Business Networks
Although social, political, technological and business networks hold our modern world together, we still lack a good understanding of what business networks are, how they work and the language of network analysis that we may apply to solve common, everyday problems. This book looks at such questions as: How do we make sense of the business networks we participate in and the networks we observe from a distance? Are business networks distinct from social networks, and if so what distinguishes them? And how can business network analysis from a multidisciplinary perspective enhance strategic management? Business Networks provides an interdisciplinary overview of the theories that explain the strategic behaviour of interlinked actors, the relational dynamics that emerge in business networks and the shaping of different business network configurations. The book engages the reader with a range of economic, sociological, strategic management and communication theories that contribute to our knowledge of networks and networking. Going beyond any particular discipline, and synthesising the contributions that shape the structural, relational and cultural approaches to network analysis, the text offers a wealth of conceptual frameworks and an exhaustive typology of existing business networks. In this book Emanuela Todeva explores the patterns of networking and the dynamics of network relationships, showing how we can begin to tap their full potential for strategic and operational business decision-making and for the coordination of collective action. The book will be of interest to students and scholars engaged in business network analysis, and will also prove informative for managers who wish to obtain insights into network dynamics and its implications for strategic decision making. Emanuela Todeva is currently Senior Lecturer in Strategy and International Business and Programme Leader for the MSc Technology Management programme at the University of Surrey.
Routledge studies in business organisations and networks
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7 Organizing Industrial Activities Across Firm Boundaries Anna Dubois
2 Towards a Competence Theory of the Firm Edited by Nicolai J. Foss and Christian Knudsen
8 Economic Organisation, Capabilities and Coordination Edited by Nicolai Foss and Brian J. Loasby
3 Uncertainty and Economic Evolution Essays in honour of Armen A. Alchian Edited by John R. Lott Jr 4 The End of the Professions? The restructuring of professional work Edited by Jane Broadbent, Michael Dietrich and Jennifer Roberts 5 Shopfloor Matters Labor–management relations in twentieth-century American manufacturing David Fairris 6 The Organisation of the Firm International business perspectives Edited by Ram Mudambi and Martin Ricketts
9 The Changing Boundaries of the Firm Explaining evolving inter-firm relations Edited by Massimo G. Colombo 10 Authority and Control in Modern Industry Theoretical and empirical perspectives Edited by Paul L. Robertson 11 Interfirm Networks Organization and industrial competitiveness Edited by Anna Grandori 12 Privatization and Supply Chain Management Andrew Cox, Lisa Harris and David Parker
13 The Governance of Large Technical Systems Edited by Olivier Coutard 14 Stability and Change in High-Tech Enterprises Organisational practices and routines Neil Costello 15 The New Mutualism in Public Policy Johnston Birchall 16 An Econometric Analysis of the Real Estate Market and Investment Peijie Wang 17 Managing Buyer–Supplier Relations The winning edge through specification management Rajesh Nellore 18 Supply Chains, Markets and Power Mapping buyer and supplier power regimes Andrew Cox, Paul Ireland, Chris Lonsdale, Joe Sanderson and Glyn Watson 19 Managing Professional Identities Knowledge, performativity, and the ‘new’ professional Edited by Mike Dent and Stephen Whitehead 20 A Comparison of Small and Medium Enterprises in Europe and in the USA Solomon Karmel and Justin Bryon
21 Workaholism in Organizations Antecedents and consequences Ronald J. Burke 22 The Construction Industry An international comparison Edited by Gerhard Bosch and Peter Philips 23 Economic Geography of Higher Education Knowledge, infrastructure and learning regions Edited by Roel Rutten, Frans Boekema and Elsa Kuijpers 24 Economies of Network Industries Hans-Werner Gottinger 25 The Corporation Investment, mergers and growth Dennis C. Mueller 26 Industrial and Labour Market Policy and Performance Issues and perspectives Edited by Dan Coffey and Carole Thornley 27 Organization and Identity Edited by Alison Linstead and Stephen Linstead 28 Thinking Organization Edited by Stephen Linstead and Alison Linstead 29 Information Warfare in Business Strategies of control and resistance in the network society Iain Munro
30 Business Clusters An international perspective Martin Perry 31 Markets in Fashion A phenomenological approach Patrik Aspers 32 Working in the Service Sector A tale from different worlds Edited by Gerhard Bosch and Steffen Lehndorff 33 Strategic and Organizational Change From production to retailing in UK brewing 1950–1990 Alistair Mutch 34 Transportation Economics Towards better performance systems Edited by Bart Jourquin, Piet Rietveld and Kerstin Westin
35 Knowledge Flows in European Industry Edited by Yannis Caloghirou, Anastasia Constantelou and Nicholas S. Vonortas 36 Change in the Construction Industry An account of the UK Construction Industry Reform Movement 1993–2003 David M. Adamson and Tony Pollington 37 Business Networks Strategy and Structure Emanuela Todeva
Business Networks Strategy and Structure
Emanuela Todeva
First published 2006 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2006. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an informa business © 2006 Emanuela Todeva All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN10: 0–415–36838–3 (hbk) ISBN10: 0-203-02826-0 (ebk) ISBN13: 9-780-415-36838-4 (hbk) ISBN13: 9-780-203-02826-1 (ebk)
To my family: my parents whom I lost, and those who have stood by me through all these years.
Contents
List of illustrations Foreword by Richard Scase Preface 1
Introduction
2
Aspiring networks
xi xiii xv 1 18
Approaches to network analysis 19 Overview of network characteristics and concepts 36 3
Acting in business networks
48
Nature and attributes of network actors 49 Motives and drivers for actors’ behaviour 55 Heterogeneity of actors 76 Behaviour in business networks 80 4
Relationships in business networks Relational analysis 84 The nature of the bond – relations, connections, interactions, exchanges 88 Emergence of relationships between human actors 96 Relational dimensions 98 Relational context/atmosphere 114 Relational dynamics and evolution 116 Types of business relationships 123
84
x
Contents
5
Business network structures
128
Types of structural configurations 130 Organising principles 143 Network boundaries and organisational boundaries 146 Structural measures for analysis of business networks 149 6
Types of business networks
160
Entrepreneurial small business networks 161 Family business networks 163 Chinese family and community business networks: guanxi, hegu, hui, bangs and clans, kongsi 166 Japanese corporate business networks: zaibatsu/keiretsu 170 Japanese trading business networks: sogo shosha 175 Korean circular shareholding networks: chaebol 177 Value chain supply networks: global sourcing and global commodity chains 178 International corporate networks: multinational corporations (MNCs), strategic alliances, interdependent corporate relationships 182 Research and development (R&D) alliance networks and project networks 189 Network-based businesses: utilities, public services, infrastructure networks 193 Communication-based business networks: internet 196 Spatial clusters, industry clusters and cluster–network relationships 199 7
Conclusions
204
Future research directions 212 Appendix: concepts and indicators for empirical investigation of business networks Bibliography Index
214 230 258
Illustrations
Figures 1.1 2.1 2.2 2.3 2.4 2.5 3.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.1 5.2 5.3 5.4 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9
The ‘Network Diamond’ Structural theory of action and types of action The simple network of actors, resources and activities in a dyadic relationship Network characteristics Network mapping The intertwined actors, relationships and network structure The behavioural system in business networks The dyadic relationship as a focal relationship Interconnected relationships Multilateral relationships Emergence and levels of network relationships Relational dimensions Evolution of relationships Relational dynamics (A) Relational dynamics (B) Relational dynamics (C) Mutual determination of action, structure and relationship Archetypes of structural configurations Ego-networks vs. distributed networks Organising principles Entrepreneurial small business networks Family business networks Chinese family and community business networks – hegu, hui, bangs and clans, kongsi Japanese keiretsu business networks Japanese trading business networks – sogo shosha Korean chaebol business networks Supply networks and commodity chains Business networks of multinational corporations R&D alliance networks and project networks
3 24 27 37 44 46 80 89 93 95 96 99 117 119 119 120 129 131 140 144 162 164 167 172 176 178 181 183 192
xii List of illustrations 6.10 6.11 6.12 7.1
Network-based businesses Communication-based business networks Industrial clusters Antecedents to network theory
194 197 203 205
Tables 4.1 Environmental context 4.2 Types of business relationships
115 124
Foreword Professor Richard Scase
We are currently witnessing a revolution in the ways in which business is conducted. Old organisational structures with the emphasis upon hierarchies and closed boundaries are being replaced by flexible dynamic and open structures. A number of forces are driving this paradigm shift. One of the more important shifts is the continuing application of communication and information technologies that enable businesses to manage the operational processes from any location in the world. Alongside this, there is an increasing emphasis for companies to focus upon specialist and to outsource all other aspects of what traditionally were internally structured functions to subcontractors, specialist service providers and strategic partners. These forces are leading to the emergence of business networks which are increasingly international in their character such that it is now common to refer to the emergence of global supply chains. The cost advantages offered by emerging economies, particularly those of India and China, are encouraging business in the US and Europe to develop global business networks that incorporate production activities in those countries with the distribution and marketing of products being conducted within the more advanced economies. All these developments require the application of new management practices and core business competences which as yet are inadequately understood. The management of business networks that cut across national boundaries and operate within an ever-changing global context puts on the agenda the need to study the economic, relational and social dimensions of social networks and how these in turn shape the evolution of business strategies. In this path-breaking book, Dr Todeva has undertaken a thorough and painstaking review of the research that is being conducted on these emerging new organisational forms. In this task, she has produced a synthesis of the differing theoretical debates cutting across the academic disciplines of business strategy, organisational theory and even sociology and social psychology. She skilfully amalgamates conflicting paradigms for network analysis and multiple theories that explain behaviour and relationships between firms in business networks. Further, as part of this exercise she highlights
xiv
Foreword by Richard Scase
the direction for further research and suggests issues that need to be further explored if understanding of business networks and how these are likely to shape emerging management paradigms in the twenty-first century can be reached. London
Preface
This book has become one of these long and daunting projects that we undertake and never want to give up. The idea has been with me since 1998, when I wrote the first piece of work on business networks. Since then I realised that the challenge is there for someone to attempt to integrate all those disciplines that explain different aspects of business networks. Many people encouraged me to develop my multidisciplinary approach to this subject, including Jeffrey Henderson, Richard Scase, David Reason and Howard Davis. At a later stage David Knoke, Noshir Contractor, Stewart Clegg and Michael Muetzelfeldt discussed different ideas with me and even read through the script with patience and an open mind. With their comments and suggestions they have influenced how I shaped my argument. In addressing their challenging questions I developed the ‘six-point argument’ that attempts to synthesise existing approaches to business network analysis. I would also like to acknowledge the fact that the seeds of my interdisciplinary approach were laid in Bulgaria where I worked with Christo Dalkaluchev, Krustjo Petkov and Kenneth Spenner, all of whom inspired my interest in economic sociology as an umbrella discipline above organisation theory. I benefited greatly from the help of a number of economists – colleagues and friends Saul Estrin, Haico Ebbers, Michael Wood and Geoffrey Hodgson. I have to thank all of them for their efforts to bridge my sociological background with their economic thinking and attitude to analysis of markets and firms. And special thanks to Paul O’Brien, my ‘preface editor’. My approach to business networks as an explanatory framework is fundamentally political and has been influenced by the model of the centrally planned economies – a model that facilitated the process of industrialisation in a number of countries, but was unable to transform itself and to break through its political chains. Although this model replaces natural economic interactions with forced economic engineering, it does illustrate the interdependences between firms connected into a boundariless value-added and value-extraction processes.
1
Introduction
The concept of business networks is present in many personal conversations and academic discussions. There is no doubt that we live and work in a networked society. But how can we make sense of these business networks that we participate in, or observe from a distance? Can we really understand and grasp what stands behind interlinked businesses, what holds them together and what impact they have on our lives? What distinguishes business networks from social networks, or are they the same? Although social, political, technological and business networks hold our modern world together, we still lack a good understanding of what business networks are, and the language of network analysis that we may apply to solve our common everyday problems. If we can learn to understand more accurately the patterns of networking and the dynamics of network relationships, we can begin to tap their full potential for decision-making and for coordination of collective action. The interest in business networks has significantly grown during the last decade. However, the lack of leading theories is evident from both the fragmentation of the empirical research and the lack of in-depth sophisticated explanations of the network phenomena. Although network theory is very far from consolidation, the field offers a unique opportunity for an interdisciplinary endeavour by different social sciences to join their efforts in extending our knowledge and understanding of the behaviour of interlinked firms as economic and social entities. A comprehensive and interdisciplinary enquiry of the outcomes from collective or coordinated action and from the interaction between business actors can help us to map business networks and to capture the value of networks. This book examines business networks as structures of relationships between heterogeneous actors interacting for a business purpose. The heterogeneity of actors refers to business organisations, individuals within them, managers that make decisions and choices on behalf of an organisation, various institutions that govern relationships, technologies, industry standards and other artefacts that participate in the framing and the development of business relationships. I adopt a very broad definition of business networks in the book, which refers to multiple theories and real life cases.
2
Introduction
Business networks – like industrial markets – are interlinked resources, activities and actors. At the same time they are social structures of ties, facilitating relationships and exchanges between individual firms and business actors. The concept of business networks is similar to the concepts of culture, organisation or relationship as they can mean so many things at the same time. These concepts are overloaded with connotations of personal experience and academic discourse, and are open to limitless interpretations. There are several distinctive analytical approaches to studying business networks and collaborations. Most prominent among these are the economic, psycho-social and socio-structural traditions. None by itself can give insight into, let alone explain, the dynamics of collaboration in business partnerships and alliances. Each approach highlights some elements of business networks but also conceals others. This book addresses this shortcoming by exploring how the dynamics of repetitive business transactions and interactions between business actors can be brought into focus when all network elements are highlighted. The synthesis of distinct approaches that recognise and explore different elements of business networks is the ultimate objective of this book. The book represents an encyclopaedia of theories and thoughts that inform our knowledge of business networks. It articulates different scientific languages that have been used by different communities of thought in social sciences. Multiple arguments are intertwined to produce a complex account of what business networks are and how they exist, operate, function and expand. These arguments are presented from the perspectives of three dominant approaches – the structural/positional approach the relational approach and the cultural approach. The analysis of business networks is focused on three complementary levels – the level of actors, the level of relationships and the level of the entire network configuration or network structure (Figure 1.1). Actors’ behaviour is interpreted in the context of multiple motivations, network relationships and network configurations. Network relationships are introduced in the context of actors’ strategic decisions and choices, and the structural configuration of the network – also interpreted from multiple theoretical perspectives. Network structure is introduced from the perspective of organisation theory, social network analysis and strategic management. These complex settings are presented in Figure 1.1 as the ‘Network Diamond’ and they outline the main thrust of the book – as an encyclopaedia of thought that extends our knowledge of business networks. The book offers an overarching umbrella of conceptual tools that are applied in the final chapter to a large number of business networks, reviewed from the literature. The theories reviewed in the book outline a very interdisciplinary field that analyses the attributes of network actors and the way these attributes induce and frame actors’ behaviour and interactions in business networks. I
Introduction
3
cultural approach
ACTORS
STRUCTURE
relational approach
structural approach
RELATIONSHIPS
Figure 1.1 The ‘Network Diamond’.
purposefully avoid a direct critique of individual theories as my aim is to integrate as much as possible distinctive paradigms. Lowe (2001) labelled these integration efforts as ‘paradigm crossing’ – or the recognition and engagement with multiple paradigms, employing cognitive flexibility to accept the coexistence of multiple truths, and building scientific expectations of the mutual benefits arising from the synthesis of apparent conceptual and empirical opposites. Although this is difficult to implement as a methodology and there are no prescriptions and recipes on how to do it, the first step I made was to outline the conceptual frameworks and to expose their underlying assumptions. The second step I undertook in the book was to employ conceptual frameworks that are complementary and enhance the depth of scientific understanding. So what are business networks? What kind of organisational formation are they? Are they physical or virtual, real or only a metaphor that represents interconnected entities in complex business systems? One of the strengths of the business network metaphor lies in its bridging function: between the social and economic dimensions of human conduct, between different disciplines and methodologies, between the academic community and the world of practice. Business network is an essential concept that can explain the organisation of the contemporary economy and society and the behaviour of interconnected business actors. One of the current developments that arouses interest in business networks is the globalisation of the economy and society and the impact from the global competition on business relationships and the society. It is
4
Introduction
acknowledged that different economic systems based on markets, hierarchies and networks have different comparative strengths and weaknesses (Ouchi, 1991; Gerlach, 1992b). Research on comparative business systems worldwide has established solid foundations for the notion of alliance capitalism (Gerlach, 1992b), or relationship-based capitalist system, and this has led to a gradual change in paradigm in the neo-classical economic theory, where the focal point of analysis has shifted from individual firms and transaction costs to business networks, clusters, collaborative business relationships and strategic alliances. The success of large numbers of Japanese multinational corporations (MNCs) and the fast growth of Southeast Asian economies has raised fundamental questions of comparative business structures, comparative institutional frameworks and comparative effectiveness of different coordination mechanisms for governance of economic activities, as well as the role of culture, national institutions, traditions and practices in business relationships. All theoretical efforts inevitably have confronted the question of complementarities among the three coordination mechanisms of marketbased transactions, hierarchical-based organisation of production and operations, and network-based connectivity, interactivity and interdependence in the global economy. The increased global competition is linked in the literature with the issues of deregulation and liberalisation policies worldwide that stimulate internationalisation of firm activities. Deregulation policies have increased the opportunities of firms to access foreign markets and to enter different business systems. These policies have also increased the risk and the uncertainty of the environment for international business operations and hence has changed the environmental context of inter-firm relationships. The strategic response by multinational firms to globalisation of competition is no longer based entirely on cost calculations and expectations of returns on investment, but rather is driven by motives for uncertainty avoidance and global presence in strategically significant markets and strategically important global alliances. Foreign-market entry of multinational firms in remote locations has increased the interconnectedness and the interdependencies of business actors and business actions and choices in the global market. These developments are part of a historical process of continuing social and functional differentiation and integration of the global market place (Luhmann, 1995). Within this historical process, internationalisation of business operations increases the permeability of firm boundaries and the fragmentation of markets (Borghoff and Oliveira, 2000). Some of the other outcomes from globalisation are the diminishing importance of national cultural and cognitive boundaries, where the perceptual, interpretational and learning capabilities within firms are becoming vital for the evolution and performance of organisations. As a result of these global changes neither isolated markets nor isolated hierarchical and organisational mechanisms are sufficient to establish control over business transactions or processes. The changes of the global environment at systemic level have produced a
Introduction
5
number of challenges to management, and the reaction by managers has been to build complex sets of intra- and inter-organisational relationships in order to construct shared realities between globally dispersed network players. The global competition demands flexibility of business operations and business relationships provide the vehicle for absorbing environmental shocks. Many authors acknowledge that in this global context networks have a critical advantage as they provide selective specialisation and flexibility of firms based on complementary activity structures (Borghoff and Oliveira, 2000). Networks instigate flexible decentralisation of power combined with focused decision-making. This of course is compared with the rigidities, the sunk-costs and the organisational inertia of hierarchical organisational formations and is contrasted with the uncertainties and volatility of markets. Networks are known as a very old organisational form, but newly empowered by information and communication technologies (Castells, 2000b). The current social theory recognises that we live in an information society and in networked society as well. Contemporary information networks alter the relationships of production and consumption, of power and authority, of experience and practice, culture and meaning. According to Castells (2000b), information networking is the contemporary organisational form that dominates all human activities. The domination of information networks over the production/consumption relationships takes place through enhancing the control over those human activities that transform and appropriate nature for the benefit of people. In this process of transformation, humans generate surplus which is invested according to socially decided goals, and the control over this investment process is also enhanced by the information networks. Experience and practices are enhanced by the information networking as humans enhance their capabilities to interact with objects and with each other. Power is interpreted by Castells as acting upon other human beings, and as such is also enhanced by the information networking, which facilitates monitoring and control. Networking enhances the transformation of the symbolic value of power itself through endless digital and visual representations. The information society is global in its inception. The business activities that it supports are global too, as information technology was born as a global industry. Many of the business networks that I will discuss in the book represent global business networks and the communication and crosscultural aspects of business relationships and transactions are considered as intrinsic to the relationships. Although I do not intend to address in detail the principles of information and communication technology, I have looked at the literature that describes the nature of communication and computer networks, the operations of communication technology, its impact on interactions between business actors, and the profound effect of information flows on the networks of subjective and objectified knowledge that are embedded in technologies and in business practices.
6
Introduction
Castells suggests that technology is ‘the use of scientific knowledge to specify ways of doing things in a reproducible manner’ (2000a: 8). As such, the domination of technology is exhibited by domination of science and research on other human activities. Castells argues that it is not the scientific knowledge itself that plays a dominant role, but it is the use of it, which includes the institutional, political, economic and cultural context of knowledge itself, and the enactment of knowledge in information networking and in business practice. This position explains some of the foundations of the cultural approach to network theory that I discuss in Chapter 2. Technology is viewed by some network theorists as representing interconnected relationships between different scientists, pieces of knowledge or other preestablished technologies and socio-technical artefacts (Law, 1987). Technology at the same time is defined as a heterogeneous network of human and non-human entities or cultural artefacts that enable human actors to make further decisions and choices and to participate in networks they actively frame. The heterogeneous network of technological interfaces frames all other relationships of production/consumption, experience, power and culture (Castells, 2000a), or, to use Wellman’s phrase, technology is a network within a network. In this discussion of business networks I address the questions of knowledge and information, as well as technology – as resources that substantiate network interactions in the market place. The technological paradigm of the information society generates a network paradigm, where social transformations are driven by networks of information affecting every aspect of the social, political, economic and cultural sphere of the humankind, particularly business transactions. The business networks discussed in the book are all embedded in this global society, including most of its contemporary attributes such as: globalisation of technology and competition; global financial markets; global science and technology; international trade of goods and services; global manufacturing and services industries; multinational firms with operations, investments and ancillary networks of affiliated businesses in remote parts of the world; global communication infrastructure and global media coverage; a range of globalised professions and shared practices. The new global economy and society are networked in the heart through connectivity and interdependency. Wriston (1998) authoritatively argues that information networks drive the global capital markets that ultimately determine the globalisation trends of all manufacturing and service industries. He describes the global market as a complex adaptive system to which the global information networks have evolved as its nerve system. These global information networks comprise the marriage between the telecommunication infrastructure and the information technology hardware and software, and this system is connected to data content providers and global users. This global information network facilitates instantaneous transactions that may originate from any
Introduction
7
part of the world and are recorded as events on the market. Wriston eloquently describes examples of small events at the periphery of the global system which can trigger macroscopic changes and cause an avalanche of effects throughout the entire system causing systemic failure. These risks of systemic failure from business transactions have triggered enormous interest in the behavioural aspects of interlinked market transactions. At the same time the social sciences are still struggling to grasp the principles that drive human behaviour and choices within these networked relationships and events. Much of the work in this book attempts to synthesise significant advancements along this line of thought, coming from a multitude of disciplines. Another network aspect of the global market place that we address in the book is the emergence of multiple intermediaries that connect to various players and add value by facilitating interactions and the functioning of the market. The emergence of intermediaries transforms the classical dyadic transaction relationships into interconnected network relationships, hence generating interdependencies within the system. This is relevant both for the traditional and the electronic market places where intermediaries connect buyers and suppliers and perform a number of market functions such as assistance on matching buyers and sellers, facilitation of transactions and compliance with the institutional infrastructure (Bakos, 1998; Giaglis et al., 2002). Intermediaries connect and expand business networks and are an essential factor that determines the dynamics of transactions within the business network. Business networks and networking are seen as an aspect of the business context and the business practices that facilitate risk management and uncertainty avoidance by managers, and lead to improved business performance. To reduce the risk of their decisions, international managers are increasingly seeking support through professional networks and business partnerships, through international alliances, through establishing virtual inter-firm projects and multinational teams, and through multi-level contract management and assets management across borders. Castells (2000b) quite rightly points out that the unit of production in the global economy is no longer the firm, but the projects, integrating multiple autonomous participants through a common goal and shared information. Tom Lester (1992) looks at the rise of personal networking in international business, and the evolved view by international managers that networking gives a strategic advantage and leads to success. Business networks are designed by managers to increase the international competitiveness of the firm. Intra-company networks between executives at different levels are seen as a tool that facilitates communications, the development of cooperative spirit, the creation of confidence in the work of colleagues, the assurance that ‘things are done’ and the encouragement of initiatives (Lester, 1992). Inter-firm relationships smooth negotiations, contract management, information sharing and self-organisation of cross-company project teams.
8
Introduction
Inter-firm relationships bridge the boundaries of individual organisational units and create a large a complex system capable for a coordinated action. Research at corporate level relationships confirms that business relationships have become driven by a bundle of market-based, hierarchical, heterarchical and political mechanisms in which it is difficult to disentangle individual motives or success factors. Evidence of overlapping inter-personal, inter-firm networks and relational interfaces is provided by Baker (1990) with her research on US investment banks. Baker confirms the prevalence of strong relationship-based interface between the US investment banks and their clients, which is based on exclusive and personalised ties. She also confirms that the pure market transaction interface expected for mature markets is rare even in the context of investment finance, and relationship-based interface is used as complementary to the market-based interface. Her empirical results also confirm that most firms maintain a hybrid relational and market interface with their investment banks as a mixture of market principles and relational principles governing strategic decisions for financing corporate operations (Baker, 1990). While market interface generates accountability, the relational interface creates shared realities and business context that supports transactions. The shared realities between organisations dispersed globally are mainly based on the sharing of knowledge across intra- and inter-organisational boundaries. This is in concurrence with Kogut and Zander’s definition (1993: 627) of firms as social communities ‘that serve as efficient mechanisms for the creation and transformation of knowledge into economically rewarded products and services’. According to this knowledge perspective, firms are networks by themselves, and they engage in other networks by transforming public and private knowledge into products and services. In a global context firms with international operations are immersed in very different knowledge and interpretation systems, and hence learning is essential and a critical source of competitive advantage. Business success in a global context depends on competencies such as knowledge transformation, learning, knowing and interpreting. Business network relationships become the main source of knowledge acquisition, knowledge development and sharing. Although we have not yet found a satisfactory definition of what knowledge is, there are some references in the literature to what knowledge does. Knowledge facilitates the transfer of models of reality for individuals and organisations, and it is endowed with experience, judgement values and the subjective perspectives and goals of individuals who participate in the knowledge-sharing process (Jansen, 2004). Hence knowledge is subjective and relational, and it is embedded in one form or another in any network formation. It can be embedded in the network rules or practices, or it can be part of the resource exchanges and interactions leading to learning. Jansen (2004) also stresses that knowledge can be a public good, a private good, a collective asset of a group, an industry or a profession. In the context
Introduction
9
of the blurred boundaries between science and technology, there is no longer any cognitive, social or economic distinction between different knowledge activities. All that is clear is that what we may call ‘knowledge activities’ do require and simultaneously generate relationships – between human beings and between humans and cultural, technological or knowledge artefacts. The critical contribution of Jansen is the statement on knowledge production. It is no longer a priori invention by individual researchers or entrepreneurial inventors, but it is rather a collective collaborative output within and across organisational settings (Jansen, 2004). The management literature has paid attention to the know-how exchange through international joint ventures and foreign direct investment, particularly in China, Southeast Asia, the US and Europe. Among the most studied knowledge exchange of practices based on intra-firm networks are some of the Japanese managerial practices such as just-in-time (JIT) and totalquality-management (TQM). Both are based on intra-firm networks and evaluations across corporate sub-units. The literature explores how these intra-firm network practices can be replicated in other intra-firm and in inter-firm contexts. The literature has pointed out numerous cultural barriers and environmental constraints that obstruct knowledge transfer and knowledge sharing. Our discussion of relational dynamics between business partners and the effect of relational context gives many insights into the debate on knowledge transfer. Cooperative strategies and cooperation through project networks has attracted a significant interest among academics and practitioners. Business networks are perceived as cooperative organisational structures and sets of relations between businesses and managers. We transform this collaborative and relational atmosphere into an object of analysis, looking at what actually happens between firms linked by repetitive transactions and relational bonds. We look at how actors make strategic decisions to cooperate that result in business relationships and network configurations. Drawing on some of the world’s leading thinkers on networks across a range of disciplines, we seek to distil the most important lessons from the study of firms and networks and to address some of the critical questions that our ‘network society’ presents. Embracing this network logic enables us to change not just our tools of analysis and intervention, but our ways of seeing the world. One of the aims of this book is to review some of the distant academic fields that have contributed to the development of the network concept as a structure of relationships between economic agents, and to develop an interdisciplinary approach to the study of business networks. This book builds upon the advancements in social network analysis (Knoke and Kuklinski, 1982; Wellman and Berkowitz, 1988; Nohria and Eccles, 1992; Knoke and Guilarte, 1994; Wasserman and Faust, 1994; Freeman, 1977, 1996), the research on industrial markets and supply chain management (Håkansson and Johanson, 1992; Johanson and Mattsson,
10
Introduction
1992; IMP Group, 1997); the developments in the field of knowledge and technology networks and actor-network theory (Latour, 1986, 1987; Callon, 1986b; Law, 1986b, 1987); and a range of economic and strategic management theories that have discussed the behaviour of interlinked economic agents. The contributions from social network analysis and supply-chain network analysis are essential as they have framed many of our contemporary views on social and business networks. These approaches are introduced in the book as the structural/positional approach and the relational approach in network theory as they offer significant body of consolidated theories and methodologies. The third approach to business networks discussed in the book as cultural approach originates from actor-network theory and from anthropological exchange and symbolic interaction theory. I have made significant efforts to integrate the three approaches in an attempt to form a broad interdisciplinary body of theories that explain and predict the structure and functioning of business networks. I have attempted to integrate the methodological robustness of social network analysis with the explanatory power of other scientific disciplines that analyse behaviour of firms. Most of this book will be weaving between well-established theoretical approaches and new emergent frameworks that contribute to business network theory. One of the key new theoretical frameworks is the contribution by Gulati and Gargiulo (1999) who contrast the sociological approach to inter-organisational relationships with the strategic one. They emphasise that sociologists such as Pfeffer and Salancik (1978) and Burt (1982) view the network formation as driven by exogenous factors, that is: the distribution of technological resources, the flow of information and other resource dependencies among network actors. These exogenous factors trigger a responsive reaction by firms who respond to environmental uncertainties and to exogenous resource dependencies. The unique contribution of Gulati and Gargiulo (1999) is the development of the strategic perspective in which partners’ attributes matter, and the selection of partners and the establishment of relationships with these partners are endogenous processes that drive the network formation. The fundamental endogenous factors that drive the process of alliance and partnership formation identified by Gulati and Gargiulo are: relational embeddedness of actors (or previous relationships with other organisations); structural embeddedness (previous alliances with a common third-party); positional embeddedness (or the centrality position of an organisation in its social network and configurations of business relationships); and the structural differentiation of the overall network (or a systemic property of the network that reflects the differentiation of network positions occupied by organisations). Gulati and Gargiulo argue that these endogenous factors assist in the process of selecting strategic partners by bridging the information gap between actors and the uncertainties that stem from insufficient information about partners’ competencies and partners’ reliability.
Introduction
11
In spite of the differences in conceptual apparatus across this interdisciplinary field of business network theory there are deep similarities between the social network analysis, the supply-chain network analysis and the strategic analysis of networks – all rooted in social sciences. One of these common issues, addressed by different streams of network thought, is the growth and internationalisation of firms and their evolving position in the global economy that brings to the academic debate the issues of firms’ boundaries (Thornton and Brandon, 1995); of forms of inter-company cooperation (Harrigan, 1995); the issues of power and politics in business organisations (Mintzberg, 1983a; Pfeffer, 1992); the strategic management of the external and internal environment by managers (Robbins, 1990); the formation and working of the board of directors in multinational firms as a specific form of corporate governance in a market economy (Bearden and Mintz, 1987; Scott, 1987; Todeva and Knoke, 2005); the complementarities of markets, bureaucracies and networks (Ouchi, 1991; Gerlach, 1992a); and the endogeneity and exogeneity of firm interdependence (Gulati and Gargiulo, 1999). The complex network of firms worldwide and the enormous learning, dynamic adaptation and re-positioning of firms globally provides not only a test of the existing economic and organisational theories of firm behaviour, but also an opportunity for an integration of a range of strategic management theories dealing with cooperative business networks and inter-organisational relations. Economic theory has set up a slightly different agenda from strategic management theory, perceiving business networks as composed of interrelated economic agents involved in repetitive transactions and exchange of products, services and market information. The range of business networks conceptualised in this way includes supply chains, entrepreneurial networks and subsidiary–headquarter relationships in multi-national corporations (MNCs), as well as more complex formations of research and development (R&D) networks, industrial clusters and strategic alliance networks. Although the emphasis on business transactions is essential for the economic view of business networks, it often undervalues the relational aspects of the links between economic actors. Economic theory primarily explains the behaviour of economic actors and their strategic choices, which are both fundamental to relationship formations. Different theories of what motivates actors and behaviour in networks are discussed in Chapter 3. The interpretations of networks by sociologists and social anthropologists are much more focused on the interaction side of the links and as such, sociological theories make a significant contribution to our understanding of the dynamics of business networks. Part of the same body of knowledge is the discussion on trust and social capital that has emerged at the crossover of management and sociology. Recent research concludes that competitive advantage arises from the balance between control and trust, between commitment, learning and knowledge protection (Ibbott and O’Keefe, 2004).
12
Introduction
A conceptual bridge between the ‘social world’ of inter-organisational relationships and the business world of profits, costs and contracts is brought about by the soft relationship approach in management that offers practical guidance on how to engage with partners and to build trust in partnerships, while navigating in the darkness of environmental uncertainties, business risks and structural constrains from industries, technologies and specific market conditions. The processual view of business networks is well established in the information technology research on networks. The concept of networking or the process of communication and interaction between managers and firms brings research questions that can be addressed simultaneously by social psychology, social anthropology, communication sciences and information technology theory and principles. All these scientific fields have introduced discussions on the hierarchical structure and asymmetry of relationships, on the dependencies between a sender and a receiver of information, and on the issues related to interpretation and distortions of information, the subjective nature of relationships, the effect of social structure, culture and tradition on relationships, the relativity and fluctuations in affections, trust, loyalty and commitment in inter-firm relationships. Information technology theory and principles contribute tremendously to our understanding of a number of factors that determine the context of business interactions, such as: globalised and computer-mediated connectivity, portability of use and application of information, personalisation of transactions, ubiquity of service delivery (i.e. anytime and anywhere) and organisational interconnectivity. Many of these factors and effects of information technology are exhibited in the large business networks, such as multinational corporate networks, utilities and infrastructure business networks and public service networks – described in Chapter 6. The diversity of meanings attached to the concept of business network reveals the interdisciplinarity that is required in order to advance the theoretical thinking and empirical research in this scientific field. No one academic discipline is sufficient by itself to reflect upon the wide variety of characteristics and dimensions encapsulated in the term business network. The development of a comprehensive framework for a business network analysis requires an interdisciplinary review of the main theoretical contributions related to analysis of firm behaviour and strategic choices and decisions, combined with theories describing social and business structures, group behaviour and communications, as well as theories of regulation, leadership and allocation of resources. It is important to merge and synthesise distant theoretical frameworks that have made a contribution to the interpretation of the network concept both as a structure of relationships and as a process of communication, interaction and coordination of activities. In this respect, criticism of these theories is not essential in order to incorporate their insightful principles into a broader framework with extended explanatory power.
Introduction
13
A clear and unambiguous definition of the concept of business networks is essential in order to avoid misleading interpretations. There have been numerous attempts to define what network is and quite a few attempts to explain what business networks are. I would like to review some definitions related to business networks in order to establish a common understanding of the concept, so I use it beyond its metaphorical reference. One of the early contributions from the sociological perspective has been the theorising by George Simmel (1950) who attempted to explain the emergence of social phenomena as arising from exchanges, relations and reciprocal action of human agents. He described the society as a ‘network of affiliations’ and complex ‘inter-subjective movements’, exhibited as activities and intentional behaviour of conscious human actors (Mattelart and Mattelart, 1998). Simmel did not attempt to define the concept of what network is but pointed to the fact that social structures arise from relationships embedded in affiliations and inter-subjective movements, inter-subjective dynamics which bond people together. It is no longer possible to ignore the fact that social networks are intrinsic to business networks, and business relationships are torn apart or assembled by these inter-subjective movements. Relational aspects of business transactions are intrinsic to business networks. Mitchell (1969) attempts to give one of the earliest formal definitions of networks and suggests that a network is a specific type of relation, linking a defined set of persons, objects or events. This statement suggests that the actors in a network are human, non-human and social artefacts, or timespecific events and activities. While the network heterogeneity is evident for the earlier developments of social network analysis, with the formalisation of the research methodology, the network concept is reduced to dyadic interpersonal relationships or community-type collective referrals. Mitchell also points out that a specific network structure is a configuration of present and absent ties between the actors (Mitchell, 1969; Knoke and Kuklinski, 1982). While present ties, obviously, are the existing relationships and exchanges between members, the notion of absent ties remains controversial, and could be interpreted in many different ways. Absent ties could be, for example, needs for resources and information, which are not satisfied, or potential relationships, that lead to new opportunities for linking of network members that have some resources at their disposal. In all cases, network membership based on existing ties is assumed. If a member of a network is not present at a network event, or has not acquired a desired and expected resource from another network member, we could say that there is a potential link which is absent at a particular moment. The behaviour of that member is affected both directly and indirectly by the potential link as it generates mutual expectations between actors, and reflects actors’ knowledge of the other’s resource opportunities. The very fact of existing expectations between actors suggests an interaction and existing link, based on actors’ prior knowledge and mutual recognition. The impact of major events or extremely desirable objects like profit
14
Introduction
returns or rewards is also critical in determining both the configuration of a business network and the behaviour of the participants in it. Wellman and Berkowitz offer another definition of networks as social structures – or ordered arrangements of relationships that are contingent upon exchange among members of social systems (Wellman and Berkowitz, 1988). This definition could easily be applied to business networks as socioeconomic structures of transacting economic agents. Exchanges in business networks could be interpreted both as input–output relations between actors, and as transformation of resources, information, symbols, meaning and value (Wellman and Berkowitz, 1988), including economic value, or brand name recognition as a symbolic affiliation between a firm and its customers. Business relationships also can be interpreted in organisational context. Podolny and Page assume that inter-organisational networks are a specific organisational form, and the authors define them as a collection of two or more actors that pursue repeated, enduring exchange relationships with one another and, at the same time, lack a legitimate organisational authority to arbitrate and resolve disputes that may arise during the exchange (Podolny and Page, 1998). The main benefits from the network form of organisation, according to these authors, are: superior learning, enhanced legitimation and status, and a range of economic benefits. Business networks are also seen as sets of connected exchange relationships between actors controlling business activities (Forsgren and Johanson, 1992), as resource flows between different organisational units based on intra-organisational and inter-organisational linkages (Schmid et al., 2002), or as an integrated and coordinated set of ongoing economic and noneconomic relationships embedded within and outside business firms (Yeung, 1994). Business networks are defined by relational analysts in two ways – as a set of three or more interconnected actors, or as two or more connected dyadic business relationships (Anderson et al., 1994). A strategic business network is defined by Hinterhuber and Levin (1997) as a system of small or mid-size firms or strategic business units, functional and regional units, suppliers, controlled firms and other partners that are linked together in order to satisfy key stakeholders by optimising specific core competencies and improving critical business processes. This definition is an example of the use of the business network concept in a metaphorical way describing a whole variety of cooperative business relationships formed by firms and portrayed as network relationships (Johannisson and Monsted, 1997). Traditionally the literature supports the view that networks provide a special governance structure, where trust conveys more commitment than hierarchy and the loose coupling provides variation close to that of a market (Johannisson and Monsted, 1997). The common theme between these distinctive conceptualisations of the term business network is that they all refer to a structural formation which facilitates interactions between actors and exchanges of some kind. In review of the
Introduction
15
above listed definitions and a number of other definitions of networks (Knoke and Kuklinski, 1982; Håkansson and Johanson, 1992; Knoke and Guilarte, 1994; Gulati and Gargiulo, 1999) I define business networks in the following way: Business networks are sets of repetitive transactions based on structural and relational formations with dynamic boundaries comprising interconnected elements (actors, resources and activities). Networks accommodate the contradictory and complementary aims pursued by each member, and facilitate joint activities and repetitive exchanges that have specific directionality and flow of information, commodities, heterogeneous resources, individual affection, commitment and trust between the network members. Each network has limited resources, and different members have different access to these resources. I use the term ‘resources’ in a broad sense, including information, financial, human and social capital, organisational capabilities, technology, knowledge and other intangibles. Each network member has different capabilities to accumulate and utilise network resources. This inequality is further enhanced by the division of labour and the specialisation pursued by each individual firm in the business network. The specialisation within networks is similar to specialisation in organisational hierarchies. The difference between the two is in the coordination mechanism employed in both cases. Equipped with this background and this definition, I would like to take the readers of this book on a journey through those social theories that have made a significant contribution to business network theory. Different sciences have developed different theoretical frameworks and conceptual apparatus. The difficulties of grasping such an interdisciplinary field can be overcome only by efforts to integrate distant fragments of knowledge in order to produce a coherent picture of what business networks are and how they work. Although I am aiming at a synthesis of theories, I believe also that there is a constructive potential in contrasting alternative approaches and conflicting paradigms in the search for a deeper understanding of a complex phenomena. The book offers an encyclopaedia of thoughts that are put together in a complex but coherent framework (Figure 1.1). With this framework I aim to capture the synergies that emerge from such an interdisciplinary enquiry and to establish the foundations for future interdisciplinary studies of business networks. The existing research on business networks puts emphasis on three aspects – the ‘nodes’ (identified as the actors, agents or network members, i.e. firms, managers, individual entrepreneurs, institutions), the ties and relations (identified as the links that facilitate transitivity, reciprocity, directionality and multiplexity of content) and the overall network configuration, or network structure. These dimensions are first introduced in Chapter 2, and
16
Introduction
then discussed separately and with more depth in individual chapters as three distinctive levels of analysis of business networks. Chapter 2 also introduces the three building blocks of business-network analysis with their main conceptual apparatus – that is, the structural/positional, the relational and the cultural approaches. Chapter 3 focuses on the nature of business actors and their behaviour, their strategic choices and decisions. Firms behave both as market agents and as network members. The structure of their business relationships is determined simultaneously by the structure of the market in which they operate, the structure of their value chain and the wider network of relationships with the environment. The main theoretical contributions to the behaviour of business actors are synthesised from a range of leading economic and strategic management theories that have built knowledge and understanding of what drives business choices and decisions. In Chapter 4 I introduce the foundations of the relational approach to business network analysis. I explain the nature of the bond in business networks and how interactions and exchange of information progress towards repetitive exchanges of resources and business transactions, and towards stable network relationships. Among the main contributions in this chapter are the conceptual framework that synthesises the most significant relational dimensions describing dynamics in business interactions and the models that explore relational dynamics in the context of different types of relationships. In this chapter I also attempt to conceptualise the heterogeneity of processes in business networks, such as enrolment and network construction, ‘translation’ and the normative activities within networks, competition, cooperation, selection and ‘displacement’ of other members, as well as repositioning through strategic choices. This intra-network dynamics is analysed in terms of a rich relational context operationalised within the relational approach. Chapter 5 is an in-depth reflection on the structural/positional approach in business-network analysis and the structural measures for network analysis. These are discussed in the context of a variety of organising principles that bond actors together and generate interactions and interconnected business relationships. The types of structural configurations introduced in this chapter represent a synthesis of different conceptualisations of business networks from organisation theory and the theory of the firm. The chapter gives an overview of the most significant structural characteristics of business network, among which are size, centrality, density, cohesion, range, structural equivalence and diffusion. Chapter 6 offers 12 distinctive cases of business networks that have been described in the literature. These are: the entrepreneurial family and small business networks, Chinese family and community business networks, Japanese keiretsu and sogo shosha networks, Korean chaebol networks, valuechain and supply networks, the corporate networks of multinational firms,
Introduction
17
R&D alliance networks, network-based business of the infrastructure industries and communication-based business networks and business clusters. Each case examines the particular network as a structure of relationships between heterogeneous actors. The heterogeneity of actors refers to business organisations, individuals within them, institutions, technologies and other artefacts that participate in the relational dynamics. For each case I describe the division of labour established within the network, the type of governance and interdependence between the actors, and the type of boundaries that determine network membership. The book attempts to provide an overview of multiple theoretical perspectives that have contributed to our knowledge of firms and their behaviour in networks, and my hope is that it offers a coherent body of concepts and tools for future research on business networks.
2
Aspiring networks
This chapter introduces the main components of the ‘Network Diamond’ from Figure 1.1. The three approaches (structural/positional, relational and cultural) are fundamental to building a coherent body of theories and methodologies for business-network analysis. At the same time they do not offer a clear direction for future research. In order to overcome the contradictions embedded in the conflicting paradigms, I put the main emphasis on the three distinct levels of network analysis – the level of business actors, relationships and structural configurations. This chapter gives an overview of the three approaches and the three levels of analysis, and prepares the grounds for analysis of the complex system of intertwined actors, relationships and network structure. The chapter gives an introduction to network theory as it stands at present – with its fragmentation and interdisciplinarity, and with its multiple categories for actors’ attributes for relational characteristics and for structural properties of the network. The methodologies for empirical research on networks are based, on the one hand, exclusively on graph theory and mathematical sociology as a quantitative approach, and on the other, on the use of in-depth case studies. Business networks have been studied primarily by case studies. The conceptual apparatus developed within social network analysis, although precise, is extremely difficult to grasp by non-dedicated researchers. This has been one of the main barriers to the wider spread of the original social network methodology to business and management research. This chapter offers a preliminary synthesis of this vast literature, and it is written mainly for those social scientists and business practitioners with minimum technical expertise that would like to investigate inter-firm network relationships in a business context and to employ some of the concepts and methodologies developed by social network analysis, actornetwork theory and the broad management science. Firm behaviour in network constellations has been explored in research by economists and strategic management scholars. The behaviour of interlinked economic agents and the nature of inter-organisational relations are introduced under the auspice of the relational approach. Contributions on
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19
knowledge and innovation networks are introduced as the cultural approach. Each of these approaches will be discussed in more detail in this chapter and will be referred to in the subsequent discussion on network theory.
Approaches to network analysis The structural/positional approach The earliest approach to network analysis is the structural or positional approach, based on the structural paradigm in social network analysis and the work by Knoke and Kuklinski (1982), Burt (1982, 1992b), Wellman and Berkowitz (1988), Nohria and Eccles, (1992), Krackhardt (1992), Wasserman and Faust (1994), Knoke and Guilarte (1994) and the wealth of methodological work by social-network analysts such as Steve Borgatti and Martin Everett (Borgatti et al., 1990, 1992, 1997; Everett et al., 1999), Linton Freeman (1977, 1979, 1996) and Alstyne (1997). The emphasis in this work is put on structure, form and action within networks; on measurements and methodology for social network analysis; on structural holes in relational networks, the strength of weak ties and the small-world networks. One of the advancements made by the structural analysis is to recognise the embeddedness of business transactions in the structure of social relations. The practical consequences of that fact, however, remain hidden in implicit assumptions about roles, status, positions, network ties and relationships between the actors. The history of social network analysis is traced back to the development of the sociometry by Moreno (1934), and the graph theory by Harary and Norman (1953). Subsequently the historians point to the developments within the American sociology in the 1970s and 1980s, and the development of INSNA (International Network for Social Network Analysis). The leading social network theories that are acknowledged by the historians are: graph theory (Harary and Norman, 1953); cognitive and structural balance theory (Harary et al., 1956; Heider, 1958); social and generalised exchange theory (Malinowski, 1922; Homans, 1958); power dependence theory (Emerson, 1962; Blau, 1964); structural embeddedness theory (Granovetter, 1985); and the seminal work on the network approach to social structures (Wellman and Berkowitz, 1988). The main assumptions that are carried through with these theories are: • •
human attitudes change as a consequence of cognitive dissonance effects, as human actors avoid the pressure from being different (cognitive dissonance theory – Harary et al., 1965); actors avoid intransitive triads and prefer to form transitive triads or interconnected relationships leading to dispersed structures (structural balance theory – Heider, 1958);
20 • • •
• • • • • • •
•
•
Aspiring networks when beliefs are unbalanced, psychological stress creates pressure to change a person’s sentiments towards homogenisation (cognitive balance theory – Heider, 1958); diffusion is affected both by direct and strong ties, and by weak ties that enhance access to information and opportunities (communication and information diffusion theory – Wellman and Berkowitz, 1988); behavioural psychology propositions can fully explain social exchanges, as larger societal structures arise because rational selfinterested persons repeat rewarded actions (social exchange theory – Malinowski, 1922); modern socioeconomic systems are constructed as lengthy chains of indirect transactions, where direct reciprocity is often impossible (generalised exchanges theory – Heider, 1958); power and inequality in a dyadic relation arises from ego’s control over some resources that are valued by alter (power dependence theory – Emerson, 1962; Blau, 1964); power of an actor represents a structural relationship which is inverse to the cost that one actor is willing to pay to another for an exchange (power dependence theory – Emerson, 1962; Blau, 1964); interconnected complex exchanges reinforce inequalities (imbalances) and change actors’ dependence on others (power dependence theory – Emerson, 1962; Blau, 1964); actors’ behaviour depends in large on how actors are linked to each other (network approach to social structure – Wellman and Berkowitz, 1988); norms emerge from locations of actors in structured systems of social relationships (network approach to social structure – Wellman and Berkowitz, 1988); the network topology represents the structural configuration of the network, and the network flow, or the flow of information between actors, depends on the network topology and the time (network approach to social structure – Wellman and Berkowitz, 1988); economic behaviour of actors is embedded in social relations and network structures and these relational structures have substantial exogenous influences on markets, firms and individual actors’ choices (structural embeddedness theory – Granovetter, 1985); social structure determines the operations of dyadic relationships (network approach to social structure – Wellman and Berkowitz, 1988).
In addition to the fundamental assumptions that have underpinned research by social network analysts, Barry Wellman (1988) defines five paradigmatic characteristics of social network analysis that he claims demarcate its theoretical foundations: 1
behaviour results from the structural constraints on activity such as the socialisation of norms;
Aspiring networks 2 3 4 5
21
analysis ignores the inner attributes of the actors and is focused on the relationships between these actors; central focus for the analysis is how a pattern of relationships (i.e. social structure) affects actors’ behaviour; special emphasis is put on the notion of structure as a network of networks, that may or may not be partitioned, and hence there is no clear guidance on what are the building blocks of a structure; formal analytical methods developed under this approach deal with the patterned relational nature of structure that supplement and supplant formal statistical measures by dealing with interdependent units of analysis (Wellman, 1988).
