Electronic Markets and Electronic Hierarchies,

¶ … Electronic Markets and Electronic Hierarchies, Malone (1987) argues that the creation of markets and hierarchies is directly related to asset specificity and complexity of product descriptions inherent in products and services. According to the author a market's primary role is to act in essence as an intermediator of supply, demand, and market-specific information including pricing. Hierarchies act as the enablers and coordinators of value chains, where managerial decisions, not market forces, strive for the efficient coordination of suppliers and buyers. Malone's analysis of markets vs.

hierarchies reflects what each of these entities excels at and illustrates through his analysis their interdependencies on each other. A fundamental assumption of markets is that they have low production costs and high coordination costs, which is certainly the case for distributors, an example the author provides. Contrasting these assumptions about markets are the ones associated with hierarchies, which state production costs are typically high and coordination costs are low. Malone is assuming that hierarchies are inward centric and more focused on the efficiencies of their own processes.

Hierarchies have supply relationships that aren't built for breadth of offerings but instead designed for efficiency and accuracy of transactions. Hierarchies favor low complexity and standardization in asset specificity and low complexity of product description, while the converse is needed in markets. The author's assessment of the gradations between two models is dated and therefore lacks the insights into how hybrid hierarchy and market models could potentially be designed through the use of hierarchy, supplier, and market integration; a concept Malone spends the latter half of the article discussing.

The article concludes that the rapidly maturing area of database integration, use of artificial intelligence, constraint-based technologies for delivering product configurators and guided selling applications to the Web, and the use of intelligent agent technology to optimize online search will revolutionize the structure of hierarchies, markets, and lead to more time-focused hybrid models.

At the beginning of the article Malone makes an excellent point of assets having a time-specificity element to them, which is in fact the case with websites selling airline, entertainment, and sporting tickets where the event is the asset. The applications of Malone's theories is reflected in the growth of private trading exchanges (PTX), pioneered by Proctor and Gamble in the late 1990s to streamline transactions between buyers, sellers, and their channel partners or markets according to Columbus (2001).

Malone's contention that hierarchies would face more challenges even as real-time integration and databases entered what he saw as the highest level of evolution, Shared Databases, he didn't predict how integration would affect transaction velocity and the corresponding need for distributed order management systems to become the critical link between hierarchy and market structures. Critique of Malone Article In defining the shift of hierarchies towards markets, Malone does not go the entire distance of a value chain and analyze the ramifications of real-time integration changing selling and service arrangements.

Malone's analysis discusses efficiencies from a myopic perspective; he hasn't opened up the aperture of his analysis to consider how hierarchies and markets can be synchronized to deliver a more personalized, responsive, highly tailored, and very profitable experience to the customer. There are many examples of companies who have gone this last mile so to speak and looked at their value chain with the customer involved.

Wal-Mart, UPS, Dell Computer, General Electric, and other companies how have world-class supply chains didn't stop where Malone did with an analysis of integrations' effect on data sharing. These companies moved past the inward-facing view of data sharing and the effects of integration into the broader construct of how, at the moment of truth of selling to a customer, they could deliver the right product at.