The Networks as a Governance Structure

          The Networks as a Governance Structure

“Inter firm Cooperation beyond Markets and Hierarchies”

                     Network management can be seen as the coordination of activities between companies (Konsynski and McFarlan 1990). The managerial actions that are necessary from a network perspective are more selective and focused than general management of single firms, because a network typically serves a specific purpose for its member organizations (Castells 1996; Riggins et al. 1994). Consequently, networks rarely demand the coverage of the whole range of issues that a single firm has to address.

                       In order to organize the necessary exchange between different economic actors, three different modes can be distinguished. Reality is likely to be mixture of these three actors

                                               

                                                                                                                       

                 There is growing evidence, if not a general acceptance, that inter-firm relationships are an important part of this. (Håkansson and Henders 1992) report that surveyed firms had 10 business relationships on average. It is therefore not surprising that many Hierarchy Market Relationship authors describe an “interacted environment” (Ford et al. 1986) or the “network economy” (Achrol and Kotler 1999).

                         

                      Relationships are one of the most valuable resources that a company possesses” (Håkansson 1987). Relationships can be defined as a process where two firms “form strong and extensive social, economic, service and technical ties over time, with the intent of lowering total costs and/or increasing value, thereby achieving mutual benefit” (Anderson and Narus 1991). Hereby, relationships are not restricted to one type of partner – relationships are important modes of interaction in many if not all areas of economic exchange:

                            

                      In order to be truly customer-oriented, a firm needs to develop good working relationships with its customers because it is these relationships which allow a firm to understand customers’ needs and to serve them accordingly. No single firm can produces products and services on its own. Instead firms are embedded in complex value creating systems which only function competitively if good business relationships are developed.

                       A firm does not have total control over their resources, as other actors influence or restrict the actions taken by a given firm (Ford 1997; Wilkinson and Young 1994). “There is no ‘invisible hand’ creating a situation of efficiency and health. Instead there are several ‘visible hands’ that try to create situations that are beneficial to themselves” (Håkansson 1987). Some even go as far as to argue that firms are the wrong level of analysis as networks occur and evolve.

                     

                          Initiation is the entrepreneurial stage of networks. It is about finding an (business) idea that might work as a common purpose to link independent firms together. During this phase, a first definition of the scale and scope of the network’s activities is developed as well as a first rough concept of the network members’ roles and linkages. Moreover, the reasons to go for a network rather than alternative forms of organizing need to be clarified.

                              

              

                        By bringing firms together, network initiation is the first step of community building. A core part of which is to select, screen and mobilize potential partners and thereby to define however loosely the boundaries of the network. The selection of partners requires special attention, as agreement about the purpose of the network and shared strategic goals is crucial for defining a joint set of activities and responses to emerging challenges.

                        Specific (task-related), social, psychological, organizational and technical competencies are needed to be able to collaborate in an inter-firm network. While the strategic and formal fit of the companies is important, the social chemistry needs to be in balance, too (Moss Kanter 1996) puts it:” Yet, too often, top executives devote more time to screening potential partners in financial terms than to managing the partnership in human terms.” The challenge is to find a good fit of partners who show common goals and the right fit in terms of their ability to cooperate.

                          Nevertheless, network management is not simpler or easier. It has to deal with the collection, combination and allocation of labor and tasks, knowledge and resources, as well as benefits and profits among network members. Reflecting the uncertain nature of networks, network management itself is unstable: “the development of networks is a process full of frictions, resistances, surprises and self momentum, and therefore not steadily controllable.”

                      

                         Business networks are the locus of innovations because strong links to suppliers, customers, consultants, research institutions and governments are vital for knowledge creation and technology transfer. Therefore, managing business relationships and being able to manage

                         One of the prime factors for the creation of networks is the need of firms to address the environmental uncertainty of a competitive environment; the actual action of setting up collaborations entails severe risks in terms of partner selection. Not all opportunities for collaboration between two organizational units materialize in networks.

                            Firms need sufficient information regarding their prospective partners in order to avoid opportunistic behavior. More specifically, they need to know the true capabilities, needs and performance of potential partners in order to minimize decision risk and guarantee future performance. Existing social networks and trusting relationships with partners in the marketplace might thus be the trigger for certain partner gathering. An existing social relationship between two management executives might also be the agars for collaboration ideas and lead to the discovery or creation of joint business opportunities and thus the formation of a network.

                           Network management aims to establish structures and mechanisms that are needed to sustain ongoing coordination efforts among network members (Johnston and Vitale 1988). Hence, management within a network environment faces a series of complexities: coordinating different actors with different knowledge and backgrounds, creating an environment where collaborative action can evolve and take place, and dynamically aligning different strategic, organizational and technological perspectives and systems.

                            In many industries organizational networks emerge because a dominant player incorporates networking in its strategy and forces suppliers and customers to cooperate and adopt certain procedures and ways of doing business. This approach triggers a wave of collaborative agreements with the dominant player in the epicenter. Therefore, the commitment of a dominant player can greatly enable networking within a specific market since the initiative is usually supported by heavy investments both in technological and social capital.

                           A network business model can be characterized using the three elements (1) value proposition, (2) revenue streams and (3) architecture. The configuration of networked business models has to focus on the value creation network, its structure and the roles of the players involved in network value creation. More specifically, in the network context the balancing of value propositions and revenue streams between partners is a crucial task in order to achieve an incentive compatible solution for the participating players. The network business model thus specifies the group of actors, their roles in terms of value creation activities (“who does what”), the interplay between the actors (“how does it work together”) and the value flow between the partners. The network business model is the starting point for the definition of the network organization which will be discussed in the next paragraphs.

                            A network provides multiple linkages among the network members, it engenders rich opportunities. These linkages extend beyond what is intentionally designed or actively managed. The linkages provide opportunities to explore and extend beyond the official purpose of the network.

                            Network information resource, systems and infrastructure management need to be mirrored on the firm level. Network relevant information assets need to be identified and policies for sharing, pooling, developing or protecting need to be devised. The above mentioned concept of networkability does also refer to the interoperability of information systems and infrastructures as another factor to ensure the ability to cooperate. Firms have to develop the ability to connect Information Systems that contribute to collaborative processes in the network.

                            A dense and rich communication environment supports the development of social relationships and the emergence of trust. While the influence of management in this area is clearly limited, the structure of the exchange relations and institutional rules within the network can nevertheless help to foster social capital. Professional governance structures and professional conduct among the network members help to build trust. In return, the developed trust helps to contain conflicts and to operate in an environment of incomplete contracts.

                       The main ingredient for network creation is the existence of a concrete business opportunity. Networks occur among companies that join their forces in order to jointly develop their business or to deliver new value to their customers through joint actions where each partner can bring in their expertise and resources to jointly serve the customer. Existing need and interdependence between companies contribute to the formation of networks, but it is the actual opportunity to do business together that ultimately triggers network formation.

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