Networking is a hot topic, for companies as well as individuals. Firms that are interconnected with others in a web of relationships are seen to be at an advantage to those that are isolated or adopt a go-it-alone attitude.
Networks are regarded as alternatives to traditional hierarchical organisations. Hierarchies organise all their activities in-house with a division of labour that assumes co-ordination and co-operation among the units or departments. There is a strict delineation between what is inside and outside the organisation. The external environment is regarded as inherently competitive and relationships with outside companies are a zero-sum game.
In contrast, companies embedded in networks do not have such clear organisational boundaries since they are part of an interdependent group. As such, networked companies recognise that collaboration can produce a win-win situation for all. Collectively, the network member companies carry out all the functions normally performed within the one traditional hierarchical firm. In its tightest form, the network functions as a virtual corporation.
The network combines elements of the traditional hierarchy with market mechanisms. It tries to capture the best of both worlds by discarding the legalistic elements inherent in both and replacing them by voluntarism. These legalistic elements intrinsic to the traditional hierarchical organisation, operate on chains of command, using plans, schedules and transfer pricing to co-ordinate its business units. Market mechanisms are regulated by a legal contract whereby players interact on a deal-by-deal basis. In the network, they also interact with each other as distinct market entities, but their interchanges are governed by long-term relationships, division of labour, and some sense that they are part of a unitary entity that competes against others in a marketplace.
Thus, networks are loose constellations of businesses, organised through the establishment of social rather than strictly legally binding contracts. Mutual adaptation guided by practical business needs provide the rationale for the collaborative behaviour. It has been said that companies in networks employ a "continuous handshake".
A network is really an open-ended system of ideas and activities, rather than an entity with a clear structure and definable boundary. While networks can take many forms, usually there is a core firm or master broker that builds the network and co-ordinates the activities of its members. They are facilitators, problem solvers, and information transmitters. In many cases, the network is a value added chain, built on the strategic idea of the master broker. Many examples are seen in the fashion and athletic apparel industries. The core or broker company creates a name, an image and a label, e.g., Ralph Lauren, Versace, Nike, etc. It contracts out production and distribution, and sometimes even technical and process design.
Ray Miles and Charles Snow, two American professors have been studying the evolution of organisational forms over the last three decades. Like others, they assert that innovation is the key to business success for the twentyfirst century. This necessarily entails collaboration and knowledge sharing to create and commercialise the new ideas that constitute innovation. But collaboration cannot be effected by dictat or hierarchically imposed. Collaboration is voluntary. Voluntarism is an inherent aspect of networking, one of the major strengths of this form.
Members of the network share expectations of mutually beneficial outcomes if they work together by exchanging information, ideas, experience and insights. Of course, trust is one of the foundation stones of such a free exchange of a member's most precious assets - intellectual capital. Such trust is built up in the context of jointly constructive relationships fostered over time in the network. Thus, relationships go beyond simple subcontracts. There is an expectation of creativity.
Through working together over the long term and sharing experiences, firms develop and continuously build a body of knowledge together, especially valuable tacit knowledge. New ideas move back and forth among the partners and are constantly upgraded through ongoing competitive activities.
Information technology enables networks by facilitating computer aided communication, product and process design. But IT does not create networks in its own right. It is a useful tool only against a background of trust and voluntary association.
So, flexible market-focused innovation is one of the favourable outcomes of networks. In contrast, the current oft enunciated need for companies to be nimble and flexible as well as efficient can put hierarchical firms at a disadvantage. Geared for predictability and control, they can be slow moving.
Politics, rivalries and industrial relations unrest can create an internal market for power that can inhibit the co-operation and commitment that should prevail in a unified organisation.
Other related benefits drive the formation of networks. Value added networks have advantages over vertically integrated companies which are unlikely to be optimally proficient at all parts of the value chain and would be best outsourcing those functions where it is not a leader.
In contrast to vertically integrated companies, in networks, each firm concentrates on its distinctive competence. For example, Toyota is tightly linked with 180 primary and first tier firms that supply components and do joint research with it. On the other end, Toyota is linked to distributor firms, while its own core competence is on the design and manufacture of cars, and of course, on managing the network.
Networks capture some of the advantages of integrated companies, since the firms in the network have stakes in each other's success and have a common goal in making the whole network competitive. They are constantly on the lookout for ways to help their fellow partners. For example, a partner at the customer end of the value chain can recognise emerging needs among consumers that can impact on design or component supplier firms' activities. It can inform the affected firms of the emerging trends.
Networks can capture economies of scale from common purchasing and sharing of infrastructure activities and systems. At the same time, each firm's sense of focus minimises superfluous activities.
Dr Eleanor O'Higgins is a lecturer in strategic management and business ethics at the Smurfit Business School, UCD.
