Dr. Leonidas Baziotopoulos 12-01-09

Inter-firm networks:structures, members, and processes

Author: Dr. Leonidas Baziotopoulos (Logistics Consultant)

Introduction

For several years inter-firm networks have been receiving considerable attention from strategy theorists and practitioners (e.g. Grandori and Soda, 1995). Many argue that these networks represent an organizational form which is particularly well suited to meet the requirements resulting from today’s turbulent changes in the firm’s environment (e.g. Miles and Snow, 1986; Jarillo, 1993; Alter and Hage, 1993; Hinterhuber and Levin, 1994.

More specifically, inter-firm networks have been changing over time, which is something that patterns of inter-firm linkages are linked to the life cycle development of an industry. Major trends today indicate that legally independent firms trying to create a competitive advantage by building and maintaining linkages with other organizations. Inter-firm linkages can consist of the exchange of information, or resources and/or joint ventures. Characteristic examples of the dynamics of inter-firm linkages has been given throughout the years by many scholars regarding several industries, such as the “Global Pharmaceutical Industry”, the “US Computer Industry”, and the “Italian Furniture Industry”(Lorenzoni and Ornati, 1988; della Valle and Gambardella, 1993; Ring and van den Ven, 1994; Hobday, 1994; Wieandt and Amin, 1994; Pisano and Wheelwright, 1995; Gemser et al., 1995, 1996).

The term “inter-firm network” depicts a complex arrangement of reciprocal, cooperative rather than competitive, relationships between legally independent but economically interdependent organizations (Sydow, 1992; Sydow et al., 1995). Networks in which the firms are primarily connected by supply relationships and collaborate to produce tangible goods are accordingly designated supply or production networks (Pfohl and Buse, 2000). As the dynamics of change is usually seen as the dominant challenge to firms in today’s economy, interest has recently focused on those types of networks that offer a high degree of structural-or strategic-flexibility and enable adaptation to rapid and extensive changes.

i) Network structure: Types of inter-firm network structures and components

Network Structures

In a production network the extent to which the advantageous properties of inter-firm networks can be realized depends for a large part on the organizaton of the logistics processes connecting the firms (Pfohl and Buse, 2000). For the spatially and temporally distributed performing value adding activities, which is a consequence of the joint production in a network of independent firms, makes great demands on the coordination and operation of the logistics processes.

Moreover, in the field of logistics the recent popularity of production networks has its counterpart in the strong interest in the concept of supply chain management, which also emphasizes cooperative relationships, integration of processes and information systems, and inter-firm problem solving (Glaskowsky et al., 1992; Cooper and Ellram, 1993; Pfohl, 1994; Cooper et al., 1997). However, empirical results on the positive effects of supply chain management or its individual components (e.g. cooperative vertical relationships) seem to confirm the usefulness of the concept (e.g. Dyer and Ouchi, 1993; Waldmann, 1996; Spekman et al., 1998), it also has some weaknesses, which are partly due to problems of implementation and partly of a conceptual nature. Problems which arise because firms are often not part of just one supply chain but can at the same time be integrated into various chains with different logistical requirements are not sufficiently addressed.

Furthermore, the linear view does not take into account the complexity-and the potential for improvements-which can result from different types of relationships (Pfohl and Buse, 2000), such as:

  • Horizontal relationships (two suppliers cooperate in competing logistical requirements. For instance they bundle their delivery volumes or one of the suppliers acts as logistical service provider for the other supplier);
  • Lateral relationships (a supplier supplies one customer and the at the same time supplies another supplier of that customer);
  • Circular relationships (in which the customer at the same time acts as supplier to his supplier); or
  • General reciprocal dependencies (the performance of a supplier depends directly on the activities of other suppliers: the customer might change his production plan due to delivery problems of one supplier which in turn can result in problems for other suppliers).

