Strategic alliances and interfirm networks have been ... From a business perspective, networks are ... important to know that managing a business network.
52
MANAGEMENT DECISION 33,9
Do networks really foster innovation? José Tomás Gómez Arias Suggested ways to extract the maximum innovative potential from interfirm networking
Introduction Strategic alliances and interfirm networks have been gaining popularity with many firms for their lower overhead costs, increased responsiveness and flexibility, and greater efficiency of operations[1]. Besides, interfirm networking has the capacity for regulating complex transactional interdependence as well as co-operative interdependence among firms[2]. Moreover, actions, interactions and counteractions drive further change and industrial evolution[3]. An innovation, therefore, should not be seen as the product of only one actor, but as the result of an interplay between two or more parties; in other words, as the product of a network of actors[4]. Technology and innovation are often the key drivers in the formation of business partnerships and networks, reflecting the parallel relationship between the institutional set and the technological set [5]. A number of motives are especially important in interfirm co-operation with a technological focus[6]. They are related to: (1) Basic and applied research and some general characteristics of technological development: ● increased complexity and intersectoral nature of new technologies, cross fertilization of scientific disciplines and fields of technology, monitoring of evolution of technologies, technological synergies, access to scientific knowledge or to complementary technology; ● reduction, minimizing and sharing of uncertainty in R&D; and ● reduction and sharing of costs of R&D. (2) Concrete innovation processes: ● capturing of partners’ tacit knowledge of technology, technology transfer, technological leapfrogging; ● shortening of product life cycle, reducing the period between invention and market introduction. Management Decision, Vol. 33 No. 9, 1995, pp. 52-56 © MCB University Press Limited, 0025-1747
(3) Market access and search for opportunities: ● monitoring of environmental changes and opportunities; ● internationalization, globalization and entry to foreign markets; ● new products and markets, market entry, expansion of product range. Networks that are strategically guided are often successful, fast growing, innovative and leading edge. And this happens both in high-technology sectors such as semiconductors and computers and in older and mature industries such as textiles. However, it has been reported that innovative corporations are more heavily involved in strategic partnering, and that there is not a clear relationship between strategic partnering and corporate performance[7]. Forming tightly knit networks of relationships often entails drawbacks and hazards such as increasing complexity, loss of autonomy and information asymmetry[8], all of which can hamper innovation and technological change. Little attention has been paid to these problems and their consequences for network performance. In this article, we explore how networks simultaneously promote and block innovation in the partner companies involved. First, we try to pin down the concept of the network and its multiple variations. Then, we analyse different attributes of networks as they relate to innovation: flexibility, speed and networks as learning systems. Finally, we conclude with suggestions to extract the maximum innovative potential from interfirm networking.
What is a network? The term “network”, by itself, is an abstract notion referring to a set of nodes and relationships which connect them[9]. From a business perspective, networks are “clusters of firms or specialist units co-ordinated by market mechanisms instead of chains of commands”[10]. It is
DO NETWORKS REALLY FOSTER INNOVATION?
53
important to know that managing a business network involves managing two sets of objectives: (1) The nodes (business units) that form the network, which have varying degrees of independence from other units and the network centre (in case such centre exists). (2) The mechanisms, links and relationships that glue the nodes together forming the network. Networks can be conceived as an intermediate or hybrid form of organization in the middle of the road between markets and firms[11-13]. Others view networks as a third type of organizational arrangement, different from both markets and firms[14]. It is not the purpose of this article to discuss the nature of networks as hybrid or distinct organizational forms. In either case, they can be characterized by two features: (1) Networks co-ordinate their actions using both market signals such as prices, strategic moves, announcements, and so on, and non-market mechanisms such as explicit agreements. (2) Communication is partner-specific, i.e., communication takes place between any two units in the network in a particular fashion.
networks reshape how and by whom essential business decisions are made. They integrate decisions horizontally at the lowest managerial levels and with superior speed. A network identifies the “small company inside the large company” and empowers it to make four-dimensional trade-offs among functions, business units, geography, and customers[16].
