Developing and Maintaining Networks on the Firm Level–
A 3-Dimensional Network Model1 Professor Staffan Gullander, Linköping Institute of Technology
stagu@eki.liu.se
Ph.D. candidate Joakim Wallenklint, Luleå University of Technology
joakim.wallenklint@ies.luth.se AR 2000:41
Abstract
This paper demonstrates that there exist several different types of networks in the “interjacent marsh”
between markets and hierarchies. Depending on the base of resource configuration and co-operation (task dimension), power characteristics and mechanisms for controlling opportunism (people dimension), and both the ability and need for change and flexibility (change dimension), these different types of networks may be identified. These specific networks have different logic’s, and a 3-Dimensional model is suggested as an important tool for assessing potential partners when considering constructing a network, but also for assessing an already existing network as a part of an ongoing improvement strategy.
1. Introduction
In the past fifteen years we have seen dramatic changes in the way business activities are organised, involving more decentralised structures and partnerships between parties integrated either vertically or horizontally. Many of these partnerships have grown out of an outsourcing strategy where close relations are developed and nourished with both new and existing suppliers. On the other hand we have also seen small firms with scarce resources and capabilities joining forces with other firms in order to get access to external resources and competencies. This trend of either breaking big organisations into small separate units, or gathering small businesses into co-operative systems, has put the network approach of organising business activities in focus. (see for instance Rogers and Whetten 1982, Piore and Sabel 1984, Clemons and Row 1992, Nohria 1992, Hedberg 1994, Miles and Snow 1994, Alexander 1995, Forsgren et al 1995, Håkansson and Snehota 1995, Jones, Hesterly and Borgatti 1997, Pihkala, Varamäki and Vesalainen 1999, and Wallenklint and Ylinenpää 1999).
Networks could be considered to be a hybrid between markets and hierarchy and is a distinct form of co- ordinating economic activity (see also page 3). This hybrid mode is characterised by flexibility and informality in contrast to bureaucratic and formal structures within firms, or a pure market based organisation where relationships are short termed and based on price (see Coase 1988, Williamson 1991, De Toni and Nassimbeni 1995, Vesalainen, Varamäki and Pihkala 1996, Jones, Hesterly and Borgatti 1997). A network can be divided into loose and stabile forms of networks. A loose form of a network is characterised by having loose and temporal ties between the participating firms. The strategic intent and the degree of formalisation is low, and these networks are typically more dynamic and conflictual in the sense that we see more changes in the constellation of the members in the network and also more network break- ups. A long-term stabile network is characterised by having common strategic goals, business idea, control centres, and perhaps most important, a more defined boundary (see Oliver 1991, Millson, Raj and Wilemon 1996, Murto-Koivisto, Routamaa and Vesalainen 1996, and Vesalainen, Varamäki and Pihkala 1996).
1Presented at the SNEE 2000 Conference on Economic Integration in Europe:
Networks on the firm level occur in different shapes, forms and under different labels (see Håkansson 1990, Hedberg 1994, Chatterji 1996, Murto-Koivisto Routamaa and Vesalainen 1996, Jones, Hesterly and Borgatti 1997, Nassimbeni 1998, Cagliano, Chiesa and Manzini 1999, Pihkala, Varamäki and Vesalainen 1999). Two basic types of networks may however be identified on the firm level, namely inter-firm networks and supply networks. Inter-firm networks mainly consists of small firms with scarce resources and capabilities that join forces with other firms in order to get access to external resources and competencies and thereby serve a market with multiple customers (c.f. Wallenklint and Ylinenpää, 1999).
A supply network is on the other hand often a product from a company’s outsourcing strategy, and normally only serve one main customer (c.f. Nassimbeni, 1998).
Recognising the growing importance of networks, it has become increasingly important to develop a better understanding of factors related to and conditioning the usefulness of forming and managing networks.
This paper aims to contribute to such a better understanding. Building on previous research in the field, we will in this paper propose a model on network co-operation, which then is applied on three different networks with the purpose of illustrating different aspects of this model. This paper ends with a discussion on different aspects of the suggested model, and presents some final conclusions and implications.
2. Frame of Reference and Purpose
Our basic framework for partnership and networks is founded on a model from Williamson (1991) that concerns itself with three alternative modes of exchange of products according to figure 1 below:
Figure 1. Conditions of Virtual Organisations according to Transaction Cost Theory SOURCE: Developed on the basis of Vesalainen, Varamäki and Pihkala 1996, Nellore and Söderquist 1999, Nonaka and Takeuchi 1998, Larsson 1999 p. 51
A network is here considered to be a hybrid between market and hierarchy, where the hybrid mode can be further subdivided. According to Cox (1996) there are four grades: preferred supplier, single sourcing, network sourcing, and strategic alliance, while Maccoby (1997) uses a five graded scale: preferred supplier, value-added supplier, alliance, co-operation, strategic partnership. The extremes “market” and “hierarchy”
are characterised by specific rules of behaviour, while this is not the case for the hybrid. A metaphor is to describe the extreme positions as stable, while the hybrid corresponds to an interjacent marsh where partners muddle together. Williamsons model is of course a far going simplification of reality, because firms normally perform exchanges of goods and services spread out over all the modes in the model. In the hybrid mode the firm is giving up part of its independence, and the ability to act fully according to its own will. Oliver (1991) characterises this mode by stating that the firm has lost its organisational autonomy.
