .J~uIrrralI\m fll\/c~rj, \ t)]. 9, summer 1982, pp. 42-48, and Samuel Kemell,

“The Early Natlt)nal l~atlon (Jt’ PolItIcal News In America,” S(wiies In Amcrlt’{ln Pcdit\cal

/jc\ c/oIvncnt (New li:i\cn, CT Yale Unlvcrslty Press, 1986), pp. 255-278.

~ In the Llm Icd States. Iltrrarws have always been regarded as ~)pular educatl{mal

ln~[itullons. I.lhc the publlc schools,” they derived their supptm from the public education

and rcftlrm mo\ cmcnts that cie\ cl(~ped after the Civil War. Traveling libraries were

founded t{) hrlng ncv \ and reading materials to rural areas where hr(k deposit s{ati(ms

w crc \ct up In grange ha] I\. nclghhwh(~)d st(mcs, fire stati(ms, and women clubs. In ci -

tlc~, IIhrarws were c\[abllshcd not imly to provide access to h)oks, but als(+like the

w[tlcnwnt ht ~uscs-—to prf)\ ]dc a haven and adult educati(m programs for a gr(~wirrg number ~)t working claw ln~nligranls. These librarlcs dcvclopd rapidly during the p~st-Cl\ II

W’ar pcrl(d. and c\ en contlnucd [(~ [hrl\ c In the depression } cars. See V. H. hfathcus, l./-

hrar{(’$ /or 7i)(ia) aml 7im~orr(nt (Garden City. NY: Hipp~rene B(x~hs, 1976).

Just as the government

helped American

farmers adjust to the

industrial revolution, so,

toda~ many call on it to

better prepare American

businesses to compete

in a knowledge-based

global economy.

I 117
118 I Electronic Enterprises: Looking to the Future

4 Toward the turn of the century, ‘t

school system.

became more active in promoting science and

technology, especially through the university sys-

(em.s

These overriding values helped to structure the

federal government’s response to the agricultural

crisis that followed the Civil War and the challenges posed by industrialization. 6 To help farmers adjust to the structural changes in the economy, the government began to develop and transfer

modem technology to agriculture. 7 Working

through the Department of Agriculture, the federal government established four complementary

programs:

1.

2.

. . 3

land grant colleges;

support of agricultural research at agricultural

experiment stations;

making basic information on farm and home

problems available to people through extension

services: and

4. providing vocational training on agricultural

problems, home economics, and industrial subjects.

Just as the government helped American farmers adjust to the industrial revolution, so, today,

many call on it to better prepare American businesses to compete in a knowledge-based global

economy.

8 Drawing on the success of the government past experience, there are a number of options that might be pursued today.

OPTION A: Expand the Program for

Extension Services

Federal extension services have a long history in

the United States, dating to 1914 with the passage

of the Smith-Lever Act.9 This act, inspired in part

by the Country Life Commission, focused on agriculture and the problems of rural areas. It authorized partial federal funding for a nationwide extension program modeled after private, state, and

.t~e Alllerlcan ~olllnlltnlcnt t. pub] ic schooling” grew in the w~e of the Civil War. This Commitment Was so intense that it gave rise to a

na[l(mal crusade to establish public sch(x)ls. Ctmcemed about the problems of reconstruction in the South, the influx of Cathol ic immigrants,

and the advent of inciustrlal izati(m in the Ntwth, Americans saw pub] ic schooling as a way of preserving the social, ec(m(m~ic, and p)l itical order.

See Rush Welter, Po/~u/ar Eduta//orI and Denrocralit Thought in America (New York, NY: Columbia University Press, 1962); and David Tyack

and El ifabcth Hans(m, “C(mfl ict and Consensus in American Public Education,” America’s Schools: Pub/lc and Pri\wte, Daeda/us, summer

I 981.

$ Sec Edward Shils, “The Order of Learning in the United States from 1865- 1920: The Ascendance of the Universities,” Miner\ ’a, vol. 18,

N(). 2, summer 1978.

6As Wayne Rasnlu~sen has desc~~d it: -me revolution” generat~d by the Civil War catapulted the nation’s farmers not only into a new era of

mechanizatl~m but also into a world of c(mlplex social and economic forces that were t(x) volatile and powerful fur individual farmers to confr(mt by themselves. It seemed that the appearance of more complex and productive tools intended to guarantee the farmer’s survival had made

that survival more c{mlplex.” Wayne D. Rasmussen and Paul S. Stone, ““Toward a Third Agricultural Revolution, “in Don F. Hadwiger and Ross

B. Talh~t (eds. ), Food Pu/l(y and Farm Programs, Pn)ceedings of the Academy of Political Science (New York, NY: The Academy of Pol itical

Science, 1982), p. 179.

7~c idea that knowledge could inlprove agriculture was first put forward by agricultural societies composed Of well-to-dogentlemen farmers, farm jmmal ists, and s(m}e educators. Such citizen advocacy was histered by public agencies and private agricultural interests that acted in

mutually supportive ways. These public agencies included the U.S. Department of Agriculture and the land-grant colleges. The private interests

Included general farm t)rganiz,ations as well as c(mm~odity gr(mps, Wayne D. Rasmussen, Taking the Uni\rersi~ 10 rhe Peep/e: Se\’enty-Fi\’e

Years o/ [’oopcrafl}e E~/en.rion (Ames, 1A: lowa State University Press, 1989), pp. 8-22. See also David E. Hamilton, “Building the Associative

State: The Department of Agriculture and American State-B uilding,” Agricul[urul History, vol. 64, pp. 209-218.

8 See, for a dlscussitm, U.S. C(mgress, Office of Technology Assessment, Making Things Better: Cornpefing in Manl~&’/uring, OTAITE-443 ( Washingt(m, DC: U.S. Government Printing Office, February 1990). See also, J(K Janmesurak, “priority #1: Fix Industrial Infrastructure,” Aijp/lan(e Manujatturer, vol. 40, N(). 10, October 1992, p. 92.

‘

) Am(mg extensl(m services, for example, were Dearnan Knapp’s “demonstration famls,” on which famws could learn by watching and

doing. and “m(wablc sch(x)ls such as George Washingt(m Carver’s Tuskegee mule-driven wag(ms full of new seeds, faml machinery, and dairy

cqulpment, as w cII as boys and girls’ clubs thnwgh which it was hoped parents c(mld be educated. See Hadwiger and Talhx, op. cit., footnote 6.
Chapter 6 Educating for Technology Transfer | 119

local efforts that provided education and information to rural communities.

Building on these ongoing efforts, the Cooperative Extension Service (CES) brought together

a wide range of players and encouraged cooperation among them. The U.S. Department of Agriculture (USDA) and the land-grant agricultural

colleges were charged with management of the

program, while the costs were shared by the states,

counties, and county organizations of innovative

farmers, called farm bureaus. In addition, partnerships were established between university extension and experiment stations, and between county

extension agencies and county farm bureaus. 10

Later on, extension people helped to start other

farm organizations called commodity organizations. The experiment stations also formed links

with the farm bureau and with the commodity

groups so they could better understand the research needs of producers. Leadership for this

public-private network was recruited from graduates of the agricultural colleges. Within a few decades, this elaborate network of players had

achieved its goal of farm modernization. The

quality of farm life had also been improved

through access to home economics and farmer information services. 11

Industrial extension, like agriculture extension.

originated at the state level. ] 2 However, it did not

receive national focus until 1989 when Congress

established three Manufacturing Technology

Centers (MTCs)13 and a State Technology Extension Program (STEP) 14 to be administered by the

Department of Commerce’s National Institute of

Standards and Technology (NIST). 15 Today there

are seven MTCs located throughout the United

—

10Thc ~()~lnty ~gcncles ,)rganlzcd [h~ fam~ bur~aus, w hlch In turn ft)mled Stfite and nati(mal farm ~Jrganiz:ltlonS. lhcrcatkr bcL(m IIn: the

Extensltln Scrvlcc.s Ilrrh with p~lltlcal suppwters as well as farmers.

1 I At ~re~ent, ~hc C,)OP>ra[l\e Extension ser~l~~ (CES ) pr-ovl~es Cducati(m, inftjmlati(m, and technology” lranSfCr ~~n nllmc’r~)lls (~~pl~’~ rCIC -

~ ant tt J fanning and a.grlculturc ,gcncrally. The sc{)pe e x tends t{) marry topics that are gemlanc to rural de\wlopment. CES has the ad~ antage ( ~f

n]any c \tensl \ c state and cxmnty networks of land-grant C(JI Iegcs, extensitm agents, and field experiment statltms to dlsscm Inatc ] nf(m~~a{ ion

:ind cxiucatl( )n. CES has Intcrprctcd Its s[a[rm ~ry rnanda[c as extending to the general health of rural Armmca, and has mm d~nc’l(~p>d ](s (m n

rura I cIc>; cI{ lpmcnt \tr~itcgy I n L(X d ina[ I( m w lth the LI .S. Department of A grlculturc and gtwernrncmt- w Ide rural \ Ital I ~atl{ in In it] at I \Ics. Sc.c

OTA, Rur~// Anwr~~ (I al (he (’ro.\ ~roads: ,Vem (u-hln~tor (he F’ufwe, OTA-CIT-47 I (Washingt(m, DC U.S. G()}crnmcnt Printing of’fic’c, Apr]l

I w I ), ~n~ Rohcrt E. Chapman. Marianne K. (’lark. and Enc D~lbs~m, “Tcchn~)l{~gy-Based Ec(m(mlic De\ elt~pmcnt A Study t)f Sl:ilc ;ind l%dtv

al Tcchrrlcal Extcnslt~n Scm i~cs... N:itl[mal Institute t)f Standards and Technology, Special Publicatl{m #786, June 1990, p. 7.

I Zone ~)f the IargcJt ~)f [hesc ~ffo~s ,s [hc 1ndus[rla] Extensl(}n Senlce established in ] 956 at Georgia Institute of Technology)”. on]! In 1964

did tht fcdcriil gf)\ cmmen[ hcc(~nw ln\t)lvcd on a \cry I imlted basis, disseminating technical infomlati(m to manufacturers through pr[~grams

oper;itc(l by tndt \ ldual states. O[hcr prt)grams w erc run Independently of universities through state devel{)pment agcnclcs. See Chine R. SI rmm~,

“Industrial Extensl(m and Inmn atl(m,” In LCW is M. Bransct)mb (cd.), Ernpo\tering Techrro/og): /n@enwnfing a U.S. .! Jratex-v (Carntmdge,

hlA The MIT Press, 1993), pp. 171-172.

I 1l-~ay, thc~e inc]~lde. ] ~ the No fihca~t Manufacturing Tcchno]ogy” Center, I(Kated In Tr-(}y, NY; ~) the Sou[heas[ Manufa~turlng Techn(~](~-

~y [’cn ter In C{ ,Iurllbla, SC; ~ ) the CJreat Lakes Manufacturing Technology” center in Cleveland, OH; 4) the M idw~st Manufacturing Tcchn{]l( ~-

Ok Center In Ann Arbor, M 1, s ) the M l&Am~rlca Manu fac[uring Technology” Center in Overland Park, KS; 6) the Cal ift~mla Manuf:ictur-in g e-.

Techn(~l(~g} Center in T(rrance, CA; and 7) the Upper Midwest Manufacturing Technology Center in Minneap(di:,, MN. LI.S. Department (Jt

C{m~merce, Tcchn{)l(~gj Admmlstra[i(m, Nati(mal Institute of Standards and Technology, “Helping Manufacturers Bu]ld a Tcchn(~loglcal Ad-

\antagc,” March 1993.

I ~~c slate Techn(J](~gy E~t~nsi~)n ~ogranl (Smp) helps states to develop industrial extension programs and a rmxkrn lnfraSIT’UCtUrC to

\cr\ c [hc ncccls t)f sn~al 1 and mcd ium - sized businesses. It also funds planning grants for states, and f(~ll(~ws up with sup~~rt for Implcmentatltm.

In addltl(m, the STEP program develops tools that state prt)grams can use to provide client services.

I +mc rllan,lfacturlng technology”centers ~ere established under the Omnibus Trade ~d Competitiveness Act of I ~~~. AS des~’rl~’d h)

Slrmms, “.C(mgre\$ltmal In[crcst In ]mplcmcrlting a federal technology” p(~l IC) dur]ng the Bush admirrlstrati(m resulted In sc\ ~ri]l small pr{)grams

under the Deparlrmmt of Commerce. or-w of these, the Manufacturing Techmdogy Centers (MTC) program, IS based {~n the prcm]sc that smaller

m;inufacturcr-s :irc the f~ wnda[ltm of (1. S. industry. The designers of the MTC prt)gram defined the tcchn(~logical impr(~vcrlwnt of the imiill~r

nl:inufac [ur-crs a\ a necc~sa~ precursor tt) the resurgence of LJ, S, manufactunng. ” S irmms, “lndustnal Extensl(m and 1nn(~\ atl(m,.. In 1)r:insct)nlh, op. clt,, t(x)tnt)tc I 2, p. 167,
120 | Electronic Enterprises: Looking to the Future

States. Their task is to enhance productivity and

technology performance in U.S. manufacturing

through the transfer of manufacturing technologies and techniques. However, each employs a

somewhat different approach to meet its own

area’s special needs. For example, the Midwest

MTC, located at the Industrial Technology Institute in Michigan, has a strong industry focus, reflecting the presence of the automobile industry.

The Southeast Manufacturing Technology Center, which is situated on the campus of the University of South Carolina, caters more to the needs of

small, rural manufacturers. 16

Although modeled after the CES, the industrial

extension program does not have comparable federal funding. In 1992, for example, the CES was

budgeted at $1 billion, $400 million of which was

provided by the federal government. In contrast,

industrial extension was budgeted at $80 million,

with the federal government providing only $17

million. 17 Thus, it is not surprising that the CES

has 3,140 offices located throughout the country,

whereas industrial extension has offices in only 20

states. l8

Federal funding might increase in the future,

however, given the growing popularity and bipartisan support for technology transfer programs.19

This support was most recently confirmed in

March 1993 when the Advanced Research Projects Agency (ARPA) announced the Technology

Reinvestment Program (TRP), which will receive

$472 million of reprogrammed fiscal year 1993

Department of Defense (DOD) funds .20 The MTC

program is now incorporated in the TRP and budgeted at $87 million.21

Despite their limited resources, the MTCs have

received considerable praise for their accomplishments 22 Using a variety during their first 4 years.

of outreach mechanisms, they have provided support to more than 6,500 small manufacturers, who

claim to have received $250 million in added

benefits. 23 Among the many programs they provide are individual project engineering, [raining

courses, demonstrations, and assistance in selecting and using software and equipment. Some

MTCs have also conpiled large databases of computer-aided design and computer-aided manufacturing software, which can be run for business c1ients using MTC hardware. A number of

demonstration facilities display how automated

machining processes-such as automated metalworking equipment, robotics, and state-of-the-art

16Na[iona] Instl[u[e of Standards and Techm)h)g}, “A (’ollccll(m t~f Successful lnlcracll~ms Bctv. ccn the hlTCs iind (’lwnt FlrIl~s.” 11 S.

Department of” Commerce, Technology Admlnistratl(m. NIST SP 848, March 1993.

I _I’Mos[ federal fllndlng is used [() supp)fl Itlc MK program, adminis(erc’d thr(mgh NIST. J In) Trccce, ‘“{ )hsc.f \ lng pr~dutli(m,” Pr(xll(( ll~m.

Oct(dwr 1993, p. 32. As noted by Gene Sin~~)ns “’. .c(mlparcd to similar prl)grams in ~)thc[ L (mntr]c’s, such iis Japm pr(yraltl iundcd at $5(N

nulli(m per year, the U.S. federal r(dc wtis quite small.” In Branscxmlh, op. CII,, t(~t)[nt){c 12, p. 170.

1 ‘Ibid.

I gAs Sirll{)ns p)lnts ~)111, “me Bush Adnlinlstra[lon’s position” (m technol(jgy for Industrla] ~)lIcy ii[){k’wcd 10 dll 1( In 1‘)~~, w hCn thC (~lldCrsecre(ary for Technology, R(Jbert White, issued the Techrmlogy Adrninistratitm ‘ Stratcglc l’icw. ‘ ‘Ilis report pr~)p)d cxpand}ng the MTC

program to 30 large centers and 100 small centers t)ver the next 8 years. Bipartisan supp)rt dc\clf)ped ~hcn G\)\crm(w Cllnt(~n pr{~nllscd in hls

platf(mn to expand the MTC progranl to 170““n~iirkcl dri\’en” ctmlcrs and [(~ pr{~f’]dc \uplx~rl t(~l rrllpr~J\ lng sl,itc c\[~nsI{~n ~qwl aII(~n\, In oct(~-

hcr 1992, Senator Bingaman prt)pt)sed In the Department t)f Defense hudg~t rcvlsi(ms t(l spcncl $540 rl~llll(m In fi~~iil ! eiir 1993 ~~n ~[ii[~ iind

federal lnitiatlvcs.” I bid., p. 169.

20Ftw a dcw-ipti(m {)(’ this prx~gram, see ch. 5.

21 If passed, the Nati(mal C(mphltiveness Act (HR 5757/S4) w(mld provldc an add]ll(~niil $150 mill 1{ m lo [hc Dcpartnwnt {)t (’(mlnlchrcc [n

suppwt t)f N IST extensitm services. The armmnt targeted for 1996-97 is $500 millr(m.

~2Marianne K. Clark and Eric N. Ilhm, “’Increasing the Con~petlti\’cncss t~f Anwca’s hliint)fiic[llr~[s A Rc>\ IlhW of S[:IIC lndu~trl:il I;\

tcnsltm Pnvyams,” Center for P(~lIcy Research, Nati(mal G()\em(m’ Ass(wuitlim, Wii$l]lrlgt{)n. IX’, I ‘X) I

~~lbld.
Chapter 6 Educating for Technology Transfer | 121

coordinate-measuring machines-can be used.

Two of the centers have mobile demonstration facilities 24 (see box 6-1 ).

With additional funding, MTCs will be able to

expand their in-house capabilities; they will also

be better able to link up with, and leverage the expertise of, other federal, state, local, and private

sector organizations that are involved in similar

activities.25 Recent legislative proposals would

facilitate this kind of interaction because the concept of extension is now much more broadly defined.26 This would allow for greater sharing of

resources and expertise. This kind of cross-fertilization proved critical for agricultural extension,

and it will be a major factor in assuring the success

of industrial extension.27

New types of nonprofit and professional organizations are already emerging to fill this need.

The Modernization Forum, for example, generates interactions among the MTCs and refers them

to other experts and organizations with relevant

interests and needs.28 Similarly, the National Center for Manufacturing Sciences, which promotes

technology adoption through “teaching factories,” hopes to partner with the MTCs, providing

services as needed on a nationwide basis. 29

Much of this interorganizational, interagency

cooperation could occur electronically, online.

This could greatly reduce the costs of providing

extension services. The expenses entailed in establishing such a network would be small because

many agencies are already investing in networking. A networked extension program might also

facilitate the dissemination and integration of

agency research, allowing it to be more rapidly

diffused and effectively employed in the exten-

~-obld., pp. I -3.

2sFiJr a discussitm of (me such plan, see U.S. Department of C(mlmerce, Technology Administrati(m, National lnst]tutc (}f Standmh and

Tcchnoh)gy, “Mimufac[uring Extension Partnership,” summer 1993.

26As Sirmms pints out “For example, the DOD authorizati(m bill defines manufacturing extension as any ‘public {Jr prl\ al~ ntmprofit

program for the improvement of the quallt y, pr(xiuctlvity, and performance of small manufacturing fim~s. And the pr(lp~stxi Natltmal C~~mpctitt \ eness Act Includes federal, st:ite, and h~’al agencies as well as universities, schtwls, laboratories, small business dcvcl(pncnt ccn[cr\, pr(~fc\-

sifmal society programs, and industrial [wganizati(m, as qualifying outreach centers. . . .

As this broad range suggests, industnal extensl(m within the federal lexicon now refers not (rely to the m(we tradi[i(mal cxmc’cpt of agcrr[s

mah mg In-plant v islts as consultants and mmble shooters, but also institutions such as c(mmmn ity and technical colleges and w orlwr tral ni ng

Institutes to which manufacturing fimls could send their employees. Hundreds of these institutions are already (qxrating across the country, ;ind

with federal bachlng, c(mld be the nucleus of Ihe expanded nati(mal network of industrial extension. ” In Branscomb, op. CI[., ft){~tnote 12.

