Strategic management Interfirm relations and strategic networks Fernando Alberti, Istituto di Econom

1
Strategic management Inter-firm relations and
strategic networksFernando Alberti, Istituto di
Economia Aziendale
2
Summary

• Inter-firm relations and strategic networks
• what is a network form?
• which are the characteristics of a network?
• equity-based networks
• formal networks
• social networks

3
Introduction

• In the beginning was the market,
• the economist would say
• In the beginning was the clan,
• the anthropologist and the sociologist would say
• In the beginning was the hierarchy,
• the organisation theorist would say

4
Hybrid forms of organisation
Besides these three pure collective
organisational models (i.e. markets, clans,
hierarchies), modern capitalism has favoured the
flourishing of a wide variety of hybrid and
intermediate forms of organisation, both formal
and informal. Inter-firm relations and Networks
5
The determinants of network forms

• a new concept of firm from a concept of firm, as
  a specific aggregation of scarce resources aimed
  at a corporate objective, to a concept of firm,
  as the access to a limitless aggregation of both
  internal and external resources.
• internationalisation of firms the will/need to
  be positioned in different geographical markets
  induces firms to look for relations with foreign
  actors.
• technological developments the fast pacing of
  technological development obliges companies to
  group together in order to better master new
  technologies (scientific, technological,
  manufacturing and commercial collaboration).
• internet connectivity web-based technologies
  allows a global connectivity, favouring virtual
  networks

6
The determinants of network forms
More specifically, main determinants of network
forms for companies seem to be the following

• costs reduction
• risk reduction
• time reduction
• product range enrichment
• technology sharing
• new technology monitoring
• geographical posture enlargement

7
Hybrid forms on a continuum
Network forms can be traced on a continuum of
organisational forms that goes from strictly
hierarchical forms (quasi-firms) to loosely-tied
forms (quasi-markets)
hierarchy
market
hybrid network forms

• Which are the characteristics of a tied relation?
• Which are the drivers for having a certain
  strength in ties?

8
Hybrid forms on a continuum
In order to assess the characteristics of
different network forms on the continuum, some
criteria seem applicable

• equity - non equity
• formal - informal
• equal - unequal
• open - closed

9
Equity-based networks
The phenomenon of equity-based linkages among
organisations has largely increased in the last
decades, both for scale purposes, crisis
globalisation and technology. Among the different
forms of this kind, there are

• holdings
• mergers
• acquisitions
• joint ventures
• capital ventures

10
Formal networks
There is a wide variety of co-operation forms
among firms that are not equity-based, but still
formally structured, such as

• franchising
• licensing
• consortium
• trust
• formal agreements
• other contracts
• business associations

11
Social networks
This kind of networks comprises such relations
that are based neither on equity nor on formal
agreement, but rather on social norms and shared
values or objectives. These are, for instance

• interlocking directorates
• clans
• industrial districts
• clubs
• meta-organisations

12
A comprehensive framework
STRENGTH
EQUITY-BASED NETWORKS
FORMAL NETWORKS
SOCIAL NETWORKS
Holding Joint venture
Franchising Consortium
Strong
Sub-contracting Industrial district
Co-partnership Other contracts
Cross-holding
Interlocking directorates
Medium
Trust Syndicate Business Association
Non-formal mutual exchanges
Minority shares
Weak
13
Network design
One of the most neglected issues regarding
networks refers to their design. This aspect
appears to be particularly critical from a
strategic point of view, since it affects the
nature and effectiveness of the network itself.
With reference to this attention should be
dedicated to the following aspects

• beyond the dichotomy between network relations
  (co-operation) and market relations (competition)
• shared interests
• opposing interests
• how to design an efficient and effective network,
  paying attention to conflict, agreement and
  governance issues?

14
Network success
The success of a network form is influenced by

• the degree of reaching shared objectives
• the degree of presence of homogenising factors

15
Network success
The difficulty of reaching an agreement, and
therefore to establish a relationship in a
network form, depends on

• similarity among strategic objectives of the
  organisations involved
• complementarity of resources
• shared output timeframe and goals
• partners resources appropriability asymmetry
• differences in corporate values

16
Network success
In these cases some neutralising elements can
play a critical role

• degree of mutual trust
• presence of external parties that act as
  arbitrators
• introduction of mechanisms for assessing and
  sharing results.