- Minimise trans. costs - Shirking costs - Efficiency
- Non-specialised resources - Qualitative specialisation - Tacit
- Minimise both = optimising - Preserving both
- Joinable and complementary resources
- Quant+ qualit specialisation - Explicit + tacit
- Minimise prod. costs - Cheating costs - Effectiveness - Specialised resources - Quantitative specialisation - Explicit
Market Networks Hierarchy
A more full picture to the characteristics of a firm being in the hybrid mode is provided by Nellore och Söderquist (1999). They depicted the following characteristics for the hybrid mode: (1) presence of opportunism, (2) strong power/dependence relationships, (3) difficulties to manage cultural differences and the management of relations between actors, (4) start-up costs in the establishment of the relation, (5) need for transfer of know-how and technology between parties, (6) costs for co-ordination, (7) costs for locking in parties in the relationship creating opportunity costs for poor quality etc. (8) need for regular reviews, (9) instability due to sudden loss of trust, unexpected events, loss of personnel etc., and (10) unintended loss of resources such as personnel, know-how etc.
Cox och Lonsdale (1998) identified the following risks for participating in networks, from an outsourcing viewpoint: (1) loss of core competence, (2) leveraging by the supplier, (3) loss of strategic flexibility, (4) irregularities in supplies, (5) poor quality, (6) lowering of personnel morale, (7) loss of internal coherence, (8) security aspects, (9) loss of intellectual property rights.
In view of these problems and risks of participating in networks, one could wonder why firms dwell there?
Obviously there must exist some compensating advantages. Such advantages have been investigated by many researchers, (see Mohr & Spekman 1994, and Murto-Koivisto, Routamaa & Vesalainen 1996) on a high level of description, finding the following drivers for co-operation in networks: (1) individual and organisational learning, (2) cost savings from economies of scale and scope, (3) critical mass, (4) synergies, (5) finding and developing new businesses, and (6) credibility. To this we would, referring to Oliver (1991), like to add (7) uncertainty reduction.
As a consequence of the need to evaluate and balance the pros and cons of partnering, a number of decision models have been developed. According to a model by Quinn och Hilmer (1994), the activities that are important for competitiveness and are strategically vulnerable should remain in the firm, while activities that score more moderate levels for the two variables should be allocated to different partnership modes, and finally the remaining activities should be allocated to the market mode. Olsen and Ellram (1997) suggest that only non-critical activities should be allocated to the market, and the remaining kept within the firm. Arnemo, Bondesson and Gullander (1999) imply that outsourcing is suitable for products with modular architecture and components relating to non core-competence. The opposite case where there is integral architecture, due to complex interfaces, outsourcing is advised against.
In addition many researchers have contributed to providing lists of suggestions on how to maximise the advantages, and minimising the disadvantages of networking, by focusing a number of success factors.
Murto-Koivisto, Routamaa och Vesalainen (1996) thus recommend to analyse the network with respect to some ten factors, among others similarity, equality and compatibility of resources, number of firms in the network etc. Other researchers that have also considered the importance of success factors are Mohr and Spekman (1994), Bruce et al (1995), Ellram (1995) and Canadian Business Network Coalition (1996). A consolidated and grouped list of success factors could thus look as follows:
- Attributes of the partnership: (1) commitment, (2) co-ordination, (3) interdependence, and (4) trust - Communication behaviour: (1) quality, (2) information sharing, and (3) participation
- Conflict resolution techniques
With this review we have provided examples of guidelines and checklists from a large number of researchers on this issue of networks on the firm level. We have indicated the differences to the firm in good exchanges in the three different modes: market, hybrid and hierarchy. Traditionally firms have been operating in the two extreme modes, but during the last 30 years or so, it has become apparent that operating in the hybrid mode is preferred by many firms in order to pursue joint value creation with their partners. We claim together with many other researchers that it is utterly different and difficult for the inexperienced firm to operate in this hybrid mode. The rules of the game are different, the need for co- ordination inside the hierarchy and the hybrid is much larger than in the market mode, where ” the invisible hand” reigns. We believe at the same time, that an improved understanding of what it means to work in the hybrid mode should be developed, which is our intention in the rest of this paper.
In this work we are guided by Jarillo (1975), who states that:
”we must understand under which circumstances a network arrangement can be more efficient than both a purely market relationship or an integrated (hierarchical) solution; that is, we must look at the differential efficiency of alternative organisational forms. If it is more efficient, it can easily be turned into strategically superior”
2.1. Purpose and some Definitions
With reference to the conceptual framework presented above, the purpose of this paper is two-folded:
- to accomplish some kind of structuring of the different factors that affect firms participation in networks, and then develop a model of developing and managing networks on the firm level.
- to illustrate this model by three cases of networks on the firm level.
We think that this model applies both to dyads as well as networks of firms with more than two actors.
