7/30/2019 004_06 (Edna) Jarillo_1988

1/14

ON STRATEGIC NETWORKSCARLOS JARILLO JStrategic Management Journal(1986-1998); Jan/Feb 1988; 9, 1; ABI/INFORM Gpg. 31

Strategic Manageme

ON STRATEGIC NETWORKS

J. CARLOS JARILLOInsti tu to de Estud ios Superiores de la Empresa

Barcelona, Spain

7/30/2019 004_06 (Edna) Jarillo_1988

2/14

strategy scholars have had little use for theconcept of networks. They do not use the networkconstruct precisely because it is very hard toharmonize with the basic postulates of competitivebehavior. This 'problem' to conceptualize therealities of networks has been probably aggra-vated by the preeminence of models of strategybased on microeconomic theory (Porter, 1981).And yet the anecdotal evidence of phenomenaclassifiable as networking abounds. Among thebest-known cases is the use of suppliers byJapanese manufacturing firms (Twaalfhoven and

Hattori, 1982; Imai, Nonaka and Takeuchi,

1985). Pracand industrHippel (19relationshipfirms withvation. Thempirical sreason is pis difficulof competitReproduced

Further repro

7/30/2019 004_06 (Edna) Jarillo_1988

3/14

networking then, are not even asked (Kuhn,1970).

. In spite of this conceptual difficulty, scholarlyarticles are appearing on the topic, mostly fromEurope, and ideas are emerging that can be usedas building blocks in a theory of strategic

networks. We will discuss briefly these develop-ments now, before proceeding to elaborate thebasic framework being sought.Reproduced with permission of the copyright owner.

Further reproduction prohibited without permission.

Thorelli (1986) sees networks as somethingbetween markets and hierarchies. Firms act in a

complex environment, where no firm can really beunderstood without a reference to its relationships

ith many others. He recognizes that, instead ofnetwork, he could have used the term 'system',

'dynamic nof organizastances. Tharrangemenpurposefullfor their fi

describe butheoretical th

In this paa mode of managers oin a strongeterm 'Etrate

see strategiarrangemenprofit orgathem to gain i h i

7/30/2019 004_06 (Edna) Jarillo_1988

4/14

relationships can enhance the competitive stanceof the particular firms involved in the network,and what the conditions for the stability of therelationships are. Briefly, we must understandunder which circumstances a network arrange-ment can be more efficient than both a purely

'market' relationship or an integrated solution;that is, we must look at the 'differential efficiencyof alternative organizational forms' (Masten,1984: 403). If it is more efficient, it can easilybe turned into strategically superior.

The preceding paragraph points out the first

theoretical element to be sued in this conceptual-ization of networks. The by now ubiquitouscharacterization of markets and hierarchies(Williamson, 1975) will serve as a starting point.

The other fcompetitorsof an activfunctioningReproduced wi

reproduction pr

In a wortransactionsfunctions. reap econombut also allfocus, pluswhenever t

so advised.If, howevwill integrasubcontractlower thos

7/30/2019 004_06 (Edna) Jarillo_1988

5/14

Approach to the Relationship

Zero-Sum Game Non Zero-Sum Game

E

Is.

tr)e.)

ClassicMarket

StrategicNetwork

Bureaucra

cy

Clan

Figure 1 . The four modes o f o rgan iz ing economi cactivity

2In a very sim

about marketsof coordinatipenetrates the

Reproduced w

reproduction p

but many oreferring toopen marke

The thirit, is probWilliamsonlong-term rspecified coof an organ

Finally, I' i

7/30/2019 004_06 (Edna) Jarillo_1988

6/14

is. The task now is to understand how can it beefficient, in the competitive sense; i.e. how canit be more efficient than any other mode oforganization. This takes us back to Williamson's

7/30/2019 004_06 (Edna) Jarillo_1988

7/14

original question of why economic activitites areorganized along different modes.

In order to understand the way firms structurethemselves (which activities are integrated andwhich are farmed out) we must break up thefirm into smaller units of analysis. In this section

a framework is provided to look at those decisionsfrom a strategic point of view, analyzing theoptimum possible combination, thus leading theway to see why networks can be extremelyefficient.

The concept of the value chain (Porter, 1985)is very useful in this effort to break up the firm.

Distinguishing different activities within the firmthat are, to some extent, independent althoughinterrelated, is important b, -1 ,ilsc it reflectsreality much better than thin.;--lz c.1 he firmas a one dimensional production fzulc:ion

supplied tlowered uthe entreprand, precisethan its coeffectivenehub firm inbecause itwhatever sofirms, thabecause TCthis will btechnologibe loweredcan be reacondition fois that EP necessary f

k i id b i i f i ff i

7/30/2019 004_06 (Edna) Jarillo_1988

8/14

keeps inside, because it can reap economies ofscale and develop distinctive competences. Thus,when deciding the allocation of an activity(assessing internal and external costs), the realcomplete internal cost must be calculated. It isoften higher than it seems at first look, because

performing a given activity inside may imply aloss of efficiency for the overall firm. This is wellknown to many successful real-life entrepreneurswho refuse to be distracted by activities otherthan the essential ones.

HOW CAN A NETWORK BE CREATEDAND SUSTAINED?

The conditions for the existence of stablenetworks are the same as the conditions for the

is effectivmechanismbasic dileminstead of inEfficiency

conditions

see now wentrepreneuapply.It will be

that marketto be estabbecause of

inefficient. man's 'bounthe future, players for possibility o

7/30/2019 004_06 (Edna) Jarillo_1988

9/14

Boss (1978), that an atmosphere of trust isactually conducive to more efficient problem-solving. The reason is that, in such as atmosphere,information is exchanged freely, and moresolutions to a given problem are explored, sincethe decision-makers do not feel they must protectthemselves from the others' opportunistic

behavior. These arguments deal with the functionof trust within organizations, but they can beeasily applied to networks. In the words ofWilliamson (1979: 241), 'other things being equal,idiosyncratic exchange relations [i.e., transactionsinvolving specific assets] which feature personaltrust will survive greater stress and display greateradaptability'.