Equipped with these theoretical assumptions social network analysis (SNA) developed a broad methodological approach and a range of sophisticated techniques for network analysis and these methods have enabled researchers to assign quantitative value to interactions between people. This development was assisted by the increase in computing power and software development that allowed for a graphic visualisation of actors’ position and links between actors. The method of social network analysis has aimed to prove primarily to sociologists and behavioural scientists that the structured social relationships are a more powerful explanatory tool than the personal attributes of system members. However, in its natural development SNA has neglected the fact that individual attributes of the actors matter as well. This is particularly the case of business networks and business partnerships, which are formed because of the individual choices of actors and their strategic capabilities that they bring to a partnership. These choices and decisions are framed by multiple factors including: individual attributes of potential partners, the attributes of the initiator of a relationship, and other structural properties of the relational set or the environmental and market factors. It is one of the paradoxes of social network analysis that what is the object of analysis – the relationships between nodes – is assumed in either/or categories as a bundle of actions and behaviour of the actors. The relationship is either present or absent, directed or symmetrical, strong or weak. Although it is clear that a relationship is in fact a process of interaction between actors or entities, this process is disembodied from its dynamic component, and is reduced to a link, which makes social network analysis quite inappropriate for researching business network transactions that take place within a particular link but vary in volume, intensity and value, and are determined by individual strategic choices. For sociologists, anthropologists and organisation scientists within SNA, networks resemble a social structure of ties, facilitating relationships and exchanges between social actors. The patterns of relationships emerging as a result of the interactions and exchanges between human and institutional actors facilitate resource allocation within the social structure. The ties that
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are initiated as asymmetrical relationships between social actors evolve into complex frames of power and dependency relationships. The research findings on corporate directorship interlocks, professional networks, kinship and family business ties demonstrate these interdependencies (Mizruchi and Schwartz, 1987). The structural/positional approach in principle investigates the interdependencies between firms in alliances and network formations both from functional and from structural analytical perspectives. The functional analytical perspective is focused on the behaviour of the firms and exploits resource dependence theory. It looks at how firms pursue instrumental goals by establishing and maintaining relationships, and investigates how firms generate network configurations as an outcome of their behaviour. The structural analytical perspective is focused on the role and the position of firms and as such investigates proximity in the inter-firm relationships with emphasis on the categories of structural and relational embeddedness. Both the functional and the structural analytical perspectives contribute to the emergence of a comprehensive picture of the motivations and selfenforcing mechanisms behind networking, and alliance formation, and how firm behaviour, stimulated by business relationships, generates network configurations. Inter-firm alliances and networks utilise also the concepts of repeated ties, inter-firm trust that emerge and underpin these ties, and shared resources and information between network members. These concepts are used to explain how relationships consolidate in social and business structures that facilitate further interactions and transactions between firms. Casciaro (2000) argues that the two analytical perspectives (structural and functional) within the structural/positional approach are complementary. She advocates that the effect of a structural position does not derail functional and goal-seeking motivations that stem from resource dependencies and constraints. On the contrary, the author provides evidence that structural position affects alliance formation only under conditions of resource dependence, namely conditions where functional motivations drive decisions and choices of actors. The structural/positional approach supports research when the network boundaries are not known, but it requires knowledge of all relationships of an actor (or building ego-networks for each actor), in order to determine their position in relation to all other members of the network (Burt, 1982). Within this framework, individuals are assumed to act according to their position, rather than according to their personal choice, affected by values, norms, individual attributes and individual assessment of the situation. Both the individual strategies and the normative aspects of actors’ behaviour are usually ignored within the structural/positional approach. The notion of a norm is reduced to the concept of a status norm – or the normative rules that derive from the social status of actors. Under this approach rules and norms are interpreted only as behavioural frameworks stripped of their
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23
content as internalised cultural values and attitudes. As a result of that, there is a very limited discussion on where these norms in a network derive from. A fundamental explanatory framework for network behaviour is the structural theory of action (Burt, 1982). In the context of this theory, relationships emerge from attempts to utilise resources in order to realise interests. Interests emerge from the already existing division of labour (or status/roleset) that position each individual vis-à-vis the other members. The status/role set also determines the structural autonomy of the actors, ignoring variation in individual attributes of these actors. Although structuralists acknowledge that structure emerges from relationships, empirical investigations assume the existence of these relations and do not study variations in relationships apart from their symmetry and the strength of their ties. Both the individual attributes and the relational attributes are excluded or reduced to a minimum in network analysis. The postulates that Burt introduces as part of the structural theory of network action are: action is purposive, and actors evaluate the marginal utility of an action in reference to some criterion (Burt, 1982: 329). A chain of actions results in a process of interaction and constitutes a set of relationships between an actor and its partners. Social network analysis treats purpose as equivalent to self-interest, and both are assumed to be present in a relationship. The marginal utility of an action and a relationship is also assumed as constant, varying only by the structural position of the actors. The social topology of a network or the structure is constituted by the status-role sets that emerge in the process of interaction. These role sets arise from dyadic relationships, actively and purposefully manipulated by the network members through their activities and interactions. These categories are presented in Figure 2.1. The purpose of the actors is defined either as intention for an action, or as an argument and justification used by the actor to explain and rationalise past behaviour. Within the structural theory of action the structure of the network or the purpose of the actors are taken to an extreme, almost denying spontaneous activity by actors in the network. In reality the action is not only a resultant from the effects of network structure and actors’ purpose. The action is represented by individual choices and the imposition of individual attributes. The structural theory of action has not recognised the variety of actions that are associated with an actor (Figure 2.1). Actions of the partnering individuals are intrinsic elements of the interaction process. Action is interpreted as a broad interaction between subjects and objects for the achievement of some utilitarian or instrumental aims. Habermas (1981) enquires deeper into the theory of action, and defines three main types of action: objective or cognitive action, inter-subjective action and expressive action. These types of action represent different layers of human conduct and different drivers for human behaviour. Experiential action represents the layer of human praxis. The cognitive action represents the layer of
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Aspiring networks
actors’ interests, purpose
structure
action
experiential cognitive normative purposeful spontaneous reaction interaction
Figure 2.1 Structural theory of action and types of action.
knowledge and learning. The normative or inter-subjective action represents the layer of social interactions and relationships. Expressive action is spontaneous. From the business actors’ perspective there is another typology of actions: value-generation action (such as investment, recruitment and development activities) and value-extraction action (such as market sales and rent-seeking behaviour). Both can be a reaction to a stimulus. Although actors hold interests and purposes which drive their choices, they are also embedded in social structures and other environmental conditions. The internal and external environmental conditions induce and frame reactions which do not always satisfy interests and purposes. Purposeful action and reaction are substantially different and both can be related to the social structure. In addition, there are spontaneous actions that have expressive and exploratory function – seeking to reflect upon and map the environment. Finally, interaction emerges when two or more actors connect. Interaction in a dyadic or network relationship can not be easily broken down into individual actions. Interaction gives another dimension to the events that unfold between the interacting entities. Understanding the variations in actions and actors’ behaviour is essential to understanding network processes. The concept of acting in the business literature has simultaneously three different meanings: first, as performing unilaterally business functions; second, as participating in events along with other agents; and third, as
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linking to other business actors for the purpose of resource exchange/ acquisition or market realisation of the output. Acting in this context involves the use, accumulation and investment of resources by firms and the specific allocation of these resources for further business operations. Examples of acting from a network perspective include strategic positioning within the set of relationships with buyers, suppliers and competitors, or selecting partners for strategic alliance. The behaviour of the firm and the strategic choices made on behalf of the firm by managers bear the fundamental subjectivity of human agency, or the capacity to make decisions and choices and to act. The action is composed of multiple elements such as: the actors, their motives and their individual attributes; the resources controlled by the actors; and the actors’ evaluation of the utility (or the outcomes) from an action. The causal cycle of an action is described as a triangulation between the social structure of an action, the actors’ interests and the action itself (Burt, 1982). The emphasis on the action as a linking attribute brings a new dimension to network analysis and shifts the focus on the dynamic and relational aspects of network configurations. Overall the structural/positional approach has not been able to address the complexity and dynamics of network processes that unfold as part of the interactions in networks. Structural analysis embedded in the methodology for social network analysis in principle does not take into account the heterogeneity of actors and the variation of network relationships. As such, structural analysis does not facilitate research of adaptations in complex systems. Among the alternative approaches to network analysis that have developed a conceptual apparatus to study the relational dynamics is the relational approach. The relational approach One of the earlier investigations which focused on network relationships and partners’ adaptations is the work by the Industrial Marketing and Purchasing (IMP) group at Uppsala University. With their work they developed the foundations of relational approach which puts emphasis on supply networks and industrial markets. The IMP group introduces an alternative conceptual framework for the analysis of dyadic and network relationships. According to this framework the interacting parties are conceptualised as individuals or the organisations they work in, with the size, structure, strategy, experience and technology employed by these individuals and organisations. The interaction process in business networks is operationalised as a dyadic relationship between interacting actors and the episodes of interaction, including exchanges of resources, products, services and information or financial payments. The interaction process includes both business transactions and social exchanges taking place in a competitive market environment. The environment within the relational approach is conceptualised as comprising the market structure, the market dynamics, the position of each firm in the
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Aspiring networks
value chain, and the buyer–supplier relations in complex market situations (Håkansson, 1982; Achrol et al., 1983; Turnbull and Valla, 1986; Ford, 1990; Anderson et al., 1994; Holm et al., 1996; IMP group, 1997). Under the relational approach Håkansson and Johanson (1992) acknowledge three overlapping network structures. These are: the network of actors, the network of resources exchanged by them and the network of interlinked activities. Knoke and Kuklinski (1982) also support the view that networks comprise relationships not only between people, but also relationships to objects and events. Knoke and Kuklinski (1982) argue that fundamentally different relationships co-exist in networks and offer the following typology of network relationships: transaction relationships, communication relationships, boundary penetration relationships, instrumental relationships, sentiment relationships, authority/power relationships, kinship and descent relationships. Overall the relational approach acknowledges the multiplexity of links between actors, events and resources. The exchange relationships are usually conceptualised as taking part between firms as collective actors that are performing various activities and are employing heterogeneous resources (Demsetz, 1992). Connected relationships link actors that share common network perceptions, comply with a set of norms of business interactions and participate in chains of activities (Anderson et al., 1994). Connected relationships represent constellations of resources employed in value systems that support actors and activities. The main model that captures the complexity of business network relationships is the widely accepted model called ‘A–R–A’ (actors–resources– activities) that distinguishes between the three overlapping networks of actors, resources and activities (Håkansson and Johanson, 1993) (Figure 2.2). The main argument within the A–R–A model is that parallel networks coexist – the network of actors interlinked in dyadic and network exchange relationships; the network of input and output resource flows that move across the network of business actors; and the network of interconnected activities – understood as participation in events and as performing business functions within the value chain. The model presented in Figure 2.2 is an extension of the original A–R–A model developed by Håkansson and Johanson (1993), and demonstrates the interplay not only between the three overlapping networks but also the multiplexity of a network relationship involving multiple relational ties and exchange events between two actors connected in a simple dyadic exchange relationship. The detailed description of this model below represents an account of the main conceptual framework developed under the relational approach. Figure 2.2 shows details of two nodes and the inside linkages within the overlapping networks of actors, resources and activities in the context of two discrete exchange activities (activity A and activity B). Actors (A1 and A2) commit specific resources for each activity (resource A1, resource B1, resource A2, resource B2). Examples of discrete activities could be a rela-
Aspiring networks
Resource A1
Resource A2
resource interdependence
4
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4
Resource B1
Resource B2 2
2 Activity A Activity B
1
3
3
1
4 activity interdependence Actor 1
4
dyadic exchange relationship
resource commitments by actor 1 resource commitments by actor 2 activity participation emerging interdependencies
4
Actor 2
1 2 3 4
resource links commitment links participation links interdependence links
Figure 2.2 The simple network of actors, resources and activities in a dyadic relationship (source: Adapted from Håkansson and Johanson (1993), actors–resources–activities model (A–R–A model)).
tionship that involves both product development (activity A) and comarketing (activity B). This simplest dyadic relationship has at least three distinctive interdependence links: 1
2 3
Resource interdependence is represented by both the accumulated resources by actors that are available for investment in operations and exchanges and the actors’ dependency or need for input resources. These are represented in Figure 2.2 as resource links (1) (or available resources, assets and capabilities), and commitment links (2) (invested resources in the relationship); resource needs emerge when commitments exceed available resources. Activity interdependence is represented by joint operations, activity participation and coordinated behaviour, or acting in events and exchanges. These are represented in Figure 2.2 as participation links (3). Actor interdependence is represented by the mutual dependency between two interacting partners, or where a human actor depends on the choice of another human actor and the performance of a non-human one, and the non-human actor depends on the human actor regarding how its capacity is employed. These are represented in Figure 2.2 as interdependence links (4).
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The three types of interdependence links capture the multiplexity of a dyadic relationship between two business partners. The interdependence links in a dyadic relationship represent also the ability of firms to expropriate or capture network resources available beyond their own boundaries (Johanson and Mattsson, 1986; Easton, 1992, 1997). In this framework, resource is defined as a possession or a capability of an actor (Emerson, 1981), which obviously affects interactions, but is not the sole purpose of it. If it is an actor’s attribute, it can be committed directly to activities within the network through a participation link. If it is an object (technology, information, a document) under the actor’s control, it has a role by itself which stems from its own attributes – enrolled and employed by the human actors (as described within the cultural approach later on in this chapter). Resource flows occur when actors exchange products under their control and services within their capabilities. Resource flows comprise both types of resource links and commitment links. Activity flows are represented by the participation links that interconnect actors and activities (investment of resources or rendering resources to the network for access by other network members). Activities differ from individual behaviour of actors as they establish a framework that facilitates collective participation and cumulative outcomes at dyadic and global network levels. Participation in activities means actors taking part in events and contributing to a scenario that involves other actors and multilateral distribution and utilisation of resources. Participation also means information and knowledge exchanges that lead to the emergence of communities of practice and knowledge structures. The dyadic exchange relationship in Figure 2.2 comprises the direct communication link between the actors and the resource and activities interdependence ties that connect them. The activity interdependence and resource interdependence are intrinsic parts of the dyadic exchange relationship. The notion of discrete activities (A1, A2) that require distinctive resources (RA1, RA2, RB1, RB2) refers to the scope of the relationship (encompassing multiple activities), and the changes that are expected to occur for the duration of this relationship. The critical interpretation from this model is that in parallel to the network of actors there exist a network of resource flows and a network of interlinked activities, and the three distinctive networks facilitate a multiplexity of exchanges and interactions between relational partners. The resource interdependence and activity interdependence within a relationship may vary in time, intensity and direction. Actors could make different commitments for different activities. For example, Actor 1 may be a leading actor in Activity A – joint research and development – and hence committing substantially more resources and playing a more dominant role than Actor 2. For the second Activity B – marketing, for example – the roles and dependencies could be reversed and Actor 2 may be playing a more dominant role. This model assumes interaction between two human actors, actively
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making choices to participate in activities, and to exchange resources. This is a typical assumption for the relational perspective in business network analysis. Johanson and Mattsson (1992) acknowledge that within the relational perspective only human actors have intentions, and thus can create and implement strategic choices. These leading actors, however, make decisions and choices regarding non-human entities both on their own behalf, or on behalf of the institutions and organisations that they represent. Engagement with non-human entities such as technologies does extend the business network and the resource and activities interdependencies. Håkansson and Johanson (1992) also identify four forces that bind actors in business networks together: functional interdependence, power structure, knowledge structure and intertemporal dependence, or the history, memories, investments in relationships, knowledge and routines of existing interactions. Although the authors acknowledge, that the relational network model is voluntaristic, and not deterministic, which makes it difficult to lay solid research foundations for hypothesis testing, its main advantage is that it reflects the reality of repetitive business transactions and long-term relationships in industrial markets, and enriches our understanding of differentiated structural layers of interaction. Although the A–R–A model represents a milestone in business network analysis, there have been other contributions that extend the relational perspective. Some managerial and strategy theorists that have attempted to develop further the relational approach have emphasised how business relationships are affected by power and authority, by individual actors’ choices and by the domination between interlinked economic agents (Mintzberg, 1983a; Porter, 1991). Mintzberg’s work (1983a) on intra- and interorganisational power relations and Porter’s theory of competitive advantage built by organisations through extending their control over the value chain and the value system (Porter, 1991) provide alternative explanatory frameworks that interpret relationships of power and dominance within business networks. Authors within the structural/positional approach have also made serious attempts to address some of the questions and the theoretical foundations of the relational perspective. Burt (1982) acknowledges that the advantages of the relational approach are that it is possible to build network models that describe the intensity of dyadic relationships. Under these models researchers could describe an actor’s behaviour knowing only a few of the actor’s relationships and without attending to the actor’s many other relations. Burt acknowledges also that the relational approach is not suitable for mathematical modelling, as it requires detailed information on the network boundaries and on a representative set of relationships. The author still assumes uniformity of relations, which is one of the paradigmatic assumptions of the structural/positional approach. This assumption ignores the overlapping layers of network elements, described by relational network analysts under the A–R–A model.
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Some of the work by Wellman and Berkowitz (1988) on asymmetry of relational exchanges and transactions and transitivity of network ties also informs the relational perspective. These views, although shifting the focus more onto the relationships that bond actors, remain within the structural/ positional point of view, arguing that action and behaviour are determined by social structure and that the individual attributes are not taken into account. Overall the relational approach has not been able to establish distinctive methodological roots to network analysis, and has not been able to address in full the question about determinants of strategic intent and network behaviour. Most of the research underpinning the relational approach is conceptual and based on comparative case studies and a range of qualitative information. It has also accommodated much of the empirical investigations under the cultural approach. The cultural approach The cultural approach to network analysis has its roots in two main streams of thought – the actor-network theory with its emphasis on human– technology interaction and knowledge networks, and the critique of the relational approach which focuses on the cultural aspects of network interactions. Lowe (2001) criticises the relational approach which, in spite of its focus on actors’ attributes and the interactions between actors, on the processes of forming bonds, sharing ideas and learning, fails to explain how culture moderates network processes. Lowe defines culture as systems of meanings and ideas, or as this non-physical, interpretative and expressive character of the human being that affects and subsumes the entire social world of interconnected subjects and objects (Morgan, 1997; Lowe, 2001). A distinction is drawn in the literature between cultural artefacts as objects (i.e. technologies, documents and texts, physical objects) and culture as a reflection, subjective interpretation, imagination or self-awareness (Lowe, 2001). Welch and Wilkinson (2001) describe the cultural aspects of networks as ideas, meanings, logics, norms, theories, ideologies and rules within knowledge systems. However, these are treated as real artefacts, rather than nominal general processes of human imagination. The authors discuss the process of change and evolution in networks as facilitated by the evolution of ideas that emerge as part of the networking practice. This is borrowed from the actornetwork theory in sociology of knowledge where the actor world is represented as a network of entities such as knowledge, technologies, technical artefacts, other human beings, skills, money, texts and other resources (Callon, 1986, 1992; Callon et al., 1986; Law, 1986a, 1987; Law and Bijker, 1992). The actorworld within the cultural approach is composed of all interconnected elements/entities and their contexts that they bring to the network. Network analysis from a cultural perspective focuses on the experience of network actors as cultural participants, that is acting, interpreting and imagining networks – through language, symbols, myths, stories, rituals and
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other processes of human action and imagination. Business interactions exist both as physical exchanges of resources, goods and services and as ideal relational representations embedded in cultural processes of transformation of individual intentions and circumstances into individual and collective actions, decisions and choices. The cultural perspective acknowledges the existence of cultural artefacts, their direct impact on human interactions and relationships, and the spontaneous emergence of new structures and new forms of behaviour in open systems. Authors acknowledge the framing effect of cultural artefacts – perceived both as physical objects and as self-organised consciousness. The cultural perspective refers to networks as living systems that can invent themselves, that can modify their relationship structure and can manage their internal and external environment. Of primary interest to business network analysis from the cultural perspective is to identify all key actors in a network (human and nonhuman), and to deconstruct their interests, their strategies and their power to influence network processes. Cultural network analysis aims to reveal those driving forces behind interactions that are encrypted in the actors’ properties, in their institutional form, in their position in the network of interconnected elements and in the contracts that bond actors to each other. The cultural approach originates from the work by Latour (1987), Callon (1986, 1992) and Law (1986b, 1987) on heterogeneity in actor-networks and the framing effect of texts and cultural artefacts on social interaction. Callon in his initial definition of the concept suggests that actor-world is ‘the world of entities generated by an actor-network’ (1986: xvi), where actornetwork is constituted by actors and their social world of subjective meaning that they derive from the process of interacting with other entities. The actor-world is composed of all socio-cultural elements that constitute interactions and social structures, and their contexts that they bring to the network. According to this methodological approach, cultural artefacts such as knowledge and technology can act and exercise power within networks, locking firms into a particular strategic choice and configuration. Both human and non-human actors have a dual existence in a network: they exist by themselves with their own properties, and they exist as enrolled, incorporated, mobilised or absorbed by the network, with ascribed roles and functions. Important elements of the actor-network are also the outcomes from the activities of the enrolled actors, or the artefacts of their behaviour as network members. Describing the negotiated market, Callon asserts that network actors ‘negotiate their own identities and interests’ (1998: 295). Their identities are both independent properties involved in the negotiation process and a negotiated outcome. The institutional framework that facilitates the negotiation process, according to Callon, is composed of instruments that impose the notion of objectivity of facts upon the subjective viewpoints of actors.
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Texts and rules are examples of such instruments. It is assumed that every member of the network agrees to surrender their own subjective viewpoint when interacting with others. In other words, the objectivity is constructed institutionally by the agreement of the interacting and negotiating parties. By incorporating human and non-human elements along with cultural and organisational artefacts in the network the cultural approach raises new fundamental research perspectives in network analysis. One of the main strengths of the cultural perspective is its focus on heterogeneity of actors and the processes that take place in a network. The conceptualisation of the heterogeneity of network members – individuals or organisations, human or non-human – establishes a new dimension of network research that explores the causality of network interactions. The conceptualisation of the actor-world as a composition of all network elements induces the network context as an essential element of network analysis. The cultural perspective addresses a range of issues related to the nature and attributes of network actors and their network behaviour – interpreted as a network process that unfolds as part of the interaction. All human actors of an actor-network, according to the cultural perspective, could exhibit strategic behaviour. They could act as: translators (ascribing roles to others), or spokesmen (speaking on behalf of the other enrolled entities). Network actors position themselves (an actor to render itself indispensable from a network position). Actors also displace others (or oblige other entities to detour, hence creating links and associations between entities as obligatory points of passage) (see Callon, 1986). The human actors design the contracts with all other players. They allocate resources, encrypt incentives for performance, actively enrol, translate and associate other non-human elements, making them accessible to the network. The non-human elements of an actor-network could not exhibit strategic behaviour. They can act as spokesmen representing their contexts and bringing their attributes to the actor-world. Non-human elements can be translations and interpretations representing their creators, and performing a specific role ascribed to them by these human creators. Non-human actors or artefacts such as texts, documents, technologies, coded knowledge and contexts, shared meaning and practices do not speak for themselves, but speak for their human creators and audiences, who encrypt and deconstruct the meaning attributed to them. In the list of actors Callon (1992) pays special attention to texts, acting as pure intermediaries. Texts participate as intermediaries in the processes of ascription of roles, translation of meaning, information, rules and practices, and enrolment of other entities and contexts. Texts carry the message of the translator, the reader and the audience simultaneously. Texts are treated as spokesmen or exhibiting actors’ presence. The translator’s capabilities of translation and enrolment are as crucial as the reader’s capabilities of decoding and deconstruction of the meaning of these texts. Both the translator’s
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role and the reader–observer’s role can be attributed only to human actors. Beyond the capabilities of the translator and the reader–observer, the texts themselves are merely complex entities, containing coded information about other entities and various associations between these other entities. Texts along with other network resources and artefacts are also called ‘media’ because of their intermediation in the cultural process of communicating and acting (Luhmann, 1995). Interactions between human actors and non-human ones such as technologies, standards, legal norms or other cultural artefacts induce incentives and impose frameworks that diminish or enhance actors’ decision-making power. Within the cultural perspective non-human actors exhibit attributes that ‘suggest’ to human actors new directions, new activities and extensions of current practices. Non-human actors are not merely resources, they are the means and the tools of employing resources, the vehicle for participating in activities and intermediaries in relationships. The human actors, compared with the non-human ones, act strategically and negotiate the frame for their interactions, namely the rules and the roles that each of them has to play. In this way the human actors drive the network processes. The strategic behaviour of human actors include: selection of network partners being carried out at the initial stage of networking; enrolment of other actors or incorporating new members by allocation of roles to them; translation and interpretation of roles and meaning; representation of other embedded relationships which carry associations between numerous other entities; displacements or transfer and relocation of actors in positions; and problematisation or a selective process of framing of alternative problems, choosing a problem to solve and selecting an appropriate solution (Callon, 1986). Although these examples of strategic behaviour represent network processes that correspond with specific actors’ roles, they take place at different stages of the network development or can occur simultaneously. Many of these insights from actor-network theory offer an original conceptual framework for analysis of strategic behaviour of business actors in a network context. Another metaphor, used by Callon in actor-network theory, is staging. This describes a process of how some actors interpret the wider surroundings in order not only to position themselves in the network, to prescribe roles for themselves, but also to prescribe roles to other actors and to relate to the wider socio-economic environment. The staging of interactions is effectively a positioning of individual actors in the wider context. Staging is strategic behaviour that translates actors’ roles to the network and transforms the network properties into the language of the outer-world. Within the cultural perspective the core actors are employing their own cognitive resources staging and framing the network with their strategic choices by selecting other actors, enrolling them into positions, or translating assignments and rules. Actors are also framing the interface between the internal and external network relationships and flows of resources and information.
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One of the main criticisms of the actor-network theory is the way it empowers the non-human actors, ascribing to them organising capabilities in the form of structuring and framing of the network. The classic example in Callon’s work is the electric vehicle project, where the technology is assumed to have prescribed which partners were to be involved in the subsequent research and design. This approach misplaces the role of the human actors who create and employ technological artefacts in the first place. At the beginning of any enrolment stands a human act of knowledge construction, which brings to life the entities – technological and socio-cultural artefacts. Non-human elements have no capabilities or power in themselves to enrol other entities. They only facilitate the enrolment process by carrying ascriptions from one human actor to another. Apart from their attributes that play a structuring role in the network, the enactment of their network roles is determined by human decisions embedded in these entities. The same network model in Figure 2.3 (see page 37) can be used to illustrate a relationship between a human and a non-human actor. The human actor – individual or institutional (A1) – through an elaborate process of translation and enrolment, directly or indirectly, employs the non-human actor (A2) and hence establishes a relationship with it. A2, for example, could be a technology that dictates industry standards such as the GSM in the telecommunications industry. As such, this actor determines strategic choices of firms or resource flows and value-chain activities among firms that employ this technology. Although non-human actors do not exhibit preferences, they have resource attributes that affect the preferences of the human actors and the dynamics of the relationships they are engaged in. The power of non-human actors derives not from their will and choices, but from their attributes and from the network effect of their application by human actors. For example, technologies employed in a product and process development project effectively frame the choices of human actors, imposing standards and requiring resource commitments at a certain level. The network roles of non-human actors represent a translation of their attributes and employment of their resources and intrinsic capabilities by human actors for a specific purpose. Non-human actors such as technologies, scientific, manufacturing and organisational artefacts can be incorporated in contracts, but are not recipients of contracts by themselves, and can not hold responsibilities in a contractual relationship. The participation of nonhuman actors or objects in a relationship is determined by the human choices made in association with these non-human entities or their attributes and capabilities. Once employed, however, they can impose their attributes on human actors, making them dependent on the interactions with the non-human entities. Although the cultural approach has developed some valuable insights into the structuring and dynamics of networks, it has not established solid foundations for empirical research. It has received only fractional support from scientists studying networks, and as a result it has not built a strong
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domain in the literature. References to the cultural approach are mainly made at forums led by scientists representing the relational perspective in network analysis. The cultural approach also has not yet answered a number of questions significant for its own development. Such questions are related to the nature of technology, organisation and texts – are they social actors or social artefacts? What are the essential attributes of an actor that enable it to participate actively in network processes? What are the implications from the distinction between passive and active actors in a network? How to distinguish between the effects from network actors, their behaviour and choices, and the effects from the relational socio-cultural context of network relationships? The discussion in this chapter and in the book as a whole is an attempt to reconcile the relational and the cultural perspectives in network analysis through an extension of both. The assertion of the constitutional effect of technologies and institutional norms on business relationships is essential, and has to be properly acknowledged by network analysts. The association of human actors with technologies and other non-human entities in an actornetwork world is not a spontaneous process. It is directed, controlled and coordinated by the human actors that set the frame for the network. However, human actors subscribe voluntarily to institutional norms, technological standards and cultural artefacts or other factors imposed on them. All three approaches – the structural/positional, the relational and the cultural – have generated a rich pool of observations that extend the conceptual boundaries for understanding of firm behaviour in a relational and cultural context. All three approaches address the structural consequences of interactions between firms. The structural/positional approach explains conceptually, relationships between autonomous firms and business units, between headquarters and subsidiaries, the role and position of individual partners in network alliances, and the interlocking governance structure of corporations. The relational approach examines supply-chain relationships and resource dependencies between firms connected across different markets. The cultural approach explains the role of cultural proximity and attitudes, technologies and other embedded socio-cultural artefacts on partnering agreements, the process of partner/supplier selection and relationship management. Ultimately, both the relational and the structural/positional approaches are interested in predicting the behaviour of interlinked actors, assuming that it arises out of contentions for resources, and as a result of interactions and repetitive transactions between individuals, groups, organisations and institutions. The behaviour of network members, their choices and decisions are ultimately based on individual motives and individual constraints, on their individual attributes, on their structural position within the network of relationships and on the relational dynamics that emerge between partners. In addition, the behaviour of network members under the cultural
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approach emerges as an outcome of the interactions and network associations between entities. All three approaches have employed different methodologies for social enquiry and have developed different sets of paradigmatic propositions. Although this book does not propose a complete synthesis of different approaches and frameworks, it aims to extend the knowledge and understanding of the concepts shared between different approaches. This is aimed ultimately to enrich the conceptual apparatus of network theory, and to establish broader foundations for the analysis of business networks. In the subsequent chapters conceptual tools will be employed across the entire board of theoretical frameworks that address the issues of the nature of actors in business network, what drives their behaviour, communications, exchanges and transactions, and how business relationships form specific structural configurations.
Overview of network characteristics and concepts The existing empirical research on networks puts emphasis on three of their aspects – the nodes, the ties between actors and the overall network configuration. This chapter will give an overview of these three levels of network analysis and the chapters in the rest of the book will discuss each of them in depth. Here I will introduce with some details the concepts, categories and indicators used for theoretical reflections and empirical investigation of business networks as distinguished at these three levels. For this purpose I develop a conceptual model that illustrates the key attributes and measurements of actors, relations and network structure (Figure 2.3). The first group of measures comprises characteristics of the nodes – the members, actors, agents or entities of a network that are engaged in some form of relationship – their individual attributes, roles and positions in the network topology and some behavioural conditions. The second group is focused on the relationships, or the links and ties between actors, including communications, affiliations, exchanges of information and resources, transactions between firms and other contractual arrangements. The third group is related to the overall network configuration, the structure of relationships and the topology of roles and positions, and it includes summative measures of the entire network and its properties. The structural characteristics of a network could be treated both as an internal network environment and an external environment in which each individual member operates, that is the structural context for dyadic and network relationships, or what Kenis and Knoke (2002) call a ‘field-net’. The conceptual model in Figure 2.3 illustrates the main operationalised measures that have been used for empirical investigation of networks primarily by scholars representing the structural/positional and the relational approaches. One of the aims later on in this chapter is to introduce the conceptual apparatus used by social network analysis and to translate and
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CHARACTERISTICS OF THE ACTORS/NODES FIRM SIZE HISTORY OWNERSHIP AND GOVERNANCE ACCUMULATED RESOURCES INTERESTS, VALUES, INCENTIVES, PREFERENCES, EXPECTATIONS CAPACITY TO LEARN AND INNOVATE CAPACITY TO CONNECT POSITION, STATUS, ROLES, PRESTIGE POWER CENTRALITY STRUCTURAL AUTONOMY
Ties/Relational Attributes density directionality strength incoming vs. outgoing direct vs. indirect intensity reciprocity symmetry content transitivity multiplexity longevity nature of the bond competition vs. cooperation bridges = exchanges with the environment dyadic vs. network
Network Configuration Characteristics Size Density Range Connectedness Spatial configuration of positions Cliques Cohesion Structure and hierarchy of communications Control centres Structural equivalence between positions Efficiency Governance Productivity system
Figure 2.3 Network characteristics.
explain the rich pool of instruments and measurements developed for structural and relational analysis, adapting it for the purpose of business network research. Usually networks are displayed in the form of a map of nodes, matrices or spatial models where actors are connected to each other either directly or indirectly (Wellman, 1988). From a formal point of view networks are graphs that contain information only about ‘who is connected to whom’. Some graphic displays of networks have more interpretative power than others and they could convey information about the heterogeneity of actors, the variety in actors’ relative position and the variety in their relationships. The model in Figure 2.3 demonstrates such a map with nodes A, A2, B, C, D, K, L, M, X1, X2 and X3, where A is directly connected to both B and C, while A2 is connected directly only to C, but its link to B is indirect. Some of the nodes occupy a more central position than others (like B or C). The nodes X1, X2 and X3 indicate homogeneity in attributes and in position, and exhibit a cluster formation. The nodes K, L and M indicate a
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sub-set of actors that are connected via the bridge (K–A). This configuration shows that the boundaries of the network are drawn at the researcher’s discretion. The graphical display of links indicates overall heterogeneity in status and position of all actors and a variety in their relationships. The structural topology exhibits different types of centrality of B and C. One is based on incoming relationships, and the other is based on outgoing relationships. Particularly interesting is the relationship between C and D, which symbolises a multi-dimensional (multiplex) link that may include multiple contracts and multiple exchanges of resources and information or a long-term open-ended contract for joint activities, payment links and sharing agreements. Characteristics of the nodes All three approaches described above have contributed significantly to the development of the concepts and measurements of the nodes in networks that are linked to other nodes for some purpose. These concepts that have emerged and have been operationalised for empirical research are defined in the Appendix (see page 214) with some examples for clarification. The nodes in a business network are occupied by individual firms, by strategic business units of firms, or other institutions and private agents that are assumed to have distinctive competencies, legal status and organisational boundaries. Nodes in business networks can also be leading technologies, licensing agreements or industry standards supported by legal texts and documents. The properties and attributes of the business actors are very much framed by their presence in various geographic locations, product markets and strategic configurations. It is important to mention that current theory does not generally discuss specific characteristics of the individual nodes. The network members are assumed to have similar characteristics. However, it is self-evident that both social networks and business networks comprise members that vary in attributes and behavioural choices. The participation of individual members (i.e. firms) in business transactions and exchanges is specific, and it is directly effected by, for example, the firm’s size, its history, its product portfolio and diversification, the overall market share of the firm, or the market penetration through distribution channels and individual products. All these are company-specific characteristics and essential attributes of the nodes that drive the relational dynamics and the structural configuration of the business network. A detailed analysis of the individual characteristics of network members contributes significantly to an explanation of the agency structure and the specific distribution and concentration of resources within a business network. The categories that measure attributes of actors in a network are generally interpreted as factors that affect actors’ behaviour, and as behavioural choices or how actors engage in network relationships and transactions. These opera-
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tionalised measures can broadly be described in two groups: individual properties of the actors and structural properties of the actors that derive from their location in the network topology. The individual properties or attributes of the economic actors are: size and history of the firm, ownership and corporate governance, assets and accumulated resources (including knowledge, technology, capital and market access), interests, values and expectations, incentives and preferences. The variety and heterogeneity of actors is determined broadly by their individual attributes, framed at inception (i.e. registration of a firm) and modified through evolution and adaptation. Attributes are also affected by the previously established relations in which actors are embedded, including value-chain links to suppliers, distributors and business service providers. The individual attributes determine actors’ capacity to connect and to form relationships enrolling new partners in their own business networks. The picture of structural properties of actors is much more complex as it contains multiple formal measures. Among the structural properties of network agents, developed by the structural/positional approach, are the categories of position, status, role-set, prestige, centrality and structural autonomy as actors’ attributes and as measurements of the extent to which an actor controls and has an impact on ties or relationships. Positions in networks are defined in two ways: first, by assigning actors to groups (or sub-sets in the network) according to the pattern of their relationships; and second, by assigning roles to actors within each group. These roles vary between three possible positions: the role of core actors – densely interconnected and forming a sub-set or a clique; the role of primary members – closely connected to the core actors; and the role of secondary or peripheral members – connected infrequently to clique members. Actors, according to the structural/positional approach, that jointly occupy a position are expected to pursue similar structural interest and not to compete with one another, while simultaneously they are expected to compete with nonoccupants (Burt 1982). Actors according to their position receive a membership status within the network or the group. This status confirms their network membership and frames subsequent relationships and behaviour or specific roles and functions that actors perform in a network. This mechanism has been investigated within a specific stream of network analysis where the fundamental assumption is that ‘Position ⫽ Status ⫽ Membership ⫽ Role’ and the four are interpreted as equivalent. The position itself is disentangled from the power exercised by actors enacting specific roles. As such, the position as a structural attribute is separated from the other individual attributes that explain behavioural motivations in networks. The status/role set represents the outcomes of the actor’s efforts to position itself in the network. The individual status and the individual role-set as actors’ attributes derive from the acquired or occupied position of the actor in the network configuration. Both depend on the rules and the structuration processes within the network and simultaneously affect actors’ choices.
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Empirically research within the relational perspective concludes that power may also derive from actors’ attributes and from their capacity to learn and to innovate as a source of their competitive advantage. Overall individual attributes and status/role-set determine individual power, which is encrypted in the measure of actor’s structural autonomy. Structural autonomy of actors derives from the occupied position, from their individual status, and from the actor’s power and ability to control information and resource flows within the network. Structural autonomy is the ability of actors to pursue and realise their interests and to circumvent market constraints (Burt, 1982). Actors’ autonomy can also be defined as their ability to capture value while entangled in multiple relationships, resource flows and shared network activities. High structural autonomy within position, according to Burt (1982), is correlated with a specific relational pattern (common for all occupants of this status), and involves low competition with one another and high competition with the non-occupant actors. Burt also assumes that occupants of a status have equal control of resources. However, there is no strong empirical evidence to support this statement. On the contrary, control of resources may depend both on the position of the actors, and on their individual attributes. This is certainly the case of business networks which are framed by input–output relationships, where similar suppliers, for example, occupy similar positions and pursue similar interests, but engage in direct competition with one another for contracts with buyers. Competing for the same pool of resources makes them substitutable and makes the relationships with structurally equivalent actors redundant. Therefore, the allocation of resources between structurally equivalent actors may be substantially different in business networks, although they may share a similar pattern of relations with the rest of the network members. In addition to the formal interpretation of status/role-set and structural autonomy, there is a functional/behavioural interpretation of these concepts. Individual actors may design different roles for themselves and perform them differently. Some members of a network may serve as gateway keepers or a bridge in the exchanges with the environment and connecting to other networks. This is an example of empowerment through location of the actor and through the role and function that this actor performs in the flow of resources and information. The location and position of a company in a production network and a value chain determines how attractive this company is for linking with it, and for partnership with it in joint activities. Centrality is another measure of a structural attribute of an actor that results from the actor’s capacity to connect to others, to form relationships and to restructure existing link-paths in order to determine the minimal number of steps needed to connect to other network members. Actors’ centrality is an attribute that measures the number of incoming and outgoing ties or the overall prestige and popularity of the actor. In the model in Figure 2.3, the
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centrality of B is determined by the number of incoming ties, while the centrality position of C is determined by the number of outgoing ties. The implications of that fact are that node B displays a role of a ‘gate-keeper’ or an ‘information broker’ – receiving information from a number of incoming ties. The latter implies that B has power to relocate and redistribute information to the entire network. On the other hand, node C appears to play a role of ‘coordinator’, enabled by its location in the network and the number of outgoing relationships to determine priorities for the network activities for a large number of other members. Node C by its centrality has potentially the power to relocate and redistribute performance tasks, contracts or other resources. The two actors B and C will have different influences on the rest of the network and these differences derive from their roles and their centrality positions. The determinants of actors’ strategic behaviour derive from their individual attributes, from their roles, positions and structural properties and from the relational constraints and opportunities within the network. Actors’ attributes, relational attributes and structural properties of the network have a causal effect on actors’ choices and decisions. The actors’ attributes themselves do not measure in any form actors’ behaviour but represent the factors that affect this behaviour. The next chapter focuses very much on these actors’ attributes that determine individual strategic choices and behaviour. Chapter 3 synthesises the interdisciplinary foundations for analysis of network behaviour, or the broad conditions under which actors make choices and decisions to participate in network relationships. Characteristics of the relationships between network members The formal network analysis under the structural/positional approach investigates primarily whether there is a link between two actors or not, whether it is uni-directional or reciprocated, what are the paths of information and resource flows, and to what extent actors are reachable within the network. The relational approach puts more emphasis on the content of the relationship, and hence the conceptualisation of overlapping networks of actors, resources and activities. The cultural approach interprets links between network members in a semiotic and phenomenological way, putting the emphasis on the observer’s perspective as a main tool for framing the entities in a network and the links or associations between them. The concepts that underpin analysis of relationships between network members have been developed by all three approaches in network theory, the structural, the relational and the cultural. Relational measures explored in network analysis have been primarily developed within the structural/positional and the relational approach. These are: density, direction and strength of ties, reciprocity, intensity, asymmetry, transitivity, content and multiplexity (Brass, 1992; Brass and Burkhardt, 1992; Burt, 1992b; Ibarra, 1992; Krackhardt, 1992; Knoke and Guilarte, 1994;
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Arino, 1997; Holm et al., 1997; Monge and Contractor, 2003). All categories are defined in the Appendix (see page 214). The model in Figure 2.3 represents a set of links/ties between actors, or contracts between firms. Each business relationship has three dimensions: actor bonds, activity links (with schedules and allocated obligations) and resource ties (with specified methods of exchanges and payments). The relationship itself is measured by its longevity and the nature of the bond between firms that stems from the purpose of the relationship such as product development, technology sharing, financing or the implementation of other strategic objectives. The directionality of a business tie indicates whether a link is initiated by a particular actor and usually this is determined by which party has more interest to establish or prolong an existing relationship, and how the two parties negotiate the terms and conditions of the exchange. The intensity of the exchange usually is a measure of the repetitiveness of the transactions between the two companies and is measured by the multiplexity and the content of what they actually exchange and the agreed form of payments. The reciprocity or relational symmetry experienced by individual members is measured by the incoming vs. outgoing relations in terms of sending or receiving links, and whether they are direct vs. indirect ties that connect actors across the networks. The reciprocity of the link between two firms is a measure of the extent to which both companies satisfy mutual interests, and exchange or share resources. In the model in Figure 2.3 there is more reciprocity in the relationship between C–D and A–B, while the relationships which C maintains with A and A2 are uni-directional and, in this case, are determined by C. Business relationships between network members are usually asymmetric and they are in many ways unique and pre-determined by the individual characteristics of the nodes, by their location and position in the network, and by the overall network dynamics. Transitivity is a measure of the relationship that indicates how a link initiated by an actor passes through a number of other actors to reach a distant node. The transitivity in relationships is one of the main mechanisms and indicators for diffusion in networks. The content of a relation is one of the most complex aspects of network analysis as it changes over time. It is determined by the two partners involved in it, their attributes and their interests, and the way they perceive each other. The content is also affected by the way actors reflect upon the situation as a whole, and frame the transaction by selection and choice. Two actors usually define their interests and strategies individually. Part of the relationship between them is to exchange information about their intentions, which assists the other party to develop certain expectations. The contract between the two actors evolves as a negotiated strategy for mutual cooperation, supported by framed expectations and formal agreements. The content of the relationship therefore includes: a) the individual intentions of
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each partner; b) the negotiated strategy between them; and c) the exchange or the transaction itself. This multilayer approach to interpreting relational content suggests that an in-depth analysis of ego-networks is a more appropriate method which takes the complexity and the dynamics of the relational content into account. The content and intensity of the transaction between firms could vary by the type of contract, by the competitive position of the firm or by the market demand. Multiplexity is a measure of the exchange of multiple contents (Knoke and Kuklinski, 1982; Wellman and Berkowitz, 1988). The content of an exchange between companies could differ by the intensity or the volume of the exchanged goods or services. It could differ also by the value of the exchanged recourses, or by the terms of the contracts between these companies. Multiplex relationships have been under-researched as they pose the challenge of relational complexity that can not be easily operationalised and incorporated in network models. The relational perspective has generated a number of alternative frameworks that aim to capture richness of relationships. Schmid et al. (2002) describe resource flows that substantiate business relationships and transactions as varying by content (material and immaterial resources), by domain (inter-functional, inter-business and cross-border), by genesis (deliberately planned or emergent), by nature (independent, dependent and inter-dependent), by intensity, frequency and criticality. The authors also point out that there are two sides to resource flows – providers and receivers. Håkansson and Snehota (1995) distinguish between a ‘single actor function’ in dyadic relationships, and a ‘network function’ as the balance of functions in all business relationships maintained by an actor, or a measure of the connectedness of an actor. Business network relationships are a form of collective action involving cooperation and implicit agreements between firms which are inherently interdependent. All relational characteristics introduced by the structural/ positional approach, the relational and the cultural approach aim to throw light on the interactions between actors and the outcomes from these interactions. These, however, are insufficient to describe and explain interdependencies between firms. These interdependencies will be discussed with more depth in Chapter 4. Characteristics of the entire network configuration Network configurations or topologies emerge from interactions between actors. These interactions have been studies not only by social scientists, but also by physicists, computer scientists, biologists and others. The mapping of actors and relations into configurations has produced some dominant patterns (Figure 2.4). The ego-centred network is one of the most popular structures and it is also known as a hegemonic network, as the focal firm exercises significant control over all relationships with its partners.
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Hegemonic
Value chain
Tree
Circular
Clustered
Regular
Core/periphery (scale-free)
Universal
Small world
Figure 2.4 Network mapping.
Ego-networks have one central core actor and multiple primary members that may be connected between themselves, but are not expected to form cliques. Tree-networks represent hierarchies where there is clear subordination between actors at different levels, although communications are simultaneously vertical (between levels), horizontal (within levels), or a mixture of the two. Actors pass on information and resources to a nearby partner, and this flow reaches back to the originator, represented by a circular structure. Circular configurations are constituted by actors with equivalent structural position and minimum connectivity, where each actor is connected to a maximum of two neighbouring members. If actors are connected in triads, then they represent a regular network, where each actor is connected to no more than two neighbouring actors. A dispersed network of randomly scattered and mutually connected nodes is also called universal, as it provides generic and universal connectivity assuming homogeneity of nodes and symmetrical relations. Universal networks exhibit maximum connectivity and may comprise within themselves multiple other configurations such as clustered and circular formations, long-distance bridges and small-world phenomena or entire value chains. Actors connected in an input–output chain represent a value-chain network. Value-chain networks are similar to the circular networks with one main exception – the originator of the chain does not receive feedback communication from the final position in the chain, so that there is no circulation of information as most resource flows and interactions are directional (Figure 2.4). Empirical research has identified three additional types of structural configurations – clustered networks, where actors congregate in specific and multiple locations with high density and interconnectivity; core-periphery network, with different interactivity and connectivity between the two
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levels; and ‘small-world networks’, where very distant actors build bridges across space, connecting distant parts of the network and shortening the path-length between distant actors. Knoke and Kuklinski (1982: 38) demonstrate that there are ‘virtually limitless numbers of diagrams that can be drawn that contain the same relational information’, and hence one particular network can exhibit multiple topologies. There are also multiple ways of formalising the network relationships by making assumptions about the actors and the links between them, which produces various topologies of network configurations. These topologies will be discussed in more detail in Chapter 5. Among the important attributes of the network structure are: the overall size of the network, or the number of participants in it; the network density – measured by the average intensity of contacts maintained by a central actor; proximity in roles and positions of different members; range – measured by the diversity of actors enrolled in the network; the spatial configuration of individual positions; the structure of communication links between the nodes; the connectedness of the agents; cliques and social circles; the emergence of control centres within and outside the network and the concentration of power around nodes and groups of actors; the structural equivalence between positions (in terms of roles, responsibilities and influence); the social cohesion between actors (in terms of shared beliefs, values and understanding); and the efficiency of transactions and exchanges (Wellman and Berkowitz, 1988; Krackhard, 1992; Knoke and Guilarte, 1994). Håkansson and Snehota (1995) add to this list two more elements: the network governance (or the network of all actors and their exchange relationships), and the production system (or the network of interdependent production activities and resource flows controlled by the actors). The network structure is usually not a homogeneous agglomeration, but comprises sub-sets and cliques of actors interconnected by bridges. Erickson (1988) offers a good overview of the formation of cliques using abstract models of structural equivalence and studying attitude similarities in dyadic formations. Although sub-sets of actors may form cohesive groups, the existence of separate cliques in a network diminishes the level of cohesion of the entire network. Examples of cohesion in a business network will be shared standards and specifications, and shared managerial practices between firms. It is expected that large and international business networks will have a much lower level of cohesion than small and nationally based business networks. According to Easton (1992), the structure of relationships and the structure of cliques and bridges derive from the division of work among firms, and the boundaries of the network. Specialisation and diversification of firms is a major structuring mechanism that frames the network configuration. All three groups of network characteristics discussed in this chapter influence the performance of the entire network. They require in some cases different methodologies for investigation and measurement, and their
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interpretative frameworks reside in different paradigms. The first group includes attributes of the actors, or path-dependent and attribute-dependent individual behaviour that brings particularistic aspects of the network. The second group includes relational attributes or characteristics that describe the relational context of actors’ behaviour, their choices and the dynamics of interactions in networks. The third group includes structural characteristics that are universal by nature and allow development of typologies of network configurations, of structural processes and control mechanisms that span within networks. Complex network structures are interesting not only because of themselves, but also because they represent interlinked actors and entangled relationships. All three aspects in this triangle (Figure 2.5) simultaneously cause changes in each other and represent an effect from the processes that take place as part of the overall network interaction and exchange. At the heart of this dynamics is the notion of individual actions and interactions. Different actions and choices are the engine that drives the formation and evaluation of networks. It is essential also that all three perspectives – structural/positional, relational and cultural – are recognised and integrated in a business network analysis, as they bring complementary views on the dynamics of interactions and exchange between interconnected firms. Structuralists have been able to make strong predictions of the structural implications from a set of network relationships. At the same time their attempt to explore network relationships at a global network level has not allowed them to reveal much about the depth of a relationship which has significant managerial implications. Relational measures such as direction and strength of ties, reciprocity, intensity and asymmetry attribute varying quality to individual ties, but can not capture the dynamic aspects of resource flows and content variations.
relationships
action interaction
actors
structure
Figure 2.5 The intertwined actors, relationships and network structure.
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Measures which are studied by the structuralists such as density and centrality explain more about the network structure, rather than the coordination of information and resource flows throughout networks. The structural/positional perspective makes reference to the content and multiplexity of ties, but research on these indicators is still in its infancy. The structural models have not been able to capture the simultaneous competition and cooperation, for example, that take place within business networks. An example might be two supplier firms competing for contracts with a main vendor and cooperating (sharing capacity) when large contracts are obtained. This duality of cooperation and competition in interconnected relationships is not captured well, neither by the dichotomy of strong–weak ties, nor by the discussion on multiplexity or negative ties in structural network analysis. The variations in content and quantity of exchanges are also not systematically studied within the structural/positional approach. The structural analysis is also of limited value to practising managers who not only need to construct relations in the real business world, but also to fill these relationships with content. Pro-active behaviour in a business network requires understanding of the behaviour of the other network members, their motives and preferences, and understanding of the relational dynamics that emerge in exchanges and transactions, captured by a processual approach introduced within the relational perspective. The structural perspective treats inter-firm relationships very much in an instrumental way – as a ‘black box’ representing a connection of some sort without specifying what takes place between the connected parties. The relational perspective offers an alternative processual approach which is focused on the process of resource sharing and resource development through interactions, as opposed to mere resource exchange or utilisation (Forbord and Kvam, 2002). The notion of network development captures well the added value from a relationship through the process of interacting. The relational approach offers a lot more conceptual work that underpins relational analysis with a full account of individual actors’ attributes, relational content and context. The cultural perspective enlarges the scope of investigation suggesting that the relational dynamics is framed both by choice of human actors and by the attributes of non-human entities, employed in network relationships. The need for a more holistic methodology is evident and the rest of the book is an attempt to offer a complementary account of the leading theoretical arguments that extend our knowledge of business networks. The next chapter attempts to apply a holistic approach to multiple theories that inform us of actors’ behaviour in networks, of their motives as an essential actors’ attribute, and how the environmental conditions shape actors’ choices and interaction processes.
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A profound understanding of network actors is essential for the analysis of business networks and their dynamics. This chapter takes the main issues from the literature that correspond with the actor’s level of analysis. We start an intellectual journey into the economics and management theories that investigate the behaviour of firms and managers, what their motives are for making particular strategic choices, what are the other individual attributes that affect strategic behaviour and relationship building, what are the drivers and the environmental constraints that shape these choices, what is the nature of their heterogeneity, and, ultimately, what are the behavioural responses from the actor’s point of view. The literature on business networks usually refers to firms as the main agents, inter-connected into chains of business activities. The structural/ positional perspective identifies simultaneously three types of network actors – organisations, individuals and groups. The relational perspective introduces an enlarged list of actors, which includes interlinked resources and shared activities. Finally the cultural perspective explores relationships with heterogeneous cultural artefacts such as technologies, ideas, texts, technical standards and institutional norms. In this vast pool of interacting and interdependent entities there is a significant lack of conceptual work and robust and integrating theoretical frameworks for analysis of network behaviour. This chapter is a search for a comprehensive overview of the theories that extend our knowledge of the nature and behaviour of interacting agents in business networks. Naturally, more emphasis is placed on firms and managers as leading business actors. The nature and behaviour of firms has been elaborated in a large number of economics, strategy and management theories. Economic theories treat firms as autonomous actors that are engaged in value creation activities, utilising various resource inputs and factors of production. The strategic management theory has recognised that behind each firm stands a management team, composed of professionals that are empowered to make decisions regarding strategic alternatives, the internal allocation of resources and the direction of activities of the firm. Administration and management theories have also contributed to the debate on decision
Acting in business networks 49 making, power relationships and structure – or factors that induce behavioural responses by firms and by interconnected business actors. Sociological, anthropological and organisational behaviour theories have explored the behaviour of individuals, groups, institutions and other organised entities, as well as the development and interaction with technologies and socio-cultural artefacts. In this broad interdisciplinary context this chapter is an attempt to synthesise the knowledge generated from a wide pool of distinctive social science disciplines that have contributed to the debate on the organisation and management of interlinked actors. The purpose is to establish the foundations for an interdisciplinary analysis of actor’s behaviour in business networks. I will start with some definitions that explain the nature of the actors in business networks, the nature of the firms as business organisations and what are their embodiments in terms of other interconnected entities engaged in business relationships. I will look at specific attributes and individual characteristics that frame behaviour in relational settings, and explore the motives and drivers of this behaviour.
Nature and attributes of network actors Whitley (1993: 2) defines firms as ‘centres of economic power that combine allocative decision making with authoritative coordination of economic activities and as such they add value to human and material resources through collective organisation of work’. Firms are seen as dominant units of strategic decision making and planned coordination that combine differentiated skills, capabilities and knowledge, and embody a collective organisation which transforms human and material resources into productive services. Attributes of these economic actors are: governance structure; separation of ownership from control and delegation of control; goals and objectives realised within particular profit constraints; diversity of activities and capabilities which are coordinated through authoritative communication; and radical discontinuities in the activities and capabilities carried out (Whitley, 1993). This definition gives a comprehensive list of attributes that allow comparisons of actors in business networks. Mark Casson (1998) gives another original definition of the firm, as an institution that specialises in coordination of business functions using a single locus of responsibility as a legal entity, and a structure designed to harmonise the decisionmaking efforts of a group of people who focus their efforts on pre-selected issues. Casson also compares the firm with an information-processing mechanism, and his formal definition is that the firm is ‘a specialised decision-making unit, whose function is to improve coordination by structuring information flows, and which is normally endowed with legal privileges including potential indefinite life’ (1998: 50). The attributes of the firm in Casson’s framework can be described as specific roles and functions and include the following:
50 • • •
•
• • •
Acting in business networks producer – transforming inputs into outputs; organiser – making price and production decisions in the context of permanent market volatility composed of demand and supply shock of transient and persistent nature; employer – contracting resources, engaged in and designing the division of labour where ‘optimists’ (with positive attitudes to business opportunities and positive expectations on returns) hire ‘pessimists’ (with negative attitudes and expectations) (Casson, 1998: 56); intermediator possessing simultaneously special knowledge of valuations of goods and market information on possibilities for the market relocation of these goods for alternative use: such intermediators are capable of organising a market, enacting speculation (buying to sell at a higher price) and engaging in arbitrage (extracting rents from intervening in a market place); risk-taking vs. risk-aversive decision maker – possessing attitude of pessimism vs. optimism in relation to risks and future possibilities and acting upon this attitude; user of information, capable of acquiring trade-related information which is pre-eminent as the basis for the long-run comparative advantage; and evaluator – capable of evaluation of resources and self-evaluation of competencies.