Interchangeably we will therefore use the concept partnership for the relationship.
To the concept of resources this paper include tangible as well as intangible products, both goods and services. By intangibles, according to Webster’s, we mean ” an asset that is not corporeal”. A suitable enumeration of intangible resources is provided by Hall (1993): intellectual property rights of patents, trademarks, copyrights, trade secrets, contracts and licences, data bases, information in the public domain, personal and organisational networks, know-how of employees, suppliers and distributors, reputation of products and company and culture of the organisation.
3. Towards a Model of Partnership
The model of partnership that we are going to develop is based on a model on leadership behaviour from Ekwall och Arvonen (1994). These researchers discriminate between three dimensions task (structure), people and change and development, where each leader can be characterised along these dimensions. The most appropriate leadership is dependent on the specific needs of leadership that an organisation has. There is thus no supra leader who is best suited for all organisations. Since a partnership is an organisation by itself, and is affected by the behaviour of people, we think this connection to leadership is relevant, and that a network can be characterised along the same three dimensions, which will now be presented one at a time.
3.1 The Task (structure) Dimension
The factors that relate to this dimension are those usually presented in an analysis of networks, and that were identified in early research work on partnership - see for instance Gullander (1976 a, b). With a resource-based view of the firm, we could say that these factors relate to the focus on combining resources from the participating firms. The combination seeks advantages in the form of economies of scale or scope, critical mass, getting access to resources not available on a market etc. These combinations can be achieved in different areas, and according to Forsgren et al (1975) divided into (1) technical, (2) economical, (3) planning, (4) knowledge, (5) social, (6) economic and (7) legal combinations. Such advantages could occur for instance in production capacity, scope of production/production range, product development or sales network, also factors reducing uncertainty belong to this dimension.
An important driving force in creating task related advantages is the complementarity of the different resources - the lower the similarity, the greater the complementarity (Kale et al (2000) p. 224). This complementarity is achieved in a unique way for each partnership constellation of actors.
For one actor, complementarity effects can be very strong for one resource in relation to another actor, but absent visavi another actor. Some researchers refer this to the concept ”partner fit”. Expressed in another way, we could say that this driving force is based on differences in resource configuration between different actors. A difference that could have occurred by chance or accident, or been purposely created in the modern society by the process of specialisation, as witnessed for instance in the present strong trend of outsourcing. Here the perspective is to look at each activity that does not belong to a firms core competence - the area of specialisation if you like - as a candidate for outsourcing. Different researchers use different wordings for the same principle. The so-called Uppsala network school uses the wordings ”division of work”, ”heterogeneity” as opposed to homogeneity in resource configuration, etc. - see Forsgren et al, op.
cit. Similarity can however also be a driving force to partnership, where similar actors joining forces together can achieve economies of scale. Typical examples of networks formed on this basis are found for instance in export and sales co-operation, where possessing a large size is considered important.
Whether originating from differences or similarities in resource configuration, the combination of the resources results in dependencies between the firms. These are in turn connected to different difficulties and issues which we will look at in the next section.
3.2 The People Dimension
The people dimension refers to the ”soft” issues of participating in partnerships, and is based on the fundamental influence of people working together. Thus we need to consider how personalities of people interact, how group dynamics evolve etc.
Power/Dependence
Achieving the benefits of partnership from economies of scale also simultaneously results in dependencies between the actors or firms - potentially between each and every actor in the partnership. Dependence creates power - if one actor is dependent on another, the latter possesses power on the former.
Power/dependencies thus occur between all actors in a partnership, is unique for each actor configuration, and reflects the combination of resources. Since these dependencies are inherent for the hybrid mode, whether caused by similarities or differences, they are unavoidable. Power is created by dependencies, and the concepts constitute each other’s inverse, or more amateurish, constitute the two sides of the same coin.
If there is no dependence, there is thus no power. In spite of this coupling of the concepts, it is sometimes more fruitful to investigate the power/dependency issue from the dependency side rather than from the power side. This is noted from contacts with Swedish businessmen who prefer not to talk about power, but well accept dependencies. A deciding issue is to what extent you can eliminate the initial dependence altogether. Since the partnership presupposes the dependence this is not possible, but it appears that through different countermeasures as indicated above, a more or less complete overall pacification can be obtained.
Arranging such countermeasures carries along costs, that has to be balanced against the benefits obtained.
This is an important and interesting issue, on which further research has to be made.
Referring back to figure 1, we hypothesise that power/dependencies are at very high levels in the hybrid mode of product exchange. In the market extreme, firms are very independent from each other, and in the hierarchy, there is no exchange. As we said before, the focal firm would normally have product exchanges distributed over all the three modes. If we are interested to measure the focal firms total power/dependency situation, we would then have to weigh the influence of the different exchanges on the different modes, to get an impression of their individual impact. This indicates the importance of analysing the importance of a partnership in more holistic perspective. Power is fertilising the ground for opportunism. We do not go as far to claim that elimination of power eliminates opportunism. Still the relationship is highly important, and will be discussed below.