“AS described by Clark and Dobs(m, w lth reference to agriculture extension services” ‘“The development of linkages to {~ther scr\ ICC pr{~-

vders and sources of technical expertise is critical to success. Alth(mgh the programs differ in temls of how narrow Iy or broadly defined thclr

services, all indlcaled the need to work with and provide access to other service pr(widers. Extension programs often refer firms I() SBA-suppiwted Small Business De\ cl(~pment Centers for help with marketing or management, to ctmmlunity colleges for training. and to unlversit Ies t~w

research and development.’” Op. cit., f(x)tnf)te 22.

28Tbe M(xiemizati(m F(mum was established by the MTC directors to support their collaborative projects and kaming and to gI\ c thcm a

c(mlm(m voice In working w Ith others.

“)Ibid. The Nati(mal Center f{w Manufacturing Science (NC MS) is a membership research and development c(~ns(mlum that scr\ c’s Ix)(h

large and small fimls in a broad range of Industries. Its only mandate is to ad U.S. member fimls to bec(mw Inlcma[l(mally c{mptltl\e In

manufacturing. Under its 50 I (c)( 3 ) status, NCMS must make its research results reas(mably a\ ail able to the public. Mcmbcr llrms define research projects and develop the research. !vlembcr firms also have ftrst call (m research results. Member firms w ill be 1 icenwd tt) use the tcchn(~log} d~\~lopCd at lower fees than nonn~enlh.r fimls In [~rder to offset their in-kind par-t iclpati[m in the research pr(~cess and their mcmk>rship

fees that help to fund the research.
122 I Electronic Enterprises: Looking to the Future

Rapid changes in manufacturing and Information technologies and business practices have left many

small manufacturers struggling to keep up Without the cushions of large capital and human resources, they

are frequently left to make do with shoestring budgets and seat-of-the-pants decisionmaking The NIST

Manufacturing Technology Centers (MTCs) are responding to specific business needs with a variety of assistance services such as Implementing total quality standards, pooling demand for expensive resources,

and helping small businesses grow

For example, to help suppliers meet competitive demands for higher quality, the MTCs are working with

client firms to register and qualify for the new European IS0-9000 standards 1 Manufacturing Development,

Inc (MDI), of Cheney, Kansas, a small company with 25 employees and $1 5 million in annual sales, worked

with the Mld-America Manufacturing Technology Center (MAMTC) to Implement the D1-9000 quality standard 2 An MAMTC field engineer and the company’s president and vice-president together arranged for

incorporation of statistical process control (SPC) techniques Training for all employees was arranged

through classes taught by an MAMTC quality coordinator and the cost of training was offset through a Kansas Industrial Retraining (KIR) grant provided by the Kansas Department of Commerce and coordinated

through the MAMTC Through this effort MDI was approved as a D1-9000 supplier, and subsequently realized savings of $132,000 for the year

Currently, thousands of Industrial sales in Europe, compared with a few hundred in the United States. are

registered under ISO 9000, which IS predicted to become a de facto prerequisite for doing business in Europe In Troy, NY, the Northeast Manufacturing Technology Center (NEMTC) established a pilot ISO 9000

registration program which Includes seminars, workshops, onsite visits to manufacturing facilities, and

step-by-step training modules In 10 sessions over the course of a year, client firms, in collaboration with

each other and the Quality Systems Resource Facility (QSRF) at NEMTC, prepare for the third-party registration audit This pilot program iS anticipated to serve as a model for other MTCs

Another small business need that MTCs help provide is access to expensive specialized equipment or

services that small businesses can only afford on a fee-per-use basis Frequently, as was the case for Fortitech, Inc of Schenectady, NY, this iS for experimenting with or consulting for new computer systems Fortitech iS a business that blends minerals, vitamins, and other food additives After rapidly growing from its

Incorporation in 1986 to 1992, its turnaround time Increased to longer than a month Fortitech’s chemists

were spending too much time doing hand calculations for the blends and could not attend to analysis of the

final products After consulting with NEMTC for several weeks, Fortitech computerized most of its chemists’

practices using off-the-shelf database programs that run on personal computers In addition, Fortitech

found further ways to improve their process by networking the computers with the analysis equipment and

feeding the analysis Information into the newly established enterprise-wide recordkeeping system And the

databases have contributed to inventory control. Most importantly, the turnaround time dropped to 2 weeks

and Fortitech’s founder estimates that the system has saved the company several million dollars that would

have resulted from lost business

1 ‘While the ISO 9000/C)90 series IS only a mmlmum set of requirements for a quallty management system, It prowdes the foundation for total quahty management Orgamzatlons that do not meet the requirements of ISO 9000/C190 are unllkely to be able to meet

more comprehenswe requirements such as GMs Targets for Excellence’ or Fords 01 program ““’ACollectlonof Successful lnferactions Between the MTCS and Cllent Firms, ” NIST SP 848, U S Department of Commerce, March 1993, p 5

2 Boeing, one of MDIs customers, IS requiring Its vendors to be approved as D 1-9000 (Advanced Quallty Systems) suppllers by

1996 Ibid p 24

SOURCE ‘A Collectlonof Successful InteractIons Between the MTCsand Cllent Firms, ” NISTSP848, U S Department of Commerce

March 1993
Chapter 6 Educating for Technology Transfer I 123

sion process. However, to develop such a program

it would be necessary to establish an organizational mechanism for synthesizing and packaging the

information to be delivered.30

A prototype electronic network for manufacturing extension service providers, TECnet, has

already been funded through the Technology Reinvestment Program. This network links NIST’s

MTCs, state technology extension projects, federal technology sources, and other technology reinvestment projects. TECnet will facilitate communication and collaboration among industrial

extension services providers, their client firms,

national laboratories, and other government programs. It will be accessible through the Internet

and employ a state-of-the-art graphical user interface incorporating electronic mail. public and private electronic conferences, business software

applications, databases, remittance services, directory services, context-sensitive help, security

and access control, file transfer capability, and

gateways to other information sources. In addi-

(ion, a wide variety of business-related information services will be made available to the MTCs

and their clients free of charge31 (see table

6-1 ).

Databases and information

Computer-aided design (CAD) file transfer

CAD selection tool

CAD utility software

Chemical safety data

Commerce Business Daily

Directory of Business & Financial Assistanc e

Federal procurement leads

Federal Register

Internet mail

ISO 9000 reference materials

Military Specifications Index

MTC and NIST service briefs

NASA technology transfer Information

Quick View assessment tool

U S Library of Congress database

Used Industrial equipment directory

Virus protection software

Public conferences

Business news briefs from United Press International

CAD software support conference

Database software support conference

IBM- PC support conference

Newsletter on manufacturing networks

Spreadsheet software support conference

Private Conferences for NIST MTCs

Defense conversion

Defining CAD terminology

Human resources group

Director’s conference

Field agents’ conference

National Staff Conference planning group

SOURCE ProductIon Technology Inc Arlington VA unpublished paper, 1993

—

~OA ~ “( ~[e~ hy ~’ [ST ‘“~e F~~~ral g( )v~mnl~nt has a varl~~y of approa~h~s to sen I ng [he needs {Jf Snlal ]- and nll!d IUnl-S Izd lllan Llf:ICt UrCl”\.

]nci )rpor;itlng ccntms and pr(~grarns w ith in the Nati(mal Aer(mautics and Space Adml n istrati(m (NASA), DOD, the Department of Encrg}

( DOE), LJSDA. the Department of Labor (DOL), the Small Business Adn~lnlstratltm (SBA ), and a number of (~thcr dcpartnwn[s .ind agcnclc\.

For the target set of manufacturers. thi~ threatens to present a cxmfuslng dI\ ersl[} of scnlccs fr(~nl which It ]s difficult for these con~panlcs to

cht)(~se. These programs w(III c{)ntlnuc to represent a major p)rtlon of the res(~urccs w hlch the Federal go\ emnwnt appllcs for this purp)sc. ”

NIST, op. cit., to(~tnote” 25.
124 I Electronic Enterprises: Looking to the Future

More recently, TECnet—in conjunction with

EINet, 32 Production Technology, Inc. (PTI),33

and some of the national R&D labs—has proposed an even more elaborate prototype network

under the auspices of the Manufacturing Outreach

System to Achieve International Competitiveness

(MOSAIC) program. 34 This network would link

the MTCs and TECnet into a national information

network providing access to one another; to their

small- and medium-sized business clients; to the

national laboratories and other technology

sources; to electronic commerce networks; and to

the defense sector. Given the positive externalities

that are associated with networking, the benefits

of such a network should be considerable. How

much value might be added becomes clear when

one considers the full range of networked services

being offered throughout the country that can be

linked to this network in support of electronic

commerce (see box 6-2).

No matter how extensive electronic networks

are, however, they cannot meet all extension

needs. Many types of manufacturing equipment

are immobile, requiring the development of demonstration centers that can replicate the factory

floor. Moreover, successful technology transfer

requires much more than technology; it also requires organizational and social change. To bring

these kinds of changes about, onsite visits are critical. 35 Extension agency staff members will not

only have to be expert and up to date in their

knowledge of manufacturing technology; they

will also need to understand, and be able to mediate, the relationship between technology and organizational change.

Even with increased funding and electronic interconnection, providing industrial extension to

meet business needs in a knowledge-based global

economy will be an extremely difficult task. In the

United States, there are 360,000 manufacturing

companies that have less than 500 employees.

They represent a broad range of industries with

distinct activities, production methods, and products. Given limited resources, they need to set

priorities in meeting their diverse needs. Care will

be needed to assure that some groups and some

types of businesses are not pitted against one

another. Questions will also arise with respect to

how and on what basis services are to be made

available. If, as is now the case, services are intended to be self-supporting and provided on a fee

basis, firms with few resources may be excluded,

regardless of their prospects for success.36

Labor has had very little role in industrial extension. At present, the only formal connection

between labor and the MTCs is through the recently established Office of the American Workplace