Kinds of network
Stable-dynamic The stable network has its roots in the structure and operating logic of the functional organization. It is designed to serve a mostly predictable market by linking together independently-owned specialized assets along a given product or service value chain. However, instead of a single vertically integrated firm, the stable network substitutes a set of component firms, each tied closely to the core firm by contractual arrangements, but each maintaining its competitive fitness by serving firms outside the network[10]. Under this kind of arrangement, the firm assuming a central position has a relevant role as creator of value for its partners, as leader, rule setter and capability builder, and as simultaneously structuring and strategizing[1].
Networks are not a homogeneous species. They vary along a number of dimensions which give them specific characteristics. These dimensions are mainly applicable to each of the relationships between units in the network, and characterize the network itself. Two of those dimensions are of relevance here: internal-external and stable-dynamic. Internal-external During the 1980s and 1990s we have witnessed a process of corporate fragmentation, simplification and reaggregation[15]. International competition and rapid technological change forced massive restructuring across Western industries and companies. Established firms downsized to their core competence, de-layering management hierarchies and outsourcing a wide range of activities. New firms eschewed growth through vertical integration and instead sought alliances with independent suppliers and distributors[10]. Downsizing has been only one aspect of fragmentation. On one hand, fragmentation has involved getting rid of accessory businesses. On the other hand, it has also included the use of market mechanisms to manage internal resource flows in an effort to reduce co-ordination costs and improve efficiency. Internal networks are the consequence of the creation of this market inside the firm. Here, organizational units buy and sell goods and services among themselves at prices established in the open market. Obviously, if internal transactions are to reflect market prices, the various components must have regular opportunity to verify the price and quality of their wares by buying and selling outside the firm[10]. Internal
The aggregation and reaggregation of firms brings about the birth of external networks. They allow companies to gain access to complementary resources and competences which are not available internally[15]. The ties linking the different components of a network vary in their strength. If supplier markets were totally reliable and efficient, rational companies would outsource everything except those special activities in which they could achieve a unique competitive edge, i.e., their core competences. Unfortunately, most supplier markets are imperfect and do entail some risks both for buyer and seller and unique transaction costs[17]. Hence relationships range from offthe-shelf purchasing to contract agreements and special ventures to wholly-owned subsidiaries depending on the potential competitive edge to be obtained and the degree of strategic vulnerability.
In dynamic networks, independent firms are linked together for the one-time (or short-term) production of a particular good or service. For the dynamic network to achieve its full potential, there must be numerous firms (or units of firms) operating at each of the points along the value chain, ready to be pulled together for a given run and then disassembled to become part of another temporary alignment[10]. In general, networks of strategic technology co-operation are only moderately stable, unlike closed circuits. Over time the population of companies that play a leading role in these networks is transformed through exit and entry, but a core structure of heavily partnering companies remains intact. In that sense, they are dynamic structures subject to change[8].
54
MANAGEMENT DECISION 33,9
Flexibility Change has become a natural state of organizations. They need the flexibility to respond to continuous evolutions and revolutions in products, technologies and markets. Flexibility involves agility, versatility and resilience. Put simply, strategic flexibility is the ability to do things differently should the need arise[18]. As a result, companies are moving away from monolithic and rigid organizational designs towards flexible and agile organizational forms which can accommodate novelty, innovation and change. Network structures seem to provide that necessary flexibility. Flexible specialization among a number of supplier and customer firms can provide an alternative to vertical integration within individual firms. The emerging organizational system of firms is more akin to a federation or constellation of business units that are typically interdependent, relying on each other for critical expertise and know how[18]. Ideally, specialization in specific activities within a wider value chain is complemented by flexible technology and responsiveness to changing market conditions[19]. However, that is not always the case. A strategic gridlock can stem from crowding in the alliance field[20]. As more partnerships are formed in a given business or country, there are likely to be fewer partners available for new deals. This constraint is particularly troublesome in oligopolistic industries, in which only a few strong companies compete worldwide. Another possible source of strategic gridlock is technological. In network industries (i.e., industries with network externalities arising when the benefits which a user derives from a product increase as others use compatible products), the degree to which different technological systems are compatible with one another determines users’ relevant network boundaries[21]. As the size of the network increases, so does the customer value of each component organization’s products. However, established technical standards that grant compatibility limit the degrees of freedom to explore innovative technologies[22]. Thus we face a strategic dilemma between compliance to standards or innovation. Some companies have been able to solve the dilemma using open systems. By allowing general access to their proprietary technologies, they create a critical mass of users and firms adhering to their networks. Without isolating mechanisms, firms which wish to survive must introduce new products continually which enhance system performance. Dependence is inherent in networks. In all alliances, the allying companies lose some control. Cumulatively, the growth of a network of alliances may gradually and inexorably link an individual company’s destiny to that of the network. The economic performance of any of the units integrated in the network is contingent on the performance of the whole network[3]. If that occurs, the company may
have to subordinate its own decisions to those of the network[20]. Often times, small companies partnering with large corporations find themselves locked into a trajectory shaped by the needs of powerful corporate partners which reduce their capacity to adapt their strategy to changing circumstances[19].
