EMNet 2005 – Budapest
International Conference on
ECONOMICS AND MANAGEMENT OF NETWORKS
Network, but which one?
Management of, in, or by network?
Paper
Tibor MANDJÁK¹
¹Corresponding author
Professor of Marketing
BordeauxBusinessSchool and
CorvinusUniversity of Budapest
680, cours de la Libération, 33405 Talence Cedex France
Phone: 33-556-84-2228
Fax: 33-556-84-5500
Email:
Judit SIMON
Professor of Marketing
CorvinusUniversity of Budapest
1093 Budapest, Fővám tér 8.
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Fax: ++ 36 1 217 1853
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Network, but which one?
Management of, in, or by network?
Can we manage networks? It is a very hard question. The answer depends on what we think about networks.
The word network is one of the buzzwords in science and economy today. However, definitions and meaning vary in different sciences and sometimes inside the same discipline as well. After a very short review of economic, sociological and management approaches to networks we shall provide an argument about the business network.
We define business networks as socially constructed systems of mutual relationships among the involved actors’ economically driven activities. A business network is more and qualitatively different from a simple aggregation of the involved actors’ dyadic business relationships. Business network actors are in direct and indirect relationships with each other. These relationships influence and provide feedback for both each actor’s economic behaviour and the business network itself. A business network is a continuously changing complex open system. Trust, exchange, dependence and connection are the main dimensions of business networks. Each involved actor has a particular network position.
The actors’ interdependency and the interactivity of their relationships guide us to argue mainly about the possibility of management in business networks. However, in the example of huge projects what we can observe is the creation of business networks; which means a certain type, mainly temporal management of networks. We can see the same in quasi-closed, technological process driven supply chains as in the motor vehicle industry or in some franchise systems. In the case of companies with weak network positions we can imagine a very strong dependence on their business network. This could be the case of management by network.
Management means organisation, monitoring, information, and trust building and motivation activities. Their combinations depend on the dimensions of the business network and the company’s network position. In order for us to manage complex phenomena first we have to understand them, at least partly. We hope that describing the business network and emphasising its social economic nature will help this. This understanding can help a new, more pertinent strategic approach to and in business networks.
Introduction
The word network is one of the buzzwords in science and economy today. However definitions and meaning vary in different sciences, and sometimes inside the same discipline as well.
However the concept of network is not as new as it seems to be. Blood circulation in 18th century medical science was described with the concept of network. Networks played a very important role also in the development of technical sciences in the 19th century; it is enough if we think of the telegraph and the network of railways only. In the same century it was also an important principle in regional development that networks of large, urban areas and those of small settlements in their vicinity should be created. Semantic networks were worked out and applied in the 1970s during the research activities concerning linguistics and artificial intelligence. Various concepts constitute the intersections of semantic networks; they are connected by the lines of relations among these concepts (Dortier 2004).
Among the classical authors in sociology Georg Simmel’s "formal" sociology is built on the mutual activities among individuals. Simmel perceives and understands social reality as a network of relations (Boudon 2000). In U. S. sociology first James Coleman’s theory on social capital, then the research activities by Mark Granovetter, a leading figure in new economic sociology called the attention to the extreme significance of social networks.
In literature on company management and strategy the network company appears as a new organisational form in the 1980s and 1990s. This new organisational and management form mainly stresses the significance of the practice of horizontal relations, informal ways and division of power (Dortier 2004).
Networks have become an important issue in social sciences. Degenné and Forsé (1999) distinguish among three different network approaches. In a sense of strong determinism the network as a structure means that the network takes precedence over the individual. On the other hand the network as a structure cannot be reduced to the sum of individual actions. Strong determinism is present when authors argue that the structure exerts absolute constraint on individual actions. Weak determinism approach shares the idea that networks are not the simple aggregation of individual actors, but emphasises that structural constraint is merely formal, leaving the individual free to act, but effectively closing off some of their options. Modern rational choice theory regards networks in another way. Actors act to achieve goals they set themselves as a function of their personal preferences. Constrains interfere with actions by influencing the probability of achieving some of these goals; the constrains are structural or institutional. Networks are considered as structural constrains. Structural constraints induce actors to act in the manner most consistent with their preferences, and thereby lead them towards their goals (Degenné and Forsé 1999).
In business marketing a relatively new paradigm, the industrial network approach, has been developed. Based on, at the beginning mainly European empirical research data and rooted in both the resource dependence model and the social exchange theory, the industrial network approach “shares with other approaches a belief that the existence of relationships, many of them stable and durable, among firms engaged in economic exchange provides a compelling reason for using inter-organisational relationships as a research perspective” (Easton 1992:3). It means that business relationships among firms are the sine qua non of an industrial network paradigm (Easton 1992). First we shall see in some words the essentials of business relationships, and after that we shall focus on industrial or business networks.