(OAW) in the Department of Labor. This agency is

charged with developing concrete initiatives for

promoting innovative workplace practices and

cooperative labor-management practices. To this

end, OAW is working with the MTCs, as well as

~~~]is [he [~~hni~al and nlanagenlent SUpp)r-t agent for the Navy’s Best Manufacturing Practices pr(&ranls and the M)D Manufacturing

Science and Technology Program.

~~””Manufacturlng outreach Systenl T() Achieve Intemationa] tl)mpeli[ivtmess: A Pr(p)sal for Extensi(m Enabl in: Scrviccs Under ~h~ Defense Dual-Use Assistance Extension Program,” Production Technology, Inc., Arlingt(m, VA, unpublished paper, 1993. The name has recently

been changed fr(ml MOSAIC [o MEPnet (Manufacturing Extensi(m Partnership Network).

~SC]ark and ~)bson, t~p. cit., fot~tnole” ZZ, p. 88.

MAs descrl~.d by C]ark and ~)bson: “As progranls kcon}emore successful and visible, it is likely thal there will be a greater demand for

services. Thus, there will be a greater need to screen clients and target resources. States may want to target assistance h) flm~s with the grea[est

p(mmtlal for ec(m(mlic growth or to [hose industries thought to be of critical impwtance to the state’s future ecomm]ic health. Eff(mts arc underway to develop t(x)ls to assess a fim)’s competitive position. ” Ibid., pp. 88-89.
Chapter 6 Educating for Technology Transfer I 125

L

Aeronet Electronic sharing of mechanical specification and process information to drive flexible manufacturing cells for metal fabrication in the aerospace Industry

MADE Manufacturing Automation and Design Engineering program to develop both enabling and application technology sponsored by Advanced Research Projects Agency (ARPA)

AMTEX Electronically connecting textile supply chains from retail back through manufacturers to raw material suppliers

AUTO-NET An agile manufacturing pilot demonstration of the benefits of networking, electronic commerce,

and distributed team management in the auto supplier chain

TEXAS ONE The Texas Open Network Enterprise iS sponsored by the Texas Department of Commerce to

provide a statewide communication network for manufacturers and technical assistance providers

Alaska University of Alaska Small Business Development Center’s Alaska Technology Transfer Assistance

Center wiII provide network access to their client firms

OTNET The State of Ohio, in coordination with its Edison Program and the Great Lakes Manufacturing

Technology Center proposes to establish the Ohio Technology Network (OTNET), a statewide network of

technology deployment agencies to support small and medium-sized companies

Rensselaer Polytechnic lnstitute/Northeast MTC (RPI/NEMTC) RPI/NEMTC wiII use the network to link suppliers provide access to Quickview—a business assessment tool—and train extension providers

New York Public Library The NY Public Library wiII provide manufacturers with access to a number of

Iibrary-held databases

Michigan State University (MSU) Technology Transfer Network (TTN) MSU TTN IS a statewide communication network for technical assistance providers and small businesses in Michigan

California ACORN ACORN proposes to build a full-scale prototype of a National Information Infrastructure

for engineering and agile manufacturing

New Hampshire Manufacturing Extension Program New Hampshire Department of Postsecondary Technical Education and New Hampshire Governor’s Technology Partnership are creating a statewide electronic

network to deploy available technologies to small and medium-sized manufacturing enterprises

Best North America Best North America iS a commercial network providing access to a database of publicIy and privately generated technical articles

New Jersey Institute of Technology This Institute wiII provide mail, database, and scheduling services via

an electronic network to five Manufacturing Outreach Centers in New Jersey

Kansas/Sprint Kansas/Sprint wiII provide capability to transfer computer aided design files and conduct

video training programs

Teltech Teltech wiII provide assistance to service providers in accessing federal and commercial technical

Information

NTTC National Technology Transfer Center wlll facilitate and provide access to federal technology for small

manufacturers assist in identifyng dual-use technology, assist defense-dependent firms with diversification and provide customized access to procurement opportunities

Oak Ridge Associated Universities (ORAU)/Oak Ridge National Laboratory (ORNL)/Production Technology, Inc ORAU/ORNL/JPTl wiII develop a training course for universities based on the Navy’s Best Manufacturing Practices Program and the Program Managers Workstation developed by DOD

SOURCE ProductIon Technology Inc Arlmglon, VA, unpublished paper 1993

. . —

I

I
126 I Electronic Enterprises: Looking to the Future

state and local offices, to develop ways in which

firms can integrate innovative work systems and

human resource practices with new technologies

and production methods .37

The lack of direct input of labor groups into extension could be a serious mistake. Excluding labor from the extension process will not only affect

workers and their quality of life; it may also limit

the benefits to be gained by business from industrial extension. If businesses are to benefit from

new modes of production, organizational as well

as technological restructuring will be required.

Changes in job content and skill levels, as well as

in work patterns and authority structures, will also

be necessary. 38 For this kind of workplace redesign to succeed, workers must be active participants.

One way of providing for greater worker representation would be to recognize labor as a constituent of the MTCs in its own right. Organized labor

or some other agreed-upon worker representative

might be included on any policy committee that

directs the work of an MTC. To the extent that labor representatives have the appropriate abilities

for design, assessment, and outreach, the MTCs

might solicit their input and advice as they do

from their client firms. MTCs could also encourage the concept of participatory design by offering

both management and workers’ assistance and

training on group process methods, problem-solving, and best practices in this area.39

Organized labor could also serve as a target of

outreach efforts by MTCs as well as a part of their

process. Unions might be encouraged to contact

MTCs with questions about new technologies and

modem manufacturing methods. In turn, local and

regional AFL-CIO bodies might be used to link

firms represented by affiliates, encouraging them to

participate in the work of the MTCs. In this event,

MTC staff would need to maintain contact with

appropriate union bodies to explain MTC’s work,

make information about the MTCs available, and

solicit union support in contacting employers.

Bringing labor representation into the MTC

process may not be welcomed by all. Many of the

businesses that are likely to use MTC resources

are small businesses that have had few dealings

with organized labor. They may view labor participation as a disruptive element, if not an intrusion

into their affairs. Business may not be fully aware

of the potential benefits that can result from such

interaction. Often when businesses have decided

to partner with labor they have done so not on the

basis of principle, but rather for the sake of survival.@ For this option to be viable, therefore, greater

efforts will be needed to demonstrate the advantages that can be gained by all.

37U . .s ~pannlent of Lakm ‘“industrial Extensk)tiTechnt) Iogy Integration,’” American Workp/uce, vol. 2, No. 2, March 1994, p. 2. This

office was established in the fall of 1993. According to Martin Manley, its director, the OAW has three top priorities. These are to: I ) build a

clearinghouse 10 help companies and employees learn from the experience of America’s most successful companies; 2) develop partnerships

with business and Iatx)r organizations (o identify and promote high-performance work practices, employee ownership, and new roles for Iah)r

uni(ms; and 3) promote the use of new measurements of workplace practices to allow investors, managers, and h)ard members to better determine the ecxm(mlic impact of high Perfomlance work practices. See U.S. Department of Lah)r, ‘-Martin Manley C(mfimled as Assistant Secretary for the American Workplace,’” American Workplace, vol. 2, No. 1, January 1994.

Msee Baw Macy and H iroaki Izunli, “’Organizational Change, Design, and Work lnm)vati(m: A Meta Analysis of 13 I N(wth American

Field Studies—1 96 I -199 1,“ in R. W(mdrnan and W. Pasmore (eds. ), Research ]n Organi:afiona/ Change and De\’e/opmen/ (JAI Press, f(mthc(mling).

l~~c ~alns frorll these kinds of ac[i\l[les cm IX significant. one study that analyzed the use of computer-controlled technology” in ov~r

1,000” sitcs~(mnd that pr(ducti(m time decreased considerably when shopfloor workers wrote their own control programs. See, f(w a descripti(m,

Maryellcn Kelley, “’productivity y and lnfomlation Techm)logy,” working paper 92-2, School of Urban and Public Affairs, Camegie-Mell(m University, January 1992.

%)r an overview of the type of labor-management issues that need to be overcome, as well as some of the benefits of working them

thnwgh, see Pn)ceedlngs, Conjerencr on the Fumre oj”~he American Workp/ace, Department of Lahw and Department of C(mmwrce, Chicago,

IL, July 25-26, 1993. As was emphasized throughout the conference, businesses often resisted change, except when their survival was at stake.
Chapter 6 Educating for Technology Transfer | 127

OPTION B: Promote the Dissemination of

Business-Related Information

To assist American businesses in a knowledgebased global economy, the government might also

promote the dissemination of business-related information. This is not a new role for government.

Because of the critical role that information plays

in economic transactions, the government has also

acted to ensure its widespread and equitable distribution. 4l Taking advantage Of the advanced

communication and information technologies

that are available today. the government will be

able to provide more information, which will be

better packaged to meet business needs; delivering this information electronically can also serve

to promote networking and electronic commerce.

42 A number of such efforts are already underway.

The Small Business Administration (SBA), for

example, has developed a national bulletin board

(SBA On-line) that provides free information

about the SBA loan programs, financial management services, government procurement services,

publications, and training. 43 This system allows

users to download information that can then be

processed and incorporated into spreadsheets at

the desktop. Within the next year, small businesses will also be able to access the network from

persona] computers in Business Information Centers to be established in each of the agency’s 10 regions. These PCs, equipped with databases of

their own, can be used to develop business plans,

do financial planning, and conduct cost-benefit

analyses. Eventually, these centers will provide

gateways to other bulletin boards as well as government and commercial databases. If capacity

permits, E-mail services will also be available. allowing businesses to contact SBA counselors or

members of its service corporation of retired

executives.

The benefits of this kind of effort can far exceed

the costs. The SBA On-Line system, for example,

cost less than $50,000 to establish. It is comprised

of a PC, 20 modems, and telephone lines fed by

two 800 circuits provided free to the government

by Sprint. The SBA centers will also receive donations of hardware and software from vendors such

as Microsoft Corp., Lotus Development Corp.,

Apple Computer, Inc., and Sony Corp. of America .

44

The Department of Commerce also provides

online information through BISNIS, a network

that helps companies identify business opportunities in the newly independent states of the former

Soviet Union. This network offers information

about upcoming trade missions, potential customers and partners, sources of financing, trade and

investment laws, market research, advertising opportunities, and the status of trade and investment

treaties. The network was inspired by the recent

Commerce Department report, “Obstacles to

Trade and Investment in the Newly Independent

States of the Former Soviet Union.” Funding is

provided by the U.S. Agency for International De-

~ I Be tort the tclc,,r:iph. new Spap.rs pri)vl&~[he basic means of obtaining business-related new S. N~u spa~’rs de~’~)t~d t~’t~ een 75 [f) go

pcrcerr[ t~t thclr $p;ic;tt) hrsinc~s-related topics, and they provided the fastest and cheapest way of gathering lnf(~rnlati(m. Tt~ prf~rm~tc [hc dlsscn~lnatlim { )f ncws, the gt)~ cmnwnt pemlitted the postage-free exch,ange of newspapers am(mg printers. L(mg bef~~re the ad\cnt (J1 press

as\( )C I;itl{ ~ns, edll~ w~ [ htalned m m local in f(mnation by culling out-of-town newspapers, their so-called exchanges. 1 n an arrangement [hat

I(AIYy)uma] lsts n~lght find t’(wclgn and offensive, the g(wemment, in essence, operated the nati(m news-gathering services. These printers’

ckchangcs furn[shcd r)~t)\t non]{ )c’al rwws thrxwghtmt the first half of the 19th century. See Richard B. K ieltx)wic~, ‘“The Press, Post ofticc. :ind

the Fl~ JW (JI NCW \ in the E2irl) Rcpublic,’”J~)J/rn~Jl oj’fhe L“ar/y Repub//c, vol. 3, fall 1983, pp. 255-280; and Richard B. Kieltx)w icz, ‘“M{k-nilatlon, (’orl~!~~(lr~lciitl(~n Polrcy. tind the Geopolitics of News, 1820- 1860,” Crlfica/ .Vudles In A4a.ss (’onlnrlinltcj~i(~n,~, vol. 3, March 1986, pp.

2 I -35

4 { Scc G. Anthcst,‘ ‘“FccIs Set LJp BBS for Small Businesses,” C’onr/)[(lcr\torl(i,” Oct. 26, I 992.

~Ibld.
128 I Electronic Enterprises: Looking to the Future

velopment. The Export-Import Bank of the

United States and the Overseas Private Investment Corp. are also involved.45

The Internet is also a source of governmentprovided business information.46 The Economic

Bulletin Board (EBB), for example, is a “one-stop

source of current economic information.” It

houses 2,000 information files provided by federal agencies such as the Federal Reserve Board, the

Bureau of Labor Statistics, the U.S. Census, and

the Treasury Department. Included in these files

are current business statistics, economic indicators, employment statistics, energy statistics, foreign trade data, monetary statistics, price and productivity statistics, regional economic statistics,

and summaries of current economic conditions.

Also provided are regular updates on key economic and business indicators, including Treasury rate

quotations, foreign exchange rates, bond rates,

consumer price index, producer price index, advance retail sales, manufacturing and trade inventories, and employment and unemployment statistics. In addition, Trade Opportunity files (TOPS)

and International Marketing Insights (IMI), which

are compiled by American embassies and consulates, are made available on a weekly basis.47 As

more and more files are added, issues of financing

and pricing will need to be dealt with. It is likely

that regular institutional users will be required to

pay an annual flat fee, while infrequent users will

pay according to use.48

Federal agency information useful to business

can also be accessed through the Library of Congress Information System (LOCIS). Using the

new search tool LC Marvel (Machine-Assisted

Realization of the Virtual Electronic Library),

businesses can retrieve Presidential documents,

speeches, and White House press releases; portions of the Federal Register and the Federal Information Exchange (FEDIX); as well as files

from key federal agencies such as the Departments of Agriculture, Commerce, and Energy; the

Food and Drug Administration; NIST; the National Institutes of Health, the Patent and Trademark

Office; and the Office of Management and Budget

(OMB). 49

Government provision of economic data can

clearly help businesses identify new opportunities

and reduce overall transaction costs. However,

this practice, if carried out extensively, may also

give rise to a number of policy issues. For example, there is a rapidly growing industry comprised

of commercial firms that repackage and add value

to federal information for sale. While benefiting

from access to government information provided

in an electronic format, many firms in this industry are concerned about the possible adverse affects from government competition. Efforts by

OMB to establish policy in this area have proven

to be controversial .50 The advent of electronic dissemination of federal information also raises equity concerns. To the extent that electronic formats

have distinct advantages (for example, in terms of

timeliness and searchability), those without electronic access will likely be disadvantaged.51

Thus, if equity is the goal, policies that aim to pro-

~sErl~ B~&r, .’conlnwrce ~pa~men[ opens a ‘B ISNIS’ Center for Newly Independent States of Ex-U. S. S.R.,” Business Ameri(’a, June

29, 1992, p. 17.

~For ~ dl~cusslon ofhow” this inftmnation can be accessed, see Mary J. Cronin) “Internet Business Resources,” Darabase, December 1993,

pp. 47-50.

~T1bi~. see ~]~() Rosa]lnd Resnick, “Log on [() Trade Leads,” Internaliomd Business, vO\. 4, No. ~, Novembr 199 I ! PP. 63”64.

‘Ibid.

~g]bld see ~]so, ‘<HOW t. Use the Freedom of Information” Act t. Benefit your Business: This We]] -Known Act ]S Little Used by Business,

But It Should Be,” Agency .Sa/e.! Magazine, June 1993.

s(J~TA, ,Jp. cit., fo(m)te 42, P. 9.

51 Ibid.
Chapter 6 Educating for Technology Transfer 129

mole information dissemination will need to be

closely linked to policies that affect technology

access and technological literacy.

OPTION C: Provide Greater Support for

Business and Business-Related

Education

In its efforts to help rural Americans make the adjustment from an agricultural to an industrialbased economy, the federal government did not

limit itself to promoting technology transfer

through extension services. Equally important

were its efforts to train people in the new ways of

doing business. The land grant colleges, provided

under the Morrill Act of 1862, played a key role.

Responding to the major structural changes taking

place in the economy, these universities were

called on to expand beyond their traditional role

of training gentlemen as preachers. lawyers, and

doctors. Using applied research, universities were

asked to develop the more practical applications

of education in fields such as agriculture, engineering, home economics, and business administration.52

The impact of the Merrill Act was very evident

in the field of engineering. Before the act wits

passed, state legislatures had been reluctant to invest in technical education. Responding to the offer of federal grants, however, they quickly sought

to establish new types of schools; private colleges.

caught up in the movement, also established departments of engineering.53 Schools of engineering expanded rapidly thereafter, numbering 110

by 1886. The number of engineering students similarly increased from 1,000 in 1890 to 10,000 in

1900.54 As more and more engineers were educated in formal institutions, there was a greater

emphasis on engineering in science. With the establishment and growth of these institutions, a

profession was developed and with it a means of

preserving, transmitting, and increasing an evolving body of engineering knowledge.55

Today, the government is engaged in a number

of similar efforts to ease the transition from an industrial to a knowledge-based global economy.

However, most of these undertakings are focused

on technology development and technology transfer alone; much less attention has been paid to the

problems of organizational barriers, and the need

to help businesses reconceptualize and redefine

the way they think about and carry out their activities. This gap needs to be filled. If businesses fail

to adapt their thinking and their organizational

culture to the structural changes taking place in

their environment, both they and the nation will

fail to reap the full benefits that communication

and information technologies afford. Just as the

government turned to the land grant colleges to

help farmers adapt to the industrial era, it might

now look to universities to develop and widely

disseminate a business curriculum that is more appropriate to a changed economy.

Recognizing that organizational culture and organizational change are critical factors for success, many large firms are already spending con52 This law provided land to the states, the proceeds of which were to be used to teach in the fields of agriculture and mechanical arts. Subsequent Iegislation provided federal financial support for research and the operation of the land-grant colleges. Democratic and populist in origin.

these universities were open to children of all backgrounds. Moreover, unlike the traditional colleges, the land-gram colleges were not isolated

communities. Through then agricultural expcriment stations and their service bureaus, their activities were designed to serve the states. See, for

a discussion, Clark Kerr, The Uses of the University (Cambridge, MA: Harvard University Press, 1972).
130 I Electronic Enterprises: Looking to the Future

Billions of 1992 dollars

60

5 0

4 0

30

2 0

10

0

1988 1992

SOURCE October 1992 p 32

siderable amounts of money to reeducate

themselves 56 (see figure 6-1). To do so, they are

importing some of the best faculty members from

the top business schools to lecture on their premises. The cost of this kind of in-house training is

high, ranging between $5,000 to $20,000 per day.

Although expensive, this approach not only al10WS businesses to stay up to date in their understanding of successful corporate strategies; it also

allows them to apply these lessons to their company’s specific problems and goals.57

Drawing on faculty from both business and engineering, some of these programs are highly innovative. Ford Motor Co. and Wayne State University, for example, have recently established a

joint venture to create a program offering a Master’s Degree in Engineering to be offered to employees on Ford Motor Co. premises. This is an

interdisciplinary program with courses and faculty drawn from both the Schools of Business and

Engineering at Wayne State University. Taking

into account both the organizational and technological problems entailed in technology deployment, this program provides both depth in engineering and breadth in business management. The

Massachusetts Institute of Technology (MIT) is

currently putting together an innovative interdisciplinary program that also involves both business

and engineering (see box 6-3). Unlike Wayne

State’s program, it will be delivered by interactive

video technologies. Both Wayne State and MIT’s

programs are full degree programs.

Smaller companies can hardly afford such services, however. Operating with minimal staff and

narrow time constraints, they rarely have the time

or resources that full degree programs require.

One way to meet their educational needs, however, is through targeted distance learning classes.

The development costs of programming and other

training materials can be shared among many users, and participants can schedule the viewing of

such courses at their own convenience.

In England, a distance learning educational

program for small-business managers is now being offered through the Open University.58 This

program was jointly developed by the Cranfield

School of Management, the Open University, and

the British Broadcasting Corp. The course materials, which draw on the experience of over 200 entrepreneurs, are designed to teach the principles of

good management. In addition to video programming, students are also provided with audio cassettes and workbooks. A number of workshops

have been set up to allow face-to-face interactions.

Initial financial support for this program, totaling

1.5 million pounds, was provided by the Training

Agency (formerly the Manpower Services Commission). Over the long run, however, the program is intended to be self-supporting. 59

 Getting Trained, ” pp. 59-65.

‘The Professor IS In,” Business Week, 25, p. 105.

 “Switched Distance Learning,” June 1990, p. 127.
Chapter 6 Educating for Technology Transfer I 131

After engineers have been in Industry for several years, they frequently move into project leadership

positlons and must then expand their knowledge base to Include not only more of the engineering systems

with which they work, but also more of the business and Industrial systems Only with knowledge of the “big

picture” can such leaders and managers take products efficiently and effectively from design to manufacturing to sales Today, practicing engineers who are formally trained in both technology and business and

able to run large-scale design projects are rare Rarer still are educational programs geared toward filling