Speed Speed is essential for successful innovation, in order to seize market and technological changes and opportunities. As a competitive weapon, speed offers three major payoffs[23]: (1) Speed yields competitive advantage. The ability to respond to customers’ needs and changing markets faster than competitors, and to beat competitors to market with a new product is often the key to success. (2) Speed yields higher profitability. The revenue from the sale of the product is realized earlier, and the revenues over the life of the product are higher, given a fixed window of opportunity and hence limited product life. (3) Speed means fewer surprises. The short timeframe reduces the odds that market conditions will change dramatically as development proceeds. Collaborating in product development as been promoted as a means to reduce the time taken to develop new products[24,25]. The rationale behind this is that involving suppliers and customers in the product design process makes it easier and faster to arrive at customer requirements and needs, technical solutions are more readily available and specifications for parts are easier and allow for smoother production start-up. Bureaucracies, hierarchies, narrowly defined jobs, centralized decision making, and communications that flow from the top of the organization down, severely constrain innovation[26]. Instead, involving all constituents in the process brings a wider range of ideas and smoothes the implementation process. Bringing in outsiders into a looser structure, however, has some major drawbacks. The more units with different objectives and strategic agendas are involved, the more time consuming is the process of decision making. Indeed, failure to co-ordinate adequately the efforts of the members of the network can offset the benefits of getting rid of slow bureaucratic structures. Therefore, close attention must be given to the trade-off between faster implementation and slower decision making.
Learning systems Co-operation offers companies the availability of a wide range of resources almost immediately, without sacrificing flexibility, while limiting uncertainty[27]. Under the current competitive circumstances, the two basic resources are knowledge (competences) and relationships[28].
DO NETWORKS REALLY FOSTER INNOVATION?
Pooling those resources is necessary for a business network to get stronger. In this sense, knowledge transfer is essential for the network as a learning system. Innovation, whether solving a problem, introducing a product, or re-engineering a process, requires seeing the world in a new light and acting accordingly. A learning organization is an organization skilled at creating, acquiring and transferring knowledge about markets, products, technologies, and business processes, and at modifying its behaviour to reflect new knowledge and insights[29]. The network organization form appears ideally suited to the goals of the learning organization, by providing linkages with external learning partners in long-term relationships that facilitate information sharing. In fact, sometimes the most powerful insights come from looking outside one’s immediate environment to gain a new perspective. Some companies use what has been called a “borrow-develop-lend” approach to new ideas[1]. “Borrow” means that the company deliberately buys or licenses some existing technological ideas from a third party; “develop” means that it takes the outside ideas and adds value by developing them further in its own organization. This commercialization can be exploited or “lent” with great rapidity through its stellar system. Borrowing ideas, which are subsequently developed and exploited, stretches the organization and forces it to grow its capabilities and competences. Not all kinds of knowledge, however, can be transferred across business units with the same ease. Explicit knowledge is formal and systematic, so that it can be easily articulated in product specifications, formulae or computer programs, combined and internalized. Tacit knowledge is in part technical skills, but it also has an important cognitive dimension formed by mental models, beliefs and perspectives difficult to articulate. Socialization is the only means of transferring tacit knowledge between individuals through observation, imitation and practice[30,31]. But, when it comes to implementation tactics, access between partners to each other’s information systems, assignment of key employees to work in partners’ organizations, joint collaborations on key product design projects, and using customers as strategic advisers, are complex and expensive to implement[32]. Furthermore, learning is a two-directional process. The communication and transfer of technical knowledge, which occurs within an industry, also results in a certain amount of technological advancement related to “learning by sharing”[33].