These roles can be performed simultaneously by the same actor, and different actors can have strengths in different roles. These roles and functions also can be outsourced to third parties which can lead to the differentiation of the market space. As attributes and associated capabilities of the firms, these roles can lead to differentiation and specialisation within business networks. Organisation theories have also left a footprint in the definitional maze, conceptualising firms as organised collectivities. One of the explicit definitions of an organisation is a statement that combines contribution by Weber (1947), Meadows (1967), Pfeffer and Salancik (1978), Scott (1995) and Aldrich (1999). Overall the sociologists view the firms as: goal-directed, resource dependent, boundary maintaining, and socially constructed systems of human activity, comprising deliberate design, status structures, orientation towards an environment, with shared understanding among participants, and substitutability of personnel who are entitled to various organisational benefits. This definition at organisational level can be adopted at network level as well, where organisations represent the intermediary level between human activity and the global network effects. I will look briefly at how each of these organisational attributes has an impact on the behaviour of organisational actors. As goal directed, organisations and networks generate preferences and choices for their members, and are vulnerable to be controlled by owners and leaders through the preferences of these leaders. As resource dependent, organisations seek, acquire
Acting in business networks 51 and accumulate tangible and intangible resources, capabilities and competences that enable them to accomplish the work. Accumulation and employment of heterogeneous resources satisfies current needs of organisations and frames future needs. It is assumed that networks satisfy their own interests through internal circulation of resources. As boundary-maintaining, organisations enlist membership and draw a distinction between members and non-members. Organisations also develop membership rules and procedures to coordinate and manage the membership status of actors. Although there is no established definition of boundaries as a convention, there is a shared understanding that the boundaries are usually not physical, but conceptual and legal, and that they demarcate a distinction between members and non-members, between endogenous vs. exogenous processes. This is applied both for organisations and networks. Boundaries indicate more the scope of particular legal obligations and asset ownership, rather than real boundaries of activities, functions and resource flows. The organisational autonomy of a firm and its independence from its environment are framed by the organisation’s ability to control its boundaries, its membership, its structural parts and elements. The relations between the organisation and its environment are manifested by the multiple interactions and exchanges, by the legal status, by the macro-economic and social conditions, and by the set of technology and resource relationships in which the organisation is embedded. As an activity system, each organisation consists of interdependent role behaviours, set of routines, and a bundle or multiple sequences of activities accomplishing the work. The activity system is represented by what organisations do and what organisational members enact in the process of participating. Organisational routines, following Levitt and March (1988: 320), are ‘forms, rules, procedures, conventions, strategies and technologies around which organisations are constructed and through which they operate’. Network routines in equivalent terms will be these conventions that are widely adopted by the network members. The activity system within each organisation is entangled in resource flows and shared activities across units and boundaries where the distinctions between individual actors disappear and the boundaries maintaining activities transform themselves into cross-border interactions and enrolment of new members. The activity bundle in networks generates the need for coordination and control, which in organisations becomes embodied in control structures and management. Coordination in networks requires a new layer for evaluation monitoring and control – performed either internally or externally. These control structures are aimed at enacting arrangements or routines for directing, evaluating and rewarding participants (Aldrich, 1999). All these definitions enlist certain attributes of firms as network members and attributes of organisations as collective entities. Other actors’ attributes
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that affect behaviour in networks are the organisational size, history and ownership. Organisational and network size can be measured by the input (number of employees and member organisations), by structural characteristics (number of divisions, subsidiaries and sub-groups) or by their output (various performance indicators such as sales or turnover). Organisational history is another attribute explaining path-dependent strategic choices of the actors. Organisations are also characterised by different institutional forms that determine the control structure, governance framework and coordination mechanisms employed for conducting the work. This is described either as the type of ownership or as collective shareholding interests. Ultimately organisations do not act by themselves, but are represented by their members or their shareholders who carry individual and groupshared interests, values and expectations. In addition, organisations, shareholders and managers hold unique identities. Identity refers to a ‘shared collective sense of who we are’ or to narratives that provide a sense of organisational continuity – we are what we do and what we have experienced and accomplished in our history. On the one hand identities bind people together, but on the other hand they draw boundaries between those that share the identity, and have legitimate claim to this identity, and those that are excluded from it. Boundaries and identities are to a certain extent self-reinforcing, where drawing boundaries creates identities and sharing identities demarcates group boundaries. Identities are among the main instruments that legitimise organisations. Identification can be defined as a cognitive reach-out of the self to the level of the organisation, and Rousseau (1998) suggests two forms of identification – situational (related to discrete work settings and work dynamics) and structural (identity that stretches over the boundaries of roles, task settings, situations and time frames, and derives from long-term structural relationships). Identities induce normative behaviour where individuals follow norms perceived as typical elements of a particular identity. The concept of identity is applied both to human actors in firms and at the level of organisational establishments. The organisational identity in the literature is described as the legitimation or the recognition of the firm by its members and partners in business transactions. This legitimation process is driven by the attributes of the firm and by its interaction with other firms. Most of the actors’ attributes discussed so far derive from different social theories that have attempted to define the nature of business actors. Social network analysis and the structural/positional approach have also contributed to the list of individual actors’ attributes. From a formal network analysis point of view organisations, firms and actors exhibit a certain capacity to connect to other actors in an attempt to re-integrate divided specialised parts of the production system. This individual capacity determines an additional attribute of centrality that measures the actor’s overall position in the network. The centrality and the network position are attributes that are associated with a particular status and role set that enables each actor to
Acting in business networks 53 be a fully functional network agent. Centrality, network position, status and role set are intrinsic parts of actors’ identities and essential attributes that determine individual choices. The concepts of position and status apply both to individuals and organisations. People position themselves and pursue status as a means to achieve power and access to resources, or as an emotional goal in itself. The status is integrated in the individual’s utility calculations. People regard status as a valued resource in itself rather than as a means to an end. Individual identity and subjectivity is very much dependent on the status – as a self-perception and as a social inclusion. The concept of positioning by business actors can be interpreted both in the context of social structures and in the context of industrial structures. Firms position themselves in their industry context, in their markets and in their relational sets with suppliers, buyers, competitors and all stakeholders. Firms can break out from their current domestic position through foreign market entry and internationalisation. Firms can increase their status and prestige (or how their position is perceived by others) by public relations, but also by quality- and capability-enhancing strategies. The resulting status is an essential attribute of the firm that gives it public recognition and bargaining power. Each structural position is associated with specific roles and functions chosen by the actors and confirmed within the relational set. Roles as actors’ attributes derive from the actor’s identity – what they do – and from the established division of labour and the actor’s integration in it. In this sense, roles are shared perceptions among actors that perform a selection of differentiated tasks in a wider system of specialisation. In this capacity, roles determine behavioural expectations among actors. Roles as actors’ attributes affect part of the restructuring of business relationships along with other factors such as new technologies, new specialisation or intermediation that restructures the value chain and the resource supply chain in industries. Change of organisational roles is always associated with some form of organisational change, or with restructuring of the resource flows in the network. A process of socialisation and re-socialisation takes place continuously among network actors. They adjust to new roles and new task structure. Actors redesign relational sets as part of adoption of new technologies, new standards, or in response to the effect of a new network member. Examples of specific roles in business networks are suppliers, salesmen, buyers and middlemen. These roles evolve over time partly due to the actors’ choices, and partly due to circumstances and environmental forces. The role of the middlemen, for example, is continuously changing – from firms and agents that act as a bridge between production and sales, to leading distribution channels and engaging in product design, materials development and specifying production methods under trade mark ownership. Traditionally middlemen are actors that are positioned between two other actors and in this capacity control the relationship between the latter. This role is
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analysed primarily in terms of its relationships to the roles of other core actors. Middlemen carry both the risks and the incentives of bridging other actors and usually carry out the transactions and resource exchanges between the two parties by themselves. The role of the middlemen evolves as these agents add value by re-combining resource inputs and by creating unique resource bundles in supply chains. The status of the middlemen derives mainly from the value of the recombination of resources. Each generic role can be enacted in multiple ways. Gadde and Snehota (2001) identify three roles of the middlemen – the roles of traders, the role of distributors and the role of providers. Traders add value by facilitating buyers to meet with suppliers. Distributors assist in the allocation of demand and supply within the business network and affect the volume of trade. Providers facilitate the bundling of resource inputs for a producer. Role behaviours in networks emerge from interactions between organisations and between human members and non-human elements such as products, technologies, information, know-how, rules and procedures, where the division of labour and allocation of tasks leads to role differentiation. The current network theory does not generally discuss specific characteristics of the individual actors and how these impact on actor behaviour. It is acknowledged that individual attributes of firms have an impact on framing strategic behaviour. At the same time it is widely accepted that environmental conditions affect all firms and organisations, and in many cases produce a bandwagon effect, where all firms choose the same strategy in response to the environmental stimuli in spite of their individual differences. Structural attributes such as centrality position, status and role are much stronger determinants for behaviour than individual attributes such as size, history and legitimacy (Ibarra, 1993). However, it is essential that actors’ attributes are taken into account too. The participation of network member-firms in transactions and exchanges is directly affected by the firm’s size, by its history, by its structure, strategy, product range and diversification, by its market share or the market penetration through distribution channels, by its governance and control, by its connected activities and operations, legitimacy and role in the business network, and by its relational set. In addition to company-specific characteristics, other environmental characteristics such as industry, market, technological and infrastructure factors also induce a pattern of behaviour and affect groups of firms. Overall economists would agree that firms are simultaneously a bundle of contracts, a bundle of resources and even a bundle of knowledge and information, and all these bundles have been studied separately, and have been subject to scientific scrutiny by different streams of economic thought – property rights theory, agency theory, transaction-cost economics, institutional and evolutionary economics, and the resource-based view of the firm. In most of these frameworks the firm remains a mystic black box, a complex bundle beyond the ability of scientists to disentangle various aspects of it.
Acting in business networks 55 The review of these theories further in this chapter will attempt to capture and synthesise the essence of the theoretical contributions that inform us about the nature of the economic actors and what drives their behaviour. Although in most cases the analysis is conducted in the context of a competitive environment, the principles can be interpreted as well as driving actors’ behaviour in networks and under collaborative conditions.
Motives and drivers for actors’ behaviour Conceptually it has been difficult to integrate the economic theories with the behaviour theories and the organisation and management theories of the firm. While the former deal with the issues of agency, governance, structure of costs, efficiency and productivity, the latter are focused on the actual process of decision making in an organisational structure, and the individuals involved in this process – with their multiple goals and authority relations (Simon, 1957; Cyert and March, 1963). Firms are not only economic agents capable of strategic decisions in relation to their position in the market. They are also social entities capable of adaptive learning and strategic behaviour in dynamic and complex situations. For conceptual clarity I will look at different streams of economic, organisational and management thought separately to highlight contributions that have reached advanced understanding of the nature of business actors and their behaviour. Although theoretical assumptions about organisational behaviour have been made in the context of a competitive market environment, most of these principles hold in the context of business networks and collaborative settings. Firms are assumed to carry individual liabilities as economic actors both when they compete and cooperate. Among the leading economic theories that have contributed to our understanding of firm behaviour are: transaction cost economics (Coase, 1937; Williamson, 1975, 1981b, 1985); non-cooperative game theory (Encaoua et al., 1986; Dixit and Nalebuff, 1991; Seth and Thomas, 1994); agency theory; contract theory (Grossman and Hart, 1986; Haugland, 1999); evolutionary and institutional economics (Nelson and Winter, 1982; Hodgson, 1993). The two building blocks for the economists have been ‘incentives’ and ‘costs’, and hence the development of theories that explain sources of incentives (property rights, governance theories and agency theories) and the sources of costs (contract theory, transaction cost economics and various shareholder theories of cooperation). Established organisation and management theories that have advanced our knowledge are: resource dependence theory (Penrose, 1959; Richardson, 1972; Pfeffer and Salancik, 1978; Teece, 1980; Peteraf, 1993); contingency theory (Child, 1972; Mintzberg, 1979, 1981; Miller and Friesen, 1984); population-ecology theory (Hannan and Freeman, 1977, 1984); and institutional theory (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Zucker, 1987; Scott, 1995). The main building blocks in management
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science have been: resources and capabilities, environmental factors and strategic response. Transaction cost economics: minimising costs and maximising benefits Transaction cost theory is one of the most influential economic theories that aims to explain strategic choices of firms. Some of the original propositions in transaction cost economics go back to the definition of transactions by Commons (1934) as actions in which there is a pre-agreement over the terms of performance. Although in this framework transactions are seen as contracted actions or contracted behaviour, in the subsequent development of the transaction cost economics, Williamson shifted the attention to terms of governance and the role of the bureaucratic mechanism as a substitution to the market price mechanism. The governance costs are compared between markets and hierarchies, and conclusions are drawn in terms of which mechanism maximises transaction efficiency and in what circumstances. Transaction costs that determine the efficiency are perceived as two main types: visible costs (associated with the resources) and invisible costs (associated with monitoring and control of partner behaviour). This argument is important for explaining why firms bond together in networks in their attempt to minimise transaction costs and to improve efficiency. Network relations change the structure of costs and allow loyal partners to share costs and business risks. Within the transaction cost economics, market transactions are assumed to be most cost-effective, because of the assumed existence of competition at both ends of buyers and suppliers, and the assumed correspondence between low costs and low prices when bidders are exposed to competition. These ‘low-cost ⫽ low-price’ offers enable a bidding firm to obtain a contract for a particular business transaction and to exchange its product for the best value payment. The market-efficiency argument is also based on another set of behavioural assumptions that refer to the opportunistic behaviour of economic agents motivated by self-interest. Under these behavioural conditions the transaction-cost theorists argue that markets discipline actors to be costefficient and to lower their prices, while firms and bureaucratic formations nurture actors’ opportunism, and hence generate inefficiencies. The inefficient firms exist as institutions that internalise transactions when bureaucratic coordination is more cost effective than market exchanges. From a transaction-cost perspective business networks are seen as a combination of markets and hierarchies, and as an efficiency compromise between market discipline and coordination through long-term contractual relationships. The basic unit of analysis in transaction-cost economics is the transaction, or the exchange of resources and payments, which usually is assumed to take place on a bi-lateral basis at population level of analysis. Transactions are suggested to depend on four critical dimensions – asset specificity, uncer-
Acting in business networks 57 tainty, complexity and frequency. Under the conditions of high asset specificity, high uncertainty, high complexity and frequency of exchanges, firms (which are called hierarchies, bureaucracies and institutions) will be more cost-effective. Business networks are also in this category as they offer opportunities for repetitive transactions, where individual firms may extend their commitments towards network partners by increasing asset specificity and comensing partnership agreements. Networks allow sharing of costs in situations of uncertainty and complexity of operations. In the cases when high frequency of transactions is required, business network relationships will increase the centrality of inputs and reduce transaction costs. The transaction cost theory suggests that firms are constantly aiming at reducing transaction costs, and their strategies to do so employ efforts to increase the more general use of assets, to enhance the control over the uncertainty of the market environment and the control over the frequency (or the volume) of transactions. Different firms have different capabilities to manage their cost structure, and this evolves in a radical inequality between network members. Variation in actor capabilities ultimately leads not only to variation in efficiency across the network, but also to a variation in business relationships with their impact on network configurations. Other forms of behaviour induced by the actors’ efforts to minimise costs are: diversifying assets and capabilities; securing long-term contracts; and extending commitments to buyers and suppliers. Among the unique theoretical encounters in transaction cost economics are: • • • • •
the recognition of the crucial role of environmental uncertainty on actors’ strategic behaviour; the recognition of the information asymmetries in transactions; the acknowledgement of the role of internal organisation, coordination of production and distribution of resources; the justification of firm boundaries and the explanation of related and unrelated integration of assets and business functions through vertical and horizontal integration; and the development of an extended list of transaction costs such as: • • •
information costs of collecting market information and discovering prices; relational costs of identifying deal partners and negotiating contracts with them; and monitoring costs of controlling for opportunism.
The transaction-cost perspective has also dipped into non-traditional waters discussing quasi-integration between firms under the examples of: relational contracting (Goldberg, 1980; Dore, 1983); non-standard commercial contracts (Williamson and Ouchi, 1983); organised markets (Butler, 1983; Lundvall, 1985); value-added partnerships (Johnston, 1988);
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networking (Thorelli, 1995); strategic alliances (Badaracco, 1991). This perspective has fuelled the development of an additional stream of thought – the contract theory, which will be discussed separately. Buckley and Casson (1988) propose a theory of cooperation still within the transaction cost paradigm, explaining how relationships have a positive effect on coordination costs and how they provide incentives to partners for forbearances, therefore reducing monitoring costs. Although the purpose of the book is not to engage in criticism of the presented theories, I would like to stress that the efficiency argument which is fundamental to transaction-cost economics is based on too many assumptions that can not apply to the modern complex world of business. The hidden or invisible transaction costs, for example, often outweigh the measurable ones and they apply with equal power to markets, firms, strategic alliances or networks. In addition, actors are very much aware that minimising costs often leads to undermining strategic competitiveness, and this may induce negative value to market positioning, to legitimacy, to status and prestige in the economy. This knowledge is sufficient to drive behaviour that avoids minimising costs at the prospect of long-term growth. Non-cooperative game theory: maximising pay-offs The game theory is a representative of the ‘incentives’ school in economics. It is looking at structured game situations, at alternative interactions between agents and the incentives that emerge from these interactions. The theory analyses the underlying motives of strategic behaviour in a competitive environment under the conditions of limited access to information. According to the leading theorists in this field, the market players aim at maximising their pay-offs in a wider sense, rather than maximising profits. The market strategy of each actor is determined by the market structure, although structure is described only with two components – number of players and number of stages of interaction in the game. Different market structures (i.e. game scenarios) provide different incentives for actors to engage in different strategies during the game. Usually the alternative strategic choices given to players are to cooperate or to compete. The theorising has followed the path of controlled hypothetical experiments and the assumptions underlying these modelled experiments are that the players react directly to incentive, and they continuously create for themselves more favourable market positions, from which they have increased chances of ‘outdoing their adversaries’, knowing that the adversaries are trying to do the same (Encaoua et al., 1986; Dixit and Nalebuff, 1991; Seth and Thomas, 1994). Although this adversarial attitude in market interactions clearly undermines collaboration and destroys the conditions for trust between partners, it does resemble attitudes of network actors when they negotiate business contracts and evaluate potential outcomes.
Acting in business networks 59 Players in a coordination game are allowed to communicate and exchange information still under competitive conditions. The basic assumption in this game scenario is that the motives of each player are observable by the others and there is an interdependence of players’ decisions. The behavioural adjustments that players make in the game are according to their expectations, observations of others’ motives and rational calculations of their own self-interest. This is an important contribution to understanding network behaviour as it allows for psychological and organisational attributes to affect strategic choice. The analysis of coordination games also accepts the evolution of strategic behaviour as endogenous process. The theorising of ‘entry games’ has produced some additional findings that, in order to enhance their status, actors anticipate future rival response and make adjustments in advance. This clearly leads to the notion of strategic positioning of actors irrespective of the costs for their behavioural choices, where expected long-term benefits determine the choice, rather than the calculation of the costs of the commitment. Finally, the introduction of the so called ‘prisoner’s dilemma’ in game theory justifies cooperative behaviour as calculative decision and brings evidence that cooperation is one of the dominant and preferred strategies in many situations, as it produces benefits in spite of the strategic choices made by the other actors. Non-cooperative game theory describes well the process of repositioning of actors in a competitive environment. Actors maximise payoffs and benefits at the same time as they accumulate resources, and both strategies can improve strategic position in a network. The decisions which firms make in a game scenario depend on the available information and resources. Naturally actors aim to gain control over their access to resources and information, or control over the design of the ‘game scenario’. Examples of non-cooperative positioning strategies that aim to enhance the control by a firm are: investment in physical capital, investment in intangible assets, strategic control of information, and horizontal mergers and acquisitions (Shapiro, 1989). Examples of cooperative positioning strategies that also aim to enhance access to information and resources are: forming strategic alliances and partnerships, joining business consortiums, franchising and other inter-organisational forms of collaboration. The non-cooperative game theory reveals another significant characteristic of the network members. They tend to increase asymmetries in their relations, in their competition for more favourable position in the network, and they create inequalities that lead to further structuring of the network. Asymmetries emerge due to the control of information by some firms, or the intra-network re-groupings of affiliations. In addition behaviour by actors in networks with high density stimulates firms to invest in new links and relations as an attempt to increase the redundancy of some actors and their own control of information. The network analysis from game-theoretic perspective calls for a change of the traditional view of business networks as ego-centred sets of firms,
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connected to their buyers and suppliers. The behaviour of network members is very much affected by the activities of their competitors and partners – or framed by the dyadic and multilateral relations. Agency theory: bargaining and negotiating contracts The non-cooperative game theory projects motives and behaviour of actors entirely dis-engaged from contracts and relationships with others. The agency theory of the firm, on the contrary, looks at the company as governed by a set of contractual relationships, or a bundle of contracts. The firm is only a legal entity, an agent engaged in bilateral and multilateral contracts. The agency theory does not look at the contracts themselves, but what decision-making power they constitute and what relationships they represent. Each contract is conceptualised as a formal agreement between a principal (delegating power) and an agent (exercising this power and making decisions on behalf of the principal). The bargaining and the political nature of these contracts is assumed. The main research questions discussed in the agency theory are: how contracts affect behaviour of participants; what organisational forms emerge and are designed by the principals in order to control the agents’ behaviour; how ownership structure affects managerial behaviour; and how to provide realignment of incentives in order to reduce agents’ opportunism. Among the most studied organisational forms are the entrepreneurial firm, where ownership and control reside within one agent, and the public corporation, where there is a separation between ownership and control, which leads to a set of agency problems. The main control mechanism is assumed to be an exit by the principal or the agent. The literature has been dominated by the notion of an exit by owners and shareholder. There is very little conceptual work about the potential exit of employees or other stakeholders, who are seen to be substitutable on the markets for labour, resources and for corporate control. In this respect, agency theory is connected to the property rights theory which is concerned only with property rights contracts. It is also linked to contract theory that deals with exchange contracts and their dynamic nature and with a number of potential agency costs embedded in contracts. More recent developments look at the bonding and contract enforcement costs that stem from the set of internal and external relationships maintained by each firm. Agency theory looks also at the information costs within and between firms, and the residual losses from risks, negotiations and missed opportunities. There are two main advancements that the agency theory has brought to the debate on the nature of economic actors and their behaviour. The first is the recognition of both formal and informal contracts and agreements. The second is the acknowledgement of the residual risk that stems from the decision-making processes and outcomes within firms. It is accepted in
Acting in business networks 61 the management literature that decision making can not be subject to full and effective control, as it is strongly linked to non-rational motives such as loyalty, good will, the exercise of judgement, the use of professional expertise, and the communication and coordination efficiencies. The risk is measured by the potential withdrawal of good will, and the potential harm from poor judgements and wrong decisions. In the context of business networks these two arguments are essential as they explain the wide use of informal agreements between network partners, and the risk-sharing practices that emerge in long-term multilateral business partnerships. The theory also reveals the political nature of network members involved in continuous negotiations of contracts. The bargaining and political nature of these contracts suggests that the relationships behind these contracts are a balance of competition and cooperation between actors. The balance is determined by the existing agreements between them (commitment to cooperate under the terms of the contract), and by the abilities of some actors to change contracts unilaterally (competition for a dominant position). All networks are characterised by certain asymmetries when some members in certain positions, particularly those with high centrality or a high number of non-redundant contacts, are able to control the network processes (Burt, 1992b). Dominant actors may decide to honour contracts, or they could change terms of contracts unilaterally and without negotiations. In addition to these management problems the agency theory has identified the so-called transparency problem. The assumption in agency theory is that the principal can observe the agent’s behaviour, and therefore can act on this information. Principal–owners can observe only measured outcomes from decision implementation, which does not infer efficiency of the resource allocation and the decision-making process itself. The recognition of asymmetric information when the principal can not observe the agent’s level of effort in the process of decision-making and contracting out immediately brings into play the notion of trust, which is a highly irrational component that drives agents’ behaviour. The implications for network analysis are that more attention needs to be paid to the structural and relational asymmetries that exist between network actors and how these asymmetries are bridged by incentives, informal contracts or trust. Contract theory: contracting resources and services, public goods and externalities The contract theory is related to the ‘new institutional economics’ and has adopted a critical stand to assumptions about contracts. It brings few new conceptualisations regarding the forces that drive behaviour of actors. These are particularly related to incomplete contracts (Grossman and Hart, 1986) and relational contracting (Haugland, 1999). Grossman and Hart argue that all long-term contracts, such as employment contracts, carry ambiguity as they do not incorporate the effect from environmental influences, the effect
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of learning of actors or the impact of organisational development and growth. In addition, no contracts can account for entrepreneurship and facilitation when actors add value by the virtue of their individual attributes or their structural position. According to agency theory contracts are built around costs and benefits, as well as the Williamson’s assumptions of opportunism. In this framework contracts represent formal agreements between firms where they take legal obligations as a guarantee for their partner and as their own protection from opportunism. One of the criticisms of contract theory is the argument by Mark Casson (1998) that the most crucial elements in explaining the behaviour of economic actors are the concepts of intermediation, information synthesis and volatility. All contracts are inherently dependent on the institutional form of intermediation that exists for contract enforcement, on the ability of contracting agents to acquire and synthesise all relevant information, and on the environmental volatility. One of the advancements brought by the contract theory is the recognition of contract costs, or the costs for evaluation of contract information, for writing contracts, negotiating them and fulfilling contract obligations. These costs add to the decision dilemmas of actors. Other essential concepts brought in the debate by contract theorists are the notion of public goods which are usually left out from contracting arrangements, and the notion of externalities or unintended outcomes that are generated as a by-product of the contracted activities of a firm. In the context of networks, both of these are an attribute of the network, and can be re-invested as resources by the network actors. Overall the developments within contract theory have led to the acknowledgement that while on the one hand contracts facilitate legal protection of agents, on the other they are insufficient as an instrument for managing business relationships with partners. Although contract theory has remained a part of the mainstream modelling approach to economic transactions, it has inspired a wealth of original and controversial research bridging economics with political sciences. Lara and Einaudi (2002) have examined contracts in medieval Venice, and have encountered two distinctive types of contracts according to their financing mechanism – debt financing and equity financing contracts. The authors conclude that the co-existence of both and the transition from one type to another is driven by the state’s ability to verify contract-related information, to exercise contract enforcement and to enhance the development of the ‘reputation mechanism’ through active building of institutions, extending business and political networks abroad, and through political and administrative intervention. This research acknowledges the political role of the state and establishes the state as an essential actor in any business network. A significant contribution to the economic theory that explains the behaviour of the firm is relational contracting, introduced as an alternative form to both hierarchical governance and market’s arms-length contracts
Acting in business networks 63 (Haugland, 1999). Relational contracts rely on a range of diverse coordination mechanisms such as ‘reciprocity norms’, ‘inter-organisational trust’ and ‘social capital’ embedded in a multiplex of exchanges and social interactions. As a theoretical perspective, the scientific assumptions of mutuality and agreement that implicitly underlay relational contracting contrasts with the opportunism which is explicitly presumed in both agency theory and transaction cost economics (Borsch, 1994). Relational contracting embraces not only unspecifiable terms and conditions in complex and open-ended contracts, but also collective interorganisational strategies employing tacit coordination. Pursuing a collective strategy typically depends on unanticipated future conditions that cannot be explicitly written into formal contractual agreements between business network partners. Hence, successful strategies require basic trust, mutual understanding, unrestricted learning and inter-organisational knowledgesharing to achieve a high level of joint decision making at both strategic and operational levels. Doz et al. (2000) have operationalised these processes as ‘open solicitation’ and ‘seeking domain consensus’, where the relational partners continually elaborate on their mutual objectives, capabilities, resources and tasks. Achieving a consensus would then serve as a foundation on which relationally contracted firms could subsequently announce and implement formal contracts, such as strategic alliances or collaborative agreements. A central issue remains how best to manage the balance between interdependence and control (Harrigan, 1988; Haugland, 1999). Overall relational contracting is one of the most appropriate conceptual frameworks for analysis of behaviour in business networks, and requires much more attention by network analysts. Evolutionary and institutional economics: mimicry and normative compliance, variation, selection, retention, inertia, survival, legitimation The development of evolutionary economics is closely related to the work by Nelson and Winter (1982) on the fundamental processes of variation, selection and retention in populations of firms. These principles apply to populations of firms at a market place. The variation principle suggests that firms vary in the routines they have developed to conduct their business. As these routines capture tacit knowledge and endogenous learning, they capture unique bundles of resources and capabilities. The second principle of selection refers to some routines being revealed to be more effective then others, and therefore becoming dominant over time through natural selection by the market. This selection by the market assumes that certain routines lead to improved market performance. However, this does not mean that the routines themselves represent superior knowledge and capabilities. The retention principle refers to firms’ capabilities to manage their bundle of routines and practices while competing with other firms. This principle assumes that
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routines represent stable organisational solutions that can be protected from being copied by competitors, and hence represent a major source of competitive advantage. The evolutionary economics is closely related to both the populationecology theory and transaction-cost economics. The three main principles correspond directly with the transaction-cost economics notions of variations in cost structure between firms, and the selection of governance forms that minimise costs. Overall the evolutionary economics brings a Darwinian perspective to the analysis of firm behaviour, and puts emphasis on the dynamic aspects of this behaviour through change, adaptation, development and growth over time. It puts the environment as an endogenous factor that justifies the variation in organisational forms and in governance types. The theory also substantiates the argument for heterogeneity in actors’ forms and attributes. As a theory it offers explanations of the boundaries of organisations and populations which demarcate an entity from its environment. Similar to population-ecology theory, the evolutionary economics looks at the complexity of organisational populations, and identifies demographic characteristics of these populations, such as founding and mortality rates, that affect individual firm behaviour. Overall evolutionary economics does not offer a definition of an organisational population. The concept of organisational population is treated in the same way as suggested by Hannan and Freeman (1977, 1984) in their population-ecology theory, putting strong emphasis on the biological origin of the concept. As a result, research under the evolutionary economics paradigm focuses on already demarcated populations, or groups and clusters of firms such as industries, labour unions, universities and restaurants. Variation, retention and selection then lead to the survival of some and the death of other firms and institutions, which changes the composition of these populations. Underlying theoretical assumptions in evolutionary economics are: • • • • • •
firms delay their response to environmental changes and hence the relative inertia of firms to change their behaviour; firms develop procedural norms to enhance internal control and retention of capabilities and to institutionalise accountability for resources; firms develop and possess reproducible structures that guarantee survival; birth and mortality rates of firms and populations in the market place are determined by environmental changes and the failure of firms to fit or respond with adaptation to these changes; the size of an organisational population is attributed to competition and legitimation (or acceptance) within an occupied environmental niche, which is a ‘new’ concept accepted by economists; structure is interpreted as how a firm is organised and governed and how decisions are made and implemented;
Acting in business networks 65 •
the concept of strategy is also introduced as the set of commitments made by a firm that determine and rationalise its objectives, and how the firm intends to pursue them. (Douma and Schreuder, 1991)
The treatment of organisational routines is a bridge between evolutionary economics and institutional economics. Both theories incorporate the notion of organisational skills, tacit knowledge, memories and core capabilities as attributes of the firm that are critical for its survival. The institutional and evolutionary economics are also quite different from their related theories in sociology. Institutionalisation theory in sociology, for example, puts emphasis on the reactive behaviour of business organisations that take place in compliance with normative pressures from the social environment. The normative pressures arise as actors internalise widely accepted social norms through their efforts to seek legitimacy and to fit within their socio-economic environment. The institutional theory is primarily concerned with the relationships or fit between organisations and their institutional environment and the normative context of this environment encapsulated in cultural, institutional and social conventions (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Scott, 1987, 1995; Zucker, 1987). Behaviour is analysed from the perspective of the effects of social expectations (norms) on the actors and the extent to which actors comply with these norms. Conformity and compliance with the established rules and institutional practices produces patterns of actions typical for organisational populations under particular environmental constraints. Such conformity can often result in inexplicable and inefficient organisational actions and structures. Theorists put emphasis on the coercive, mimetic or normative isomorphism among business organisations (DiMaggio and Powell, 1983). The sources of this isomorphism are various environmental pressures. Coercive pressures arise from broad-based societal expectations as well as from interorganisational dependencies. These pressures are represented by cases where firms are compelled to make certain decisions and choices because of resource dependencies or authority rules. Normative pressures stem from professionalisation, socialisation and internalisation of practices. Examples of behaviour that results from normative pressures is when firms react to stakeholder’s expectations in an attempt to carry social responsibilities. Mimetic pressures are experienced by firms as a function of their efforts to reduce uncertainty. Firms copy each other and produce the so-called ‘band-wagon’ effect where multiple firms make similar choices and follow market leaders. Institutional economics also questions many of the neo-classical economic assumptions, but it takes a different route from evolutionary economics. It recognises the importance of institutions, namely rules, procedures, practices and organisational arrangements that frame economic decisions and actions. In this institutional context institutional economists acknowledge the
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chronic information problems undermining the fundamental price mechanism governing market relationships, and look at the price mechanism from a cognitive perspective – that is, acknowledging that prices act as market signals only within some cognitive frames of ‘price levels’ and ‘price norms’ known by the individual, and established via individual observations, or practical experience in exchange situations. This personification and humanisation of price decisions is a fundamental principle that is accepted in institutional economists. They also acknowledge the purposefulness in human action, or the ability of actors to change strategically both their goals and their behavioural trajectories. Under the theoretical perspective of institutional economics, firms and other institutions emerge in order to eliminate the radical uncertainty that surrounds them. It is implied that institutions create a framework for compliance. Agents are seen to be optimising their behaviour on the basis of ‘expected maximum utility’ and, as such, they voluntarily withdraw from opportunism (Hodgson, 1988). This argument is also supported with an acknowledgement of the bounded rationality of actors (i.e. computational difficulties experienced by the actors, limited information they have about the market and the abundance of sense data that actors have to face) and the sense-making communication process that takes place between agents. Knowledge and learning play a significant role in institutional economics and are used to explain how decisions and human actions are framed and evolve over time. Part of the same argument is the recognition of the continuous transformation of productive and organisational technologies, impacting on exchanges, transactions and decision making. Overall the arguments put forward by the institutional and evolutionary economics, by institutional theory in sociology and population ecology theory reaffirm the fundamental assumption that the functioning of the market is contingent on social processes that take place in the social environment that surrounds firms. This assumption is extended over the behaviour of the firm leading to conclusions that the choices that firms make are framed by social and normative conditions. In this context social interactions between firms can be seen as one of the most effective ways of responding to environmental uncertainty. The resource-based view of the firm: accumulation of heterogeneous resources Considering the fact that all activities of economic actors involve one form or another of resource exchange, allocation, distribution and utilisation, it is important to look at the ways firms deal with the resource issue. The resource-based view of the firm conceptualises companies as a bundle of heterogeneous resources that enable them to accomplish idiosyncratic productive functions, and to act as competent agents in addressing technical and organisational problems that arise from the production function of the
Acting in business networks 67 firm (Montresor, 2001). The resource-based view of the firm is seen as an alternative theoretical approach to the contract theory and the transactioncost economics, and has flourished mainly within the strategy and management literature. Although some economists have argued for the conceptual integration within the ‘production-transaction dichotomy’, the contractual approaches, underpinned by exchange and transaction-cost logic, have not recognised fully the resource dependencies that come with the focus on the production function. The resource-based view in the economic literature has aimed to compensate for the domination of transaction-cost economics and the contract theory as theoretical disciplines that carry atomistic contractualism and behavioural reductionism. The resource-based view addresses the resource dependencies and the knowledge interdependencies that drive production in value chains, in industries, within and across firms. The acceptance of the resource dependencies that firms face assumes resource linkages between firms and this underpins the notion of business networks as stable business configurations. The early stage of the development of the resource-based view is attributed to Penrose (1959) who sees the firm as a collection of productive resources, and assumes that each firm possesses a distinctive set of competencies, specialised resources, skills, tangible and intangible assets that provide a competitive advantage in the market place, and generate a source of economic wealth. The accumulation of resources within firms is conducted in a dynamic environment, which is dominated by stochastic random and spontaneous processes affected by various constraints and opportunities (Seth and Thomas, 1994). These resources under the transaction-cost economics are often treated as exogenous inputs and an outcome of exogenous influences from the environment. The tradition in economics is to ignore the endogeneity of the strategic decision-making processes within the firm. The resource dependence view alters this perspective, suggesting that present resources and business opportunities depend on past strategic decisions. This position links the resource-based theory with the path-dependence theory, which also argues that the historic development of the firm is an endogenous factor affecting strategic choices (Penrose, 1959; Richardson, 1972; Pfeffer and Salancik, 1978; Teece, 1980). The literature has listed a bundle of tangible and intangible resources, including management skills, organisational processes and routines, information, knowledge, prior experience, capabilities and competences, brand-name recognition, product quality, market reputation, patents, licences, location advantages and market share (Barney, 1991). A further contribution to the list of intangible assets controlled by firms is the work by Webster (1999) who conceptualised three types of investment capital as intangible resources that can be reinvested in business: knowledge capital (intangible assets which improve the human understanding of the market
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and the profit opportunities); capacity capital (intangible assets which raise the maximum level of production through employment of new organisation and labour technologies); and control capital (intangible assets that enable firms to control their input markets, the quality and quantity of work efforts, and the output markets). The latter can also be divided into rentseeking capital (dictating prices to suppliers), organisation capital (controlling the work flow) and market access capital (controlling output prices and the level of demand) (Webster, 1999: 14). The accumulation of heterogeneous resources is a selective and strategic process that originates with a managerial vision as a significant driving force. It is difficult to establish the causality between accumulated resources and assets by a firm and specific strategic decisions – both are simultaneously constraints and opportunities for each other. Lockett and Thompson (2001) emphasise that the opportunities of firms’ are unique, following from the unique bundle of resources possessed by each firm. Strategic decisions lead to both the accumulation of a unique bundle of resources and designing unique trajectories for firms’ growth and development. Strategic decisions with resource implications include those for ownership of assets and for the use of technologies, for the structuring of activities and the scope of internalisation, for the diversification of products and new market entry, for corporate refocusing and market exit, for innovation, for foreign direct investment, mergers and acquisitions, joint ventures, or the entire portfolio of managerial decisions that give a direction to the firm. The resource-based view of the firm explains the inequality between network members in terms of access to resources and factors of production, and the directionality of their efforts to maintain and establish new resource ties. Managerial strategies related to resource accumulation have a significant impact on the level of cohesion and competition within the network, on the structure and configuration of relationships, and on the reciprocity of exchanges between members. Knowledge-based approach: firms as acting bundles of knowledge Among the main authors who have developed the knowledge-based approach in relation to firm behaviour are: Kogut and Zander, 1992, 1996; Grant, 1996; Madhok, 1996; and Spender, 1996. They look at the firm as a bundle of knowledge and skills embedded in organisational routines and practices. The knowledge is not treated merely as a resource, but as an essential element of the learning process that takes place in parallel with the work process. The learning framework challenges all established economic theories, suggesting that the value of assets changes due to voluntary contributions of added value by learning agents above the contracted one. According to the knowledge-based approach, learning makes agents legitimate claimants to rent distribution. It is acknowledged also that learning takes place across the boundaries of the firm, which makes the value-added process
Acting in business networks 69 in firms subject to relationships and information flows beyond the control of the management. Informal or incomplete contracts are suggested to give learning advantages to actors, allowing them to extend their capacity and capabilities during the process of carrying out the contracted activity, and hence generating extended value of their input. Firms’ abilities to learn are also referred to as dynamic capabilities, allowing these agents to gain comparative advantage. An essential pre-condition for learning is a shared context of language and culture that allows actors to communicate, interact, exchange information and relate to each other, strengthening further the initial framework of shared understanding. In a recent work on choices and selection Paolo Ramazzotti and Marco Rangone (2000) conclude that the behaviour of the actors (purposive or not) does affect the market selection mechanism via learning and knowledge creation. The interaction of actors in a network modifies the very framework for interpretation of market information. Interaction shapes the market mechanism that affects market choices and relationships between market players. The authors also confirm that key market players or market leaders also affect customer preferences and decisions, and as such they undermine the very principle of autonomous selection. Both the role of interactions and the role of market leaders are examples of embeddedness of business transactions in social and knowledge frameworks. Managerial theory of the firm: forming coalitions, managerial choices, preferences, decision making and goal setting The foundations of the managerial theory of the firm are built on the work by Berle and Means (1932, revised 1968), the contributions from Weber (1947) and the work by Cyert and March (1963). Berle and Means recognised initially that the separation of ownership from control transfers the control power from the owners to the managers, who do not carry liabilities. Weber extended the knowledge on types of bureaucratic power that emerge in the efforts to manage organisations and communities. Cyert and March attributed details on how firms make decisions, and what are the motivational forces behind managerial behaviour in firms. Much of the development of the managerial theory of the firm is based on the fundamental assumption by Cyert and March of the maximising behaviour of actors where participants receive inducements from the organisation in return for their contributions and they aim to maximise these inducements. This assumption is extended in the literature with the argument that decision making in organisations is rational and goal oriented. Further analysis of the goal-oriented behaviour suggests that goals are derived at in the process of bargaining between individual participants within the firm. In this process of bargaining and negotiations of goals participants develop expectations regarding the behaviour of the others, and
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may adjust their own goals according to the expectations of others. The goal-adaptation process frames different strategic opportunities and modifies alternative organisational choices of actors within firms. Organisational choices are defined as outcomes from the goal adaptation and the decisionmaking process. On these grounds authors reject the assumption of the profit maximisation of the firm as an overall orientation in the market place, and suggest that decision making and negotiations lead to optimising behaviour. The firm’s managerial and administrative apparatus, or structure and hierarchy, are considered as dominant factors that determine the strategic choices and managerial decisions regarding economic transactions. The profit maximisation motive hence is filtered through managerial self-interest, and transformed into decisions regarding resources and performance targets (Seth and Thomas, 1994). Insights on managerial choices could also be found in the work on power in organisations by Mintzberg (1983a) and Pfeffer (1992), and the work on interlocking corporate directorates by Burt (1979) and Scott (1987). Mintzberg’s (1983a) definition of power as the capacity to affect organisational outcomes suggests that managers purposefully construct coalitions, adopt their goals accordingly and engage in relationships with each other in order to secure support from each other in everyday decision making. These coalitions (or cliques) usually aim to ensure that all participants share similar objectives and are willing to compromise. Without coalitions, a substantial amount of energy is required to neutralise the effect from the rival action of others pursuing different objectives. In order to prevent from disagreement between actors during the decisionmaking process, and to minimise the negotiation costs, coalitions usually aim to enhance bonding between managers, to ensure effectiveness of the group effort. A collective strategy will obviously improve the efficiency of both decision making and decision implementation in organisational settings. Forming a coalition in network analysis is known also as formation of cliques (or ‘action sets’ – Knoke, 1994), and it is seen as having a negative impact on the equality of distribution of information, resources and power. Ultimately this is expected to have a negative impact on the functioning of the network. In addition, network members that are engaged in a coalition or an action set do not necessarily act in a coherent way. The implementation of collective decisions still involves an amalgamation of personal viewpoints. Even within coalitions there might be a discrepancy between the desirable outcomes, perceived by each actor, or the extent to which goals and strategies are shared. If coalition members have conflicting objectives and intentions, they will interpret the coalition in a different way, seeing different opportunities for themselves, and creating asymmetries within the action set in order to achieve their own objectives. Whether they are able to do so will depend on their position within the coalition and their capacity to generate
Acting in business networks 71 support for their plans through coalition. The same principles apply to open networks, where actors are interested in a collective effort. The interpersonal dynamics in coalitions is determined by the changes of participants, and by some fundamental behavioural principles described in social psychology, such as the threshold of reaction that exists for each participant. According to Chwe (1996), each individual member has a specific ‘threshold’ of reaction to events and to other members’ behaviour that evolves over time. This threshold of reaction is highly dependent on the individual preferences, and the knowledge of the preferences of the ‘other’ participants. If an individual has a limited knowledge of the preferences of the others, it is difficult for him/her to choose a mode of reaction. The assumption is that when motives and stimulus are below the threshold, and when the preferences are high or no positive outcomes are expected, then agents do not act. Most managerial theories of the firm explain the development of tools and means to control the behaviour of actors, namely through the use of incentives, power and coalitions. The process of coordination and control is identical for organisations, networks or any community of actors that share a common aim and interact with each other. Interactions in business networks involve the same level of coordination as in formal and informal organisations. The fundamental difference between the two is that in addition to task coordination network actors are involved in coordination of numerous dyadic relationships. The emergence of multilateral coordination in complex networks is a new phenomena that has not been addressed in the literature and should be investigated from similar premises. Overall, the managerial theory of the firm has produced a number of conceptual frameworks to explain the use of power to control the behaviour of other actors, the use of various relationships and manipulative techniques to counteract uncertainties and opposition and to coordinate the activities and behaviour of others. Acquiring and maintaining power in business networks The concept of power has been taken beyond organisation theory and has been used to explain not only behaviour of actors within organisations, but also behaviour of firms in a market context. Weber’s contribution on types of authority (1947) remains a milestone in our understanding of power relations. The distinctions between legitimate vs. coercive power and traditional vs. bureaucratic authority remain fundamental to the analysis of behaviour in organisational settings. The legitimate power is also considered as utilitarian (or exercised through incentives) and normative (or exercised through norms and symbols). Power and authority are used for the exercise of control at multiple levels – to supervise activities, to coordinate tasks under the conditions of specialisation and division of labour, to monitor performance, to act towards conflict resolutions when contradictory interests and demands emerge, and when prescribed rules have not been complied with by some
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actors (Etzioni, 1964). Power and authority are exercised for setting goals, for decision making and implementation, and for exercising managerial discretion in strategic choices. The strategic management literature and particularly the work by Porter on value chains and competitive forces give another perspective on bargaining power, strategic decision making and strategic behaviour. According to Porter (1991), organisational power is measured through the sustainability of profits against bargaining (by suppliers and buyers), and against direct and indirect competition (by existing competitors, new entrants and substitutes of products and services). In order to sustain and increase power, organisations engage in a range of strategic activities not only within firm boundaries but within the value chain that is affecting inputs and outputs, and within the overall value system. According to Porter (1985) the value system comprises: a) upstream value chain of suppliers; b) the firm’s own value chain; c) downstream value chain of distribution channels and end-users. The value chain of the firm itself comprises the firm’s infrastructure, human resource management, technology development, procurement, inbound logistics, operations, outbound logistics, marketing, sales and services. A firm gains power and strengthens its position in the value system by creating assets external to it, which could be tangible (such as contracts) and intangible (such as brand images, relationships with customers and network ties) (Porter, 1991). Firms maintain power also through relocation and concentration of resources within the value chain and value system. Porter makes it clear that firm’s advancement to a favourable position is achieved in three ways: • • •
through the initial conditions (including pre-existing reputation, skills, routine practices – an argument embedded in the path-dependence theory); through the managerial choices of which activities to perform (studied by the management theories); and through the supporting investments in assets and skills (or allocation of resources within the value chain – an extension of the resource-based view of the firm). Here, the value chain is part of the value system that is understood as the entire network of suppliers and buyers, maintained by each company.
Managerial choices in this respect will depend not only on how managers perceive the interest of their company, but also on how they perceive their partners in the value chain, their suppliers and buyers. Long-term commitment to a business relationship is something that has to be nurtured through mutual understanding and knowledge sharing, and to be enhanced through inter-personal bonding. It is important to note that firms as members of a business network are continuously involved in value creation in order to maintain their position
Acting in business networks 73 in the market (i.e. in the value system), or to advance their position. Advancement will mean higher bargaining power against suppliers and buyers, and a more stable position against competitors. Overall the managerial theory of the firm treats in an equal way the behaviour of the firm and the strategic choices of the managers – even though the latter is a means of the former. The implications for network analysis are that both managers and firms could be placed in the nodes of a network. Relationships between nodes – firms or their respective managers – could take the form of exchanges of both tangible and intangible assets and resources – products, services, information, practices, knowledge or experience. In this respect, for the purpose of a network analysis both firms and managers represent economic agents involved in business transactions. Control and manipulation of the external and the internal environment Strategic behaviour of firms is discussed also in a more applied business framework where firms actively manage their internal and external environments. Environmental management from a strategic perspective includes internal and external strategies applied by firms and managers. The internal strategies, according to Robbins (1990), are: recruitment (or personnel selection and accumulation of human capital); geographic dispersion (or location of operations to tackle political and market risk); buffering (or securing supplies and ensuring absorption of outputs); smoothing (levelling out fluctuations in the market); and rationing (re-location of resources according to priorities and critical situations). The external strategies include: environmental scanning (to analyse the position of stakeholders, government, competitors, trade unions); domain choice (or targeting a specific market niche); advertising (manipulation of demand and the price sensitivity of customers); coopting (absorbing individuals that otherwise may threaten the firm’s operations – e.g. through interlocking directorates); lobbying (or using influence to achieve favourable outcomes in relation to government policy and legislation); contracting (to externalise costs and to protect against changes in quantity and price); and coalescing (or formation of mergers and joint ventures for lessening inter-organisational competition and dependency) (Robbins, 1990). ‘Recruitment’ and ‘geographic dispersion’ are forms of behaviour that enhance firms’ assets and capacity to control its network ties. These are also investments in intangible assets in order to gain a comparative advantage in relation to other firms. ‘Buffering’, ‘smoothing’ and ‘rationing’ are all directed towards absorbing and modulating pressures on the entrance and the exit of the firm in order to protect existing network relations. The external strategies are all oriented towards repositioning in the market place and therefore enhancing certain relationships with customers (through ‘advertising’), with shareholders, banks, governments or competitors (through ‘coopting’ and ‘lobbying’), and with business partners
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(through ‘contracting’ and coalescing’). The ‘environmental scanning’ is gathering information about other actors in the network and their relations in the market place. ‘Domain choice’ is behaviour oriented towards preferential location in the production network and the market segment. All these examples of environmental management strategies highlight the fact that network members are not indifferent to the rest of the network configuration, but are active participants that are able to transform and manipulate network ties with an impact on the entire network configuration. Environmental management practices show abilities of firms to affect their relational environment in a strategic manner, and to shape certain environmental conditions. Cooperating with stakeholders In order for a transaction and an exchange to take place most of the economic theories assume an existing agreement between the contracting parties in a market. This minimum agreement refers to the act of accepting payment for goods/services, and accepting particular quality and quantity of these goods/services for money. The stakeholder theorists extend the context of these agreements and apply the same argument to all agents that have vested interests in the transactions or the overall operations of the firm. The stakeholder theory assumes consent and agreement within a network of agents called stakeholders – such as buyers and sellers, managers and employees, shareholders, government and the wider public. Each stakeholder group aims at maximising their own benefits, even if it is at the disadvantage of the others. The firm is the focal point in the stakeholder network, trying to balance the interests of all of them, or at least the interests of the most influential ones. The research on stakeholders’ interests has focused on the dynamics of communication links and relationships, and has not investigated details of the impact of structural configurations on the power and influence of stakeholders. There are structural dimensions among stakeholders related to their legal obligations and historical profile that frame much of their interests and their behaviour, and the pressure and demand that they put to the firm. This, however, is rarely looked at as stakeholder theory, in general, it offers more an instrumental approach to managing stakeholders’ expectations. The behaviour of the firm in a market, conceptualised according to the stakeholder theory, depends on the decisions and the activities of the dominant stakeholders, their legitimacy and the means they use to utilise their power. Apart from fulfilling legal obligations, most of the stakeholder influence is exercised through interpersonal communications, public and interpersonal relations The stakeholder theory advocates that stakeholders as network members have a mutual interest to participate in the network of activities and resource flows. However, it does not suggest that all agents are equally posi-
Acting in business networks 75 tioned, and that they have complementary interests. On the contrary, the complementarity comes through communication and coordination, through negotiations and increased awareness of the preferences of the others. Entrepreneurship – initiation of new relationships, transactions and contacts One of the distinctive managerial theories is the entrepreneurship theory. The attempts to understand the entrepreneurs are very old. Cantillon (1755) defines them as a distinctive social class which is formed by people who are willing to take risks, shifted onto them by the rest of society. Marshall (1890) introduces the entrepreneurs as a factor of production. Schumpeter (1934, 1939) extends the concept by looking at the entrepreneurs as a social elite with a distinctive psychology who are engaged in a ‘creative destruction’ of value. Entrepreneurs are considered to be driven and motivated by the lure of profit. They actively close pockets of ignorance in the market place, seeing these as new market niches and as opportunities to generate profits through transactions and exchanges. Entrepreneurs devise ways of overcoming transaction difficulties and of reducing bounded rationality by bridging the market ignorance gap with knowledge, insights and business ideas, and with linking to buyers and suppliers (Foss and Foss, 2000). In a nutshell, entrepreneurs initiate new business, lead market changes, and design and integrate business networks. Leading actors in a business network that initiate transactions and new relationships are also called ‘network entrepreneurs’ (Burt, 1992). They are the first to identify a new business opportunity, and to pursue the realisation of that opportunity through establishing new business relationships. They have the time advantage in accessing buyers, suppliers or partners, and this gives them bargaining power in negotiations of the formal contracts that substantiate these business relationships. Entrepreneurs have a high level of centrality in the entrepreneurial network, and initially have a high level of control over decisions in that network. They could act as information brokers – actors with a proportionately large number of incoming ties – or as coordinators – actors with a proportionately large number of outgoing ties. The evolution of entrepreneurial networks depends to a great extent on the vision of the entrepreneurs as ‘network designers’ and their ability to lead the network processes. The notion of network entrepreneurs is the first step towards recognising that networks are managed and the coordination of activities can be both exercised as self-coordination or through a coordination agency. Self-coordination vs. coordination agency Usually it is assumed that networks imply a mechanism of self-coordination and self-organisation of activities between agents. However, network
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analysis has not yet found significant evidence of self-coordination as a widely employed mechanism in the real business world. On the contrary, the dynamics of relationships between different agents suggest that power in networks gravitates towards certain actors, and under certain conditions business networks can transform into hierarchical structures. Examples of this transformation are mergers and acquisitions within the value chain. There is an ongoing process of re-distribution of resources and information in a business network which aims to shift the balance of power and influence. This process between network members could be captured and directed in two ways: either by enhancing control and dependency (and creating contractual hierarchy or relational subordination in the network), or by developing trust and commitment at the inter-personal level. The choice between enhancing control or enhancing trust and mutual support produces two main types of networks – regulated and directed, or self-regulating. Self-regulation and self-coordination among actors in a network exhibits a distributed leadership function and a distributed entrepreneurship, where multiple actors in the network are expected to take initiative, to exercise monitoring and control, and to participate in strategic decision making and allocation of resources. Regulated networks are controlled either internally by powerful members, or externally through hierarchies and legal procedures. Self-regulated networks utilise social mechanisms such as norms, rules, loyalty, commitment and trust. All theories reviewed in this chapter highlight principles that drive actors’ behaviour in a business environment and network context. All economic and management theories are focused on firms and managers as actors that make strategic choices, that negotiate agreements, and act upon internal and external constraints and opportunities. Most studied are motives and drivers of actors’ behaviour and the environmental conditions that frame and induce this behaviour. This literature to a great extent ignores the individual attributes of actors that also frame strategic decisions. Most of the theories discussed in this chapter also assume homogeneity of actors in the market place and hence they do not create space for analysis of behaviour and interactions of heterogeneous actors. In an effort to bring together different perspectives, there now follows a discussion of the heterogeneity of actors and how this frames strategic choices and decisions.
Heterogeneity of actors Actors differ in their organisational type, in their access to resources and in their position in the decision-making process in the network. They vary also in their interests, responsibilities and commitments to the network. Heterogeneity therefore represents the variation between actors, and more precisely the qualitative differences that affect the decision-making process and outcomes and the participation in the network.
Acting in business networks 77 The heterogeneity of actors derives from the specific institutional form which they take, from their properties and attributes, and from their different position in the network. The cultural approach introduced in the previous chapter explains the rationale behind the heterogeneity concept which addresses the main distinction between human and non-human actors. In addition to the pool of human actors and firms, actor-network theory has enlisted a number of other acting entities that affect the decision-making process and the resource allocation in networks. The theory suggests that these entities constitute an actor-world as an interconnected actor-network. Among these entities are technologies, technical artefacts, other human beings, skills, money, texts and other resources (Callon, 1986, 1992). The actor-world is composed of all elements and their contexts that they bring to the network. Non-human entities in general have no decision-making capabilities. They are only intermediaries that facilitate the decision making and the resource allocation process. The actual decision makers are individuals or groups of administrative and managerial staff who represent particular interests, and act on behalf of the organisation or the institution they represent. It is the human beings that attribute value to objects, and therefore associate interests with selected objects, actors, technologies and other artefacts. Although I strongly support the insights from actor-network theory on non-human actors, I will differ from its extreme position that animates texts and technologies. My moderate view is expressed below with the attribution to non-human actors of a strong intermediation function. Non-human actors – texts and interpretations as intermediaries The previous discussion has already acknowledged that business networks comprise heterogeneous organisational and human actors and cultural artefacts connected by dyadic relationships driven by the individual properties of the actors, the properties of the link and the overall network properties. Actor-network theory develops a thorough discussion of how human entities – or what we call cultural artefacts – engage in a social construction of the interaction process. Callon (1992) discusses texts and documents as intermediaries in a network as they participate in the process of ascription, translation and enrolment. Although the recognition of intermediaries is an important contribution to network theory, it is not necessary to animate artificially these intermediaries beyond their cultural and social role. Texts may frame the processes of ascription, translation and enrolment but only as intermediaries that are carrying the message of the translator to the reader and the audience. Texts could be spokesmen only within the boundaries of the translator’s knowledge. The translator’s capabilities of translation and enrolment are crucial in the same way as the reader’s capabilities of decoding and deconstructing the meaning of these texts. Beyond the capabilities of the
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translator and the reader–observer, the texts themselves are merely complex cultural entities or artefacts, containing coded information and meaning about other entities and various associations between these other entities. The information embodied in texts is captured by human actors and employed in the value-transformation process by human actors. Organisations and institutions in this context represent human collectivities and are on the agency side that actively employ texts and cultural artefacts. Strategic action could only be attributed to human and institutional entities in the actor-network. Only human agents could act strategically beyond their individual attributes. All non-human elements ‘act’ only by their presence (as being ‘enrolled’ in the network), and according to their attributes (as employed by the human actors). Technologies and industrial standards may determine strategies of business actors only as far as they are accepted, selected by these actors because of their properties. Once enrolled, technologies and their documentation do play a significant role, shaping the allocation of resources and the decision-making process. The non-human elements could be used by the human actors in such a way which may look as having a prescribed role. However, they do not perform this role, because they do not act purposefully. They are merely employed in the process, or used as a point of reference or an intermediary by the human actors. Using such intermediation assists human actors to acquire further resources, or to achieve other objectives. Technologies are non-human actors that do not participate in agreements, and do not act strategically, but could be the subject of these agreements and could provide opportunities or constraints for the strategic behaviour of the human actors. Non-human actors do not bear identity, and can not enact individual interests that in the case of human actors derive from their identity. It is important to say that texts, technologies and other cultural artefacts may carry powerful frames that condition human behaviour and strategic act. This power, however, derives from the human imagination that has created these entities and from the institutional framework that supports particular economic and socio-cultural practices. Only human actors can select technologies, interpret texts, ascribe roles and put exchange value to resources, objects and processes. Interaction in networks involves various forms of exchanges of information, resources, personal commitments and affiliations, and each of these has a different exchange value for the ‘donor’ and for the ‘recipient’. Interpretation of texts is carried out by the actors and their ability to attribute meaning to a link/relationship with another entity. The texts themselves have no capabilities of that kind. They do not speak for themselves. Creators of texts, audiences and readers–observers can speak for texts by attributing meaning and constructing other texts in order to express themselves and to make explicit their own understanding of what they have read and observed. An important implication of the reasoning above is the point of the
Acting in business networks 79 double interpretation of facts – first, the coding when the text is constructed by the author and, second, the decoding, when the text is received and understood by a reader–observer. Each text brings two additional agents to the actor-world – the author of the text and the reader–observer. A business network that comprises texts among other actors is composed of the authors and the readers of these texts. The texts themselves are merely carriers of the interests and the knowledge of the two types of actors – the authors and the readers. Texts are also carriers of emergent frames that condition interactions in business networks. Scientific texts are representations of the heterogeneous network of actors – authors, audiences and research laboratories – that are using these texts. Also among these actors are firms and government agencies certifying the texts and the pieces of knowledge and technology, or other objects and technologies reflected in these texts. Yet this heterogeneous representation could be subjected to re-interpretation only by a reader–observer or by a human actor. The observation or the deconstruction of the text (and the accompanying interpretations of the associations that are encrypted in the ‘text’) has to be performed by a knowledgeable agent or by a human actor. The text or the documentation of a particular technology, process and operation is an encryption of existing objects, entities and relationships. The text that describes a particular technology is a holder of the scientists’ knowledge and enables other human actors to employ this technology in a new way. Other actors can employ the technology within the boundaries of their own knowledge and understanding, based on the texts and the coded knowledge from previous actors. The new actors can ascribe new roles to that technology in their own actor-network world, which goes beyond the original knowledge and text. Texts as embodiments of organisational routines and practices connect managers and other human actors within and across firms. Texts are employed in contracts and as such they establish legal relationships between business partners, and play a constitutive function in establishing business networks. To summarise this discussion, the heterogeneity of actors stems from their institutional type, from their bundle of resources, knowledge and technology, overall from their attributes that affect their decision-making power, as well as from their enrolment status. Non-human actors can be enrolled in such a way that they can play both a supporting and a constitutive role for the network, framing other actors’ behaviour, and effectively exercising governance function. Overall the strategic choices and decisions are taken by human actors. In the subsequent parts of this chapter I attempt to synthesise all theories that treat actors’ behaviour and summarise various forms of behaviour of business actors, connected in networks of value-added activities, or connected by transactions, resource dependencies and other market forces. All behavioural motives and actions are presented in Figure 3.1.
