Business Networks: Navigating Competition and Cooperation at the Frontiers of Organization

1. THE LIMITS OF COMPETITION & FRONTIERS OF COOPERATION:Business Groups & Interfirm Networks Mark Fruin Organization & Management College of Business, SJSU Rock Center for Entrepreneurship, HBS

2. WHY THIS TOPIC? • BECAUSE GEOFF JONES ASKED ME • JAPANESE FIRMS ARE USUALLY TIED TO BUSINESS GROUPS & INTERFIRM NETWORKS IN ONE WAY OR ANOTHER • COOPERATION IS UNDERSTUDIED IN BUSINESS & ECONOMICS

3. DEFINITIONS • BUSINESS GROUPS - INTRAGROUP TRANSACTIONS ARE LOW AND TIES OF LOCATION & OWNERSHIP ARE HIGH • INTERFIRM NETWORKS - INTRAGROUP TRANSACTIONS ARE HIGH AND TIES OF OWNERSHIP AND LOCATION OFTEN ARE NOT

4. WHERE INTRAGROUP TRANSACTIONS ARE HIGH • ASSOCIATED WITH SIZE, SHAPE, DENSITY, COHESIVENESS OF NETWORK • ECONOMIES OF SCALE & SCOPE • COMPLEMENTARITIES IN RESOURCES & CAPABILITIES • ENVIRONMENTAL & INSTITUTIONAL FACTORS

5. HISTORICAL SHIFT? • BUSINESS GROUPS WERE MORE COMMON BECAUSE OWNERSHIP & BUS ACTIVITIES WERE GENERALLY LOCALIZED • INTERFIRM NETWORKS ASCENDANT: NEW TECHNOLOGIES, NEW MARKETS, NEW STRATEGIES & NEW NOTIONS OF CORPORATE GOVERNANCE

6. INTERFIRM NETWORK More Formal Definition • “NETWORK ORGANIZATIONS ARE COMPOSED OF SETS OF INDEPENDENT ACTORS WHO COOPERATE OFTEN FOR MUTUAL ADVANTAGE AND, IN THE PROCESS, CREATE COMMUNITIES OF PRACTICE,” Fruin, Network, Markets & the Pacific Rim, 4

7. KEY WORDS • SETS • INDEPENDENT ACTORS • COOPERATE OFTEN • MUTUAL ADVANTAGE • COMMUNITIES OF PRACTICE

8. COMPETITION & COOPERATION IN BIOLOGY • SINGLE-CELLED PROKARYOTES (no mem-brane around nucleus)ARE ORIGINS OF LIFE • COMPETE NON-INTERACTIVELY WITH OTHER PROKARYOTES FOR SURVIVAL • MULTICELLED EUKARYOTES ARE SPECIALIZED INTERNALLY • SPECIALIZATION INCREASES FUNCTIONALITY, VARIETY AND VULNERABILITY

9. WHICH IS OLDER (BETTER)? • PROKARYOTES APPEARED 3.75-4 BILLION YEARS AGO • EUKARYOTES APPEARED 2 BILLION YEARS AGO • PROKARYOTES TWICE AS OLD • BUT BOTH ARE TERRIBLY OLD AND USEFUL/FRUITFUL ADAPTATIONS ARE NOT DIRECTLY A FUNCTION OF TIME

10. WHICH IS A BETTER MODEL OF EVOLUTION? • CHARLES DARWIN - SURVIVAL OF THE FITTEST AT THE INDIVIDUAL LEVEL OF SELECTION • CLOSER TO PROKARYOTE, SINGLE-CELL, INDIVIDUAL UNIT OF SELECTION MODEL • DARWIN DID NOT HAVE THE BENEFITS OF CELLULAR & MOLECULAR BIOLOGY, BIOCHEMISTRY, PHYSICAL CHEM

11. ALTERNATIVE TO DARWIN • DR. LYNN MARGULIS ADVANCES THE ENDOSYMBIOTIC HYPOTHESIS IN 1981 (Origin of Species, 1859) • EUKAROYOTIC CELLS ORIGINATED AS PROKARYOTIC ELEMENTS THAT ENTERED HOST CELLS • HOST CELLS & FOREIGN ELEMENTS DEVELOP MUTUAL & SYMBIOTIC RELATIONSHIPS

12. ANOTHER EVOLUTIONARY PATHWAY • “LIFE DID NOT TAKE OVER THE GLOBE BY COMBAT, BUT BY NETWORKING,” Symbiotic Planet, 1998. • ENDOSYMBIOSIS --> MULTICELLULAR LIFE --> SYMBIOTIC VARIATION --> SOURCES OF EVOLUTIONARY NOVELTY

