Industrial Networks (Routledge Revivals)

A New View of Reality

B Axelsson, G Easton, B Axelsson, G Easton

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317244585
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1992, this volume brings together contemporary studies and reviews the research which established the study of networks as an area in its own right. By looking at the foundations of industrial networks and analysing network methodology and modelling, this book offers an integrated and coherent approach to the whole area. Covering small group analysis, network change processes and implications for business strategy, and presenting new ways to exploit inter-organisational relationships in the face of change, it tackles key issues with important implications for the future. This book will be of interest to students of economics and business.

Part I

Why networks?

New readers start here. Work which can be recognised as being in the industrial networks tradition has been going on for something like ten or more years. This book is not meant to be primer in the field or a review of what has gone on before. As mentioned in the Preface it was originally meant to be state of the art. In practice a better description would be ‘current preoccupations of some of those involved in the field’. Thus the book is, in one sense, empirical in that it taps into current concerns rather than attempting to build a comprehensive, and comprehensible, framework of which all elements are covered equally. This being the case those readers who are not familiar with the body of work need some sort of introduction. Part I of the book provides precisely that.

The first two chapters provide a vivid contrast. Chapter 1 by Geoff Easton is a review of the field. In a sense it too is empirical in flavour since it attempts to map the various issues which have been written about and researched without attempting to be particularly evaluative or integrative. It tracks the history of industrial network thinking and attempts to categorise and define. It provides the new reader with a first taste of the rather special language that has evolved within the field and references the original work. What is apparent from the review is that there are a number of perspectives on industrial networks and the temptation is to believe that they represent alternatives. That would be a false conclusion. They overlap heavily and should not be regarded as equivalent. However, they do not completely overlap so that they cannot be considered to provide a single unified view of the phenomena they seek to provide. If this is understood the first chapter will be better understood and appreciated.

Chapter 2 is introductory but in a different sense. It provides an apparently simple and straightforward description of the actors, resources and activities model of industrial networks. This model underpins many, but not all, of the remaining chapters in the book and is set fair to provide the conceptual and empirical agenda at least in the short term. It does not, however, supplant what has gone on before but draws upon and extends it. The simplicity is more apparent than real because the set of relationships it describes are theoretically complex especially when network dynamics are taken into account. The simplicity of the language is also deceptive. A basic understanding of this chapter is necessary in order to be able to understand what follows.

1 Industrial networks: a review

G. Easton

INTRODUCTION

Research in the area which encompasses organisational marketing, business to business marketing and organisational buying behaviour has developed in two quite different traditions. The first, and original, approach has, to a large extent, taken its lead from consumer marketing, has by and large opted for study of either buyers or sellers and is generally associated with writers in the United States. The second tradition has its home in Europe, has been influenced by work outside the marketing area and focuses on the ‘space’ between organisations. Neither exhibits monolithic paradigms; both traditions have had room for a variety of approaches. Within the European tradition, and a twenty-year history allows the use of the word, the industrial network approach has emerged as a separate and viable paradigm in its own right. It shares with other approaches a belief that the existence of relationships, many of them stable and durable, among firms engaged in economic exchange provides a compelling reason for using inter-organisational relationships as a research perspective. It differs from other approaches mainly in terms of its scope. It is concerned to understand the totality of relationships among firms engaged in production, distribution and the use of goods and services in what might best be described as an industrial system. The boundaries of such a system are problematic and will probably vary depending upon the purposes for which the boundary is being drawn. The focus of research is, ultimately, the network and not the firm or the individual relationship, although firms and relationships must be studied if networks are to be understood.

Much of the work on industrial networks has been published but in far-flung places that are often difficult to access. What is surprising, and gratifying, is that it is available at all to an international audience since the bulk of the work has been done in Sweden by Swedes. The objective of this review is to provide a stepping off point for the remainder of the book. To do so it must be relatively comprehensive yet succinct. It has not been an easy task. For such a young paradigm there exist a remarkable number of alternative views and perspectives, sometimes espoused by the same author at different times. In addition since these are views of the same phenomena from different angles they are irreconcilable and cannot be integrated and I have not attempted to do so. However the paradigm is socially rather cohesive and there are many shared assumptions.

The problem of multiple perspectives is not an uncommon one especially in the social sciences. Morgan (1986) has championed the cause of a metaphorical mode of analysis. In Images of Organisation he apportions the literature on organisations among a series of metaphors. More recently Mintzberg (1988) has described five alternative metaphors for strategy. A similar approach will be taken here. Four metaphors for industrial networks are used to structure the chapter. They are: networks as relationships; structures; processes; and positions. However, first, to set the scene, the history and provenance of the industrial networks approach is described. The final section is concerned with the normative implications of network ideas and areas of application.

