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BUSINESS NETWORK DYNAMICS
Business networks are cooperative entities formed by more than two firms in order to generate competitive advantages for each member. However not all business networks are alike: they vary with regard to their purpose, structure, size, effectiveness and efficiency. In many industries, firms can join alternative networks, and will select whichever brings the greatest advantage, as the Latam example illustrates. Cooperative entities are thus faced with specific forms of network competition as a main driver of network dynamics (see figure 1):
First, business networks can be challenged in their purposeby other competing networks (competition in network formation). Such competing networks might be substitutes with regard to their raison d’être and the function they serve for their members. Firms may consider the membership in their present network (incumbent network) as obsolete or less advantageous, project higher benefits (of whatever kind, e.g. financial benefits or higher status) to their membership in the newcomer network, and can decide to switch from one to the other. If many member firms decide to follow this logic, incumbent networks that are unable to match the benefits of competing networks, or have lost sight of their specific advantage for their members, will degenerate. On the other hand, this type of competition gives rise to innovative networks that provide timely and relevant benefits to their members and do not lose sight of their purpose.
Second, networks compete for growth and stability in their member constellation (competition in network composition). They attempt to attractnew members, but also to retain existing members. To do so, networks need to employ processes and tactics that produce more or unique member advantages. This relates to network competition with regard to membership structure.
Third, networks compete in achieving and maintaining an effective and efficient administrative structure (competition in network governance): The most effectively organized network can generate more benefits for its members than other networks, or it can generate similar benefits than other networks faster, at lower costs, or with greater frequency or reliability. In order to devise the most effective governance for a network, questions of decision-making mode, organizational structures and processes need to be addressed.
FIGURE 1: Three forms of network competition as drivers of network dynamics
In the remainder of this chapter, I will further elaborate on each of these network competition forms, present one exemplary research study for each and suggest implications for network and corporate management.
3.1. Competition in Network Formation
Competition in network formation occurs when a firm (or a group of firms) discovers an opportunity to realize a relevant benefit or advantage that can most effectively be exploited by cooperating with others. In this case, competitors will ponder whether they are brought into a disadvantageous situation and consider a potential reaction. Of course, a firm will strive to compensate any potential disadvantage brought about by a rival. Network formation as a competitive move has only slowly gained research attention (Silverman & Baum, 2002). Gimeno (2004) analyzed alliance formation dynamics between competitors; that is, how firms respond to their rivals’ alliance strategies. He suggested that firms react by either trying to ally with the same partner that the rival has formed cooperative ties with, or building a countervailing alliance with different partners that provide similar benefits (see figure 1).An example is T-Mobile’s exclusive 2007 distribution agreement for Apple’s fashionable iPhone in Germany, a move that put the firm’s competitors at a major disadvantage. T-Mobile’s rivals (for example, Telefonica’s O2, or Vodafone) were faced with two options:
FIGURE 2: Illustration of Reaction-Types in Alliance Formation
Source: adapted from Gimeno (2004)
First, try to neutralize T-Mobiles’s advantage by imitating its move and form an alliance with Apple that would challenge T-Mobile’s exclusivity (a “rival’s partner link” in Gimeno’s terminology). This would depend on the exclusivity clause in the T-Mobile-Apple agreement, but also on T-Mobile’s bargaining power. Since Apple intentionally foregoes additional revenues and efficiency potentials in exploiting its resources by restricting its customer base to those of a single network, T-Mobile will have to pay an exclusivity premium. Depending on the size and bargaining power of T-Mobile and its competitors, however, the exclusivity premium and clause will be more or less enduring and strict.
Second, T-Mobile’s rivals could establish countervailing alliances. Within this option, two further possibilities exist: forming an alliance with one of Apple’s competitors, ideally a close substitute, such as Samsung or HTC (Gimeno’s “rival alliance link”) in order to address similar consumer desires by different technologies, and thereby reduce the (potential) drain of own customers that turn to T-Mobile due to the iPhone offer. Or T-Mobile’s competitors could form an alliance among themselves, e.g. O2 could ally with Vodafone (Gimeno’s “common rival link”) and attempt to jointly attack T-Mobile on different features of its offers. This countermove could then address an element in T-Mobile’s product and service portfolio totally unrelated to smartphones and expose a weak spot in its competitive posture, a phenomenon known from multi-market contact theory (Yu & Cannella, 2013).
Gimeno (2004) suggested that partner selection and the type of alliance formed as a response to a competitor do not follow a naïve logic; that is, neither allying with a rival’s partner nor the formation of countervailing alliances is systematically preferred. Rather, alliance type choice depends on the degree of co-specialization, which itself reflects the degree to which alliance partners emphasize the specific needs of the particular partner, inter alia through specific investments, or by providing proprietary knowledge. In our example, if Apple offered a specific version of the iPhone in the shape of a T-Mobile logo, and T-Mobile installed specific T-Mobile-iPhone stores, this would reflect relationship-specific investments into the alliance that would be lost if the alliance broke up. Gimeno is thus able to show that rivals’ co-specialized alliances may involve exclusivity, precluding alliances with rivals’ partners and thus encouraging countervailing alliances.
Overall, a firm’s network formation, or its joining an existing network, can lead to manifold competitor responses. From a strategic management perspective, this implies at least three imperatives:
First, firms need to make sure that they are aware of competitors’ partnering actions as an essential part of competitor analysis (Gnyawali & Madhavan, 2001).
Second, firms need to implement and improve the capability to assess the consequences of competitor actions in alliancing and quickly generate potential responses. The options that Gimeno (2004) provided are certainly neither exclusive nor exhaustive, but might serve as a first framework to devise possible reaction strategies.
Third, taking a proactive approach to the opportunities generated by alliance formation can lead to a temporary advantage: Firms could therefore actively seek opportunities in order to improve their own positions via alliances, and consider that first-mover advantages may offer substantial returns, at least in some environments (Suarez & Lanzolla, 2007).
3.2. Competition in Network Composition
The competition for «good ideas», that is, identifying sources of beneficial cooperation that could otherwise not be realized, is only one dynamic that challenges firms and existing networks. Once established, networks will discover the potential — and, over time, even the imperative — to improve their setup, including their organizational structure and management (to be dealt with in the subsequent section of this chapter), as well as their member base.
The specific member constellation (network composition) with its idiosyncratic resource and capability endowment determines whether networks can deliver on their intended benefits. Therefore, to improve their resource and capability base, they often proactively search for new members. However, in most industries, strategically relevant resources are owned by a limited