Opportunism, Contract and Trust
Opportunism in English language implies ”the pursuit of self-interest with guile” (Cox and Lonsdale, 1998.
p.40), and is treated in the literature as a factor responsible for large costs and difficulties in partnerships - see also Williamson (1991), and Cox (1996).
The negative influence of opportunism has constituted a basic ingredient in Williamsons view of the three models of product exchange. Williamson implies that by predicting the opportunism, it can be compensated for by contractual agreements between the acting partners. This assumes that the future can be completely predicted, i.e., no uncertainty or risk has to remain. This is of course seldom the case, and thus the contractual ”solution” is not a full protection. A complementary ”weapon” against opportunism is trust which functions like a lubricant in the relation between the actors that can compensate for a lot of friction.
Trust can be looked upon as a sedative, but might even prevent a problem of coming into existence, especially through opportunism. Or, as Lyons and Mehta (1997) express it: ”-- the role of trust (is in) facilitating efficient exchange relations when agents are vulnerable to opportunistic behaviour”. To improve the chances for a successful partnership, most researchers and practitioners recommend the presence of trust, or confidence according to Forsgren et al, op. cit., in the partnership. By trust, applied to a dyad of A and B, we mean very generally, that A applies Bs decision rule when put in Bs position, and B applies As decision rule when put in As position.
Weighing contractual- and trust solutions against each other is not easy, which depends on the interrelationship between the variables (see for instance Lyons and Mehta (1997). Simply expressed one could say that by entering too deep into contractual relationships, trust is lost. At the same time proper contractual discussions, can generate trust from improved understanding of the other partner. This sort of knowledge corresponds to what some researchers call ”conflict management”. This also implies that the concept contract should not be defined too narrow-mindedly to a physical document, but more broadly, including a possible document, the process of bringing it into existence, and ensuing measures such as a decision on cross-ownership arrangements, or the formation of a joint venture - see Kale et al (2000). Such formalised comprehensive arrangements also provides the additional advantage according to the same researchers, of creating a hierarchical higher court, that can act as an arbitrator between the actors in case of need.
Other researchers who also have pointed to the relationship between trust and contract are Vesalainen et al (1996), and Kale et al (2000). The latter research group say for instance that ”trust enables firms to reduce dependence on equity structures (=contract)” and ”trust reduces negotiation costs”. In extreme cases power/dependencies can be compensated to such an extent with trust that contractual arrangements can be foregone. This is found by Lorenzoni och Baden-Fuller (1995) who describe that the Italian multinational Benetton does not possess any contracts with its franchisees. The success of a partnership also depends to a great extent by its ability to develop experience from working in networks, and thereby knowing the other partners. This is referred to by stressing the importance of ”relational capital” (Kale et al. op cit s. 221),
”networking capability” (Vesalainen et al. op. cit), or ”skills” according to Jarillo, op. cit.
3.3 The Change Dimension
The third dimension is connected to the pace of change and development. As Ekwall och Arvonen (1994) point out, this dimension was in the past not that important, since changes in the environment was not that rapid. With faster clock speed and more time-compression, the significance of the third dimension increases. This last dimension could be said to measure the ability of the partnership to achieve changes and developments, in other words the flexibility of the firm. The flexibility dimension is a sum of the ability to adopt and the demand for change derived form the network environment. We could speculate that flexibility in organisations could be achieved by allowing personnel to make mistakes, working in many and different projects in different positions at the same time, strong individual and group performance incentives etc. In accordance to Lorenzoni och Baden-Fuller (1995) we want to stress that leadership in environments characterised with significant change is particularly demanding. This requires an intricate balance between creativity and discipline. All participating organisations should be looked upon to form a super organisation, and to devote considerable time and effort to strategic issues in a constructive dialogue.
Maybe an example could be in the IT-industry, putting emphasis on entrepreneurship, which in the phrasing of Ekwall and Arvonen (1994), corresponds to a partnership emphasising strength in task and flexibility particularly. In analogy with the reasoning of Ekwall and Arvonen (1994) on leadership, we could expect that many partnerships are not a subject to high requirements of flexibility. They can operate in a rather stable setting, and we can then disregard the third dimension.
3.4 The 3-Dimensional Model on Partnership
The theoretical overview on the different dimensions that are important in developing and managing networks has given us a 3-Dimensional model and is concluded below (see Table 1).
Table 1: A 3-Dimensional Model on Partnership
This model illustrates the three dimensions, trust, people, and change, and will further on be tested on three real-life cases in order to evaluate its viability.
4. Methodology
This paper will use qualitative data in order to illustrate the 3-dimensional model, and due to the complexity of this model there is a need for gaining deep and detailed information about this phenomena.
Therefore according to Yin (1994) a case study would be the appropriate way of collecting data. This is why this paper has chosen to illustrate this model by three network cases. And as a consequence derived from the basic model on market and hierarchy form Coase (1988), the networks chosen are example that could be derived from both of these extremes.
In all these three case studies there has been a mixture of both primary and secondary data. Primary data has been collected through personal interviews with all or several C.E.O.s of the firms in the different networks. Data has been collected during 1998, 1999 and 2000, and the interviews were based on a form containing a number of open-ended questions that served as a base for discussion and clarification. Each interview was documented in written form and concluded in a case-study protocol for each firm (cf. Yin 1994). Secondary data has been collected through annual reports, company brochures, Internet etc.