Recommendations Networks are a powerful tool to foster innovation in companies and industrywide. But, how can we make them work to their full potential? Here are eight suggestions for successful interfirm networking.
55
(1) Anticipate key business risks associated with partnering. They will appear and it will be necessary to be flexible to find joint solutions beyond formal agreements. Networks are not supposed to last forever in their initial form. Changes will be necessary in the nature of the relationships and the components of the network. (2) Know your partner(s), in terms of the excellence and complementarity of the resources they offer, compatibility of goals, commensurate levels of risk and co-operative culture[34]. Choose carefully. (3) Rigorous resource planning and commitment of resources to the network (financial, human, technical, and other). Resources allocated to the network must be free to move within the system, especially in the case of people and information. However, resources committed and performance must be commensurate. (4) Business units may form networks and alliances, but relationships take place between people. In the end, it is people who determine how well networks perform. And that includes people at all levels in the organizations involved, from top management to floor personnel engaged in the day-to-day interaction. For a business network to be effective it is necessary to develop and nurture an overlapping social networks. (5) The motives for entering into a relationship must be positive (to pursue future opportunities), not negative (to mask weaknesses or escape a difficult situation)[35]. (6) Communication, sharing technical data, objectives and goals, and also knowledge of conflicts, trouble spots, or changing situations. (7) Networks are as strong as the alliances within them: each individual relationship must be managed carefully. At the same time, groups are worth more than the sum of the alliances within them: manage the group as a whole[20]. (8) Ensure that there is at least perceived equality of contribution and benefits from the various parties involved in the collaboration. Inequalities are likely to lead to dissatisfaction, resentment, and possibly the termination of the agreement. The creation of a win-win situation whereby all partners gain from the collaboration is an important requisite for success[24]. Every company, whether large or small, is the hub of its own network of relationships. It is important to use it as a strategic asset, shaping it to the needs of the company and managing all those relationships in a holistic way. This need is even more important in promoting technological innovation characterized by technical and economic uncertainty, where flexibility, speed and rapid transfer of knowledge constitute some of the keys to success.
56
MANAGEMENT DECISION 33,9
References 1. Lorenzoni, G. and Baden-Fuller, C., “Creating a strategic center to manage a web of partners”, California Management Review, Vol. 37 No. 3, 1995, pp. 146-63. 2. Grandori, A. and Soda, G., “Inter-firm networks: antecedents, mechanisms and forms”, Organization Studies, Vol. 16 No. 2, 1995, pp. 183-214. 3. Lundgren, A., Technological Innovation and Technical Evolution, Routledge, London, 1995. 4. Håkansson, H., Industrial Technological Development: A Network Approach, Croom Helm, London, 1987. 5. Johanson, J. and Mattsson, L.G., “Network positions and strategic action: an analytical framework”, in Axelsson, B. and Easton, G. (Eds), Industrial Networks: A New View of Reality, Routledge, London, 1992. 6. Hagedoorn, J., “Understanding the rationale of strategic technology partnering: interorganizational modes of cooperation and sectoral differences”, Strategic Management Journal, Vol. 14, 1993, pp. 371-85. 7. Hagedoorn, J. and Schakenraad, J., “The effect of strategic technology alliances on company performance”, Strategic Management Journal, Vol. 15, 1994, pp. 291-309. 8. Hagedoorn, J., “A note on international market leaders and networks of strategic technology partnering”, Strategic Management Journal, Vol. 16, 1995, pp. 241-50. 9. Fombrun, C.J., “Strategies for network research in organizations”, Academy of Management Review, Vol. 7 No. 2, 1982, pp. 280-91. 10. Miles, R.E. and Snow, C.C., “Causes of failure in network organizations”, California Management Review, Vol. 34 No. 4, 1992, pp. 53-72. 11. Williamson, O.E., “Comparative economic organization: the analysis of discrete structural alternatives”, Administrative Science Quarterly, Vol. 36, 1991, pp. 3-37. 12. Thorelli, H.B., “Networks: between markets and hierarchies”, Strategic Management Journal, Vol. 7 No. 1, 1986, pp. 37-51. 13. Jarillo, J.C., “On strategic networks”, Strategic Management Journal, Vol. 9, 1988, pp. 31-44. 14. Powell, W.W., “Neither market nor hierarchy: network forms of organization”, in Cummings, L.L. and Staw, B. (Eds), Research in Organizational Behavior, JAI Press, Greenwich, CT, 1990, pp. 295-336. 15. Wiss, D., “Les nouvelles frontières de l’entreprise”, Revue Française de Gestion, No. 100, 1994, pp. 38-49. 16. Charan, R., “How networks reshape organizations – for results”, Harvard Business Review, September-October, 1991, pp. 104-15. 17. Quinn, J.B. and Hilmer, F.G., “Strategic outsourcing”, Sloan Management Review, Summer, 1994, pp. 43-55.
