Managing Networks in International Business

M. Forsgren, J. Johanson

• Publisher: Routledge
• Year: 2014
• eBook ISBN:
  9781317762461
• Topic: Commerce
• Subtopic: Commerce Général

The book introduces a unique and innovative perspective for the study of international business networking. In contrast to the standard construction of models for optimal strategic decision-making, the essays in this book emphasise interpretation, learning by doing, trust and co-operation in the international business community. The editors focus upon business relationships within and between firms as well as the importance of middle management in the international arena.

1

Managing Internationalization in Business Networks

Mats Forsgren and Jan Johanson

1.1.	A New Approach to International Business Analysis

The international business arena is enlarging rapidly as well as undergoing dramatic structural changes. The old international business actors – large and small multinational firms engaged in industry, trade and services – are expanding all over the world. They are developing and modifying their business practices. New actors – private and public – are entering. Some of them come from countries and areas which used to be isolated and economically backward, some come from the old industrialized countries but from business fields which were mainly domestic in most countries. New forms and patterns of business activities are brought to the arena. Sometimes the firms compete on their own, sometimes they co-operate with other actors in ever changing patterns. The traditional distinct roles in the market place as suppliers, customers and competitors are becoming mixed. Competitors in one market co-operate in another and are suppliers and customers to each other in a third. Correspondingly, traditional boundaries between industries are breaking down and firms from different industries meet in new markets.

Parallel with this development there has been a tremendous growth in the research and literature about international business. The number of textbooks about international business, marketing, and finance is increasing exponentially. But their character remains essentially the same despite some minor changes. Thus, in the sixties we witnessed the first textbooks about International Marketing (i.e. Cateora, 1966), in the seventies they were called Multinational Marketing (i.e. Keegan, 1974) and in the eighties we see textbooks titled Global Marketing (i.e. Toyne & Walters, 1989) in the publishers’ lists. In spite of the changing titles the basic approach remains the same.

Reflecting the dominant approach in business literature the single firm operating – or potentially operating – internationally is strongly in focus. This firm, in its entirety, is the unit of analysis and a distinct boundary separates it from its environment. The basic task of these books comprises the analysis from a top management perspective. Given the environment of the firm and its own resources, which strategic decisions maximize the company’s return and which organization is needed to implement them.

This book is based on a different approach to business analysis. It starts with the assumption that international business takes place in a network setting where different business actors are linked to each other through direct and indirect business relationships. Managing international business, then is a matter of establishing, developing and maintaining the firm’s positions in the international business networks.

A corner stone in the network view is that it regards firms as engaged in more or less lasting business relationships with other actors in the business arena, the main managerial task being to handle their interaction. Thus, rather than drawing a sharp line between the firm and its environment this book focuses on the interaction between firms in an attempt to understand how they, in competition and in co-operation, together shape the future conditions for business. Rather than viewing the environment as a set of separate, anonymous forces – political, competitive, legal, cultural, economic, etc. – all the actors are considered bearers of diverse interests, powers and characteristics. It is in the meetings in the international business arena that such factors impinge on the development of business.

Second, as this interaction involves managers on all managerial levels the book lacks the clear top management perspective so dominant in international business literature but focuses on the tasks of middle management in handling the relationships with customers, suppliers, distributors and all kinds of business actors. This implies also that the firm as a whole is not taken for granted. Rather, the firm operating internationally can be seen as composed of different units with different interests and differential possibilities to pursue their interests. Thus managerial problems may as well concern managing relationships with other business units in the same firm as with business units in other firms. In fact, this view implies that managing relationships with superior units is an important managerial task.

Third, rather than focusing single, discrete decisions this book devotes attention to the current activities in the firms and their consequences. It assumes that business relationships are developed and maintained primarily through everyday interaction. This approach implies that business processes, whether they take place within or between firms, should be of prime interest in international business studies. Understanding of the processes whereby the firms develop internationally and maintain their international business positions is more important to managers than models for optimal strategic decisions.

The approach of the book is based on long-term research in international business at Uppsala following two separate but closely related lines which are presented in the next sections of this Chapter. Both lines of research have been pursued in close interaction with business managers and have a strong empirical orientation. The first concerns business networks and the second the internationalization process of the firm. In a third section of the chapter these two lines are integrated and the content of the book is outlined.

