TVA Rural Studies

Telecommunications Technology and American Rural Development in the 21st Century

Edward J. Malecki
Department of Geography
University of Florida
Gainesville, FL 32611-7315
July 1996

5. Business Use of Telematics

To businesses, telecommunications networks used to be like electricity, water distribution, and other utility networks. They were an important resource, but one over which a firm had very little control or influence. Firms had little choice about the equipment they could get or the services they were offered by monopoly providers. That was when all that was available was POTS plain old telephone service. Today, corporate users put together entire networks, either completely under their control or using circuits leased from common carriers, bypassing the public network partly or entirely. Together, deregulation and the new digital technologies have permitted firms to consciously design and operate private, internal telecommunications networks to decisively enhance their competitive position (Bar et al. 1989: 47-48; Hagstr"m 1992). "What used to be a cost of doing business is becoming a source of competitive advantage" (quoted in Cohen and Zysman 1987: 179; Keen 1991; Li 1995). Telecommunications services are used by all economic sectors, from mining and agriculture to manufacturing and tourism (Miles and Thomas 1990). These private networks are present in all global industries, where multinational companies have become true network firms. In all such global sectors, such as agriculture, autos, electronics, and financial services, sophisticated and constantly changing use of telecommunications is now a fact of everyday life and business operation (Mansell 1994).

Large business users have sophisticated needs and demands for systems that are cost-effective, flexible, secure, automated, integrated, and dependable. When local providers do not meet these needs, at a reasonable cost, firms do not hesitate to develop private networks and other solutions (Schmandt et al. 1990: 293). Multinational firms typically coordinate production and marketing by means of satellite-based communication systems. Ford Motor Company, for example, has built a transatlantic system of linked computer networks with video-conferencing capability in order to coordinate product development and manufacturing design (The Economist 1995a). The system grew out of earlier networks initiated within Ford of Europe, designed to centralize design and facilitate transfer of CAD/CAM (computer-aided design and computer-aided manufacturing) data among company locations (Dixon 1992). In the retailing sector, Wal-Mart Stores uses a leased satellite transponder to link its 1700 stores to its Bentonville, Arkansas headquarters and 14 distribution centers, in order to track every item sold at each checkout and to play the same background music in each store (Heenan 1991: 69; Bernal, Stuller, and Sung 1991: 36-43).

While information flows within corporations take place in many forms (personal contact, mail, courier), leased networks offer numerous advantages, such as lower costs, security, and compatibility of computer standards (Langdale 1989: 503). Most users of leased networks are large multinational firms. Smaller companies are generally unable to operate leased networks because of their cost; they are economical only if the organization is large enough to generate sufficient traffic to save on the more expensive public switched services).

Global firms were among the first to exploit telematics, and remain both large users and early users of new technologies. Sectors and specific operations that depend heavily on telecommunications include: those with credit card authorizations and billing operations, toll-free customer service numbers, outbound active telemarketing using automatic or human dialing systems, central publishing and facsimile transmission to remote printing locations, central transactional processing for accounting and other types of record-keeping, and financial transactions including brokerage, consumer loans, mortgage loans, and other bank-related transactions (Hack 1992b: 71). Among the largest users of telecommunications technologies are financial service firms (Warf 1989). Companies that are large telematics users rate demonstrated reliability, fiber-optic cabling, and ISDN as the most important elements of telecommunications infrastructure in business parks (Lyne 1991).

Just as the construction of new infrastructure networks of earlier eras such as the railroads and the interstate highway system altered the relative value of locations, the new telecommunications infrastructure is doing the same thing today (Cohen and Zysman 1987: 185-186). Flexible production processes and segmented markets demand advanced communications services (Twenhafel et al. 1989). A recent survey of economic development executives in the USA found that 38% of them say their area's telecommunications infrastructure recently played a primary role in attracting a new corporate facility (Venable 1993). Wilson and Teske (1990) cite numerous examples (rural as well as urban) of location decisions based on availability of superior tele- communications.

Most studies of location factors, or influences on the location of economic activities, have not considered telecommunications as a separate item. Hack (1992b: 71) reports that "a review of almost every list of plant location factors that has been published in the last 20 years reveals the absence of the telecommunications factor." Despite limited research, it is clear that telecommunication technologies have significantly reduced the technical constraints on the decentralization of business activities. This greater locational flexibility permits a firm to "follow locational factors to the far corners of the earth without losing its internal cohesion" (Chapman and Walker 1991: 11-12). The principal effects of improved telecommunications are both to disperse some operations to take advantage of other location factors, such as low-wage labor, and to concentrate other activities in a small number of urban agglomerations.