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Firm’s conditions and attributes
Market conditions
Industry conditions
Factor conditions
Mediating factors
Manageability/ control
Reactive and Strategic Behaviour in Networks Decision making and goal setting Negotiating identities, interests and agreements Bargaining and negotiating contracts Ascribing and accepting roles Structuring information flow Coordination Maximising profits, pay-offs, benefits Minimising costs/sharing costs Optimising behaviour and maximising ‘expected utility’ Manage the use of their assets Accumulation of heterogeneous resources Investment in assets capabilities and relations (inc. diversifying assets and capabilities) Building strategic capabilities Specialisation Initiation of contacts and entrepreneurship Contracting resources Developing relationships Extending commitments to partners (buyers, suppliers) Acquiring and maintaining power Monitoring and evaluation of partners, building expectations Exchange of incentives Strategic positioning Mimicry, conformity and compliance Legitimacy seeking Forming coalitions and partnerships Cooperation for a final outcome Learning Knowledge sharing Manipulating external and internal environment
Business operations Other connected activities
Relational framework/ context
Relational attributes
Legitimacy and role
Factors
Figure 3.1 The behavioural system in business networks.
Behaviour in business networks The behaviour of network actors includes both – reactions to environmental pressures and to unfolding events, and the development and implementation of strategic choices, or purposeful action. Action and reaction can be intertwined in interaction where the causality can no longer be traced. Mouzas
Acting in business networks 81 (2001) defines strategic acting as an ‘inventive stream’ of identifying possibilities or opportunities in the network context, transforming them into real options and acting upon them. In the strategic management literature acting is seen as investment of some kind where resources are located for a purpose, and there is therefore a ‘cost of capital’. Overall strategic acting is seen as the implementation of strategic decisions and choices, and it can be inward-oriented towards the internal environment vs. outward oriented towards the relational set of the external environment. It can be directed towards expansion of activities in a series of steps or towards defence and reduction of activities. It can be oriented towards deferral and abandonment of a particular strategic direction, or rationalisation of activities and operations supporting the chosen direction. In this variety of options I am looking for milestones that explain why firms will choose one direction for acting or another. The theories discussed above give many insights into what motivates firms to act, and the direction of their activities. In reality multiple motives and factors play simultaneously and frame strategic actions and interactions in business networks. The model in Figure 3.1 gives a synthetic view of the factors that determine firms’ behavioural choices, and a long list of behavioural responses to constraints and opportunities. All these categories have been discussed in the previous part as concepts developed within different theoretical frameworks and the purpose here is to put them together in a common framework. Most of the causal relations that trigger behaviour and actions by firms have already been explained. The map in Figure 3.1 attempts to compare and contrast different behaviours, or what firms do and what they are perceived as doing. This framework synthesises only theories that refer to firms and managers as actors and does not include other heterogeneous actors such as cultural artefacts. However, the cultural argument of active negotiations and participation of cultural intermediaries is employed throughout the discussion. Firms engage in decision-making and goal-setting activities when their circumstances change – either through changes in their external market conditions, or in their internal environmental conditions and constraints. Firms have to negotiate their identities and interests when they form a relationship (with customers or suppliers), and the outcomes from these negotiations depend on the relational context. Agreements and contracts between firms are embodiments of negotiated interests and activities. When firms form a relationship they ascribe roles to their partners expecting these partners to behave and act in an appropriate way. At the same time firms accept roles from their partners when agreements are made. Accepting a role involves allocation of tasks internally, so this role can be performed. Accepting roles channels a range of internal activities that lead to developing strategic capabilities within the firm and changing its attributes. Firms do structure their information flows as part of their internal communication and their communication with buyers, suppliers and partners.
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All marketing, promotion, public relations and public announcements represent such information activities. Firms continuously have to coordinate internally their operations, and externally the inflow of resources and the outflow of outputs. This coordination is known as operations and logistics and is symbolised by the complexity of decisions that are required for the management of procurement and sales. Strategically firms attempt various operations that maximise their profits, pay-offs and benefits, and minimise their costs. Usually this behaviour is perceived negatively by partners and stakeholders who would like to see the firm sharing benefits from partnership operations. As a result, some firms attempt to optimise their behaviour and to demonstrate ethical concerns, or to carry social responsibilities within the community. Part of the strategic behaviour of firms is to manage their assets, their tangible and intangible resources, which includes accumulation of heterogeneous resources, investment in assets, capabilities and new relations. As part of the management of their resources and capabilities firms specialise in certain areas where they have strengths and simultaneously outsource and develop partnerships in other areas where they have weaknesses. All market transactions are based on some form of a contract. Contracting of resources and subcontracting of activities involves building relationships with these contractors. This involves extending the commitments that firms and managers make to partners, the monitoring and evaluation of partners, and the exchange of incentives with these partners. Firms that are engaged in complex network form coalitions and cooperate with others for specific final outcomes. Firms acquire and maintain certain power in these coalitions and partnerships or act in compliance with agreed rules and procedures. Often firms copy the behaviour of market leaders, which is known in the literature as mimicry or a band-wagon effect. Usually firms share knowledge and other resources with their partners and learn from their business experience with different partners. This learning can be interpreted both as a firm’s attribute to acquire and develop knowledge, and as a purposeful behaviour aiming to extend the capabilities of the firm. Overall firms (through managerial decisions) continuously engage in strategic positioning in the industry and in the market place, and this involves manipulation of both – the external and the internal environment. This repositioning often includes introduction of new products or services, initiating new partnerships, or various forms of entrepreneurial activities that bring innovation to the market place. The essential principle in strategic acting, supported empirically by Mouzas (2001), is that strategies are embedded in organisational practices, and that they are introduced as new constraints and opportunities in the context of the existing inter-organisational relations. Practices capture repetitive and routinised actions and interactions. As such, practices represent the
Acting in business networks 83 entire bundle of actions with their experiential, cognitive and normative aspects (Habermas, 1981). The acting of one organisation gives the rationale for other network members to act and this generates a cycle of interaction within a relationship. Although interactions can be broken into fragments of individual activities, analytically this does not produce a very valuable outcome and should be treated as an initial stage of conceptualising relationships. Behaviour is also framed and governed by institutional norms and organisational practices. These norms in principle facilitate acting in a certain direction, and impose constraints in other directions. Institutions and practices produce the normative framework for interactions and relationships. Spontaneous strategic and purposeful or reactive behaviour has to fit within these normative frameworks, and at the same time patterns of behaviour generate the very norms that constitute institutions and practices. This chapter has looked at the factors that shape the behaviour of heterogeneous actors. Actors are conceptualised as: human agents with decisionmaking power; institutions and organisations as collective entities involved in allocation of resources and coordinated activities; firms as performing different business functions; and various objects and cultural artefacts that intermediate economic activity. Analysis of behaviour of actors in networks represents the first level of network analysis and it is one of the fundamental research questions for network analysis, as everything else stems from a chain of actions. Both relationships and network configurations emerge as a result of actions and choices made by individual actors. The next chapter builds upon the assumption that actors act towards each other and form a relationship. The analysis of the emergent relationships represents another distinctive level of network analysis.
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This chapter shifts the emphasis from actors’ attributes to relational attributes. Although the economics and management theories discussed in the previous chapter describe well the motives and drivers of behavioural choices of business actors, they can not explain how this dynamics is altered when firms and managers enter long-term relationships. The theories synthesised in this chapter look at how relationships have been conceptualised by various strategic management, marketing and organisational behaviour theories. On the basis of multiple theoretical arguments this chapter offers a new conceptual framework for relational analysis and offers insights into the relational dynamics in dyadic links. It also offers a typology of relationships that enriches our understanding of the implications from interactions. The discussion mainly represents conceptual thinking under the relational and the cultural perspective that uses the processual approach for the analysis of complex behavioural responses within relationships.
Relational analysis Most of the theories of actors in business networks discussed in the previous chapter explain behavioural choices under specific environmental conditions. Although these theories point at conditions that induce collaborative behaviour, they do not say much about how firms interact and cooperate with each other, how transactions and repetitive exchanges occur, how activities across firms take place and how resources are shared in partnerships. The economics perspective of the firm acknowledges that market transactions between firms are based on arms-length market relations, without explaining what exactly is the nature of these relations. Single market transactions are still seen as simple exchanges of goods, services and money. Cooperation in this framework is merely defined as the case of two or more autonomous actors, committed to a long-term relationship based on trust and on clear and mutually agreed objectives, and on extensive and continuous sharing of information, risk and resources (Ellram, 1991; Mudambi, 2004). In addition, both cases of market transactions and partnerships assume
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explicit and implicit agreements on prices, quality, quantity and the conditions of exchange. Economists usually do not discuss details of the agreements themselves that constitute a market relationship – their history, how agreements were negotiated, their institutional and psychological aspects, or what Granovetter (1985) called the embeddedness of transactions. This chapter argues that agreements between business actors even for a single transaction imply a form of collaborative relationship embedded by the trust and the expectations and commitments of the transacting parties. The resource dependence theory, the knowledge-based approach and the contract theory of the firm – discussed in the previous chapter – all acknowledge that social networks across resource interdependent firms mitigate transaction costs and information costs via trust and resource sharing (Casson, 1998; Gulati et al., 2000). These theories also promote the managerial approach to explaining firm behaviour, where collaboration and competition are intertwined. However, there has been no consistency in attempts to establish theoretical foundations for relational analysis of business networks, or an attempt to transcend individual action and behaviour to engagement in interactions resulting in relationships and structural configurations (see Figure 2.1 on page 24). The sociological view of the firm perceives the organisation as a collective actor comprising individuals, bound with formal and informal ties, and carrying subjective views, intentions, evaluations and decision-making power embedded in culture and institutional norms. Inter-firm relationships are explained with various social exchange, and cognitive and evolutionary theories (Monge and Contractor, 2003). Within the sociological view both intraorganisational and inter-organisational social relationships are assumed to embed economic transactions through institutions and practices. This view of embeddedness, however, is not accompanied by a critical understanding of what are the mechanisms through which relational embeddedness of firms emerge, or the mechanism through which it exercises an impact on economic incentives and behavioural choices. Strategic theories discuss aspects of resource exchanges between firms that underpin inter-organisational relationships and interdependencies. A fundamental assumption in the strategic management literature is that agents act strategically with their decisions, choices and selections in response to environmental influences. In doing so agents interpret information from observations of what other firms and business actors do. Strategic behaviour is triggered by and based upon information of what other actors – competitors, collaborators and facilitators – choose to do. As such, strategic behaviour is analysed as a strategic and long-term response to environmental constraints and opportunities irrespective of the relational bonds and resource dependencies across firms. One of the fundamental mechanisms in strategy – the value chain – explains how firms interlink with each other in a value creation process.
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A thorough analysis of the division of labour and the specialisation of firms within the value creation process explains very well why firms specialise in different business areas, why firms with different product portfolios co-exist in industries and why they interlink with each other. The main research on strategic partnerships has advanced the discussion on motives and drivers for collaborative ventures, strategic alliance formation, partner selection and managing stakeholders (Gulati, 1998, 2000; Dussauge et al., 2000; Todeva and Knoke, 2005). Strategists see different motives and drivers for seeking relationships: economic, organisational, strategic and political. Among the economic motives are those related to market entry, cost sharing and risk reduction. Among the organisational motives are learning and competence building. The main strategic motives are competition shaping/pre-emption, and motives related to product and technology. Finally, the political motives for collaboration include those related to market development and overcoming regulatory barriers (Todeva and John, 2001; Todeva and Knoke, 2005). Overall, the strategic management theory does explain driving forces behind relational formations, but does not say much about the nature of these partnerships, or about the processes that lead to their emergence, their structuring and outcomes. Although the value chain mechanism has attracted significant attention in the strategy field, it has received only partial recognition within network theory. Gulati et al. (2000), for example, focus on two relational issues introduced from a strategic perspective that represent research questions on strategic business network relationships. One is the ‘lock-in and lock-out’ effects from selecting partners, and the other is the ‘learning race’ that takes place in partnerships where partners attempt to maximise the learning outcomes from the relationship. The lock-in and lock-out effects refer to the consequences of partnerships that anchor firms in strategic development paths with their partners where exit strategies become extremely expensive. The development trajectories are linked to opportunity costs from an economic point of view and to inertia and barriers to innovation. The learning race refers to the nature of communication flows between firms in business partnership that generate voluntary and involuntary sharing of knowledge and experience. Knowledge seeking is one of the main drivers for building collaborative relationships. In addition, the strategic theory has contributed to business network theory with research on selecting partners and on the effect of trust and learning on the duration of inter-firm relationships (Doz et al., 2000). All these issues trigger discussions on the positive and negative implications from business relationships, without in-depth analysis of the underlying mechanisms. Many questions still remain regarding how firms form business relationships, and the evolutionary transformation of these relationships. Many other disciplines have also contributed to the advancement of the
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relational analysis such as social and organisational psychology, ethnography, communication studies and phenomenology, and this chapter reviews some of their leading concepts and mechanisms that explain different aspects of inter-firm relationships. The main task in this chapter is to look deeper into the relational bond between firms and to bring to the surface certain concepts from social science theories that extend our understanding of the nature and the process of business relationships and the underlying mechanisms that bond together business partners. The main questions related to analysis of network relationships that have not been resolved yet by economics, strategy and management theories and require further attention are the following. What constitutes a business relationship (a question about the nature of inter-firm associations)? Why do actors connect to each other (a question about their motives and drivers)? How do actors connect to each other (a question about the forms and types of network links and bonds)? What takes place in a relationship (exploring the possible content of communications, exchanges and transactions, the dynamics of interactions and the stages of development)? What are the implications of being connected (the consequences of a relationship for the actors and for the network of interconnected relationships)? One of the fundamental challenges for business network analysis is the complexity of the business networks being simultaneously social and economic structures of actors occupying positions in social systems, and dynamic processes of interactions and exchanges between the actors. While the structural analysis explores the positioning and the linking of the actors revealing network structure, a detailed study of the dynamics of relationships within the relational and cultural approaches brings to light the functioning of the network and the management of inter-organisational relations. Analysis of the network relationships is an essential part of network research and this chapter attempts to review and synthesise a number of the theoretical foundations that inform this field. Most of the theoretical contributions that have emerged within the relational approach analyse firms’ exchanges in the context of industrial markets and supply chain networks. These research frameworks are complemented by a number of communication, interaction and social exchange theories that underpin network research. This chapter attempts to bring together different disciplines and to propose a generic and interdisciplinary framework for relational analysis. For the development of this framework distinctions are made between human and non-human actors under the cultural approach, between the dyadic versus global network relationships under the structural approach and between different levels of analysis – the level of actors, resources or activities. Although the relational perspective in network theory has advanced substantially our knowledge of relational analysis, there are other contributions related to communications, interactions and resource commitments in business networks, knowledge sharing and interactions between business
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partners, cognition, affection and relational value that have not been incorporated sufficiently into the current stream of research on inter-firm relationships. The next section focuses on some definitional issues that emerge from this attempt to extend the multi-theoretical approach in the analysis of business network relationships.
The nature of the bond – relations, connections, interactions, exchanges Most theories describe network relations as links or ties and connections between agents. Often some interaction between actors is assumed even when the depth of the link is not discussed. A broader definition of these concepts particularly within the cultural perspective refers to any association between two subjects, or a subject and an object that generates certain relational outcomes. This association could be physical, logical (in the form of ‘cause-andeffect’ link) or normative. An example of a physical association is the human and computer interaction which requires a physical co-presence. Among the logical and causal associations are: ownership (an association between actors and assets); power and authority (an association between actors and decisions, agreements or documents); and dependency (an association between actors and resources or activities). An example of a normative association is the link between a technology, a licence for using it and the licensees as firms or customers. Relational attributes in all these associations are deduced from certain environmental conditions (such as technology impact, demand for assets, stability of government), from institutional effects (such as effectiveness of the legal system), from actors’ attributes (such as actors’ capabilities or adaptability of technology) or from the interaction itself (such as learning and knowledge sharing). The main argument in these examples is that non-human entities or objects such as technological standards, documents or legal forms can play a dominant role by framing network relationships and the behaviour of other network actors. A relation in the most generic sense is an association between two entities – subjects or objects – that are co-present in a field. The association exists prior to any communication or interaction between these entities, and is established prior to exchanges and transactions. Actors might be linked and related to each other even before they start to know each other and to exchange information. Examples are: firms registered in the same geographic location or in the same industry, and managers graduated from the same school, coming from the same town or speaking the same language. All these actors are associated with each other and related to each other by their attributes without having a relationship. Prior to any exchange the following relations exist: •
an association between one subject (Ego) and another subject (Alter) – linked in negotiations that frame the future exchange (Figure 4.1);
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O1
ALTER
O2
EGO
Attributes / affiliated members, sub-units, resources, associated objects
Figure 4.1 The dyadic relationship as a focal relationship.
• • •
an association between a subject (Ego) and an object (resource) under its control (O1); an association between a partnering subject (Alter) and an object under its control (O2); an association between the objects (O1) and (O2) – compared vis-à-vis some exchange value.
Subject can be defined as a human agent, an institution or a firm as a collective organisation of human beings with the capacity to make decisions and choices in a resource allocation and resource utilisation process. Object can be defined as a non-human entity – technology, cultural artefact, an institutional norm or a resource – that can be employed or engaged in interactions and exchanges. An existing relation or association between actors is based entirely on actors’ attributes and on their general location in time, space and the socioeconomic system. Such an association is a precondition for the emergence of an exchange relationship, and for negotiated transactions. Knoke and Kuklinski (1982) call this association a potential relationship, which is not yet established. For example one firm has resources that are needed by another, but the two firms have not met yet. A relationship emerges when a communication channel between the two firms is opened up and a process of communication or information exchange starts. Communication is defined as a process of transfer of information from a sender to a receiver. Communication and exchange of information are an intrinsic part of a dyadic relationship and take place between already connected actors. Most network theories are based on the assumptions of an existent communication process between the actors. The question of how individuals communicate with each other and how business communications take place is an important aspect of relational analysis. Among the main theories that explain how people exchange
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information are the information theory (Shannon and Weaver, 1949) and the theories of mass media. The framework by Shannon remains unchanged until the present time, and it includes a chain of constituent elements: the source of information (agent that designs the message, embodies meaning into text and symbols); encoder (agent that transforms the message into signals and transmits the message); and the channel of transmission (cables, instruments, communication infrastructure); decoder or receiver (agent that reconstructs the message); and destination of information (a subject who is making sense of the message, or a device acting upon received information). Communication can only be understood as a continuous and integrated process affected by vertical contexts (the relation between elements of the system as described above) and horizontal contexts (levels of communication, the sequence and the content of the messages) (Mattelart and Mattelart, 1998). The communication process is linear and pre-designed, and it is positioned in a time continuum, hence we have to recognise the potential delays and errors in the transmission that can be attributed to any of its constituent parts. This communication process involves multiple constitutive relations between human agents and machines or technological devices – all existing within organisational and institutional environments comprising departments, individuals and social practices (such as organisational communication or tele-working). This complexity of interrelated agents and entities makes the communication process stochastic, that is subject to random changes that may occur at any point of the chain between the source of information and the destination. Usually, there is no reversal in this process, and the feedback loop from the receiver to the sender is exposed to the same stochastic influences. The feedback in a communication process or the response and reaction of the receiver merely increases the complexity of the communicative act and the communication process overall. A communication process usually assumes a dyadic relationship. However, it may involve multiple actors, connected in a number of different scenarios: a single sender and a single receiver (one-to-one communication), a single sender and multiple receivers (broadcasting), multiple senders and a single receiver (collecting information), or multiple senders and multiple receivers (crowd communication). When a receiver of one communication link forwards the information to a third party, then a communication chain emerges. Dyadic communication links may extend into communication networks when receivers of information (or resources) interlink to other actors and build an extended web of communication links. The communication web may comprise either direct links to multiple receivers (as in mass media broadcasting and in advertising), or multistage and indirect links through intermediaries (as in relationship marketing, and the ‘word of mouth’). At a macro-level of analysis the communication system is seen as comprising two sub-systems – one responsible for collecting information and the production of a message, and another for its distribution. Each subsystem
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comprises actors with various roles or companies that specialise in different operational fields. For the media sector specialisation of firms may include content design, recording, broadcasting and dissemination of information, audience rating, advertising, regulation and arbitration. Some of these roles are connected by input–output relationships within the communication value chain. Others represent intermediaries that connect to the main value chain of information processing at different points and hence affect the process by generating additional value or extracting value from it. The communication system therefore is seen as a heterogeneous population of firms that form a complex network of interconnected actors with various roles and influence on the communication process. This system exists both at societal level and at firm level or network level where information is produced for management purposes and distributed according to strategically designed communication channels. The implications for the communications that take place between firms in general are that their exchange of information and their relationships are subject to various effects from people, communication channels, communication devices, technologies and the communication system as a whole. All elements of the communication process, described by Shannon (Shannon and Weaver, 1949), are an intrinsic part of the focal relationship and bring information transparency as well as noise, disruption and potential errors in interpretation. Both the messages and the noise and errors can be multiplied by the network effect, where the firm broadcasting the message may lose control of the communication process it generates. To summarise this overview of the communication theory: inter-firm communications are intentional, they bear the human choices and designs and the interactions with non-human entities (devices, technologies, norms and codes), and they can be investigated both at a dyadic and at network level. The essence of communications between firms resides in relational and interactive processes comprising multiple social components such as: developing shared frame of reference, exchange of information within this frame, learning, support of the exchange of other resources, joint monitoring and evaluation of the relationship, and the information accuracy and transparency. In this rich context of the interactive processes at inter-firm level physical, cultural or technological proximity facilitate smooth communication. An interaction process may include multiple communicative acts and information exchanges between interacting parties. A communication process also may include multiple micro interactions (for example, between human beings and communication devices). Communication and information exchange are not equivalent to interaction. While communication is described by linearity and feedback, interaction includes a range of activities and behavioural responses by the agents involved. Interaction is defined as an exchange of information and other resources between at least two actors who act as both senders and receivers in
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turn, and the change of roles is reciprocated by the parties. Interaction is also defined as a situation of direct communication where two or more actors exchange meaning and experiences (Simmel, 1950). Weick (1979b) defines interaction as a ‘contingent response pattern’, where an action by actor A evokes a specific response from actor B, which further causes a response by A, and so on. Weick (1979b) also argues that this double interact is the basic element of organising – a social process between interlinked actors. Price signalling in market exchanges can also be regarded as an interaction since the price is often determined on the basis of the seller’s evaluation of the attributes of the buyer, and therefore can be regarded as a contingent response (Forbord and Kvam, 2002). If, based on price signalling and customer preference, an instantaneous market transaction is not possible, then there are two scenarios that may occur. One is when the buyer or the supplier exit the situation, and the other is when a further communication process emerges between the two actors and they negotiate specific terms and conditions for the exchange. This communication and information exchange transforms the initial interaction into a thick process of interacting that subsequently establishes a market relationship between the two actors, sharing information and expectations. This is different from the initial relation, that is the association that has emerged when the two actors joined the market place. Negotiating a transaction is a relationship as well. Promising after-sales services for on-the-spot transactions is also a relationship as it raises expectations for future interactions. Interactions between firms comprise: negotiations of terms and conditions; information exchanges concerning firms’ needs, capabilities and production strategies; and coordinated activities between firms and resource exchanges (Cunningham and Homse, 1986; Håkansson and Snehota, 1995). These interactions at some point consolidate into a relationship that constitutes a framework for further interactions and exchanges between the business actors. Business relationships therefore represent both the interactions and the norms (or frameworks) of interacting, established by the partners. There is an interesting conceptualisation of business interactions as ‘thin’ market interactions based on the price and preference mechanism, and ‘thick’ interactions encompassing knowledge and information flows, and the joint development of resources (Forbord and Kvam, 2002). Thick interactions and embedded transactions assume a relationship and an agreement between the actors through which collaboration and mutual exchange take place. An in-depth analysis of interactions tends to assume dyadic relationships for simplicity. Triads represent a more complex form of interacting where information and resources from a dyadic exchange transit to a third party, therefore creating a field of shared communication between the three agents. This transitory function is also applied at a network level between a set of interlinked agents or connected relationships. In Figure 4.2 the main dyadic link is called a focal relationship which develops the past history of interac-
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Future relationship Past relationship Focal firm
Focal relationship
Direct counterpart of the focal firm
Connected relationships Indirect counterpart of the focal firm
Indirect counterpart of the focal firm
Figure 4.2 Interconnected relationships.
tions and future expectations. All the past, the present and the future of a relationship are affected directly by the choices of the two actors, and indirectly by the other connected counterparts (Figure 4.2). The transitory effect is both ways: from the focal relationship to the connected relationships, and vice versa, or from the third parties to the focal actors. The transitory effect described for a triad or for interconnected relationships explains the main mechanism of transitivity that also produces the global network effect. The transitivity has been most successfully studied under the structural approach where much of the details of dyadic relationships are ignored. The specific relational outcomes from the interaction process both within dyads and within the network emerge at three levels – meaning, relationship, and society (or community) (Simmel, 1950; Berger and Luckmann, 1967). At the level of meaning interacting partners develop a common understanding, share knowledge and learn to interpret each other’s behaviour. At the level of relationship partners develop norms and shared practices how to participate in joint activities, including transactions and communicative acts. At the level of society, wider synergies develop including trust, security and general attitudes to cooperation. While the concept of interaction implies a voluntary contribution of information, the concept of exchange means a calculated gesture of a resource exchange between firms (including information exchange). Transaction is yet another concept which is defined as an exchange of goods or services that are paid in equivalent value. Hence there is a progression from an interaction to an exchange and to a transaction in terms of rational calculations and measurement of value, costs and benefits. All three concepts – interactions, exchanges and transactions – imply a bilateral relationship and
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an agreement between the exchanging parties. The three concepts also assume an action by each partner. In contrast to this proposition the cultural approach in network theory has identified that relationships exist also when actors are non-human (technologies, societal institutions, norms and other cultural artefacts). The nonhuman entities and elements act upon human actors by imposing certain frames and conditions on the interactions. Non-human actors can frame the choices of the human actors and determine their activities. An example of such dominant imposition of a technology is the GSM technology in telecommunications that has induced strategic choices by mobile operators and communication hardware providers or other business actors in the mobile communications industry, and as such the GSM technology has framed the restructuring of the value chain in the entire sector. This framing and effect is, however, not because objects and non-human actors can impose themselves and their will, but because human actors employ these objects and identify and recognise their attributes as essential. Technologies and cultural artefacts remain a resource employed by firms and human actors that could frame and lock human actors in specific developmental trajectories. The exchanges and transactions do require at least two interacting agents to complete the exchange. These agents not only know each other, but they send and accept information, make agreements and exchange resources in a repetitive way. Non-human actors can be involved in interactions or employed to facilitate exchanges. They themselves do not possess resources that can be exchanged. Their resources are their attributes which are engaged or employed by human actors or what is described by Callon (1986) as actors rendering themselves to a relationship. The concepts of relationships, exchanges and transactions, however, can not be used interchangeably, as they refer to different levels of association. A relationship implies interaction and association between human actors, while transaction implies socio-economic exchange of resources. Relationship is implicitly defined via the participants in it, while the exchange is implicitly defined via the resources exchanged – information, goods, services, payments – all measured via specific exchange value as a reference point. Interactions and exchanges can be treated as a similar level of association between network actors, as both are based on reciprocated behaviour. Both include sharing of resources, trust, commitment and shared expectations. Once a relationship is established, actors learn from each other better ways of communicating and responding to each other. They can adapt to each other, and their combined efficiency can be improved by generating innovation and added value from the relationship itself (Lundvall, 1985). This mutual adaptation and added value is the primary function of network relationships. It is exercised through interlinked activities, through leveraging heterogeneous resources and through mutuality based on self-interested
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actors (Anderson et al., 1994). Business relationships are hence various business connections, interactions, exchanges with individual or organisational participants. Business relationships employ technologies and various heterogeneous resources in partnerships and repetitive transactions that bring economic value to each actor in the partnership. The complex picture of business relationships has been addressed by empirical research both within the structural/positional and the relational approach. Within the structural approach, the main dimensions of network relationships are content, intensity, frequency, durability and direction. The content is usually specified by the data collection procedure and is assumed to be homogeneous across the network, varying in intensity or multiplexity. Intensity is measured by the recorded frequency of interactions and exchanges. Multiplexity is measured by the reported multiple contents, namely friendship, advice, payment, and so on. Durability is measured by the length of the relationship on a time scale. The category of direction distinguishes between unidirectional, bilateral and multilateral relationships (Figure 4.3). The level of information and resource sharing can be measured only in relative terms and as individually perceived by different participants. The nature of the bond and the multiplexity of the relationship is more difficult to capture at both a dyadic and a network level, and the relational dimensions discussed further on in this chapter offer a conceptual framework for this analysis. The discussion aims to contribute to the in-depth analysis of relationships and to establish a broad conceptual framework for comparative studies at dyadic and global network level.
focal firm
Figure 4.3 Multilateral relationships.
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Emergence of relationships between human actors Regarding social relationships, there is a very rusty question in social network analysis – If I know you, but you don’t know me, are we in a relationship? In other words, is reciprocity a requirement for a network relationship? Links between actors can represent only unilateral associations and do not necessarily form exchange relationships. However, they do represent an association between actors and therefore they resemble potential exchange relationships. Linking with other actors is effectively building the social infrastructure for exchange relationships. It is a matter of choice and design by human actors – who to link with and who to link to whom. Subsequently decisions are made regarding the content of the relationship, and the coordination and control over the exchange processes that gradually emerge between interlinked actors. The entire process of emergence and evolution of relationships is described in Figure 4.1. The process of networking between actors (human and non-human) can be conceptualised in six progressive stages (Figure 4.4). The initial stage includes loose associations. Actors may be associated with each other by their attributes, or by their co-presence in a field (such as an industry, location of the business or a market place). They may not even know each other, but collectively they would be exposed to the same environmental conditions, and may be associated with the same industry, technology or an institution. Initiating a link is another stage of the evolution of relationships and it represents a pre-relationship stage when one of the actors approaches
POTENTIAL RELATIONSHIP
Co-presence in a field
Relation/association between subjects and objects
PRERELATIONSHIP
Initiating a link (including learning about the other)
Knowing someone or something
INTERACTION/ Establishing a relationship Mutual recognition COMMUNICATION (including certain between human actors, LINK reciprocity) or interaction with objects DYADIC MARKET RELATIONSHIP
Market transaction (including agreement)
Single exchange of resources between human actors
LONG-TERM RELATIONSHIP
Repetitive transactions (including a partnership agreement)
Repetitive exchanges, employing an object into a process
NETWORK RELATIONSHIP
Interconnected relationships Community exchanges (including transactions and interconnected and resource flows) processes
Figure 4.4 Emergence and levels of network relationships.
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another to acquire information and to open a communication channel. Although this situation represents a non-reciprocated link, it shows the emergence of a unilateral relationship. At the third stage of evolution of relationships the initial link triggers a response by the second actor, and this corresponds with a mutual recognition of the partners. At this stage partnering actors start to communicate, to exchange information, and potentially to negotiate future joint activities and resource transactions. The fourth stage represents an interaction where the communication link has evolved into a shared experience, repetitive exchange of resources and transactions. There is a subtle distinction between exchange of information in a communication tie (i.e. the third stage of mutual recognition) and exchange of resources – based on a contract or agreement between the two actors at the fourth stage. A market transaction or a single exchange of resources represents a relationship that has passed the negotiation stage, and the two actors are prepared to make resource commitments towards an agreed objective. An example of this type of link between actors is a market relationship or a single act of collaboration. If actors extend their agreement beyond the initial exchange, then a cycle of activities and resource commitments arise between partners underpinning a repetitive dyadic relationship – described at the fifth stage. Most of the literature that contributes to an in-depth analysis of collaborative business relationships brings insights into such repetitive dyadic relationships. Finally, the sixth stage of evolution of relationships represents a network of interlinked relationships and communication exchanges in the sense that the exchange between A and B affects the relationship that B has with C, which further influences how C manages its relationship with D, and so on. Value-chain networks, commodity and supply chains, and community networks are examples of interlinked network relationships, where inputs from one firm affect the operations and outputs of another, which transits further upstream towards the final market realisation of a product or a service. Interlinked network relationships have multiple forward, backward and crossward links that cut across the relational set. Under the relational approach ‘connected relationships’ such as network relationships are defined as a situation where an exchange in one dyadic relation is contingent upon an exchange in another (Cook and Emerson, 1978; Emerson, 1981). Connected business network relationships also represent a global network level of interconnected actors resources and activities. The composition of the business network emerges as a system comprising two layers – the level of dyadic relationships (or a primary network function), and the level of interconnected sets of relationships (or what is known in the literature as a secondary network function and global network composition). At the first level of analysis partners share resources in dyads. At the second level new phenomena emerge, such as chains of resource flows, a common communication infrastructure and a common network of activities.
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Relational dimensions Although the relational perspective has developed a large pool of conceptual frameworks for studying dyadic relationships between buyers and suppliers, there is very little consensus on the definition of a relationship, its dimensions and the theoretical underpinning of the A–R–A model. One of the most comprehensive definitions is by Wimmer and Mandjak, who define business relationship as a process of bounded interactive exchange episodes, where exchanges of products/services, information, finance or social affiliations take place between actors and groups of actors (Håkansson, 1982; Ford, 1990; Ford et al., 1998; Wimmer and Mandjak, 2003). There is a wide acknowledgement that relationships satisfy particular needs of firms. Even the largest conglomerates can not produce everything by themselves and need input of resources, intermediary products and business services. All firms that specialise in a particular product field are connected to supply and distribution chains, and the resource-dependence theory and the knowledge-based theory of the firm explain well how firms accumulate and exchange resources across the value chain. In addition to satisfying resource needs, relationships have cognitive and affective dimensions as individual representatives of the firm are involved in these relationships and experience varying level of satisfaction with their partner. Relationships generate affective and cognitive responses or learning for all partners. These responses become an intrinsic part and an attribute of the relationship itself that has generated them. When Håkansson and Johanson (1993) introduced the A–R–A model for network analysis, they introduced two new dimensions – the dimension of shared activities and the dimension of resource flows, both being intrinsic aspects of the network linkages between actors. Resource links and activity links can exist only between actors who commit resources and participate in joint activities. Hence resources and activities can be interpreted as relational attributes that extend the network bond beyond its interaction stage. The discussion on the nature of business actors from the previous chapter also introduced a number of dimensions of relationships affected by actors’ attributes such as: incentives that drive choices and decisions; role, status and identity that position an actor vis-à-vis other actors; value of the exchanges determined by market prices; and actor costs. Many of the empirical cases of buyer–supplier relationships reveal the importance of relational content and context that varies in different relational episodes, and the framing of the exchange situation by actors. Each of these dimensions is a sphere where different processes take place and different theories are needed to explain the dynamics over time. All these key aspects to a business relationship and relational attributes are synthesised in Figure 4.5, and are discussed in more detail below – mapping the multi-theoretical field of relational analysis.
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Value
Needs, incentives and preferences
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Resources and capabilities Behaviour and activity
Framing Relations Content Bonds Links
Cognition
Role and status
Identity
Affection and trust
Figure 4.5 Relational dimensions.
Relational needs, incentives, preferences Actors approach each other seeking specific outcomes – either personal benefits, or altruistic rewards. Social relationships are driven by the basic need to communicate, to learn, to integrate with the society or the economy, to express oneself. Although needs are very much actors’ attributes, they evolve through relationships and are shaped by relationships. Needs become relationship specific when actors associate specific needs to be satisfied by specific relationships. Business relationships are generally driven by the need of actors to access certain resources, to engage in a market realisation of products or services, to generate income, or just to do business with another actor. Relationships with non-human actors, objects, technologies and socio-cultural artefacts are also driven by the needs of human actors to achieve specific objectives and to realise certain opportunities. The behaviour and choices of business actors within a relationship is triggered also by specific economic incentives or motives and social preferences that are framed within the context of all established and potential relationships. Individual needs and incentives generate relational preferences and as such they become an intrinsic element and an attribute of the relationships. Monge and Contractor (2003) have synthesised a number of social theories that describe behavioural mechanisms that drive communication processes and individual behaviour towards a collective action. Among the main theories that aim to explain why individuals seek each other and engage with each other and the motives to start a relationship and to
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exchange information between each other are the theories of self-interest and the cognitive theories. These theories are discussed in this section as they refer to motives that are enacted only in a relational context. Among the self-interest theories are transaction-cost theory (discussed in Chapter 3), social capital theory and structural holes theory. The fundamental mechanism underlining all these theories is the individual value maximisation assumption suggested as the main driver for people’s preferences and choices. According to this assumption, individuals are able to make rational calculations of their costs and benefits. Individual actors are assumed to exhibit a general efficiency orientation to minimise costs and maximise benefits. The social capital theory builds on the same assumptions and argues that social capital is a unique resource that is acquired and invested via relationships, and, hence, individual actors build relationships in order to increase the value of their social capital. According to social capital theory individuals also aim to maximise their relationship potential and hence to maximise the accumulation of social capital (Coleman, 1990; Burt, 1997; Lin, 1998; Monge and Contractor, 2003). The social capital can then be transformed by individual actors into new opportunities to achieve one’s own objectives. Burt’s structural holes theory (1992b, 2001) fills an essential gap in the social capital discourse, mainly by explaining the relational opportunities that emerge from identifying unconnected actors and isolates possessing specific human capital. The structural holes mechanism is employed in connecting the isolates to other actors by matching their interests and needs where the intermediaries control the information and communication flow and the value capture within the newly established communication links. The actors that operate as facilitators and intermediaries and take advantage of the structural holes mechanism are called network brokers or network entrepreneurs who design the network and control the communication processes within it – driven by their own self-interest. The structural hole theory predicts that connecting to and enrolling new actors bring value both to those network entrepreneurs that actively connect others, and to the rest of the network. There are individual firms that attempt to connect themselves to others without intermediaries. These actors have the opportunity to shape the communication process and to frame the relationships by themselves. Needless to say both social capital and structural holes theories exclude even the possibility of altruistic behaviour and motives that often emerge in a social context. In uncertain situations when the self-interest can not be calculated the social capital mechanism is reduced to an effort to minimise the risks. The maximising behaviour in the self-interest theory represents the incentives school in social theory and reaffirms the efficiency paradigm to relationships. One of the most influential among the cognitive theories that explain motives and drivers for seeking relationships is the social comparison theory
Relationships in business networks 101 (Festinger, 1954). It assumes that people interact with each other as they are driven by their needs to test and confirm their perceptions and knowledge of the reality. This is a very powerful motive and a relational mechanism which is employed to compare and contrast individual status, role and position, in order to derive at some notion of identity and self-awareness. Actors compare their own costs and benefits from transaction and relationships and contrast them with those of their partners. Actors make a value judgement on the relationship itself based on the social comparison mechanism. Social comparison also drives individuals that have similar attributes and resource needs to participate in the same activities, such as trade fares or street markets. This is known as the ‘band-wagon’ effect. Actors seek to connect to similar others in order to confirm certain aspects of their own identity and legitimacy – for example, membership in Chambers of Commerce. Although these mechanisms have been developed within social psychology, their application to business actors is evident through how firms handle public relations and why they seek professional membership with specific business associations. Overall the social comparison theory highlights motives that are relational attributes and emerge only in relational context. Another group of theories that explains the mechanisms and driving forces that induce communicative behaviour are homophily, proximity and social support theories (Monge and Contractor, 2003). The homophily principle suggests that actors select similar others to ease communication, to increase predictability of behaviour, and to enhance trust and reciprocity (Brass, 1995). The argument in this theory is that actors aim to reduce the potential psychological discomfort that may arise from cognitive or emotional inconsistency. Similarly, an information input which is consistent with actors’ own observations provides individual actors with a basis for legitimising their own social identity (Monge and Contractor, 2003). The physical proximity effect is based on the same principle as homophily theory, projecting that the probability of a link between actors increases with the increase of their physical proximity in co-location. Even in virtual networks where electronic proximity is blurring the distance in time and space and is enlarging accessibility of actors, physical proximity matters, as it determines the localised knowledge context. Proximity economics, for example, explains geographic agglomerations of firms through their need to achieve economies of scale and economies of scope through learning, synergies and resource advantages. The resource advantages are accrued through the use of geographic proximity, as well as organisational, technological or cultural proximity in forming relationships. Proximity theories develop the argument that proximity in a relationship alters not only the intensity but also the structure of the motives, where individual motives are transformed into relational ones. Social support theories explain that the search for support by firms is a leading motive in selecting partners. In the same way as individuals seek social support from social circles of people with whom they share interests
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and common characteristics, companies seek their business circles where they can find business support and synergies. Many small businesses seek support in business clubs, professional circles or other collective gatherings where information sharing and collateral learning takes place via social network relationships. Kadushin (1983) identifies that membership circles fulfil at least three functions – they are a source for help; they facilitate the mobilisation of collective resources; and they convey status and immunity through a collective address of actors’ problems. All theories mentioned above describe different motives that underpin seeking relationships and drive individual choices of partners. As these motives emerge in a relational context, they expose relational attributes, or what drives the behaviour of partners in relationships. These theories have to be considered in conjunction with the theories that explain the economic behaviour of firms described in the previous chapter. All motivation theories explain actors’ behaviour in networks and in relationships. All motivation theories are focused on the actors’ needs, preferences and choices. There is however, one additional element that frames behaviour at its inception. This is the concept of mutual orientation. When actors meet and commence a relationship they express a mutual orientation in order to start the communication process. There is very little recognition of the fact that mutual orientations are fundamental to establishing a relationship and that they shape the framework and context of that relationship (Johanson and Mattsson, 1986; Easton, 1992, 1997). Mutual orientation is not only actor specific, but it is also situational and relationship specific, and carries both the existing individual attitudes and beliefs towards partnership and cooperation, and the relational constraints that arise from the initial relational episodes. Mutual orientation establishes a platform where motives, drivers and incentives are modified under interactions and negotiations between the partners. Mutual orientation between a buyer and a seller, for example, is framed by their individual resource needs and preferences, by their individual business experiences, and by the situation when they negotiate the contract. Once the relationship is framed and mutual orientation is established, then the individual needs, incentives and motives become associated with the particular relationship. As part of the same process the individual needs and motives undergo deep transformation as they are negotiated in the relationship and as such they become a relational attribute. The orientation between a human actor and a technology (or other cultural artefacts) is unilateral in a way that the human actor has made a choice and expressed a preference of this technology. With this choice human actor has made the technology accessible to the network. And yes, the human actor may be conditioned by some cultural artefacts to choose this particular technology, but this conditioning is primarily part of the human nature and an attribute of the human actor. In cases of adaptable technologies and adaptable systems this conditioning may apply to non-human actors as well,
Relationships in business networks 103 and the fundamental question there is whether the adaptability of cultural artefacts and non-human entities is pre-designed or emergent. Further studies on mutual orientation between business actors will enhance our understanding of networking and relationship management and will be an essential extension to network analysis. Relational resources and capabilities The network of resource flows suggested under the A–R–A model is composed of both exchanged and shared resources. It comprises the individual resources, skills and capabilities of the actors that are used in exchanges and interactions, and the shared resources and social capital within existing relationships. The resource links in networks are interpreted both as individual needs for resources that motivate behavioural choices, and as individual command of resources. Each actor commands specific resources and allocates some of them to specific relationships. Some of the allocated resources are shared, others are given in exchange of goods, services or payments. Accumulated resources as actors’ capabilities and assets represent actors’ attributes. Committed resources and those shared with specific relational partners represent relational attributes that change with the evolution of the relationship. Among the theoretical frameworks that inform research on this category are the social capital theory and the resource-dependence theory. Resourcedependence theory was discussed in the previous chapter as one of the main conceptual tools that explain individual behaviour of firms. The social capital theory has built upon the resource-dependence argument introducing relational aspects to the notion of resources. Coleman (1990) defines social capital as all social-structural relations that are assets, or resources which facilitate actions by individuals in a specific social system. Social capital is jointly owned by the parties to a relationship, with no exclusive property rights for individuals. As such, social capital is entirely a relational attribute. A main distinction is drawn between human capital (based on individual attributes) and social capital (the sum of resources that an individual accrues by virtue of possessing a network of institutionalised relationships, embedded in communication networks) (Bourdieu and Wacquant, 1992). Both types of capital can be put into realisation only through the voluntary will of the actors that possess them (human capital), or through voluntary exchange and interaction (social capital). Firms that have strong connections with the government have a preferential access to lobbying (equivalent to their social capital). They can use these connections as a resource for their own benefit, and they can offer access to lobbying to other firms, hence attracting other firms as partners and subsequently increasing their own social capital and the social capital of their partners. The use of the terms resources and capital suggests that firms can invest in relationships multiplying social opportunities that can generate potential economic value both for the individual actors and for their partners.
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Corporate social capital is an example of resource that can be associated both with individual actors (corporations) and with their partners. It is a concept that originates at macro-level processes that are more than aggregated interpersonal ties maintained by a corporation. Inter-organisational networks can generate corporate social capital in the form of organisational prestige, reputation, status and brand-name recognition (Todeva and Knoke, 2002). For example, companies making philanthropic contributions to health, welfare and artistic non-profit organisations gain prominence and legitimacy in their local community as good corporate citizens, and hence accumulate social capital (Galaskiewicz and Bielefeld, 1998). In some theoretical discussions, corporate trustworthiness constitutes a fundamental type of organisational social capital, a strong-tie relationship between a firm and another member of the industry. A company, for example, builds and reinforces a widespread reputation among its peers for its fair dealing and impeccable reliability in keeping its promises about quality, safety and service (Todeva and Knoke, 2002). Reputation and brand-name recognition are the main examples of corporate social capital that clearly generate value-added for firms, but are difficult to measure. All these examples demonstrate that corporate social capital is a relational attribute, or associated with the inter-organisational relationships. Being a relational attribute, social capital is also an incentive for a firm to accumulate it, and it is a resource attractor for other firms to connect to those that possess social capital. There is clearly a two-way link between incentives and resources. In this two-way link needs are defined via available and required resources and the resource flows are determined by needs and preferences. All relational dimensions are interlinked and the purpose of Figure 4.5 and the efforts to separate the individual categories is to introduce more theoretical depth to each of the relational attributes. Relational behaviour and activities Once a mutual orientation emerges in a relationship, then actors usually begin to act accordingly to what commitments they have undertaken and what are the expectations of their partners. The behavioural dimension in relational analysis is brought by the recognition that within relationships actors behave – that is, make decisions and choices, perform business functions, act and participate in organised activities. Actors also anticipate the behaviour of their partners and act according to the anticipations of their partners. This behaviour is driven by relationship-specific motives and incentives and is conditioned by the relationship-specific resources and capabilities committed by actors. The behaviour is also conditioned by actors’ attributes, and by other relational attributes such as mutual expectations, trust and affection, value or the relational frame. The behavioural dimension (or activity dimension) synthesises the individual actions underpinned by decisions and choices combined with the actions of the recipient partner of
Relationships in business networks 105 the focal relationship, or what we call shared activities. The behaviour of the partnering actors is coordinated and synchronised within the relationship and within the network of shared activities. Relational behaviour is hence more an amalgamation of anticipated and anticipating chains of activity. The behavioural dimension of relationships is another under-researched area. The work by Håkansson and Johanson (1993) and the subsequent implementation of the A–R–A model in relational analysis has contributed much to the interpretation of business functions such as resource procurement, manufacturing and marketing as discrete business activities of the firm, and as behavioural responses to environmental and resource constraints. All inter-firm activities represent shared activities and take place in response to some relational opportunities. However, no underlying theoretical mechanisms have been identified yet to explain the behavioural aspects of relationships. There is no conceptual clarity on what constitutes interlinked activity networks, and how events, episodes and business operations are related to each other in this flow of shared network activities. Distinctive business operations such as procurement, manufacturing, services or marketing represent a chain of activities within the firm. When these operations are outsourced or conducted in collaboration with another firm, then the activity networks of the partners interconnect, sharing task structures, information and resources. One of the ways to analyse the intraand inter-firm activities is through task structures, the sequence of operations and the sequence of events that have occurred in a particular timeframe involving participating firms. Substantial research is needed to enhance our knowledge of managing network activities. Relational cognition Interactions between business partners are driven by specific motives, supported by specific relational resources, that involve a number of cognitive and affective processes. The cognitive dimension is one of the strongest proofs of effective interactions, as it includes all learning processes, dialogues and negotiations between firms that take place. The cognitive dimension is both a prerequisite and an outcome from a relationship and this is why it has been so difficult to conceptualise it. The operationalisation of the cognitive dimension is based on the recognition of the fact that actors acquire knowledge about potential partners in order to choose whom to relate to, to connect to and to trust. In order to make these choices actors engage in a cognitive evaluation of the worthiness of their potential partners. The cognitive evaluation includes learning about and assessing the capabilities of potential counterparts, their competences, cultural proximity, professional credentials, reliability in carrying responsibilities and dependability. The evaluation of a potential partner frames the focal actor’s perceptions, attitudes, intentions and expectations.
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In addition to the cognitive process of partner evaluation, there is a cognitive process of learning from the partnership, developing and accumulating knowledge and practice. Both processes can take place only in a relationship and interaction between partners, and hence appear as relational attributes. Research of the cognitive dimension of relationships has been informed mainly by various learning- and knowledge-based theories underpinned by cognitive psychology and various disciplines within linguistics. Much of the cognitive theories explain the roles of perception, meaning and knowledge in the communication process at a dyadic and at network level (Monge and Contractor, 2003). Research on the cognitive aspects of communication dominates the field. In order for the communication process to take part actors build a semantic link based on shared understanding and interpretations. These shared interpretations and understanding and the semantic link itself are the building blocks of the cognitive dimension in relationships. The fundamental assumption in cognitive theories is that human beings have a natural aptitude and cognitive orientation towards the external world which drives their actions. These actions are object-oriented (acquiring information about objects), subject-oriented (interacting with other human beings) and process-oriented (acquiring information of and participating in processes). This means that naturally human actors are attracted to learn about objects (resources, technologies) from their external environment, to acquire and share information with subjects – human actors or potential partners – and to design and participate in various processes that assist their learning and enhanced cognition. The distinction between cognitive dissonance theory and cognitive consistency theory is in the mechanisms that operate at individual level (Monge and Contractor, 2003). The first theory emphasises that individuals seek novelty of information, while the second theory highlights that individuals seek information that fits, or is consistent with already possessed knowledge. Research has concluded that both mechanisms can be complementary, and both can operate at individual and dyadic levels. Both mechanisms can shape simultaneously the individual choices: the choices of subjects (who to learn from and with), the choices of objects (what to learn about) and the choices of processes (what to participate in). It is a very difficult question as to how these mechanisms operate at the global network level with multiple interlinked actors and interconnected relationships. Cognitive processes start at the very beginning of forming a relationship when actors are still loosely associated in a common place, such as a market or a trade fare. Actors collect information about each other which assists them in making decisions on prices and choices for partnership. Cognitive processes further intensify with the intensity of interactions and with the complexity of the network relationships. Relationships and interactions generate semantic convergence which spreads from a dyadic level to a network level. Research shows that the depth of the semantic link between
Relationships in business networks 107 actors is positively related to the intensity of communication activities between each pair of actors in a network, and is inversely related to the individual’s inertia or ‘strongholds’ of opinions and attitudes (Monge and Contractor, 2003). Research on cognitive processes and networks has attracted substantial academic interest and is one of the leading perspectives on network analysis. Relational affection The affective relational dimension in the literature is referred to as the emotional investments people make and the emotional responses in interactions – the feelings of security, trust and faith in partners’ behaviour, and the personal care and concern for partners (Lewis and Weigert, 1985; McAllister, 1995). Relationships between firms involve individuals that make decisions and choices on behalf of these firms. It is these individuals that experience affections associated with the relationships. These affections, in the same way as the cognitions, influence actors’ decisions not only within the particular partnership but also within other connected relationships. Among all indicators of affectional bonds, trust is the most researched one. At a firm level of analysis, trust has been associated with positive experiences and expectations of the transacting parties. The literature suggests that trust reduces the perceived risks in undertaking future transactions (Todeva and Knoke, 2002). To the extent that trust substitutes for more formal control mechanisms, such as written contracts, a partnership which is based on trust can reduce or mitigate paying several types of transaction costs – that is, searching for information about potential partners, and monitoring to ensure that each party meets its obligations (Gulati, 1995b). Based on the self-enforcing foundation of inter-firm trust, far less costly protections are available to firms. There are many more emotional responses that actors exhibit in relationships that have not attracted much attention. Examples are the emotional security and faith that can be experienced only in the context of a relationship. Psychology of emotions and personal traits theory both have been neglected in network research and they certainly can contribute to our understanding of affections that emerge in relationships and have an impact on relational dynamics. Relational identity Although identity is one of the major actors’ attributes, it is strongly affected by the relational dynamics in partnerships and, as such, emerges as a relational attribute. Actors may carry multiple identities and only some of them are enacted in a particular relationship, and as such become relationship specific. Actor identity and network identity both develop as
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self-perceptions (or how actors perceive themselves) and as social perceptions by partners. Firms develop perceptions of their partners through direct communications or indirectly through sources of business information that communicate identity information. Firms start business relationships and negotiations of transactions and exchanges only after they have learnt about their counterparts via some legitimate source. An example of a legitimate business source is a business directory with a list of firms. The listing of a firm in a business directory not only gives information about the firm, but also attributes legitimacy and identity to it. Firms’ identity is the initial piece of information that is exchanged at the initial stage of building an inter-firm relationship – who you are (name and address of the firm) and what you do (business portfolio). After negotiations start, firms can put on the negotiation table their ‘credentials’ (licences, certificates and awards received), their reputation (market presence, a list of customers and partners) or other individual attributes that define the corporate identity. Indicators such as market value, and share price contribute to the company’s identity, but have to be accompanied by social/institutional recognition in order to secure respect from partners. The list of clients serviced by a firm is one of the most powerful attributes of firms’ identity that demonstrates social recognition. The relational identity derives from the shared perceptions between interconnected actors and their shared reflections from joint activities and repetitive transactions. While individual identity of actors drives the process of selection of partners, once a partnership is formed, actors communicate to each other various aspects of their identity, and start to recognise each other in this particular context. It is this recognition that generates the relational identity that emerge within the dyadic relationship. Network identity emerges through a similar process of interaction, awareness and knowledge shared across interconnected relations. Network identity resembles a symbiosis of individual perceptions and self-perceptions of actors participating in multiple other relationships. Network identity gives actors the feeling of inclusion, reliance and support, or a shelter from competitive forces and environmental uncertainties. Overall the identity of network actors and their partners determine future relational choices. Both the actors’ role and identity can be a prerequisite for forming a partnership and an outcome from this partnership. Particular identity may attract partners, or may be attributed to actors as a result of successful partnerships. Apart from the theoretical work on identities in sociology there is not much research that can explain how business relationships are affected by the identity and legitimacy of firms. This is another challenge for future research on relational analysis.