this professional gap in the workplace

The Massachusetts Institute of Technology (MIT) is currently designing a new engineering/management

curriculum to address this gap through distance learning The project, still under development, proposes to

grant engineers a “second professional degree “ Because of MIT’s firm belief that the best education is interactive, it wiII Iikely utilize interactive video between professors at MIT and on-premise company Iocations

The on-premise arrangement IS Important because industry generally does not want to do without valuable

engineers for more than a few months In addition to combining traditionally separated engineering and

management courses, the project iS further driven by two other themes First iS the need to bridge MIT’s

strengths in basic technical and management knowledge and industry’s strengths in applications Yet

another strong driver is to better educate America’s professional workforce, which necessarily entails learning from and working with industry

This project builds on the experience of MIT’s successful Leaders for Manufacturing (LFM) program that

also combines engineering and management Now in its sixth year, the LFM program iS a partnership between MIT and about a dozen large U S manufacturers Students in the program get practical experience

by doing a term-long internship in a manufacturing company Participants get two master’s degrees one

from MIT’s School of Management and one from the School of Engineering MIT’s new distance Iearning

program differs from the LFM program in two respects it emphasizes engineering design rather than

manufacturing, and introduces remote delivery Both programs are intended to give students an understanding of the whole company Also, the successful LFM program model of university-industry interaction

and cooperation wiII Iikely be duplicated in the distance Iearning project

wiII graduates of this new program be a new breed of upskilled managers? Perhaps wiII this model of

distant education be emulated by other universities that have strong engineering and business programs?

Perhaps Importantly the new curriculum has strong interest by both MIT and industry Since industry iS

under competitive pressure, they need engineer-managers trained in both the newest technology and management practices And MIT’s engineering and management professors wiII benefit by their exposure to

Industrys present concerns Ultimately, both MIT’s engineering and business courses can be made more

effective by addressing real world problems

Government, as the promoter of both education and a National Information Infrastructure has a stake in

supporting pilot projects, such as M IT’s, that combine elements of industry-relevant workforce education

technology and business knowledge diffusion both ways between industry and academia and demonstration of state-of-the-art “information Infrastructure” such as interactive video technologies

SOURCE Prwate commumcatlon John D C LNle Institute Professor and Professor of Management Science and Joel Mcses Dean

of Engmeerlng Massachusetts Insflule of Technology, March 1994
132 I Electronic Enterprises: Looking to the Future

Similar types of programming could be provided in the United States, either via public broadcasting or the public switched network. In states

that already have a vast educational infrastructure

in place, programming and delivery mechanisms

could be provided as part of the overall educational system. In the State of Maine, for example, the

University of Maine system has created a network

that is comprised of an extensive interactive television system reaching 77 sites, an electronic library catalogue database including the holdings of

the state’s major libraries, and other data and information technologies. Efforts are now underway to greatly enhance the network’s potential for

use by the citizens of Maine. The university and its

partners are forming the Maine Information

Technology Users Consortium (MITUC), a new

nonprofit membership organization that will consist of Maine schools, not-for-profits, state agencies and departments, municipalities, businesses,

labor organizations, professional and trade

associations, and educational and cultural institutions. This consortium will foster education and

training, professional development, access to information databases, teleconferences, legislative

and other public policy briefings and hearings,

and cultural and other programs. The anticipated

startup costs of such a program are between

$400,000 and $500,000.60

To support new developments in business

education, the federal government might also pursue an approach similar to the one it took to promote science education following World War II.

Recognizing that advanced technology was critical for both the nation’s economic growth and its

defense, the government established the National

Science Foundation (NSF) to improve the nation’s potential in scientific research and science

education. 61 Provoked by the successful launching of the Soviet spacecraft Sputnik, defense considerations also motivated the passage of the National Defense Education Act of 1958 (NDEA),

whose goal was to improve instruction in mathematics, science, and foreign languages. Under this

law, funds were provided on a matching basis to

public schools and as long-term loans to private

institutions. Funds could be used for needed

equipment in these instructional fields, curriculum development, guidance counseling, vocational education in defense-related fields, and

teacher training in foreign language instruction.62

With the nation’s shift from defense to national

and economic issues, government could complement its efforts to promote technology and

technology deployment with steps to prepare its

citizens to make the most productive use of these

technologies. In recognition of the complex relationship between technology and organizational

social change, the government might support the

development of new centers of research and new

curricula that would extend beyond the realms of

engineering and business to incorporate disci-

~ectms(wtium is presently seeking a federal grant of $400,000 to pay for startup costs, which the University of Maine will match with

$100,000 cash and in-kind investments.

c ITbe philosophical” basis for es[ab]ishlng NSF, and the rati(male for including the development of scientific manpower within its (lrgan12ati{mal missi(m, was explained by Vannevar Bush in Science-The Endless Fron(ier, his report to the President (m a program for p)stw ar scientific research. Ahmt the need for scientific manpower, he said: “Today, it is truer than ever that basic research is the pacemaker (}f technology”

progress. In the 19th century, Yankee mechanical ingenuity, building largely on the basic discoveries of European scientists, could greatly advance (he technical arts. Now the situation is different.

A nati(m that depends on others for its new basic scientific knowledge will be slow in its industrial progress and weak in its c(~mpetiti~e

pt)sititm in world trade, regardless of its mechanical skill.” The Nationa/ Science Foundmion and Pre-Co//ege Science Edutwflorr: 19S0-/975,

repmt prepared for the Subcommittee on Science and Technology, U.S. House of Representatives, 94th Corrg., 2d sess., by the C(mgresslonal

Research Service, Library of Congress, January 1976, p. 19.

bzme passage ~)fthe NDEA resulted in substantial increases in federal aid to education. Since federal dollars had to be nlatched by state and

local funds under provisi(m of the act, the overall investment in NDEA programs was large. Between 1958 and 1961, $163.2 milli(m in federal

funds were disbursed. Approximately 75 percent of these funds were directed to the development of science curricula. See OTA, /~/orma~ion

Tethno/ogy R&D: Critica/ Trends and /ssues, OTA-CIT-268 (Washington, DC: U.S. Government Printing Office, February 1985), ch. 5,

“Educati(m and Human Resources for Research and Development.”
Chapter 6 Educating for Technology Transfer | 133

plines such as anthropology, psychology, sociology, and technology assessment. In addition, as in

the case of the NDEA, financial incentives in the

form of loans might be provided to encourage students and faculty to pursue these interdisciplinary

areas of research. To enhance the benefits of such a

program. students might be provided the option of

repaying their loans, in part, by working with

small businesses, perhaps in the context of an organization such as an MTC. Matching funds

might also be provided by state and local entities.

Implementing such an option might be difficult

because any curriculum that deals with business

will likely have political overtones. On the other

hand, faced with the need to explain differing patterns of growth across countries, many in academia recognize the need for a more interdisciplinary approach to understanding economic

phenomena.63

OPTION D: Provide Greater Support for

Worker Training

Given the constitutional limitations on the federal

government’s role in education, the responsibility

for developing human resources has always been

shared by a number of different social institutions

ranging from the family to the business communi -

t y. As American society has become more technologically advanced, however, the federal government has been increasingly called on to play a

more significant role. The pressure on the government to be more active in this area is particularly

strong today as the nation seeks to maintain its

place in a highly technical and competitive world

environment.

Although Americans were aware of the economic benefits associated with having a skilled labor force, the nation did not original] y adopt a formal system for transmitting vocational and

technical skills when agriculture was the dominant mode of production. 64 It was only with the

rapid industrialization of society at the end of the

19th century that education came to be valued in

economic and technical terms. 65 As Americans

learned that special technical knowledge was the

key to prosperity in the modern age, secondary

educational institutions were restructured to prepare American youth for an increasing] y differentiated set of economic roles. Not only were vocational courses added to the educational

curriculum, but the schools themselves were remodeled to conform to the prevailing business

standards of efficiency. The business community

played a major role in bringing about these

changes, Concerned about strikes, labor turnover.

and increasing worker absenteeism, they hoped

that schooling would socialize a growing number

of immigrant youths for the workplace.66

The educational and training strategies for an

industrial era are increasingly less relevant today.

given the changing nature of the American workplace and the structural changes in the economy.67

Yet the quality of the U.S. workforce matters now

more than ever before. In today international

~ {See for Injt[lncc, J()\~ph E. StIgl ItZ. ‘“Social Absorptwn Capability and lrmwation,” CEPR Publlcati(m N(). 292, Center For Ec~~non~ic

POIIC) Re\carch. Stanford Unl\ crslty, Novtm~ber 1991, and Ilmglas Cecil North, Inslirulion.s. /nsrirutiona/ Ch~Jn,qc, cJrrd E“([)mmI[ Pcr/~)rntf~n(e (C,in~brld:c. UK Cambridge University Press, 1990).
134 I Electronic Enterprises: Looking to the Future

economy, motivated workers who can produce

high quality goods and services at low cost can enhance industrial productivity and competitiveness

and keep American living standards high. Workers must be trained, however, to change the way

they do their jobs in order to capture the benefits

from rapidly evolving technology. Well-trained

workers go hand-in-hand with productivity, quality, flexibility, and automation in firms that perform well.

Unfortunately, most American workers are not

well trained, especially when measured by international standards. Foreign countries place

much greater emphasis on developing workforce

skills at all levels (see table 6-2). Experienced production workers at Japanese auto assembly plants,

for example, get three times as much training each

year as their American counterparts. American

workers are so mobile, especially when they are

young, that most U.S. companies offer training

only sporadically. Workers in many smaller firms,

in fact, may receive no formal training at all. Although larger firms provide more formal training,

most of it is for professionals, technicians, managers, and executives. Rarely do American workers

voluntarily upgrade their skills for job advancement (see figure 6-2).

The need for better training is clear in both

manufacturing and service industries where skills

and responsibilities are broadening. Work reorganization forces employees to take more responsibility, cooperate more with one another, understand their roles in the production system, and act

on that knowledge. Competitive manufacturing

and service firms are increasingly relying on employees with good higher-order skills such as reasoning and problem-solving.

United States Germany Japan Korea

School-to-work transition Left mostly to Apprenticeship for Personal Employers recruit

chance, some most relationships from vocational and

employers have noncollege-bound between employers academic high

ties with local youth and local schools schools

schools

Vocational education

Extent Available in most Universally Limited, mostly Universally

urban areas available assumed by available

employers

Quality Wide range, poor Uniformly good Fair to good Vocational high

to excellent schools uniformly

good

Employer-provided training

Extent Largely Iimited to Widespread at Widespread Limited, employers

managers and entry level and to rely on public

technicians qualify for vocational Institutes

promotion

Quality Wide range, some Very good Very good Generally poor

excellent, but more

often weak or

unstructured

Public policies Federal role very Govern Subsidies Directive-some

Iimited, state aid to apprenticeship, encourage training employers resist

employers growing encourage by small firms policies

continuing training

SOURCE Off Ice of Technology Assessment, Worker Training Competing in fhe New /nternafinoa/ Economy, OTA- ITE-457 (Washington DC U S Government Pnnhng Off Ice, September 1990)
Demographic changes are also shaping training

needs. Over the next few years, the labor force will

expand more slowly than at any time since the

1930s. In the year 2000, the average worker will

be nearly 40 years old compared with 36 today.

Keeping this slowly aging workforce up to date

and flexible will require ongoing training. New

entrants in general will need better basic skills, including reading, writing, arithmetic, and oral

communication. Americans already in the labor

force will require better skills as well.

Simply providing more training will not be

enough, however. If work is not organized to tap

employees ‘ skills, the firm’s investment will be

wasted. In addition, training must not only be focused on workplace problems, but it must also be

delivered effectively. Efforts to employ more innovative and effective training approaches are still

rare outside of sophisticated firms with large training budgets. Instead, most programs lag far behind state-of-the-art training.

If training is to be made available to businesses

and other firms with 1imited resources, new institutional structures will be needed to make affordable training available to employees of small businesses and other firms with limited resources. A

variety of approaches. including industry training

consortia, involvement of employer organizations

in training. state assistance programs, and joint labor-management programs promise to enhance

the scope and quality of training. While such efforts are currently limited, government can act to

foster these developments in a number of ways.

One approach the government might take, for

example, is to reduce the barriers to company

training. These barriers include 1imited funds, an

inadequate awareness of training needs, a lack of

knowledge about good training pract ices, and a reluctance to train young and older workers. To address these problems, the government could encourage the establishment of training consortia

through government startup grants. Such a pro-

,

gram would allow companies to share the costs

Chapter 6 Educating for Technology Transfer | 135

Professional

Technicians &

 related support

I Executive/

 managerial L--–---——-- ----- -- 

 production,

- craft repair

 ----- support

 ‘—- - 1

I 220/o Machine operators,

 assemblers and Inspectors

I Transportation &

 material moving

Handlers, equipment cleaners,

1 0 10 20 30 40 50 60 70 80 90 100

Percent

—

a NOT average of workers skill 

 for 

 Max Alan [ How Workers 

(Washington I It of Bureau of Labor 

1985) pp 18 19

and risks of training. A related possibility would

be to expand technical assistance to trade associations, other industry groups, and joint labor-management organizations to aid in the development

of training programs for their members.

The federal government could also use financial inducements, such as tax credits, to make

training investments more attractive. It would be

important, however, to ensure that the revenue

loss is matched by an increase in the desired train-
136 I Electronic Enterprises: Looking to the Future

ing activities. This could be done by establishing a

national payroll levy. 68 Congress could also expand assistance available to firms for certain activities, such as basic skills training and vocational

skills upgrading, that would make it easier for employees to participate in training activities.

Over the long term, federal support for work

and learning research, and for the development

and dissemination of new training technologies,

could also improve worker training at a relatively

low cost. The quality of training varies greatly. Although some U.S. firms are world leaders in training, others know little about best practices. Moreover, research about how adults learn often fails to

be integrated into training practices. To address

this problem, Congress could direct federal agencies that have education and training programs

(e.g., Defense, Education, Labor, Commerce,

Health and Human Services) to develop and disseminate information about new educational

technology and best practices. In addition, the

government could support the periodic updating

and dissemination of information on workplace

training.

~~under such ~ (Jptlon, ~orllpanles would ch(x)sc between either spending a Specified percentage of their payroll on pafli~ular IYW’S of

training w con[ribu[ing that percentage to a national fund for training initiatives. Several countries (including France, West Gcrnuiny, Ireland,

and South Kt~rea) use such levies t{) encourage worker training. In the United states, four States now raise training funds [hr~)ugh this t) pe of

levy. For a more detatled discussitm, see ibid,
Government

and

Markets 7

M

arkets are generally viewed as the “web of relationships

between buyers, sellers, and products that are involved

in an exchange.”] They can be defined in several ways

according to a number of criteria. For example, markets

can be local, regional, national, or global. They may be relatively

open or closed to entry. They may be more or less competitive, and

they may be restricted or not in the kinds of products and services

exchanged. Finally, markets can encompass exchange relationships

that are momentary or that endure over time and space.

A market’s form affects the way it functions and how it meets

national economic and social needs. In capitalist societies, the

market system, for the most part, manages economic activity,

coordinating supply and demand and allocating goods and services. To the extent that market structure reflects perfect competi -

tion—i.e., each producer selects the factors of production that

will maximize profits; each consumer maximizes preferences;

and perfect information is available to all—the market system

will distribute goods and services in the most economically efficient fashion.

Rarely, however, are all these conditions met. Producers and

consumers are limited in their abilities to find, process, and use

information in their decisionmaking processes.2 Few markets are

1 Peter Steiner, “Markets and Industries,” ln!ernational Encyclopedia of Social Scien( e (Nw }’t)rk, NY Macmillan, 1968), vol. 9, pp. 571-581.

2 As a result, indi~ ldual acmms will, according to Herbert Simon, “be intendedly ratlmal but (ml y I imitedly so.’” Hcrh’rt A. Sim(m, Adrn/nisrra/i\e Beha}’ior (New York, NY:

Macmillan, 1961 ).

True e/ecVonic

commerce is in its

in fanc~ but the

government may need

to take steps to further

assess its market

implications.

I 137
138 I Electronic Enterprises: Looking to the Future

competitive in the classic sense; that is, comprised

of buyers and sellers who are unable to influence

market events. Most large modern corporations

have considerable leverage in the marketplace.

They can structure market relationships through

their competitive strategies; influence preferences

and tastes through marketing and advertising; determine the nature and quality of labor through

their work organization and labor management;

and help to define the economic rules of the game

through lobbying and political activities.3

Markets diverge from the theoretical ideal because of economic, social, and political factors;

they do not exist independent of their circumstances. Markets are historical phenomena, having emerged and evolved at a particular time and

under a set of social and economic circumstances.4 Markets are embedded in cultural, social, and institutional environments and operate in

the context of these environments.s

The government helps to establish markets in a

number of ways. At a fundamental level, it determines the social activities of the marketplace, as

well as which commodities are bought and sold.

Government also defines economic actors—proprietors, workers, and corporations-by establishing and enforcing their rights and obligations,

the rules by which they interact, and the means

they use for exchange.6 These decisions are of major importance; they determine the economic opportunities for business, as well as the efficiency

and performance of the economy as a whole.7

Government decisions about the market are not

cast in stone, however. They need to be reevaluated to accommodate the changing business environment. Communication and information tech3 See Fred Block, Post industrial Possibilities: A Critique oj’Economic’Dlsciourse (Berkeley, CA: University of California Press, 1990); and

Charles E. Lindblom, Politics andhlarkets: The World’s Politica/-Economic Sysfems (New York, NY: Basic Books, 1977).

4 For the Marke( system 1() enlerge and pre&)minate required the secularization of society, the establ ishment of Pr(V-fiY rights that ‘ere ‘ree

from feudal obligations, and the division of society into groups and rankings that, while based on economic interest, permitted social mobility.

States and other ruling powers played a major role in establishing these conditions. They were responsible for breaking down the feudal system

and bringing large temtories under physical control. In addition, they established property rights; a comrn(m currency; and a reliable system of

banking, investment, and contracts. They also eliminated internal market barriers. Fordiscussions, see Karl Polanyi, The Great Transjimnalion:

The Politl<al and Economic Origins oj’Our Time (Cambridge, MA; Harvard University Press, 1986); Femand Braudei, The Wheels oj Commerce, Cit’i/irarion and Capira/ism 15[h-/8fh Century, vol. 2 (Berkeley, CA: University of California Press, 1992); Albert O. Hirschman, The

Passions and~he Interesls: Po/itica/Argunlents jtir Capi/a/isn] llejtire 1!s Triumph (Princeton, NJ: Princeton University Press, 1977); and Randall Collins, “Weber’s Last Theory of Capitalism: A Systematization,”m Mark Granovetter and Richard Swedberg (eds. ), 7’he Soc/o/ogy of

Economic Llje (Boulder, CO: Westview Press, 1992).

s Every economic transaction—however fleeting< ntails interaction and, therefore, requires a contextual basis for its interpretation. Thus,

if the market itself is to function, economic participants must act in accordance with some agreed-upon norms of behavior such as honesty and

fairness. See, for discussions, Talcott parsons, 7’he Slrucfure oj”Stjcia/Acfion, w)]. ] (New York, Ny: me Free press, 1949), and Enli]e Durk.

heim, trans. by W.D. Halls, The Di\ision oj’Lubor in Society (New York, NY: The Free Press, 1984).

6As descrl~d by Friedland ~d R()~fis()n: “me contest over property rights is not one that is played out in the nlarket, but in regulatory

agencies, law courts, and legislatures. To understand how individuals work to maximize utility—the hostile takeover, dual classes of st(d,