TASK DIMENSION
Resource configuration Similarity (i.e. a low degree Difference (i.e. a high degree of base: of differences, exploiting ad- differences, exploiting advantages
vantages related to capacity) related to complementing compe- tencies)
Cooperation charac- Low strategic intensity High strategic intensity teristics:
Low degree of formalisation High degree of formalisation
PEOPLE DIMENSION
Power characteristics: Dependency (i.e. a low degree Autonomy (i.e. a high degree of Of autonomy/self-determination self-determination among partners) among partners)
Mechanisms for con- Trust (i.e. non-formalised Contract (process of formalizing
trolling opportunism: confidence) trust into an agreement)
CHANGE DIMENSION
Flexibility: Low ability to be flexible in new High ability to be flexible in new
situations situations
Volatility and need Low demand to adapt and change High demand to adapt and change for adaption/change:
Looking at the different cases in this paper we see that two of these are located in Sweden, where firms with scarce resources and capabilities have joined forces with other firms in order to get access to external resources and competencies. The third case is located in Italy, and is an example of a supply network, where different firms have joined forces in order to meet the needs of a big company’s outsourcing strategy. The first case is called Skellefteå Innovation Pool (SIP), which consists of six smaller firms possessing different and specific competencies and resources. The second case is called Skellefteå Snickeri Central (SSC), which consists of eleven smaller firms in the joinery industry. The third case is the Coxa network consisting of four firms, and is a supplier to Tetra Pack.
5. Illustrative Cases
The following section will illustrate the 3-dimensional model on three cases of networks on the firm level.
This in order to get an understanding of the relevance of the three different dimensions.
5.1 Case One: Skellefteå Innovation Pool
Skellefteå Innovation Pool (SIP) was formally established in 1996 when five different firms joined forces in order to serve as a pool of capabilities that is jointly offered to potential customers and markets. The network builds its co-operation on its need for complementary resources and competencies, since the firms are in different industries and represent different kinds of competencies. The network is in a large part an innovation network where product development is in focus (see Table 2).
The firm The line of business No. of employees Turnover SEK
CIDEMA AB working in 3-D visualisation of construction drawings
7 employees 2.5 million
DANEX AB developing and marketing
innovations to the construction market
3 employees 2.5 million
ELFIX AB working in electrical installations 8 employees 8 million
ROLEIF KB developing equipment for the
health-care market
one-man firm –170 000
SQS AB working in laminated sheet
constructions
20 employees 8 million
YPV AB developing and manufacturing
equipment for building, construction and transportation
5 employees 5 million
Table 2: The Participating Firms in Skellefteå Innovation Pool
The main motive for the network is to get access to resources and capabilities in order to offer their potential customers a more complete solution to their problems. Another driving force is to achieve economy of scale in different areas such as the marketing area where the participating firms in the network jointly markets themselves towards customers. Depending on the specific type of project that SIP undertakes, appropriate resources and skills needed for carrying out a project are acquired from the network partners. Also depending on the nature of the project, the firm initiating a specific project normally will identify and engage the appropriate resources and skills that are needed. This firm will hence serve as the project leader for a specific project, while the other firms act as contributing project members or subcontractors to the project leader. The project leader also serves as the contact point towards the specific customer, and bills the customer when the project is finished. The owners of the firms have personal relations to each other, either being former employees to one of the firms in the group or by being closely related as relatives or by physical location. This co-operation builds on mutual trust between the partners, since there are no judicial liaisons or contracts written regulating the conditions between involved parties.
Dan Nilsson (Danex) acts as a central figure in this network and has taken the part as the project-leader of the network. His main task is to co-ordinate the specific activities that occur and be spokesman for the
network towards different interested parties. The lack of board interlocks, joint programs for staff training or quality control and the absence of written contracts between partnering firms underline the informal nature of the actual co-operation.
The ability of being small and large at the same time gives the participating firms the flexibility of not having to be stuck with over- or under capacity either if it is in a state of decline or upturn. Many of the small firms involved in this network have very painful experiences with being stuck with over-capacity in manpower or machines in declining business and missed business opportunities because of under-capacity when the business has been in upturn.
5.2 Case Two: Skellefteå Snickeri Central
Skellefteå Snickeri Central (SSC) was formally established in 1959, when several joineries decided to co- operate by co-ordinating their different capacities and capabilities and allowing them to be larger and stronger. The SSC network consists today of eleven smaller firms and is one of Scandinavia's leading manufacturers of pre-fabricated joinery products and custom joinery, concentrating on the professional building market and customers such as building contractors, home builders, institutes etc (see Table 3).