Relationships in business networks 109 Relational role and status The role and the status of individual actors are both actors’ attributes and relational attributes to the extent to which they are negotiated between partners and are accepted as symbols of the relationship itself. There might be generic roles that are an intrinsic part of the identity of an actor. However, there are specific roles that the actors perform as part of the exchanges and interactions within a focal relationship. These specific relational roles are recognised by the partners and exhibit a normative effect on the relationship – framing mutual expectations and suggesting appropriate behaviour. An individual actor has a different standing and status in different relationships. In some relationships the actor could be a dominant partner with high status, in others it could be an inferior partner with low status and low bargaining power. The relational role and status are attributes of a specific dyadic relationship of the partners and they can form part of other network relationships in terms of reputation and public visibility. This aspect of the business relationships is also significantly under-studied and needs research efforts both at empirical level and at conceptual level, bridging strategic management theory and behavioural sciences. Relational content – links and bonds The content of a relationship is determined primarily by the two partners involved in it. Both actors usually define their individual preferences and exchange information about their intentions. The content of a business relationship includes: a) the individual intentions of the partners, their aims for the collaboration; b) the interactions, communications and exchanges of information or other resources between actors; c) the negotiated strategy for partnering, including the formal and informal contract agreements; and d) the business transactions resource flows that take place within the relationship. The content, directionality and intensity of a relationship depend on the actors’ individual intentions and strategies, and how each actor perceives the partner’s intentions and strategies (Chwe, 1996). At present there is no systematic research on companies’ intentions. The content of the communication between business partners has been researched with more depth. The content of a message between two actors is determined by the elements of the communication process and particularly the intended meaning by the sender and the interpreted meaning by the receiver. Usually in the literature communication links are referred to as evidence of existing relationships which represent minimum commitment. It is important to stress that companies that talk to each other may not do business with each other, and the content of their relationship will lack any business transactions. Transactions have to be negotiated first, which brings another dimension to the relational content.
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The negotiated strategy for mutual cooperation involves a formal or informal contract between firms. This contract frames the relational content and determines mutual obligations, resource flows and activity links. Individual strategies are introduced to the negotiations which have to end with a common and collectively negotiated strategy and an agreement for a collaboration and joint operations. The nature of the agreement is an essential part of the relational content. Companies that negotiate transactions from a distance exhibit minimum transaction costs if they can trust their partner. Negotiations usually end with some agreements that support transactions and exchanges between firms. Both partners independently assess the transactions and the relationship itself, and respond according to their own assessment with trust, resource commitment, loyalty, desire to extend or to shorten the contract, to change it or to preserve it as it is (Brass, 1992; Knoke and Guilarte, 1994; Casson, 1997). It has been recognised that in many multilateral agreements details of interactions can not be specified. Many of the partner obligations in multilateral agreements are assumed and only agreed upon in principle. Many contracts of this type include informal agreements called relational contracts. Relational contracting embraces usually unspecifiable terms and conditions in complex and open-ended contracts (Doz et al., 2000). Formal business contracts do represent relational bonds of different types – legal, informational, economic, social, technical, logistic, administrative, operational, knowledge-based. These bonds can be made in a single contract, or in multiple contracts between the same partners. Some could be explicit, while others can be implicit or informally agreed. Harrison (2000) distinguishes also between ‘contract-in-law’ and contract-in-fact’, where the first represents a physical document text that embodies details of the agreement, and can be used for legal purposes. The second type captures an existing practice that is already in place and is used as a reference point by the partners. The relational practice established between transacting partners includes bonds and linkages – aimed at transactions and joint activities and underpinned by a set of resource flows and exchanges of knowledge. This description of a relational practice explains the essence of the concept of multiplexity used in social network analysis. The concept of multiplexity refers to the existence of multiple forms and layers of exchanges that take place in parallel within a single dyadic relationship. These multiple layers are generated by a multitude of formal/informal agreements, external and internal codes of practice and multiple activities and relational episodes. It is essential to note that all these exchanges and interactions can represent both symmetrical and asymmetrical relationships, and in the course of the relationship they develop as mutual dependencies. The longer the relationship exists the stronger the dependencies between partners that learn to rely upon each other. The research on transactions and on resource flows in partnerships is still in search of theoretical underpinning.
Relationships in business networks 111 All conceptual frameworks that address the question of relationship content give only a snapshot of different issues from different angles. It is important that research is continued so that a more coherent picture can emerge. Relational framing Each relationship is a result of the strategic choices and decisions made by the actors, and any behavioural effects from intermediaries that have linked the focal actors. The strategic choices of the partners and the active interpretations of individual roles, responsibilities and resource commitments represent the relational frame or the subjective definition of the relationship and its boundaries. The relational frame exists as perceived by each individual actor and in the context of some institutional norms and conventions such as contracts or informal collaboration agreements or a promise by the partner. Relational frames can be individual or shared and agreed upon. They can be intrinsic or incorporated in more formal agreements and contracts. The frame itself is a subjective expression of how individual actors perceive and interpret the relationship. Relational frames are embedded in relational contracts and hence are part of the relational content as well. Relational framing is a process of deliberation between partners in which they share their individual cognitive and affective perspectives and derive at a specific relational frame embedded in their agreement. This relational frame changes under the evolution of the relationship. The evolution itself is associated either with changes in the content of the interactions or changes of the relational context and frame. Frames are used as a reference point or a milestone in the evaluation of a relationship. At a point when the relationship itself does not satisfy the expectations of at least one of the actors, this actor starts a process of renegotiation of the terms and conditions for the relationship. Changing the terms and conditions of the relationship is effectively changing the relational frame and as a result of this change, actors need to adopt new roles with further impact on the relational content and context. There is very little research on relational frames and it is informed by organisational theory, cognitive theory, the organisational behaviour theory, studies on organisational boundaries and studies on the impact of interpersonal negotiations and agreements. Further research is essential to enhance our understanding of the process of relationship management by framing and negotiation of relational boundaries. Relational value Each relationship brings value to its beholders or to the interconnected actors. The value of the exchanges and interactions that take place in a
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relationship is judged individually by the participating actors, and it is subjective by nature. It is based on individual perceptions and judgements. The perception and evaluation of the relational value and the economic self-interest of each business partner is affected by a number of relational processes such as the social interactions that take place, the satisfaction with the relationship, the social comparison that individual partners undertake, and the legal-ethical norms and moral values that derive from the wider socio-political environment but are shared by the partners. The perception of relational value is a catalyst to any decision for cooperation versus competition. The literature confirms that decisions to maintain a collaboration are associated with positive relational experiences, while exit strategies from a relationship are induced by deterioration of the perceived economic value beyond a certain threshold (Hirschman, 1970). Tolerance and loyalty to stay in a relationship are affected more by social, political and psychological factors (emotional affiliations, partners’ identity, perception of each partners’ dependence on the relationship and evaluation of partners’ response towards interdependence) rather than by perceived economic benefits. Empirical research confirms that perceived value is directly affected by psychological factors such as relationship commitment (Dean et al., 1996). According to the authors, relationship value and profitability correlate both with commitment (as a driver) and with durability and longevity of the relationship (as perceived outcomes). The real relational value is contingent upon the psychological attitudes of actors and the ability of each actor to capture value by learning and adaptation. Another essential aspect of the relational value is that it can be assessed only in relative terms – that is, compared either with the two partners, or compared with the value from other relationships that each actor is involved in. The relative value of a relationship for each of the connected actors determines potential asymmetrical interdependence, and may affect each actor’s choices and responses to the initial relational conditions (Gassenheimer et al., 1998). If an actor perceives a low value from a particular relationship, this actor may decide to reduce its commitment, therefore creating asymmetrical interdependence. The same asymetrical effect is produced by extremely positive perceptions that do not correspond with the real value of a partnership. This distortion effect is intrinsic to the relational value judgements and represents one of the main challenges to managing business relationships. Although value judgements are subjective and can be made only in relative terms, they can also be operationalised and measured to some extent. Authors propose two different ways of measuring relational value. One is via information and calculations based on the economic and social benefits from the relationship minus individual actors’ costs, and the other is through assessment of the extent to which relational objectives are achieved. Verna Allee (2000) argues in addition that there are three currencies that measure acquired value by firms:
Relationships in business networks 113 1 2
3
real and financial value – goods, services and revenue – measured via economic transactions, contracts, invoices, return receipts, orders and various confirmations of payments; knowledge capital – measured via exchanges of strategic information, technical know-how, planning processes, corporate policy developments, collaborative designs, and support of core products and services across the value chain; and intangible assets and benefits such as customer loyalty, brand value, corporate image, community relationships and partnerships.
An essential argument in Allee’s conceptual framework is that if we identify good indicators for measuring relational value, potentially this can be incorporated in the balance sheet of a firm. All three ways of measuring value derive from three relational foundations: (a) buyer–seller relationships (where contracts, orders and invoices capture real value of transactions and payments); (b) sender–receiver relationship (where interaction and communication lead to knowledge creation, knowledge sharing and knowledge transfer between partners); and (c) stakeholder relationships (where bargaining and negotiations maintain the wider social, political and strategic relationships with other firms and community of actors and result in a strategic positioning by firms). The measurement of acquired value therefore indirectly measures the effectiveness of contracts and partnership agreements. It is important to stress that this framework is complementary to the economic and strategy theories of the firm behaviour that attribute rational behaviour to companies, or the ability to invest strategically in knowledge capital and intangible assets. Mandjak and Durreu (2000) propose two alternative approaches to measuring relational value – one focusing on the product utility value and the other focusing on the episode value. According to the authors, product utility value can be measured by the value of outputs (transactions, sales, economic returns, customer loyalty, etc. – all in the context of particular relationships). The episode value can be measured through the ratio between episode benefits and relationship benefits versus the episode and the relationship sacrifices (costs) (Mandjak and Durrieu, 2000). Depending on what indicators are used, the value can be classified as acquired value, perceived value, desired value or value judgement (Flint et al., 1997), or as economic, strategic or behavioural/psychological value (Wilson and Jantrania, 1996). Relationships can also have negative value if they hinder or compete with other dyadic exchanges. An example is the lock-in and lock-out effect in choices of technological standards aligning a company with particular partners and markets, and foreclosing other strategic options. This negative value can have a summative effect at network level. A deteriorating relationship also hinders performance not only at a dyadic level, but it may reduce the overall coordination of activities and resource flows at network level. The concept of negative ties is used in a similar way, conveying the fact that a
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network relationship may raise barriers to information and resource flows in networks and may hinder simultaneously actors’ performance and overall network performance or future network development. Mishra and Seshadri (2000) take a broader perspective on evaluation of business relationships and propose a three-phase model. Each phase corresponds with a distinctive level of analysis. Phase 1 comprises the business strategy level, where strategic decisions about resource allocation in relationships are evaluated. Phase 2 refers to evaluation of the structural configuration of relationships. Phase 3 represents the evaluation of processual sequence of interaction episodes. These three phases bring to light the potential costs to a relationship stemming from the process of strategic planning, decision making and relationship coordination. The model explains how the specific outcomes in each relationship derive from the individual interpretations of various episodes at strategic level – crystallised in structural configurations, and enacted in joint activities and transactions. The literature has not yet developed a clear distinction between relational value and relationship performance, and this is one of the weaknesses of relational analysis that has to be addressed in the future. Both relational value and relationship performance have interpretative nature and at the same time can be associated with tangible and measurable outcomes for the actors and for the relationship itself. Perhaps the only distinction that can be made between the two concepts is that relational value implies an actor’s point of view while relational performance implies a dyadic and network point of view. All approaches for evaluating business relationships described above are fundamentally different and demonstrate the diversity in research enquiries and the lack of coherent methodological foundations that can inform a comparative analysis of relationships across networks. Further operationalisation of the concept of relational value will enhance the theoretical foundations and will bring more clarity for comparative research on network relationships.
Relational context/atmosphere Each focal relationship is embedded in its history, its context (Håkansson, 1982) and its network of other connected relationships (Ford et al., 1998). Most of the literature on embeddedness is focused on the implications from it. I would like to review the literature that describes some of the mechanisms that produce this effect. To take the three categories, history, context and interconnectedness – they are difficult to disentangle from each other, and at the same time they represent different dimensions of the relational environment. The history of a relationship is an account of the resource interdependence and the activity interdependence that have occurred in the past between actors. History is interpretative by its nature. It represents a
Relationships in business networks 115 selection of facts and stories of events recorded and remembered by the individual actors, or shared memories within groups of actors. History is also an intricate part of the context in which the dyadic relationship evolves as it represents an account of the various events and episodes that have occurred between the partners. The concept of relational context has been defined separately from history as loosely associated with the concept of relational atmosphere. Within the relational perspective, relationship atmosphere is defined as the impact from dyadic, triadic and network relationships on firms’ behaviour and on the functioning of business markets. With this definition relationship atmosphere is introduced as a concept that captures simultaneously the factors that drive actors to seek partners, and the subsequent relational outcomes and implications that affect the behaviour of firms and markets. The elements of the relational context are simultaneously relational causes, outcomes and relational attributes. Substantial research efforts have been made within the relational perspective for empirical investigation of the dimensions of the relational atmosphere, and as a result we have a list of indicators and measurements for evaluation developed by authors such as Tahtinen (2002) and Rokkan (2002) (Table 4.1). In their framework, the indicators power and dependence are compared on the same scale which is based on the assumption that high power enables actors to control transactions and interactions maintaining independence. Closeness and proximity in a relationship is measured by the level of shared Table 4.1 Environmental context Indicators
Measurement
power vs. dependence
power balance and dependence level (high/low)
closeness vs. distance
affinities, similarities, identification with/sharing norms and values, goal congruency, culture
symmetry vs. asymmetry
level of
commitment
symmetry/asymmetry (high/low), partner-specific investments, mutual promises and expectations for communications and information exchange
transparency
each actor’s subjective feeling of being informed, or vendor transparency, recipient transparency and process transparency – as seen from individual actor’s perspective
cooperation vs. conflict
level of
continuity
length, strength, stability of relationships
interconnectedness
level of connectivity between actors
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values, norms and congruence of goals. The level of understanding between partners is a direct result of the cultural distance between them. The level of symmetry is an indicator of how relational costs and benefits are shared. The perceived level of symmetry produces certain expectations and shapes attitudes towards personal commitments. Transparency allows partners to compare costs and benefits and to make judgements on the value of individual relationships and interdependent linkages within a network. The level of cooperation in contracts vs. competition and conflict is a factor that affects collaborative decisions and choices, which further affects the continuity of individual relations. Interconnectedness as a category that indicates embeddedness is at the heart of the relational environment. As a mechanism it explains the transitivity of attributes from an actor to a dyadic relationship, and to a network level of interactions. It is essential that we advance our work on transitivity and interconnectedness in order to gain a deeper understanding of the embeddedness of actors and relationships. All these indicators and measurements of environmental context explain the factors that determine relational dynamics in networks. All relational dimensions discussed above also represent the relational context that affect relational dynamics. Research shows that in established dyadic relationships it is difficult to separate the relationship from its context without a distortion of the view on the content and the character of the relationship itself. In communication relationships, for example, the context of the communication process (i.e. encoding, transmission and decoding) is an intrinsic part of the content of the message and its interpretation. A lot more conceptual work is needed to advance our understanding of what constitutes evidence of relational context and how to interpret relational process with an account for actors’ attributes, relational attributes and the contextual factors.
Relational dynamics and evolution Relationships evolve over time. The relational dynamics is triggered by four critical factors: new information received by the partners, changes in the relational context and the environment, changes in the network of activities and interactions, and changes in the behaviour of actors (Eggert and Helm, 2000). Any new information, including increased transparency and the level of disclosure, can trigger response and reaction by the actors. Lack of essential information may also instigate behaviour that aims to bridge the uncertainty or to increase/decrease relationship transparency. Uncertainty in the transactions and exchanges can be due to insufficient information about the behaviour of the partner or information about the external environment. It is expected that environmental uncertainty will intensify relational bonds, while behavioural uncertainty of the partner will send alarming signals and may increase the psychological distance between partners and potentially may lead to termination of the link. Relational transparency is important to
Relationships in business networks 117 smoothe communications between partners, and to build trust between them so they can address adequately environmental problems and uncertainties that arise in the course of exchanges and interactions. Changes in network activities and interactions are triggered either by changes in the relational context/environment, or by changes in actors’ behaviour and the reaction of network members to it. Changes in actors’ behaviour are the most dynamic components of the system, as each behavioural act triggers a reaction which opens a chain of reactions that may diffuse beyond the dyadic relationship. The relational dynamics can be observed in three ways: as fluctuations within a relationship, as a sequence of stages within a dyadic relationship, or as a process comprising different relationships between the same partners. Ford et al. (1998) suggest a number of sequential stages that form a cycle of a relationship (see Figure 4.6): • • •
pre-relationship stage – when actors learn of each other and identify the needs of their potential partners and their own needs that can be satisfied through a particular partnership; exploratory stage – when actors search and select partners, initiate a communication link, establish a reciprocated exchange of information and develop a relational frame; negotiation stage – when actors agree upon conditions for the exchange and transactions;
selecting partners initiate relationship reciprocate partner’s efforts framing
pre-relationship stage
identifying needs evaluation of potental partners
exploratory stage
individual commitment learning seeking complementarities and synergies framing
negotiation stage
development stage
designing transactions agreements framing
Figure 4.6 Evolution of relationships.
relationship assessment decision-making attempts for restoration dyadic communication of termination network communication of termination disengagement sense-making aftermath
stable execution stage
relationship management
termination stage
118 •
• •
Relationships in business networks development stage – when actors individually commit resources in order to facilitate the exchange process (i.e. learning languages, purchasing a common software or the appointment of new staff to deal with a particular business contact). In the development stage actors build trust, and identify complementarities and synergies; stable execution stage – when actors manage activity and resource flows including maintenance, monitoring and evaluation of exchanges, coordinating participation, inputs and outputs; termination stage – when actors end contacts and exchanges.
Each stage is characterised by various inter-firm communications, activity participation and resource commitments. All these stages represent on the one hand a hypothetical line of evolution of network relationship and at the same time a map for assessment of what is going on in a partnership. This processual view assumes a linearity of effects from one stage to another and does not take into account any outcomes that emerge through actors’ experience and learning, or network reactions that alter the dynamics of the link. Most research that is focused on the relationship process suggests that there is no linearity in the cause-and-effect dynamics, and multiple cognitive, affective and socio-economic stochastic processes interfere, constantly changing the direction of a partnership. Hence, the stages described above have to be treated only as an indicative map tracking changes in a relationship. The theoretical frameworks explained in the section below represent initial research attempts to reflect on the relational dynamics and the relational evolution from a process perspective. These frameworks intend to offer a list of starting points in conceptual and empirical work and to map future research directions. Gassenheimer et al. (1998) propose an evolutionary model for evaluation of the relational dynamics and the transition outcomes of interorganisational relationships. Their model builds upon transaction-cost economics (Williamson, 1975), social exchange theory (Thibaut and Kelley, 1959) and distributive justice theory (Deutsch, 1975; Cook and Hegtvedt, 1983). According to the authors, the transaction-cost economics offers an economic logic for comparing transaction costs, advantages and disadvantages of alternative solutions. This theory suggests a progression through relationships as cost-saving and benefits-enhancing choice. The social exchange theory in this framework introduces the emotional costs and advantages considered by actors when deciding on the overall value and desirability of a particular relationship. Social exchange theory uses the same efficiency argument but applied to the social and psychological context of the interaction. The principles of distributive justice assist actors to evaluate what is a fair dispersion of socio-economic benefits and market value. Actors’ perception of the symmetry of dependence in a relationship and the fairness of distribution of outcomes is based on a judgement of partners’ dependence and bene-
Relationships in business networks 119 fits, and ultimately affects actors’ willingness to tolerate certain relational conditions. This mechanism is used in negotiations of exchanges and transactions as well as in assessment of the outcomes from relationships. The three mechanisms described above generate individual perceptions of costs, benefits and relative fairness which inform actors’ decisions and choices that fuel further developments of the relationship. All three mechanisms explain the drivers and motives behind relational dynamics. A core concept in this model is the tolerance level as a measure for assessing relationship loyalty and actors’ commitment to a relationship at a stage where there are deteriorating signals, and a decision is required for an exit or an extension to an existing relationship (Hirschman, 1970). The tolerance level is individual and is affected by the relational context, history, track record of success and failure, the reputation of the partner, its identity and a number of situational factors. The fundamental argument in this model is that there are two-dimensional feedback links between relational context, tolerance level and social, psychological and economic benefits and costs (Figure 4.7). Changes in the relational context alter the costs and benefits for individual actors and this affects further the relational attitudes, expectations and tolerance level. At the same time specific individually obtained tolerance levels determine the criteria used by individuals to assess relational costs and benefits, which in itself determines the relational context. Tikkanen (2000) offers another framework for evaluation of the changes and dynamics of business relationships. The author suggests that there are three stages in the process of exchange: 1) conception of the need to change; 2) process of transition; and 3) desired state (Figure 4.8). Desired state is Relational context
Evaluation of costs and benefits
Figure 4.7 Relational dynamics (A). Conception of the need to change
Desired state
Figure 4.8 Relational dynamics (B).
Process of transition
Actor’s tolerance level
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often not achieved, and needs have changed, which launches another cycle of transition – perpetuated over time. Intensive communication and interactions between partners take place at all three stages, where new actions are negotiated and agreed upon. Eriksson and Maquardt (2001) investigate the evolution of dyadic relationships as a feedback loop between understanding, experience and coordination between partners (Figure 4.9). Understanding between exchange partners changes over time via coordinated communications, interactions and activities, and via accumulated experience. Actors’ understanding ultimately refers to sense making of the interaction experience and the relationship itself from the actors’ own perspective. Experience in one relationship affects judgements in another. Experience in different systems of coordination produces different memories, awareness and understanding that frames future experiences. Effective coordination of activities can compensate for a number of weaknesses of the partners, of their experience and understanding, producing positive outcomes and generating positive dynamics in the relationship. Based on their individual understanding actors make decisions as to what changes they need. A decision to continue a relationship or exit one depends very much on how actors individually understand the interdependence in each relationship, and how they assess its value and costs. In addition, actors engage in a comparative assessment of the alternatives (Thibaut and Kelley, 1959; Williamson, 1975). The factors that affect these alternatives, namely the symptoms of deterioration, the costs and benefits of retention vs. exit, the social and utility value of a relationship, or to what extent the relationship enables an actor satisfactorily to achieve long-term goals, and the overall satisfaction with the relationship and the relational outcomes. In practice, signals of a failure and deterioration are: relational abuse, partners’ harmful intentions, prohibitively high maintenance costs or when actors’ needs are best served elsewhere (Gassenheimer et al., 1998).
Experience
Understanding
Coordination
Figure 4.9 Relational dynamics (C).
Relationships in business networks 121 Coordination of relationships is also responsible for the relational dynamics. It refers to the organisation of activities and transactions, associated with identified tasks to achieve certain outcomes. Coordination of relationships implies management of joint activities, management of resource exchanges and direction of resource flows, repetitiveness and the development of routines. The coordination itself is affected by the level of individual and shared experience, and the common understanding between partners. The evolution of these processes is accompanied by multiple adaptations by each partner – technical, physical, organisational, social and psychological adjustments individually made by the actors. The experience itself is a function of the coordinated activities and transactions between partners and the shared understanding or their subjective reflections on their interactions. Experience is measured through satisfaction, learning and knowledge acquisition of each partner in the process of interacting in each dyadic relationship. Among the coordination processes used in networking, Young and Wilkinson (1992) list communication, formalisation, bargaining, intermediation, conflict management and influence tactics. These are tools and mechanisms that actors may employ to coordinate shared activities and resource flows, to frame the pace of the exchanges and the sequence of the interactions, and to negotiate rules and procedures that aim to govern the relationship and the transactions. Communications improve the information flow and the individual access to it. Formalisation transforms implicit knowledge and implicit agreements into explicit ones, affecting the framing of the relationship and the coordination of activities and interactions. Bargaining facilitates the mutual adaptations that partners undertake and assists them in developing expectations. Intermediation (or brokerage) assists partners to identify alternative ways to satisfy their needs through partnerships. Intermediation supports actors to make better choices and decisions. Conflict management is an essential mechanism that is triggered when partnerships are in trouble and individual actors have to make additional efforts. Influence tactics are applied by each partner in order to alter the direction of a relationship, and the individual techniques are through framing and displacement of partners’ roles and functions. Research on relationship coordination is another under-researched area of relational dynamics that needs more academic efforts in order to establish some more robust conceptual tools. The theoretical underpinning for investigation of the relational dynamics derives mainly from the exchange and dependency theories. Monge and Contractor (2003) contrast them and suggest that the exchange part of the communication process assumes equality of distribution of resources between partners and across the network, while the dependency part explains the inequality of distribution of resources, separating the actors into those that dominate and the rest that are subjected to control, power and
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domination. Both theories assume that a calculated exchange of resources takes place within a relationship and that the relationship itself is a form of satisfying information and resource needs (Homans, 1950, 1974; Emerson, 1962; Blau, 1964). The social exchange theory is based on assumptions of dyadic exchange relationships that take place in a complex social and institutional environment of societal norms, values and expectations. One of the main theoretical assumptions is that exchanges and interactions between partners are framed by this institutional environment. Hence actors’ choices are not independent, but are ‘regulated’ by the societal norms and expectations. Subsequently changing social norms is the most powerful mechanism to induce specific firm behaviour and relational dynamics. Dependency in this framework is seen more as a negative side effect of the application of norms, rather than a mechanism that drives communication processes in networks. Resource dependencies, according to the resource-based view discussed in Chapter 3, are both motives and driving forces for an exchange relationship, and outcomes from the occurring exchanges. Resource dependencies change over time and as such they induce changes in the relational frame and the relationship content. Often relational dynamics reflects the dynamic changes of resource flows in the network. Although decisions for alterations of relationships are made on the basis of individual ‘calculations’ of costs and benefits and individual evaluations and choices, the factors that affect these choices include considerations for the partner as well. For example, the evaluation of the individual dependence requires a judgement on the individual reliance on this partner to accomplish certain agreed objectives and to perform certain tasks. This reliance has two dimensions – an economic dependence on inputs and outputs, and a social dependence expressed with the level of expectations. Pure high economic dependence encourages exit behaviour, while social dependence may encourage higher tolerance (Thibaut and Kelley, 1959; Heide and John, 1988). Overall, perceived dependence and perceived partners’ dependence are relatively stable characteristics of a relationship as they express a summative opinion. They can be changed though in extreme situations and as a result of unexpected events. Emotional rewards and sacrifices as part of the social dependence and concerns with the partner are an intrinsic part of induced economic behaviour (Gassenheimer et al., 1998). Hence they may have a simultaneously bi-polar effect, creating both positive and negative tensions in a relationship that may lead arbitrarily to the increase or decrease of relational intensity. This is why it is difficult to optimise the effect from concern with the partner and emotional rewards. Other parallel processes driven by strategic choices of the actors that change the relational dynamics are different forms of strategic behaviour such as enabling of the partner, fading or enhancing of monitoring and control.
Relationships in business networks 123 The relationship dynamics at both levels – the dyadic and the network level – evolve through the interactions between the actors. This evolution is based on trust, understanding, learning, knowledge creation and dissemination, coordination of activities, commitment to the relationship and investments in it. The evolution of the relationship inevitably leads to the development of new relational attributes that further fuels dynamic changes. The developmental process is not deterministic, but is rather driven by the combined creativity of partners (Levinthal and Fichman, 1988; Holm et al., 1996). This section has discussed how multiple factors generate relational dynamics and how different mechanisms are triggered between interacting partners. The important question is how this relational dynamics impacts on actors and on the network structure. There are many interesting questions that can be raised regarding relational dynamics. This part of the discussion on network relationships has offered only a broad introduction to these issues. Finally, I would like to address the possibility of developing a typology or a taxonomy of business relationships.
Types of business relationships There are numerous typologies that describe the variation of linkages between network actors. Different typologies are based on different variation factors such as actors’ attributes, relational attributes or network attributes. A number of criteria have been proposed by different authors. The main value of these typologies is that they help to understand the variety of choices and alternative solutions for firms seeking partnerships. All proposed typologies in the literature have to be seen as complementary and mutually enhancing our understanding of the richness and variations of network relationships. The main typologies offered from researchers within the structural and the relational perspectives are synthesised in Table 4.2. Actors’ attributes such as their nature, willingness to cooperate and to assist each other, and their expectations for relational continuity generate three different typologies. Focus on relational attributes has produced another list of seven typologies that distinguish between different strengths of ties, types of communication links, number of actors involved, the content of the exchange, the purpose of the collaboration, the type of dependency and level of symmetry (Table 4.2). Among the network attributes that have produced typologies of relationships are: the type of relational episodes, the range of relationship effect, the stages of the overall business process, the type of knowledge that is employed in the transaction and the level of information disclosure. This long list demonstrates that it is pointless to seek a coherent typology, as it depends on the selected perspective (variation factor) and the chosen criteria. The list in Table 4.2 gives only partial information of the groupings of distinctive types of business relationships that emerge in a
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Table 4.2 Types of business relationships Variation factor
Criteria
Actors’ attributes
Nature of actors
personality links vs. representative links vs. institutional links Willingness to cooperate voluntary vs. enforced Expectations for continuity desirable vs. undesirable
Relationship attributes
Communication link Strength of ties Number of actors involved Exchange content Purpose of collaboration
Type of dependency Symmetry
Network attributes
Types of episodes Relationship effect Stages of the business process Status of the knowledge employed in transactions Information disclosure
Typology
direct vs. indirect weak ties vs. strong ties dyadic, triadic, multilateral material links vs. symbolic links product relationship, technology relationship, financing relationship, achieving strategic objectives independent vs. dependent, vs. interdependent symmetric (community) relationship vs. asymmetric (patron–client) relationship simple vs. complex limited vs. extensive strategic planning, problem solving, decision making, R&D, manufacturing, marketing product links (migratory knowledge) vs. knowledge links (embedded knowledge) transparent vs. unclear
Sources: Adapted from Eisenberg et al., 1985; Campbell et al., 1986; Badaracco, 1991; Veludo et al., 2001.
business network. Conceptually more criteria can be introduced and different typologies generated. Further on in this section I review some additional typologies that have been used in empirical research. The typology offered by Eisenberg et al. (1985) distinguishes between: personality link (when individuals from organisations exchange information and resources); representative link (when role occupants from organisations exchange information and resources); and institutional link (when interorganisational exchanges take place – usually with a normative effect on the actors).
Relationships in business networks 125 One of the most researched comparisons of relationships is based on the distinction between strong and weak ties explored within the structural perspective. The assumptions in general are that strong ties are based on intensive interactions and routine information exchanges within established and reciprocated relationships. Weak ties on the contrary connect actors that have scarce interactions, and usually are a source of novelty information to each other. The frequent interactions in strong ties produce adaptations and similarities between firms, while weak ties connect diversity across networks. Strong links according to structural analysts are suitable for a stable environment, while weak links provide an additional source of competitive advantage in a dynamic and uncertain environment. Empirical research has found that companies seek weak ties as a source of new knowledge when they face change and when they need to innovate (Eriksson and Sharma, 2000). The same authors also confirm that firms are able to assimilate knowledge from weak ties, and hence firms can develop capabilities to solve problems by themselves. Subsequently, firms with already accumulated experience from different markets use fewer weak ties and prefer either autonomous arms-length transactions, or strong and predictable ties that achieve specific objectives, such as outsourcing and subcontracting. These findings suggest that the choice between strong vs. weak ties depends more on the attributes of the firm that makes these choices, and the stage of development of the relationships, rather then on the characteristics of the environment. In the context of intra-firm relationships Hansen (1999) confirms that firms use weak ties for knowledge acquisition mainly across units within the firm and for simple projects. When the knowledge to be transferred is complex, project teams prefer to build strong bilateral and multilateral relationships. The positive effect on actors of having weak ties only holds for cases when already codified and stand-alone knowledge is required. In all other cases strong ties are preferred for innovation and development. Campbell et al.’s typology (1986) refers to the type of connection of actors in the focal relation – independent, dependent, interdependent. Although the level of dependency varies over time for each relationship, there are some structural configurations that frame the long-term level of dependence between partners. The question of symmetry of the relationships has also produced a list of different types of business relationships. This variation arises as early as at the level of ‘mutual recognition’, at which status is usually attributed to different actors. The asymmetric patron–client relations are personalistic – they are associated with ego-centred networks, and usually inhibit equal-status ties (Wellman and Berkowitz, 1988). Community relations are regarded as an alternative, where the communication and the distribution of resources is symmetrical and leads to a pattern of mutual and shared benefits and increasing equality between the interlinked actors. Veludo et al. (2001) propose a matrix typology of relationships based on
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simple vs. complex episodes, and limited vs. extensive relationship effect. The four types that emerge within this framework indicate that network attributes are interrelated with relational episodes and with relational outcomes. Badaracco (1991) suggests that relationships in business networks differ according to the status of the knowledge transmission – product links and knowledge links. Product link is when a company outsources particular products/services, and the acquisition of these products and services indicate migratory knowledge. Knowledge link is when two companies are involved in joint activities that are based on embedded knowledge, which is not transitory. Knowledge link assumes knowledge sharing, while product link assumes resource exchange. This complexity of typologies demonstrates the variety within the literature and the theories that inform social enquiries into business networks. Monge and Contractor (2003) conclude that this complexity has to be addressed by an interdisciplinary multi-theoretical and multilevel approach that bridges conceptual fields. Their multilevel approach distinguishes between three levels of analysis: •
•
•
dyadic level of analysis of communication relationships – where relational characteristics are intrinsic to the system and represent endogenous variables, while some actors’ attributes, such as age and organisational type, act as exogenous variables; the level of a triad – where the same principles apply plus transitivity and cyclicality of the relationship being either an endogenous variable in homogeneous systems, or an exogenous variable, when there is a substantial difference between triads; the global network level – where additional endogenous variables are some of the network properties, such as density and centralisation, while other network properties act as exogenous variables. The entire system is exposed to a multitude of endogenous and exogenous variables, creating a complex and dynamic open system.
This typology by Monge and Contractor (2003) builds the foundations of three distinctive levels of analysis of network relationships that focus on: 1) analysis of the immediate relational impact in dyads; 2) analysis of the indirect impact through transitivity in triads; and 3) the distributed impact in network configurations (including communities and multilateral agreements). Overall this chapter has looked beyond the motives and driving forces that frame the individual behaviour of heterogeneous actors in networks. It has explored how these complex heterogeneous actors engage in multiple resource linkages, contractual relationships, and joint and coordinated activities. The multiplexity of the relational tie between any two actors in a network explains the nature of interdependence that emerges between actors
Relationships in business networks 127 in the process of exchanges and interactions. The richness of a single relationship affects other connected relationships producing both the transitivity effect in triads and the network effect in multiple indirectly connected relational links. The complexity of network relationships can hence be analysed as the cumulative effect from multiple dyadic relationships and taking into account the diffusion of relational attributes across the entire network. The rich model for relational analysis presented in Figure 4.5 (on page 99) offers an opportunity for more detailed consideration of the relational attributes and their impact on network structure and processes of diffusion. The relational attributes appear as intermediaries and antecedents to the processes of networking and structuring in network configurations. It is expected that each relational attribute will have a different rate of diffusion across the network, and hence multiple network patterns or clusters will co-exist according to dominant relational attributes. The structuring of the network will represent an evolving process of emergent structural configurations as patterns of diffusion, and their dynamic change under new diffusion waves. The diffusion will be constrained by certain actors’ attributes, such as firm ownership, cultural barriers, prohibitive transaction costs and other resource constraints. The diffusion may also be constrained by actors’ capabilities to participate to full capacity in different relationships. The diffusion pattern therefore depends both on the strength of the relational attributes and on the constraints and the catalysing effect from actors’ attributes. The next chapter will focus on how network structures affect diffusion of relational attributes and patterns of actors’ behaviour. Structure is a pattern of relationships and represents both the static and the dynamic aspect of interactions.
5
Business network structures
The previous two chapters discussed in depth the behaviour of network actors and the relational attributes that emerge as part of interactions in business networks. This chapter shifts attention to the global network level where new properties emerge. I have clearly mentioned that some relationships are coordinated and that business actors form multilateral partnerships and alliances for strategic purposes. This chapter will look at the structural consequences that emerge. Overall the chapter offers a review of theories on types of structural configurations, the organising principles that operate when multiple actors act together, on the issue of network boundaries and on the variety of structural measures used primarily within the structural approach to draw conclusions on network configurations. Since its foundation network theory has been focused on the structural implications of social interaction and social relationships. The structuration theory proposed by Giddens (1984) represents this very clearly as the duality of structure and action, where human behaviour induces structures of relationships that further frame and direct human action. This assumption has also been used for intra- and inter-organisational analysis and it is widely acknowledged that there is a symbiotic relationship between organisational structure and strategy, and between organisations as collective and purposeful entities and their competitive environment, directly affected by their behaviour and strategic actions. Internal organisational structure and capabilities are in a symbiotic relation with the firm strategy, and both are regularly changing under the impact from external environmental pressures. The external environment of firms is represented by the organisational field and the organisational population that surrounds each focal firm. The structure of this field emerges from the activities of its members and the relationships between them, and the field-structure itself frames these activities. The dialectics between structure and action mirror the relations between structure and function or structure and environment, where structure is both dependent and independent variables. Structure is conceptualised as both a cause and an effect of organisational behaviour. Structure is also defined as a set of relationships. The causal model that conceptualises structure emphasises the association between action–structure–relationship, where each
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component depends on the other two components (Figure 5.1). Structure emerges from actions of business actors and from a pattern of relationships. Actions are framed by the structure and the position of actors in it and by the pattern and the dynamics of relationships. Relationships are conditioned by the structure and evolve under different actions, choices and decisions by the actors. This causal model is closely related to the methodological triangle in Figure 1.1 that consists of actors–relationships–structure, and this is not a coincidence. The methodological approach for the book has been consistent with the structuration theory where the structural and relational approaches meet and where they touch ground with the cultural approach. While the previous chapters of the book focused on the actor’s attributes that drive action and on the relational attributes that emerge from interactions, this chapter synthesises the knowledge related to business network structures, developed within organisation and network theory. Organisations in general are defined as groups of people working together under a division of labour in order to achieve some common aims or instrumental goals (Brass, 1992). An organisation is both a collectivity of people and an aggregation of interlinked organisational sub-units, coordinated towards the achievement of the instrumental goals. There is a division of labour inside organisations which is a result of the specialisation of actors and sub-units for the efficient implementation of organisational goals. The division of labour is also an antecedent of the structural relationships that emerge between individuals and sub-units. These principles from organisation theory can apply to individual organisations, organisational sub-units, or mega-sets of interlinked organisations and business networks where coordinated activities prevail over spontaneous actions. Networks, in the same way as organisations, comprise interlinked elements/actors that specialise in their contribution to the network output and coordinate activities for the implementation of some aims. The main structural and functional characteristics of such networks and organisational formations described in the literature are: pre-specified and
Structure
Action
Relationship
Figure 5.1 Mutual determination of action, structure and relationship.
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stable relationships, instrumentality of goals, additivity of parts, unidirectionality of command, universality of communication flow and synergy in activities. With these fundamental characteristics organisations and networks have become the dominant form of social coordination along with markets, administrative hierarchies, political intervention and normative control. Intra- and inter-organisational networks have evolved as complex organisational systems of structured relationships that facilitate coordinated economic activity. This is why the analysis of the main archetypes of network structures starts with the analysis of organisational structures as building blocks of complex organisational agglomerations.
Types of structural configurations There are many descriptions of complex inter- and intra-organisational agglomerations and many classifications of organisational structures that attempt to synthesise this knowledge. Monge and Contractor (2003) refer to five epistemic perspectives on the emergence of structure from chaos, that capture almost all structural possibilities. This classification is used here as the main framework within which I incorporate all other structural configurations. The generic classification of epistemic structural possibilities starts with the so-called nested type of structure which is accompanied by fully hierarchical control. Nested structures are composed of nests or sub-units, which are interconnected and subjected to maximum control by a centre and minimum flexibility in their choices. This form is known also as the classical hierarchy. Under the classical hierarchy we can observe all structural attributes such as: instrumentality of goals, additivity of parts, uni-directionality of command, universality of communication flow and synergy in activities. When complexity increases and full control becomes a source of inefficiency another epistemic form emerges which is called nested and hierarchical modular type of structure. This form has clearly defined sub-units or modules that encompass a selection of nests and multiple clusters of relationships within and across modules. These modules or semi-autonomous entities within the network structure are integrated through intra-network modular coordination. Modular nested structures resemble a business network of units organised as modules, where relationships within modules differ from the relationships across modules, and yet there is a coherent coordination at individual, modular and network level. An example of this type of business network structure is the functional organisation (Figure 5.2) where sub-units and divisions are organised as individual modules coordinated by a combination of market mechanisms, administrative instruments or normative control tools providing both flexibility and accountability. The third epistemic type of structure is called nested and partially hierarchical structure, which is a combination of hierarchies and flexible modular units. Most of the structural archetypes of business networks that evolve from hierarchies are examples of this modular type. These include the
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Hierarchical organisation (Weber, 1947)
Functional organisation Matrix organisation Multidivisional organisation (Simon, 1962; Chandler, 1962; Williamson, 1975)
Transnational (Bartlett and Ghoshal, 1989)
Horizontal organisation / value chain, supply chain – through vertical integration of activities (Porter, 1986)
Industry groups (Porter, 1980)
Hybrid organisation
designer
(Miles and Snow, 1986; Powell, 1987)
supplier
producer broker distributor
Heterarchy (Hedlund, 1986)
Community / dispersed / distributed Hegemonic / ego-centred Clustered / dispersed / distributed Circular / regular / small world Universal / core-periphery / scale-free
Figure 5.2 Archetypes of structural configurations.
matrix, the transnational and multidivisional organisation, and the heterarchies or value chains as complex organisational formations (Figure 5.2). The emphasis in these structural formations is on the range of operations coordinated by a leading control unit and the flexibility of each unit. These structures resemble network configurations with complex and overlapping communication, technology, ownership, authority and control, or resource links. The activities in these structural formations are nested and are partially controlled by the centre or the headquarters. Much of the coordination takes place outside of the central unit, and it is dispersed throughout the network at the level of clusters and densely connected nests of actors and
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activities. Under this epistemic type of structure coordination emerges at lower and intermediate levels providing further flexibility to the system. Finally, the last two epistemic forms in this framework are the non-nested type of structure that applies to collectives or communities, and the non-nested collections of actors or crowds. Communities and crowds represent distinctive network formations that are based on dyadic, triadic and multilateral relationships, and the activities of the actors are coordinated and controlled via non-hierarchical principles of mutuality and multilateral agreements. Both of these epistemic types of structures encompass simultaneously intra- and inter-firm relationships and they will be discussed in more depth further on in this chapter. Before that I would like to discuss the details of these network formations that resemble the type of modular, nested and partially hierarchical structures (Figure 5.2), and some of the ideal types of network structure such as hegemonic, clustered, circular, universal and core– periphery networks. Analysis of organisational structures has taken many different paths, described in the typology presented in Figure 5.2. Among the leading archetypes of structures described in organisational research are: hierarchies (with a single line of command and control); functional organisations (with decentralised decision making); a matrix type of structures (with a dual line of coordination and control – both horizontal and vertical); and multidivisional formations (as a combination of divisional structure, hierarchical control and functional flexibility). This list of organisational formations is extended by new theories that have emerged in the strategy and management literature introducing the value-chains (Porter, 1986b), the heterarchies (Hedlund, 1986), the transnational corporate network (Bartlett and Ghoshal, 1989) and various network configurations described in complexity network theory, such as hegemonic, clustered, circular and universal networks (Everett and Borgatti, 1999). The theory that explains organisation structures is based on the leading work by Weber (1947) on the prototypes of bureaucracy and the subsequent conceptual definitions of organisational hierarchies and the multi-divisional form of organising (Chandler, 1962; Simon, 1962; Williamson, 1975). Hierarchies in organisation theory represent the ultimate coordination and control tool in cases of known and calculable input and output resources. Hierarchical control is described as one of the most effective mechanisms for inter-unit and inter-firm coordination of activities and its supremacy is challenged only when the formation is facing high uncertainty, or when rapid changes in the environment require flexibility and adaptation simultaneously at multiple levels. There are many networks that are constructed on the basis of hierarchical control such as information technology networks, government networks or ownership networks. Functional networks represent an evolution from hierarchy which improves the flexibility and the adaptability of the configuration. Many project networks adopt a flexible configuration. Matrix organisation is
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another evolution of the hierarchy, applicable to complex systems and configurations where accountability and innovation is coordinated from multiple directions. The M-form or multidivisional form of organising was invented in the context of the General Motors corporation in the US to encompass: central control and ownership; vertical integration of the production; formal internal coordination through vertical and horizontal linkages; corporate head office function; and specialised staff concentrated in departments and sub-units. Historically the M-form of structure represents an evolution and adaptation of organisational hierarchy under the conditions of complexity and uncertainty of operations. The M-form of structure enabled the internationalisation of the firm and the emergence of the transnational corporation as a complex ego-centred business network with centralised governance and modular type of coordination of activities. M-form business networks are the type of holding companies where there is a centralisation of control through ownership ties but decentralisation and dispersion of coordination and management where individual modules have the autonomy to make strategic choices and decisions. Although the strategic management literature has looked at the intraorganisational relations, it has also explored various forms of vertical and horizontal integration at industry level through inter-firm relationships and supply chain relationships that follow a value-added chain. From a strategic perspective Porter (1986a) looked at inter-organisational relationships in industrial context and underlined their input–output and resource dimensions. He defined the vertical type of industry organisation as a ‘value chain’ or a ‘value system’ of coordinated input–output activities – some of which are conducted within the firm, and others outside of the focal firm, or even outside of the industry. This organisational form of integration between firms within industries is based on upstream and downstream control of inputs and outputs. The same type of vertical integration within industries is represented and labelled as a horizontal type of organisation in organisation theory, putting emphasis on the horizontal flow of resources between organisations and sub-units. The horizontal organisation of resources represents a shop-floor view of the firm where resources move from one work station to another and form an assembly line of input and output. In spite of this confusion in terminology the two concepts mean the same structural formation and the horizontal organisation is equivalent to the vertical integration of firms within industries. The value chain resembles a virtual integration of processes within an industry which is labelled a horizontal organisation in organisation theory, and a vertical organisation in strategic management theory. There is a mutual dependency between connected firms in value chains which stems from the nature of the transactions and exchanges and their impact on individual partners. This mutual dependency emerges from the input–output dependency and the repetitive transactions that take place within the
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value chain. The mutual dependency does not assume any subordination between firms. The notion of horizontal industrial organisation was captured by Porter with another concept of the industry group, or a group of firms that occupy a similar position in the value chain and compete with one another in the same industry segment by employing similar strategies. Most recent studies suggest that industry groups also represent a structural formation as firms within them are not indifferent to each other. They are entangled in complex relationships of competition, collaboration, benchmarking and standards-setting activities. Research on industrial groups and value chain networks has concluded that the industry structure represents a network of densely connected firms through input–output relationships, and this structure emerges from the effects of competition, barriers to entry, barriers to mobility, the position of various industry groups within the overall industry structure, the unique resources and capabilities of each firm, the contracting and coordinating costs, the path-dependence and dynamic environmental constraints and opportunities for firms (Gulati et al., 2000). Under these industry effects the industry structure emerges as an agglomeration of interconnected firms according to the scale of their operations, to their product portfolio, or their specific technology, and their input needs and output capabilities. While the value chain represents collaborative contractual relationships, industry groups represent predominantly competitive relationships determined by the level of concentration in industries. The industry group as a concept captures small parts of the value chain and also represents a community structure of nonnested type. Firms in these industry groups are similar, pursue similar strategies and occupy structurally equivalent positions, thus facing similar environmental resource constraints. Collaborative network strategies emerge both within the value chains and within industry groups and the attempt by firms to coordinate efforts and reduce environmental uncertainties. The industry group represents a type of configuration where firms are connected to each other via their product portfolio and target customers. The relationships of firms in industry groups depend on the market conditions. Growing market demand may produce collaborative relationships, while decline in market demand will reflect an increase of competition within the industry group. The concept of heterarchies has been developed mainly as a contest to the concept of the multidivisional form (M-form) of organising. Heterarchies are a hybrid form of organisation or a combination of market type and hierarchical type of coordination typical for alliances, partnerships and various strategic collaborative agreements between firms (Powell, 1987). According to Powell, the main drivers for this shift in corporate structure towards a hybrid form of organising are the following factors: the downsizing of large corporations, the growth of small firms and business units; the development of extended trading networks between firms based on long-
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term contracts and repetitive transactions; and the changes within large corporate structures such as spin-offs, outsourcing of business functions or internal venturing through autonomous and flexible units. Hence hybrid organisations are various organisational configurations that emerge from the intense evolutionary processes of corporate restructuring of M-form corporations. Hybrid organisations are based on intra- and inter-organisational relationships partnerships and strategic alliances that bridge independent firms and autonomous business units and generate a complex system of interdependent business activities. The original example of a hybrid organisation that is given by Miles and Snow (1986) includes a broker, occupying a central coordination role, and pre-selected designer, supplier, producer and distributor, or as many firms as are required for the design, manufacturing and sales of a product (Figure 5.2). The emergence of new organisational forms is justified with the managerial decision to seek dynamic synergies from partnerships, rather than an individual competitive advantage for the firm (Miles and Snow, 1986). Hedlund (1986) emphasises that the new coordination mechanisms in heterarchies and complex organisations diverge from the main organising principles and establish new foundations for coordination and control. The main principles in heterarchies are the following: • • • • •
coordination is through lateral referrals, lateral decision process and integrating mechanisms; key skills are dispersed through the network; communication and coordination is based on shared values and normative integration; coordination and control is based on dynamic strategy-structure adjustments in response to changes in performance and changes in the environment; and balance is sought between horizontal and vertical integration using simultaneously output-based and behaviour-based control.
Heterarchies as complex structures have multiple dimensions of locus of control. Their constituent parts resemble a combination of modular and hierarchical-nested structure and involve interdependent units with devolved decision-making power and capabilities. The configuration as a whole is coordinated through a complicated system of organisational accountabilities through vertical and horizontal relationships. The multiple lateral relationships within the network are based on mutual interest, where different power relationships govern (for example, pressure group activity, principal–agent delegation, service provider/client relationship, resource owner/resource user relationship, and virtual teams bound by common purpose and shared responsibilities). Clearly heterarchies and networks refer to the same type of complex multi-organisational formation where new principles of governance apply and new coordination mechanisms emerge.