‘golden parachutes’ granting executives certain benefits in the event of a takeover, due process rights for employees, prenotif]cation of w(whcrs

in the event of plant closings, requirements that developers abs(wb public infrastructural costs, or environmental impact statements- rcqu ires

that we bring power, and hence the state, from the margins of ecommlic analysis 10 the very center. Because property rights attach to categories

of actors and actions, some of the most important exercises of power involve the defense of transfornlation of systems of economic classificatitm, the ways in which people construe, categorize, and measure economic activity.” R~~ger Friedland and A.F. R(bmtson, “Beyond the Marketplace,” in Roger Friedland and A.F. Robertson, Beyondrhe Marketplace: Rethinking Economy and.!iociety (New York, NY: Aldine de Gruyler, 1992), p. 10.

7 See Ilwglas C. N(mth, Institutions, Institutional Change, and Economit Perjtirmance (Cambridge, UK: Cambridge University Press,

1990). See also, Joseph Stiglitz, “Social Abs{)rpti(m Capability and lnmwati(m,” CEPR Publication No. 292, Center for Ec(m(m~ic Ptd]cy Research, Stanford, CA, November 1991.
Chapter 7 Government and Markets | 139

nologies define relationships among economic

actors and the ways the market is structured to

conduct businesses

In the past, when contacts and communications

were limited, manufacturers produced on a small

scale and out-sourced their marketing operations

to middlemen—such as shippers, financiers, jobbers, transporters, insurers, brokers, and retailers—who brokered information as well as goods.

There was little need for market regulation to preserve competition. Only at the end of the 19th century—with the development of transportation, the

growth of interstate commerce, and the rise of the

vertically integrated firm-was the federal government called on to establish national market

rules and regulations (see box 7-1 ).

Today, communication and information networks are again reconfiguring the business environment. Serving as the infrastructure for electronic commerce, these technologies are already

an integral part of many businesses. When networked for business, these technologies contribute to economic growth by reducing transaction

costs, By channeling the flow of information and

structuring economic interaction and exchange,

they will partially determine who will reap the

benefits.

True electronic commerce is in its infancy, but

the government may need to take steps to further

assess its market implications. Like electronic

networks, social and economic institutions follow

a set course, making it difficult to reorganize relationships after the fact.9The government could: 1 )

establish a commission that will investigate the

implications of electronic commerce for future

market rules and regulations; and 2) restructure

the organization for communications decisionmaking to ensure that the economic and market

implications of communication and information

technologies are adequately considered.

OPTION A: Establish a Congressional

Commission To Investigate the

Implications of Electronic Commerce for

Future Market Rules and Regulations

Building on the tradition of common law. U.S.

laws and the legal system that acts to interpret

them have proven to be remarkably resilient over

time and in dealing with major social and economic change. For example, the intellectual property

provisions provided in the Constitution, although

originally for print media, have been extended

over two centuries to incorporate an array of new

communication and information technologies10

(see box 7-2). Similarly, the Communications Act

of 1934, which established national goals for radio and telephone, has survived despite technology convergence and a rash of new communication

and information products and services (see box

7-3),

Incremental legal and institutional adjustments

have provided acceptable responses to evolutionary changes in technology and the economy in the

@ee Richard DuBoff, ‘.~e T~]~graph in Nineteenth Century America. Technology and M(m~@yt “ Cornpara!l\’e Stufflcs In Soc\et> find

Ilf$tor}, ~ol. 26, October 1984. pp. 57 I -586, and JOAnne Yates, “T%e Telegraph’s Effect (m Nineteenth Century Markets and Fim~s,” Bi(.$lne$.$

and L’( ~d ser. I s ( 1986), pp. 149-163. (moml(’ tiI Tlor>. -

‘)As cicscrih’d by P(JwcII and DiMaggio: “Institutional arrangements are reproduced because indi~ iduals often cannot even c(mcclve of

appropriate :iltcmatlt es (or because the) regard as unrealistic the alternatives (hey can imagine). [nstituti(ms do not just constrain (~pti(ms, they

establish the very crikm by which people discokw their prefixncix. In other words, strew of the most ]mpmant sunk C(WS art cogn]iivc .“ Sw

Walter W. PtJwcll and Paul J. DiMaggi(l (eds. ). 7’he ,VeM lnrtl(l(flon(]/l~r~] In Or~anl;atlm(l/ Ana/].$~,\ (Chicagt~, IL The University of Chic:igo

press. 199 I), pp. 1 ()- I I. See alsf~ N{mth, op. c]t., fo(mote” 7.
140 I Electronic Enterprises: Looking to the Future

In the early years of the American republic, business activities were regulated by the states With the

growth of interstate commerce, the federal government was increasingly called on to establish national

rules and regulations to govern business activities The federal government had the Constitutional authority

to assume this role under the interstate commerce clause and the 14th amendment, which was broadly interpreted to include corporations within its due process provisions Despite its clear authority, however, the

federal government was somewhat reluctant to act, it neither wanted to offend state governments nor to

undermine the institution of private property 1

Under these circumstances, businesses were relatively free to fend for themselves And fend they did

The exceptional growth that characterized the period from the end of the Civil War to the turn of the century

was accompanied by fierce competition, Growth in economic activity gave rise to overproduction, which

led in turn to three severe economic downturns, from 1873 to 1877, 1885 to 1887, and 1893 to 1897 In this

economic climate, the rate of business failure was exceedingly high To survive, businesses employed

whatever measures they could—including cartels and other pooling arrangements, predatory pricing, or

direct control through horizontal mergers-despite their blatantly anticompetitive nature 2

It was in this context that the federal government came under strong pressure to Intervene Middle-class

reformers, describing themselves as “progressives, ” opposed the concentration of economic power, and

called on government to control corporate abuses and to take posit we steps to reduce the negative Impacts

of rapid industrialization and urbanization. Farmers and others Iiving in the West accused big business,

especially the oil companies and railroads, of price gouging In addition, labor, now emerging as a movement in its own right, became increasingly critical of business3

The political climate, which once provided unquestioned support for business, had clearly changed But

despite the public outcry against big business, few people were certain about what the role of government,

in relationship to business and the marketplace, should be This issue, which dominated American politics

from the turn of the century until World War II, continues to reverberate today

1 Nell Fllgstein, The Transformation of Corporate CorWo/ (Cambridge, MA Harvard Unwerslty Press, 1990)

2 Louis Galambos and Joseph Pratt, The R/se of fhe Corporale Cornrnonwea/(h L/ S Bu.smess and Pukdlc Po/Icy m [he Twen(le(h

Century (New York, NY Basic Books, 1989)

3 Ibl(j

SOURCE Off Ice of Technology Assessment, 1994
Chapter 7 Government and Markets | 141

To provide an incentive for the creation and dissemination of scientific information and creative works,

the Founding Fathers Included a specific clause in the Constitution (Section 1, Article 8, clause 8) authorizing Congress to establish Intellectual property rights Rights granted under the first copyright act of 1790

corresponded to the capabilities of the printing press, these were the rights to print, reprint, publish, and

vend a writing During the 19th and 20th centuries intellectual property rights were gradually extended and

expanded to take into account the development of new kinds of information technologies The “right to perform” was first granted in 1856 for dramatic compositions, and in 1897 it was applied to musical compositions In 1909, Congress granted musical compositions a “mechanical recording right, ” at which time the

duration of copyright was also lengthened from 14 to 28 years, and on renewal, to 56 years In 1976, the term

of copyright was extended to the Iife of the author plus 50 years, in 1980, copyright was extended to cover

computer software and in 1984 chip masks were provided protection under the Semiconductor Chip

Protection Act

As Intellectual property rights were extended to Incorporate new technologies, the issue of how to bound

these rights repeatedly reemerged Although one of the primary purposes of Intellectual property rights was

to promote free and competitive markets the continual expansion of rights has sometimes had the opposite

effect Striking the appropriate balance between Intellectual property protection and the need for information access iS a difficult task that continues to challenge policymakers today

SOURCE Off Ice of Technology Assessment 1994

—

The flexibility of the law and role of the courts in Interpreting it IS well Illustrated in the case of the Radio

Acts of 1912 and 1927 and the Communications Act of 1934, which—incorporating the radio acts—formally

established national communication goals for broadcasting and telephony The standard set for broadcasting to serve the public interest convenience or necessity” was stated so vaguely as to leave room for

compromise So too was the goal for prowding “so far as possible, to all the people of the United State, a

rapid efficient Nation-wide, and world-wide wire and radio communication service with adequate facilities

at reasonable charges” for this definition did not provide criteria for defining adequacy and reasonableness Although from 1976 to 1980 Congress did reevaluate communication policy goals these efforts to

revise the 1934 Communications Act failed for lack of consensus As a result, in recent years—in the absence of clearly defined and consistent goals—-natlonal communication policy iS often set by the courts

SOURCE Office of Technology Assessment 1994

I

L ––—-
142 I Electronic Enterprises: Looking to the Future

past. But this approach may not be suitable today,

given the structural changes taking place in the

world economy. 11 In fact, if small adaptive

changes merely provide temporary relief to U.S.

economic problems, they could mask the need for

the more radical adjustments needed to sustain

economic performance over the long term. 12 In

this regard, the rules and regulations governing

market structure and market interactions will be

critical, as well as the cost and availability of information. These arrangements determine transaction costs and, hence, the incentive structure

that drives economic behavior; they also define

the scope and form that markets take. 13

Many of the rules and regulations for economic

interactions in the United States were established

in the last half of the 19th century for a national

market that prompted the growth of large, vertically integrated firms. 14 The policies that the government then selected to cope with those developments, however, stem as much from U.S. political

culture as from the events themselves. 15 Americans are fierce supporters of a free-market, competitive economy. 16 At the turn of the century,

when the government acted against the abuses of

large businesses, it did so in a uniquely American,

17 America’s preference ‘or pro-market fashion.

competitive market solutions is demonstrated in

I I As Andrew Scht)tter has pf)]nted Out: “Ectm(m~ic and social systems evolve the way species do. T() ensure their survival and growth, they

must solve a whole set of problems that arise as the systems evolve. Each problem creates the need for some adaptive feature, that is, a social

instltuti(m. Every evo]uti(mary economic problem requires a social instituti(m to solve it. . . .Those societies that create the proper set of social

instituti(ms survive and fl(wrish; those that dt) not, falter and die. The distressing fact is that what is functi(mal to meet today’s problems may be

t(~tally inadequate in meeting the tests our society faces tomorrow. ” Andrew Schotter, 7’/re Theory oj SocM/ /ns~ifu/ions (Cambridge, UK: Cambridge University Press, 1981 ), pp. I -2.

I ~ AS described by po]anyl: “A nation nlay ~ handicapwd in its s[mgg]e for survival by the fact that itS institutions, or sonle of thenl~ “lOng

to a type that happens to be on the downgrade-the gold standard in World War 11 was an instance of such an antiquated outfit. Countries, on the

other hand, which, for reasons of their own are opposed to the status quo, would be quick to disc(wer the weaknesses of the existing instituti(mal

t~rder and anticipate the creati(m of institutions better adapted to their interests. ” Karl P(~lanyi, The Greal Transjbrmalion: The Po/ifica/ and

E(onomic Origins oj Our lime (Bt)st(m, MA” Beacon Press, 1957), p. 28.

Is As described by N()~h: ‘.lnstltutions provide the sb-ucture for exchange that (together with the technology employed) determinesthe cost

of transacting and the cost of transf(mnation. How well institutions solve the problems of c(~)rdinati(m and production is detemlined by the

rm)tivatitm of the players (their utility functi(ms), the complexity of the envirtmment, and the ability of the players to decipher and order the

envir(mment (measurement and enforcement ).” North, op. cit., footnote 7, p. 34.

I ~ See A]fred Chand]er, The v’lsib/e /fand: The Managerial Re\’o/u!ion in American Business (Cambridge, MA: Harvard university %ess,

1977); and James Beniger, 7-he Control Resolution: Technology and the Economic Origins oj’the Information Sotiety (Cambridge, MA: Harvard University Press, 1986).

I f see for dlscussl{)ns of [he effects of culture on instituti(ms and t)rganizati(ms, John W. Meyer and Brian Rt)wan, “lnstituti(malized Organizati(ms: Fomlal Structure as Myth and Ceremony,” in Powell and DiMaggio (eds. ), op. cit., f(x)mote 9; Fred Block, Posfindustrla/ Possibi/i-

/ies: A Crlrique o-l Economic Discourse (Berkeley, CA: University of Cal ifomia Press, 1990); and Neil Fligstein, 7’he Trans@ma~ion oj Corporare Control (Cambridge, MA: Harvard University Press, 1990), pp. 53-55.

16 A5 (_ja]an,~)5 and ~a[t de5cribe: “what did vibrate through Arnerlca was praise for the creator of new Ventures, whether on the faml, in

transpwtatiim, or in manufacturing and c(mmerce. The materialistic culture was translated into specific pol itical improvements when the states

and h~cal ities suppmted internal improvements, encouraged resource use, eased the nmte to inc(qx)ration, and carefully protected property

~ghts$ The entrepreneurs of [hat day c(~u]d expec[ few threats and much supp(M frtml g~wemment.” L{mis Galamtx~s and Jt~seph Pratt, The Rise

o/ the Corporate Commont~ealth: U.S. Business and Public Poli(y In the T\\entleth Century (New York, NY: Basic B(ri)ks, 1989), p. 23.

I TAlthouoh these va]ues were often Supp)rted more by rhetoric than practice, they were greatly popularized by the progressive nlovenlent,

which had itseheyday in the late 1800s. Members of the progressive movement helped to expose a number of scandals that linked politicians and

business, reinforcing American suspicions of government. Ironically, the reputati{m of big business was actually impr{wed, As Walsh notes,

“Laissez-faire ec(mmic [hmy seemed newly justified by the record of great cqxmate successes between 1889 and 1929. The role of G(wem -

ment in that development was discounted and its reputation tarnished. ” Annemarie Hauch Walsh, The Pub/ic’s Business: The Po/lti~.s and Prac’-

tlces q/ Goiernnterrr Corpotwnons (Cambridge, MA: The MIT Press, 1978), pp. 25-26. See also, David Vogel, ‘

bGiwemment-industry Relati(m -

ships in the United States. An Overview, “ in Stephen Wilks and Maurice Wright (cds. ), Compararil’e (;o\ernn/er~f-/nd~dsrr} Re/a/ions (oxf(ml

Clarend(m press, 1987), ch. 5.
Chapter 7 Government and Markets I 143

four areas where the government intervened to

channel market activities—antitrust law, regulatory policy, information policy, and trade policy.

Antitrust law, for example, was codified with

the passage of the Sherman Act of 1890. Building

on common law prescriptions that dated from the

1840s, this act sought “to protect trade and commerce against unlawful restraints and monopolies.” The Sherman Act was somewhat ambiguous. however, because it did not describe which

particular practices constituted either “a restraint

on trade” or “an attempt to monopolize. ” Nor did

the act provide an institutional mechanism to undertake investigations or enforce the law. 18

Instead, responsibility for implementation was

left to the courts, and notification of violations

was made the responsibility of the damaged parties. Given such ambivalence, it is clear that the

Sherman Act was not meant to be anti business nor

anticapitalist. On the contrary, the act opposed

trusts and other forms of big business precisely

because they were anticompetitive and their behavior precluded other businesses from fully participating in the market economy. It was widely

believed that if the monopolistic practices of business could be curbed, there would be less reason

for government to intervene in the economy. 19

Regulatory policy created a similar dilemma

for government. The railroads were the first in line

for regulation because of their central role in the

nation’s economy. 20 When overbuilding and cutthroat competition at the turn of the century led

railroad owners to resort to anticompetitive practices, such as pooling arrangements and discriminatory pricing, the public called for reform. As in

the case of antitrust, there was little agreement on

how to proceed. Some favored cartelization, and

called on government to enforce pooling arrangements. Such an approach, however, would not

have been politically acceptable. At the other extreme was nationalization, which was out of the

question, given American political culture and the

costs involved.21 After much debate, Congress

adopted a hybrid solution-the independent regulatory commission. This approach left business in

private hands, while limiting the potential for monopoly abuse (see box 7-4).

In contrast to antitrust and regulatory policy,

which were inspired by turn-of-the-century

events, the government’s use of information

policy to structure markets dates back to the

founding of the nation itself.22 Operating as a

common carrier, the government used its postal

monopoly not only to disseminate information,

but also to assure that there would be equitable access to it. Policies relating to the distribution of

newspapers were key to early commerce. Newspapers carried most of the business news, and also

I H SL,ch ~OW ~r~ ~,erc ,)n IY pr,)~ ided in 1914 under [he Clay[tm Antitrust ACI, which established the Federal Trade ctmm~issi(~n.

l“BecaL1\e ~hc Shcmlan Act was ~ague, II was ~)~-n to IIkral interpretation. Thus, w ]th few exceptions, it Was not applied against ‘Xis[ing

huflncss :irrangcnwnts. Althf~ugh it outlawed cartels, trusts, and pmling, it permitted mergers thr(mgh holding c(mlpanies and vertically integral~’d cx )rp mitl~ ms. In th~ Wmrl(ti that followed the passage of the Sberman Act, there was a rash of ht~r-iz[mtal nlergers. several years later, when

this approach prtJ\ cd unsuccessful, these holdlng ctmlpanies were replaced by vertically integrated fim~s. See Galambos and Pratt, op. cit..

fo(muw 16: and Fllgstein, op. cit., ftmtnote 15.

20 T1-ic railroads presented government with a special case. Although the railroad magnates were c(msidered to be guilty of stmle of the wi)rst

nmhct-related abuses, most Pe{)ple recognized that a national rail system was critical for economic grow[h and development. The railroads,

c\ cry (me rccognlm-i, had made it p)ssible to (pm up the West, a fact that had led the gtwemment 10 subsidi~e their dm’eh~pment [hr{w:h huge

Iiin(l grants and other financial benefits. The Union Pacific Railroad, for’ example, was given 12 milli(m acres t~f land, uhile the Central Pacific

reccl; Cd 1 I rnllll<m. RailroadPerfomlance continued to affecl all other aspects of ec(momic 1 ife. The na[ion’s financial markets, for example,

w crc grca[l~ mfttmced by ral I road financing, and commodity prices were directly I inked to railroad rates. See L.C. A. Knowles, E“cononrl(

l)c~ c/~)pmerrf in NIrrefeenfh Cerrfur-?$: ~“rmr~e, [;ermarr), Rus.rlu and fhe (ln~led .SIarc\ (New }’(wk, NY. Augustus M. Kelley Pub] ishers, Reprints

~Jf Ec(~nilnlw Cl;issIcs, 1 967), pp. 91-93.

~’ ~;ulan~bos and Pratt, op. cit., footnote 16, pp. 91-93,

‘~ Sce G~lrcIon H(x)k. 7’hc Crc[ifr(m (!t the Arrrerl[an Replihlr(, 1776-1787 (Chapel HIII, NC Unl\crsit} of N(~rth Carolina Press, 1959).
144 I Electronic Enterprises: Looking to the Future

To regulate the railroads, the Interstate Commerce Commission (ICC) was established in 1887 with the

passage of the Interstate Commerce Act. Its overall mission was to assure that rates were “just and reasonable” In addition, price discrimination and pooling arrangements were prohibited To carry out this mandate, the President was to appoint five commissioners who were to serve for 6 years Although the ICC responded to the immediate call for government action, its impact on business practices was quite limited.

Having little expertise, scanty information, and no investigative authority, the ICC lacked the wherewithal to

effectively execute its role. 1

The ICC’S impact over the long term was, however, much more significant. It not only set an important

precedent for regulatory intervention, but it also helped to firmly establish the principles of common carriage and equal access to essential facilities Moreover, despite the ICC’S failings, it served as the organizational model for the regulation of a number of subsequent technologies.

1 LouIs Galambos and Joseph Pratt, The Rise of fhe Corporafe Comrnonwea/fh U S Business ar-df’ubhc Pohcy m (he Twentle(h

Century (New York, NY Basvc Books, 1989), pp 57-59

SOURCE Off Ice of Technology Assessment, 1994

provided the fastest and cheapest way of gathering signed to foster information dissemination. James

information. 23 In 1836, the Post Office also inau- Madison—the principal author of the intellectual

gurated postal express services to speed informa- property clause—was aware of the monopolistic

tion-especially market intelligence—in advance connotations of such a governmentally granted,

of the regular stagecoach mails.24 exclusive right. However, he distinguished the

The laws to protect intellectual property rights, American system of intellectual property rights

also authorized by the Constitution, were de- from previous ones that he believed to be more

23 Perhaps tie C]earest expression of the government policy to promote the widespread dissemination of news was the postage-free exchange of newspapers among printers. Long before the advent of press associations, editors obtained nonlocal information by culling out-oftown newspapers, their so-called exchanges. In an arrangement that today’s journalists might find foreign and offensive, the government in

essence operated the nation’s news-gathering services. These printers’ exchanges furnished most nonloeat news throughout the first half of the

19th century. See, for a discussion, Richard B. Kielbowicz, “ne Press, Post Office, and the Flow of News in the Earl y Republ ic,’’~oumal o~ (he

Early Republic, vol. 3, fall 1983, pp. 255-280.

24 NeWSpa~rs Could send slips postage-free; other mailers paid triple the regular rates. PoIicymakers assumed that newspapers could thereby obtain timely market intelligence through the government-subsidized service, making it available to all readers and thereby counteracting

the advantages enj)yed by speculators who had access to private communication channels. Public support for such policies intensified as the

nation expanded westward. Postal debates reflected a concern about the issue of equitable access m inf(mnati(m. See Richard B. Kielbowicz,

‘“Modernization, Communicati(m Policy, and the Geo@itics Of News, 1820- 1860,” Critica/ Studies in Mass Communications, vol. 3, March

1986, pp. 21-35.
Chapter 7 Government and Markets I 145

pernicious. 25 To avoid the evils of monopoly,

Madison intended that the exclusive rights afforded by copyright be narrowly circumscribed;

owned by “many” and “granted for only limited

periods of time. "

26 The role of the government

was also confined to that of registrar; it was up to

the holders of intellectual property rights themselves to monitor infringements and enforce their

