Business Networks

Emanuela Todeva

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134205837
• Edition: 1
• Topic: Economia
• Subtopic: Teoria economica

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?
• How can business network analysis from a multidisciplinary perspective enhance strategic management?

Emanuela Todeva deftly explores the patterns of networking and the dynamics of network relationships, to show how we can begin to tap their full potential. Of great interest to students and scholars of business network analysis, this revealing volume will also prove informative for managers wishing to obtain insights into network dynamics and its implications for strategic decision making.

Business Networks expertly provides an interdisciplinary overview. It skilfully engages the reader with a range of economic, sociological, strategic management and communication theories that contribute to our knowledge of networks and networking. Transcending specific disciplines, and synthesizing the contributions that shape the structural, relational and cultural approaches to network analysis, Todeva's outstanding text offers a wealth of conceptual frameworks and an exhaustive typology of existing business networks.

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.

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 busi-ness 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 encyclopae-dia 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.

Figure 1.1 The ‘Network Diamond’.

I 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 gloe economy and society and the impact from the global competition on business relationships and the society. It is 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 market-based 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 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 cross-cultural 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 subedded in technologies and in business practices.

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 pre-established 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: global-isation 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 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 acrossborders. 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.Inter-firm relationships bridge the boundaries of individual organisational uni...