18. Bahrami, H., “The emerging flexible organization: perspectives from Silicon Valley”, California Management Review, Summer 1992, pp. 33-52. 19. Garnsey, E. and Wilkinson, M., “Global alliance in high technology: a trap for the unwary”, Long Range Planning, Vol. 27 No. 6, 1994, pp. 137-46. 20. Gomes-Casseres, B., “Group versus group: how alliance networks compete”, Harvard Business Review, JulyAugust 1994, pp. 62-74. 21. Garud, R. and Kumaraswamy, A., “Changing competitive dynamics in network industries: an exploration of Sun Microsystems’ open systems strategy”, Strategic Management Journal, Vol. 14, 1993, pp. 351-69. 22. Léger, C., “Le partenariat entre grandes entreprises et PME: expérience ou stratégie?”, Economies et Sociétés, No. 21, pp. 7-29. 23. Cooper, R.G., Winning at New Products. Accelerating the Process from Idea to Launch, Addison-Wesley, Reading, MA, 1993. 24. Littler, D. and Leverick, F., “Joint ventures for product development: learning from experience”, Long Range Planning, Vol. 28 No. 3, 1995, pp. 58-67. 25. Guy, K. and Georghiou, L., The Alvey Programme on Advanced Information Technology, HMSO, London, 1991. 26. Souder, W.E., Managing New Product Innovations, Lexington Books, Lexington, MA, 1987. 27. Menguzzato Boulard, M., “La cooperación: una alternativa para la empresa de los 90”, Dirección y Organización, No. 4, 1992, pp. 54-62. 28. Normann, R. and Ramírez, R., “From value chain to value constellation: designing interactive strategy”, Harvard Business Review, July-August 1993, pp. 65-77. 29. Garvin, D.A., “Building a learning organization”, Harvard Business Review, July- August 1993, pp. 78-91. 30. Nonaka, I., “The knowledge-creating company”, Harvard Business Review, November-December 1991, pp. 96-104. 31. Itami, H., Mobilizing Invisible Assets, Harvard University Press, Cambridge, MA, 1987. 32. Piercy, N.F. and Cravens, D.W., “The network paradigm and the marketing organization: developing a new management agenda”, European Journal of Marketing, Vol. 29 No. 3, 1995, pp. 7-34. 33. Sahal, D., Patterns of Technological Innovation, AddisonWesley, Reading, MA, 1981. 34. Brouthers, K.D., Brouthers, L.E. and Wilkinson, T.J., “Strategic alliances: choose your partner”, Long Range Planning, Vol. 28 No. 3, 1995, pp. 18-25. 35. Kanter, R.M., “Collaborative advantage: the art of alliances”, Harvard Business Review, July-August 1994, pp. 96-108.
José Tomás Gómez Arias is a Lecturer in the Department of Marketing, Faculty of Economic Science and Business Studies, University of Coruña, Coruña, Spain.
Application questions (1) Identify and chart one or more of the actual network relationships in which your organization is engaged. What are the main benefits to each party? (2) Is a network’s success contingent on successful business relationships, successful interpersonal relationships, or both? (3) What is the role of technology in effective networking?