In addition, production networks can as a whole be distinguished with regard to form and content of the inter-firm relationships between the involved firms (Sydow, 1992). The dimensions can be used to describe different ideal types pf production networks. Miles and Snow (1992) distinguish each type of network by a specific operating logic, which describes its potentials and limits. Briefly, the different kind of typology of inter- networks are presented (Sydow, 1992; Jarillo, 1993; Semlinger, 1993; Arnold et al., 1995; Mertens et al., 1998; Picot et al., 1998;; Klein, 1996):

  • Strategic network: Strategically guided by a lorge-core firm, which is often a retailer or manufacturer close to the final customer, the network is relatively stable and oriented towards the joint achievement of strategic advantages. The member firms are usually closely linked to the core firm, but also offer their products to customers outside the network to preserve their autonomy and competitiveness (Figure 1). Well-known examples of strategic networks are supply networks in te automotive industry and the Italian manufacturer Benetton.
  • Virtual enterprise: Independent firms are working together based on shared values and a common way of doing business to exploit a particular business opportunity by jointly manufacturing a product. The firms have specific competencies, which can be combined synergistically, and the intensive use of information and communication technologies are regarded as constitutive characteristics (Fig. 2). Examples of virtual enterprises are the production of the small car in Hambach (France) or the assembly of trucks in the Volkswagen factory in Resende (Brasil) with the use of high-tech facilities.
  • Regional networks: Small, highly specialized firms situated in spatial proximity of each other cooperate repeatedly. While the individual relationships do not have to be stable, the firms have latent relationships, face-to-face interaction and large trust with a larger number of potential partners, which can be activated depending on the current demand (Fig.3). Cited examples can be found in the northern Italy (Harrison, 1994; Lazerson, 1995), but there are also efforts to create such networks in the USA (Human and Provan, 1997).
  • Operative network: Member firms can quickly get access to other partner’s resources, especially free production or logistics capacities. The transactions are relatively standardized and concern single value adding activities rather than complex processes, and the network shows some similarities to an electronic market (Fig. 4).

Figure 1: Strategic Network

Distributor, Logistics Service Provider

Focal or Core Firm

Logistics service provider

Supplier (1st tier)

Supplier (2nd tier)

Figure 2: Virtual Enterprise

Designer Manufacturer, Assembler

Broker

Supplier,

Log. Service Provider Marketer, Distributor

Figure 3: Regional Network
Figure 4: Operative Network

Supplier Broker Service provider

Log. Service Provider Manufacturer

Supplier Manufacturer

From the existing literature, basically, a lot of things can be written about the different types of networks in that phase. However, for an analysis of organizational issues the network typology has to be complemented by a suitable approach from the domain of organization theory and strategy. An approach often used in regard to cooperative supplier-manufacturer relationships (e.g. Hanke, 1993; De Toni and Nassimbeni, 1995) is the transaction cost theory.

Intending to gain some new insights, it would seem appropriate to choose a different theoretical approach, which is the resource-based view of the firm and the related concepts of organizational capabilities and learning (Prahalad and Hamel, 1990; Barney, 1991) including also the integration and the development of relational capabilities (Sydow et al., 1995; Pfohl and Buse, 1999; Dyer and Singh, 1998; De Toni and Nassimbeni, 1995), the logistics-related capabilities in strategic networks (Dyer, 1996; Pickernell, 1997; Lincoln et al., 1998; Lorenzoni and Baden-Fuller, 1995), the grounded theory approach (Strauss and Corbin, 1990; Pfohl and Buse, 2000), the structures and practices of collaboration in JIT (Just-In-Time) logistics processes (Andreu and Ciborra,1996; Vickery et al., 2003), and the logistics-related capabilities in virtual enterprises (Heppner, 1997; Pfohl, 1994; Pfohl and van der Hoop, 1995; Pfohl and Buse, 2000).