1.2.	Firms in Business Networks

1.2.1.

Business Relationships

In empirical research at Uppsala about Swedish industrial firms in international competition it was found that major marketing problems in the firms concerned establishment, development and maintenance of lasting business relationships with customers, suppliers and other important actors (Johanson, 1966, Forsgren & Kinch, 1970, Kinch, 1974).

This observation has led to a line of research focusing interaction in business relationships (Håkansson & Östberg, 1975, Håkansson, ed., 1982). Relationships with such important customers and suppliers are, according to this research, developed over time through interaction processes. Through the interaction the parties gradually, on one hand, learn about each other’s needs, capabilities and strategies and come to trust in each other, and on the other, adapt to each other’s way of performing operations and commit resources to the relationship.

Empirical data about some 1000 business relationships in European markets collected in an international research project – IMP Project – show that both industrial suppliers and industrial customers are engaged in lasting relationships, which they consider important (Håkansson, ed., 1982 and Turnbull & Valla, eds., 1986). The data also indicate that most firms operate in markets where a limited number of customers account for a considerable proportion of the firms’ sales. The managers often characterize their customer distribution by a 80–20 rule, saying that 20 per cent of the customers take 80 per cent of the firm’s sales. In a similar manner the main part of the firms’ purchases of inputs come from a limited number of suppliers. They are important as they secure effective sourcing and marketing, and because they form a basis for the firms’ competence development. The business relationships are significant, intangible assets of the firms. The average age of the relationships investigated was fifteen years, a considerable number of them were much older.

Business relationships are established and developed by investing time and resources in interaction with each other. Such relationship-specific investments may include adaptations of products, processes and routines. Examples of such adaptations are customized products, just-in-time-delivery systems, and quality assurance programs. Considerable adaptations are also made gradually as a consequence of two firms learning about each other’s ways of performing activities. The relationship-investment processes are often mutual.

Most businessmen agree that business relationships are of critical importance. The relationships are, however, hardly visible from outside, as they are subtle phenomena, in which intentions, interpretations, and expectations are important aspects (Håkansson & Johanson, 1988). They are also difficult to grasp for an outsider as they comprise a number of different and complex dependences – technical, logistic, social, cognitive, administrative, legal, and economic – between the parties.

Although the basic nature of business relationships seems to be common there are great differences between different relationships with regard to the interaction processes and the dependences. To some extent such differences are structurally conditioned. There are differences between domestic and international relationships. Likewise there are differences depending on product type, production technology and market structures (Hallén, Johanson & Seyed-Mohamed, 1987).

But the character of business relationships is also a consequence of the interaction strategies of the parties (Cunningham & Homse, 1982). A supplier of a product may pursue different strategies towards different customers. The interaction with one may aim exclusively at sales volume while interaction with another is important with regard to technical development. Correspondingly, a customer firm may have one or a few main, stable suppliers of a product and some other secondary suppliers so as to test the market.

Business in one relationship is often conditioned by relationships with third parties, such as the customer’s customers, the supplier’s suppliers, consultants, competitors, supplementary suppliers, middlemen, as well as public or semi-public agencies. This leads to the important conclusion that markets are more or less stable networks of business relationships (Hägg & Johanson, eds., 1982). Firms make important investments in such networks. The competitive situation of the firms is a matter of the networks they operate in or may operate in – there is a great difference between being an insider and an outsider – and their relations to those networks. The network is the framework which gives the firms both possibilities and constraints in their business.

1.2.2.

Business Networks

Against this background we define business networks as sets of connected exchange relationships between actors controlling business activities (cf. Cook & Emerson, 1984).

Business networks differ from social networks – and from networks in general – by being coupled to business activities. The business network model is therefore based on some assumptions about business activities. In business fields a number of more or less interrelated business activities are pursued. Each activity is more or less dependent on the performance of a number of other activities which must precede or are expected to ensue. Each activity is a link in one or several more or less extensive and closely linked activity chains. The activities are performed more or less repetitively. Over time, through experience, some of the activities are modified and adapted to each other, thus increasing their joint productivity and their cohesion. The interdependence between the activities – in the sense that the outcome of the one is dependent on the performance of the other – becomes stronger. As two activities become more closely interlinked they are usually separated from some other activities. Thus, change in the performance of one activity may lead to adjustments through activity chains and also cause changes in related activity chains.