Business relationships in some words
The interactive model of the Industrial Marketing and Purchasing group (IMP) is based on the results of empirical studies conducted at the end of the 1970’s using a wide range of international sample (Hakansson 1982). The model describes the (business) relationship between organisations through mutual (interactive) exchange episodes. The exchange episodes mean the exchange processes, which can have different elements and objects. Thus, we can differentiate the exchange episodes of products and/or services, the exchange episodes of information and the financial exchange episodes. The fourth exchange episode is given by the personal relationship that is created between the people taking part in the exchange (social exchange) (Hakansson 1982). The basic units, the building stones of business relationships are the exchange episodes (Hakansson and Snehota 1995). The condition for the creation of long-term business relationships is the frequency of exchange episodes. In the meantime, frequent exchange episodes can make it possible for the exchange processes that take place in the business relationship to become routines. This decreases the costs of maintenance of the business relationship for both actors. However, it can lead to the institutionalisation of the business relationship (Hakansson 1982), which means that the partners treat the relationship almost as a facility, they do not examine its utility (Thibaut and Kelley 1959).
The exchange processes (the nature and the realisation of the exchange episodes) are influenced by the technologies of the two organisations – including those of the products, the processes and the markets (Ford et al 1998) – or more exactly by the relationships and compatibility of these technologies to each other (Webster 1991). Technology does not, however, exclusively mean technical and technological knowledge, but fundamentally the knowledge of the resources as well as the knowledge of how and to which purposes these resources can be used, or rather how they can be combined with each other. Product technologies enable organisations to plan various kinds of products or services. Process technologies make it possible to manufacture products or to provide services. By applying market technologies, companies become capable of adapting their products or services to the market needs (Ford et al 1998).
The dimensions of two organisations compared to each other, their organisational structure and strategies also affect the exchange episodes. The exchange episodes are influenced by the experiences of organisations that are expressed in the learning process based on the results, conflicts of exchanges with the given partner and/or events that happened during exchanges conducted with other partners (Dwyer et al. 1987). During this learning process the partners decrease uncertainty, or rather learn how to live with a certain degree of uncertainty. The relationships evolve according to what the organisations consider they should learn from each other, what they are willing to learn, and what they are able to learn (Ford at al 1998).
Those involved in the business relationships also influence exchange episodes, basically members of purchasing centres and sales centres (Bonoma and Johnston 1978). More exactly, what gives outstanding importance to the personal relationships that develop between individuals is that people involved in the business relationships fulfil different roles, they take part in different processes of the exchanges, and perceive the exchange episodes in different ways.
Relying on the social exchange theory (Thibaut and Kelley 1959) the interactive model presumes that organisations are involved in exchange relationships because they compare the supposed (expected) advantages of these relationships (awards, with the words of Thibaut and Kelley) and its costs. In case they find that the relationships contribute to the improvement of their own efficiency and economical operations, they get into business relationship with each other, and develop the related behaviour samples concerning these relationships (Hakansson 1982). The establishment, the development, the maintenance as well as the termination of these business relationships all require efforts from the parties that take part in them. This means the use, the investment into the relationships of different material and non-material resources (Ford at al 1998). The investment into the relationships may however carry the risk of creating resources specific to the relationships (Heide and John 1990) that may not be or may only be used with difficulty in other relationships.
The exchange that takes place during the business relationship has several kinds of consequences. These consequences appear with both parties, but by all means not the same or similar extent or weight. In this coherence we can speak of symmetric and asymmetric business relationships. We can characterise the most important consequences with the concepts of adaptation, devotion, working together (co-operation between the parties) and the conflicts between the parties. A further essential consequence is confidence based on the experiences acquired during these relationships and the satisfaction caused by the relationships (Backhaus and Büschken 1997).
The relationships between the buyer and the supplier change over time and these changes can be very different. We can consider the change of the business relationship over time as a sequential process (this is characteristic of the different relationship lifecycle theories) (Backhaus-Büschken 1997) or as a non-sequential process (Ford 1980). Essential is that we make a difference between the individual business relationships with consideration of the role of time. This has an outstanding importance during the management and evaluation of the relationships (Ford et al. 1998).