13. DARWIN WAS HALF-RIGHT • BUT DARWIN GOT THERE FIRST • HIS COMPETITION & SURVIVAL OF THE FITTEST AT THE INDIVIDUAL LEVEL OF SELECTION MODEL --> CORNERSTONE OF NATURAL & SOCIAL SCIENCES • IN ECONOMICS, MARKETS AND HIERARCHIES ARE COMPETITION-BASED MODELS OF ORGANIZATION

14. COMPETITION, NOT COOPERATION • COMPETITION AS THE MODEL OF SURVIVAL, GROWTH & EVOLUTION • COOPERATION IS INFERIOR TO COMPETITION, ILL-LEGITIMATE, AND POSSIBLY ILLEGAL • EXAMPLES OF COOPERATION IN BUSINESS ARE SUSPECT, OF LIMITED IMPORTANCE & IRREVEVANT

15. MORE THAN A METAPHOR • NETWORK ORGANIZATIONS ARE MODELS OF HOW THINGS WORK IN THE WORLD • NETWORK ORGANIZATIONS EMBODY A THEORY OF LIFE : EVOLUTION MOVES BY SPECIALIZATION, VARIATION, SYMBIOTIC & STRUCTURED INTERACTIONS

16. 4 KINDS OF NETWORKS • REGULAR - THE AVERAGE PATH LENGTH CONNECTING ALL NODES IS MORE OR LESS THE SAME • SCALE-FREE (SMALL WORLD) - A FEW NODES ARE LINKED TO MANY BUT MOST NODES ARE LINKED TO JUST A FEW (HUB-BASED) • HIERARCHICAL - SUB-SYSTEMS FUNCTION AUTONOMOUSLY & INTERACT SEQUENTIALLY • CHAOTIC - VARIABILITY IN WHICH NODES ARE CONNECTED TO OTHERS & AVERAGE PATH LENGTHS; FINITE # OF STABLE ALTERNATIVES

17. IMPORTANCE OF INITIAL CONDITIONS • IN BIOLOGY AND SOCIAL SCIENCES, INITIAL CONDITIONS POWERFULLY AFFECT WHAT COMES AFTER • HELP EXPLAIN WHY COOPERATION IS WIDESPREAD IN BIOLOGY BUT NOT SO WIDESPREAD OTHERWISE • IMPORTANCE OF LONG DURATIONS • REGULATORY EFFECTS • INSTITUTIONAL ISOMORPHISM (IRON CAGE) • PATH DEPENDENCY (NTWRK EXTERNALITIES)

18. BUSINESS GROUPS & INTERFIRM NETWORKS IN TWO-DIMENSIONAL WORLD • NETWORK ORGANIZATIONS SUPPLE- MENT & COMPLEMENT MKTS & HIER • THE TRANSNATIONAL FIRM • NETWORK ORGANIZATIONS AS SUBSTITUTES WHEN MARKETS & HIERARCHIES FAIL • THE METANATIONAL FIRM (DOESN’T GO THIS FAR; SOMEWHERE IN-BETWEEN)

19. B.G. & I.N. IN A THREE-DIMENSIONAL WORLD • SIZE & STRUCTURE MATTER • ARROW, LIMITS OF ORGANIZATION (FIRM) • CENTRALITY, POSITION, VERSATILITY, STRTRL EQVLNC, HETEROGENEITY, COMPLEXITY, DENSITY, DURATION, & INTENSITY MATTER IN TWO WAYS • FUNCTIONALITY • VARIATION -->NOVELTY -->EVOLUTION • TOYOTA MOTOR COMPANY • SUN MICROSYSTEMS

20. IS THE FIRM DEAD? • NO, BUT IT ISN’T VERY GOOD AT HANDLING LARGE, COMPLEX PROBLEMS • IN NATURE & LIFE, LARGE, COMPLEX PROBLEMS BEST HNDLD COOPERATIVELY • COOPERATION IN LARGE COMPLEX SYSTEMS WHERE FIRMS ARE NODES DIFFERS FROM • FIRM-BASED, QUASI-NETWORK/NTWRK-LIKE LARGE ORGANIZATIONS

21. COOPERATION AS LIFE (AND LIFE STRATEGY) • COOPERATION AS STRUCTURED SYMBIOTIC INTERACTIONS IN NETWORKS • GLOBALIZATION REQUIRES COOPERATION • NEW TECHNOLOGIES ENABLE COOP • BUSINESS GROUPS (?) & INTERFIRM NETWORKS --> MORE SIGNIFICANT & CENTRAL GOING FORWARD