Any such business field involves a number of different actors – irrespective of whether they are firms, divisions, business units or individuals. No actor’s activities are performed in isolation. They are more or less embedded in the wider web of business activities performed in the field. But the dependence between actors can be more or less specific. There is a specific dependence between two actors if one of them is dependent on the activities of the specific counterpart. There may also be general dependences, which are not related to specific counterparts. Thus, a firm may be dependent on the activities in a certain market irrespective of which firms in the market perform the activities, or on the activities utilizing a specific resource irrespective of which firms utilize the resource.

FIGURE 1.1:

Relation between Exchange Relationships and Activity Interdependence

The exchange relationship can be seen as a mode of handling activity interdependence between two actors (Figure 1.1). The stronger the specific activity interdependence between two actors the more they will be inclined to develop an exchange relationship with each other. Potential gains from just-in-time-deliveries, joint product development, and quality assurance arrangements can be expected to lead to development of strong relationships rather than conducting business in arms-length market relations. Inversely, two actors who are engaged in a close relationship will tend to strengthen their specific interdependence in order to raise the joint productivity of their activities. This implies also that two actors, between whom there is initially no specific activity interdependence but who are involved in a relationship with each other due to earlier activities, will have opportunities to raise their effectiveness by adapting their activities to each other.

Correspondingly, business networks is a mode of handling activity interdependences between several business actors. Other modes of handling or governing interdependences in a business field are markets and hierarchies. The network differs from the market – the invisible hand – with regard to the relations between the actors. In a market model the actors have no specific relations to each other. The interdependences are regulated through the market mechanism which transforms the demands and supplies of the different actors into market prices. In contrast, in the business network the actors are linked to each other through exchange relationships and their needs and capabilities are mediated through the interaction taking place in the relationships. If there are productivity gains through joint arrangements within the framework of exchange relationships business networks will replace arms-length market relations.

The industrial network differs from the hierarchy – the visible hand – insofar as the actors are autonomous and handle their interdependences bilaterally rather than via a coordinating unit on a higher level. Whereas a hierarchy is organized and controlled as one unit from the top the business network is organized by each actor’s willingness to engage in exchange relationships with some of the other actors in the network. The networks are more loosely coupled than are hierarchies, they can more easily change shape. Any actor in the network can engage in new relationships or break old thereby modifying its structure. Thus business networks can be expected to be more flexible in response to changing conditions in turbulent business fields, such as those where technical change is very rapid.

It can be concluded that business networks will emerge in fields where coordination between specific actors can give strong gains and where conditions are changing rapidly.

The business networks should not be confused with strategic networks, such as franchising networks or subcontracting networks where one central actor contracts a number of franchisees or subcontractors (Thorelli, 1986). Strategic networks are usually built by one actor whereas the business networks emerge over time through interaction between several, autonomous actors. Strategic networks may well be sections of business networks. Typically, they are based on formal contracts between the actors. In business networks, in contrast, formal contracts between the actors are of only secondary importance.

Exchange relationships are basic elements in business networks. They develop over time as a consequence of exchange between two parties. Several aspects of exchange can be distinguished. In the business networks the business aspect is central but most exchange has a communication and a social aspect too. The exchange relationship can be seen as a set of more or less implicit rules governing the exchange in the same way as language is related to communication. The rules are formed, reinforced and modified through exchange at the same time as they constitute the framework of subsequent exchange (cf. Giddens, 1984). Obviously, this implies that the exchange can be more or less regular and that the relationships can be sleeping.

In business networks exchange relationships are connected, that is exchange in one relationship is conditioned by exchange in others (Cook & Emerson, 1984). The connections may be positive or negative. A positive connection means that exchange in one relationship is facilitated or supported by exchange in...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Illustrations
• Introduction to the Series
• Preface
• Chapter One: Managing Internationalization in Business Networks
• PART I: UNDERSTANDING THE NATURE OF INTERNATIONAL BUSINESS RELATIONSHIPS
• PART II: UNDERSTANDING THE NATURE OF NETWORKS IN INTERNATIONAL BUSINESS
• PART III: UNDERSTANDING NETWORK CHANGE PROCESSES IN INTERNATIONAL BUSINESS
• References
• Author Index
• Subject Index