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David Stark (2000), who is another advocate of heterarchies, suggests that they emerge from the restructuring efforts and recombination of old structures. Hence heterarchies encompass a diversity of organising principles and relationships based on interdependencies developed in the past and new commitments undertaken. A basic definition of a heterarchy proposed by Stark is that this is an organisational form based on distributed authority and organising diversity, or an organismic adaptable system for coordinating business operations. Heterarchies, the matrix type and the M-form of structures are predesigned, and a large number of communication links are established for control purposes. They are nested in the sense that links take a pre-designed pattern, where they gravitate towards a number of control centres within or outside of the boundaries of the network. Weakening of the control function in a heterarchy may allow it to evolve into a community of organisations with emergent self-control and coordination based on relational and normative contracts, trust and other non-market mechanisms. While nested structures such as heterachies are usually pre-designed, non-nested structures are based on emergent processes that lead to uncontrolled evolution. Pre-designed structures are usually made for control and authority purposes (to establish and share power, to give direction, to exchange influence), or for communication purposes (for the exchange of information and ideas). Beyond the pre-designed structure, another layer of informal structures develops where new centres of authority emerge and alternative informal communication patterns come to the surface. Research has concluded that non-nested configurations of informal relationships that resemble a clustered community of actors exist in parallel with nested and pre-designed structures. Hence, the argument is that there is an overlap of structural configurations in networks that needs to be properly acknowledged by empirical research. Among the non-nested network types that emerge within formal structures the following can be listed: workflow networks (for work-exchange of goods and services), friendship networks (for exchange of affection and spontaneous emergence of affiliations and preferences beyond the structural design of work and task relationships) and multiplex networks (where actors are connected in different ways, and hence there is an overlap of different types and different layers of dyadic and multilateral relationships) (Brass, 1992). These non-nested types of structural formations can be observed both within formal organisations and networks and within informal communities of practice. In communities and informal organisations actors are linked by their own choices for interaction, or by the choices of network brokers. In communities there is also a path dependence mechanism, whereby actors happened to be exposed to certain link opportunities by birth, by tradition or by some institutional arrangements, such as schools, profession or clubmembership. Exposure to link opportunities naturally generates communication links without substantial individual efforts. Community networks are
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most rich in overlapping and crossing communication channels, with a high intensity of exchanges and interactions. The definition of community networks derives more or less from the early human ecology theory (Park and Burgess, 1921), which defines three critical elements of a population organised as a community. These are: that the population is territorially organised; that it is rooted in its territory, history and culture; and that it is living in symbiotic relationships of mutual interdependence. It is this third dimension – symbiotic interdependency – that has suggested that community relationships are equivalent to network relationships. Examples of business communities are regional and innovation clusters, or business clubs, where business relationships have clear social and psychological dimensions. An important element of such a community is its culture, which represents a body of customs, beliefs and practices, a set of artefacts and tools, or technological systems that are shared among members. Organisational community will be a group of firms engaged in some exchange relationships (of information, knowledge, services or resources), and firms that participate in shared activities (R&D, marketing or others). Community culture contextualises and perpetuates the interdependent relationships. The same argument can be used for network culture – as shared communication and exchange practices between interacting and transacting firms, shared rules and procedures, beliefs and expectations related to these interactions and transactions. An important contribution to the field of community studies is the mutual interest theory. Coleman (1990) develops the argument that there are circumstances where actors have a mutual interest to coordinate their actions. One case of mutual benefits from coordination is the communication and exchange of information. In this case communication is interpreted as a ‘public good’ that generates benefits for all participants, providing them with information opportunities. Community relations and community structures have been studied extensively by the interpretative sociology and its theories – symbolic interactionism, social phenomenology and ethnomethodology. Actors are assumed to have internalised society’s fundamental value system, and social cohesion results from shared aims and expectations (Parsons, 1937; Garfinkel, 1967). Within this framework scientists have explained collective action, social structure and the broad social context of communities. An important aspect of community studies is that the interactions are not interpreted as simple bilateral connections, but are conceptualised on the basis of multilateral communication experiences, collective observations and common knowledge. Knowledge, experience and interaction in this framework are bundled together. This model also illustrates the duality of community structure and action (meaning interaction). The structural properties of a community that facilitate the multilateral communication encounters are both a medium and an outcome of the interactive practices,
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the same which they recursively organise (Giddens, 1984). Hence structure is internal to individual organisations and communities, and exists as memory traces of conversations and experiences, as shared documents and event participation, or as mutual contributions to a transaction. Community structure is also simultaneously constraining and enabling actors to participate in community activities. Community interactions involve what Bourdieu and Passeron (1970) have labelled as habitus, or a way of living, a stable system of dispositions by individual actors and collective entities – how to perceive and act – that contribute to the reproduction of an established social/community order. These interactions are not unconstrained. Foucault (1966) describes two mechanisms that are used to exercise control in a relational community environment. One is based on formal and normative control (prohibitions, bans, barriers, hierarchies and physical communication breaks). The other is based on intersecting surveillance techniques and flexible control procedures that induce self-monitoring and internalisation of the prohibition. Much of community psychology derives from two axioms. The first is that the crowd exalts affectivity, inhibits individual thoughts and induces mass behaviour through suggestion. The second axiom supports the opposite argument that an individual subjected to the influence of the crowd has an ultimate choice, and may choose to follow the crowd because of a need to be in harmony with it, or may choose an individual path (Freud, 1921). The second argument suggests that individuals have a choice and may choose to cooperate with other network members, or may choose to compete with the other members of the community network. Although there is no conclusive position on this argument, there is a wide acknowledgement that there are industry processes, value chain mechanisms and other resource dependencies that induce both choices – to collaborate through business networks and immerse in the complexity of resource flows, or to compete for market share, for a contract, or for a dominant position. While in communities actors are linked through competitive and collaborative relationships, in crowds they may be co-located and associated via a common goal, but indifferent to each other. Crowds are quite different agglomerations from communities as they are much more affected by random changes, rather than by the organising principle of a common goal. In crowds, people are linked randomly – by proximity or accidental occurrence and co-location. Networks in crowds are therefore random. This form of organisation also represents a market where information search costs can be very high if individual actors do not know anything about each other, and there is no facilitation mechanism that can be used for one actor to form a link with another. The main distinction between crowds and community structural formations is that communities are organised by social structures, while crowds are randomly organised and represent the closest formation to anarchy. Actors in communities have relationships, and these relationships are repro-
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duced via social structures, while relationships in crowds are emergent. Both types can be used as archetypes for empirical business network analysis. In addition to these main types of network structural formations described in Figure 5.2, there are other less popular classifications that contribute to our knowledge of structures of business networks. Fombrun et al. (1983) suggest four types of structural network formations based on distinctive inter-organisational and community relationships: agglomerate collectives (homogeneous groups of firms linked through competition or contractual cooperation – i.e. industry groups); confederate collectives (homogeneous group of firms linked by a common goal – i.e. industry collusion, horizontal strategic alliances, R&D partnerships, franchisee networks); conjugate collectives (heterogeneous groups of firms established in different industries, but closely coupled together in a symbiotic relationship based on complementarities – i.e. supply chains); and organic collectives (heterogeneous agglomeration of firms integrated into a complex and interdependent system comprising both direct and indirect links – i.e. complex business networks and business ecosystems). The category agglomerative collective can be associated with clusters and generic communities based primarily on co-location that emerge within organisations and networks. Confederate collectives are more organised and can be associated with alliance partnerships, networks of interlinked firms based on complementarity. Conjugate collectives can be represented by regional and industrial clusters, by the M-form and the hybrid organisation that comprise vertically and horizontally related heterogeneous actors. Organic collectives represent complex networks and systems comprising heterogeneous entities, or organised business communities that coordinate multilateral and multiplex relationships and multidirectional resource flows. All these categories contribute to our extended knowledge of the variety in network formations. In addition to the epistemic types of structures and the organisational archetypes described in Figure 5.2, as well as the structural network types suggested by Astley and Fombrun (1983) above, network theory has established a legacy of empirical research with configurations such as ego-centred vs. distributed networks, project networks and supply networks and valuechain networks, industrial clusters and industrial groups. Among the most researched archetypes of networks are the ego-centred and the distributed networks. Ego networks vs. distributed networks Ego-centred networks are also known as hegemonic networks as they are dominated by the central actor and the relationships include a form of hierarchical control and coordination. The ego-centred networks usually comprise two positions (ego and multiple alters – Figure 5.3). Network relationships could comprise dyadic links with each of the alters, as well as
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EGO
Figure 5.3 Ego-networks vs. distributed networks.
multilateral connections (with three or more interconnected actors). Analysis of ego-networks requires that all respondents and observers know the network boundaries. The advantages of this approach are that network models describe the structural configuration, the intensity of dyadic relationships, and researchers could investigate actors’ behaviour knowing only a few of their relationships (Burt, 1982). Egocentric network studies elicit network members vs. non-members and types of relationships maintained by the focal actor. Distributed networks, on the contrary, are based on a community type of relations and allow network analysis without knowing the network boundaries. This approach requires knowledge of the leading relationships of each of the network actors, in order to determine their individual structural position in relation to all others. Distributed networks of firms are compared with distributed intelligence and distributed cognition, or interlinked physical artefacts and mental representations in the case of knowledge networks (Hutchins, 1995). In all these types of networks there are multiple patterns of resource flows that generate structural differentiation in the form of subgroups of actors and nodes, cliques and cohesive groups. There are deep connections between distributed networks and heterarchies as complex adaptive systems of heterogeneous elements connected via multiple organising principles. Many of these heterogeneous systems are unstable configurations with a temporary time dimension. For this reason heterarchies are used synonymously with distributed networks or complex adaptive and self-organising systems of actors tied by interdependent relationships. Distributed networks can be studied with a sociometric type of network analysis focused on patterns of relationships, sub-groups and cliques, structural positions of actors, measuring the strength of ties and using matrix-based analytical techniques such as centrality, density and cluster analysis. Processes of structuration and fragmentation emerge continuously both
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within the ego-networks and the distributed networks, and as a result some actors develop stronger links that tie them into cliques. Cliques, cohesive groups and clusters are considered to be like sub-sets of large and complex networks, modules in a modular network structure, or what Wellman called ‘networks within networks’. Cliques and cohesive groups have stronger and stable relationships between their members. Cliques have been studied empirically in craft-based and skills-based industries such as construction, publishing and film-making, where project-based flexible organisation is the preferred mode of inter-firm coordination. Overall, distributed networks represent a good model for the study of business networks as they facilitate analysis of complex resource flows and resource inter-dependencies between firms. Project networks vs. supply networks From a managerial point of view the main types of networks discussed in the literature are projects, supply chains, or process chains and industrial clusters. A business project is considered to be any business activity related to production, distribution, development, investment or accumulation of resources, including tangible and intangible assets, products, services, knowledge or technology. Project networks are pre-designed and constructed on the basis of clear objectives and pre-set targets, but often with unknown or uncertain outcomes. Participants in project networks are pre-selected and enrolled as contributors with designated roles in order to produce target outputs. An example of a business project which has been instrumental to the development of the cultural approach in network theory is the construction of an electric vehicle for public service in France (VEL), described by Callon (1986). Such a project, established and funded by the French government, required employment of heterogeneous resources and actors. The project itself is a temporary organisation that has specific aims and limited resources (including knowledge and technologies), and incorporates the activities and resources from a variety of economic, social and scientific agents such as firms, consumer associations, laboratories, government bodies, technologies, physical artefacts and technical documentation. These network actors are either human entities – firms, organisations and institutions that represent different interests, or non-human elements that are employed for a particular utility function. Two of the leading actors in the VEL project are a government body, EDF (Electricite de France), and the pre-selected firm for the project, Renault. Both of these actors represent different institutional forms and specific bundles of resources and interests. EDF as a public institution is one of the key agents that drive the selection of the other network members including Renault. EDF as a leading actor sets selection criteria, and controls the construction and the development of the heterogeneous network of economic and scientific actors for the
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project. Renault is also a leading actor which enrols other participants in the project, including key technologies. At a micro-level of analysis the VEL project includes technical and managerial staff, pieces of knowledge and technology (such as electrons, fuel cells, accumulator, electrodes, catalysts) and other technical and material objects and non-human agents that represent embodiments of human knowledge, human decisions, human selections and choices, human subjectification of material objects and human interests. The example of the VEL project is used by Callon (1986) to demonstrate the interactions between human and non-human entities and the effect which each of them exhibits on the network configuration – framing, displacing others and acting upon decisions. Similar types of heterogeneous project networks can be seen in the construction industry or in R&D projects. Project networks can be both egocentred or distributed. A supply network of a firm is another essential type of a business network, where all partners exhibit input–output dependencies and are interested in completing the exchange in primarily dyadic relationships. One of the most studied supply chain networks are in the automobile industry and the textile and garment industry (Gereffi, 1990). All actors negotiate individual outcomes, trying to maximise or optimise the benefits that this exchange brings to them. Trust in fulfilling the obligations, repetitiveness of the transactions and mutual adaptations between interlinked firms and agents is what constitutes the set of network relationships. Usually transactions are supported by contracts or mutual agreements. Re-negotiation of these agreements takes place periodically in a supply network. Supply networks represent a small part of larger value-chain networks and value systems that run across industries, and encompass multiple players in various structural positions. This type of network configuration has also been described as a global commodity chain (Gereffi, 1990), or interlinked firms that connect global sourcing with manufacturing and with the retail sector, coordinating the entire process from either the manufacturing or the retailing side. The main distinction between project networks and value-chain networks is that the former comprises more multilateral relationships while the latter is based on interlinked dyadic relations. Both types can be represented either as ego-networks where there is a leading actor with control functions, or as dispersed networks based on distributed control. In addition to the structural configurations described in the organisation and management theory there are some other models developed by physicists. These network models include: circular, regular, universal, scale-free or small-world (see Figure 2.4 on page 44). Each of these types has been described as a structure that facilitates distinctive network processes. Circular networks represent closed systems of actors interconnected through dyadic relationships only. Regular networks represent a structure whereby each actor is connected to the nearest two actors comprising both dyadic and
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triadic relationships. A universal network is when all actors are interconnected so that each actor is connected to all others. Scale-free network is a complex system of an infinite number of interconnected actors. Finally, a small-world network is a circular or a regular network where most actors are connected to their nearest neighbours, but some are connected with very distant actors, hence creating a bridge across remote locations. These network models have been used primarily for network modelling of extremely large network systems. These are listed here only for the completion of the typology of structural formations. The discussion in the subsequent parts of this chapter focuses on the organising principles that are common to all structural formations and all facilitate interactions All these types of structural network configurations discussed in this chapter are ideal types of networks that can be used in a complementary way for analytical purposes. Before looking at the real business network configurations I would like to clarify some more theoretical issues related to the organising principles behind structural formations and the issues of boundaries and specialisation within specific network structures.
Organising principles The main organising principles in networks derive from the social nature of human actors that form collectivities of interacting agents. Organisations and networks represent such collectivities or agglomerations of co-located actors that coordinate their activities and organise their interactions. The organising principles for both organisations and networks stem from the same principles of coordinated action and behaviour of human actors. The main questions related to cooperation and organisation of activities are: what brings these actors together; what are their motives; what driving forces affect the process of interacting; how actors signal to each other and to the rest of the network their intent and their efforts; and what rules and conventions are shared among actors. While the economists start with the assumption of existing co-located buyers and sellers in a market place motivated to complete certain transactions for some expected outcomes, the sociologists attempt to describe the underlying social mechanisms or organising principles that put actors in the market place in the first instance. Different organising principles emerge as a result of different interactive and interpretative processes that take place among actors and the institutionalisation of practices, norms and conventions in social context. George Simmel identifies two mechanisms that are used by individuals in acting and constructing their social world – sociation and dissociation. The two mechanisms are complementary and represent a dialectical process of mutual facilitation. Dissociation is expressed by a door, that draws boundaries between entities and demonstrates individuals’ capacity to separate things, and thus to derive at a meaning of things. A dissociation between firms is when they identify individually the costs and benefits from an
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exchange, which enables them to define their interests in pursuing further the business relationship, to determine their aims, objectives and behavioural strategies. Sociation is the opposite process and it is expressed by the metaphor of a bridge that establishes an association between entities previously disconnected (Mattelart and Mattelart, 1998). An example is a meeting of individuals, or expressed mutual interests and agreements between firms. Dissociation is when a firm decides to engage in a relationship, while sociation (or association) between firms occurs when firms sign a contract. Both processes facilitate individual understanding, individual choices between alternatives and decisions related to other actors and entities (Figure 5.4). The dialectics between dissociation and sociation explains the fundamental premises of interaction between actors, self-organising their activities and self-coordinating their behaviour. Usually the organising principles that emerge in organisations and networks apply to a group of actors that have colluded in one particular location. The group becomes an organised entity only after certain goals for a collective action emerge. The definition of shared goals and aims is the first step in organising collective systems. The evolution of such a collective entity, following the setting-up of goals, further progresses through the following processes: division of labour through fragmentation of tasks; differentiation of roles, skills and capabilities; specialisation and integration of functions; further evolution of interactions that generate internal structures and a form of control; the use of control and accountability for coordination of activities; further innovation and adaptation of the organisation components Emergence and self-organisation
Dissociation and association
Setting up goals Divisibility/ modularity/ differentiation
Communality
Connectivity
Specialisation
Integration of functions
Rationalisation
Institutionalisation Innovation and adaptation
Figure 5.4 Organising principles.
Structuring for control and accountability
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and network elements; and continuous institutionalisation or evolution of internal norms, rules, practices and knowledge (Figure 5.4). Each of these processes represents an essential organising principle. For example, the setting-up of goals is related to framing the direction for the network as a whole and for each of the actors and constituent units. If network members share the same goals and objectives, then they resemble more organisational heterarchies and cliques, rather than a dispersed configuration of linked actors. The fragmentation of tasks and specialisation within the network naturally creates an opportunity for allocation of roles and enrolment of actors into specialised positions. The differentiation of skills is both an antecedent to internal structuring, and an outcome of specialisation under designated roles. Integration of functions within a network is achieved through sharing of information, self-coordination and the activities of brokers, facilitators, various intermediaries or external performance evaluation agencies. Dealing with difficult links and situations usually helps the configuration to evolve, to innovate solutions and to circumvent key inefficient participants. The emergence of procedures and norms for dealing with these cases will be an example of self-organisation of the network. The institutionalisation of these norms and practices across the network will also be an example of self-organisation. New knowledge and practice is embedded in the operation of the network and the interactions between network actors. This innovation in networks becomes the highest organising principle that initiates a new circle of setting aims and realisation of objectives usually at a more advanced level with higher complexity of operations and transactions. Control and accountability remain one of the most important organising tools for achieving objectives and target performance. The question of control and accountability can be raised only in the context of formal network agreements and contracts, where there are specified expected outcomes from the transactions. Most of the informal agreements based on informal relationships cannot be formally assessed, and hence can not be used as sanction tools. In these cases, network actors have to rely on trust, shared norms and practices, or normative self-control, and continuous learning and adaptation. Reciprocity is a key mechanism that can provide feedback on actors’ efforts. We have to add to the framework in Figure 5.4 the three principles suggested by Weber (1947) as the theoretical mechanisms that create bureaucracy and administrative apparatus. These are: rationalisation (of task structure), differentiation (of roles) and integration (of operations and functions). Rationalisation, differentiation and integration take place both at organisational and at network level. Rationalisation of the network, for example, is the emergence of brokers in places of structural holes. Differentiation of the network is represented by the distinction between core and periphery actors. The network integration is represented by the level of interactions and transactions between network members and the emergence of network outputs (vs. individual outputs).
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Networks as organisational configurations share the same principles as single organisations where actors pursue goals, specialise, and coordinate their input and output. The organising principles apply in the context of continuous interactions between actors and within specific structural configurations of relationships. While structures of relationships create stability, interactions lead to adaptability and innovation. Both structures and interactions can be pre-designed or can emerge from existing organisational arrangements. Structures can be pre-designed by selecting actors, giving them roles, and enabling them to interact according to their designation and choice. Pre-designed interactions include selecting actors, allocating roles to them and setting up communication channels to facilitate the interaction. Both pre-designing structures and relationships involves employing a set of organising principles. Interactions can also emerge from the effect of co-location of actors in a common geographic, technological or operational field, where similarities, differences and complementarities generate motives for new interactions, and where social structures emerge based on evolving relationships. Finally, one of the specific organising principles associated with networks is the principle of self-organisation. The self-organising logic assumes that spontaneous processes take place in organised entities. A process emerges at a certain critical point of interactions, when a threshold is reached. At this threshold the organised system reacts spontaneously generating new processes and spontaneous interactions between actors. The self-organising principle contradicts all efforts for network management and design control, as it assumes uncontrolled emergence. This emergence can be mapped only through evaluation of changes in the structural positions of network actors over time, which is a difficult methodological task. This is the reason why the self-organisation of networks is studied mainly in complex network theory using primarily mathematical models. All organising principles discussed above establish the organisational frame of the network within which divisibility, connectivity and communality exist. Divisibility provides for specialisation and deepening of coordination within the network. Connectivity provides for smooth communications, interactions, exchanges and transactions between distinctive specialised actors. Communality provides for sharing of resources, affections and expectations between interconnected actors, sharing costs and outcomes. Overall, all organising principles explain the emergence and functioning of business networks as agglomerations of firms engaged in coordinated action.
Network boundaries and organisational boundaries Boundary research is still in its infancy. It is acknowledged that knowing network boundaries is important for network analysis. At the same time current research has accepted that boundaries of business networks are set arbitrarily as they cannot draw a clear distinction between network
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members and non-members. Many firms located at the periphery of one network are connected to other networks as well. Members of one network can be members of other networks as well, which causes interconnectivity across networks and overlapping network configurations. In addition, the concept of boundaries has been used very much in a metaphorical sense, referring to: • • • • • •
communication boundaries – or parameters that demarcate unobstructed from obstructed communication; cultural boundaries – an abstract distinction between different cultures based on cultural artefacts such as language, practices, attitudes and institutions; locational boundaries – an abstract line that demarcates between different locations; knowledge boundaries – the limit of comprehension beyond which there is a lack of understanding; learning boundaries – the limit of pedagogical effectiveness, beyond which learning processes do not occur; technological boundaries – the limit of use of technology and compatibility between interlinked technologies.
This list shows the eclectic nature of the question on network boundaries. Research can choose any criteria in order to label actors as members and non-members. One of the main criteria that is used to draw organisational boundaries is the concept of ownership. It is based on the distinction between business functions that are executed in-house, or under full ownership and control, and functions and activities performed by other organisations under contractual obligations. Although the concept of ownership does not apply at network level, business functions could still be separated as those performed by the network and those performed outside of it. Many collaborative practices in network involve shared knowledge, technology and resources across ownership boundaries – such as licensing, co-production agreements, joint ventures, strategic alliances and others. For a number of strategic reasons the ownership boundaries of firms become more and more blurred under the impact from various available stock market tools such as minority shareholding, dept and equity swaps, asset-backed commercial securitisation, derivatives, options, futures, forwards. All these financial instruments transfer risk exposure outside of the individual firm, diminish the effect of ownership and, as a result, incorporate the assets of individual firms into multiple other investment and security networks. Boundaries may be of two types: pre-set and emergent. Boundaries can be pre-set by agreements that bound actors together and draw membership lines. Actors that have signed an agreement become pre-selected members, enrolled in processes through resource and activities commitments. Actors
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that have not been pre-selected, and have not committed resources, are left outside of the pre-set boundaries. Boundaries also emerge from repetitive transactions and exchanges that diffuse knowledge, information and opportunities within particular channels. Actors that are directly connected to these channels get to share these network resources, and hence become enclosed in these main flows. Boundaries then emerge between the directly connected actors and the rest, or between the core and the periphery of the network. Boundaries emerge also between clusters and cliques, where the intensity of interactions within the cliques raises boundaries to nonmembers. Any adoption of innovation and change in firms happens in some locations and concentration of users and within certain boundaries. The spread of this innovation draws the boundaries between users and non-users, where the main criteria for drawing the boundaries are ‘membership’ or ‘participation’. Participation and membership can be both voluntary and involuntary, which makes research on boundaries even more difficult. The literature has listed different types of boundaries according to their impact on members and non-members. Clear boundaries can be drawn when there are distinctive and measurable criteria such as formal membership, ownership and control. These boundaries may be both conceptual and physical to the extent that they demarcate physical assets, location of labour force, location of production and location of customers. When the criteria are not established in absolute terms, or the structural formation cannot be mapped clearly according to estimated boundaries, then the boundaries are defined as blurred or unclear. Examples of blurred boundaries are networks that use virtual resources, and coordinate virtual resource flows. Another concept with a similar meaning is ‘fuzzy boundaries’, which refer to the expanding nature of structural formations where there is a continuous process of new member enrolment, and firms seizing relationships with the network. This flexibility in membership is attributed to the flexibility of network boundaries experienced by firms as low barriers to entry and exit. Fuzzy boundaries are also an attribute of the network structure and as such they are associated with a loose coupling and indeterminate membership. As already mentioned the network boundaries in network research can not be observed, and have to be drawn by the researcher following some criteria. Boundaries are always assumed and have to be described with diligence and made explicit. Network boundaries are important to demarcate the applicability of network measures and the validity of conclusions from network analysis. The network analysis itself is analysis of actors, relationships and structures within explicit boundaries. Network boundaries are particularly important for analysis of structures and the application of a range of techniques developed by the social network analysis.
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Structural measures for analysis of business networks Most of the measures for evaluation of the attributes of network structures have been developed by the structural/positional approach. Social network analysis has advanced two distinctive methodologies for evaluation and measurement of network structures. These are based on the use of socio-grams and the application of graph-models. Socio-grams represent usually all connections (direct and indirect) between actors. Socio-grams display the pathlength between every pair of actors, the range or how an actor can reach every other actor in the network, and the cliques, or cohesive groups of actors that emerge within the network. Socio-grams are an appropriate method for small networks. An example of a socio-gram is the network in Figure 2.3 on page 37. Graph-models on the other hand put emphasis on the symmetry/asymmetry of relationships, where the structure of roles and positions emerge as a result of all incoming and outgoing ties. Graph-models use matrices that display the symmetric or asymmetric relationships. Various structural indices such as centrality, structural equivalence and structural autonomy can be measured using matrices. The most popular structural measures for network analysis are centrality, density, reachability and range. Other structural measures that are computed for organisational networks are structural equivalence, connectivity (cohesion), symmetry (hierarchy) and clustering. All structural indicators are defined in the Appendix on page 214. Network centrality and centralisation The centrality measure is one of the most prominent measures in network analysis, and multiple algorithms for measuring have been used. The three most widely used centrality measures are degree, closeness and betweenness (Freeman, 1977, 1979). Degree is formalised as in-degree and out-degree, and is measured by the number/proportion of incoming or outgoing ties from one actor. At network level it can be calculated as average, minimum and maximum, describing the network pattern. Degree centrality is a measure of network activity and refers to the extent or the degree to which an actor is directly connected to many other actors. Actors with high degree centrality represent natural egos that dominate over more peripheral actors. Closeness is a measure of actor’s accessibility – how close it is to others, and what is the path-length through which it can be accessed from a particular position in the network. Closeness centrality has been developed as a measure of independence of an actor from the control of others, and it is calculated with the path through which an actor is connected to others. The length of the path is a measure of the reachability of this actor by others through intermediaries. Actors with high closeness centrality represent well
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connected agents that are highly reachable and have a more significant impact on the network compared with others. Finally, betweenness centrality has been developed as a measure of the information controlled by an actor and it is calculated by the extent of shortest paths that an actor has to others. It is an indication that a particular actor is positioned on many geodesics (i.e. paths that connects multiple other actors) (McCarty et al., 2001). Betweenness is the geodesics between any two actors that wish to contact each other (Burt, 1982). Although this is a measure attributed to bilateral relations, it can be calculated at network level to discriminate between different geodesic structures. All centrality measures ultimately allow comparability between network structures, and the development of different typologies of network configurations. All types of centrality are calculated with the number of incoming and outgoing ties, interpreted in different ways. Centrality measure is an important indicator pointing at the privileged positions of some actors compared with other members of the networks. This special privilege is attributed only in relative terms as there is no absolute value to indicate high vs. low privilege. Ego in ego-networks and headquarters of large multinational corporations in principle have a very high centrality measure. In the real business world, however, this measure exhibits huge variability. Whatever the centrality measure attributed to the headquarters of a corporate network and whatever the size of the network, a more important effect on the network structure and performance is produced by the specific role attributed to the centre. For example, the headquarters of large corporations which are natural hubs of their business network can exhibit at least four different roles: • •
•
•
a financial holding company – with little coordination activities, but immense control over the redistribution of rents within the corporate network; headquarters of integrated operating company – responsible for the integration and coordination of activities within multiple value-chains within the corporate boundaries; maintaining full control over distribution of rents and allocation of investments; centre of strategically related businesses – involved in both vertical and horizontal coordination of operations across multiple boundaries (i.e. across vertical supply chains and horizontal partnerships); limited control over distribution of rents and allocation of investments; headquarters of a diversified conglomerate, using a mixture of administrative and financial control tools to manage resource flows and rent realisation among its subordinate units.
This list of different roles of the headquarters of large business networks demonstrates that using a count of ties to and from headquarters as a proxy for the level of importance of the corporate centre is not an adequate
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measure as it may mean different types of control and different coordination roles. Actors’ attributes in this example are essential to give a full picture of the network. Hence the centrality measure cannot represent adequately either the level of control or the level of integration within networks with multiple strong corporate players. Centrality measure is an adequate indicator mainly within homogeneous networks, where there is a high similarity in actors’ attributes. Density, symmetry, reachability and range Very important structural measures are also the density of the network or cliques or cohesive groups and clusters within networks. Density is a measure that gives an indication of the intensity of contacts maintained by a firm in the network, and this is multiplied across the entire network. Density is defined as the ratio of the number of actual ties to all potential relations in a population (or the number of dyadic relationships). High density network is expected to have a much higher level of interdependence between actors than low-density network. Network density is measured both for the entire network and for subsets of it. In the case of clusters, cliques and sub-sets of the subgroups, where all are members of the network, it is represented as the proportion between members and nonmembers. Among the network measures are also hierarchy or symmetry of the relationships. Network symmetry is measured by the ratio of number of symmetric to asymmetric dyadic ties. In a hierarchical type of network structure, relationships are asymmetric and unreciprocated where power and control flow downwards, while information and compliance flow up. Asymmetric relationships exhibit various forms of horizontal and vertical dependencies, and are an intrinsic part of many business networks. Reachability is a concept that represents the connectivity in a network. It is measured by the walk from one actor to another one, or the steps in the path that connects the two actors. Two actors are reachable if there is a path that can connect them passing through other actors and connections. Actors are not reachable if the path disconnects at some point and no indirect communication can take place. Reachability is an effective concept regarding communication networks, but it is not very useful regarding interactions and transactions between network members as it encompasses many indirect links. Indirect links represent potential relationships that may not be engaged by the business partners, and hence may have no impact on the real transactions and exchanges. Range is a concept which in network analysis means diversity. It has been suggested as a measure for the diversity of ties and linkages maintained by an actor or the diversity of actors enrolled by an ego. An actor with high range has many links to different others, which may not be linked between themselves. High range means that multiple paths or walks pass through a
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focal actor. This is a useful concept for business networks as it gives an indication of both business opportunities and business dependencies. Research has shown that range (or how far an actor can reach out to other network actors) and social cohesion (or how similar are actors) are more important for generating network effects then the centrality of the actor or the strength of the tie (Reagans et al., 2003). Their research is focused on one particular network effect, or what roles are played by the core of a network in its facilitation of knowledge transfer. This research has shown that network range increases the individual abilities to convey complex knowledge across heterogeneous systems, and that social cohesion reduces individual motivation to seek new knowledge. Cohesion and sub-groups Each business network contains subsets of actors that maintain more intense relationships between themselves than with the rest of the network members. This intensity is measured with cohesion, the level of which is a clear criterion for drawing the boundaries of the subsets and the cliques of actors. Cliques and cohesive groups within a business network demonstrate the differentiation within the network. Cliques are composed of actors where all are directly connected to each other, and some are connected to other actors outside of the clique. Distinctive features of cliques and subgroups are that either their individual members exhibit very similar behavioural patterns, or the group itself acts as a single unit. The extent of clustering of actors into cliques and dense sub-sets of relationships is a measure of the network cohesiveness, where there is high cohesiveness within the cliques and low cohesiveness across the network. Social cohesion is a structural measure which acts as a moderating factor for actors’ behaviour. Actors with varying roles and attributes may act in a similar way if they are exposed to the same level of social cohesion. The notion of cohesion is closely related to the concepts of ‘strong ties’ and ‘network closure’, when every actor is connected to every other actor in this sub-group, and the exchange relationships between actors are dense, direct, reciprocated, facilitating intensive sharing of information, creating solidarity and enabling the group to act ‘collectively’ (Wasserman and Faust, 1994). Cohesion therefore assigns attributes to both individual actors and network configurations, particularly at the level of sub-groups. Cohesion of sub-groups suggests homogeneous entities that exhibit a high level of diffusion and homophily. Clique is a term that describes an ideal cohesive sub-group of a minimum of three actors that represents a complete sub-graph of a network. The ultimate formal conditions of a clique are: maximally complete closure – every actor is connected (adjacent) to everyone else in the sub-set; maximal density; minimal distance between actors; overlapping with other network
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subgroups. A formal relaxation of these principles creates n-cliques, allowing larger distances between actors and some indirect links. Although cohesion and homogeneity are continuously sought as criteria for drawing the network boundaries, they are rarely observed and represent exceptions rather than the rule. Business networks naturally are heterogeneous by the nature of the actors and entities that participate in relationships. They are also significantly in-cohesive and this is why researchers have looked for cohesive sub-groups, or cohesive regions within the network. Cohesive regions exhibit a group of actors that are mutually reachable via direct or indirect links. They are particularly important for sampling large networks where the membership status derives from an external criterion rather than connectivity. Another concept related to subgroups is an affiliation group. This in essence is a configuration that consists of relations connecting actors to events, and events to participating actors. Examples are membership lists of associations, activist groups, strategic alliances between firms and partnership agreements. On a larger network scale these affiliation groups represent dual networks with two types of connectivity – a) actors connected to each other via an event; and b) events associated to each other via an overlap of participating actors. Ultimately both types of associations represent clusters of actors or events, and mark the grey area of overlap between cluster methodology and network methodology. Network position and structural equivalence Many of the structural measures are based on formal structural characteristics of actors occupying specific positions in the network. The positions are defined by the roles that actors play in the entire set of relationships, which is further translated into ‘social status’ of a focal actor, recognised by the ‘alters’. In dispersed networks many actors jointly occupy a certain position. They are labelled as structurally equivalent and are assumed to pursue similar structural interest. Under standard conditions two structurally equivalent actors that jointly occupy one network position are also labelled to be structurally substitutable. The structural equivalence concept is a core measure used in formal network analysis. The extent to which actors hold equivalent or similar set of links to other network members is measured by the structural equivalence. By measuring the relative location of actors in the set of relations research aims to predict actors’ responses to the same social and corporate environment. One of the conclusions is that structurally equivalent actors tend to mimic each other and consequently they face the same outcomes from network processes (Wasserman and Faust, 1994). Under this theoretical assumption the following principle emerges: ‘Position ⫽ Role ⫽ Behavioural pattern.’ Under these assumptions actors’ behaviour is deduced from its occupied position in the network.
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Structural equivalence implies symmetry, reflexivity and transitivity of the relationships, and is a strong measure that can predict behavioural outcomes. The leading assumption is that such structurally equivalent actors do not compete with one another, while simultaneously they compete with non-occupants that are trying to challenge their position. This assumption within social network analysis certainly cannot be replicated directly to business networks. Particularly in the case of input–output business relationships structurally equivalent suppliers occupy similar positions, pursue similar interests, but engage in direct competition with one another for contracts with buyers. Suppliers therefore compete with those occupying similar positions (i.e. other similar suppliers), and cooperate with non-occupants (i.e. buyers). The structural equivalence measure in a supply network will be a measure of competition rather than a measure of similarity. In project networks structurally equivalent actors are expected to have similar access to resources and decision-making power over allocation of these resources. Hence, in project networks structurally equivalent actors may both compete and cooperate depending on the situation and on their objectives. A larger number of structurally equivalent actors will represent a high level of competition in a supply network, and mixed competition and cooperation in project networks. The structural equivalence concept does not apply for ego-networks, such as a large multinational corporation, as subsidiaries may have similar formal status but a very different level of autonomy and a specific role in the value creation process. Another maintained assumption within the structural/positional approach is that structurally equivalent actors are substitutable. As such they are also redundant, or can be easily made redundant. In reality both competition and cooperation can lead to actors’ redundancy – either actors being outplayed by rival competitors, or they are displaced by collaborators and other structurally equivalent actors that can be either members or nonmembers. In supply networks, competition takes place in specific product markets or resource markets, and under the conditions of limited resources, or limited market opportunities. Competition therefore derives from the limited opportunities for realisation of actors’ interests, rather than directly from the network of actors’ structural position and structural autonomy. Cliques and cohesive groups may emerge with actors holding different structurally equivalent positions, which results in further variation between structurally equivalent positions and the orientation of actors in them. Structural autonomy and individual attributes Every structural configuration includes a form of control (even when it is through internalised norms of behaviour) and a certain level of autonomy and choice by actors. Structural autonomy as a concept has been developed to explain the effect of network structure on actors’ behaviour. Structural
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autonomy is defined as the ability of actors to pursue and realise their interests and to circumvent market constraints (Burt, 1982). Structural autonomy derives not so much from the position of actors, but from their power and ability to control information and resource flow within the network. This power and control may derive either from the role and the status of actors, or from their individual attributes. Structural autonomy hence is contingent on the structural configuration of actors and their individual attributes and the relational attributes that emerge in the process of interaction. Structural autonomy can be interpreted both in the context of the actors and in the context of their structural positions. As an attribute to a particular structural position (or a status of actors) it is suggested that structural autonomy is highly correlated with a specific relational pattern common to all occupants of this status. Under this framework it is assumed that occupants of a status have equal control of resources. There is no empirical evidence to support this assumption. Control of resources and autonomy for their use depend both on the position of the actors, on their individual attributes and on the market conditions. Occupants of the same status may have different capabilities to utilise their position to capture network resources, to influence network processes or to benefit from network participation. Structural autonomy is only an indicator of the constraints and opportunities that actors face as part of their network participation. Their learning capabilities and individual attributes are equally important for the realisation of their interests as autonomous entities. A general assumption regarding the autonomy of the actors as occupants of a status is that their power is determined by the extent to which they are capable of realising interests without, or despite the constraints from, others. It is an established fact that the constraints from others derive from the relationships with them and hence relationships determine both the status and the structural autonomy of the actors. Different individual actors have different capabilities of affecting the content of their relationships with others, and different capabilities to diminish the network constraints. Structural holes, brokerage and weak ties Most network configurations include a variety of strong and weak ties, densely connected and partially disconnected members, and a number of brokerage opportunities for more experienced and entrepreneurial members. The argument about structural holes and brokerage opportunities in networks starts with Granovetter’s theory of the strength of weak ties (1973). This theory is based on the premises that transitivity derives from two opposite arguments – from cognitive preference theory – asserting that similarity induces liking, bringing together distant actors and from cognitive dissonance theory – asserting that opposites attract each other by offering complementarity. These attractions act as weak ties or local bridges that associate actors and provide conditions for the development of a relation.
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Weak ties of marginal associations between actors reduce path length within the network, speed diffusion of information and resources, and increase the utility of the connections. Increased utility within the network by itself induces conditions for a faster change and more efficient coordination of network activities. Weak ties within ego-network increase individual chances for access to resources and therefore enhance actor’s opportunities. Overall Burt (2001) concludes that the structure of relationships among actors in a market place can affect the distribution of information. In this capacity relationships are elevated to coordination mechanisms that facilitate distribution of information and market transactions. From this theoretical perspective weak ties may play a stronger framing role compared with strong ties. Similar status is attributed to the so-called structural holes that appear where there is an opportunity to establish new links between actors. Burt never defines whether structural holes reside with a node or with a link. Brokerage in business networks emerges both from actors (new firms acting as intermediaries) and from relationships (service operations of firms being outsourced, or re-launched as spin-offs and positioned as intermediary linkages). One thing is certain in this conceptual framework – structural holes and brokers or intermediaries are positioned between non-redundant sources of information and offer possibilities for increased connectivity across the network (Burt, 2001). When these holes are filled in, creating a bridge between the distant nonredundant actors and sub-sets, they add connectivity into the entire network and increase cohesion. Actors strongly connected to each other represent a cohesive group and are more likely to share resources and possess similar information. Many relationships within cohesive groups are redundant as they provide merely alternative roots and paths to obtaining access to the same pool of shared resources (Burt, 2001). Structural holes offer additional connectivity to a sub-set of actors and therefore bring novelty and facilitate innovation. Closure in networks is a case when every actor is connected to every other member of the network. This situation is associated usually with strong cohesive ties and high trust between network members. Subsequently a high level of ‘social control’ is expected in cohesive networks with closure (i.e. ‘old boys’ networks). In such networks each actor is expected to behave in a certain way, and deviant and opportunistic behaviour is sanctioned by the rest of the members through mechanisms of exclusion. This is a stage of maximum network coordination through support and assistance in carrying mutual obligations. This is also an ideal type of self-coordination in networks through dispersed trust among actors, and equal and symmetric relationships. The ideal world of social entropy in networks with closure in practice is subjected to the impact from the purposeful actions of social actors. The actors structure their relationships driven by purposeful intent, and as a result of that they structure the entire network. Strong egos emerge from
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the set of actors, and drive further network processes by managing relationships. Some actors are gradually surrounded by disproportionately high numbers of ties and form cliques and dense sub-groups within the network. In other parts where density of ties remains low many actors remain potentially disconnected. These parts of the network with low density of contacts create brokerage opportunities for network entrepreneurs, or brokers that facilitate connectivity and allow value capture from latent ties. Network brokers are actors that position themselves in such a way, that they can gain earlier access to information flows by connecting other actors. Brokers generate value in the network by acting as a bridge to remote alters. At the same time brokers may extract value from the network getting a commission for their brokerage services, or by manipulating other actors through connectivity, through special offers and imposing constraints. As brokers are acting simultaneously towards pursuing personal objectives and pursuing collective network objectives (i.e. enhanced connectivity and potential network closure), it is very difficult for researchers to disentangle the bundle of their motives. Burt (2001) contrasts closure and brokerage as coordination mechanisms in networks and emphasises the distinction that closure lowers the risk of cooperation, while brokerage increases the value of cooperation. As information flows more within than between groups or cliques and sub-sets, network closure creates competitive advantage by more effective risk management through social control and enforcement of sanctions. At the same time brokerage creates a competitive advantage by providing access and control of information, bridging information gaps through extensive development of relations. Brokers act where there is a structural hole, that is weak connections between sub-sets in the network. Bridging these sub-sets creates a competitive advantage for the broker, as well as new opportunities for the actors in the sub-sets that are unable to access information and resources previously unobtainable. This explains why sharing of benefits is embedded in the network mechanism of coordination. Both closure and brokerage as coordination mechanisms put actors in positions that enhance the sharing of network resources. Diffusion and contagion Diffusion is a concept that refers to the spread of something – such as information, resource, innovation, trust, a story, an infection or other condition – through a population. It is one of the fundamental processes that occur as an outcome of human interactions. Dyadic and multilateral relations create the opportunities for a diffusion to take place, but are not the driving force behind the actual dissemination. Most of the aspects of diffusion indicate a self-sustainable process that is triggered by an agency, or a triggering factor that activates the process above certain threshold of connectivity and interaction. All of the synonyms of diffusion – such as dispersion,
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distribution, circulation, transmission, flow – suggest a lack of preferences for the origin, the direction or the intensity of it. Previous studies of the diffusion of innovation have identified that there are three alternative and complementary mechanisms that lead to the spread of knowledge and information and the adoption of innovation. These are simultaneous invention (many actors come to the same conclusion at the same time); broadcasting (simultaneous dissemination of information to many actors at the same time); and ‘word-of-mouth’ (gradual spread of information via person-to person transmission). These three forms of diffusion take place both in organised and in randomly scattered populations of actors, and they do not confirm a network effect by itself. The network effect emerges from actors embedded in network relationships, from network closure (where every actor is connected directly or indirectly to every other actor), through network brokerage (where network brokers and entrepreneurs selectively feed in particular information to particular network members); via network cohesion (where densely connected actors share common knowledge and attitudes, facilitating intense communication and unconstraint adoption of the innovation); or via structural equivalence (or adoption as a result of social comparisons with actors occupying similar positions). Monge and Contractor (2003) contrast two alternative mechanisms that explain diffusion processes in networks – one is contagion by cohesion, where physical proximity and connectedness are the critical factors, and the other is contagion by structural equivalence based on the assumption that similar structural patterns of relationships are more likely to induce similarity in behaviour within networks and the adoption of innovation. Contagion is a concept that has been used in network research almost as a synonym of diffusion. However, we have to draw a boundary between the two concepts, as there is a subtle difference. Diffusion may take place through a mass broadcasting of information, while contagion suggests that there is a ‘word-of-mouth’ element to the spread, or a gradual increase of the scope of dissemination. This can apply to innovation, trust, adoption choices, knowledge, habits, corruption, or any other side-effects that emerge from business relationships. In its primitive form the contagion mechanism explains how certain actors’ attributes and behaviour are affected by the attributes and behaviour of others in the neighbourhood, to whom the actors are connected. Contagion, in other words, means spread and diffusion of network effects through existing linkages. Examples in business networks are the diffusion of innovation through adoption and adaptation of new practices, organisational technologies, or any product and process innovations. Contagion theory assumed a pre-existing communication network whereby individual actors are linked and participate in various exchanges. The essence of contagion theories is the transfer of association. Contagion theories explain the diffusion and the spread of network effects
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at three levels. The first is the semantic and cognitive level, where diffusion of network effects is explained through actors’ learning. The second – attitudinal level – explains diffusion as individual actors changing their opinion. The third – behavioural level – attributes the diffusion of network effects to a behavioural pattern when actors copy each other mimicking what leading actors do affected by proximity and by example. Network cohesion is a critical factor that facilitates contagion or diffusion of changes and occurrences. Intermediated knowledge structures are responsible for the transfer of relationships and the transfer of knowledge and learning across the network. All structural measures have been developed in order to attribute the notion of structure on patterns of relationships that are observed in real life situations. Business relationships emerge from interactions between business actors. Business structures emerge out of patterns of business relationships. Structures are then consolidated through institutionalisation of business practices and through the establishment of a governance form of the system for effective control and coordination. The governance of the network is what gives it legitimacy, even if self-governance is implied. There is no clear distinction between the concepts of network, organisation and institution. The organising principles are effective for all three phenomena. Interactions and coordinated and specialised roles of the actors are either allocated to actors, or emerge. Domination, leadership and power relations also emerge out of the spontaneous and random interactions. The activities within the system demarcate its boundaries which become the limit for the application of a particular governance mechanism. The system itself is subject to specialisation, or what is known in the literature as the division of labour. The actors within the system experience variable levels of autonomy, dependence and interdependence. Overall the concept of network structure refers to these abstract attributes of the overall system that hold together different pieces of it and enable it to exist as a unified entity. The next chapter will demonstrate some cases of real business networks that have been described in the literature. All cases show a wide variation of combinations of structural attributes. Each business network represents a unique case that has emerged in a particular historical context when different economic incentives and political constraints have been in place. The cases aim only to illustrate the variety of business networks and principles of network coordination.
6
Types of business networks
After going through so many hurdles to grasp such a variety of contributions to the theory of business networks, how does this enable us to understand the real world of business networks? How does this in-depth knowledge of business actors and their behaviour, of business relationships and their dynamics, and of network configurations and their effect on behaviour enable us to understand better the interconnectedness and interdependency in business networks? This chapter attempts to use the integrated language of sociologists, behavioural scientists, economists and strategists to offer a number of distinctive cases of business networks that have emerged historically in remote parts of the world. Each of the cases is unique as its settings are uniquely determined by historical, institutional and cultural conditions. Direct comparison across these cases is not possible as they represent business formations with different depth and form of control in different institutional and historical settings with different form and level of interdependency. Each case is a distilled business practice of interconnected actors, relationships and business functions. It can be viewed as an ideal type that represents a certain pattern of business transactions which are framed by the participating actors and the relational context. Comparisons within individual types of business networks would be a fruitful research strategy. The variability within types of business networks is caused by the active choices of business actors and their negotiated strategies under certain economic and political influences. The variability across types is caused by multiple environmental and context characteristics that have shaped relatively different structural configurations. Although the globalisation process world wide and the effect of global information and communication networks and global markets and industries play a standardising role, the differentiation factors at the level of national business systems and the national institutional environment and at the level of interconnected firms within business networks driven by actor’s choices and individual preferences are equally strong. In addition, this typology is not conclusive as the business practice of network formations invents continuously new forms of business collabora-
Types of business networks 161 tions. The interactivity within these collaborations inevitably generates new structural configurations that are institutionalised with various business contracts and agreements. In this context, my typology of business networks is exhaustive only as far as the literature has taken me in my review of business networks: • • • • • • • • • • • •
Entrepreneurial small business networks Family business networks Chinese family and community business networks: guanxi, hegu, hui, bangs and clans, kongsi Japanese corporate business networks: keiretsu Japanese trading business networks: sogo sosha Korean circular shareholding networks: chaebol Value chain supply networks: global sourcing and global commodity chains International corporate networks: MNC, strategic alliances and interdependent corporate relationships R&D alliance networks and project networks Network-based businesses: utilities, public services, infrastructure networks Communication-based business networks: internet Spatial clusters, industry clusters and cluster–network relationships
Entrepreneurial small business networks The research on small entrepreneurial business networks has substantially increased in volume during the last years. Interest comes both from the entrepreneurial side, where businesses interlink rapidly, and from the policy side, where governments implement different policies to support the growth of small businesses in order to enhance self-employment and economic development. The active positioning of entrepreneurial firms in the business arena coincides with building effective business relationships with customers and suppliers, with government bodies and large corporations. This makes small firms embedded in intricate business networks composed of local, national and international partners, government agencies, financial institutions, consumer associations. Donckels and Lambrecht (1997) define entrepreneurial networks as organised systems of relationships with customers, suppliers and other entrepreneurs, with relatives, external consultants and other agents or potential partners. Entrepreneurial and small business networks usually represent dispersed and heterogeneous networks with fuzzy boundaries and resource-based and role-based division of labour (Figure 6.1). They comprise autonomous agents that are linked to each other via various formal and informal contracts, who share information and design collective strategies. The founders of small firms usually learned their business while working at other regional firms, and many of their contacts evolved from that employment. Empirical research demonstrates that for over half of the
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Consultant
BANK Supplier
Customer SME SME Customer
Trade fare
Government department Customer
• • • • •
heterogeneous dispersed type of network configuration with fuzzy boundaries role-based governance resource-based and role-based division of labour autonomous agents engaged in contract relationships
Figure 6.1 Entrepreneurial small business networks.
small firms the most important customer is some large firm either in the region, or nationally, to which small firms subcontract their services (Young et al., 1994). The behaviour of small entrepreneurial firms and their strategic decisions and choices to interlink with other business partners depends on a number of environmental factors. Among these are: demographic specificities of the region; the local culture and the support from local institutions; regional structure of the economy in terms of leading companies that build the local pool of skills; professional and business links with leading employers in the region; the level of entrepreneurial education; the number of years running a business of their own; the industry sector; the size of the firm; and the growth orientation of the firm (Young et al., 1994; Donckels and Lambrecht, 1997; Johannisson and Monsted, 1997). The growth orientation of the small business is determined by the embedded entrepreneurial attitudes towards exploring business opportunities, by the perceived benefits and expected profits, and by the participation of the firm in the redistribution of resources in the local community. Small businesses are more likely to choose to remain small and flexible in network configurations where the collective results go far beyond the abilities of any
Types of business networks 163 single company. Together these networks of small entrepreneurial firms generate higher profits for all by gaining access to larger markets, by benefiting from economies of scale and by competing with larger firms without merging or being acquired. Johannisson and Monsted (1997) argue that for entrepreneurial firms running a small business and being self-employed it is a way of life and a source of legitimacy to run your own business which goes beyond rational economic choices and behaviour. Small firms use networks primarily to complement their own limited resources (Aldrich and Zimmer, 1986). The context of the entrepreneurial business activity involves the entrepreneur, the entrepreneurial venture, the context of the entrepreneurial actions (or the environmental conditions and constraints), and the justification and legitimation of the entrepreneurial activities (Gartner, 1985). Naturally the boundaries of the entrepreneurial network would be the reach of those partners and associates of the entrepreneur who perceive certain value in the venture. They are current or potential partners for economic transactions or exchange of ideas, and therefore they are linked to the small business as it is justified and framed by the entrepreneur. The network boundaries are therefore determined very much by the legitimacy of the business. Entrepreneurs develop contacts not only in their neighbourhood, but also to firms located in a distance and across multiple borders and boundaries. Relationships of resource-sharing dominate the dynamics of inter-firm exchanges and transactions. Entrepreneurial firms exist only because they satisfy certain market demand, even though they actively construct their market space with their innovations. By emerging in a certain market space entrepreneurial firms connect to other firms, organisations or individual customers. What makes them different from supply networks is that they are much closer to customers, and therefore much more vulnerable to changes in customer needs. What distinguishes them from family business networks is that they rely much more on resources outside of the family. Entrepreneurial networks are similar to family business networks and represent a dispersed type of structural network configuration. We may expect that small entrepreneurial networks will exhibit the socalled ‘small-world’ phenomena, where all actors in a particular region have less then six degrees of separation, or they are connected by a relational path with six steps through which each actor can reach every other one. While entrepreneurial networks represent a structural configuration of a distributed type, family business networks are usually ego-centred and more localised types of formations.
Family business networks The research on small business does not usually distinguish between small business networks and family business networks. In my view this distinction
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is important in order to understand the driving forces behind network formations. While small business entrepreneurial networks are driven by selfemployed agents, family business networks are based on family employment with all subsequent aspects of risk-taking, flexibility, self-financing and control. Family business networks depend on how the business is embedded within the family and the household, called by Wheelock and Oughton (1996) an ‘informal or complementary economy’. In the household economy other motivations besides economic gain operate (Rosa et al., 1994). Family business networks are usually homogeneous, where actors experience family interdependence and normative-based governance (Figure 6.2). They present ego-centred networks with fairly clear boundaries and exploit functional and normative divisions of labour. Family businesses embedded in the web of family relationships absorb higher risk in response to uncertain employment and income opportunities. This is particularly useful to absorb the shocks of economic restructuring and to assist in economic development via self-employment. Households not only can provide for themselves, but can support family members in other social and economic activities through internal redistribution of wealth. The inheritance law, passing ownership rights from one generation to another, as well as various changes to fundamental institutions such as the separation of the household and the family from the firm, can be considered as the most important factors that determine the scope of the family business (Nenadic, 1993; Mingione, 1994). Research shows that people in households may base their actions on traditional or patriarchal reasoning, and may run their own business as a source of identity, as well as for the preservation of dignity and independence.
Members of the household • • • • •
homogeneous ego-network with clear boundaries normative-based governance functional and normative division of labour family interdependence
Figure 6.2 Family business networks.
Types of business networks 165 The individual transition through households – from birth to adulthood – is an extremely important institutionalisation factor that determines attitudes and values, subsequently projected in the business choices and decisions. Mariussen et al. (1997) also write about different forms of rationality in conducting business within the household. This different rationality is based on the concepts of risk and insecurity within the family, which contrasts with the conventional presumption of maximising benefits from entrepreneurial activity. The family business network is structured much more strongly by tradition rather than by wider economic interests. Both small businesses without family ties and household businesses are strongly concerned with economic security, business survival, maintenance and growth (Mariussen et al., 1997). In addition Gray (1997) develops a three-way categorisation of motives that drive business decisions in family micro-firms including ‘money’, ‘lifestyle’ and ‘safety’. Overall, four business attitudes are proposed by Mariussen et al. (1997) for small family business networks: (1) survival and security attitudes where relationships provide for living for the family and for the owner; (2) businessintrinsic attitudes where relationships provide satisfaction with the ownership and with the running of the business; (3) intrinsic-creative attitudes where the business gives pride in creativity; (4) achievement-oriented attitudes where the business satisfies the need to seek new challenges. Empirical research reveals that the first type of attitude is more typical for traditional family businesses, while the other three types are also important for independent entrepreneurial small businesses (Mariussen et al., 1997). Another interesting piece of empirical evidence is that the inequality of labour is stronger for family business, where women who participate in the business alongside their husbands typically play a supporting role. The classical authority relations of subordination, the use of traditional technologies and the flexible mode of mobilisation of labour within the family are all considered typical characteristics for the family business (Mariussen et al., 1997). This demonstrates how the family institution is related to the wider market – the reluctance of the family to seek support from outside agencies; the determination to avoid family conflict; periods of intergenerational change which are critical for the business development; traditional socialisation of children through labour practice; and intergenerational transfer of technology. The tradition is reproduced as a morally binding force (Mariussen et al., 1997). Much of this discussion explains the constraints on family business networks particularly in Europe, their weaknesses to link to the wider socioeconomic resources and their fragmentation in the landscape of rapid growth of business networks and alliances. The following section will contrast this classical Euro-centric view of family business networks with the Asian family-controlled business networks.
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Types of business networks
Chinese family and community business networks: guanxi, hegu, hui, bangs and clans, kongsi A wide variety of family-controlled business networks in Asia have emerged over the history of the region. Most of them have been scrutinised as inefficient non-market institutions that have been involved in economic activities. Numerous efforts have been made by the international community to undermine the credibility of the Chinese family business networks among Chinese immigrants in the region, and to dismantle the Japanese family businesses zaibatsu immediately after the Second World War. More recently attacks were directed and attempts were made to restructure the Korean chaebol. In spite of the attacks on business networks in Asia, their adaptability and comparative advantages stemming from robust family bonds, leading to the accumulation of relational value, have become more evident to analysts. As these networks are based on fundamentally different relationships and business practices, different categories and examples of Asian family business networks are considered separately in this chapter. Among the Chinese family and community business networks five different practices are compared. Guanxi Guanxi means relationships that bind people through the exchange of favours. It also refers to reliance on informal business agreements. While some authors attempt to link the strength of the Chinese business networks to some fundamental religious attitudes, others argue that the normative basis of guanxi – as the development of particularistic relations with instrumental value does not come from Confucianism. The values of interpersonal trust and affinal reciprocity are universal, and many other people and nations have recognised the practical advantage of reciprocal obligations, against fears of reprisal and of losing functional ties. In addition to that, the merchant class in China itself has adopted Confucian rhetoric only as part of its flexible adaptation and search for legitimacy (Li, 2000). Guanxi networks are based on reciprocity of favours which facilitates social exchanges supported by a mutual belief in reciprocity. Guanxi resemble a set of affective ties between people, linked through kinship, native place, dialect, school, work-mate or sworn brotherhood. Guanxi are established to facilitate exchange of personal and knowledge-based resources, for mutual benefits and for protection (Bun, 2000). Guanxi networks have most of the features described for the previous category of family business networks. A main distinction is their ability to grow beyond the family, and to expand into economic activities within the wider community. Although known as guanxi networks in the literature, the Chinese family and community business networks encompass a number of different social practices. Very often these different practices which are based
Types of business networks 167 on different institutional formations are bundled together as Chinese business networks or guanxi. Usually Chinese family and community business networks are homogeneous and have clear boundaries (Figure 6.3). There is no formal division of labour and different individuals are collectively entrusted to do different things and engage in different operations. The network develops its own rules and norms which generate normative interdependence. These networks use family representation and develop informal institutions that coordinate the collective efforts. Hegu One of the early types of highly sophisticated business network institutions that emerged in China, whose activities were recorded by the Qing Dynasty (1644–1911), were hegu – based on investment contracts, shareholders and the use of a general manager. These were inter-family partnerships established between rich families as a joint venture for investing their wealth and for making more money. Family members, entrusted by the family to act as representatives, could sign agreements as shareholders in the hegu. They
• • • •
homogeneous institution-centred network with clear boundaries legitimacy-based governance normative interdependence
Figure 6.3 Chinese family and community business networks – hegu, hui, bangs, clans, kongsi.
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could bring the family capital to the hegu partnership and participate in strategic investment decisions for the appropriation of the collective pool of money. Hegu network is a prototype of the modern investment funds with appointed fund managers. Hui I-Chuan Wu-Beyen (2000: 129) looks at another type of network formation in China – voluntary financial associations or hui. The author compares these hui financial networks in China and Taiwan and traces them back to the Buddhist temple practices from the seventh century onwards, that provided loan money to the poor. As an institution hui represents a charity or a cooperative social organisation that facilitates the establishment of a pool of money for communal borrowing with no interest, and brings mutual benefits to its participants. The hui practice is that an initiator establishes a committee, and defines the rules of participation. The purpose is to establish a rotating savings and credit association. In this association all participants make financial contributions according to the rules. The collective pool of money goes to selected participants, again according to the rules. The participation agreement is bonded by trust in the initiator and in the other participants. As a financial institution hui reduces the costs of financial capital, and extends the purchasing power of poor individuals and families, providing them with new social and economic opportunities. Hence the actors in this network are bounded by economic interests and trust. Bangs and clans Other types of network formations with business purpose are the Chinese bangs (network organisations based on linguistic similarities and a common dialect, with strong feudal patriarchal authority structure), and clans (family business networks based on extended family linkages, facilitating entrepreneurial access to resources such as labour, capital, information, credit and markets). Family business networks of the clans type enable individual members to utilise the benefits of family trust and family welfare. Network formations of the type of bangs also utilise the social resource of trust but trust is accumulated through business dealing, rather than through family bonds. Chinese family business networks or clans are primarily based on paternalistic relationships with full confidence in the family head who owns and manages the businesses. The business leader usually exhibits modesty, unrivalled experience and moral authority. Strategic business decisions are made on the basis of experience, intuition and informal exchanges of information, rather than detailed reports or expensive advice by external consultants. Modesty in consumption, high rates of savings and community financing are
Types of business networks 169 accounted as the main source of capital that finance the family business activities (Weidenbaum, 1996). There is a tendency of bangs and clans to engage in as many business relationships as they can with people of similar culture – those from the same clan or village, or those who speak the same dialect. The growth of these business networks is based not on economic efficiency, but on a strong preference for cultural proximity, risk sharing and optimising business returns. Kongsi and the Chinese overseas business networks The Chinese business networks also claim their popularity from the overseas Chinese communities, including different communal and business practices in the wider region. Such historical examples of Chinese community business networks discussed in the literature are: the trading activities during the colonial period of the sixteenth–nineteenth centuries; the quasi-autonomous communities in the Malay world in the eighteenth century; the smuggling activities of Chinese entrepreneurs during the Opium War with France and Britain (1839–1842); and much of the entrepreneurial activities of the twentieth century (Bun, 2000b). The family enterprise nested in wider community relationships is the basic economic unit in these business practices. Numerous historic accounts clearly demonstrate the wide variety of ties among these overseas Chinese businesses, as well as their relationships with indigenous local communities and ruling elites in the region (Todeva, 2001). The Chinese revenue farms in the seventeenth–nineteenth centuries were developed as fiscal institutions encouraged by the Dutch East Indies Company for tax purposes (Gribb, 2000). These institutions within the community were called kongsi, or Chinese communal business organisations. Kongsi maintained their own armed forces, health and education systems, and currencies. They developed essentially in the eighteenth century in the gold mining industry, where the Chinese immigrants possessed superior extractive technology. The subsequent campaigns of the colonial forces in 1850–1854 to defeat these semi-autonomous political communities and to establish their own hegemony in the region have articulated a number of myths of strong Chinese business networks, or of Chinese entrepreneurs supported by their community who have the capacity to adapt and to collaborate effectively with the authority. These myths have reaffirmed the image of Chinese business networks as an almost irresistible force that penetrates through legal boundaries in their advancement for wealth. Many research findings point to conclusions that the bonding of overseas Chinese immigrants in business networks is triggered by local hostility, racial scapegoating, the lack of institutional safeguards for the protection of their interests, and by general distrust that surrounds them when overseas (Bun, 2000b; Holbig, 2000). The systematic discrimination against Chinese immigrants prevented them from exploring a number of professions in foreign countries, and forced them to move to commerce and trade. For their
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self-preservation they needed to cultivate government connections and mutual benefit ties, and to put a strong emphasis on informality in business dealings (Bun and Kiong, 2000; Cribb, 2000; Gomez, 2000; Liben, 2000; Schak, 2000; Shaolian, 2000). Their special abilities at making deals and developing transactional bonds with partners have given them a substantial competitive edge. Their businesses usually perform sub-assembly work, and make components that they supply to others. They are also heavily involved in shipping, transporting, wholesaling, financing, sourcing and more recently providing other services, such as real estate, hotels and entertainment. Most of their operations are behind the scenes, minimising the need for a public appearance and very often in the grey economy (Weidenbaum, 1996). The main explanatory factors for all of these social formations are: the weak legal and institutional framework of the early Chinese settlements in the region, the economic and political restrictions on Chinese immigrants, and in general the poverty and resource constraints experienced by them (Liben, 2000). Regarding the rapid spread of Chinese business networks in certain periods in history, authors point out that it is mainly due to regional economic and political factors, rather than to intrinsic strengths within the Chinese business networks as an institutional formation. A recent example is the setting up of subsidiary offices by Taiwanese businesses in China and Hong Kong in the 1980s, which can be explained by the political will of the Taiwanese government to strengthen the tax regime and the specific needs of the Taiwanese firms that are doing business with China. These needs are: to handle foreign exchange, to manage shipping and a higher level of organisational complexity, and to reduce dependency on outsider trading companies (Schak, 2000). The growth of the recent Chinese/Taiwanese business networks is associated with the general conditions of economic growth in the region, the liberalisation of the economic environment in China, and the language and cultural affinity between the two countries. From this overview of the literature it can be seen that there is no clear framework as to what set of social relationships are employed for business purposes and how these emerge as distributive business practices which represent the collective efforts of interlinked individuals and families.
