8. Network-level strategy

Introduction

When several organisations work together towards a common goal, we speak of an alliance, partnership or network; their joint strategy is the network strategy. It helps firms decide whether long-term cooperation with others is useful, and can provide efficiency and certainty.

The problem of inter-organisational relationships

Firms have many relationships with other organisations and individuals, but these are not automatically part of the strategy. When entering a cooperation, four questions must be answered: who (possible partners or opponents), why (the benefits), what (the factors shaping the relationship) and how (how to structure it effectively).

1. Who? Relational actors

2. Why? Relational objectives

3. What? Relational factors

• Legitimacy: trust, written and unwritten rules and accepted behaviour. Example: firms partner because it is normal and accepted in their sector.
• Urgency: under pressure to achieve results, relationships develop faster. Example: firms quickly form an alliance during a crisis to share costs.
• Frequency: frequent interaction changes the nature of the relationship. Example: a fixed supplier relationship is more intense than a one-off purchase.
• Power: the ability to influence others' behaviour, for example by owning resources others lack. Example: a large tech firm imposing conditions on small partners.

4. How? Relational arrangements

Cooperation can be organised through the market (conventional buy-and-sell transactions), through hierarchy (mergers and acquisitions) or in between through a partnership (a structural cooperation agreement). Partnerships can be equity (a financial component, such as a joint investment or joint venture) or non-equity (contractual or other agreements without ownership, so parties stay legally and financially independent; an advantage is that they remain autonomous). In bilateral cooperation between two firms responsibility is clear; in multilateral cooperation it is less obvious who is responsible and who gets which part of the pie.

The paradox of competition and cooperation

Firms must learn to cooperate and compete at the same time: co-opetition. They may first cooperate to develop a product, platform or logistics system and then compete again in the market. Ways to manage this:

• Parallel processing: cooperating in production while competing in marketing (Samsung supplying parts to competitor Apple).
• Juxtaposing: letting different partners and perspectives coexist, keeping options open and limiting dependence.
• Different partners for different goals: cooperating with some and competing with others, for example building a platform together but later competing for customers.

International perspective: institutional and cultural differences (regulation, economic systems, individualism versus collectivism) determine the emphasis on competition or cooperation. In some countries competition dominates (US, UK), in others networks are more important (Japan, Germany). Social networks strengthen cooperation, but strong group formation can harm efficiency. International cooperation can help overcome entry barriers.

Readings

Reading 6.1 (Hamel, Doz and Prahalad, collaborate with your competitors and win): co-opetition lets firms share costs, access new technologies and enter markets faster, while remaining rivals. Principles: collaboration is competition in a different form (guard your own goals), harmony is not the most important measure of success (some conflict can help), cooperation has limits (not everything is shared) and learning from partners is paramount. Asian firms often used alliances to learn and copy partners' skills, while Western firms often cooperated to share costs and risks. Firms protect knowledge by limiting transparency and channelling contact through a few gatekeepers. Mutual gain is likely when partners have different goals, can both learn, stand stronger together against larger rivals or have complementary skills; learning requires an open, receptive attitude.

Reading 6.2 (Creating a strategic centre to manage a web of partners): alliances and networks lower costs, raise flexibility, stimulate innovation and open new markets. A strategic centre creates value for partners, provides leadership and builds capabilities. Its roles: strategic outsourcing (finding and bringing together the right partners, setting expectations, solving problems), capability development (developing partners' competences, letting partners train each other and share information), technology leadership (the borrow, develop, lend principle) and stimulating competition within the network, because a network is as strong as its weakest link. Its tasks cover the idea (a vision defining partners and critical roles), the investment (a strong brand and communication systems), the climate (trust and reciprocity) and the partners (selection with attention to cultural fit, decision-making and availability). Information shared broadly includes ideas, feelings and insights, not only data.

Reading 6.3 (Moore, coevolution in business ecosystems): firms operate in business ecosystems, networks of interdependent organisations. When a key player disappears or changes, the whole system can change. Coevolution means interdependent organisations continuously adapt and evolve together, like species in nature. Firms must understand their ecosystem and the interplay of competition and cooperation.

Textbook deepening: De Wit, Ch. 6 (Network level strategy)

The sections below add the theory from the textbook chapter on network level strategy to the lecture notes above. Where two or more firms move beyond a mere transactional relationship and work jointly towards a common goal, they form an alliance, partnership or network (sometimes called an ecosystem); strategy then also concerns relating a network to its broader environment. No firm is autarchic; even avoiding relations with some parties is a strategic choice.

Relational actors in more detail (Figure 6.2)

De Wit separates industry actors (who perform value-adding activities or consume their output) from contextual actors (who set the conditions under which industry actors operate, following the SEPT distinction). Additional points: suppliers in a broad definition include providers of all production factors (land, capital, labour, technology, information, entrepreneurship), and relations can extend beyond first-tier suppliers. Indirect horizontal relations include complementors, producers of substitutes (as adversary or ally), potential entrants (to be assisted or blocked) and firms in other industries (as a step to diversify). Economic actors also include central banks, employers' federations and stock exchanges; political/legal actors include regulatory bodies and international institutions; technological actors include patent offices and standardization bodies. The configuration of all these actors is the firm's group of external stakeholders.

