Chapter 6

Network Level
Strategy

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Contents
• Introduction
• The issue of inter-organizational relationships
• The paradox of competition and cooperation
• Perspectives on network level strategy
• Managing the paradox of competition and
cooperation
• Network level strategy in international
perspective
• Readings and Case 6
Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
The issue of inter-organizational relationships

• All firms interact with other organizations in their

environment and therefore have inter-organizational
relationships
• Four aspects are particularly important:
 Who are the potential counterparts with whom a firm can
have a relationship (relational actors)?
 Why do the parties want to enter into a relationship
(relational objectives)?
 What type of influences determine the nature of the
relationship?
 How can relationships be structured to let
them function in the manner intended?

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Aspects of inter-organizational relations

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Relational actors
• Upstream – vertical (supplier) relations
• Downstream vertical (buyer) relations
• Direct horizontal (industry insider) relations
• Indirect horizontal (industry outsider) relations
There are also contacts with condition-setting parties in the
broader environment:
 socio-cultural actors
 economic actors
 political/legal actors
 technological actors
Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

The firm and its web of relational actors

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Relational objectives
• Relations oriented towards leveraging resources:
 learning
 lending
• Relations oriented towards integrating activities:
 linking (e.g. vertical link between buyer and seller)
 lumping (bringing together similar activities to gain economies of
scale)
• Relations oriented towards aligning positions:
 leaning (two or more firms get together to improve their bargaining
position)
 lobbying

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Relational factors
• How inter-organizational relationships develop is influenced
by the objectives of the parties but other factors also have an
impact:
 legitimacy
 urgency
 frequency
 power
• There are four specific types of inter-firm relationships from
the perspective of the power position:
 mutual independence
 unbalanced independence
 mutual dependence
 unbalanced dependence

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Relative power positions in inter-organizational relationships

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Relational arrangements
• There are many organizational forms between markets
and hierarchies: networks, partnerships and alliances
• Organizations involved in networks employ different
sorts of collaborative arrangements:
 bilateral arrangements (two parties)
 multilateral arrangements (three or more parties)
 non-contractual arrangements
 contractual arrangements
 equity-based arrangements

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships
• The intent of the collaborative arrangements is to profit
from some of the advantages of vertical and horizontal
integration, without incurring their costs
• Such relationships facilitate the process of ‘co-
specialization’. As firms focus on performing a limited set
of activities they become more effective and efficient.
• However, the weaknesses of hierarchy and the qualities
of the market may increase. Mutual dependence may
become skewed, shifting the balance of power to one of
the partners.

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The issue of inter-organizational relationships

Examples of collaborative arrangements

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 The paradox of competition and cooperation

• Firms struggle with the tension created by the need to

work with others and the need to pursue their own
interests
• Demand for inter-organizational competition
• Demand for inter-organizational cooperation

Read carefully Exhibit 6.1 London Heathrow: The sky

is not the limit

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Perspectives on network level strategy

The discrete organization perspective

• Managers view companies as independent entities competing in a hostile
market environment. Individuals and firms are motivated by aggressive
self-interest.
• Companies must strengthen their competitive position in relation to
external forces – effective power requires independence and heavy
reliance on specific suppliers, buyers, financiers or public organizations
should be avoided.
• Keeping other organizations at arm’s length facilitates clear and business-
like interactions.
• Collaborative arrangements are always second-best to doing things
independently. Collaboration is bad for the company’s long-term health.
• Companies should strive for ‘strategic self-sufficiency’.
Read carefully Exhibit 6.2 Waging wars on the
African continent

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Perspectives on network level strategy

The embedded organization perspective

• Managers believe that business is about value creation. Organizations are brought
together to achieve a common goal – they can achieve more by working together.
• A company can always find many organizations with which it shares an interest
and whose objectives are largely parallel to its own.
• Firms are becoming increasingly integrated into webs of mutually dependent
organizations.
• Firms must be sure that its partners are willing to invest in the relationship and will
not behave opportunistically. Durable partnerships are based on mutual
dependence and reciprocity.
• By specializing in a particular area the firm can gain scale and experience
advantages. Specialized firms use collaborative arrangements to quickly combine
their resources with industry outsiders to create new products and services.
• Collaboration is a real alternative means of dealing with other organisations.
Read carefully Exhibit 6.3 Majid Al Futtaim acquires full
ownership of Carrefour franchise in the region

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Managing the paradox of competition and cooperation

Discrete organization versus embedded organization perspective

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Managing the paradox of competition and cooperation
• Navigating – by focusing on one contrary element at a time, the paradox is
managed by a series of contrary initiatives, e.g. Japanese strategists
collaborate with competitors from the West with the intention to learn, and
then beat them as competitors. In the retail industry, it is common practice
that suppliers cooperate with clients to develop logistical processes and
technologies to enhance efficiency. Once the new technology is in place
parties start negotiating prices and conditions again.
• Parallel processing co-opetition – companies interact with partial
congruence of interests e.g. car manufacturers share components of city
cars while competing for market share. Companies can separate competing
and cooperating in different country units, e.g. Danone and Yakult compete
in Europe but cooperate in India.
• Juxtaposing – simultaneously managing competition and
cooperation even with the same partners, rivals can
become allies and rivals again depending on the situation.
Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683
 Network level strategy in international perspective

• Firms from different countries display widely divergent propensities to compete and
cooperate. There can also be significant variance within a country.
• Cross-border collaborative arrangements, e.g. cooperative agreements to overcome
entry barriers that exist due to import restrictions, and cross-border arrangements
within trade blocks, e.g. the EU cooperated to face Japanese competitors in the core
technologies and tried to learn lessons from Japanese practices.
• Type of institutional environment, different institutional structures, governments,
banks, universities and unions have developed in each country, and each country
has developed its own economic system.
• Market for corporate control, a relatively open market for corporate control
facilitates vertical and horizontal integration.
• Social networks and cultural values, can place more emphasis on competition or
cooperation, e.g. US more individualist than Japan.
• Negative effects of ‘groupism’, social networks do not always
lead to higher efficiency.

Only to be used with Strategy : An International Perspective 5th edn by Bob de Wit
© 2014, Cengage Learning EMEA, ISBN 97814082683