How can trust be generated? Let us take thesituation of the btisinessperson who needs togenerate trust in order to build a network, i.e.in order to lower TC arising from opportunism

d t ifi it H h ill h t t

theory that easier to enLambert, 19shown that valuable gamperformancea 'prisoner'

(Jarillo andwhy it lowereach instancesince it is asit for the loexpected to The situationbecause the

in their relaforthcomingshort run, to instead of the

S d H bi i k (1980) f d th t fi ld

7/30/2019 004_06 (Edna) Jarillo_1988

10/14

Snow and Hrebiniak (1980) found that firmsconcentrating on a distinctive competenceconsistent with their chosen strategyoutperformed competitors.

Establishing an efficient network implies theability to lower transactions costs, for it isprecisely those costs that lead firms to integrate,

shunning the flexibility offered by a marketrelationship, together with the advantages ofspecialization, both their own and their El9pliers'.This ability is, then, considered a critical elementof success when managing. After all, what the'hub firm' is doing is establishing an externalrelationship for a set of transactions that otherfirms must internalize, given the high cost for

them of having those transactions performedoutside. The flexibility and focus that result fromdeintegration, made possible by the existence ofa network that takes care of the other functions,can be extremely powerful competitive weapons,

would exposmaller, deffirms wouldhouse whenavoiding laythen be basethe 'subcon

against the trexpect in effarrangment of the riskagreement thvariance inprincipal, i.erepresents th

principal. Thbears all thcontract); if (it is a cost-= O is that th

term s ccess of the relationship and the Further reprodu

7/30/2019 004_06 (Edna) Jarillo_1988

11/14

term success of the relationship, and the'principal' has to be willing to take it. Thesupposed 'exploitation' is certainly nowhere tobe found. The arrangement gives flexibility tothe large firm while the subcontractor is betteroff because of the risk absorbed by the big firm,presumably more neutral with respect to it.

An area where the use of networks is of theutmost importance is in entrepreneurship. Toooften, entrepreneurship is viewed in too narrowa way, as just the starting of new firms, insteadof taking the more general view of Schumpeter(1934), to whom entrepreneurship was the intro-duction of innovation in the economic cycle. But

in any case it is an essential characteristic ofentrepreneurs to end up using more resourcesthan they control, for they are motivated primarilyby the pursuit of opportunity, rather than feeling

Further reprodu

advantage,superior 'mostrategic neenjoys somesome of the p

The netwo

the specializatotal cost lowterm bondtransactionsthe valued mechanism relationship

solve specificThe result

the purely cobut it is mu

7/30/2019 004_06 (Edna) Jarillo_1988

12/14

Boss, R. W. 'Trust and managerial problem solvingrevisited', Group and Organizational Studies, Sep-tember1978,pp. 331-342.

Coase, R. H. 'The nature of the firm', Economica, 4,1937,pp. 386-405.

Driscoll, J. W. 'Trust and participation in organi-zational decision making as predictors of satisfaction',

Academy of Management Journal, 21(1), 1978,pp.44-56.

Evan, W. 'The organization set ' , in Thompson,J. (ed.), Approaches to Organizational Design,University of Pittsburgh Press, Pittsburgh, PA,

1966.Fama, E. 'Agency problems and the theory of the

firm',Journal of Political Economy, 88, 1980,pp.288-307.

Farmer, D. H. and K. MacMillan. 'Voluntary collabo-ration vs. "Disloyalty" to suppliers', Journal of

P.1:hasing in Materials Management, 12(4), 1976,PP.3-8.Hall, R. H. et al. 'Patterns of interorganizational

relationships', Administrative Science Quarterly, 22,1972,pp. 457-474.

Hirschman A O Exit Voice and Loyalty Harvard

boundaries oEconomics, X

Mait lan d, I .'Sociologistsemy of Mana

Masten, S. E. 'Tevidence fromLaw and Ec

Miles, R. Ehall of fame'XXVI(3), 1

Monteverde,costs and vindustry',Be206-213.

Ouchi, W. G. Administrativ129-142.

Porter, M. 'Thto strategic.Review, 6(4)

Porter, M. ComYork, 1985.

Porter M 'Ch Stiegler G J Th O i ti f I d t Analysis of th

7/30/2019 004_06 (Edna) Jarillo_1988

13/14

Stiegler, G. J. The Organization of Industry,Richard D. Irwin, Homewood, IL, 1968.

Thorelli, H. B. 'Networks: between markets andhierarchies', Strategic Management Journal, 7,1986,pp. 37-51.

Twaalfhoven, F. and T. Hattori. The SupportingRole of Small Japanese Enterprises, IndiversResearch, NV, Schiphol (Netherlands), 1982.

Van de Ven, A. H. 'On the nature, formation, andmaintenance of relations among organizations',Academy of Management Review, 1, 1976,pp.

24-36.Van de-Ven, A. H. and D. L. Ferry.Measuring and

Assessing Organizations, Wiley & Sons, NewYork,

Reproduced with permission of the copyright owner.Further reproduction prohibited without permission.

1980.Von Hippel, E. User Innovation: An

Analysis of thSloan SchoolInstitute of T

1985.Von Hippel, E

product conc1986,pp.

791-805.Williamson, O

Antitrust Impl

1975. Williamsthe

governance oLaw and Econ

Zand, D. 'TrustAdministrative

1972 pp 229 239

7/30/2019 004_06 (Edna) Jarillo_1988

14/14

1972, pp. 229-239.