own rights .27 Despite the Founding Fathers’

intentions, however, the issue of how to bound

these rights, and the role of the government with

respect to them, has repeatedly reemerged as intellectual property rights were extended to incorporate new technologies.28

The government’s inconsistency with respect

to market rules and regulations was most apparent

in the case of trade and tariff policy. Although

Americans strongly supported free market competition in the domestic marketplace, this was not

true with respect to foreign trade. Until World War

II, the United States was the most protectionist industrialized country in the world.29 This protectionist stance was justified on a number of

grounds—the need to raise revenues, protect infant industries, and defend against cheap foreign

labor. 30 However, the country position on tariffs

also needs to be understood in terms of the overriding concern at the time about integrating the nation and developing a national market. It is likely

that the economic costs of high tariffs were difficult to perceive. Consumers enjoyed an ever-increasing number of products at increasing y lower

prices, as a result of a national market that could

support mass production.3

1 It was much later, after the U.S. economy had grown sufficiently to be

integrated into the world economy, that the United
146 I Electronic Enterprises: Looking to the Future

States became the leading advocate for free

trade. 32

Today, these four market-related policy mechanisms are overlapping because of the convergence

of information and communication technologies

and the shift to a knowledge-based, global economy. For example, trade policy can no longer be

considered apart from information, regulatory,

and antitrust policies. Increasingly, it is not tariffs

per se, but rather nontariff barriers— such as data

protection laws, regulatory rules of interconnection, and domestic cooperative business relationships—that serve as constraints on trade. Similarly, the resolution of antitrust disputes increasingly

revolves around issues having to do with intellectual property rights, regulatory policies, and

whether or not there is a global consensus on antitrust rules. For example, whether an electronic

business network constitutes an antitrust infringement might depend on the way that standards are

set, and/or the way that intellectual property rights

and privacy laws are applied to commercial networked information systems.

Determining how to apply traditional market

rules and regulations is also likely to be problematic in the future. Electronic business networks

fall somewhere between the classical notions of

markets and firms. While serving to enhance efficiency and effectiveness, they can shape the structure and functioning of the marketplace in profound ways. Because of the many interdependencies entailed in networks (whether social or

technological), their mode of operation often conflicts with the prerequisites for competitive markets.33 Members of business networks, for example, are not “price-takers” as classical theory

would dictate .34 At the turn of the century, economic actors sought to control future prices and

reduce their transaction costs by vertically integrating their activities within a corporation; today,

many businesses are hedging against the future by

establishing long-term commitments through networking .35

In developing such networks, members are motivated by both social and economic factors.36

Studies show, for example, that businesses will

accept a cost disadvantage in selecting suppliers.

Instead of seeking the lowest cost provider, they

prefer to deal with suppliers with whom they have

ongoing relationships. Similarly, in selecting

partners for a strategic alliance, businesses often

choose to work with people they have known and

dealt with for a considerable period of time.37

~z See Robert Gilpm, Tile Po//I/tw/ E(WMWI.Y d /t~/crnati<jna/Re/a/ions (Princeton, NJ: Princtmm University press, 1987). At [he end of the

19th century, the dcba[e ahmt tariffs ;ilso k>~iilll~ mtcrtwirml w Ith the issue of antitrust. The debate t(xk place along party lines. Republicans

under the RtMmevclt Admlnlstra[i(m pushed had !(lr antitrust regulation, but fawmxi high tariffs. Derm)crats, on the t)ther hand, adamantly

opp)sed the Sherman Act, arguing [hat it was high tariffs, not PNd ing and cartel arrangements, that gave rise to competitiveness prt~blems. If

tariffs were lowered, they ctmttmded. trusts w {mid face cmmgh c(mqxtition from abroad. Many years later it was the Repuhllcan Adn~inistratitm, under president Reagan, that— In its effort to Iimil the SCOFC of antitrust infringements-argued a very similar case.

1~ see crl~tlm{) An[f)nelll .’~c E~fJnonllc n~ory of lnf(mmati(m Networks, in Cristiant~ Ant(mell i (cd.), 7’he fi”conornlc$ 0/ /n/Ornlfili(jn

Nefi~orks (Arrlsterciam, The Netherlands North Holland, 1992), pp. 5-29.

~~ AS noted by H1rschrllM “Llnder pcrfe~t ~(~nlpctili(>n there is m) r(xml for bargaining, Ilcgotiati(m, rcnlonstrati(ms (M lllllllla] a~]UStlllcnt

and the various (~perat(ws that c(mtracl together need not enter into recurrent or c(mtinuing relati(mships as a result of which they would get it)

kn(nv each other wel l.’” Albert 0. Hirschman, ‘“Rival Interprctali(ms of Market St)ciety: Civilizing, Destructive, or Feeble’?’’./ourna/ o/ E{wnon~-

i[ Lilerarure, vol. 4, N(). 20, p. 1473.

~s G. H(xigson, Etononll(.s and /ns[l(ul{(ms (Can]br@c, UK: P(dity Press, 1988), p. 209. See also Jay B. Barney and William G. ouchi,

‘“Basic C(mcepts,”’ in Jay B. Bamcy and Wil I]am G. Ouchl (eds. ), Organicariorud Econonucs (San Francisco, CA, Jossey-Bass Publ ishm,

1986), pp. 2425.

36 see Mark (jranove((er, “~~ old and the NCW S(K’IOIOOy” “ b , I n Frledland and Roberts(m, op. cit., footnote 6; and Mark Granovettcr, “Ect)-

mm~ic Action and St~ial Structure: The pr(~hlen] of Embeddedrwss,” in Mark Granovetter and Richard Swedberg (eds. ), The .!k(io/ogy (~ k’conomic l.ij~ (Boulder, CO: Westvimv Press, 1992).

37 Sce Marl{) Benassi, ‘“orgm iza[ional perspectives of Strategic Alhances* “ in Gemot Grabher, 7’/1c Embedded F-lrrn: On 7-}le .S()~\()ct()n[Jttli{s @ Industrlol ,Vem orks (L(md(m, England R(mteledge, 1993), p. 104.
Chapter 7 Government and Markets | 147

Studies of innovation also show that innovation

tends to be greater when the relationships between

buyers and sellers is cooperative rather than competitive.38 Labor markets likewise often exhibit

these kinds of network characteristics.39

Business networks also violate the ideal condition for competitive markets that requires that

market information be symmetrically available.

Whereas in competitive markets the only information required is price, in business networks the

amount of information that needs to be shared is

much greater. 40 In some cases, this kind Of information exchange will be confined to the network, and thus can serve as a major competitive

advantage and a formidable barrier to market

entry. 41 In fact, it is clear that networks are often

designed precisely to play such a role.42

Some market problems relating to networked

information systems have already arisen—for example, multiple-listing services (MLSs) in the

real estate business. These networks are designed

not only to connect buyers and sellers, but also to

share the cost of searching facilities across a broad

base of users, Although such networks have existed for years, it is only recently that MLSs have

been computerized, allowing real estate information to be updated on a daily basis.43 Real estate

listings for a given area are pooled in a computer

database and distributed to realtors over an electronic network. Realtors use the system to preview houses for customers, allowing them to

compare homes according to a variety of criteria

without having to visit each one. Brokers are willing to share their listings because they reduce their

costs and receive a commission on each property

sold by another participating broker.44 Multiplelisting services are often administered by the local

Board of Realtors, which maintains and updates

the computer register. However, these systems are

not open to all brokers and a number of membership stipulations apply. 45 Restricted membership,

it is said, is designed to provide quality control.

On the other hand, those who are excluded from

such services often argue—and at times with the

courts’ concurrence-that closed MLSs give rise

to anticompetitive behavior.46

Multiple-party networking services not only

reduce search costs; they also allow transactions

and exchange to take place online. Computer reservation systems (CRSs) also provide such services. Travel agencies use these systems to select

w Marh Gran, )\ ~[ter .~c SocloIoglca I and Ec(~nonllc Approaches tO Labor Market ‘nai) ‘is” “ in Grant~\ ctter and Swedberg, op. cit., f~~{~tml[e 36, pp. 233-263.

4) See T. Scito\ sk), ‘“Two C(mcepts of Network External Ec(momies, “’Journal oj Pollncal Economy, April 1954, p. 150.

4 I Bmcc Kog(l[ Wel,lan Shari, and C,{)rd{)n walker, “Know]edge In [he Network and the Network as Kn(~~ ledge,”’ in Grabher. op. cit., f{){)tn(ltc 37, p. 77,

‘z For a dlscusslt)n, see R(hln Mansell, “lnfomlati(m, Organization, and Competitiveness: Networking Strategies in the 1990s,” In Ant(~nclIi, t)p. cit., f(x)tnf)te 33, pp. 2 I 7-227.

43 As L(lpatha and Slnlons ~)in[ out, manually (perated multiple-listing services date back to the early 1900s. Like many {)f the other indu\-

try wide organl~a[ ional arrangements that came Into existence about this time, multiple-listing services were designed to bring (waler, and thu\

greater efficltmc~, to the mdustg thnmgh the establishment of some agreed-up(m standards and practices, See John E. Lopatka and Jt)w’ph J,

Sirmm, “’Real Es[ate Multlple Listing Services and Antitrust Revisited, ‘“ in Steve S. Wildman and Margaret Guerin-Ca]vert, E/c(fronli .$er~ I{c \

,Net\\orks: A lllt~ines~ and Pub/it Pol\{y Challenge (New York, NY: Praeger, 1991), pp. 207-208.

u Jbld

4$ For ~xanlple s{)nle MLSS require that on]y exclusive right-t(~-sell listings be placed in the s~ stem, others require that nlenlk’r$ pla~c :~11

prt)pertles f~)r w hlch they have an excluslve listlng in the service; w hlle others pr(~hlbit memhershlp In competing multiple-llst]ng scm ICCS.

Ibid.. pp. 217-2 I 9,

~ See Ihld, for ~\anlp]e, who defend (he use of MLSS on quali(y and efficiency ~rounds.
148 I Electronic Enterprises: Looking to the Future

and book flights. These systems are so efficient

that they have become essential for doing business.

47 Today, there are four national CRS providers that serve over 95 percent of all travel agents.48

When deployment achieves such levels, the electronic network can truly be said to represent the

market.

The first computer reservation systems—

SABRE and APOLLO-were established by the

two largest airline companies, American and

United. Because these companies had already developed their own internal reservation systems

and had large markets, they were able to use these

systems to both increase efficiency and gain strategic competitive advantage. 49 S ince travel agents

used CRS terminals and data that were provided

by the airlines themselves, their selection of

flights was often biased in favor of the provider’s

airline service. The airlines not only listed their

own services first, but they also provided bonuses

to agents on the basis of volume sales. In addition,

the prices that American and United charged to allow others to post flights on their CRS systems

discriminated against competitors. Antitrust actions led the Civil Aeronautics Board, in 1984, to

establish rules prohibiting display bias; limiting

the terms of CRS contracts with travel agents to 5

years; and prohibiting discriminatory pricing with

respect to both booking fees and access charges.

However, despite these rules, previous market

patterns have persisted, suggesting that there are

still significant barriers to entry .50

Although automated teller machine (ATM) networks are now operated on a relatively open and

shared basis, they have, like other electronic markets, run into antitrust problems51 (see box 7-5).

In the case of ATMs, the problem is with pricing.

ATM networks are operated as joint systems comprised of a networking service provider, who provides electronic funds transfer services; and ATM

sponsors, such as banks or other financial service

providers, who own and operate the ATMs.

Whenever customers use an ATM to access the

ATM of a different sponsor, the network provider

receives a switching fee from the first ATM owner.

That same owner also has to pay a service fee to

the sponsor of the ATM accessed by the customer

through the network. ATM owners may also pay

the network provider a fixed fee for access to the

network, as well as a royalty fee for each ATM

card issued.52 The ATM providers may, in turn,

charge the customer a fee for the ATM card, a fee

for each transaction, and a fee for accessing a foreign ATM sponsor. Whether or not ATM sponsors

should be free to set rates independent y of the network service provider is an extremely controversial issue. Network providers argued that fixed,

universal rates are necessary for the effective func -

~? Estlnla[es are that Using CRSS, alrllne ~onlpanlcs have been able [(J reduce (he C(M[S of making a reservation fr(ml $7.50 It) $0.50, whli~

travel agencies have increased [heir pr(xiuctivity by as much as 43 percent. See Margaret E. Guerin-Calvert and Roger G. Nell, “Ctmlpuwr

Reservation Systems and Their Network Linkages to lhe Airline Industry, “ in Wildrnan and Guerin-Calvert, ibid., p. 147.

48 Andrew, N. Klel[, ‘hcolllputer Res~rvati~m Sys[ems: Conlpetllion” Misunderstood, “’ Antitrusr Bu//c;in, vol. 32, winter 1992, pp. 833-861.

-W Ibid. see also D COP.land and j, McKenney, “Air]ine Reservation SyS(enlS: LeSS(JnS fron~ History,’” MIS Quarterly, vol. 12, N(). 3, September 1988, pp. 353-370; and U.S. Department of Transpwtati(m, S@v qfAir/ine Compufer Reser\at/on Sysfems (Washingt(m, DC U.S.

G(wemrnent Printing Office, May 1988).

50 Guerln.Ca]ve~ and N()]], op. cil, f(~)tnote 47, pp. 1 ~- 187

f I ~crc ~,ere a nurllber of reasons ~ hy ATM network provld~rs found it in their interest to have c(mlpatible syslenls. lnlcrc(mnccli(m allowed banks to gain ec(mtm~ies t~f scale, increasing the rate of usage while averaging operating costs. In additi(m, providers were able to offer

services t~utside of [heir local marketing areas. Alan Gart, “HOW Technology 1s Changing Banking,” Journa/ ofRetai/ Bank~ng, spring 1992,

v(J. xiv, No. 1.

‘z Richard J. Gilbert, “on the Delegatitm of Pricing Authority in Shared Automatic Teller Machine Networks, “in Wildman and Gucrin-Cal -

\ m. op. cit., f(x~tm)te 43, pp. 114-144. As noted by Richard Mitchell, these fees can add up for muhiregi(mal banks that have to pay membership

fees ft~r a variety t)f networks. Richard Mitchell, “Electr(mic Payments Services: Watershed in EFT Cons(d idati(m,” Bank MfJnagcnIcnl, oct(hcr

1992, pp. 73, 76.
Chapter 7 Government and Markets I 149

Automated teller machine networks (ATMs) also function as electronic markets, providing both automated and networked banking services These networks reduce the costs of executing transactions by alIowing banks to shorten teller hours and build smaller and fewer branches At the same time, consume

gain by having much more convenient banking services, with access 24 hours a day from a number of different providers across a wide geographic area

While initially slow to take off ATMs have greatly increased in popularity 1 By 1990, there were 45,0(

ATMs deployed, as compared to only 2,000 in 19732 As usage Increased, so did the number and variety

competitors seeking to provide ATM services Nonbank financial restitutions such as Visa, Mastercard, Plus,

and Cirrus quickly entered the fray Being unregulated, these financial service providers had the advantage

of being able to offer nationally based services More recently, providers of data-processing services a

getting into the market In the fall of 1992, for example, EDS announced its intention to enter the electron

funds transfer market, deploying 10000 ATM machines by 1995, while Affiliated Computer Systems noted

its plans to Increase its ATM base during the same period from 800 to 5,0003 To maintain their market posi

tion existing ATM owners are seeking to differentiate their services by adding value, and to establish a n

tional platform and reduce their costs by entering into mergers and alliances Leading the way iS Electron

Payments Services (EPS), a joint venture of four major banking companies 4

Today’s enhanced ATM services attest to this growing competition ATMs are now available in almost any

locale—bank premises urban streets, airports, shopping malls, gas stations, universities, and hospital

Moreover the range of services offered iS expanding all the time Customers can obtain cash, transfer

funds across accounts make deposits, and obtain cash balances using the latest technology 5

In son

cases they can communicate with bank personnel via interactive video, pay bills, and make nonbank pur

chases of such things as stamps, subway cards, and even gift certificates.6ATM services can also be a

cessed Internationally By negotiating across shared ATM networks, for example, Hong Kong Bank now

allows customers to get cash at 120,000 ATMs in 50 countries Similarly, Citibank provides cash access

from 150000 machines worldwide 7

‘ The slow pace of deployment was due not only to customer resistance According to Peter Keen even as late as 1982 ma

banks were still skepllcal about the profltablllty of ATMs Peter Keen, Cornpe[fr?g m T/me Using Te/econmur?ca[lons /or Cornpet/(1

Advantage (Cambridge MA Balllnger Publlshlng Co 1986)

2 Alan Gart How Technology IS Changing Banking, ’ Journal of Retali Banking spring 1992, VOI xv, No 1, p 42

3 Rtchard Mitchell ‘Electronic Payment Servces Watershed m EFT Consolldatlon, ’ Bank Management, October 19!

p 76

4 At the outset EPSWIII Ilnk 1 400 fmanclal mstltutlonswlth 13,000ATMsm 16 states, processing an estimated 1 bllllon transactlo

per year This adds up to about 20 percent of the nation’s switched ATM services Thomas Hoffman, “Regional Banks Form ATM N

work Compu[erwor/d July 27 1993

> Laurl Green How Buck Rogers Is Balllng Out ATMs ‘ Bank Managemen/, November 1992, pp 65-67, see also, Mark Arer

High-Tech Banking Centers Add Value to Branches, ABA Banking Journal, November 1992, pp 39-46

G Ibid See also Joe Asher Seaflrsf Expands Card Delwery System, ” %erlcan Banking Journal. April 1 ~1 PP 7678

7 Mark Cllfford Touch an ATM for Money,’” Far Easlern Economic Rewew, Sept 24, 1992 pp 62-63

SOURCE Office of Technology Assessment 1994
150 I Electronic Enterprises: Looking to the Future

tioning of the network and to promote ATM

usage; others, in particular ATM sponsors, contend that rate-setting, when imposed by network

providers, is anticompetitive. Court rulings on the

issue to date have been inconsistent. However,

these kinds of cases will likely increase in the future, given the increase in competition.53

Sorting out these issues in an environment of

virtual corporations and electronic commerce will

become extremely difficult, requiring concurrent

expertise in such areas as antitrust law, regulatory

policy, networking technology and standards development, intellectual property and privacy law,

and trade policy. Given the complexity of the issues, the economic costs of institutional failure,

and the tendency of people to continue to view situations through the lens of old paradigms, Congress might want to establish a Commission or authorize a major study to analyze the implications

of conducting business via electronic networks

and enterprises for market rules and regulations.

In the past, national commissions have been especially useful in focusing the nation’s attention

on issues, such as electronic commerce, that are

likely to have a broad impact on everyone.54 The

costs of setting up a commission are relatively

small. Because national commissions are generally established to deal with a specific set of problems and have a limited tenure, there is virtually

no risk of generating an enduring, and eventually

unnecessary, government organization. Moreover, because commissions are temporary and

unique in nature, they can often attract outstanding individuals with broad experience who would

not be available on a long-term basis. This would

be especially important in understanding the longterm market implications of electronic commerce

because the range of knowledge that is required is

so broad, and experts in the field are unlikely to

have a basis for association and interaction. By

heightening the public’s awareness of a problem

and by engaging the public to debate its solution, a

commission to examine electronic commerce

could also serve an important legitimating function at a time when the economy is undergoing

such fundamental change; when government and

the private sector are reconsidering and reworking

their relationships; and when firms need to rethink

and revise how they conduct their businesses.55

One model that might be followed in setting up

a commission is that of the National Commission

on New Technological Uses of Copyrighted

Works (CONTU). This commission was established as part of an effort to comprehensively revise U.S. copyright law in the light of technological change and the greatly enhanced value of

information. Following 3 years of deliberation,

the commission presented its recommendations to

Congress; many were incorporated into the 1986

Copyright Act, thereby extending copyright

protection to computer software.56

OPTION B: Restructure the Organizational

Basis for Communication Decisionmaking

Decisions about the structure of the marketplace

are not necessarily made deliberately. Often such

choices result from decisions made in what might

53 For an econonllc” analysls of these issues, See Gilbert, ibid. For a discussion of the legal cases, see also, Karen L. Grimm and David A.

Balto, “HOW the Antitrust Lawrs Limit Pricing Policies of Shared ATM Networks,” Banking LuwRe\’iet~’, vol. 4, winter 1992, pp. 15-24, In NaItond Bank Corporation ]’. Visa USA, the court upheld the right of the network to fix credit card interexchange fees, whereas in Flrsl Texas

.%tin~s Asso(iafion v. the Court held that, when an ATM network has market power, it could fix fees only if, at the same time, it allowed ATM

owners to imp~se surcharges or rebates. In Va//ey Bank ~’. P/us Syslem, Inc., the court concluded that it was not necessary to fix fees, since a

number of ATM netw(wks o~rated successfully without having to do so.

SJ For ~)ne discussion of the role ~) fconlnlissi{)ns, see Frank Popper, The President’s Commission (New y(~rk Ny: Twentieth centu~ Fund!

April 1970).

5S Ibid,

M see Flna/ Reporl ~~ !}le Nat\~na/ conlnll.~sitjn on Ne\\ Technological Uses of Copyrighted Works (Washington, DC: Libraw of Congress,

1979),
Chapter 7 Government and Markets | 151

appear to be a totally different arena. Because

communication and information technologies undergird all social and economic activities, the

"spillover effects” of regulatory policies can have

far-reaching consequences. In a knowledge-based

economy, special care will be needed to ensure

that regulatory policies are responsive to, and consistent with, national economic and social goals.

One major problem that has prevented such policy

reconciliation in the past has been the extremely

fractionated nature of the U.S. communication

policy decisionmaking process. To avoid these

problems in the future, a more coherent policymaking process will be needed.

The Clinton Administration has taken a number of steps in this direction. Acknowledging the

critical importance of the national information infrastructure (NII) in a global knowledge-based

economy, the Administration has recently laid out

a vision for its development. To assist in articulating and implementing this vision, a National Information Infrastructure Task Force (IITF) has

been established. Membership includes high-level representatives of all federal agencies having a

major role to play in the development and application of information technologies. Input from the

private sector will be channeled through an advisory council of key stakeholders including industry, labor, academia, public interest groups, and

state and local governments. In addition, the IITF

has established an electronic bulletin board system that will provide IITF schedules, committee

reports, and public minutes of meetings.57 The

White House Office of Science and Technology

Policy (OSTP), together with the National Economic Council, is responsible for directing the operations of the Task Force, with the Secretary of

Commerce acting as Chair.58 Much of the staff

work will be carried out by the National Telecommunications and Information Administration