PROVENANCE

The industrial network approach has a number of progenitors although the exact relationships to their offspring is not always clear. At an early stage, studies of distribution channels both in Europe and the United States were concerned with the relationships between channel members and dealt with issues of power and control which are also held to be important for industrial networks. The nature of the functions, retailing/distribution, meant that a relatively narrow approach to inter-organisational activities could be taken and the assumption of a homogeneous channel could be justified. This assumption is not made in the industrial network approach. In a parallel field of study, research into the processes of internationalisation has dealt with similar issues, i.e. how do firms organise to export and manufacture abroad. The interaction approach, which was a product of the first, pan European, I.M.P. study used as the basic unit of analysis the dyadic relationship between buyers and sellers of manufactured products in different countries (Hakansson (1982b)). The I.M.P. group successfully demonstrated the existence of stable long-term buyer–seller relationships and were able to characterise their richness and diversity in a four element analytical framework. Industrial networks, by definition, comprise many such relationships and so any account of them not only has to sacrifice some of the descriptive richness of the interaction approach but also has to concentrate on those aspects which have particular implications for network operation.

The resource dependence model provides another perspective on inter-organisational relationships (Pfeffer and Salancik (1978)). Unlike the interaction approach it is concerned with a focal organisation but attempts to describe the multiplicity of relationships of any industrial or commercial organisation. The basic assumption is that organisations use these relationships in order to gain access to the resources which are vital to their continuing existence. Firms access resources not only through suppliers and customers but also through banks, shareholding institutions, government, distributors, consultants, associations, etc. The resource dependence model mainly focuses on the way in which firms handle individual relationships. It sees the behaviour of firms as the resultant of two opposing forces; the competing and often contradictory desires of stakeholders within organisations and the external requirements of the organisations to which and from which resources flow. The resource dependence model brings to the study of industrial systems a vision of the multiplicity of relationships and the dominant role of resources in determining behaviour. However it differs from the industrial network perspective by concentrating on the actions of a single firm. The network, or more accurately net, is viewed through the eyes of that firm and the working of the network is seen to be of secondary importance. In other words the units of analysis are very different.

The second I.M.P. study has, in some ways, a similar focus. It is concerned with individual relationships as in the first study but has moved on to examine each relationship in the context of the other relationships a particular firm may have. It therefore operates at a higher level of aggregation than the first programme of work and might be said to provide one form of link between studies of firms buying and selling and the full blown network level of analysis.

By contrast theories of social exchange are primarily interested in explaining the operation of network phenomena: ‘The primary focus of social exchange theory is the explanation of the emergence of various forms of social structure, including networks and corporate groups’ (Cook and Emerson (1984)). The central construct of social exchange theory is that of connection. ‘Two exchange relationships are connected to the extent that exchange in one relationship is contingent, positively or negatively, upon exchange in the other relationship.’ This concept allows us to move beyond the dyad, sequentially, to invoke and model system-wide effects. It defines the idea of indirect relationships where A may affect C through B simply because there are connected exchange relationships between all three parties. Viewing an industry as a network of interconnected exchange relationships implies adopting a systemic focus and level of explanation. In practice the approach of social exchange theory has been to test simple analytical models of network behaviour using experimental methods. It is thus rather distant from the empirical and naturalistic approach adopted by workers in the industrial network tradition. Nevertheless the debt is a very real one. Social exchange theory argues that complex network behaviour can result from the interplay of relatively simply defined exchange relationships. It is an aggregative approach and one which has influenced at least one strand of network methodology as well as providing a building block for theoretical developments.

By contrast, research into communication and social networks has been largely inductive in character (Rogers and Kincaid (1981)). The unit of analysis is commonly the individual in a social context and the network is defined in terms of the patterns of communication and/or social interactions occurring regularly between and among those individuals. The problems have occurred not in data collection but in analysis. The large numbers of links which may exist in such a network make the discernment of patterns particularly difficult. In response a whole series of matrix manipulation techniques have been developed. While these are only just beginning to be used to characterise industrial networks, network studies have influenced the language and orientation of the industrial network approach. In particular they share the view that networks should be treated as a whole, that network boundaries are problematic and that network models must be dynamic in nature.

Defining a paradigm is often helped by making clear what it is not. The industrial network approach has used traditional, and not so traditional economics, as stalking horses. In particular the notions of pure competition with atomistic and unconnected firms striking individual and instant deals with one another, in the face of competitors doing the same thing, is rejected. If strong relationships exist among buyers and sellers then the facile switching among easily available alternatives which is assumed in economic analysis no longer applies. History becomes important. Inertia is introduced into the system and the rules of optimum resource allocation fail as relational constraints start to bite and motives other than short term profit maximisation begin to dominate.