The Firm The line of business No. of employees Turnover SEK
SSC TRÄTRAPPOR AB wooden staircases 112 employees 77 million
SSC BERGLUNDS AB interior fittings and furniture 15 employees 15 million
SSC WIKLUNDS AB interior fittings 6 employees 22 million
SSC LINDVALLS AB interior fittings and furniture 12 employees 11 million
SSC ÖHNS AB interior fittings 14 employees 11 million
SSC OSTVIK AB windows 20 emplouees 22 million
SSC ÖHMAN & SON AB windows 3 employees 2 million
SSC KLINGAN AB glass sections 8 employees 5 million
SSC JUHOJUNTTI AB glass sections 8 employees 5 million
SSC SNIDEX AB glass sections 131 employees 97 million
SSC VÄNNÄS DÖRR housing doors and glass
sections
85 employees 79 million
Table 3: The Participating Firms in Skellefteå Snickeri Central
The main motive for participating in this network was the lack of internal growth, which left many of these firms with a poor resource and competence base. Many of the firms have stated that they did not believe that they would have existed today, if they had not joined this network. Through the accumulation of resources (critical mass), these firms perceived that they have achieved something that they would not have achieved alone, such as to overstep thresholds of export, capacity, and quality. This accumulation of resources has also allowed the network to use their potential for capacity or “mass production” to achieve economy of scale in the production area. Economy of scale is also achieved in the marketing area where the firms have jointly set up a sales- and co-ordination organisation (SSC Skellefteå AB) with the purpose of finding new business opportunities and preventing the firms in the network to compete with each other.
The different firms in the network have professional relations with each other, due to the fact that they generally are geographically dispersed, and that the selection of the participating firms has been conducted by a broker. These professional contacts could be considered to be a sign of a lack of trust between the partnering firms. The fact that the firms are in the same industry has forced the participating firms to submit to a higher degree of formalisation and control over the activities they perform. This is manifested by the fact that the firms operate under a joint brand name and by the considerable amounts of money and time invested in developing a sales and co-ordination body (SSC Skellefteå AB).
The SSC network with its co-ordination and sales organisation (SSC Skellefteå AB), different board interlocks, joint programs for staff education and quality control, its written rules and its frequency of
To avoid opportunistic behaviour and to facilitate co-operative actions, common rules and written contracts that regulate the co-operative behaviour between the firms in the network have been developed. The written contracts also deal with the distribution of profits and losses and the division of projects/orders amongst the participating firms in the network. The division of the projects is first of all is guided by the fact that a firm must have the required resources and capacity to match the order. If there are several firms that fit this criteria, the co-ordinator recognises ‘the principal of fairness’ to guide which firm that should be involved in a specific project/order.
Flexibility is achieved by getting access to resources and capabilities without tying up the firm legally with each other. This gives the participating firms the flexibility to be small and large at the same time, to always have the right capacity regardless if the market is in a state of decline or upturn. Flexibility as an issue is enhanced in the SSC network by the fact that they have the ability of both mass production and the ability of customer adapted production with small series of specialised products. SSC is also involved in substantial research and development although it is not formalised in any way, which makes it possible to respond rapidly to threats coming from substitute products.
5.3 Case Three: The Coxa Network
The Coxa network was formally established in 1996-97 as a consequence of an outsourcing strategy of Tetra Pak, who wanted to decrease the number of suppliers. This strategy meant that Tetra Pak wanted their suppliers to start co-operating in networks in order to deliver more complete systems, instead of having many suppliers that delivered different parts.
The Coxa company who is one of Tetra Pak´s first tier suppliers, got the responsibility of creating a horizontal network association of partners. The Coxa company choosed a loose structure for the network, because they did not want to encounter the risks of failing in the development of the network. The initial relationship between Coxa and these companies was exclusively based on a sub system, primarily a vertical system. Six different companies were contacted, but only three of them have adhered to and accepted the proposal. In this way the firms Coxa, Nuova Cam, OMR, and G2 joined forces to produce and assemble complete machines, modelled after the client’s design and wishes (see Table 4). The design-company G2 was chosen because Tetra Pak wanted the network to be able to co-design machines and parts that they produce.
The Firm Line of business No. of employees Turnover related to Tetra Pak
COXA Specialised in titanium, production of fine mechanical tools and components.
30 employees 40-45 %
NUOVA CAM Metal working, simple things such as frames and so on for the packaging machines.
25 employees 20-25 %
OMR Supplier to Coxa, which more or less do the same thing, but has not the same quality standard as Coxa.
10 employees Is a supplier to Coxa, 60
% related to Coxa G2 TRANSMAC Design company, which have left the
network.
10 employees No relation to Tetra Pak anymore
Table 4: The Participating Firms in the Coxa Network
The main motive for the firms to participate in this network was that the firms saw an opportunity to work as a system supplier for Tetra Pak. This co-operation isn’t based so much on adding and complementing the resources, but more on a search for critical mass to reach economy of scale in different areas.
In the end of 1997 and the beginning of 1998, Tetra Pak tried to develop a part to a packaging machine together with this network. It was agreed that the design team at G2 would be placed at Tetra Pak during this development period. This was not a good experience for Tetra Pak, so they abandoned this project with this network after six months. The reason for this was that there were some interpersonal problems between G2 and Tetra Pak. G2 was not able to co-operate with Tetra Pak, because they wanted to be paid for the hours they put in this project. This was not acceptable to Tetra Pak, who implied that they had transferred substantial technical know-how in the use of technological programs and specific know-how on the machines. After six months Tetra Pak stopped this work with G2 and suggested to Coxa to change their design-company.
