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Researchers at MIT, for instance, studied one major consumer products company that spent millions on computerized flexible manufacturing technology to boost productivity at an underperforming plant. The new system replaced a traditional production line with individual manufacturing cells designed to allow employee teams to work on many different products with very little set-up time. But after the new equipment was in place, productivity actually fell. Workers, it seemed, were uncomfortable with the change and quickly learned to set the new system to replicate their old production methods.

Facing this unexpected paradox, the company was forced to re-examine its processes. Officials ultimately overhauled production incentives, paying employees based on team output rather than individual piece rates. Workers were also sent to training for basic problem solving and other “softer” skills and were given more authority to set their own production schedules and expectations. Over time, the plant become one of the company’s most productive, Hitt says.

“Until very recently, the classic way of thinking about technology was that you put it in, and you get cost savings. Companies thought ‘I’ll put a new machine in, and I’ll be able to get by with fewer operators and tenders.’ Or, ‘I’ll automate my branch so I’m going to have fewer tellers.’ That’s the old story. It turns out that staff reduction is one possible strategy, but you don’t get all the benefits you would get if you stepped back and decided to redesign the way your organization works,” Hitt says. Why do so many companies remain wedded to a traditional, hierarchical structure? A plausible reason, Hitt says, is that major organizational changes are time consuming, risky, and costly. In many cases, they require throwing out practices that have been successful for decades in favor of relatively unknown, radically different ones.

But Hitt suggests companies reconsider their view of such change. Instead of warily regarding it as a cost, firms should adopt the view that major organizational change is a necessary long-term investment in a new asset.

e-commerce: What's it all about?

What about e-commerce and its effect on corporate profits? Are companies’ profits threatened by customers’ ability to search online for the lowest possible price? Another study co-authored by Hitt provides some surprising answers to these questions. In the study “The Nature of Competition in the Electronic Markets: An Empirical Investigation of Online Travel Agent Offerings,” Hitt, Wharton’s Eric Clemons and Carnegie Mellon’s Il-Horn Hann examined the growing concern that customers’ unlimited ability to search for the lowest possible price will diminish profits as prices converge. The researchers studied one of the fastest growing and most competitive online markets: the online travel agency industry, in which consumers are able to search for airfare deals and bid on unsold tickets in online auctions.

Hitt and his colleagues found that despite these new competitive realities, prices varied by as much as 25 percent for the same airline ticket. “Thus, we found no evidence that prices have converged in this market,” Hitt says. Why the marked difference in prices? While it’s often argued that consumer search costs disappear on the Internet, Hitt’s study suggests that they are simply replaced with other transaction costs: the time it takes to sign up for an online agent, learn a new interface and enter flight preferences into multiple online sites. Faced with these tasks, most consumers choose not to spend the time necessary to find the entire range of market data. And online travel agents are still able to offer vastly different ticket prices without being put out of business by their rivals.

Another interesting finding: online travel agents sometimes use complicated web site designs to stall customers in their quest for the lowest possible price. A very complex interface design may be coupled with lower ticket prices under the assumption that a more computer-savvy customer will search harder for the best bargain. A very user-friendly interface, meanwhile, may be paired with high-priced tickets. The study also found that online travel agents tend to target specific types of travelers, thus differentiating their product.