Furthermore, the phenomenology of networks is vast and complex and different network structures exist. According to the organizational structure model developed by Mintzberg (1979, 1983), the term “network” includes three main categories of inter-firm links which are: a) “supply networks; b) “agreements and joint ventures”; and c) “regional industrial systems”.

a)Supply networks: the main objective is the realization of operations synergy between the units; the main area involved is the operating core of the members; and the main interaction of the units. Networks constituted by supply relations give rise to two kinds of configuration, depending on the nature of the end product (Cusumano and Takeishi, 1991; Dyer and Ouchi, 1993; Fruin, 1992; Hines, 1994).

b)Agreements and Joint Ventures: the main objective is the realization of “functional” synergy ( in R&D, in marketing, etc) between the units, and the main integration element is the expertise flow and the skills exchange within the network units (Garrett and Quelin, 1994; Bertodo, 1990)

c)Regional industrial systems: these are industrial settlements made up of numerous firms linked at a technical-productive level, characterized by a prevalent production typology. The common element is a limited geographical area, within which interaction and synergy are established. Examples can be found in the Japanese car supply system, whose development supported by country-specific factors (e.g. Keiretsu groups) (Lamming, 1990; Sriram and Mummalaneni, 1990; Reese and Geisel, 1997;).

Components

Inter-firm market orientation can occur within a single relationship (e.g. when a manufacturer and a retailer exchange intelligence and cooperate to adapt the products better to consumer demands) or in organizations or arrangements involving a larger number of firms (e.g. a trade association that collects market data) (Kwaku, 1998). In general there is a large discussion in the literature about inter-firm market orientation and structures (Lorange and Ross, 1992; Morgan and Hunt, 1994; Day, 1994; Gulati, 1995; Hakansson and Snehota, 1995; Ford et al., 1998; Elg, 2000;). A general assumption in the literature is that vertical marketing systems should comply with the needs and wants of customers. Below, Kohli and Jakorski (1993) indicate three components on the inter-firm level:

a)Joint intelligence generation: occurs when several firms in a distribution network do something together that provides knowledge about their customers. One example is the British food retailer (Elg and Cerne, 2001). This retailer initiates special project groups that involve representatives of both the retailer and significant manufacturers.

b)Intelligence dissemination: of customer data between firms in the distribution chain is likely to influence market performance because each company will get a better knowledge of consumer wants and needs. For instance, the sales force of a manufacturer often acts as a distributor of information within the channel during daily meetings with individual retailers.

c)Collective responsiveness: takes place when firms coordinate their activities to respond better to the consumers’ needs and wants. This happens if members of a channel meet to plan the channel’s marketing activities decide how different activities of the value chain are to be performed and coordinated.

ii) What is the impact of the logistics function when network structures, components and processes are different?

Logistics excellence has become a powerful source of competitive differentiation (Mentzer et al., 2001). Specifically, logistics researchers have made little effort to build a unified theory of logistics (i.e. a theory of the role of logistics in the firm). Although, there have been attempts to build logistics theories (e.g. Pisarodi and Langley, 1990; Cooper et al., 1997; Bienstock et al., 1998), they are limited to particular components of logistics (e.g. customer service, logistics quality etc.).

However, firms engage in collaborative relationships to add value or reduce cost in inter-firm exchanges (Anderson, 1995). Accordingly, Bowersox et al., (2000) argued that the goal of integrated logistics, both inside and outside a firm within a supply chain, is to enhance end-customer value. Creating customer value requires inter-functional coordination and as a result, the boundaries between functions become blurred (Min and Mentzer, 2000). Therefore, collaboration, rather than conflict, should be the norm between functions in firms that seek competitive advantage.

While there are many environmental factors a firm encounters, there are two significant factors vital to firms: technology and global competition. Organizational processes such as manufacturing, order processing, and inventory management can become more effective and efficient as a firm adopts new technology. Indeed, firms can achieve a competitive advantage through capitalizing on differences in resources and capabilities (including logistics capabilities) (Mentzer et al., 2004).