The network is only a production network, but has today taken steps towards working on a strategic level with the network. They work with customer-oriented systems towards Tetra Pak, so one could say that the market for this network is Tetra Pak, although the network has tried to work with other customers. The individual firms in the network however still have their own contacts with their own customers apart from the network. Although this network is a supplier to Tetra Pak, they have tried to produce and sell other network-produced products. For example there has been the development of an industrialised machine for restaurants, bars and street sellers that cut sandwiches. The network also tried to work with Lamborghini Racing, with offshore racing (motorboats), where the network tried to win a contract for the development of the gear to these motorboats. For the second time G2 however failed to deliver, because the development part of the gear needed a flexibility that G2 did not have. G2 wanted to have information on design tasks months in advance (3 months for the gear development), but in boat racing it is only a matter of weeks for adjustments to the original product.
Despite the problem with G2, Tetra Pak still has a strong interest to develop this network. This is why Tetra Pak in June - July 1999 for a new project took six of its own designers and located them at Coxa, which meant that Coxa had a working area occupied by Tetra Pak designers. This was also a way for Tetra Pak to control some of the activities in the network. There is a written agreement that specifies the way the firms should co-operate in the network, which is called a “Mandate” which is a kind of a partnership deal. In this contract every firm promises to guarantee to dispose for the network a part (around 20% - 30%) of their own production capacity.
The flexibility issue in this network is dependent on the ability of being participants in the process occurring inside Tetra Pak and between Tetra Pak and their customers.
6. Cross-Case Analysis
To summarise these three different cases, we first of all recognise that both the SIP- and the SSC network are examples of networks where firms with scarce resources and capabilities have joined forces with other smaller firms in order to get access to external resources and/or competencies. The Coxa network is an example of a supply network, where different firms have joined forces in order to meet the needs of a company’s outsourcing strategy. Following Murto-Koivisto, Routamaa and Vesalainen (1996) and Oliver (1991) we may from the previous case analyses categorise SIP as having a low degree of formalisation and strategic intenent, while the Coxa network has a higher degree of formalisation and a low degree of strategic intent. The SSC network has a high strategic intent and the highest degree of formalisation of all studied cases in this paper. This could be interpreted in the way that the SSC network due to a higher degree of formalisation and strategic intent could be considered as a stable network. The SIP network on the other hand could be understood as being a loose form of network due to its low degree of formalisation and strategic intent. The Coxa network could be considered to be somewhere between the two other networks due to the high degree of dependency on Tetra Pak, which makes this network more static and less flexible.
There are also a mixture of personal and professional relations between these three cases, where both SSC and Coxa has what could be understood as professional relations, while the SIP case is based primarily on personal relations. The difference between personal or professional relations could be interpreted as being derived from the way these networks initially were established. In the SSC and Coxa case, we can see that there has been some kind of broker involved in the selection of participating firms. In the SIP network co- operation seems to have developed as a result of an evolution, with its roots in deep personal relations. This analysis leaves some question marks on the flexibility dimension. As mentioned earlier, the flexibility dimension was a sum of the ability to adopt and the demand for change derived form the network environment. The relation between the demand from the situational context and the ability to adapt to this demand has not been thoroughly covered in this paper, and will later on be suggested as a topic for future research.
Referring the discussion underpinning the 3-dimensional model presented earlier, the presented illustrative cases, and the discussion above, we can conclude the characteristics of the three different networks according to Table 5.
Case illustration Task dimension People dimension Change dimension SIP – an inter-firm
network aiming at innovation and production synergies
Resources configured on the basis of difference- to achieve competitive advantage based on complementary competencies
Low strategic intensity Low degree of formalisation
Low degree of dependency between partners(i.e. high degree of autonomy)
Verbal agreements and a low degree of formalised contracts (formalised trust)
High ability for change and to be flexible Being a newly established inter-firm network in search for a viable co- operative concept indicates a high need to adapt to occurring opportunities SSC – an inter-firm
network aiming at production and marketing synergies
Resources configured on the basis of similarity to achieve competitive advantage based on capacity
High strategic intensity High degree of formalisation
High degree of dependency between partners (i.e. low degree of autonomy)
Written contracts, i.e. a high degree of
formalised trust
Medium level of ability for change/flexibility Mature line of industry indicates a relatively low need to adapt to change
COXA – a supply network aiming at serving a larger customer’s need for design and production
Resources configured on the basis of difference to achieve competitive advantage based on complementary competencies
Low strategic intensity Medium formalisation
High degree of dependency between partners (i.e. low degree of autonomy)
Written contracts, i.e.
high degree of formalised trust
Low ability to self- determination and change
High need to adapt to change initiated by the main customer
Table 5: Categorisation of the Illustrative Cases
The overview of the three different networks indicates that the 3-dimensional model is an important aspect considering the development and maintenance of networks on the firm level.
7.
Concluded Results and Implications
A foundation for this paper is that the possibility for achieving a successful network increases when there is a correct combination of vital dimensions, considering the situational context that the network is situated in.