Relational objectives: extra detail

Firms cooperate because they expect value added: the same sources of synergy as between business units (Ch. 5) apply across company boundaries (Figure 6.3). Parties can have open and mutually beneficial objectives, but also hidden agendas or conflicting goals, and people within one firm may have different objectives for a relationship. Examples from the book: lending happens often with technology, copyrights and trademarks (licensing) and physical resources (lease contracts); linking is the most common relationship in business (every buyer-seller exchange); lumping (airline alliances, software cross-selling, postal partnerships, inter-bank settlement) is usually found between industry insiders because activities must be similar to gain scale; leaning includes forming a consortium to launch a new industry standard, weakening an alternative group or raising entry barriers.

Relational factors and power: extra detail

The four relational factors come from Gulati and Mitchell, Agle and Wood. Legitimacy concerns the "rules of engagement"; trust exists when one expects the other to adhere to them, but acting opportunistically against unwritten rules can seem advantageous. Frequency includes the expectation of future interaction: parties behave differently in a one-off transaction than in a structural relationship (Axelrod). Power stems mainly from owning resources the other requires (resource dependence, Pfeffer and Salancik). The four power positions (adapted from Ruigrok and Van Tulder, Figure 6.4) combine closeness (loose vs tight) with the distribution of power (balanced vs unbalanced). Mutual independence is what is typically expected of a market relationship; unbalanced dependence comes close to a hierarchy (as if the dominant firm had acquired its counterpart); mutual dependence (interdependence) lies between market and hierarchy.

Relational arrangements: market, hierarchy and network

Transaction cost economists (Williamson) contrast the hierarchy (central authority coordinates and settles disputes, the "visible hand") with the market (no explicit coordination, mediated by price, the "invisible hand"; Ouchi). Activities should only be internalised where markets do not function properly. Networks rely on neither hand but on the "continuous handshake" (Gerlach): coordination and dispute resolution by mutual adaptation. Figure 6.5 classifies collaborative arrangements on two dimensions:

Non-contractual arrangements are not legally binding; contractual ones are legally enforceable; neither involves a financial stake, which equity-based arrangements do. Commonly only multilateral arrangements are called networks, but De Wit uses the term for all groupings of two or more cooperating firms.

Networks as hybrid forms: they try to combine the benefits of hierarchy (structural coordination, procedures and control systems for joint activities) with the benefits of the market (flexibility and motivation, the entrepreneurial incentive). They facilitate co-specialization: activities outsourced by one become the specialization of another, which normal market relations cannot achieve when there is a risk of dependence or a need for structural coordination. Tight, durable, trust-based networks can function as virtual corporations, with fuzzy boundaries and open-ended relations. But networks can also combine the weaknesses of both: bureaucracy (red tape, dulled incentives), skewed dependence (weak partners without voice or exit) and opportunism: "self-interest seeking with guile" (Williamson), including incomplete or distorted disclosure of information. Opportunism can be limited by defining objectives, responsibilities, authority and results in explicit contracts.

The paradox of competition and cooperation: definitions and the KLM example

KLM's 1989 alliance with Northwest (joint flights, marketing, sales, maintenance, a US$400 million capital injection for 20 per cent of shares) was commercially a success but relationally "a Shakespearean drama": once recovered, Northwest blocked KLM's shareholding increase, leading to a legal battle (1995 to 1997). Lesson: alliances are about working towards common interests and being assertive about one's own.

• Competition: working against others where goals are mutually exclusive (one's win is the other's loss). Without it, suppliers overcharge, buyers squeeze prices, governments demand more and rivals poach customers. Ranges from open antagonism to subtle friction; tools are calculation, bargaining, manoeuvring, coalitions and conflict; power stems from relative resource dependence.
• Cooperation: working together where goals are mutually beneficial (both need each other to succeed). Without it, the firm misses joint product development, better service offerings, a better knowledge infrastructure and new standards. Ranges from occasional alliances to virtual integration; strongest among complementors (the network effect) or when facing a joint challenge. Overcoming opportunism requires long-term commitment, interdependence, trust and coordination and conflict-resolution mechanisms.

Firms must be embedded and independent at the same time. "Co-opetition" (Brandenburger and Nalebuff) is a catchy word, but leaves the question of how to deal with the conflicting demands.

The discrete organization perspective in more detail

In line with neoclassical economics, organizations are driven by aggressive self-interest and competition is the natural state; firms are detached from their environment with sharp boundaries (atomistic competition), vertical interactions are transactional and zero-sum: the strongest party appropriates the largest part of the economic rent. Key is to avoid resource dependence and keep low exit barriers: "be the spider, not the fly". Arm's-length relations give clear tasks and accountability and prevent information leaking. Alliances bring together weak firms and are short-lived; they are "always second best", a tactical necessity and never a strategic preference, risky because of opportunism: collaboration is "competition in a different form" (Hamel, Doz and Prahalad). If collaboration really offers long-term advantages, a merger or acquisition is preferable. Collaboration between strong firms is often a conspiracy to inhibit competition (collusion). Moreover, a competitive environment keeps firms fit, while collaboration makes them complacent. Firms should strive for strategic self-sufficiency. Porter: "Alliances are rarely a solution ... Alliances tend to ensure mediocrity, not create world leadership".