The branch of economics described as industrial organisation theory may be said to address similar issues to those dealt with by the industrial networks approach. In particular it is concerned with the structure of industries and the relationships among firms in those industries. However, once again, the relationships between suppliers and customers are assumed to be atomistic and, in this model, marginal to the central issue of rivalry among the competitors that defines, somewhat narrowly, the boundaries of the industry. Indeed in Porter’s articulation of industrial organisation theory customers are identified as ‘extended rivals’ in that they constrain the focal organisation in direct relation to the power they are capable of drawing upon.

The development of institutional economics which gives transaction costs a major role in determining vertical market mechanisms, comes closest to addressing the same issues as the industrial network approach (Williamson (1975)). It assumes that transactions between suppliers are not without friction and that, as a result, costs arise which are dependent on the particular nature of the transactions. These costs, in turn, help determine which organisational form – free markets, vertical integration or bilateral governance – is most likely to emerge assuming firms seek to minimise costs. Johanson and Mattsson (1986), however, argue that the similarities are more superficial than profound. The transaction cost approach focuses on the single relationship not the network. It assumes equilibrium under cost minimisation and economic rationality (albeit bounded). Most fundamentally it has little to say about the most interesting case, at least from a network view, that of bilateral governance. This omission is somewhat rectified in Williamson’s later work when it is admitted that bilateral governance may be a stable organisational form (Williamson (1985)).

Similarly the model of marketing which derives from microeconomic assumptions is also rejected for most organisational markets. It is no longer sensible to assume seller dominated markets where the firm, as the focal unit, sets the mix parameters and the faceless market responds. Instead the market is seen to have a face. Many individual customers may be distinguished and dealt with separately which, in turn, creates a new and different set of marketing (and buying) problems. While the industrial network approach acknowledges these issues it is important to recognise a major difference in orientation. The focus is upon the network and not the individual firm. The goal is primarily description and explanation not prescription. A network perspective has profound normative implications but they spring from the approach rather than drive it.

Having described the roots, real or imaginary, of the industrial network approach we will now examine it from four different angles in the expectation that by doing so we may come to an understanding of its nature and essence.

NETWORKS AS RELATIONSHIPS

If there are no ‘relationships’, using the word in a rather general sense, between buying and selling organisations in an industrial system then the free market models beloved of economists should reign. In other words relationships among firms are the sine qua non of an industrial network approach. One approach to industrial networks is therefore to regard them as aggregations of relationships. While modelling the network is the ultimate goal it could be argued that one line of attack is to start at the most basic level and build. However there is nowhere in evidence the naive belief that the process of aggregation is likely to be simple or additive. ‘Adding together’ relationships provides massive opportunities for systemic structures to emerge which overlay the simple and apparent linkages. Nevertheless relationships are important in determining network properties and a knowledge of their behaviour has important implications for understanding networks. The interaction approach provides a rich model of relationships between firms buying from and selling to one another. Much of this richness has, of necessity, to be discarded when an aggregate approach to relationships is required. In this section only those characteristics of single relationships which are thought to have relevance for the structure and processes of networks are discussed.

One analysis of interfirm behaviour distinguishes between relationships and interactions (Johanson and Mattsson (1987)). The relationship elements of the behaviour are rather general and long-term in nature. Interactions, by contrast, represent the here and now of interfirm behaviour and ‘constitute the dynamic aspects of relationships’ (Johanson and Mattsson (1987)). Thus there is an interplay between the two variables. Interactions, in their turn, are said to comprise exchange processes and adaptation processes. The former represent the day-to-day exchanges of a business, social or informational nature that occur between firms. The latter comprises the processes by means of which firms adjust products, production and routines.

Relationships, in their various manifestations, will be discussed first. They may be presented as comprising four elements: mutual orientation; the dependence that each has, or believes it has, upon the other; bonds of various kinds and strengths, and the investments each has made in the relationship. Clearly each of these elements is strongly interrelated with the others and is itself capable of being further decomposed and elucidated.

One of the preconditions for the existence of an interfirm relationship is what has been termed mutual orientation. This implies that the firms are prepared to interact with each other and expect each other to do so’ (Mattsson (1988)). Cooperation is required and this depends, at least in terms of one view of cooperation, on the relationships between the firms’ objectives. ‘Vigorous relationships presuppose the existence of a certain complementarity between the objectives of the parties’ (Hagg and Johanson (1983). The cooperation may be instrumental in that each firm seeks to gain different ends from the same means, e.g. access to a new process and a new market entry from the same development programme. Alternatively the objectives might be commonly held, e.g. advancing a new technology.

Complementarity of objectives is a rather abstract rationale for entering into a relationship. Why would a firm seek, consciously or unconsciously, to develop relationships? A number of instrumental reasons can be identified and these appear to fall into two main categories. The first exploits the complementarities of an individual partner. ‘[R]elationships allow of a more effective acquisition of resources and sale of product’ (Hagg and Johanson(1983)). By knowing a partner firm better and appreciating what they can do and have t...