As this paper has demonstrated, however, there exist several different types of networks in the “interjacent marsh” between markets and hierarchies. Depending on the base of resource configuration and co- operation (task dimension), power characteristics and mechanisms for controlling opportunism (people dimension), and both the ability and need for change and flexibility (change dimension), a great variety of different kinds of networks may be identified. In this paper, the variety of different networks on the firm level is illustrated by (only) three real-life cases. These three cases illustrate, however, that the logic for selecting partners, for joining a network or managing co-operation is not represented by any homogenous cookbook. In the “interjacent marsh” of various network formations, a 3-Dimensional model is suggested as an important tool for assessing potential partners when considering constructing a network, but also for assessing an already existing network as a part of an ongoing improvement strategy.
Looking more closely at these three dimensions we see that the “task dimension” is important due to the fact that the basic motive for participating in networks is to gain access to resources and capabilities in order to overcome critical mass, achieve scale economy etc. The resources and capabilities will differ depending on the line of business the firm is in, but it will also differ depending on whether the resource configuration is based on similarities or differences. The resource and capability base is constantly changing due to factors such as adaptation to environmental changes, people leaving or entering different firms’ etc. The different types of co-operation that can occur in a hybrid mode can be set on a continuum according to the intensity of co-operation. An increasing intensity may be regarded as a function of two distinct factors, namely strategic intensity and degree of formalisation. Different levels of co-operation hence range from a more loose form of co-operation to a more solid form. The illustrative cases clearly indicate that networks could be considered to be loose or stable and referring to the earlier model on market and hierarchy (see Figure 1), where the SIP network is more oriented towards the market mode and SSC towards the hierarchy mode. The Coxa network is placed somewhere in the middle. The “task” dimension is in itself complex considering different factors but also dynamic considering time, which makes this dimension very important to monitor in the creation, development and maintenance of networks.
The “people” dimension is similarly important because of a strong relationship between factors such as power, dependency, autonomy, opportunism, contract and trust. Power is a function of dependency and autonomy that in turn gives vent to (releases) opportunism, which can be overcome or controlled by contract and trust. Trust is a way of diminishing uncertainty and opportunistic behaviour amongst the members in the network. A written contract, on the other hand, is a “state” where the network is more formalised, relations are more “professional” and the firms have invested a large amount of resources in the network. Contracts are written in order to protect the interests of the firms, but have also the ability to diminish uncertainty and opportunistic behaviour amongst the members in the network. This is clearly illustrated by the SSC case, where the participating firms have invested a great deal of time and money in order to build a stable network. In order to protect investments and to avoid opportunistic behaviour they have developed a co-ordination body and introduced written contracts. Although the network tries to maintain a high degree of autonomy for its partners it is obvious that, compared to the other cases, the autonomy is low. Depending on the mixture between the existing power characteristics and the control mechanisms for opportunism, the management practice will differ.
The ”change” dimension is as important as the other two dimensions due to the fact that many of the small firms live under scarce conditions and can’t afford to have under- or over-capacity. To co-operate with other firms in order to gain critical mass and achieve just-in-time capacity is maybe the core essence of networks. Many small firms live under such conditions where every opportunity counts, which requires a large amount of flexibility in resources and capabilities. This dimension is linked to the situational context of the network: the more dynamic environment, the more flexible the network has to be, and vice versa.
This is illustrated by the SSC network operating in a mature line of industry which would indicate a relatively low need to adapt to change.
Possible implications for practitioners, both for firms involved in participating in these kind of networks, and firms or brokers involved in the development and maintenance of networks, is the potential use of this 3-Dimensional model for developing and maintaining networks. Only by analysing a specific network (or the concept for establishing a new network), adequate measures may be taken or initiated by firms taking part in or managing such networks.
The specific knowledge about how to optimise networking is also important in the sense that it offers distance collaborating SME´s the possibilities of gaining advantages that otherwise is not attainable. An implication for theory is that the improvement of an earlier model on development and maintenance of networks into a 3-Dimensional model makes more fine-graded research approaches necessary for the future. Possible future research could investigate the connection between this model and its dependence on its situational environment. The most important aspect for future research lies in the fact that there are different forms and shapes to networks each with its specific logic. Considering the 3-Dimensional model and the different factors involved, and recognising that these factors can be set on a continuum and divided in for example in two levels such as low and high imply a several networks with different characteristics.
As the left part of Figure 2 illustrates, at least eight different categories may be identified. If we instead increase the levels to three (low, medium, and high on different dimensions) the result will be 27 combinations to possible networks (see figure 2).
Figure 2: Different combinations of Possible Networks
Each and every one of these different combinations form a specific network with different characteristics, requirements and needs for management. Referring to the three illustrated cases in this paper, it is obvious that the management practices differ. By elaborating on the differences between these different types of networks, future research should be able to develop our understanding of the hybrid “interjacent marsh”
between markets and hierarchies and to develop more precise implications for practitioners.
PEOPLE
TASK
CHANGE Low
High
Medium
Low Medium High
LowHighMedium
Low High
Low High
LowHigh
PEOPLE
TASK
CHANGE
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