However, we can make a difference between the business relationships according to the strength of the relationship (tight or loose), the depth of the interactivity (simple, easing the co-operation, integrative) or the buyer’s tendency (transactional or relationship oriented) (Jackson 1985). Business relationships are very important, as the forms of co-operation and co-ordination between companies. The relationship approach makes it possible to describe and analyse the buyer-supplier relationship in a much more dynamic and differentiated structure than in the case of market or hierarchical co-operation. Webster defines the different relationships between two end points determined by the vertical integration of transactional relationships and actors, according to the type of co-ordination between organisations (Webster 1992). Regarding their essentials, business relationships mean interactive exchange relationships between two organisations.
Industrial or business networks
However, the exchange relationship between two organisations does not exist in an isolated manner, but other market and non-market actors can influence it as well. In reality, numerous other relationships and actors affect the business relationship. (Ford 1990, Axelsson and Easton 1992, Anderson et al. 1994). The straight relationship between two organisations is affected by third actors with whom one of the parties is in some kind of relationship by itself. Thus, these actors influence the business relationship indirectly, through the change in behaviour of one of the parties being in business relationship. We call network the totality of the straight relationship and the indirect one affecting the latter (Axelsson and Easton 1992).
Studies in economic sociology related to networks have uncovered numerous important aspects of networks. "Industrial development need not involve vertical integration or standardised mass production, but may instead rely on horizontal networks of production. Trust, mutual forbearance and reputation may supplement and/or replace the price mechanism or administrative fiat" (Powell and Smith-Doerr 1994:370).
For organisations not only one business relationship exists, but several ones. Each organisation, be it on the purchasing (input) side or the sales (output) side, disposes over a wide range of suppliers and buyers. To a certain extent organisations are in unique relationships with each supplier and buyer. The discretion of the relationships makes the individual management of the relationships (in theory) necessary in all cases. Nonetheless, organisations have to consider that each buyer or supplier relationships are not only unique, but they also are part of the organisations’ system of relationships. Thus the management of the business relationships makes it necessary for organisations to consider at the same time the discretion and the characteristics of the business relationships as well as the fact that they constitute part of the organisations’ relationship portfolio (Turnbull and Zolkiewski 1995). For organisations the market essentially means the total of the business relationships and the networks related to them. Based on the theory of the network approach of the market, every market is made up of networks, while the networks are made of interactions between organisations. Within the networks however, there are business relationships that are weak or short-term ones, and there are some that have a hierarchical nature (Mattsson 1997).
The total of business relationships, their structure and way of management are important characteristics of organisations. Organisations differ from each other to a great extent in the management of business relationships. Considering the mutual dependence of organisations though, business relationships can be valuable resources of companies, and it may in numerous cases seem that the relationships are the most important capital of some companies (Ford at al. 1998). In case we consider that on the one hand business relationships are exchange relationships that are at the same time social relationships, and that organisations provide themselves with the necessary resources through these and, on the other hand that these business relationships also constitute the building elements of the market network and, furthermore, that through these relationships organisations embed themselves into their environment; it may be worth examining the relationships as the social capital of organisations (Coleman 1990).
Business relationships need investments, that is to say they fix resources, they are complex, they change over time, they are unique, and at the same time part of the relationship portfolio; thus their management is of strategic importance and complex as well. Organisational strategies must define the general development direction and they have to define it then with regard to the organisations’ relationship portfolio and the client relationships as well. On inter-organisational markets strategic decisions concern changes in the current relationship portfolio. Tactical or operational decisions concern the management of the individual relationships (Ford 1980). Strategic decisions also mean that organisations have to define how they will allocate their resources among the different business relationships.
To summarise we define business network as a socially constructed system of mutual relationships among the involved actors’ economically driven activities. Business network is more and qualitatively different than the simple aggregation of the involved actors’ dyadic business relationships. Business network actors are direct and indirect relationships with each other. These relationships influence and feed back both each actor’s economic behaviour and the business network itself. Business network is a continuously changing complex open system. Trust, exchange, dependence, connection are the main dimensions of the business network. Each involved actor has a particular network position.
And now comes our basic question. Can we manage the network? It is a very hard question. Trying to answer it first we have to define management itself. Later we may take a look at what its relation is like with the business network.
Management: what does it mean?
What is management? What does a manager do? One of Mintzberg's latest definitions read as follows: "Management is a practice that has to blend a good deal of craft (experience) with a certain amount of art (insight) and some science (analysis)" (Mintzberg 2004:1). According to Peter Drucker (1999) people should not be managed, but rather guided. It means that people should be allowed to unfold the best of their abilities and knowledge. Nonetheless, the fundamental task of management is to ensure the success of organisations. Success should be given a priority, and the resources of organisations should be arranged accordingly. Result means that organisations are able to provide what others, their customers in a broad sense, expect from them. "Management is a special activity, a special function and a system of special tools, which enable organisations to achieve results" (Drucker 1999:46).