(NTIA) of the Department of Commerce.

Although the IITF represents a major step forward in the development of a coherent communications policy, in keeping with other national

policy goals, it is questionable whether such an ad

hoc process can resolve the jurisdictional problems that traditionally have characterized U.S.

communication policymaking over the long

term. 59 These problems will only be exacerbated

in the future, given the continued convergence of

technology across industry and policymaking

boundaries, the greatly enhanced value of information, and the globalization of the communication marketplace. A more permanent, organizational solution may be required in order to

consider communication policy in terms of all of

its social and economic ramifications.

One possible organizational option, for example, would be to formally designate NTIA as the

lead agency to coordinate national communication policy. NTIA, in the Department of Commerce, is a likely candidate. In 1978, Executive

Order 12046 established NTIA to “provide for the

coordination of the telecommunication activities

of the Executive Branch. ’*Go NTIA has itself pro51 //7,~- C’~olnlltlee Report, DCC. ~, 1993.

58 lbl~, Accor~lng t. the EXecutl Ve order ~s[ab] ishlng the National Ec{momic council, its charge is to “adviSe [he 1 ITF (m mat[crs r~lal~d t“

the development of the NI 1, such as: the appropriate roles of the private and public sectors in NII development; a visi(m for the e\ (~luticm t)f the

Nll and Its public and c(mmlerclal applicatitms; the impact of current and proposed regulatory regimes on the evt)lutltm tlf the NII prlk acy,

security, and copyright issues, nati( ma] strategies for maximizing interconnection and interoperabil ity of ct~nlnlun icati(~n n~t~r(lrhs, and Lint ~ ~rsal access. ” The C(mncll IS alst~ c\pected to Invite experts to submit inf(~mlatitm to the C(wncil.

$() For a ~etalle~ dlscusc.lon ~)f these Pro b]erns see OTA crl/i(a/ c~rrrra,flwn.. Co)?l/?]/~nlt’all<Jn./iJr f~~~ F14tlfre, OTA-CIT-~7 (Washington,

DC 11.S. G(wcmment Pnntlng Office, 1990), esp. ch. 13.

6047 LI. s.c. 1 s I .
152 I Electronic Enterprises: Looking to the Future

posed this option in its report, NTIA Telecom

2000,61 arguing that the current organizational

structure for communication policy suffers from

an outlook that:

m

■

●

often tends to be reactive and skewed toward

achieving short-term objectives;

focuses too much on the status quo; and

is too concerned with balancing particular interests, rather than

with long-range policy planning.62

According to NTIA, the present, fragmented

decisionmaking process encourages stakeholders

to shop around for the policy forum in which they

are likely to receive the most sympathetic hearing.63 An executive branch agency, it is argued,

can be more proactive than an independent agency

such as the Federal Communications Commission (FCC). Moreover, an executive branch

agency can more successfully bring together a

cross-disciplinary depth of skills and command

greater acceptance and respect within both the

government and the private sector than can the

FCC, which has a narrowly conceived regulatory

(and some would say deregulatory) role.64

The idea of transferring authority from independent agencies to the executive branch as a

means of enhancing policy coordination is not a

new idea. A number of Presidential commissions

created to analyze the organization of government

have recommended such a realignment of power.

65 One of the most recent was the Ash Council .

established by President Nixon in 1969. It criticized the independent regulatory commissions for

being neither responsive to the public interest nor

66 It is important coordinated with national policy.

to note, however, that in prescribing the integration of a number of independent agencies, the Ash

Council made an exception of the FCC. It argued

that FCC should remain independent, given the

sensitive role that it has played with respect to the

mass media.67

Were NTIA to play a greater role in policymaking, its staff and resources would clearly need to

be upgraded. Only recently—with a strong Presidential vision of the NII and a Democratic majority in the Congress—has NTIA shown an ability

to address a consistent national communication

policy. Nor has the NTIA been successful in performing the former Office of Technology Policy

(OTP) task of coordinating the U.S. communication policy position for presentation in international policy fora.

61 According to NTIA: ‘.The Executive Branch should have the authority to eskddid policy, while the FCC should remain the agency for

inlp/ementa/ion ofpo/icy [emphasis in the original ].” It should be noted that, if this proposal were adopted, the executive branch and legislative

agencies would, in effect, be reversing their traditional roles.

c$’2 us. ~pa~ment of Commerce, National Te]ecommunicati(ms and lnfm-mati(m Administration, NTIA Te/ecom 2~: Charling t/le

Cour.sejtir a New Century (Washington, DC: U.S. Government Printing Office, 1988), p. 165.

63 Ibid.

fJq Ibid., pp. 167-172.

65 For example, in its reP)~ to Congress, the Brown]ow” Commission, established under President Roosevelt, recommended that 100 independent agencies, administrations, boards, and commissions be integrated into 12 executive departments. The report was particularly critical of

the independent regulatory agencies, characterizing them as the “headless fourth branch of Government.” The first Hoover C(mmlissi(m, set up

after World War 11, made similar recommendations, arguing that the executive branch ought to be reorganized to create an integrated, hierarchical structure with the President as an active manager. So, too, did the J.M. Landis Report on Reguhn-y Agencies w Ihe Presidenf E/eel, U.S.

Senate, 1960. See, for a discussion, The Federal Executive Establishment: Evolution and Trends,” Library of Congress, C(mgressi(mal Research Service, prepared for the Senate Committee on Governmental Affairs, May 1980. See also Ronald C. Moe, “The Two Hoover Commissions in Retrospect,” Library of Congress, Congressional Research Service, Nov. 4, 1981.

M “A New Regulatory Framework: Report on Selected Independent Regulatory Agencies,” The President Advisory Council (m Executive Organization, 1971. For a discussion, see M(w, op. cit., footnote 65; see also Harvey Mansfield, “Reorganizing the Federal Executive

Branch: The Limits of institutionalization,” Luw and Contemporary Prob/ems, vol. 35, summer 1970, pp. 460-495.

67“A New Regulatory Framework,’” op. cit., footrmte 66, pp. ~1 -~.
Chapter 7 Government and Markets | 153

The FCC would most likely oppose a transfer

of any authority to the executive branch. Members

of congressional committees responsible for FCC

oversight, who in the past have protected their jurisdictions in this regard, are also likely to oppose

such a measure. 68 Given the historical litany of

complaints against independent regulatory commissions, their continued longevity in the face of

such criticism attests to the strength of congressional stakeholder opposition to any change.69

The FCC could also serve as the central l0CUS of

policymaking. Established by the Communications Act of 1934, FCC was designed, in part, to

implement the act “by centralizing authority heretofore granted by law to several agencies. ”70

However, the mushrooming of other agencies and

authorities to deal with burgeoning communication and communication-related issues has seriously challenged FCC’s role in this regard.

Created as an independent agency, FCC is

linked and responsible to the legislative, rather

than to the executive, branch.71 Because it is the

job of the legislature to make policy, it can reasonably be argued that FCC should be assigned the

task of reconciling national communication

policy objectives and jurisdictional disputes on a

day-to-day basis. This legislative connection

might also serve to ensure that, when developing

communication policy, a broad range of interests

are taken into account. Because compromise is inherent in the congressional environment, the legislative perspective is often eclectic and inclusive

of many minority points of view.72

This tendency to be all-embracing, however, is

both a strength and a weakness of the FCC. The

congressional focus on winning political favor

and fashioning political compromises can serve to

put the brakes on any major policy departures.73

Some might also take issue with the option of

transferring considerable policymaking authority

to FCC on grounds of democratic theory, which

requires that policy organizations be held directly

accountable to the public for their actions.74 Although shifting this authority to FCC would not

shield the policymaking process from public influence, it might change the nature and process of

the debate about policy issues.

68 AS Moe has ~)lnted (Jut, .’congres~ is not well t)rg~lzed [{) deal wi[h abstract principles, such as a unified e~ccuti~ e branch. me ~(~nln~iltee structure is m(we appropriate for dealing with specific problem areas and with distinct units w ithin the executive branch. .Glvcn its c(mstltuti(mal p)wer m establish units in the executive branch, and given its instituti(mal tendency to seek influence in the rnah ing of agcnc> Pdlc),

C~mgress increasingly has been inclined to create agencies which have a high degree of independence from Presidential supcm ]Sitm.” Moe, (Jp,

cit., f[x}tnote 65, p. 12.

69 See G Ien (), Robinson” (cd,), C’onvnun/~a(lons j& Tomorrow’: Policy Perspetti~’es jor the 1980s (New York, N y: Pracger, 1978)

1047 U.s.c. I 5 I .

7 I Alth{)uoh inde~.ndent regu]a[OV agencies have traditi(mally performed a c(m~bination of legislative, administrative, and Judicial func- 8

tions-and, In fact, this was one of the original justifications ftw their existence—they are, in theory, regarded as “arms t~f the C(mgress. ” Fi)r a

general dlscussi(m of independent regulatory agencies, see U.S. Congress, Senate C(mm)it[ee on Governmental Affairs, SII/dY on Fedcra/ Re<q -

u/al~on i’. Regu/alory Organi:aflon, prepared Pursuant to S. Res. 7 I (Washingt(m, DC: U.S. Government Printing Office, December 1977).

7Z Al[l,{)u h nlmy scho]ars and adnlinlstrators have taken issue with the concept of the independent regulato~ conmlissl~)nst a 

g ‘llll)~’r

have str(mgly defended it. Most early advocates focused on the role of such agencies as administrative expert, separate and untarnished by the

~)litlcal pr(~ess. This rationale was not hmg in vogue, however, becoming over time a major source of critic]sm of independent re~ulatc~r~

a~encles, More recent]y the argun}ent has ken nlade that, instead of being protected fr(ml abuse and invidious influences, th~ ct)n]n]l~s]t~n toml

helps to assure that different wews WI]] be taken into account at the highest agency level. See Glen Rohins(m, “Re(~rganizing the Indcpcnckmt

Regulatory Agencies,”’ Vir~lnia Law Re\ie\\, vol. 57, September 1991, pp. 947-995.

7 ~ AS Glen Robinson” has ~)inted out, this tendency of Congress to be conservative is c(msidered by s(mle to be a bencftt. AS he n(~tes’ ‘“F(N

Iandtxmnd c(mservatives. . . Congress’ incapacities are more of a virtue than a vice, they discourage facile leglsla[i\e st~luti(ms to social and

cc(m(m~ic problem-soluti(ms [hat often prove shor--sighted and ultimately mischievous.’” R{)bins(m, ibid., p. 358.

TA For this ~)lnt, See Robct-t G. Dixon, Jr., “The Independent Comrnissi(ms and Political Respmsibility,’” AdnIinj.~fra[~\e fxm Re\ Ic\t, vol.

2s, N(~. 1, w Inter 1975, pp. I -16.
154 I Electronic Enterprises: Looking to the Future

If the FCC were assigned an enhanced role in

developing and coordinating national communications policy, it would clearly need more resources. Congress’ decision to deregulate the

cable industry has put a tremendous drain on the

commission’s staff. With the mounting public interest in the NII, the commission is also being

pressed to accept petitions and filings online. Although such a policy would clearly open the FCC

to a broader range of inputs, given present resources, it will surely lead to information overload. Given a broader range of issues to deal with,

the staff composition will also need to become

more interdisciplinary. Designed primarily to perform traditional regulatory functions, the FCC has

been dominated professionally by lawyers, engineers, and regulatory economists.

Over time, organizations develop a “mystique”

of their own that affects how the public, other

agencies, and Congress relate to them .75 Once established, the character of an organization is extremel y difficult to change, often requiring nonorganizational measures that expand an agency’s

constituency, the complete reconfiguration of administration systems, and a different mix of professional skills.76 Keeping these factors in mind,

it could be argued that—given the numerous problems experienced with the previous organizational arrangements for dealing with communication

policy, and the growing national importance of

communication issues—the time may be right to

create an executive agency specifically designed

to deal with communication policy. Depending on

the degree of prominence that Congress wants to

attach to such a mission, an agency might be structured as an independent executive agency (like the

Environmental Protection Agency) or a Cabinetlevel department.77

As noted above, the virtues of the executive

branch form of organization have long been touted

by a number of scholars and commissions on governmental organization. Among the advantages

typically cited are: enhanced policy coordination;

greater efficiencies in division of responsibility

and the execution of tasks; greater accountability;

and greater ability to attract high-quality personnel.

Regardless of the merits of this option, establishing an executive department is not simple.

Historically, Congress has not been eager to create

new departments, often requiring an agency to

serve a period of apprenticeship before being promoted to the status of an executive department.

This reluctance is not surprising, given the close

interrelationships between the executive and legislative branches. Any major changes in the

executive branch are likely to have considerable

impacts on the distribution of power and responsibility in Congress. Thus, Congress has the ultimate say with respect to any significant organizational changes.

The states also might look askance at the creation of a Department of Communication. As early as 1789, they were concerned that the growth of

the executive branch would take place at the expense of their own authority and policymaking

prerogatives. It was for this reason, for example,

that the states opposed the establishment of the

Department of Education. Given this history, and

75 AS Harold Seldnlan haS noted: “me quest for C(x)rdination is in many respects the twentieth century equivalent Of the medieval ‘earch ‘or

the philosopher’s stone. If only we can find the right formula for coordination, we can reconcile the irreconcilable, harmonize compelling and

wh(dly divergent interests, overcome irrationalities in our government structure and make hard policy choices to which no one will dissent.”

Harold Seidman, Po/ilics, Position, and Power: The Dynumics oj’Federu/ Organization (New York, NY: Oxford University Press, 1980), p.

205.

76 Ibid.

77 Executive agencies resldlng (~utslde the dep~menta] s~cture were rare until the turn Of the 20th century, bec~m~ing increasingly Pr~)n~inent after World War 11. Their growth parallels, in a sense, the growing complexity of society. Many independent agencies were established in

response to the Iobbyin: pressure of a particular constituency. Examples are the Departments of Agriculture, Labor, and Education. Others such

as the EnvironmentalProtection Agency were created, in part, as a syrnbollc gesture to give prominence to a particular national concern. I bid.,

pp. 29-3 ]
Chapter 7 Government and Markets I 155

the number and intensity of recent disagreements

between the federal and state governments about

communication policy, the states might be averse

to setting up an executive agency for communication.

A number of other stakeholders are likely to be

ambivalent about creating a new agency to deal

with communication policy issues. Although

many may be frustrated by the lack of consistency

and coherence in the present situation, they have

learned how to operate effectively within it. The

establishment of a new agency would be fraught

with uncertainty. Since federal agencies have

often served to promote certain constituencies,

many stakeholders would oppose or favor an

executive branch agency for communication, depending on whether they thought it would enhance or detract from their particular interests.

In considering these options, however, it is important to remember that organizational change is

not a panacea and cannot substitute for real policy

agreement. Because of the connection between organizational structure and policy orientation,

stakeholders’ preferences concerning where the

organizational responsibility for coordinating

communication policy should 1ie are often colored

more by their policy preferences than their views

about public administration.78

78 AS descrl~d b} t~ne authority (m pub] ic administration: “’As a rule, htnvever, rcvwganizati(m prop)sals sht~uld have as their L)bjecll\e the

furtherance [~f s~mw puhllc FX)licy. Indeed, reorganizati(m appears to be a basic p~litical prc}cess thr(wgh which Individuals and gr(wps gain

p(~wcr and influence over others In order t{) achieve the social and political change the) c(msldcr desirable.” See Rtmald C, M(w, “Exccutl\ e

Branch Re(~rganllatl(m An oven iew, ” LlhraV of C(mgress, C(mgressi(mal Research Scr\ ice, 1978. p. 6.
PLANNING WORKSHOP

Carl Cargill

Standards Strategist

Sun Microsystems, Inc.

Joan Clay brook

President

Publ ic Citizen

Derek Leebaert

Graduate School of Business

Georgetown University

Jonathan Morell

Principal Member of Technical

Staff

Industrial Technology Institute

Michael Piore

Department of Economics

Massachusetts Institute of

Technology

Ronald E. Rice

School of Communication,

Information, and Library Studies

Rutgers University

Michael Schrage

Los Angeles Times

Appendix:

Workshop .

Participants A

Arthur B. Shostak

Department of Psychology and

Sociology

Drexel University

Jim Snider

Author

Arndt Serge

Faculty of Economics and Business

Administration

University of Limburg,

Netherlands

Tom Valovic

Editor

Telecommunications Magazine

BUSINESS APPLICATIONS

WORKSHOP

Tim Daunch

Manager, Information Integration

Services

Allen–Bradley Co.

Peter Grunwald

Vice President

Issue Dynamics

David Hartzband

Leaders for Manufacturing

Program

Massachusetts Institute of

Technology

Lawrence Hunter

National Library of Medicine

Leonard Kruk

Marketing Director, Workplace

Research

Knoll/Westinghouse

Robert Langridge

Computer Graphics Laboratory

University of California

San Francisco

Anne Lightburn

Director of Technology

Food Marketing Institute

Sean McLinden, M.D.

Health Field Consultant

GFN Healthcare, Inc.
158 I Electronic Enterprises: Looking to the Future

Robert Mittman

Senior Research Fellow

Institute for the Future

Jonathan Morell

Principal Member of Technical

Staff

Industrial Technology Institute

John Quarterman

Editor of Matrix News

Texas Internet Consulting

Ted Rybeck

Director of Research

Advanced Manufacturing Research

Patricia Sachs

Visiting Professor

Expert Systems Laboratory

NYNEX Science & Technology

Bruce Shriver

Professor

University of Southwestern

Louisiana

Michael Spring

Professor

Department of Information

Sciences

University of Pittsburgh

PRODUCTIVITY WORKSHOP

Daniel Appleton

President

D. Appleton Co., Inc.

Paul Attewell

Professor of Sociology

The City University of New York

Daniel Bell

Scholar–In–Residence

American Academy of Arts

and Sciences

Lewis Branscomb

Professor

John F. Kennedy School of

Government

Harvard University

Erik Brynjolfsson

Assistant Professor/Management

Science

Massachusetts Institute of

Technology

Jim Eichner

Executive Director

Expert Systems Laboratory

NYNEX

Meg Graham

Manager, Research Information

and Infrastructure

Xerox PARC

Martin Hoffmann

Senior Visiting Fellow

Center for Technology, Policy and

Industrial Development

Massachusetts Institute of

Technology

Brian Kahin

Director, Information Infrastructure

Project

Harvard University

Robert Kaplan

Professor

Harvard Business School

Harvard University

Thomas W. Malone

Professor

Sloan School of Management

Massachusetts Institute of

Technology

Warren McFarlan

Professor

Harvard Business School

Harvard University

Patricia Sachs

Visiting Professor

Expert Systems Laboratory

NYNEX

Edward Steinmueller

Deputy Director

Center for Economic Policy

Research

Bill Wittland

Williams Marketing Services, Inc.

Steven Wildman

Associate Professor

Department of Communications

Studies

Northwestern University

LABOR MANAGEMENT

WORKSHOP

Jim Berm

Executive Director

Federation for Industrial Retention

and Renewal

Ron Blackwell

Assistant to the President for

Economic Affairs

Amalgamated Clothing & Textile

Workers Union

Martin Baily Jim Keller Charles Bofferding

Senior Economist Information Infrastructure Project Executive Director

Brookings Institution Harvard University SPEEA (Boeing Union)
Dennis Chamot

Executive Assistant to the

President

Department of Professional

Employees

AFL-CIO

Ken Edwards

Director, Technical Services

International Brotherhood of

Electrical Workers

Frank Emspak

Assistant Professor

School for Workers

University of Wisconsin

Debbie Goldman

Research Economist

Communications Workers of

America

Appendix A: Workshop Participants I 159

Don Kennedy

Director and Educational

Representative

international Association of

Machinists and Aerospace

Workers

Terry Rosen

Labor Economist

American Federation of State,

County, and Municipal

Employees

Randle Sutton

Assistant Director

American Postal Workers Union,

AFL-CIO
Appendix:

Reviewers and

B Contributors

Dana I. Abrams

Director, Planning and Standards

Rockwell Int.

Leon L. Addison

Director of Personnel

John D. Hollingsworth on Wheels

Myron Aldrink

Senior Director of Marketing

Meridian Inc.

Herb Anderson

Vice President and General

Manager

Northrop Information Services

Center

John O. Anderson

Manager

Boeing Commercial Airplane

Group

Gordon J. Arita

Regional Manager, Intermodal

Sales

Southern Pacific Lines

Walter Baer

Deputy Vice President

RAND Corp.

160 |

Jerry Beasley

Executive Vice President

South Carolina Textile

Manufacturing Assoc.

Robert Benjamin

Robert Benjamin Consultants

John L. Berg

President

Future Tee., Inc.

Dick Berreth

Vice President, Manufacturing

Haworth. Inc.

Stanley Besen

Vice President

Charles River Associates, Inc.

Sena Black

Director, Research and

Communications

Tim Brennan

Professor

University of Maryland at

Baltimore

Daniel Brenner

Vice President for Law &

Regulatory Policy

National Cable Television

Association

George Brett

Director

Microelectronics Center of North

Carolina

Geoffrey Brook

Assistant Professor of Management

Science

Sloan School of Management

Massachusetts Institute of

Technology

L.E. Brown

MIS Systems Analyst

South Carolina State Development SUSPA Inc.

Board

Lin Brown

Paul L. Borrill Director

Director Ease of Use Programs

Sun Microsystems, Inc. SunSoft Inc.
Appendix B: Reviewers and Contributors | 161

Richard Bruce

President

Group Communications/Xerox

Document Con.

Xerox Palo Alto Research Center

Gary A. Burgess

General Manager

McDonnell Douglas

Peter N. Butenhoff

President

Textile/Clothing Technology Corp.

Pete Butkiewicz

Executive Secretary

Kent-lonia Labor Council,

AFL-CIO

Dave Byrne

Senior Account Manager

Clemson Fabrics

Milliken & Co.

Linda A. CalIon

Attorney at Law

Berliner and Cohen

Terri Carlton

Administrative Director

Institute of Business Designers

George Connick

President

University of Maine

Paul Cornell

Manager, Behavioral &

Environment Research

Steelcase

Russell R. Coyner

Executive Director

BIFMA

Geri Cross

Econimic Development Manager

City of Sunnyvale, CA

Frank Degar

Associate Director

Extension Operations, Southeast

Manufacturing Technology

Center

University of South Carolina

Doug Dennis

Strategic Programs Manager

Computer Systems

Silicon Graphics

R.W. Dillon

Executive Vice President

Steel Heddle

Henriette T. Douglas

Management Information Systems

TRW Vehicle Safety Systems, Inc.

Charlotte S. DuBose

Director of Retail

Partnership/VISA

Milliken & Co.

Manek Dustoor

Director for Technologies and

Concepts

Haworth, Inc.

Judson H. Early

Director, Research and

Development

Textile/Clothing Technology Corp.

Jay M. Engineer

Plant Manager

Fashion Fabrics of America

Fred Falk

Technical Manager

Project Engineering and

Development

John D. Hollingsworth on Wheels

Richard Fazzone