Japanese corporate business networks: zaibatsu/keiretsu The history of the big business groups in Japan that are called keiretsu starts with their pre-war establishment as family-controlled business networks known as zaibatsu. Zaibatsu were giant trading conglomerates that ran most of pre-Second World War Japanese industry. The historical Japanese family business zaibatsu resembled a closed intra-family corporation, where family investors were not able to take back their own investments, and some family businesses remained undivided for more than 300 years (Numazaki, 2000).
Types of business networks 171 A zaibatsu family conglomerate was controlled by a family council called shacho-kai, and the change of the number of partners within it took place only through family adoption, by marriage, or by birth and death. The difference in inheritance law in Japan and China is perhaps one of the most significant factors historically that led to the consolidation of the family power in Japan, compared with its relative fragmentation in China. The zaibatsu institution combined the wealth of rich merchant families, with the organising capabilities of warriors, and the expertise of university graduates in order to create large-scale family controlled conglomerates. Zaibatsu also represent an organisational form that emerged in response to market failures at the time of Japan’s industrialisation after the Meiji Restoration in 1868 (Hirschmeier and Yui, 1981; Imai and Itami, 1984; Lynn and Rao, 1995). The market failure at that time is described in the literature as the inability of capital markets to allocate efficiently resources to entrepreneurs because of the lack of an infrastructure to mobilise savings and to facilitate risk assessment for investment in new business ventures, especially in industries such as mining, steel and shipbuilding (Lynn and Rao, 1995). This institutional and environmental uncertainty instigated collaborative behaviour between the rich families the traditional warriors and the university intellectuals. The new enterprise system comprised narrowly focused and interlinked factories, effective at transferring new technologies between the Western economies and the Japanese economy (Imai, 1992). This enterprise system possessed ‘permeable boundaries’ that enabled them to gain economies of scope (Fruin, 1992). Part of the system were the zaibatsu in-house ‘organ banks’ – financial and insurance companies that enabled the zaibatsu to overcome the weakness of the Japanese stock exchanges, and to mobilise and channel financial resources to entrepreneurial ventures (Lockwood, 1954). The retained profits were allocated to new ventures through internal financing and budgeting systems, which facilitated indigenous growth. On the one hand, the zaibatsu controlled a large number of constituent business units through stock held by the holding company, through centralised purchasing within the group and through despatching directors to manage subsidiary units. The holding company exerted authority over the constituent units to reconcile incongruent goals and aspirations. On the other hand, the zaibatsu were market-like organisations to the extent that constituent units behaved independently and competed for resources and contracts, and some of them acted as entrepreneurial organisers (Gerlach, 1992b; Lynn and Rao, 1995). In the post-war period, serious attempts to dismantle the Japanese holding companies were made by General MacArthur and the occupation forces in 1946. Subsequently, encouraged by government industrial policies, the reunification of formerly connected businesses took place through crossshareholding and mutual business dealings under the name of keiretsu. Much
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of the zaibatsu practices, traditions and network formations were resurrected as keiretsu. Keiretsu groups exhibit a complex business network that has a multi-level structure with clear hierarchical orientation and core-periphery components (Figure 6.4). As a network it has a governance structure such as shacho-kai and employs a complex resource and capabilities based division of labour. The firms within are characterised by shared ownership and coordinated interdependence. The present keiretsu represent close, long-term business relationships established by large corporations with selected groups of smaller firms, financial and trading institutions. They represent a web of overlapping financial, commercial and governance relationships, initiated from a central core which pulls in large segments of the Japanese economy (Gerlach, 1992b). Present Japanese inter-corporate keiretsu relationships are considered in terms of three different attributes: corporate groups, financial centrality and industrial interdependency. These groups are not conglomerates as the
Group bank
Shacho-kai
First tier suppliers
Second tier suppliers
• heterogeneous • institution-centred network, multi-level hierarchical and dispersed core-periphery network with fuzzy boundaries • institution-based governance • resource and capabilities-based and asset-based division of labour • coordinated interdependence
Figure 6.4 Japanese keiretsu business networks.
Types of business networks 173 central holding companies are illegal under Japan’s post-war commercial law. The companies are independent and publicly owned. However, they are linked through cross-shareholding investment through the exchange of personnel, through shared debt and equity, and through mutual strategic plans. The strategic leadership resides within the presidents’ club shacho-kai, where implicit rules and shared understandings in unstated gentlemen’s agreements lead to coordination and general cooperation between firms for mutual benefits (Futatsugi, 1986; Kester, 1991; Gerlach, 1992b; Shimotani, 1995; Tezuka, 1997). Shacho-kai is a regularly convening association, which comprises the presidents of the core keiretsu member firms. It represents the inner circle of the keiretsu as a clique of firms whose reciprocal commitments stem from shared ownership and from long association and strong collective identity (Lincoln et al., 1996). These councils hold monthly meetings to discuss group strategy. They support group solidarity, mediate intra-group activities and settle intra-group disagreements. Keiretsu members can thus develop plans based on activities that other keiretsu members are pursuing. Numerous firms lacking shacho-kai seats are also tied to the group through their financial and commercial transactions, and through various monitoring and governance relationships. For example, middle managers of keiretsu firms meet monthly to discuss operations and try to coordinate corporate activities. Other direct linkages within the keiretsu are represented by the stable corporate cross-shareholdings, by the dispatch of managers to insider director positions and by director interlocking or directors of one keiretsu member sitting on the board of another member firm. These arrangements as control relations are superimposed on the network of regular business transactions (Lincoln et al., 1992). Regarding the cross-shareholding, share ownership is a symbol of commitment and mutual obligation, rather than motivated by expectations of dividends and returns on investment (Tezuka, 1997). A typical keiretsu core company will have 20–40 per cent of its stock owned by other companies within the keiretsu. Long-term shareholding agreements with other corporations create a situation whereby 60–80 per cent of the keiretsu stock is never traded (Industry Week, 1992). In addition to these direct forms of influence, there are a number of other indirect ties that bond the commercial and investment activities within the keiretsu. Among the centralised coordination mechanisms are: (1) the selection of keiretsu trading partners; (2) the amount of borrowing from group banks; (3) the extent of shareholding by group banks and corporations; (4) the selection of board members from the management of big leading firms (Lincoln et al., 1996). Overall financial and commercial dependencies exist both ways: dependencies on the group banks for borrowed capital, and dependencies on the group manufacturers and trading firms as buyers and sellers of products and services. There are numerous classifications of Japanese keiretsu, emphasising specific aspects of the network formation – vertical, horizontal, supplier-based,
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bank-centred. Overall there is an overlap between different categories, and most features are observed in each type of keiretsu. A supplier keiretsu is described as a vertical group of companies, centred along a major manufacturer, such as Sony, Honda and Matsushita. Toyota has more than 60 per cent of its parts and subsystems supplied by external contractors, and Canon is outsourcing nearly 90 per cent of the value-added components in its copiers (Industry Week, 1992). Their vertical keiretsu is held together by a complex mix of interlinked people, financial resources, information flow, parts and products exchanges, and joint technology development agreements. Toyota has established a first-tier suppliers’ group, the Kyoukoukai (176 companies); Nissan has its Takarakai (104 companies). Members of the vertical keiretsu have had little choice but to accept this combination of cooperation and competition. Vertical keiretsu is a way to create competitive teams of interlinked suppliers, engaged in product and process development (Tezuka, 1997; Kim and Limpaphayom, 1998). Ownership is only one part of this link: most lead firms have minority shares in their suppliers. The lead firm encourages the second or third tier suppliers to match the first tier supplier’s cost and quality, often passing along important technical and process information on the first supplier’s operations. The lead firm tries to avoid monopoly power in its network, thus stimulating all suppliers to be more efficient and price competitive. Suppliers in the same keiretsu group cooperate in projects, and yet compete with each other and with outside suppliers to excel in quality, delivery, reliability and cost performance (Tezuka, 1997). The bank-centred keiretsu is larger than the supplier-only keiretsu and includes those headed by the four largest pre-war industrial groups or zaibatsu (Mitsui, Mitsubishi, Sumitomo and Fuyo) and the two major bankcentred groups, the Dai-Ichi Kangyo Bank Group and the Sanwa Group. They are called Mutual Insurance Systems (Tezuka, 1997). Their member companies come from a variety of industries, and they seek to integrate not only vertically but also horizontally. Financial or horizontal keiretsu represent a two-tier corporate governance system, where corporations are linked together through an extensive network of corporate cross-shareholdings, and corporate members have close ties to a main bank. The keiretsu bank not only provides member firms with debt financing, but also owns a substantial amount of each firm’s equity (Kim and Limpaphayom, 1998). In normal situations, the first stage of group governance intervention is in place, and corporate shareholders provide mutual monitoring. When firms are performing well, keiretsu financial institutions do not restrain leverage levels, and keiretsu formations encourage cross-investment and collaboration among corporate members. Corporate owners take responsibility for the higher leverage and for the expansion of trade credits and account receivables as a common sources of short-term financing (Prowse, 1990; Kim and
Types of business networks 175 Limpaphayom, 1998). At this stage there is no significant relationship between ownership structure and financial leverage (Kim and Limpaphayom, 1998). In a situation of crises and reduced profitability the keiretsu network reacts with a second-stage intervention. It assumes control and reduces debt of the troubled firms. It acts as an ultimate disciplinarian (Hoshi et al., 1990). Keiretsu financial institutions can reduce financial leverage levels of their member firms in several ways: (1) allowing interest concessions; (2) providing equity infusions; and/or (3) writing off outstanding loans. Financial institutions act as both debt and equity holders, and allow their member firms to carry more debt (Kim and Limpaphayom, 1998). Shacho-kai membership ties, as well as trade, debt and equity ties, are stable relationships that are also employed in the second-stage governance intervention and increase the possibilities for assistance when a partner firm encounters difficulties. Member companies usually maintain or even increase their equity in the troubled firm. Directors are transferred from the main bank and major trading partners to the firm’s board to assist in strategic and operational decisions. Network suppliers and customers adjust their contracts to favour the target firm and to transfer technical personnel to its operating divisions. Network members may in addition mandate exclusive purchases from the target firm’s product line until the crisis has passed (Lincoln et al., 1996). Keiretsu equalise the fortunes of their members, smoothing inequality in financial returns across participating firms. Members are not able to maximise their benefits, that is extraction of profits and rents, but instead have been obliged to optimise output measures. Keiretsu networks are seen as clusters of large firms charging each other efficient prices (i.e. prices in line with their respective opportunity costs) while collectively extracting other market benefits through a collective action for maximising the joint welfare of all member firms (Lincoln et al., 1996). Keiretsu members experience lower risk than independent companies in Japan, because the entire keiretsu group shares individual risks. Keiretsu groupings are also claimed to be an effective system of minimising transaction costs, and maximising efficiency gains by economising on information and control through regularised communication and exchange (Williamson, 1985). They avert the threat of over-organisation by keeping their contractual arrangements implicit and their modes of monitoring and intervention informal and flexible (Lincoln et al., 1996). Keiretsu membership can be interpreted as a hedge against future failure (Aoki, 1988).
Japanese trading business networks: sogo shosha The Japanese trading companies sogo shosha emerged in the seventeenth century and have evolved since then. Initially they provided services as middlemen to their clients and keiretsu members and now they have diversified
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in different business areas with higher risk and higher profit margins. In building a diversified business portfolio they have settled as hubs in large business networks, controlling complex flows of resources. At various times shosha have acted as commission agents, importing and exporting on behalf of clients; as dealers, trading in their own right; as middlemen in transactions between members of a keiretsu network; as financiers, lending money to smaller keiretsu members; and more recently as investment-trust managers, venture capitalists and business consultants (Industry Week, 1992). Sogo shosha represent an ego-network with blurred or fuzzy boundaries where the ego is both an intermediary in business transactions and an ownership hub (Figure 6.5). The member firms experience controlled autonomy and controlled interdependence. The division of labour in the business network is asset-based. The entire business system is governed via ownership and connectivity ties. Many shosha are also building on their expertise as oil traders, and are currently repositioning themselves from being traders to operators in infrastructure industries, such as electricity generation, telecommunications, television broadcasting and even satellite communications. Their current metamorphosis means shedding their low-margin role as agents and petty financiers towards businesses with high profit margins. They often form alliances with foreign companies and their networks of partners are much more multinational than traditional keiretsu. As hubs in their own business networks shosha hold large shareholdings in their companies. Some of their investments represent shares in keiretsu firms, Keiretsu network Bank
Sogo shosha trading company
Foreign partners • • • • •
heterogeneous intermediary-centred network with fuzzy boundaries ownership-based and connectivity-based governance asset-based division of labour controlled autonomy and controlled interdependence
Figure 6.5 Japanese trading business networks – sogo shosha.
Firms
Types of business networks 177 some are in their own independent subsidiaries. Now shosha exhibit the role of venture merchants. Each of the leading shosha has between ten and 20 subsidiaries that are eligible to be listed on the Tokyo Stock Exchange. Share trading appears to be an attractive business for shosha, and a powerful mechanism for the growth of their business network.
Korean circular shareholding networks: chaebol Korean chaebol are family-controlled business groups, or cross-industry conglomerates that include a large number of affiliated firms as independent legal entities, interlocked by circular shareholdings. The foundations of the Korean business networks chaebol date back to the period of the Japanese occupation in the 1920s and 1930s. The system was rapidly developed during the 1960s under the presidency of Park Chung Hee, who nationalised the Korean banks and reinforced the chaebol system. Under his government a few families that owned large companies were selected and encouraged to tailor their business growth and investment targets in order to meet government objectives for export-led industrialisation. Companies were encouraged to invest across industry and expand establishing interlocking relationships in order to spread the risk of the collateral. The expansion of these cross-industry conglomerates was financed by the government through preferential loans below the cost of capital, and through almost unconstrained borrowing by the member firms from government-owned banks. The chaebol had the task to find the appropriate business forms that enable them to take advantage of the growth opportunities in the world markets, and to recruit more resources from outside. Spin-offs emerged in the form of the establishment of new firms as new members of the chaebol, financed mostly from other member firms and bank loans backed by collaterals within the chaebol system. Very little part of the capital came from the families themselves. However, through cross-shareholding the families were able to gain control over the entire group. The circular shareholdings within the chaebol enabled the families to exercise control with a minority stake only (Lee, 1999). The main driving force behind the growth of the chaebol business network, however, is the Korean government, which has created the main financial and market conditions: protected domestic market, state-controlled banking sector, active industrial policy and subsidised export credits. As a result of these policies, the families merely utilised the available resources, such as cheap loans and subsidised export credits, and diversified the business portfolio accordingly (Penrose, 1959; Lee, 1999). The chaebol represents simultaneously a family-centred and a distributed network that crosses multi-industry boundaries through asset ownership (Figure 6.6). It is based on circular shareholding governance and asset-based division of labour. The member firms experience controlled and negotiated interdependence.
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Family
• • • • •
heterogeneous family-centred and distributed network with fuzzy boundaries circular shareholding governance asset-based division of labour controlled and negotiated interdependence
Figure 6.6 Korean chaebol business networks.
An evidence of the high interdependence within the chaebol in terms of cross-subsidy by internal transactions and cross-debt-guarantee is the degree of observed synchronisation of changes of stock price among member firms (Lee, 1999). Most of the examples of Asian business networks discussed above introduce new institutional forms that have evolved in a particular historical context. These business networks represent a bundle of relationships based on resource exchanges, personal, political and cultural affiliations, ownership and control. The next section focuses on the evolution of resource supply relationships into value chains and global commodity chains.
Value chain supply networks: global sourcing and global commodity chains The traditional concept of the value chain was invented in the context of the theory of the firm and represents the notion of a sequence of interconnected production processes and business functions where the output from one process is an input into another. The input and output flow represents inter-
Types of business networks 179 connected resource flows, some of which are taking place within a company and others outside of it. The integration of these operations and business functions is seen as a choice of senior executives to internalise or externalise activities based on costs and quality considerations. There are two trends, particularly since the 1980s, that changed the processes in the value chain. On the one hand large corporations started international expansion, which involved the transfer of low value-added activities to foreign units, while building a high value-added capacity at home. In this way the value chain of the corporation stretched across borders. The second trend was the downsizing of large corporations and their attempt to externalise costs by outsourcing and subcontracting business operations to other firms. This led to a wave of new business start-ups and spin-offs from the main corporation and a flow of resources from the corporation to its partners externally, enhancing the business opportunities for the constellation of supplier and subcontractors situated at the periphery of the focal corporate network. Each product or service of the corporation has its own value chain and hence multiple supply chains cross through a corporation. The corporation makes strategic choices and decisions as to which parts of the value chain are to be performed in-house and which parts of the chain are to be controlled. The uncontrolled part is outsourced to suppliers and forms the supply chain, or to distributors (distribution chain). Once these decisions are made, the corporation develops internal capabilities to service these value chains both internally and externally. The corporation also develops control mechanisms in order to manage the input from its supply chains. Outsourcing and subcontracting are specific forms of business relationships used by the corporation in order to externalise costs and to appropriate value-added from different parts of the value chain. Global sourcing – outsourcing and subcontracting within the value chain The issues of subcontracting were initially raised in the literature as part of the analysis of Japanese industrial sourcing practices, which employed subcontracting as a form of collaborative manufacturing. Three driving forces have been behind the growth of subcontracting networks in Japan: the government-led specialisation of contractors and the institutionalisation of ‘parent–contractor’ relationships; the politically motivated industrial reorganisation in Japan and government mandates in periods of expansive growth and burgeoning demand; and the fragmented labour market with a pool of cheap labour (Nishiguchi and Brookfield, 1997). Modern Japanese subcontracting relies on clustered supply firms, in which the firms at the top buy complete assemblies and systems components from a concentrated base of first-tier subcontractors that subsequently involve second-tier suppliers, and so on (see Figure 6.4 on page 172).
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A governance of the entire group of suppliers called first-tier suppliers is applied where their status as long-term contractors and partners in new product development is established. Part of the group governance at corporate level is the intense information sharing between the corporate parent and the contractors or suppliers. The first-tier contractors in turn buy specialised parts and services from a group of second-tier subcontractors, which buy discrete parts and labour from third-tier subcontractors, and so on. The system of subcontractors in Japan resembles a semi-hierarchical and nested structure based on overlapping market and partnership relationships. There is a very significant difference between the subcontracting practices described for the Japanese system, and those developed within the western market economies. In the literature related to free market economies the subcontracting is usually used where the integration within the multinational corporation is not possible or preferable, or in cases of outsourcing of business operations. Downsizing and outsourcing are the two strategies that the multinational corporations from the US and Europe apply, by which they devolve business functions within the value chains controlled previously by them, and pass those to subcontractors. Supply networks and disintegrated value chains have accelerated their growth with the outsourcing practices introduced as the latest manifestation of the efficiency-creating division of labour. Outsourcing has opened a window of opportunity for a wave of new firms selling services and business operations on long-term contract basis that other firms no longer want to perform for themselves. Specialised tasks have become the ‘core competence’ of newly established firms. Many of the supply networks are composed of small firms, and very often research on supply networks follows the framework of small business entrepreneurial networks. However, subcontractors could be firms of any size and any geographic location. Relationships with subcontractors are a mixture of hierarchical and interdependent relationships, as the leading company holds the decision-making power over the subcontracted activities, and yet becomes dependent on specialised inputs from subcontractors. Supply networks are heterogeneous and dispersed networks with fuzzy boundaries and input–output division of labour (Figure 6.7). They are governed by inter-firm contracts and their member firms experience input–output interdependence. The dynamic change of member firms in a supply network usually depends on the activity of the central and leading agents of the network. These leading actors control the negotiation process and determine the membership status of the peripheral members and the flow of recourses. As more control is decentralised among different members of the network, overall the members are more interconnected, and more complex exchanges and resource transfers take place within the network. This is because each of the leading actors makes strategic choices and designs network flows and hence the overlap of links and interconnectedness within the network. The
Types of business networks 181 Trading company Suppliers Service provider
Distributor Intermediary Marketing
Manufacturer
• • • • •
Retail
Bank
heterogeneous dispersed network structure with fuzzy and shifting boundaries contract-based governance input/output division of labour input/output interdependence
Figure 6.7 Supply networks and commodity chains.
distribution of resources among network members is determined by the centrality of their location in the network, and particularly by the flows of information, goods, services and payments. What makes the contemporary value chain virtual is the extent of use of information at all stages of the process, or the input of ‘digital assets’ along with other tangible and intangible resources. The ‘virtual’ linking of capabilities across a broader set of players has replaced the traditional vertical integration of activities. It is recognised by firms that vertical integration brings liabilities and costs along with increased complexity of business operations. The virtual integration of capabilities in a network across firm boundaries brings flexibility and responsiveness to changes in demand beyond any previous forms of integration and cooperation. Global commodity chains Another view describes the international supply networks as global commodity chains. Global commodity chains emerged with the accelerated internationalisation of corporate activities, initially as producer-driven networks. The concept encompasses four segments of the production process: raw material supply network, production network, export network and marketing network (Gereffi, 1990). Each segment of the commodity chain consists of interlinked firms, representing an input–output structure with spatial dispersion and concentration of units, and a governance structure to coordinate the entire production system (Gereffi, 1994). Gereffi identifies two divergent governance forms: the traditional producer-driven commodity
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chain and the buyer-driven commodity chain. The former has more linear ties and is based on repetitive transactions and long-term contracts where the producers become push-factors moving their products towards the final retail market. In contrast, the buyer-driven chains have multiple backward and forward linkages and resemble strategic alliance structures with complex logistics, pulled by the retail sector with buyer-driven orders. The selection of firms for such chains is very much determined by whether the coordinator’s role is dominated by the producers or the retailers, and by the wider environmental constraints and opportunities faced by individual firms. The globalisation of commodity chains has stimulated complex cross-border economies of scale and scope that have fostered a wave of strategic linkages between firms across geographic and industrial boundaries. Both concepts of supply chains and global commodity chains represent the same type of network relationship which is based on a sequence of value-added activities performed by interlinked firms.
International corporate networks: multinational corporations (MNCs), strategic alliances, interdependent corporate relationships One of the distinctive features of international business organisations is that they resemble a complex net of business units that are integrated within a number of value chains and spread across different industries and different countries. The most distinctive example of an international corporate network is the MNC, where the business headquarters and individual subsidiary units represent the ‘nodes’ in the network. MNCs The structure of the MNC has been described in terms of the concepts of the multidivisional corporation, and more recently as a heterarchy and a network. It represents a simultaneously hierarchical and distributed network with fuzzy boundaries (Figure 6.8). The governance mechanisms are a combination of ownership and contract arrangements. The division of labour is based on resources location and prescribed roles in the value chain. The firms are bound by a complex hierarchical and semi-autonomous relationship that results in various levels of interdependence. MNCs are highly differentiated organisations that comprise multiple units located in different countries and are embedded in different business systems and socio-political contexts. The growth of the MNCs can be analysed both from the perspective of the firm with its integrated units, assets, resources and processes, and from the perspective of the foreign market entry, or the expansion of the firm beyond the home market. There is also a distinction between internal growth of the corporation, emphasising
Types of business networks 183 Turn-key contract
Joint venture Subsidiaries embedded in local clusters
Franchisees
Headquarters
Industrial cooperation agreement
• • • • •
Licensee
Representative in foreign country
heterogeneous distributed and hierarchial headquarters-centred network with fuzzy boundaries ownership and contract-based governance role-based, resource-based and location-based division of labour hierarchial interdependence
Figure 6.8 Business networks of multinational corporations.
the cumulative expansion of business activities within the firm vs. external growth, or the expansion through foreign direct investment (FDI), and mergers and acquisitions (M&A) of other organisational entities with their business operations. The evolution of the national firm to a multinational corporation includes a progressive vertical integration of down-stream and up-stream operations within individual product value chains, as well as managed diversification of the initial product/service lines. Part of this evolution is the internal structuring of units and operations, and the external positioning of these units in relation to suppliers, customers and competitors. The leading modes of internationalisation of the firm in the literature are exporting, licensing, FDI, mergers and acquisitions of new subsidiaries, cooperating across borders and forming strategic alliances (Madhok, 1998; Todeva and Knoke, 2002). The modes of foreign market entry are determined by the conditions of the foreign market, by the capacity of the MNC to coordinate and finance global transactions, and by the organisational capabilities and production capacity of the foreign firms that participate in the operation. The foreign firms are usually owned and controlled by the headquarters located in the home market. The remote control of subsidiaries
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by the headquarters has raised multiple questions about designing and managing distributed networks and has become one of the critical issues in international business. Subsidiaries and corporate affiliates Subsidiaries are business units located in another country that are partially or wholly owned and controlled by a corporate centre. The ownership is secured through FDI. FDI in a wholly owned subsidiary could be: market oriented (substituting imports), cost-oriented (utilising low labour and other input costs) and resource oriented (aiming at a vertical integration with up-stream units in the host country), and could take the form of joint ventures, mergers and acquisitions, and green-field investments. Establishing a subsidiary is an investment decision for the MNC. Subsidiaries are considered independent organisations, embedded in hostcountry local environments, and subject to both local and global competition. The hierarchical relationship between headquarters and wholly owned subsidiaries is based on clear lines of subordination and majority control. In spite of the intensity of activities and resource exchanges, the control of the international business operations is usually by the headquarters, which coordinates strategically all transactions, exchanges and partnership relations. While parent companies usually coordinate and assist subsidiaries through relocation of resources and by providing access to markets, there is evidence that this relationship may also reverse where subsidiaries determine corporate choice. Many subsidiaries or spin-offs from MNCs in Japan, for example, which are legally independent entities that issue their own stock and are listed on the stock exchange, have been assisting their parent firms under the keiretsu system (Namiki, 1999). In a multinational context the growth pattern of MNCs follows the framework of Bartlett (1986) and Prahalad and Doz (1987) in terms of global integration, global strategic coordination and local responsiveness. The aim of the combination of these strategies is to attain a balance between pulling out localised resources into the global network and relocating global resources into local clusters of firms. Integration is related to the degree of subsidiary autonomy, and it is operationalised as intensity of flows of resources between parent and subsidiaries, and between the subsidiaries themselves (Kobrin, 1991). Responsiveness is the adaptation of the MNC to the local market and regulatory forces in its many locations that put constraints on standardisation of products and operations, and requires additional coordination (Jarillo and Martinez, 1990; Taggart, 1997). Porter (1986b) defines MNC strategic coordination as implemented by the linkages between similar activities in different countries and/or different parts of the MNC’s international network. He recognises that this form of coordination allows for accumulation and sharing of
Types of business networks 185 knowledge across the network that helps the MNC to gain international economies of scale, and also to shift comparative advantage between different locations. James Taggart (1997) revisits the integration-responsiveness paradigm and particularly the integration of activities by MNCs in response to global pressures. He recognises that in the efforts of headquarters to achieve a balance between global integration, global strategic coordination and local responsiveness, four types of subsidiaries emerge according to their roles. The first one is the quiet subsidiary, or those independent overseas affiliates that have virtually no headquarters control, that keep their input and output markets independent from the MNC network, and engage both in local adaptations and independent exports, that is low integration within the MNC network and low responsiveness to local market conditions. The second type is the autonomous subsidiary with low network linkages within the MNC network, that is low integration with the parent, some sharing of technology with sister subsidiaries at a fairly low level of central control, and high responsiveness to local markets. Strategic decisions and choices and coordination activities are shared between the subsidiary and the parent. The third type is represented by the active subsidiaries with high local responsiveness and high level of integration and a global mandate, servicing the MNC parent’s customers worldwide. The level of integration of active subsidiaries with the corporate network are much higher than the previous types. The fourth type of receptive subsidiary resembles high integration and a high level of manufacturing sophistication and technological linkages within the MNC, and low responsiveness to the market of its location (Taggart, 1997). Effectively receptive subsidiaries are fully integrated with the corporate network both for input and output resources, and are strongly exposed to the corporate network control. While focusing on the governance structure and the set of transactions involving MNC subsidiaries it is difficult to conceptualise the boundaries of the firm, as some subsidiaries are not fully owned by the parent, and many subcontractors and intermediaries such as banks and trading companies enter the field of business operations based on long-term contracts and equity sharing. Distributed shareholding of units demonstrates the blurred boundaries of the MNC. The MNCs also resemble a heterarchy – fluid, decentralised and interpenetrating structures through which headquarters and subsidiaries carry out various business operations. It is suggested that the middle managers are the critical organisational level in this network-like structure, that effectively manage knowledge and transactions worldwide (Hedlund, 1994). For Bartlett and Ghoshall (1989) MNCs can be conceptualised as networks of intra-organisational relationships that are themselves embedded in networks of inter-organisational relationships in home and host economies. They can also be conceptualised as ego-centred networks, where the boundaries of the network, the structure and content of relationships,
186 Types of business networks and the autonomy of individual member-units depend on decisions from the headquarters. Regarding the dispersed structure of sub-units of the MNC, their coordination is subject to managerial decisions of different levels of the corporate network. The multiplex flows of resources and intermediate products resemble an intra-organisation network, and are guided by organisational rules, principles, communication links and transportation channels. Hennart (1991) uses the transaction-cost approach to compare three modes of control used by the parent over its subsidiaries – hierarchy, socialisation and price. His research concludes that the most favoured mode of inter-unit control in MNCs is the price mechanism under most circumstances. Inter-unit transactions are also coordinated by a transfer-pricing mechanism, where value is determined by in-house MNC accountancy rules and decisions, and is therefore not subject to market sanctions. The product differentiation within the MNCs, combined with the division of labour between units, and the presence of economies of scale throughout their operations, suggests that the evolution of MNCs leads to deepening of the imperfect competition within industries, and therefore enhances the non-market organisational solutions for further growth. These non-market cooperative forms of foreign market entry, that have evolved beyond export–import operations and wholly owned subsidiaries, are the establishment of interdependent business relationships such as licensing, franchising, international subcontracting, international outsourcing, management contracts, turnkey contracts, equity and contractual joint ventures, industrial cooperation agreement, and counter-trade agreements involving governments and other MNCs, or various forms of strategic alliances and multilateral business agreements. Strategic alliances and interdependent business partnerships Interdependent business partnerships are an under-researched area, and substantially difficult to explain using theoretical frameworks that are based on economic rationality. Most partnerships are formed for strategic reasons and usually they are justified by expected returns rather than an accumulation of resources, costs and benefits. The international business literature has studied a number of these collaborative strategies that lead to internationalisation of business networks. All forms of interdependent business partnerships are used by MNCs to coordinate business operations in foreign markets. The content of the licensing relationship could cover a wide range of contractual arrangements relating to the transfer of rights and resources between partners including knowledge transfer or financing of international business operations. The international franchising form of business organisation is another form of supply network, designed to ensure standardisation across relatively small
Types of business networks 187 and geographically dispersed business units, particularly related to the service sector – transportation, retail, distribution and fast food. It is also termed a customer service form of partnership, where a number of management functions such as sales, invoicing, debt collection and some aspects of quality control remain within the parent that is called a franchisor, leaving the franchisee to concentrate mainly on customer service delivery (Stanworth and Stanworth, 1986). The content of a franchising relationship is based not only on the exchange of resources, information and financial payments, but also on the commitment made by individual franchisees, the ‘reputation’ of the franchisor, and its contribution of specific knowledge and strategic capabilities. The payments comprise a broad range of heterogeneous forms, including financial compensations in the form of fees and royalties, or loyalty and compliance with certain company regulations that secure benefits for the franchisor. Franchising relationships are governed by contracts and are subject to law enforcement practices in individual countries. As such they are very much subject to incentives or barriers that derive both from the local business environment and from the relational context. Global sourcing as a term refers to different practices, including subcontracting, outsourcing and the use of supply networks. Global sourcing encompasses the production, purchase and assembly of parts and finished products from different firms worldwide. The network for global sourcing is usually associated with a MNC without being within its boundaries. It follows a global commodity chain integrating different industrial sectors, corporations and small businesses. Sourcing is often employed by foreign multinational firms as a means to overcome trade barriers. Whether a firm uses domestic or foreign sourcing partially depends on the cost advantage that derives from the price differentials of goods and labour in various countries, which is influenced by currency exchange rates and other environmental factors. The contractual joint ventures and equity joint ventures are very common modes of foreign market entry that result from the cooperative efforts of companies to establish a new business venture, or an investment project in a third company. Usually the joint venture is secured by contracts that determine how assets, risks and profits are shared. Contracts also specify mutual interest of the partners and conflict resolution procedures. The distribution of equity between the partners or the control over the venture may be related not only to the financial contribution of each partner, but also to their contribution of technology, know-how, brand name, other intangible assets or access to world markets. The joint ventures are seen as a form of strategic alliance between independent firms that aim to enhance their strategic capabilities through cooperation. Joint ventures are also seen as investment forms used by MNCs from developed countries to enter developing countries (Austin, 1990). Although there is not much academic research on management contracts,
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they are a popular form for businesses to acquire management services such as facilities management, warehouse management and fund management. This type of contract interlinks corporations with business service firms and other business intermediaries. Among management contracts are also a variety of individual compensation agreements with CEOs already integrated by the firm, and contracts with business organisations and consultancy firms that can also enhance the managerial capabilities of a company. In the case of large investment projects in globalised industries these contracts span borders and stretch the boundaries of international business law. A turnkey contract is usually used for construction of new production facilities, very often built by an international contractor, financed by a host government and by international financial intermediaries. Turnkey contracts include the active partnership of local firms and an international set of suppliers and subcontractors. The completion of the production facilities is usually managed by an engineering firm on behalf of an investor. It is clear that these business actors perform fundamentally different roles in the business network, and have different controls over resource flows. Sometimes turnkey contracts may include assistance at multiple stages such as the provision of technology and know-how for the installation and subsequent maintenance of the equipment under ‘product-in-hand’ or ‘market-in-hand’ agreements, and a whole range of additional responsibilities – from training of personnel to the sale of the project output. The large size of turnkey deals such as building oil-extraction and refinery facilities usually include a variety of payments – from direct financial compensation to ownership shares, or counter-trading with the output from the new plant. Industrial cooperation agreements represent strategic alliances between MNCs, host governments and independent firms. Industrial cooperation agreements are complex configurations that include a combination of relational forms, such as licensing, know-how transfer, contractual joint ventures, turnkey projects or more complex multilateral agreements. An example of industrial cooperation agreements is the Airbus project – a partnership between aerospace and aircraft manufacturers and governments from a number of EU countries, including wider subcontractors’ networks. Counter-trade agreements are another form of business partnerships that involve MNCs and governments. They are based on multiplex and interconnected relationships between heterogeneous actors, and are characterised by complexity, various levels of reciprocity and strong government involvement. Two examples of counter-trade agreements are the project for the defence aircraft industry in Australia, or the rehabilitation of coal washery plants in Vietnam, where the deals are supported by governments, and the payments are agreed in the form of barters, offsets, counter-purchases and buy-backs (Fletcher, 1996). All types of complex multi-faceted and interdependent partnerships that involve multi-national firms are usually project-based business networks that involve asymmetric commitments by different partners. They are
Types of business networks 189 underpinned by complementarities of knowledge, resources and capabilities between heterogeneous actors. While there is a general consensus on the motives for establishment of cooperative business alliances, such as learning/competence building/complementarities, cost-sharing and risk reduction, generating new business, opening development opportunities, access to markets and distribution channels, market development and competition shaping/pre-emption (Todeva and John, 2001; Todeva and Knoke, 2005), there is still not enough discussion on the content of these partnerships and the specific network formations that consolidate business relationships and enhance the variety of dependencies between firms.
Research and development (R&D) alliance networks and project networks R&D networks are perhaps one of the most renowned examples of knowledge-sharing business relationships. The complex nature of R&D in industry is associated with many different activities. These include: innovation in concepts and ideas and joint creation of knowledge; sharing knowledge between specialised knowledge fields; definition of new scientific questions and hypothesis and seeking their answer in partnerships; emergence of new solutions to problems and their market realisation; novelty in processes and cross-border integration of operations; and enhancement of new patterns and routines in market behaviour, in lifestyle and at the workplace (Miller and Morris, 1999). Managing R&D and innovation across firms is one of the most challenging tasks, and requires a wide intra-firm and inter-firm cooperation. Managing R&D fundamentally depends on management of diverse formalised and tacit knowledge which is scattered between specialised units and scientific fields, embodied in current products, processes and technologies, and carried out by scientists and researchers, employed by a wide range of business organisations. The literature describes four different generations of R&D activities at firm level that have taken place historically. Each of these periods is a distinct evolutionary step towards a more sophisticated collaboration between economic and scientific agents. The first generation of innovation networks, according to Miller and Morris (1999), emerged historically with the advancement of the industrial revolution and took place in isolated scientific laboratories, where the innovation process was managed by scientists, who defined their own research projects and pre-selected the questions to be explored. The networks of scientists resembled closed communities that worked more or less in isolation from the traditional commercial activities at that time. During this first stage scientists with different knowledge would build upon their expertise and would pull together their efforts in answering particular scientific questions. These scientists would cooperate within the
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boundaries of the laboratories as prime organisations, as well as within their scientific communities, where they shared a common understanding of scientific concepts and theories (i.e. chemistry, physics, mechanics, etc.). Essentially, the first generation of R&D networks was a cooperation network that involved different scientific communities with the scientific laboratory as a facilitating institution, and as a hub for knowledge transfer and exchange. The network though was heterogeneous as it comprised scientists, technologies, bits of knowledge and scientific practices, and a variety of cultural and technological artefacts as a context. An example of the first generation R&D networks given by Miller and Morris (1999) is the research laboratory established by Thomas Edison in 1876 in New Jersey in the USA, which led to the invention of the electricity bulb. The second generation of R&D networks is attributed to the establishment of research laboratories within the corporations, particularly after the Second World War. This organisation of R&D activities built upon concentrated application of R&D in many diverse projects for military purposes during the war in the areas of aviation, electronics, weaponry, fuels, chemical technologies and synthetic rubber (Miller and Morris, 1999). Corporate managers subsequently took advantage of this knowledge, by developing new civil applications and commercialising many innovations. The cooperation network in the second generation R&D networks was more complex and involved also the scientists from divergent fields, corporate managers and government agencies responsible for the regulation of activities, standardisation of products and processes, the licensing of technologies, and specific project funding. Gradually, the financing of R&D activities, which is inherently unpredictable, increased the overall financial exposure of the corporation and triggered the third generation of R&D networks, where alternative sources of financing were engaged. This required the invention of more sophisticated R&D management tools, such as matrices of indicators for comparative evaluation of commitment of resources, competitive advantage, risk, strategic planning of R&D projects, analysis of technology life-cycle, constructing technology road-maps and time planning. The use of these managerial techniques in the third generation R&D activities put an emphasis on the wider innovation system including university education, technology infrastructure and the implementation of government innovation policies. The wealth of new actors increased further the heterogeneity and complexity of the system. The cooperation within the third generation R&D networks which are expanding at present is externalised in an attempt by the firms to access additional innovation resources beyond their boundaries. At this current stage corporations engage in targeted acquisition of knowledge and technology using multiple forms of acquisitions of knowledge firms, licensing, R&D joint ventures, research consortiums and joint project ties with univer-
Types of business networks 191 sities, or other public sector institutions. Technology agreements between firms are paralleled with cross-equity investments and acquisitions (Peters, 1995). The R&D networks in the third generation resemble some of the most complex formations with heterogeneous agencies and multi-level organisation and coordination of resources and activities. The fourth generation of R&D networks is yet another fundamentally different stage in the knowledge creation process. It is characterised by a dynamic interdependency between organisations, resources, people and firms tied in a web of development scenarios (including knowledge, technology and product development). All actors in this network are of a different nature and most of them aim to frame the market and to dominate by exploring radically new ideas that challenge and expand the established technological field. All actors in the fourth generation R&D networks collectively explore multiple new alternative technology intensive and knowledge intensive products, processes and services, constructing simultaneously the multidisciplinary sources of knowledge and the market applications of that knowledge. At this stage all R&D efforts are intrinsically linked with the market and with the current and projected needs of customers. The great challenge of the innovation in the fourth generation R&D networks is linking emergent technologies with emergent markets (Miller and Morris, 1999). The target for the R&D management is to design innovation environment, to determine the size of the partnership and the information sharing rules for that partnership with a balance between flexible internal sharing of information, and controlled endogenous spillovers within the partnership, exogenous spillovers to the wider environment and leakage of knowledge to competitors (Atallah, 2000). Relationship management therefore became overwhelming compared with resource management. Figure 6.9 portrays one of the most complex types of business networks which is extremely heterogeneous and dispersed with embedded hierarchy. It is also a multi-layer system where different innovation processes take place at laboratory level, at the level of scientific knowledge, at corporate level and at the level of market adoption. This shows the boundaries of control that actors may have over the knowledge flow. The system is also characterised by knowledge-, task- and contract-based governance. It is structured by knowledge and resource-based division of labour and represents knowledge and contract-based interdependence. The R&D laboratories themselves resemble high-flux, open-ended, separately funded collaborative science and technology enterprises that use toplevel technologies and high value-added products, and are primarily constrained by the abilities of their members to share information, knowledge and technical expertise – both within projects and organisations and across them. The effectiveness of the R&D networks is a fundamental concern to governments. Governments implement a wide range of innovation policies in
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Competing products Competing technologies
MNC
Research consortium
Research laboratory
MNC
Government innovation policy agencies
Research laboratory Government standardisation agency Subcontractor
Scientific association Scientific and knowledge fields
International standardisation agency
• heterogeneous • complex hierarchical and dispersed laboratory-based network with shifting and fuzzy boundaries • knowledge-based, task-based and contract-based governance • knowledge-based and resource-based division of labour • knowledge and contract interdependence
Figure 6.9 R&D alliance networks and project networks.
order to counteract market failure from weak, redundant or dominant technologies. Specific policies aim to build the comparative advantage of key industrial sectors in the economies, to facilitate and coordinate intense knowledge sharing between the public and the private sector, to provide stability and funding for the co-evolution of complex research strategies and new markets, as well as to develop relational research capacity within leading firms and industrial sectors (Cusmano, 2000). Major forms of government intervention in building R&D networks are procurement contracts and leadership in R&D consortium formation. All this suggests that the government plays a central role in R&D networks – both by shaping and framing the environment for R&D networks, and acting as an active participant in them. An R&D consortium is a safeguard against market redundancy. It may explore multiple alternative technologies without knowing which might be successfully selected at the final stage. Some explorations in R&D lead to a dead-end both in terms of a technological breakthrough or a successful realisation on the market. These are discontinued at an early stage before they are challenged in the market place, and the costs are shared by the consortium.
Types of business networks 193 R&D networks are usually project based and resemble project networks involved in research and business application of scientific knowledge. The project itself is an institution that has specific aims and limited resources (including knowledge). It bundles together a variety of economic, social and scientific agents such as firms, consumer associations, laboratories, government bodies, technologies, physical artefacts and documentation. These heterogeneous agents are of a different kind: individual experts carrying specific knowledge, institutions that represent different interests or non-human elements that are employed for a particular utility function. The particular institutional form and the specific bundle of interests of all stakeholders establish the project boundaries. A distinctive feature of R&D and project networks is that they have clear boundaries between members and nonmembers. The technologies or non-human entities employed in a project represent embodiments of human knowledge, human decisions, human selections and choices, human subjectification of material objects and human interests. R&D project networks do resemble contractual ventures with specific organisational elements. They are constructed on the basis of investments with unknown outcomes. Participants are selected as contributors with designated roles in order to produce target outputs. The efforts of project members are usually driven by more or less coherent project aims, and certain rules and procedures that frame the coordination of their activities. The rules and procedures limit the negotiation process, and are foundations for the development of organisational routines.
Network-based businesses: utilities, public services, infrastructure networks Network-based businesses exist in many industries: telecommunications, transportation, airlines and railroads, banks and financial institutions, and even public services such as healthcare organisations and education establishments (Coyne and Dye, 1998). Bank branches and automated machines, for example, transport funds so customers can make transactions at any point in the network. The healthcare system facilitates the flow of medical knowledge about disease and medical practice about diagnosis and treatment. Individuals from the public enter and exit the network at certain points and connect the healthcare flows of resources, knowledge and practice. These networks transport people, goods, information or resources as a service to customers, and not just for distribution purposes. The flow of resources is hence the objective of the network and not an outcome of building business relationships or expanding the network. The transport effect constitutes a substantial portion of the added value to customers and to companies, and derives from the value inherent in connectivity or linking an entry point in the network to a desired exit point. As such, infrastructure
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networks enable customers to achieve personal objectives and this enabling function generates the value-added for which these networks receive payments. Overall network-based businesses deliver services and are structured along geographical and technological boundaries. These are heterogeneous networks with a certain degree of connectivity which evolves into various zone and lane concentration areas (Figure 6.10). The boundaries of the network are usually clear as these are determined by ownership of the peripheral units. The governance mechanism is determined by ownership, hierarchy and connectivity principles and the individual actors and units are exposed to hub-dependence while the hubs themselves are subject to hierarchical and connectivity control. Although the transport effect accounts for a great deal of the value in a network, much of its costs tend to be concentrated in the individual outlets of entry and exit points. This asymmetry can obscure the relationship between value and cost, making it hard to determine what constitutes a natural business unit in infrastructure networks, and hence what are the
• heterogeneous • hub, zone and lane concentration network with fixed ownership boundaries and infinite connectivity across boundaries • ownership-based, hierarchy-based and connectivity-based governance • geographical-based and technology-based division of labour • hub dependence
Figure 6.10 Network-based businesses.
Types of business networks 195 nodes in its configuration. The nodes can be expressed both as the costcentres and the value-added parts which usually do not coincide. In a business network, resources are usually dedicated to individual business units. In contrast, resources for network-based business are shared across business units and across multiple linkages. From this perspective, the weakest points of the business network are where most of the value-added to customers arises from, or the individual outlets that deliver the service. A strong and effective infrastructure network may distribute resources almost instantaneously throughout the entire network of linkages (Coyne and Dye, 1998), and the electricity grid is one of these examples. Initially network managers assumed that customers used the network uniformly, and resources needed to be distributed equally across the entire network. Due to the technological constraints on how to measure usage patterns, managers were unable to match capacity according to traffic, and their allocative decisions were based on ‘educated guesses’ (Coyne and Dye, 1998). With new mapping technologies managers can determine how customers actually use the network infrastructure, and these techniques enabled monitoring and research to identify three distinctive patterns of usage and concentration in networks. When, in the aggregate, customers use a network truly at random, and value all links, the resulting pattern is no concentration. This is an ideal situation which is altered almost instantaneously as interactions start and the transfer of resources commence. The interactions and exchanges in infrastructure networks produced localised agglomerations and structural patterns of usage that represent uneven concentrations. Zone concentration emerges when large numbers of customers concentrate their usage in some parts or zones of the network. Zones may naturally consolidate in natural business units as customers cluster around natural hubs in the cities. A network firm whose network consists of strategically separable zones, such as the airlines, can choose different strategies for each of the emergent zones. Zone-based strategies or concentration-based strategies can address more effectively issues of fluctuation of demand and capacity management. These zones, however, do not have clear boundaries as some customers will always cross zone lines. Finally, lane concentration appears when customers heavily use or heavily value individual links in a network. That is often the case with telephone service. When the intensity of usage is high enough lane competition may appear with new companies offering alternative dedicated services on these routes. While zone concentration requires development of nodes, lane concentration requires development of links and connectivity. A shared infrastructure such as in the telecommunications and the transportation industry decreases the importance of proprietary economies of scale, as each new competitor can benefit from the capacity of the infrastructure. Interconnection of competitors opens up the possibility of competing at the wholesale level by buying and selling network capacity. For example, in Europe
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travel agents in small shops can undercut the airlines by buying blocks of seats from whoever has the lowest rates at any given time and then reselling them. Interconnection and shared infrastructure disproportionately benefits small network players and can narrow or even eliminate the gap in comparative advantage that derives from economies of scale in large networks. Competitors that enter a large established network can become a source of customers for one another when one provider originates traffic and another eventually delivers it. This cross-network connectivity and transactions makes it even more difficult to manage resources and capacity across the interlinked units. In order to accurately assess the economics of a network outlet, the first step is to define the function of the outlet in the network. The only function of some outlets could be to service the customers, that is responsible for the shipment or where transmission originates or terminates. Other outlets could both service customers and attract new ones. Decisions about whether to open or to close individual outlets affect the whole configuration of the network and change multiple channels. The knowledge of network-based businesses is still emerging and is dominated by the technology and engineering sciences. These types of networks are the most challenging for network theory, as they are very rich in network information for all three approaches – the structural/positional, the relational and the cultural. The knowledge on business units, on transportation and organisation technologies, on knowledge, information and resource flows, and on cumulative behaviour of users – all require an extension to our current theoretical thinking. The economics of networks have acknowledged that there are agglomeration effects and network effects that cannot be easily explained with theories that explore the behaviour of individual and autonomous actors. Research on emerging dependencies and endogenous interdependencies within network-based businesses is still in its infancy and is very much required for the future development of network theory.
Communication-based business networks: internet While interconnectivity is the fundamental principle behind network-based businesses or infrastructure networks, interactivity and interoperability are the fundamental principles enhancing communication-based business networks. Interoperability means the synchronisation of activities and operations across business partnerships. Interactivity means an overlap between information exchange and operability, when the communication process substitutes for and has amalgamated with the business operations themselves. Examples are all of the internet activities that facilitate communication, negotiation and execution of business transactions. The internet revolutionises the communication processes through worldwide access, and the enabling low-cost data sharing technologies. This refers to the potential for realisation and the capacity of these technologies and not
Types of business networks 197 to their implementation in different social and economic contexts worldwide. The main distinction between internet-based business operations and the transactions within the established economy comes from the use of the internet. The internet mediates first as a content publisher (delivering information to customers), and second as a medium for service provision (enabling transactions and exchanges). The internet technology is affecting both the marketing networks of firms, the service and payment networks, the supply chain networks and increasingly their production networks – through internet-based business information systems that support all intrafirm functions and inter-firm operations. Effectively all business relationships and business operations such as product and machinery design, new product development, product description and introduction to the market, and technical support, as well as marketing, purchasing, distribution tracking and financial control, can be coordinated through internet-based business information systems (Sakkas et al., 1999). The most interesting properties of communication-based business networks are that they are extremely heterogeneous, driven and governed by technological solutions (Figure 6.11). They resemble very large and
• • • • •
heterogeneous dispersed network structure, no boundaries technology-based governance unclear division of labour emergent interdependence
Figure 6.11 Communication-based business networks.
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dispersed networks without boundaries and hence there is an unclear division of labour where actors fairly easily adopt new roles, positions and functions. Overall there is an emergent interdependence between actors and it changes rapidly. There is also an emergent hierarchy based on core intermediaries or content providers. The key of the new information technologies is that they provide three types of connectivity – protocol-based, platform-based and platform-independent. The connectivity facilitates content development, publishing and instant transfer of information. Protocol-based connectivity requires strict protocols and rules – pre-designed and rigorously implemented throughout the network. Platform-based connectivity requires the design of sophisticated platforms acting as information hubs or obligatory passage points throughout the network. Platforms host translators and transmitters, or programs that transform digital information into text and images. While platforms are strictly controlled, traffic between platforms is digital and can be coded using multiple languages. Platform-independent connectivity implies that digital information flow can cross multiple ‘language systems’ or different coding systems that reside on various user platforms. These three types of connectivity in business terms mean standardisation, comparability, information supported decision making and enhanced capabilities to design various new control mechanisms that assist business in the planning, execution and evaluation of transactions. The technologies are virtually universal and hence they can be applied in different socio-cultural and economic contexts. They provide information sharing across client and server platforms, which is extremely powerful enabling technology that facilitates synchronised interactions. The distribution of information itself is costless, excluding the cost of infrastructure, and as such this brings enormous cost-savings to firms. The technology itself creates a collaborative environment for exchange of market information with a much higher level of transparency regarding the products and services. The technology also offers a remote access to the marketplace. One hidden aspect of these technologies is that they carry embedded architecture, which allows for central administration of distributed computing and information presentation. Universality of the internet technologies is enhanced by a bundle of telecommunication functions such as interconnection, instant switching, mapping, scheduling, multi-channel and parallel transfer processes, management of traffic streams and interpenetration between communication networks. All of these technologies enable inter-firm interactions and create alternative market places with global reach. A fundamental advantage of the internet-based technologies is that they create interoperability at different levels: at the level of the firm (or the intranet), at the level of the virtual enterprise (or interconnected business entities within the value chain that contribute to the design, manufacturing and realisation of the final product) and at the level of the marketplace (or the internet-based sales and auctions). E-commerce, e-marketing and the
Types of business networks 199 dot.com businesses are all applications of the internet-based technologies that construct virtual networks of clients and what is known in the literature as virtual chains. Both the up-stream and the down-stream links of the virtual value chain are dependent on an institutional presence. First they require a standard infrastructure. The standardisation of the infrastructure has affected both the manufacturing of its components and the building and implementation of its architecture, which requires input from standardisation agencies. Second, the virtual links are dependent on interoperability between applications and data-exchange protocols, which require partnership agreements between firms. Standards, certification and licensing, and agreed business models are some examples of the role of the institutional framework that enables the connection of the virtual information-based business network. Another more traditional example of communication-based business networks are the marketing networks developed under the framework of relationship marketing techniques. The marketing network of a company resembles a communication network for information exchange with customers, where the marketing centre of the network aims at constructing relationships with customers through various information channels. Looking at marketing network ties, there is no clear distinction between the information exchange and the relationship building. Much of the marketing efforts of companies to track their customers, to reach new customers and to promote products and services, to build and use customer databases, encompass simultaneously information collection about customer preferences, organisation of the data about patterns of consumption or product functionality, dissemination of information to customers and relationship building with these customers. Network marketing usually uses the snowball principle, where the main marketing agent recruits other marketing agents, who recruit other marketing agents from within their own social networks, and so on. Relationship marketing is another specific technique of reaching customers, which has a long-term focus, and looks upon marketing as relationships and interactions within networks (Gummesson, 1994). It is using social ties as a main vehicle to establish bonds and loyalty by customers and marketing agents. The evolution of relational marketing and internet marketing leads to the emergence of ‘nests’ of marketing activities within active social groups recruited by the marketing network.
