Kellogg School Corner | How the network adds to the net worth

Kellogg School Corner | How the network adds to the net worth

Until recent decades, even the concept of inter-company partnerships was less familiar than that of competition between them. Competition, after all, is the historical basis of capitalism, with firms determined to outpace one another in pursuit of the most profitable value propositions. But, faced with mounting commoditization and increasingly demanding customers, many firms have turned to cooperative arrangements with other firms to gain advantage.

In addition, there are “more subtle resources stemming from the firm’s connection to other companies," Gulati says. These include valuable information flows and timely access to new technological developments in the industry, as well as the ability to identify future alliance partners through referrals from current and prior allies. And in today’s global economy, managers must recognize and use all available assets—within and external to their firms.

To create a framework for these complex dynamics, Gulati has introduced the concept of “network resources" as an important, but overlooked, factor in understanding organizational behaviour. Network resources accrue from a firm’s past and present connections with external constituents, such as strategic alliance partners, suppliers and customers, among others, and as such are distinct from resources that reside within the company’s boundaries. Gulati says any business leader will admit that an extremely important asset for their firm is the connections they have built with important stakeholders. Yet, very little research has sought to understand and articulate the antecedents and consequence of holding these valuable resources.

Gulati’s new book, Managing Network Resources: Alliances, Affiliations, and Other Relational Assets (Oxford University Press, 2007), will help managers and researchers appreciate the breadth of resources available to companies. The text synthesizes more than 15 years of the professor’s research on the dynamics of firms embedded in networks of alliances and other ties that influence their performance and behaviour. According to Gulati, this body of work reflects a more comprehensive view of the resources available to firms—assets that are increasingly important in today’s business context, where going it alone is not an option. The research also accounts for “the complex interplay that may occur among the disparate networks of ties in which a single firm can reside". The book considers many issues, including how network resources help shape governance structures used to formalize ties, and how network resources accruing from a firm’s connection to key stakeholders influence perceptions of its legitimacy among financial institutions and potential investors.

The relationships that generate network resources can be interpersonal as well, including affiliations of the firm to other companies based on interlocking board memberships or past ties of upper echelon managers. Gulati writes: “It is not simply the magnitude of a firm’s prior ties that matters, but rather the distribution of those ties across current partner firms and past allies."

Gulati suggests that a firm’s network resources can provide it both with direct access to partners’ resource bases, and a broader set of physical and informational assets, thereby shaping its alliance-formation behaviour, decisions related to the governance of future alliances and, ultimately, its performance. An important but under-appreciated benefit of a firm’s prior ties, Gulati says, is the firm’s ability to leverage those ties to gain access to timely information that reduces uncertainty and may trigger future ties. Many such contemporary ties are initiated “in the contexts of past or existing sets of relationships that are conduits for valuable, behaviour-influencing information," Gulati suggests. He illustrates this principle using examples.

One involves Starbucks, which Gulati considers a “relationship-centred company rich with network resources". By outsourcing a range of activities to key suppliers—Gulati terms this “shrinking the core"—and partnering with allies to provide a broader and higher value set of offerings to customers, or “expanding the periphery", Starbucks has maintained enviable growth and profits. The operating principle here is “leverage". By building a network of partnerships, Starbucks can leverage those ties to focus on what it does best and leave the rest to its partners.

Gulati notes that because of increasing commoditization—or homogenization of products and services across a wide swathe of the economy—managers must consider redefining the very architecture of their firms to differentiate cost-effectively. Two major tactics for accomplishing this are shrinking the core and expanding the periphery—impossible to carry out without network resources, he says.

The more knowledge and insights managers can gain about the value and function of their firms’ network resources, the more they will be able to realize the full potential of these assets. One goal of managing network resources, then, is to raise managers’ awareness of these important, but often overlooked, assets. A second is to establish a “conceptual anchor" management scholars can use to develop a common vocabulary and research base that will enable a more coherent and applicable body of knowledge related to network resources.

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Based on the research of Ranjay Gulati, the Michael L. Nemmers distinguished professor of strategy and organizations at the Kellogg School of Management. Matt Golosinski is the School’s editorial director. Adrienne Murrill is a staff writer at the School.