Managing in complex business networks

Abstract

For many years, research and management thinking has focused on understanding business relationships and networks. Now, the focus is shifting to managing business relationships and networks. This new approach focus poses two questions. Since networks are loosely coupled systems, to what extent are business networks manageable? Furthermore, how can a firm's ability to manage a network be characterized and measured? This paper addresses these two questions by synthesizing the current state of knowledge on management issues in networks and the contribution to managerial abilities in complex relationships. The discussion leads to a set of propositions describing the abilities firms will need to successfully manage complex business networks.

Introduction

A firm is embedded in a network of ongoing business and nonbusiness relationships, which both enable and constrain its performance. “A business enterprise looks more like a linking unit where its strategic attributes lie in how it connects other market participants to each other. Thus, the picture of both the possibilities and the means to manage the business enterprise become quite different” (Håkansson & Snehota, 1995). As such, firms should not be seen in isolation but as being connected in business systems.

Focusing on any one single firm cannot provide a significant understanding of the processes of business (Johnston, 1981). A firm's relationships “are one of the most valuable resources that a company possesses” (Håkansson, 1987). They provide direct benefits in terms of the many valued functions they perform and the resources they help create and provide access to, including knowledge and markets. They also provide indirect benefits because they grant access to other relations, organizations, resources, and competencies Håkansson & Snehota, 1995, Walter et al., 2001. Therefore, managing business relationships and being able to manage in business networks is very important. However, effectively doing so appears to be a difficult issue, given that an estimated 60% of partnerships fail (Spekman, Isabella, & MacAvoy, 1999).

Furthermore, the firm itself is nothing more than a complex network of internal relationships among people, departments, and functional units that form the basis of its ability to develop and implement its strategies. Consequently, firms are confronted with the management and integration of these internal and external relationships. Firms are seldom in total control of all these relationships and are subject to the control and influence of others within and around the relationship. As a result, business networks are not generally under the control of an individual firm but are self-organizing systems, in which order emerges in a bottom–up fashion from the local interactions taking place among firms in the relationships in which they are involved (Wilkinson & Young, 2002). This situation presents a challenge and a dilemma for management in terms of developing and implementing strategies.

While the study of relationships and networks in business has a long history (Wilkinson, 2001), their role and importance in value creation and delivery is the subject of increasing attention in the marketing and business literature. Examples of this are the development of concepts of collaborative advantage (Kanter, 1994); the role and importance of cooperative strategies and alliances (Contractor & Lorange, 2002); cooperation and competitive advantage Dyer & Singh, 1998, Wilkinson & Young, 2002; the development of the Industrial Marketing and Purchasing (IMP) Group and the markets-as-networks tradition Johanson & Mattsson, 1994, Håkansson & Snehota, 2000; the rise of relationship marketing in marketing management theory Möller & Halinen, 1999, Sheth & Parvatiyar, 2000; focus on the network properties of markets and economies Achrol & Kotler, 1999, Fligstein, 2001; and advances in logistics and supply chain management Harland & Knight, 2001, Peck & Jüttner, 2000.

Besides this long-standing interest in understanding networks, interest in managerial aspects of networking is fairly new and diverse. A firm's ability to develop and manage successfully its relationships with other firms may be viewed as a core competence, which varies among firms Dodgson, 1993, Sivadas & Dwyer, 2000 and which is an important source of competitive advantage (Day, 2000). But what exactly is this ability and how can it be conceptualized? An answer to this question is important for both academics and managers. Academics need to find a common ground for discussion to produce a comprehensive understanding of the phenomena. Managers who invest a lot of resources in networking, partnering, and alliances can only be offered guidance when issues are made explicit and research is conclusive. This, in turn, requires an overall conceptual understanding of the networking ability of firms.

In this paper, we discuss the nature and components of firms' networking ability. First, we consider the types of relationships in which a firm is embedded and the meaning of the terms relationship management and network management. Hereby, we address our first question: To what extent can a firm manage its network? We distinguish between managing of versus management in relationships and networks and between the proactive and reactive roles firms can play. We then present previous research focused on relationship and network management in various contexts to identify the key components of firms' network ability. This section will present propositions on how relationship and network management can be characterized and classified based on today's understanding of the concept. The final section examines the management and research implications.