17
Network success
A critical role in determining network success is
played by power issues of some actors

• hierarchical authority
• resources control
• access and control of information sources
• ability to face uncertainties

18
Premises
Corporate strategy decisions involve the
determination of the scope of the firm and the
allocation of resources between the different
businesses that the firm encompasses. There are
three principal dimensions

• product scope
• geographical scope
• vertical scope.

19
Vertical scope of the firm
Vertical integration is a firms ownership of
vertically related activities. Vertical
integration can occur in two directions

• backward integration
• forward integration.

Vertical integration may also be

• full integration
• partial integration

20
Market or hierarchy
Hierarchy
transaction costs gt administrative costs
Market
transaction costs lt administrative costs
21
Transaction costs
Sub-contractor 1 Sub-contractor 2 Sub-contractor
n
? Sub-contractor search ? Contracts drawing up ?
Monitoring ? Contracts implementation
Transaction costs
Firm
Administrative costs
? Diff. in the optimal scale ? Managing strat.
diff. businesses ? Competence develop.t ?
Competitive position ? Flexibility ? Compounding
of risk
22
Transaction costs determinants
The investments of sub-contractors in specific
assets increase company productivity. By the way,
they increase also the degree of opportunism of
the buyer. The increased opportunism increases
transaction costs

• cost of search for partners
• cost of contracts drawing up
• costs of monitoring
• costs of contracts application/implementation

The higher the transaction costs the more
frequent a hierarchical integrated form.
23
Administrative costs determinants
Administrative costs flourish when

• Differences in the optimal scale of operation
  between different stages of production
• Managing strategically different businesses
• Less flexibility towards an uncertain demand from
  the market
• Difficulties in the development of core
  competencies
• Difficulties in moving corporate positioning in
  close parts of the business system
• More dependence from up-stream risks

The higher the administrative costs the more
frequent a market form.
24
Market or hierarchy strategic drivers

• How many firms are there in the vertically
  related activity?
• The fewer the companies, the greater the
  attraction of vertical integration
• Do transaction-specific investments need to be
  made by either party?
• The greater the requirements for specific
  investments, the more attractive is vertical
  integration
• Does limited availability of information provide
  opportunities to the contracting firm to behave
  opportunistically?
• The greater the difficulty of specifying and
  monitoring contracts, the greater the advantages
  of vertical integration

25
Market or hierarchy strategic drivers

• Are market transactions subject to taxes and
  regulations?
• Vertical integration is attractive if it can
  circumvent taxes and regulations
• How much uncertainty exists with regard to the
  circumstances prevailing over the period of the
  contract?
• Uncertainty raises the costs of writing and
  monitoring contracts, and provides opportunities
  for cheating, therefore increasing the
  attractiveness of vertical integration
• Are the two stages similar in terms of the
  optimal scale of operations?
• The greater the dissimilarity in scale, the more
  difficult is vertical integration

26
Market or hierarchy strategic drivers

• How strategically similar are the different
  stages in terms of key success factors and the
  resources and capabilities required for success?
• The greater the strategic dissimilarity, the
  more difficult is vertical integration
• How uncertain is market demand?
• The greater the demand uncertainty, the more
  costly is vertical integration
• Does vertical integration risk through requiring
  heavy investments in multiple stages and
  compounding otherwise independent risk factors?
• The heavier the investment requirements and the
  greater the independent risks at each stage, the
  more risky is vertical integration

27
Towards hybrid forms
Concentration of suppliers
Non-standardised product
High specific investments
High TRANSACTION COSTS
Quasi-integration and hybrid forms
High ADMINISTRATIVE COSTS
28
Towards hybrid forms
H
Permanent agreements
Joint venture
Franchising
Contracts
Formalisation
HYBRID FORMS
Partnerships
Informal networks
Vertical Integration (hierarchy)
Occasional exchanges (market)
L
H
L
Degree of involvement
29
Why hybrid forms?

• repetition of transactions
• exchange of big volumes of the same product or a
  large number of different products
• information symmetry
• use of informal mechanisms for agreement
• specific investments, sunk costs

There five determinants of a reduction of
transaction costs, even when facing high
administrative costs