The embedded organization perspective in more detail

Business isn't war: value creation is a positive-sum activity; atomistic competition is a theoretical abstraction and symbiosis, not aggression, is the fundamental nature of economic functioning (Jarillo; Moore). Firms have many parties with parallel interests and a stronger interest in enlarging the pie than in dividing it. Firms become embedded (Granovetter) because specialization and outsourcing of activities close to the core require trusted partners; as experience and trust build up, strategic partnerships develop, ideally based on mutual dependence and reciprocity. Benefits: faster scale and experience advantages, focused core competences and access to higher quality, cheaper complementary resources (Richardson), and fast combination of resources with outsiders for innovation. Networks may compete with other networks, but firms should not be obsessed with "putting the competition out of business"; industry peers share interests in standards, lobbying, environmental problems, the industry's image, fundamental research and negotiations with unions.

Managing the paradox according to the book

For this paradox the number of available options is highest of all strategy issues. The book discusses three:

• Navigating: cooperate first, compete later. Japanese firms collaborated with Western competitors to learn and then beat them (Hamel, Doz and Prahalad). A-brand manufacturers and supermarkets jointly develop logistics, then negotiate prices again, in repeated cycles. Industrial policy: Japan's MITI and EU programmes (ESPRIT, EUREKA) promote cooperation in the pre-competitive stage, followed by market competition. Standards battles (Philips V2000, Sony Betamax and Matsushita's VHS/"VCR" in a winner-takes-all game) taught firms that it can be better to cooperate on standards first (e.g. Wi-Fi) and compete afterwards.
• Parallel processing: co-opetition executed in different units, e.g. PSA Peugeot Citroën and Toyota sharing components of city cars (Peugeot 107, Toyota Aygo, Citroën C1) while competing for market share; or different country units: Danone and Yakult compete in Europe but cooperate in India.
• Juxtaposing: managing competition and cooperation simultaneously, even with the same partners; "no eternal allies and no perpetual enemies" (Palmerston), like cycling teams that are rivals and temporary allies within one race. Common in business ecosystems where allies can become rivals within days.

Network level strategy in international perspective: extra detail

This is the debate with the most comparative research; firms from different countries show clearly different propensities to compete and cooperate. Chandler distinguishes personal capitalism (UK), managerial capitalism (US), group capitalism (Japan) and cooperative capitalism (Germany); De Wit adds bureaucratic capitalism (France) and familial capitalism (Italy).

• English-speaking countries: governments guard competitive markets and distrust collusion (Sherman Antitrust Act, 1890); highest individualism (Hofstede); cooperation exists under formal rules that must be negotiated and enforced (Fukuyama), hence many corporate lawyers and high transaction costs.
• Japan: group affiliation; relationships are moral rather than calculative; bank-led keiretsu with durable relationships and cross-shareholdings. China: informal relationships (guanxi) are the basis of business networks.
• Germany: holistic worldview in which management and bankers, employers and employees, government and industry combine forces; banks guided industrial development (unravelling since the late 1990s).
• Italy: family-like loyalty and trust inside communities, distrust of outsiders (government, tax authorities, banks); many small specialised firms in loose federations (Benetton, textiles in Prato, ceramics in Sassuolo).
• France: the state as industrial strategist (filière policy); cooperation imposed top-down via bureaucracies; relationships formal, rational and depersonalised.
• Industry level: competition dominates where projects are scarce (construction: lowest-bid tendering, opportunism) and in oligopolies (Airbus and Boeing, steel, oil); cooperation dominates in high-tech and knowledge industries (space, biotechnology, higher education) and platform ecosystems (Alibaba, Spotify, Uber).
• To the strategist: only about half of cross-border alliances succeed (Bleeke and Ernst).

Readings in the book's framing

De Wit places Reading 6.1 (Hamel, Doz and Prahalad) at the discrete pole: inter-firm relations are largely competitive; alliances with competitors "can strengthen both companies against outsiders even if it weakens one partner vis-à-vis the other"; an alliance is "a constantly evolving bargain" in which each firm tries to learn as much as possible while limiting the partner's access. Firms should only ally with clear learning objectives, a well-developed learning capacity and defences against probing. Reading 6.2 (Lorenzoni and Baden-Fuller) represents the embedded pole, focusing on vertical relationships: a group of firms can form a "virtual company" with most advantages of vertical integration and few pitfalls, but it needs a strategic centre acting as builder (designing and assembling the network) and coordinator (regulating activities, resolving disputes). Reading 6.3 (Moore, The Death of Competition) combines both: a business ecosystem is a part of the environment where firms co-exist and co-evolve; great companies still face extinction if their ecosystem declines; a firm creating a new market must create a new ecosystem of suppliers, distributors, service providers and customers ("a tropical tree in the desert" fails); competitive advantage "stems principally from cooperative, co-evolving relationships", as a complement to, not a substitute for, competition.