Back-office jobs (computer operations, accounting, payroll, billing, credit card services, and centralized word processing) have shifted from nearby suburbs, to small towns in rural areas, to offshore sites in the Caribbean, Asia, and elsewhere (Glasmeier and Howland 1995; Grimes 1993; Hepworth 1990). U.S. companies routinely do credit-card processing and other back-office paperwork via satellite in locations such as Barbados, China, India, Ireland, Jamaica, Korea, and the Philippines (Heenan 1991). The availability of state-of-the-art telecommunication service, a requirement for company back-office operations, can be found in many potential locations, not just in industrial countries (Hack 1992a).

In contrast to manufacturing facilities, office functions, such as business services and research and development (R&D) facilities, rely to a large degree on face-to-face contact for nonroutine information exchange (Czamanski 1981; Goddard 1978; Hessels 1992: 164; Malecki 1991). R&D facilities need to locate near company headquarters because of the need for managers to meet with scientific and technical personnel on a face-to-face basis, allowing close integration with marketing and product planning (Lund 1986: 10). Salomon (1988: 313) concludes that "the total communications costs and benefits (by both physical travel and telecommunications) are more likely to determine location than merely the availability of new technologies." Because businesses always have a certain amount of communications which requires physical travel, "it follows that remote location is a disadvantage, even if advanced telecommunications are available" (Salomon 1988: 322).

Consultants include state-of-the-art global telecommunications as an "imperative" in headquarters location, followed by a trained workforce, incentives, proximity to international airports, and labor costs and stability (Ady 1994). The critical nature of air transportation has emerged in other studies (Mahmassani and Toft 1985; Malecki 1987), but the issue is more complex for rural communities (Reeder and Wanek 1995). A recent European study by the Netherlands Economic Institute (1993: 11) suggests that

Quality of telecommunications is important to a significant minority of office, service sector and distribution projects. For these projects, companies sometimes require a minimum standard of services to be available and locations where the quality of telecommunications is below that initial level may not even be considered.

The same holds true in the USA, where "virtually everything that we do in today's modern business environment involves the transfer of enormous quantities of information over telephone lines" (Zall 1993: 32). Firms' requirements for telecommunications fall into two categories: first, basic technology requirements, including digital switching, fiber-optic loop facilities, route diversity and disaster-recovery capabilities, ISDN, and multiple-carrier capability (for using public as well as private networks), and, second, a set of service and support requirements, such as outsourcing communications operations, rapid response for maintenance and service, multivendor coordination, and long-term relationships (Harbaugh and McMahan 1992: 28-30). Needless to say, these characteristics will vary greatly, with the highest levels generally available in large (metropolitan) markets. Experts suggest that in the US, "the quality of telecommunication facilities and their costs vary enormously [according to geographic area]. There can be price differentials as high as five-to-one" (Zall 1993: 32; Hack 1992a: 138). Digital switching technology is a prerequisite for almost all telecommunications-based businesses and is the basic technological requirement for computer modems and fax machines. Wide variation exists across the U.S. in the availability of digital switching equipment, and analog equipment is not projected to be completely replaced until 2016 (Parker et al. 1989: 76-81). A related issue is line quality, which can prevent transmission of electronic data. We know too little about these cost and quality differences.

Despite the appearance of equal global accessibility and fully footloose firms, an "equal opportunity space" does not exist, mainly because of long-standing inequalities in telephone networks, which remain the "backbone" of newer systems (Salomon 1988). He stresses the need to look not only at networks and links, but also at level-of-service, which generally is a function of bandwidth but which comprises the ease, convenience, quality and rates of telecommunications services (see also Langdale 1991). Newer technologies have essentially enhanced the capability of utilizing greater bandwidths to provide higher quantity and quality of service, but these technologies diffuse first to where there is greatest demand, again to largest cities first because business customers are the largest users. However, large firms, wherever they are found, demand and use high levels of telecommunications technology. This is behind some of the pioneering efforts in the Great Plains (Richards 1994).

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