Spatial clusters, industry clusters and cluster–network relationships The recent literature on business networks incorporates discussions of specific agglomerations of firms that form either geographic clusters or other types of product and technology-based clusters where intense collaboration between firms takes place. One of the leading definitions of clusters is by
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Michael Porter, who refers to clusters as ‘geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agencies and trade associations) in particular fields that compete but also cooperate’ (1998: 197). Overall clusters are agglomerations of firms co-located in a geographic area, connected by value-adding activities and with access to benefits from input/output markets, from infrastructure, and from environmental coordination via institutions and policies. There is a basic agreement that clusters are composed of interlinked firms and the relationships in business clusters involve multiple resource exchanges based on collaborative agreements. There is still no clear distinction between business clusters and business networks. Perhaps one of the main distinctions is in the level of coordination, where clusters are loose agglomerations combining collaborative and competitive relationships, while networks are predominantly collaborative and include business relationships that involve some form of resource sharing. In addition, clusters comprise firms that share vertical and horizontal linkages, which suggest that clusters incorporate networks of firms. The clustering phenomena emerge with the beginning of economic transactions where buyers and sellers congregate together at a market place to enhance their individual chances for a transaction. Most of the research on industrial clusters is focused on the co-location of firms in geographic regions, and its impact on local labour market and local economic growth (Piore and Sabel, 1984; Doeringer and Terkla, 1995; DTI, 2001). The original concept refers back to the Marshallian ‘localised economies’ (Marshall, 1919, 1927), explaining the dynamics of clusters through: the attraction of intermediaries and input providers to localised firms; the creation of a local pool of specialised labour; the development and deployment of specialised machinery and technologies; and the spillover of knowledge and technology between firms. Cluster relationships of firms emerge in cities, within industrial zones and other regional agglomerations. Marshall (1920) identified three fundamental reasons for spatial clustering: (1) the existence of a pooled market for specialised workers; (2) the provision of specialised inputs from suppliers and service providers; and (3) the relatively rapid flow of business-related knowledge between firms, which results in technological spillovers. These reasons establish the foundations of the linkages between firms within a cluster, namely skills, shared infrastructure and knowledge. Since then the concept has evolved to capture a variety of industrial agglomerations consisting of small locally owned firms (‘New Industrial District’ (NID)); concentration of foreign subsidiaries and branch facilities of externally-based multinational multi-plant firms (‘Satellite Industrial Platform’); regional concentration of firms that supply major corporations with various inputs (‘Hub-and-Spoke’ cluster); congregation of subcontractors and partners to government entity, such as defence plants, government departments, universities (‘State-Anchored District’); and the so-called ‘Sticky
Types of business networks 201 Mixes’, which represent a combination of the above listed types of industrial and geographic clusters of firms (Pandit and Cook, 2003). This literature ignores both the co-location of firms in particular markets, where their presence and operations are a measure of competition, or the co-location of firms in product fields – as a measure of firms’ specialisation and differentiation. It is established in the literature that regional agglomeration and specialisation reduces transaction costs, maximises the benefits and increases the returns on firms’ investments. However, there is no strong evidence that the drivers behind clustering of firms derive from a bundle of locational advantages, or from improvement of coordination of resource flows through industrial and technological linkages that are captured by the value-chain concept, and are merely observed in regional agglomerations. Clustering of firms is a process that is driven by firm specific, industry specific and location specific factors such as the nature of technology; specialisation and differentiation within the value chain (or production chain); product and process innovations; emergence of niche markets; competitive pressures from suppliers, buyers and new market entries; environmental changes; and the impact of government policies. Clustering of firms in a particular location or a particular product and technology group is seen as a result of their mimic behaviour, or similarity in strategic location choices. Clustering in a geographic sense is networking manufacturers with suppliers, with government institutions, brokers or customers in a particular location. Access to specialised suppliers and the labour market are among the main cluster benefits (Anderson, 1994; Doerninger and Terkla, 1995; DTI Report, 2001). On the other hand strategic decisions related to product portfolio, division of labour and the range of value-added activities create agglomerations of firms that occupy similar positions in the sector and form industry groups, or clusters (comprising firms with similar strategic positions in the industry and activity portfolio). These groups of firms determine the industry segmentation and the overall industry structure (see Figure 6.12 on page 203). Clustered networks are constituted by core, primary and secondary members, and the status of these members derives from their structural position in the network, which is strongly affected by individual and relational attributes. Core actors are members of the clusters or cliques. Primary actors are the direct contacts of the core actors. Secondary actors are those at the periphery of the network that are indirectly connected to the cluster members. Depending on the time of entry into the cluster, firms establish different types or technological and resource relationships with other firms in the region and within the value chain they enter, and therefore firms adopt different structural roles within the industry and the market. The relational roles of firms also depend on the nature of the technology they employ – whether it is based on an incremental product/technology innovation, on a specialised technological breakthrough, or on the emergence/invention of a
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transversal technology (bridging fundamentally different technological fields). Technologies are key anchors for cluster development. Regarding the utilisation and development of generic technologies within industries, Pammolli and Riccaboni (2000) introduce six types of firms that contribute to innovation clusters: • • • •
• •
Early Entrants/Co-specialised Originators (they have gained access to new technological trajectories in their early stage of development and growth, and have introduced new products to a market); Co-specialised Developers (when the rate of entry into a technological trajectory has been slowing down, firms introduce incremental product and process innovations for market extension); Transversal Developers (established firms that control the core of the market and engage in multi-technology R&D); Transversal Originators (firms operating or entering an industry at the fringe with a new product, or process technology, and introducing successive waves of new transversal technologies, which shape the overall evolution of the market); Co-specialised Originators (firms operating or entering an industry at the fringe with specialised knowledge regarding product and process improvement, effecting primarily the cost structure of the industry); and Co-specialised Developers (marginal firms at the fringe with some specialised capabilities).
Relationships between these different types of firms are established regarding operating in specific technological fields and servicing specific product markets. Location proximity facilitates sharing of information and accessing a common infrastructure. The growth and the structural evolution of the cluster are directly related to the growth of the market, the level of product differentiation and the degree of interconnectivity of the knowledge base within and between firms in the same region or across different locations. A number of studies have discussed the roles of foreign-owned subsidiaries in leading-edge industry clusters. Porter (1990) argues that some MNCs locate subsidiaries in selected industrial clusters as scanning units that tap selectively into sources of advantage in other national innovation systems. Cluster relationships affect all co-located firms, subsidiaries of MNCs, small suppliers, local government agencies, educational establishments, or other local members. Foreign subsidiaries of MNCs appear to be well embedded in their cluster formation through stronger customer and supplier relations and greater local government support, and as such they exhibit a higher barrier to integration with MNC networks (Birkinshaw and Hood, 2000). The linkages between business actors in a cluster are extremely dense and complex. It is clear from the brief overview that business clusters encompass multiple types of business networks – supply chain networks, R&D
Types of business networks 203 networks, infrastructure networks, small business networks and others. Clusters also accommodate parts of the global networks of multinational firms and in this way act as a melting pot where global and local innovations come together. The cluster map on Figure 6.12 represents clustering of the chemical industry in the Southeast of England which demonstrates the intra-industry diversification. Different sub-sectors with dense relationships are interconnected via bridges into a larger agglomeration of industries, where subgroups are clearly identifiable. All different types of business networks described in this chapter can coexist and can be cloned as different modifications and re-combinations of structural features, such as internal division of labour and specialisation, boundaries and membership, coordination and complexity of governance. This chapter does not claim to offer an ultimate classification, as we believe that the possible structural combinations are infinite, and the types described in this chapter are only those that have attracted significant attention in the literature. Most of the business networks described here demonstrate that heterogeneity of business networks prevail and analytical techniques that are able to reflect this heterogeneity have to find their place in business network analysis.
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Figure 6.12 Industrial clusters.
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Some networks emerge out of interactions while others are formed by the purposeful activities of human actors – managers, network entrepreneurs, brokers, stakeholders. Human actors in business networks make multiple strategic decisions and choices that frame and shape their interactions with partners. Individual actors’ attributes and strategic decisions amalgamate in what is called a relational context or relational dynamics that affects directly or indirectly all members of the network. Once bonded in a network the human actors induce strategic intent to the entire business network. The very existence of a network requires coordination between actors which further induces purpose. Without a purpose the aggregation of business actors and entities is subject to stochastic changes and business relationships may dismantle at random. Essential to business networks are the coordination of action in bilateral and multilateral relationships, and the emergence of coordinated collective action at network level. In order to extend the knowledge of business networks I have approached a vast amount of literature that informs about business actors and their attributes and behaviour, about relational attributes and dynamics, and about understanding and measuring the structural outcomes from network interactions. These are the three critical points in my argument that I systematically pursue throughout the entire book. They represent a triad of distinctive levels of network analysis (exhibited in Figure 7.1). Three individual chapters were dedicated to the development of the conceptual framework for analysis of business network actors, of business relationships and network configurations, and each chapter represents an encyclopaedia of theoretical ideas and concepts on each of these three issues. In addition to these efforts I attempted to contrast and to integrate as much as I could the three paradigms that have emerged in network analysis – the structural/positional approach based on the formal social network analysis, the relational approach based on the industrial marketing literature, and the cultural approach based on the theorising of science and technology networks. All three approaches have contributed towards a better understanding of the behaviour of business actors, the relational dynamics and the visualisation of the topology of network structure. Figure 7.1
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diffusion embeddedness transitivity cognitive and power generalised structural balance dependence exchange nature and attributes
roles, status bonds and purposeful network position network ties action
decisions and choices
structure of social relations
environmental constraints
structural approach
motives and drivers
types of configurations organising principles
ACTORS
STRUCTURE
cultural approach
relational approach
behaviour
knowledge and technology interactions network processes – selection, enrolment, translation, staging, representation, framing
interactions
types attributes
dynamics and evolution
heterogeneity context/ actor-world
structural measures
interconnected industrial markets supply chain
RELATIONSHIPS context
boundaries
overlapping networks resource flows activity links resource dependence multiplexity and dynamics
norms, rules, institutions cultural artefacts/ entities technology, standards text, stories, myths, ideas the effect of outcomes
Figure 7.1 Antecedents to network theory.
displays the six-point argument that I have pursued throughout the book. With this complex approach I discuss the complementarities between social theories, and their cumulative effect on our knowledge of business networks. One of the earliest approaches to network analysis is the structural/ positional approach. It has made significant advancements to recognise the
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embeddedness of market transactions in the structure of social relations. However, the practical consequences of that fact remain hidden in implicit assumptions about network ties, relationships and attitudes of the actors. Now we already know that business transactions are embedded in institutional practices and in relationships between business organisations, but the fact that these relationships also generate specific network dynamics has been largely ignored. The transitivity concept explains very well how relationships are interconnected and how one relationship has an impact on other relationships between members of a business network. It is this dynamics that is of primary interest in some managerial theories that deal with the issues of actors’ choices and strategies, discussed in detail in Chapter 3. Research within the structural approach assumes that actors’ behaviour depends in large part on the structure of social relations or on how actors are linked to each other. The primary objectives of social network analysis as a methodology are to understand the connections or the linkages that bond actors together. The bonding, however, is reduced to who influences whom, and how information and resources flow from one node to another. The theoretical foundations of structural analysis of networks derive from various theories of social and generalised exchange that assume interaction, the purposeful action of actors and the power dependence that emerge with social structure. However, the underlying mechanisms that are implied in various cognitive and structural balance theories suggest increasing homogeneity in networks, which contradicts most observations of business networks. Business actors, in their search for competitive advantage, invent multiple strategic means to differentiate from other firms, and to protect their in-house competencies. Although diffusion of information, resources, knowledge and business practices is an intrinsic part of business transactions, it has a limited homogenising effect on business networks, and most of them increase their heterogeneity over time. One of the fundamental assumptions in social network analysis is that the network flow or the flow of information between actors depends on the network topology and the time continuum, where the network topology represents the structural configuration of the network. This structural configuration is measured by the level of connectivity and centrality, and by the level of hierarchy and clustering. Overall, social network analysis proceeds from the premises of a specific role, status and structural position of network actors, measured by centrality, hierarchy and clustering, towards the direct impact of this position on the individual behaviour of actors. This book focuses on the question of what creates a structural position, or the behaviour of the actors and their other attributes, as well as the relational attributes that generate the structural configuration of a network. Actors’ motives and strategic choices along with the environmental constraints and opportunities as drivers for the interactions in business networks are essential issues in the analysis of business partnerships.
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It is acknowledged by social network analysts that their main method is applicable only to studies of fractions of networks, or incomplete networks, in order to derive some structural explanations of social and political processes that are taking place within networks. Authors acknowledge that whole network studies are not methodologically feasible and analytically appropriate because of the unresolved question of boundaries and the subsequent difficulties in sampling and data collection within the selected population (Wellman, 1988). This problem remains and an attempt to approach variations in actors and relational attributes with more depth only exacerbates the issue. In structural analysis usually only a minimum of actor attributes and relational attributes are taken into account. Among the most researched attributes are the actor’s role (mainly as a gender attribute), position and status, and the directionality and strength of the ties. This limited use of actors’ attributes and relational characteristics is one of the limitations within the structural approach, where relational and actors’ diversity and heterogeneity are ignored. Much of the efforts of the relational and cultural approaches have been directed exactly towards these issues – searching for a more comprehensive picture of the antecedents to business networks. The relational approach explores dyadic business relationships with more depth, accepting that the actors are positioned in the industry value chain, which determines resource flows and resource dependencies. In addition, the relational approach recognises that these resource flows which are part of the business relationships take the form of explicit transactions that are governed by contracts, formal agreements and legal obligations. This analysis particularly aims to disentangle the elements of the business network relationships and to explain the strategic intent and strategic behaviour of firms. One of the fundamental theoretical underpinnings within the relational approach has been Porter’s framework for strategic analysis of the value chain of a company and the value system. This framework is translated into the language of network analysis and highlights the interdependency between network members associated through short-term and long-term contractual relations. The fundamental assumption about interrelated industrial markets comes from the notion of a value system that captures the entire process of transformation of inputs into outputs for an added value. The idea of overlapping networks of actors’ bonds, resource flows and connected activities also derives from Porter’s notion of a value chain. The argument of the resource dependence between interlinked firms marks a turning point in business network analysis. The multiplexity and the dynamics of interactions and exchanges becomes associated not with indifferent resource flows, but with strategic intent on behalf of the network actors. Although operationalisation of the concepts that underpin the relational approach is still problematic, the in-depth analysis of relationships and interactions between members of a business network is very insightful. From the perspective of the relational approach the relational dynamics
208 Conclusions within networks is determined by the position of the actors, by the contracts between them, by their individual interests, preferences and attributes, and by their knowledge of the preferences of the others – all this is taken into a particular relational and environmental context. The analysis of business network relationships in context is one of the main strengths of the relational approach. Although both the relational and the cultural approaches recognise the heterogeneity of actors in business networks, the relational analysts assume human strategic decisions and choices to be the main driving force that frames business network interactions. The cultural approach has argued that cultural artefacts such as knowledge, technology, text and institutional norms can actively frame interactions and human decisions and choices, and hence affect network structure. Norms are dynamic systems of beliefs and attitudes. They can be institutionalised in legal documents and enforced by governments. It is argued by the culturalists that both texts and institutions as beholders of norms affect and frame in a powerful way firm behaviour and hence they are active members of the business network. This is summarised by the cultural analysts as the ‘actor-world’, or the world of all entities that interact with each other, affect each other, framing both the context and the outcomes from their interactions. Important elements of the actor-network world are the outcomes from the activities of the enrolled actors. Business networks, particularly, are judged by the results, which are sometimes re-invested into the network. The results could be skills, experience, profits or new technologies. The research questions related to evaluation of network outcomes are long overdue to be explored. One of the main advancements to network theory brought by the cultural approach is the notion of network processes, such as selection of partners, their enrolment in the network, the translation of network rules and properties of the network actors, the staging of activities and interactions, the representation of interests and viewpoints, and the overall framing of the network dynamics. Both human and non-human actors have a duality of existence in a network: they exist by themselves with their own properties, and they exist as enrolled, incorporated, mobilised or absorbed by the network, with ascribed roles, functions and characteristics. This proposition is advanced in studies of the dynamics of networking or interacting while interconnected to multiple other actors and sources of influence. The behaviour of individual actors under these assumptions becomes unpredictable as it is influenced by an almost unlimited number of factors. The cultural perspective has not offered a consistent view on how to address this problem in empirical investigation. Although the relational approach has been mainly focused on business actors, scholars have utilised a narrow range of theories that explain actors’ behaviour – mainly from the strategic management and marketing literature. The economic theory of the firm has been largely ignored.
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In Chapters 3 and 4 I acknowledge the heterogeneity of business actors and attempt to explain the leading economics, management and organisation theories that have explored the motives for competitive and cooperative behaviour of firms. I have provided a comprehensive picture of strategic behaviour in networks demonstrating the factors that influence the entire network system. The economic theories that discuss the nature of the firm and aim to analyse company behaviour are a valuable source for new insights into concepts and frameworks that could be used in network analysis. The resourcebased view of the firm throws light on the process of accumulation and distribution of resources. Issues of network cohesion are in direct contradiction to the practice of unequal concentration of resources within the net. Reciprocity of exchanges could exist only between equally resourced partners. Managerial strategies to accumulate resources vital for their firms will continuously increase inequality in a network, unless a completely new principle of partnership is adopted by all managers simultaneously. Non-cooperative game theory enhances the view of the adversarial nature of network members. Cooperation vs. competition requires not only negotiations at the level of individual strategies, but a much higher level of coordination – either based on moral principles of trust, loyalty and commitment, or facilitated by a coordinating agency which can be internal or external to the network. Agency theory brings more insights into the formal and informal contracts that facilitate exchanges between partners in a network. Stakeholder’s theory takes a step further towards recognition of mutual interests beyond contradictory objectives. However, the emphasis is still on the decision-making process that takes place in a network and the subordination of decisions according to their location in the internal structure of the firm. Managerial theory of the firm puts emphasis on the variety of competencies, specialised resources and assets that each firm has in principle and the tendency of the firm to develop further a unique character in order to acquire a strategic advantage. All these factors will serve to increase inequality in a network, which will raise the opportunity for development of coordination centres and power relations. This fact diminishes all discourse of the cooperative nature of network relations and the implied selfcoordinating mechanism. The questions of what makes firms adapt and learn have been treated in many disciplines. In neo-classical economic theory they are related to the issues of market feedback and transaction outcomes. Actors engage in experiential and exploratory learning which affects their attributes and their competitive position in the business network. The cultural approach is most powerful in explaining learning and adaptation in networks through the effect of network outcomes, or the framing of actor’s behaviour by interaction with texts and technologies. Research on collective action or network-coordinated action in networks
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is scarce and implies common interests and multi-directional engagement between members of the community of network members. None of the three approaches discussed in the book offers a satisfactory answer to the question of network-scale behaviour, and this is one of the questions that requires further study. Research conducted by Mouzas (2001) reports that trial strategies are implemented mostly at the level of bilateral relations, but further replication strategies are implemented multilaterally throughout the ego-network of each actor. Both of those strategies are implemented in the context of what Håkansson (1992) called network evolution, where actors combine and re-combine activities and resources, and try to control these activities and resources at network level. The analysis of the behaviour of interconnected business actors requires a very complex framework, which is mapped in Figure 3.1 (see page 80). However, this analysis is further complicated by the impact from the relationships on actors. Relational analysis brings a new dimension to network analysis, by looking with more depth at the ‘black box’ of a single relationship. It has been acknowledged that the analysis of the content of network relationships requires a much more holistic approach (Buckley and Chapman, 1996), which naturally invite a case study methodology. The main efforts within the relational approach have been to acknowledge the effect of relational context on individual interactions and on the dynamics and evolution of relationships. In Chapter 4 I extend the current framework for relational analysis which is focused on the overlapping networks of actors, resources and activities. I propose a new framework for relational analysis (see Figure 4.4 on page 96) which includes ten relational dimensions that explain the emergence of new properties in a dyadic relationship. These dimensions describe relational attributes and explain the sources of relational dynamics and how changes occur in interactions and exchanges between network members. The relational dimensions also explain how stable network configurations emerge out of established relational practices. In addition, the frameworks that I suggest for a relational analysis extend the efforts of network analysis to understand the multiplexity and transitivity concepts. Multiplexity refers to the multiple concepts that are exchanges between partners, and transitivity refers to how these multiple contents affect other connected relationships. The network dimensions derive from the transferability of actors’ and relational attributes and the complementarities between actors on a multiple scale that emerge from connectedness. The transferability and complementarities are related to resources, knowledge and capabilities, activities and participation of network members. The network structure is viewed not as a constant, but as an ever changing structure of relationships determined by contractual agreements. I also look at different types of relationships that constitute a particular structure.
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Ultimately the heterogeneity of actors, and the different types of relationships that bond them together results in a complex business network. Although in Chapter 5 I review different types of business network configurations, I acknowledge in Chapter 6 that the real business networks have a much more complex structure which can be represented by any combination of the established structural configurations. This complexity is intrinsically related to the division of labour in a network, the boundaries, the coordination mechanisms that are used to govern interactions and exchanges, or what I call the governance of the network. The structural measures developed by the structural/positional approach are reviewed in Chapter 5, but only some of them are applied to my analysis of real business networks in Chapter 6. The main reason for that is that the research of large business networks has emerged only recently, and it is still in search of appropriate methodologies. The types of business networks, discussed in Chapter 6, demonstrate the variety of approaches taken by business organisations in managing simultaneously collaboration and competition. From the cases it is clear that a new approach emerges for a balance between control and flexibility, and towards inter-operability across multiple external and internal relationships. The difficulty in analysis of business networks is that in many cases firm boundaries are blurred by shareholding interests, commodity flows and resource commitments that spread across and penetrate the entire network. This undermines in some cases the notion of clear agency boundaries. The implications for network analysts are that they have to identify clear criteria which enable the identification of actors in a business network and the demarcation of organisational boundaries that determine membership. As more control is distributed among different members of the network, the members are more interconnected overall and more complex exchanges take place within the network. The cases in Chapter 6 also point to the fact that although networks do not have an evident hierarchical structure of subordination, hierarchical relations can be observed in all types of networks. The dynamic change of members takes place both at the core and at the periphery of the network, although the periphery is more exposed to these changes. In addition, these changes usually depend on the activity of the central and leading members of the network – those who control the resource flows and the negotiation processes, and who determine the ‘membership status’ of the peripheral members. In conclusion, the book calls for a more holistic approach in network research which will allow simultaneous analysis of the structure and content of relations as well as their dynamics in a fast changing business environment.
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Future research directions The thrust of this book has been mainly to review the theoretical underpinning for research on business networks. It offers an encyclopaedia of theories and concepts that enrich our understanding of business networks and contribute towards the integration of a network theory. Overall I have addressed theoretical problems that are faced by network analysts. I hope that the conceptual frameworks and the synthesis in diagrams and models will bring more clarity and insight to the analysis of business networks. I also believe that these conceptual tools are applicable to empirical research, suggesting that integration of research methodologies is required. At present all three approaches employ their own methodologies and there is not much attempt to cross the boundaries of each approach. The structural/positional approach employs structural measures to whole network studies, ignoring internal dynamics and variation. The relational approach employs case studies and compares across cases. The cultural approach uses the inter-subjectivity argument, where relationships are derived from subjective deconstruction and analysis of networks. There are also criticisms that crossing paradigms may not necessarily be a fruitful intellectual exercise, as it will dilute the robustness of conclusions that may be reached. I do not recommend any particular direction for empirical research, although my preference naturally is for a holistic study that combines depth with scale and methodological robustness. I believe efforts should continue in multiple directions, to enable us to address the real-life problems of business networks. This book marks only the beginning of the journey towards synthesis of scientific languages and paradigms of business network research. I would like to conclude the book with a long list of empirical questions that are waiting to be addressed by network analysts. What types of strategic business networks exist at a national and international level? How do large firms and holding companies transform their dependencies within the value chain into network advantages (such as economies of scale)? How do new business networks get established and what is the effect of new weak ties on the performance and restructuring of a network? What is the balance between high flexibility in contracts and more stable cooperative alignments in terms of effective network dynamics? Why are some firms not able to transform their network dependencies and develop new business links? What are the variations in network relationships with governments and how are these relationships affected by government policies? What is the effect of inter- and intra-industry value-chain dependencies on company networks? How do firms deal with network dependencies? How does membership in professional and political networks by managers or other stakeholders affect company performance? How do risk and uncertainty in the business environment affect network cohesion and structure? What happens to firms which are not supported by a formal network of suppliers and buyers? How
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stable is the position of network actors in the value chain and in their industry? How are strategic resources allocated within the network by leading members acting as hubs? How are strategic objectives set, and how are strategic choices made by the central network actors? What are the similarities and differences in the network structure of MNCs from different countries of origin? The questions are challenging enough, and I hope that the book as a whole will inspire a new generation of network analysts!
Appendix: concepts and indicators for empirical investigation of business networks
Concepts
Operational definitions
Characteristics of the actors Node A member of a network and an actor or an agent that is linked to or involved in a relationship with other actors/agents; persons, objects and events, firms, strategic business units and economic actors involved in a transaction, in exchange of resources or a regulatory activity.
Examples of application Firms connected in a value chain; firms that are members of a supply network; firms that have formed an alliance network; strategic business units of a corporation; members of a project team; members of a business group or an association; members of the board of directors.
Broker
An actor that has a link which is an essential cut-point in connecting sub-sets of the network. Actors that specialise in a particular business function or a service which enables them to assemble and coordinate the inputs and outputs from other functionally specialised actors, and who are able to construct the network itself through establishing new links (Håkansson, 1987).
Door-to-door salesmen, connecting customers to a firm; internet service providers; estate agents connecting property buyers to sellers.
Hub
An actor with high in-degree and out-degree of relations that facilitates connectivity throughout the network.
Airport facilities; major railway station; port authority.
Appendix 215 Concepts
Operational definitions
Examples of application
Individual attributes
Unique characteristics of individual actors that determine their behaviour and participation in relationships.
Capacity to connect
Capabilities of an actor to initiate a link and establish a relationship with another actor. The location of an actor in a set of relationships; the place occupied by an individual actor according to its role performed as a member of the network; two actors connected to the same set of other actors occupy the same position according to the formal network analysis. Observable behaviour as a pattern of relations that connect actors to each other (Miles and Snow, 1986); a set of structurally equivalent actors that exhibit similar participation and contribution to the network output; main network roles are ‘star’ (an actor who is highly central to the network), a ‘bridge/liaison/ gatekeeper’ (an actor who is the only link between network groups or cliques, which otherwise will remain disconnected, and hence controls the flow between these network subgroups), an ‘isolate’ (an actor who has no links or relatively few links to other members of the network) (Monge and Contractor, 2003).
Intentions, expectations, needs, motives, strategic decisions, size, history, ownership, governance structure, assets, roles, status, position, structural autonomy. Exercise of good communication skills maintaining high level of potential or ‘just-in-case’ ties. Centrality of headquarters (HQ) of a multinational firm; autonomy of a subsidiary; in Figure 2.2 (page 27) centrality and location of B connected to A, C, D or D connected to A and A2.
Position
Role
Providers vs. receivers of resources; coordinators of activities; senders vs. recipients of information; facilitators and moderators.
continued
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Appendix
Concepts
Operational definitions
Examples of application
Status
A network position jointly occupied by three or more actors (Miles and Snow, 1986 Alstyne, 1997).
Highly respected and well-recognised members; disenfranchised participants.
Prestige
An attribute of an actor showing the degree to which other actors in a network show deference to her/him in their relations; it is measured by the in-degree, or the proportion of relations directed towards this actor; in a matrix of symmetric relations, the prestige score is also a centrality measure (Miles and Snow, 1986; Monge and Contractor, 2003).
An attribute of suppliers with superior quality of products/services, or service providers with superior technology.
Size
An attribute of economic actors measured by the number of employees, sales, operating revenue, turnover, market capitalisation or other indicators.
Small firms with over £10,000 operating revenue; large suppliers with over 1000 employees.
Firm boundaries
A definition of ownership rights that spread over business units from one main legal source; a list of employees.
All full-time staff; all shareholders.
Heterogeneity
A composite characteristic of actors in a network indicating variety in their attributes, such as organisational type, institutional form, ownership, size, historic background.
A network comprising private firms, university departments, government funding bodies, R&D laboratories, investors, etc.
Actor centrality
An attribute of an actor who has a proportionally large number of network relations; a measure of actor’s power and control over resources through incoming, outgoing and reciprocated
The position of headquarters in the network of their subsidiaries; the role of a hub in relation to its end-point destinations.
Appendix 217 Concepts
Operational definitions
Actor centrality contd.
relations; a measure of the degree of actor’s involvement in all the network relations and the ability of an actor to gain access to and/or influence other network members (Ford et al., 1986); it is measured by in-degree (number of incoming ties), out-degree (number of outgoing ties), betweenness and closeness (Monge and Contractor, 2003); centrality refers to the structural location of an actor in a network (Granovetter, 1973).
Degree
The number of links with Company that attracts many other actors. ‘In-degree’ clients because of its unique measures the number or products; company that proportion of incoming ties targets multiple clients for to one actor from all others, marketing and sales purposes. and ‘out-degree’ measures the number or proportion of outgoing ties from one actor to all others (Knoke and Kuklinski, 1982; Brass, 1995; Monge and Contractor, 2003. In-degree is a measure of an ego-centred sub-set of a network.
Range (diversity)
Number of links to different Firm’s partners in others, which are not linked geographically different between themselves, and markets, which are are members of different disconnected otherwise. network cliques (Brass, 1995; Monge and Contractor, 2003).
Characteristics of the relationships Relation ⫽ tie ⫽ An emergent property of relationship the connection or linkage between nodes, actors or other network units of observation (Miles and Snow, 1986).
Examples of application
Commodity flow; resource commitment.
continued
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Appendix
Concepts
Operational definitions
Examples of application
Network relation
A relation embedded in a multilateral context of other relations.
Community tie.
Business relationship An agreement between two business partners for an exchange of resources, i.e. business transaction.
Contracting, reciprocal trading, franchising, regulation.
Actor bond
Relationship between two actors which is essential for their participation in the network.
Relation with subcontractors or major suppliers.
Nature of a relation ⫽ nature of a bond
Characteristic of a relationship Competitive relation; that represents an essential collaborative relation; aspect of the network that supporting relation. determines network membership.
Relational form
Refers to properties of the connections between pairs of actors (Miles and Snow, 1986); it is determined by the intensity or the strength of the link, and the level of mutual involvement of the actors.
Relational content
Types of exchanges between Affections, payment, actors that determine the knowledge, information, type of network: goods, services. communication relationship (exchanging information), transaction relationship (exchanging control over resources), sentiment relationship (exchanging feelings, affections), authority/ power relationship (indicating rights and obligations), kinship and descent relationship (among family members), boundary penetration relationship (linking with actors beyond the network), instrumental relationship (securing resources for private use), etc. (Miles and Snow, 1986).
Number of exchanges and agreements between partners; level of mutual interdependence on the transaction/partnership and variation between actors.
Appendix 219 Concepts
Operational definitions
Examples of application
Resource tie
Resource exchange.
Strategic link
A link between a pair of actors indicating that at least one of them places a strategic value on the relationship. A link between a pair of actors indicating that at least one of them requires support and assistance through this relationship. Participation of an actor in an event, when events are considered as nodes in heterogeneous networks. Relationship between two actors that represents a particular function of the network. Potential ties that link an actor in resource needs to another actor that can supply the resource. An attribute of a relationship that originates from one actor and is clearly directed towards another actor in a network.
Resource commitment by firms in order to fulfil an obligation. A leverage tie, where a company pursues strategic aims through connecting to other firms and intermediaries. A support tie, where a firm seeks or offers (potential or real) assistance to another firm.
Relational link
Activity link
Functional link
Access to resources
Directionality
A firm taking part in a trade exhibition.
Outsourcing of a meter reading by an electricity supplier firm. A firm purchasing resources or acquiring them in exchange with its own outputs. Seeking quality assurance from suppliers; seeking payments for delivery of goods or services.
Genesis of resource flow
Location in the network where firms’ outputs generate transactions and resource flows.
Patented invention; new technology licence; new product development.
Domain of resource flow
Level and scope of reach of Inter-functional resource flow particular resource exchanges. between functionally interconnected units; interbusiness resource flow between input–output interconnected firms; crossborder resource flow between interconnected firms in different countries. continued
220
Appendix
Concepts
Operational definitions
Examples of application
Uni-directional flow
A relationship with a clear initiator and a recipient.
Door-to-door sales; mail-shot.
Asymmetric relation
One actor directs a link towards another, which is not reciprocated (Miles and Snow, 1986).
The control of headquarters over subsidiaries.
Symmetry/reciprocity Extend to which a R&D consortium where relationship is bi-directional partners are equally and reciprocated. committed to share information; 50/50 joint venture. In-coming tie
A link that facilitates incoming information and resources.
Component supply; resource materials supply.
Out-going tie
A link that facilitates outgoing information and resources.
Payment for acquired goods and services; seeking customers; instructions to suppliers.
Direct tie
A link between two actors that is used for direct exchange of resources, information and personal aptitude.
Contract with main suppliers; bank account with a bank.
Indirect tie
An indirect link between two actors that is used for an indirect exchange of resources, information and personal aptitude. The path that connects two actors, and is mediated by other network members (Brass, 1995; Monge and Contractor, 2003).
A contract with a wholesale and a distribution firm; membership in business associations; participation in events.
Strong tie
Confirmed repetitive interactions which occur over extended period of time, with frequency, multiplexity and emotional intensity (Brass, 1995; Monge and Contractor, 2003).
Subcontractors, long-term business partnerships, joint ventures.
Appendix 221 Concepts
Operational definitions
Examples of application
Weak tie
An association between Acquaintances; list of actors that creates an participants. opportunity for a relationship.
Bridge
A line that connects two sub-sets of a network that otherwise will remain disconnected; a ‘weak tie’ that facilitates exchanges of information and resources in complex networks (Krebs, 2001).
A broker that connects investors with firms; promotion agency that connects firms with customers.
Bilateral relation ⫽ dyadic relation
A link between a pair of actors; single actor function in networks.
Individual ties.
Multilateral relation
Three or more actors bonded Multilateral agreement; by the same contractual a meeting; virtual discussion relation and activity. group.
Repetitive relation
Transactions and exchanges that are repeated and re-occur over time.
Re-occurring events, of interactions.
Intensity/frequency
Frequency of exchanges and transactions; how many times, or how often the link occurs (Brass, 1995; Monge and Contractor, 2003).
How often partners interact.
Longevity
The length of time of existence of a relationship.
Number of years of the existence of a partnership.
Criticality
The importance of a relationship for the survival and functioning of an actor.
Critical contract for the survival of a firm.
Multiplexity
The existence of more than one distinct type of relationship between a pair of actors in a network (Brass, 1995; Monge and Contractor, 2003).
Two firms involved simultaneously in at least two or more distinct types of exchanges: 1) supply relationship; 2) joint cooperation agreement; 3) corepresentation to local authorities, etc.
Transitivity
A relationship that passes through a number of actors to reach a distant node.
Circular newsletter. continued
222
Appendix
Concepts
Operational definitions
Examples of application
Reciprocity
Extent to which two actors Trust in joint ventures and that are connected in a partnerships. relationship reciprocate incoming information and resources and share a common intent regarding the value, commitment and longevity of the relationship; shared goals and common interests of firms are evidence of mutuality and reciprocity (Ford et al., 1986).
Particularity
Uniqueness of interaction, extent of standardisation of interaction (Ford et al., 1986).
Open credit line to a customer, unique contract agreement.
Inconsistency
Ambiguity, lack of clarity in interaction; coexistence of cooperation and conflict (Ford et al., 1986).
Partner in a dyadic business relationship does not behave according to expectations.
Dependence
Different resources tied together in a relationship, and committed to an event (Håkansson and Snehota, 1995); different types of dependency – historic, economic, technological, logistic, knowledge-based, political, ideological, social, psychological, cultural, administrative, geographic (Håkansson, 1987).
Power dependence in relationships is often asymmetrical and may be subject to shifts; it is observed as an imbalance in a particular dimension of a relationship.
Path
The sequence of lines that Suppliers connected through a connect two actors value chain. through a set of intervening points.
Path distance
The minimum number of sequential lines that must be traversed to link two points in a network (Miles and Snow, 1986).
The number of intermediaries that facilitate a transaction between two actors.
Appendix 223 Concepts
Operational definitions
Average path length
A measure of the The number of actors that are effectiveness in information required for a node to reach transmission and ability of all other distant network a network to reconfigure members – as a ratio to the itself after a topology number of alters. change (Ford et al., 1986). The existence of a channel The number of actors that are or a path between two actors, required for a firm to reach so information and resources any other network member. can be transmitted. The shortest path that links The map of network relations a pair of actors in a network; that connect two actors could vary between one step (possibly through and multiple steps in a path. intermediaries). A measure of how many All intermediaries that points fall on the path that facilitate a transaction and act connects two endpoints, or as in-between positions actors in a network, i.e. the connecting two firms. length of the path between two end-points; between points have the potential to control the flow between the end-points; betweenness is also measured by the number of paths that pass through an actor, as a broker between two sub-sections of a network, or alternative networks (Ford et al., 1986). A measure of the position Two firms are close if they of an actor in a network that can connect as directly as allows this actor to access possible with a minimum of all others through the intermediaries. shortest paths of indirect links (Ford et al., 1986); a measure of the distance between two actors; this is an attribute of a relationship. The extent to which a Many suppliers to a large firm person’s ego network has that produce substitutes are contacts with others that potentially redundant as the are connected between focal firm may switch contracts themselves. from one to another, and therefore terminating a relationship with the former supplier. continued
Reachability
Geodesic
Betweenness
Closeness/proximity
Redundancy
Examples of application
224
Appendix
Concepts
Operational definitions
Characteristics of the entire network configuration Network Emergent system of relationships between self-organising actors.
Examples of application A set of business partners, or a set of units owned and controlled by a firm.
Network size
Number of actors in a network.
Number of subsidiaries under the control of a headquarters; number of customers to a firm.
Network boundary
Definition of a socio-economic organisation that attributes membership status to certain entities, and excludes others as non-members.
The list of all subsidiaries owned by a multinational firm; the list of interconnected elements of a production system.
Density
Proportion of the reciprocal Large or small number of linkages between all actors interconnected actors in a in a network – calculated limited space. as the number of all ties occurring in a matrix, divided by the number of all possible ties (Miles and Snow, 1986); the ratio of the number of actual ties to all potential relations (or the number of dyadic relationships) in a population; a measure of the constraints and the autonomy of actors.
Network cohesion
Actors connected directly to Strong cohesion – each other with reciprocated interconnected members of an relationships represent a R&D team; weak cohesion – cohesive group ⫽ sub-set ⫽ occasional suppliers. clique ⫽ social circle (Miles and Snow, 1986); strong social cohesion when actors occupy equal positions; weak social cohesion when actors occupy different positions (i.e. leaders and followers; suppliers and buyers); network cohesion is a measure of the proportion of reciprocated network relations.
Appendix 225 Concepts
Operational definitions
Examples of application
Clique/social circle/cohesive group/component
A highly cohesive sub-set, Independent directors or a group of directly sitting on a board of interconnected actors that directors meeting; a work have more intense relations team; firms involved in an with each other than with R&D project. actors outside of the group; a set of actors with shared interests having direct or minimally indirect linkages with each other (Miles and Snow, 1986); a subset of network nodes where all actors are connected to each other by direct or indirect ties, and no nodes have links to nodes outside of the group (Brass, 1995; Monge and Contractor, 2003); mutually connected actors through multiple paths.
Structural equivalence
Actors that jointly occupy positions or roles to the extent that they have the same set of linkages to other actors in the system (Miles and Snow, 1986); a measure of the social stratification and the division of work in a network.
Wholly owned subsidiaries of a MNC; all suppliers from a list of potential alternative suppliers.
Connectedness/ connectivity/ reachability
The extent to which members of a network are linked to one another through direct and indirect ties, and the degree with which linkages consist of short direct chains versus long and indirect paths; a characteristic of a pair of actors indicating how they may be linked; it may vary between no connectedness, connected by a line disregard its direction, connected by a path of directed lines,
Technical specifications that an R&D department passes on to headquarters, which information is further transmitted to partners, first tier suppliers, then to second tier suppliers, and then to the franchised retail chain; in this example the technical information will affect all of the recipients of it.
continued
226
Appendix
Concepts
Operational definitions
Connectedness/ connectivity contd.
connected by a path in both directions (Miles and Snow, 1986); it is measured by the ‘path’ or a ratio of pairs of nodes that are mutually reachable – to the total number of pairs of nodes in a network (Brass, 1995; Monge and Contractor, 2003); connectivity between a pair of actors refers to their reachability, their distance from each other and the number of paths that connect the pair (Granovetter, 1973). A measure of the overall How central a leading actor network structure; an index is, such as headquarters or a based on the difference government agency between the centrality score promoting a government of the most central actor and scheme. all other actors (Miles and Snow, 1986); the greatest value is in a star network. A nod or a sub-structure of Location and concentration of the network with high power in an actor of a small centrality and a significant clique of actors. role in allocating resources throughout the network. A snapshot of configuration Ego-centred structure of the of present and absent ties headquarters of the MNC and between network actors its subsidiaries; dispersed (Miles and Snow, 1986); the configuration of a way in which actors are multicultural partnership distinguished by patterns between firms. of incoming and outgoing ties; a map of the social structure in a network, identifying differentiated positions of actors and the interdependence between them. Actor’s location in a Subsidiaries of multinational network determined by its firms that are embedded in network relations. their local economy business relations.
Network centrality/ centralisation
Control centre
Network structure
Network neighbourhood
Examples of application
Appendix 227 Concepts
Operational definitions
Examples of application
Ego-centred network Consists of an individual node and all others to which it has relations, and the relations among these other nodes.
The headquarters of a large multinational firm connected to all their subsidiaries in host economies.
Transitivity
A triad of actors is transitive when one bilateral relationship interconnects with another bilateral relationship, passing on relational attributes from the first one to the second one; transitivity at network level is the number of transitive triples divided by the number of potential transitive triples (Brass, 1995; Monge and Contractor, 2003).
Three firms are transitive if whenever A is connected to B, and B is connected to C, then A and C are connected as well.
Spatial configuration
The location of actors in a space revealing the proximity/distance between them in a proportional way.
A global strategic alliance between firms located in different continents, where distance between the location of their operations is measured in physical terms.
Sociogram ⫽ graph
Visual display (spatial or geometric representation) of the actors (as points) and the relationships (as lines) showing explicitly the connectedness between the actors and aspects of the network such as actors’ centrality, periphery, distance, isolation and the network boundary (Miles and Snow, 1986).
Figure 2.3 (page 37); Figure 2.4 (page 44).
Digraph
Directed graph, representing a set of actors linked by directional relations or directed lines.
continued
228
Appendix
Concepts
Operational definitions
Examples of application
Matrix
A table consisting of an algebraic display of network data, where both rows and columns represent the actors in identical sequence; in directed graphs rows represent the initiators of a relationship, and the actors in columns are the recipients.
Adjacent matrix
The simplest matrix composed of binary values (1 ⫽ relation, 0 ⫽ no relation); they reveal whether any two actors in a sociogram are connected/ adjacent.
Clusters
Sub-groups of actors that Figure 2.4 (page 44). show homogeneity (minimum variation) within the group.
Network design
The design of links and paths in close network systems that aim to achieve a balance between the competing goals of reducing path length, reducing available paths and increasing network robustness (or the number of failures that the network can withstand) (Ford et al., 1986).
Network topology
The spatial location of actors Figure 2.4 (page 44). in a network according to the set of their direct relationships; the most common small network topologies are star, ring, full mesh and partial mesh; the shape and the form of the structural configuration are determined by the level of centrality and the level of connectivity.
Appendix 229 Concepts
Operational definitions
Network organising
The establishment of goals, the segmentation of tasks and roles, the communication of assignments and results, and the re-integration of outputs which achieve the goals of the network members (Håkansson and Snehota, 1995).
Network coordination
A plan for sharing limited resources, for completing sub-tasks and for sharing intermediate results (Håkansson and Snehota, 1995).
Network governance
The exercise of decision making, monitoring and control over network organisation and coordination.
Network efficiency
Ability of a network to transmit information between members and to adapt and reconfigure itself after changes in the topological structure (Ford et al., 1986).
Examples of application
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Index
activity dependence/interdependence 27–28, 114 activity flow 27–28, 219–220 activity structure 5, 128 activity system 51 actor interdependence 26–27 actor-network theory 30–34 actor’s attributes 39, 49–52, 215 actor’s capacity to connect 215 actor’s position 39, 53, 215 adaptation 144 affectional bonds 107 agency theory 55, 60–61 agglomerative collective 139 alliance structure 182 allocative decision making 49 altruistic behaviour 100 A–R–A model (actors–resources– activities), 26–27, 103 archetypes of structural configurations 131 ascription 77 association 144 authoritative coordination 49 band-wagon effect 101 bangs 166, 168 bargaining 60, 69 behavioural system 80 betweenness centrality 150, 216–217, 223 bridge 221 buffering 73 business network, definition of 14–15 business relationship 218 business structure 4, 128, 159 centralisation 149–151 centrality 40–41, 52–53, 149, 216–217
Chinese family and community business network 166–170 circular network 44, 131, 141–142, 177–178 clans 166, 168 clique 141, 225 closeness-centrality 149, 216–217 cluster 141, 228 cluster-network relationships 199 clustered network 44, 131–132, 136, 179, 201–203 coalitions 70–71 cognitive balance theory 20 cognitive consistency theory 106 cognitive dissonance theory 19, 106 cognitive evaluation 105 cohesion in networks 44 cohesive sub-groups 152–153; see also clique) communality 144–146 communication 89–92 communication and information diffusion theory 20 communication-based business networks 196–199 community 13, 16, 71, 93, 96–97, 113, 124–125, 131–134, 136–140, 161–162, 166–169 community interaction 138 community networks 137 community structure 134, 137–138 conformity 65 conjugate collective 139 connectedness of actors 43 connections 88 connectivity 144–146, 155–156, 225 contagion theory 157–159 contingency theory 55 contract-in-fact 110
Index 259 contract-in-law 110 contract theory 55, 61–63 contractual joint venture 187 control 130 control structure 51–52 cooperation 84 coordination of activities 75 coordination of relationships 121 coordinators 75 core-periphery network 44, 131–132, 145, 147–148, 172, 179, 211, 228 corporate control 186 corporate social capital 104 corporate structure 134–135 cost structure 55–56, 64, 202 counter-trade agreement 188 crowd 138 cultural approach 30–35, 41, 47 cultural artefacts 30–31 degree-centrality 149, 216–217 density 149, 151–157, 224 dependence 19–22, 29, 59, 112, 118, 122, 125, 159, 205–207, 222 dependency 124–125 differentiation 144 diffusion 157 diffusion of innovation 158 digraph 228 directionality of ties 42, 217, 219 dispersed structure 44, 131, 153, 186, 197 dissociation 144 distributed network 139 distributive justice theory 118 diversity 151 divisibility 144 divisional structure 132–134 double interact 92 dyadic relationship 96 ego-network 43–44, 139 emergence 144–146 emergence of network relationships 96–97 emotional security 107 enrolment 77 entrepreneurial small business network 161–163 entrepreneurship theory 74 environmental context 115 environmental scanning 73 equity joint venture 187
ethnomethodology 137 evolution of relationships 117 evolutionary economics 55, 63–66 exchange relationships 26 exchanges 88, 93–94 externalities 61 family business network 163–165 firm/actor’s behaviour 2–3, 7, 10–11, 18, 20–32, 35, 38, 41, 46–47, 47–83, 85–105, 113, 122, 140, 162, 206, 209 firm: attributes 50, 215; definition of 49 framing 99, 111 franchising 186 functional organisation 131–132 generalised exchange theory 20 geographic dispersion 73 global commodity chain 181–182 global integration 184 global sourcing 179, 187 global strategic coordination 184 goal-adaptation process 70 goal setting 144 governance structure 49, 60, 172, 175, 181, 185 group/network behaviour 12, 48, 84, 138 guanxi 166 hegemonic network 43–44, 131–132, 139 hegu 166–167 heterarchy 131, 134–135 heterogeneity of actors 76, 216 heterogeneous resources 66–67 hierarchical control 130, 132 hierarchical coordination 131–132 hierarchical structure 76, 130, 132, 211 hierarchy, definition of 132 homophily theory 101 hub 214 hub-concentration 194–195 hui 166, 168 hybrid organisation 131, 134–135 incentives 99–102 individual preferences 71 industrial cooperation agreement 188 industry clusters 199 industry group 131, 133–134 industry structure 134, 201
260
Index
inertia 63 information 30 information broker 75, 214 information networking information technology impact 12 infrastructure networks 6–7, 12, 54, 90, 96, 176, 190, 193–200 innovation 144, 155 input–output chains 44 institutional economics 55, 63–66 institutional theory 55 institutionalisation 144–146 intangible resources 67 integration of functions 144 interaction process 25 interactions 33–34, 88, 91–95 interactivity 44, 196 interconnectivity 44, 196 interdependence 4, 11, 17, 27–29, 51, 59, 112, 115, 120, 126–127, 137, 149–150, 164–167, 172, 176–178, 180–183, 191, 197–198, 218, 226 interdependent business partnerships 186–189 international corporate networks 182 interoperability 196 interorganisational strategies 63 interpersonal dynamics 71 Japanese keiretsu 171–175 Japanese sogo shosha 175–177 knowledge 30, 66, 79 knowledge-based approach 68 knowledge structure 28–29, 139, 159 kongsi 166, 169 Korean chaebol 166, 177–178 lane concentration 194–195 learning 82 learning from partnerships 106 legitimate power 71 legitimation 63 licensing 186 local responsiveness 184 management contract 187–188 manipulation of the external environment 73–74 manipulation of the internal environment 73–74 market selection mechanism 69 market structure 58
matrix organisation 131–132 matrix structure 131–132, 136, 140, 216, 224, 228 maximising benefits 56 maximising payoffs 58 measuring relational value 113 membership circles 102 middlemen 53–54 mimicry 63 minimising costs 56 modular coordination 130 modular structure 130–135, 141 modularity 144 multi-divisional (M-form) organisation 131–133 multilateral relation 221 multilateral relationships 95 multinational corporations 182 multiplexity of relational content 26, 43, 95, 110, 221 mutual interest theory 137 mutual orientation 102, 104 mutual recognition 125 mutuality 63 negotiating contracts 60 nested structure 130, 135–136, 180 network actors 32–36, 48–83; see also node network-based businesses 193–196 network boundaries 146 network brokers 100, 157–158, 214 network characteristics 37, 45–46 network cliques 44 network closure 156, 158 network cohesion 158, 224 network context 31–32 network coordination 51, 229 network entrepreneurs 100 network governance 229 network heterogeneity 31–32, 216 network position 153, 215 network relationship 96 network resources 26–28 network size 52 network society network structure 2, 9–10, 13, 15, 20, 23, 26, 36, 45–47, 87, 123, 127, 129–132, 141–143, 148–159, 161–166, 172, 181, 208, 226, 229 network topology 36, 43–47, 229 networking 58 node 36–37, 214
Index 261 nodes, characteristics of 38–41 non-cooperative game theory 55, 58–59 non-human actors 30–31, 33–35, 77 non-nested configuration 136 normative behaviour 52 normative compliance 63 organic collective 139 organisation, definition of 129 organisational boundaries 51, 216 organisational identity 52, 53 organisational practice 82–83 organisational routines 51, 79 organisational structure 128, 130–132 organised markets 57 organising principles 143–146 outsourcing 179 overlapping networks 26 path-dependence theory 67, 72 path distance 222 perceived relational value 112 population 137 population of firms 63 population-ecology theory 55, 64 potential relationship 96 power 70, 76, 78 power dependence 19–20 power dependence theory 20 preferences 99–102 pre-relationship 96 prestige 216 processual view 12 profit maximisation 70 project network 141–142 proximity theory 101 public goods 61 purposive action 23 range 149, 151, 217 rationalisation 144–146 rationing 73 reachability 149, 151, 223 reciprocity of ties 42, 222 recognition 108 recruitment 73–74 redundancy 223 regular network 44, 131, 141–142 relational affection 99, 107 relational analysis 84 relational approach 25–30, 35, 41, 46–47 relational atmosphere 114
relational behaviour 99, 104–105 relational behaviour and activity 99, 104–105 relational bond 13, 16, 30–31, 37, 41–42, 56, 70, 72, 85, 87–88, 95, 99, 107, 109–110, 166, 168, 170, 173, 199, 205–207, 211, 218 relational cognition 99, 105–106 relational content 42–43, 99, 109–110, 218 relational context 114 relational contracting 57, 61–63 relational dimensions 96–98 relational dynamics 116–123 relational identity 99, 107–108 relational needs 99–102 relational practice 110 relational resources 99, 103–104 relational role 99, 109, 215; see also relational status relational status 99, 109, 216 relational value 99, 111–114 relations 88–89 relationship 36, 84–127, 217–223; characteristics of 41–43 reputation mechanism 62 research and development alliance network 189–193 resource accumulation 67 resource dependence/interdependence 26–28, 67, 85, 98, 103, 114, 122 resource-dependence theory (resourcebased view RBV) 55, 66–67, 103 resource exchange 66 resource flow 27–28, 43, 103, 219–220 resource tie 219 retention 63 role behaviour 51, 53–54 role differentiation 53–54 routines 63, 68 scale-free network 44, 131, 141–142 selection 63 self-coordination 76 self-organisation 144–146 self-perception 108 self-regulation 76 shacho-kai family council 171, 173, 175 shared activities 105 simultaneous invention 158 small-world network 44, 131–132, 142–143,163 smoothing 73
262
Index
social capital theory 100, 103 social cohesion 152 social comparison 112 social exchange theory 20, 118–122 social network paradigm 20–21 social perception 108 social phenomenology 137 social status 153 social structure 2–3, 9, 12–14, 19–21, 24, 30–31, 53, 138–139, 146, 206 social support theory 101 sociogram 228 spatial clusters 199, 228 specialisation 144 stakeholder theory 74 status/role set 23, 39, 53, 215–216 strategic action 80–83 strategic alliance 58, 186 strategic behaviour 32–33, 41, 48, 54, 57–59, 72, 78, 80, 82, 85, 122, 207, 209 strategic behaviour 80–83 strategic choices 53, 56–83 strong ties 125, 220 structural archetypes 131 structural autonomy 23, 40, 154–155 structural balance theory 19 structural characteristics of networks 129–130 structural configuration 36 structural embeddedness theory 20 structural equivalence 153–154, 158, 225 structural holes 155–157 structural holes theory 100 structural measures 149–159 structural/positional approach 19–25, 35, 39, 41, 43, 46–47, 52, 95, 149, 154 structuration theory 128 structure 1–5, 9–10, 12–16, 18–26, 29–31, 35–38, 40–47, 49–58, 60, 64–65, 68, 70, 76, 81, 123,
127–135, 159–166, 172, 176, 181, 190, 193–200, 208, 211; definition of 128 structuring of networks 44, 144 subcontracting 179 subsidiary unit 184–186 supply-chain network 131, 133, 141–142 symbolic interactionism 137 symmetry 124–125, 151, 220 tacit coordination 63 task structure 105, 145 technology 30, 77–79 threshold of reaction 71 tolerance 112 transaction-cost economics (TCE), 53, 56–58, 100, 118 transactions 56, 93, 109 transitivity of ties 42, 93, 126, 221, 227 translation 77 translator 77–78 tree networks 44 trust 99, 107 turnkey contract 188 types of action 23–24 types of business relationships 123–127 types of connectivity 198, 225 types of structural configurations 130, 227 universal network 44, 46, 131–132, 141–143 (see dispersed networks) value-chain networks 44, 131, 133–134 value chain supply network 178–182 variation 63 virtual value chain 199 weak ties 125, 155–156, 221 zaibatsu 166, 170–174 zone concentration 194–195
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