Telecommunications Affairs

Manager

GE Information Services Co.

Frank Fisher

Visiting Scholar

Lyndon B. Johnson School of

Public Affairs

Richard Fry

Director, Management Information

Services

American Seating

Jim Fulton

Technical Manager

Microelectronics Center of North

Carolina

Francesco Garibaldo

Research Director

Institute for Economic and Social

Research

Bologna, Italy

Henry Geller

Director

Washington Center for Policy

Research

Arthur B. Goodwin

Manager of Transportation Projects

WORLDPORT LA

Charles E. Grantham

President

Institute for the Study of

Distributed Work

John E. Gross

Group Leader

McDonnell Douglas

A mar Gupta

Sloan School of Management

Massachusetts Institute of

Technology
162 I Electronic Enterprises: Looking to the Future

Dale N. Hatfield

President

Hatfield Associates, Inc.

Ed Hill

Site Director

Clemson University

Arnold J. Hooton

Manager, Technology Assurance

The Knoll Group

Catherine Howells

Manager, External Standards

Boeing Computer Services

Ken Hubbell

Computer Graphics Designer

Textile/Clothing Technology Corp.

Robert Johnston

Corporate Liaison

Public Policy Department

Herman Miller Inc.

Mary Gardiner Jones

President

Consumer Interest Research

Institute

Brian Kahin

Director, Information Infrastructure

Project

Harvard University

Ted M. Kahn

Research Scientist & Director of

Technology Development

Institute for Research on Learning

Richard Kennedy

President

Kennedy Research

Dan Keyes

Technical Specialist

Applied Technology Center

Birgit M. Klohs

Executive Director

Grand Rapids Area Chamber of

Commerce

Robert Koplowitz

Director

Logistics Services

Port of Seattle

Ellee Koss

Associate

The Human Resources

Management Group, Inc.

P.E. (Pat) Lanthier

Director, Public Policy and

Technology

Pacific Bell

William Lehr

Professor

Columbia University School of

Business

Harvey G. Lehtman

Strategic Technology, Planning &

Quality

Apple Computer, Inc.

W. Douglas Lewis

Chief Information Officer

AT&T Network Systems

James L. Lemons

President

Center for Applied Textile

Technology

Michael Liebhold

Senior Scientist

Apple Computer, Inc.

John D.C. Little

Institute Professor

Massachusetts Institute of

Technology

Stuart E. Madnick

Professor of Management Science

Sloan School of Management

Massachusetts Institute of

Technology

Thomas W. Malone

CEO

Milliken and Co.

Elliot Maxwell

Assistant Vice President

Policy and Issues Management

Pacific Telesis

Gloria Mayer

Chief Operating Officer

Friendly Hills Health Network

Bruce McConnell

Chief, Information Policy

Office of Management and Budget

Dennis James McIntosh

Executive Director

Center for Office Technology

Udo Mehlberg

Director, Technology and Research

Port of Tacoma

William L. Miller

Director, Research and

Development

Steelcase

W.L. Mitchell

Administrative Manager

Project Engineering and

Development

John D. Hollingsworth on Wheels

Jonathan Morell

Senior Member, Technical Staff

Industrial Technology Institute

Joel Moses

Dean, School of Engineering

Massachusetts Institute of

Technology
Appendix B: Reviewers and Contributors I 163

Dennis Nagel

Ford Motor Co.

Jeff Newman

Fielding Institute

Eli Noam

Director

Columbia Institute for

Tele–Information

Columbia University

Stephen Nobel

Vice President

The Right Place Program

AlexOsadzinski

Director

Markets & Product Strategy

Sun Microsystems Computer Corp.

John (Jack) Peck

Professor, Department of Computer

Science

Clemson University

Ken Peterson

General Manager, Regulatory

Affairs

McDonnell Douglas

Thomas M. Reardon

Manager, Research and

Information

BIFMA

David Reiling

Southeast Manufacturing

Technology Center

Andrea Riniker

Deputy Executive Director

Port of Seattle

Doug Rippy

Dean, School of Textiles

Clemson Apparel Research

James M. Robinson

Director of Operations

Science and Technology, Inc.

NYNEX

Kenneth Robinson

Telecommunication Policy Review

Kirk Rosener

Electronic Commerce Consultant

Technology Management

Applications

George L. Roth

Research Associate

Organizational Learning Center

Massachusetts Institute of

Technology

Fred E. Rutan

Director–Purchasing

Haworth, Inc.

Anthony Rutkowski

Executive Director

Internet Society

Jon Ryburg

Principal

Facility Performance Group

AlIan M. Schiffman

Enterprise Integration

Technologies

Arthur Schiller

Arthur D. Little, Inc.

Leslie Schneider

TECnet

Tufts University

John F. Sheeran

Manager

Architecture & Standards

Management

Boeing Computer Services

Gene Simons

Director

Northeast Manufacturing

Technology Center

Marvin Sirbu

Chairman

Information Networking Institute

Carnegie–Mellon University

Lewis Smith

Systems Coordinator

Wundaweve Carpets

Oliver Smoot

Executive Vice President

Computer Business Equipment

Manufacturers Association

Michael B. Spring

Professor

Department of Information Science

University of Pittsburgh

Richard Solomon

Research Associate

Massachusetts Institute of

Technology

Nancy J. Staples

Research Associate/Assistant

Professor

Clemson University

Anne Strauss-Weider

Principal Transportation Economist

Port of Authority. NY

Susan U. Stucky

Associate Director

Institute for Research on Learning

Jim Sweeney

Manager, Electronic Data

Interchange

Southern Pacific Lines
164 I Electronic Enterprises: Looking to the Future

Paul Tang

Program Manager

Hewlett Packard Labs

Richard Thayer

Director of Government Affairs

AT&T

Thomas Valovic

Editor

Telecommunicate ions Magazine

Rex Visser

Manager, Engineering Information

Technology

Haworth, Inc.

Janet M. Vratny

Information Specialist, Apple

Library

Apple Computer, Inc.

Brian W. Warren

Vice President

Operations and Manufacturing

Wundaweve

Karen E. Wieckert

Research Affiliate

Institute for Research on Learning

Steven R. Wilcox

Manager, Technical Services

BIFMA

Frederick Williams

Chair in Communications

The University of Texas at Austin

Mark L. Williams

Manager

Existing Business and Industry

Services

South Carolina State Development

Board

Bill Wittland

Williams Marketing Services, Inc.

JoAnne Yates

Associate Professor and

Coordinator of the Sloan

Communication Program

Sloan School of Management

Massachusetts Institute of

Technology

Diane Zandstra

President

Intersect Interiors

Lewis E. Zink

Senior Manager

Communication–VIP Relations,

Everett Division

Boeing Commercial Airplane

Group

Joseph L. Zobkiw

Director, Facilities Management

Manufacturing Services

Haworth, Inc.
Contractor

Reports c

Richard Bishop, “Information Technology Selected Case Studies: Environmental Consumer Segment,’*

March 1993.

Timothy J. Brennan. “Market Failure and Public Policy Toward Telecommunications Infrastructures,”

May 1993.

Robert Mittman, Institute for the Future, “The Electronic Enterprise,” May 1993.

Abbe Mowshowitz, “European Positioning in the Information Economy,” July 1993.

Paul Teske, “The Historical and Institutional Context of American Government Efforts to Aid the Electronic Enterprise,” March 1993.

I 165
Appendix:

Boxes,

Figures,

D and Tables

BOXES

Chapter 1

1-1 Some Examples of How Businesses Are Using Information Networks, p. 8

1-2 The Economic Environment, p. 11

1-3 Online Information and Services Market, pp. 16-17

1-4 Enterprise Integration, p. 21

1-5 Shared Information Systems, p. 22

1-6 Networking for Economic Advantage, p. 24

1-7 Technology Applications To Support Organizational Change, pp. 25-26

1-8 Markets, Firms, and Networks: Their Relationship to Information Technology, p. 28

1-9 Electronic Data Interchange, p. 29

1-10 Electronic Commerce Matrix, pp. 30-31

Chapter 2

2-1 Groupware Product Growth by Product Category, p. 44

2-2 Intelligent Network, p. 45

2-3 American Information Exchange (AMIX) Network, pp. 48-49

2-4 Organizational Restructuring: The Cases of Saturn and Ford, p. 53

2-5 A Flexible or Fragmented Workforce?, p. 57

Chapter 3

3-1 Support for Minitel in France, p. 74

3-2 The Modified Final Judgment, p. 75

I 166
Appendix D: Boxes, Figures, and Tables | 167

Chapter 4

4-1 Standards Universe: Type of Standard by Goals, pp. 86-87

4-2 National Initiative for Product Data Exchange (NIPDE), p. 88

4-3 Open Systems Interconnection (OSI) Reference Model, p. 90

4-4 Integrated Services Digital Network (ISDN), p. 91

4-5 The Global Internet, pp. 92-93

Chapter 6

6-1 NIST’s MTCs Respond to the Needs of Small Manufacturers, p. 122

6-2 A Sampling of Statewide and Regional Network Programs, p. 125

6-3 MIT’s Engineering-Management Distance Learning Project, p. 131

Chapter 7

7-1 Role of Government in Structuring the American Marketplace, p. 140

7-2 Intellectual Property Law, p. 141

7-3 Communications Act of 1934, p. 141

7-4 Interstate Commerce Commission, p. 144

7-5 Automated Teller Machine Networks, p. 149

FIGURES

Chapter 1

1-1 Factors Determining Economic Performance, p. 9

1-2 Share of Major International Joint Ventures, p. 12

1-3 Growth of Private and Public Electronic Mail Networks, p. 13

1-4 Information Technology as a Share of Total Investment in Producers’ Durable Equipment, p. 14

1-5 Capital Endowment in the Service Sector, p. 14

1-6 Annual Online Vendor Growth 1983-92, p. 16

1-7 Annual Online Database Growth, 1983-92, p. 17

1-8 Annual Database Publisher Growth 1983-92, p. 17

1-9 Enterprise-Wide Computer Network, p. 21

1-10 Network of Networks, p. 22

1-11 Networking for Economic Advantage, p. 24

1-12 Performance Criteria, Organizational Responses, and Technology Support, p. 26

1-13 Electronic Data Interchange (EDI), p. 29

1-14 Electronic Commerce Matrix, p. 31

Chapter 2

2-1 America’s Leading High-Tech Users, p. 39

2-2 Groupware Product Growth by Product Category, p. 44

2-3 Intelligent Network, p. 45

2-4 American Information Exchange (AMIX) Network, p. 49

2-5 Forming the Partnership: A Two-Stage Process, p. 55
168 I Electronic Enterprises: Looking to the Future

Chapter 3

3-1 Information Industry, 2001, p. 67

3-2 Electronic Market to the Home, p. 68

3-3 Economies of Agglomeration, p. 68

3-4 Common Carriage “Rights-of-Way,” p. 69

3-5 Global Telecommunications Alliances, p. 77

Chapter 4

4-1 Type of Standard by Goals, p. 86

4-2 OSI Reference Model, p. 90

4-3 Growth of Networks Connected to the Internet, p. 92

4-4 Uses of Internet Networks and Internet Protocol Internets, p. 93

4-5 CALS in the Context of the Information Infrastructure, p. 95

Chapter 6

6-1 Total Training Budgets for U.S. Corporations, p. 130

6-2 Upgrade Training by Occupation, p. 135

TABLES

Chapter 1

1-1 Changing Organizational Patterns in U.S. Industry, p. 18

Chapter 5

5-1 The Federal R&D Tax Credit, p. 107

Chapter 6

6-1 Information Services, Databases, and Conferences on TECnet, p. 123

6-2 Comparison of Workforce Training, p. 134
Acronyms

ADA

AMIX

AMTEX

ANSI

ARPA

ATM

ATM

ATP

BARRNET

B-ISDN

BISNIS

CAD

CAD/CAM

CALS

CASE

CES

CIM

CIX

CNC

CNRI

COBOL

CONTU

COS

CRADA

CRS

and

Terms E

After Date of Award (of contract)

American Information Exchange Network

American Textile Partnership

American National Standards Institute

Advanced Research Projects Agency

Asynchronous Transfer Mode

Automated Teller Machine

Advanced Technology Program (NIST)

Bay Area Regional Research Network

Broadband Integrated Services Digital Network

Department of Commerce network that helps companies identify business opportunities in the states of the former Soviet Union

computer–aided design

computer–aided design/computer-aided manufacturing

Continuous Acquisition and Life-Cycle Support (DOD)

Computer Aided Software Engineering

Cooperative Extension Service

computer-integrated manufacturing

Commercial Internet Exchange Association

computerized numerically controlled (machines)

Corporation for National Research Initiatives

Common Business–Oriented Language

National Commission on New Technological Uses of Copyrighted Works

Corporation for Open Systems

Cooperative Research and Development Agreement

Computer Reservation System

| 169
170 I Electronic Enterprises: Looking to the Future

DAMA

DARPA

DOD

DOE

DOL

EBB

EC/EDI

EDI

EDIFACT

EINet

EPRI

FCC

FDDI

FEDIX

GSA

HPCC

IETF

IITF

ISDN

IVANS

KIR

LAN

LFM

LLNL

LOCIS

MAP

MAN

MAMTC

MCC

MFJ

MIT

MITUC

MOSAIC

MTC

MLS

NASA

NCMS

NDEA

NEMTC

NIST

NII

Demand Activated Manufacturing Architecture

Defense Advanced Research Projects Agency

Department of Defense

Department of Energy

Department of Labor

Economic Bulletin Board, a network of business and economic information operated

by the Department of Commerce

Electronic Commerce through Electronic Data Interchange

Electronic Data Interchange

Electronic Data Interchange For Administration, Commerce and Transport

Enterprise Integration Network

Electric Power Research Institute

Federal Communications Commission

Fiber Distributed Data Interface

Federal Information Exchange

General Services Administration

High Performance Computing and Communications

Internet Engineering Task Force

Information Infrastructure Task Force

Integrated Services Digital Network

Insurance Value Added Network Services

Kansas Industrial Retraining

local area network

Leadership for Manufacturing program at MIT

Lawrence Livermore National Laboratory

Library of Congress Information System

Manufacturing Automation Protocol

metropolitan area network

Mid–America Manufacturing Technology Center

Microelectronics and Computer Technology Corp.

Modified Final Judgment

Massachusetts Institute of Technology

Maine Information Technology Users Consortium

Manufacturing Outreach System to Achieve International Competitiveness

Manufacturing Technology Centers

multiple–listing service

National Aeronautical and Space Administration

National Center for Manufacturing Science

National Defense Education Act of 1958

Northeast Manufacturing Technology Center

National Institute for Standards and Technology

National Information Infrastructure
Appendix E: Acronyms and Terms I 171

NLM

NSF

NTIA

OAW

OMB

ONA

OSI

OSTP

QSRF

RBOC

REA

RINET

RJV

SBA

SEMATECH

SMDS

SPC

STEP

TCP/IP

TECnet

TOP

TQM

TRP

UNIX

VAN

WAN

National Library of Medicine

National Science Foundation

National Telecommunications and Information Administration

Office of the American Workplace (Department of Labor)

Office of Management and Budget

Open Network Architecture

Open Systems Interconnection

Office of Science and Technology Policy

Quality Systems Resource Facility

Regional Bell Operating Co.

Rural Electrification Administration

Reinsurance and Insurance Network

Research Joint Venture

Small Business Administration

a consortium of DOD (through ARPA) and 11 private semiconductor companies

Switched Multimegabit Data Service

statistical process control

State Technology Extension Program

Transmission Control Protocol/Internet Protocol—a standard developed for the Internet

Technologies for Effective Cooperation Network

Technical Office Protocol

total quality management

Technology Reinvestment Program (administered by ARPA)

an operating system standard developed at Bell Labs

value–added network

wide–area network
A

Access

open, 64-70, 85

requirements for, 33-34

Advanced Research Projects Agency, 97,99, 108,

112, 120

Advanced Technologies Program, 108

American Information Exchange Network, 48-49

American Textile Partnership, 82

A MIX. See American Information Exchange Network

AMTEX, See American Textile Partnership

Antitrust, 73-79, 143

ARPA. See Advanced Research Projects Agency

ATM. See Automated teller machine

AT&T, 71,74,78

Automated teller machine, 148-149

B

BISNIS, 127

Bottlenecks, 79

Business

environment, 10-19

global, 19-20

large, 48,54,83,85, 100, 129, 130

medium, 39, 83, 84, 85, 100

potential for, 19-30

small, 20, 39-40, 49-50, 52, 54, 83, 84, 85,

100-101, 107, 130

Business-related information, dissemination of,

127-129

c

CALS. See Continuous Acquisition and Life-Cycle

support

CES. See Cooperative Extension Service

CIM. See Computer-integrated manufacturing

CIX. See Commercial Internet Exchange Association

CNC. See Computerized numerically controlled machines

I ndex

CNRI. See Corporation for National Research Initiatives

CommerceNet, 101

Commercial Internet Exchange Association, 113

Commission, on electronic commerce, 139-150

Common carriage, 50,64-70

Communication decisionmaking, 150-155

Communication marketplace, international, 20

Communications Act of 1934, 139, 141

Computer Inquiry H, 65

Computer-integrated manufacturing, 20,23

Computer reservation systems, 147

Computerized numerically controlled machines, 57

Consortia, 20,89,95-98

Continuous Acquisition and Life-Cycle Support, 95,

111

CONTU, See National Commission on New Technological Uses of Copyrighted Works

Cooperative

Extension Service, 119, 120

networking. See Networking

research and development. See Research and development

Research and Development Agreement, 82-83

Corporation for National Research Initiatives, 99

CRADA. See Cooperative Research and Development Agreement

Criteria to evaluate policy options, 61-62

Cross-ownership rules, 73-79

D

DAMA. See Demand Activated Manufacturing Architecture

Demand Activated Manufacturing Architecture, 83

Department of Agriculture, 118, 119

Department of Defense, 95,97, 110-111, 112, 114

Department of Energy, 82, 83, 112

Department of Labor, 124

Deployment. See Technology

Diffusion. See Technology

Digital Library Initiative, 99

Distance learning, 130, 131, 132 | 173
174 I Electronic Enterprises: Looking to the Future

Distributed computing systems, 20,43

Downsizing, 27,57

E

EBB. See Electronic Bulletin Board

EC/EDI. See Electronic Commerce through Electronic Data Interchange

Economic performance, 7-10,59

Economies of agglomeration, 66,68

Economy, global, information-based, 10-14

EDI. See Electronic Data Interchange

Educating for technology transfer, 117-136

Education, support for, 129-133

EINet. See Enterprise Integration Network

Electronic

Bulletin Board, 128

commerce issues, 37-62

commerce matrix, 30-31

Commerce through Electronic Data Interchange,

114

Data Interchange, 20,23,27,29,40,49-50, 56,82

mail networks. See Networks

Enterprise integration, 21-22

Enterprise Integration Network, 101

Extension services, 118-127

F

Federal Communications Commission, 47,48,63,

65,71,74, 152, 153, 154

Federal Information Exchange, 128

FEDIX. See Federal Information Exchange

Financial Services Technology Consortium, 83

Findings, 30-35

Ford Motor Co., 130

G

GATEC. See Government Acquisition Through

Electronic Commerce

General Services Administration, 111

Global economy. See Economy

Global partnerships, 20,77

Government Acquisition Through Electronic Commerce, 114

Government role, 34-35

Grants and loans, 107-109

Groupware, 20,43-44

H

High Performance Computing and Communications

Program, 99, 114

HPCC. See High Performance Computing and Communications Program

I

ICC. See Interstate Commerce Commission

IETF. See Internet Engineering Task Force

IITF. See Information Infrastructure Task Force

IMI. See International Marketing Insights

Industrial extension, 119-126

Information

Infrastructure Task Force, 151

policy, 143

systems, shared, 22

technology, investment in networked, 14

Insurance Value Added Network Services, 82

Integrated Services Digital Network, 91,95

Intellectual property law, 109, 139, 141, 144, 145

Intelligent network, 43-45

Interconnection, 41,64-70

International integration, 76

International Marketing Insights, 128

Internet, 79,92, 112, 113, 114, 128

Internet Engineering Task Force, 89,91,93

Internetworking, 43,48

Interoperability, 40-43,61

Interstate Commerce Commission, 144

ISDN. See Integrated Services Digital Network

Issues, 37-62

IVANS. See Insurance Value Added Network Services

J

Japan, 46,54,56,57

Joint ventures, 12,20,76,98, 100

Just-in-time

production, 40

delivery, 50,56

L

Labor, 124-126

Lawrence Livermore National Laboratory, 114

LCMarvel. See Machine-Assisted Realization of the

Virtual Electronic Library

Library of Congress Information System, 128

LLNL. See Lawrence Livermore National Laboratory

LOCIS. See Library of Congress Information System

M

Machine-Assisted Realization of the Virtual Electronic Library, 128

Maine Information Technology Users Consortium,

132
Index | 175

Manufacturing

agile, 40-41

Outreach Centers, 84

Outreach System to Achieve International Competitiveness, 124

Technology Centers, 84,85, 101, 119-126

Marketplace rules, 139, 140

Markets, government and, 137-155

Mergers, 78-79

Minitel, 73,74

MIT’s Distance Learning Project, 130-131

MITUC. See Maine Information Technology Users

Consortium

MLS. See Multiple-listing service

Modernization Forum, 121

Modified Final Judgment, 74,75

Monitoring. See Workplace

MOSAIC. See Manufacturing Outreach System to

Achieve International Competitiveness

MTC. See Manufacturing Technology Centers

Multiple-listing service, 147

N

NASA. See National Aeronautics and Space Administration

National

Aeronautics and Space Administration, 99, 112

Center for Manufacturing Sciences, 121

Commission on New Technological Uses of Copyrighted Works, 150

Defense Education Act of 1958, 132, 133

Information Infrastructure, 7,71, 151

Initiative for Product Data Exchange, 88

Institute for Standards and Technology, 84, 108,

112, 119

Library of Medicine, 112, 114, 132

Science Foundation, 99, 112, 113, 132

Telecommunications and Information Administration, 72, 112, 115, 151, 152

Networking, cooperative, 81-101

Networks,

architecture, 33

business use of, 8,24

designing, 33

electronic mail, 13

proprietary, 30,33

structure of, 33

versatile, 61

worldwide, 20

NII. See National Information Infrastructure

NIPDE. See National Initiative for Product Data

Exchange

NIST. See National Institute for Standards and

Technology

NLM. See National Library of Medicine

NSF. See National Science Foundation

NTIA. See National Telecommunications and Information Administration

o

OAW, See Office of the American Workplace

Office of

Management and Budget, 128

Science and Technology Policy, 151

the American Workplace, 124

Online databases, services, 16-17

Open Network Architecture, 75

Open systems. See Interoperability

Open Systems Interconnection, 90,94,95

Organizational

change, 18, 23, 25, 34

innovations, 50-56

structure, 62

OSI. See Open Systems Interconnection

OSTP. See Office of Science and Technology Policy

P

Partnering, 20,52,54-55,77

Policy

implications, 30-35

options, criteria for evaluating, 61-62

Procurement, leveraging, 108-111

Production, flexible, decentralized 14-19

Production, mass, 15

Productivity paradox, 51

Proprietary systems, 41

Public goods, 42

R

REA. See Rural Electrification Administration

Reengineering, 23,55

Regional Bell Operating Companies, 74,75,76,78

Regulation, 62,63-79, 143

Regulatory approach, need for a new, 47-50

Reinsurance and Insurance Network, 82

Research and development, 103-115

Research and development, cooperative, 96-101

Resource maintenance, 62

RINET. See Reinsurance and Insurance Network

Rural Electrification Administration, 84,85

s

SBA. See Small Business Administration

SBA On-line, 127

SBIR. See Small Business Innovation Research

Grants Program

SEMATECH, 97-98
176 I Electronic Enterprises: Looking to the Future

Small Business

Administration, 127

Innovation Research Grants Program, 101

Technology Transfer Grants Program, 101

Small businesses. See Business

Software, 43-50

Standards

and interoperability, 40-43

dissemination, 94-95

open, 94-95

proprietary, 60

Standards-setting, 41-42,85-96

State Technology Extension Program, 119

STEP. See State Technology Extension Program

T

Tax incentives, 105-107

TCP/IP. See Transmission Control Protocol/Internet

Protocol

Technologies for Effective Cooperation Network,

101, 123, 124

Technology

and organizational innovations, 50-56

business access to, 70-73

choices, 35, 58-61

deployment, 33,38-39,61

development, 103-115

diffusion, 33,38-39, 107

impact on businesses, 19-23

impact on markets, 23-30

/industry developments, promoting, 103-115

investment in, 14, 51

push, 105, 107, 109, 111-115

Reinvestment Program, 101, 108, 120

to support business needs, 37-43

transfer, educating for, 117-136

TECnet. See Technologies for Effective Cooperation

Network

TOPS. See Trade Opportunity Files

Total quality management, 54-55

TQM. See Total quality management

Trade and tariff policies, 145

Trade Opportunity Files, 128

Training. See Education, See also Worker training

Transaction costs, 30-33,73

Transmission Control Protocol/Internet Protocol, 94,

112

Translational corporations, 19-20

u

Universal service, 70-73

Users, 38,73

v

Value-added networks, 114

Videoconferencing, 23

Virtual marketplace, 64

Visible Human Project, 114, 115

w

Wayne State University, 130

Wide area networks, 20,23

Work environment, 34,57,58

Work, team-based, 43

Worker training, support for, 107, 133-136

Workforce

flexible, 34,56-58

skills, 23

Workplace monitoring, 58

$? U.S GOVERNMENT PRINTING Of FICE: 1994 – 3 (J 1. 804 / 1 74 ~ ~