Logistics capabilities can be categorized into demand management capabilities- supply management interface capabilities, and information management capabilities (Morash et al., 1996; Zhao et al., 2001; Bowersox et al., 1999). These capabilities, also, called customer-focused (Zhao et al., 2001), value-added (Lynch et al., 2000), or customer integration capabilities (Bowersox et al., 1999). These capabilities assist a firm target a given customer base, and meet or exceed their expectations by providing unique value-added activities.

Therefore, as many scholars empirically stated, logistics capabilities play a distinctive role in the integrative strategic process, due to the expected benefits of improving efficiency (cost and capital reduction) and effectiveness (customer service) via two-way communication and information processing (information management) in a strategic context (creating customer value) (Porter, 1985; Bowersox and Closs, 1996; Seth and Thomas, 1994). As Porter (1985) proposed that vertical linkages reflect interdependencies between a firm’s activities and the value chains of suppliers and distributors. Coordinating and jointly optimizing with suppliers (inbound) and customers (outbound) can lower costs and/or enhance differentiation.

In other words, a review o the theories of the firm leads to the conclusion that the role of logistics is to provide the boundary-spanning, demand and supply coordinating, capabilities the firm needs to create customer value to satisfy customers (Bahatnagar et al., 1999; Bienstock et al., 1998; Bowersox, 1990; Bowersox and Closs, 1996; Bowersox et al., 1999; Christopher, 1994; Cooper et al., 1997; Ellram and Cooper, 1990; Emerson and Grimm, 1996; Langley and Holcomb, 1992; Lynch et al., 2000; Mentzer et al., 1999; Mentzer et al., 2001; Moore, 1998; Morash et al., 1996; Murphy and Poist, 2000; Olavarrieta and Ellinger, 1997). Even in the supply network the processes and the components are different, the role of logistic capabilities is just that, to make process and components more coherent, more particular and more united. Specifically, it can help the firm cooperate with supply chain partners (i.e. suppliers, distributors etc.) in coordinating supply and demand flows to deliver customer value (Mentzer et al., 2004).

The attention paid to logistics has progressively shifted from the management of tangible goods to the management and transfer of intangible resources. Two major consideration have been made through empirical studies: a) Business logistics implicitly supports a system of tangible and intangible flows, affecting both the internal and the external environments; and b) From its support for the relational network, logistics can become the very object of the relationship and can favour outsourcing phenomena (Bowersox et al., 1992). Particularly, a study of the reorganization of Unilever-Sagit’s logistics system highlights the crucial role logistics has played (Calza and Passaro, 1997).

Conclusion

The discussion of issues of the management of logistics in production networks by many scholars from an organizational capabilities perspective has shown that the tension between specialization and integration has consequences for the development of logistics-related organizational capabilities. In the strategic network co-specialization, mutual adjustment and collaborative development of capabilities can be identified as important mechanisms, which can ensure a high efficiency of the inter-firm logistics system.

However, much research has to be done about the logistics capabilities that impacts inter-firm network structures, in order to identify the pros and cons of such capabilities on inter-firm network structures and processes. It would be crucial to consider, how the role of logistics can provide a competitive advantage in today’s changing environment, and how different network structures and processes in inter-firm relationships can be integrated, that is a proper fit between strategy and structure in the new competitive environment. Therefore, coordination of inter-firm and intra-firm activities and processes at geographically dispersed and organizationally distinct locations must be further examined.

Bibliography

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-Bowersox, D.J. and Closs, D.C. (1996), “Logistical Management: The Integrated Supply Chain Process”, McGraw-Hill Series in Marketing, McGraw-Hill, NY.

-Bowersox, D.J., Mentzer, J.T. and Speh, T.P. (2000), “The mega-trends that will revolutionize supply chain logistics”, Journal of Business Logistics, Vol. 22 No. 2, pp. 1-16.

-Calza, F. and Passaro, R. (1997), “EDI network and logistics management at Unilever-Sagit”, Supply Chain Management, Vol. 2. No.4., pp. 158-170. MCBUniversity Press.

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