Inter-Firm Collaboration, Learning and Networks

An Integrated Approach

Bart Nooteboom

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781134330508
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Inter-firm relations are not new. But fast developments in technology and globalization have led to increased opportunities for international alliances, and an upsurge in the interest in inter-organizational relations. With the time ripe for a unified theory of collaboration, Inter-firm Collaboration, Learning and Networks surveys the current field

Chapter 1

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Introduction

• Aims and scope
  • Questions
  • Scope
  • Disciplines
• Concepts and theory
  • Competence
  • Knowledge
  • Decision heuristics
  • Organization
  • Institutions
  • Complementary cognition
  • Tacit knowledge, absorptive capacity and firm size
  • Knowledge transfer to small firms
  • Governance
• Advanced
  • Cognitive distance#x2022; Empirical tests
  • Evolutionary psychology
  • Institutions and evolution
  • Methodological interactionism
  • Incommensurability

SUMMARY

This introductory chapter presents the aims and scope of this book, outlines its content, indicates its special features and discusses some of the basic concepts used. First, it indicates the questions dealt with in this book, in subsequent chapters: why should one collaborate (goals), in what form of organization and network (structure), how (governance) and how does collaboration develop (process). Second, this chapter indicates the scope of the book, in terms of themes, perspectives and disciplines used. The book analyses bilateral relationships as well as networks in which they are embedded. It lays an emphasis on dynamics: learning and innovation as a goal of inter-organizational relationships (IORs), and the development of relationships and networks. It aims to give a comprehensive treatment, integrating a variety of perspectives and disciplines. In particular, it integrates perspectives of competence (especially competence development, learning) and governance (how to manage relations, in particular ‘relational risk’). This chapter briefly indicates what elements are used from what disciplines: economics, sociology, social psychology, business studies, geography and cognitive science. Subsequently it discusses some of the basic notions to be used: competence, knowledge, decision heuristics (taken from social psychology), organizations and institutions, governance and some features of cognition and knowledge transfer. In the advanced section (p. 26), it further discusses the notion of ‘optimal cognitive distance’, empirical tests of that, some evolutionary origins of cognition, the notion of ‘co-evolution’, the methodological stance of ‘methodological interactionism’ and the problem of ‘incommensurable paradigms’.

AIMS AND SCOPE

This section discusses the notion of IORs and what is new about them. It specifies the questions addressed in this book, the perspectives from which the analysis is conducted and the disciplines that are used.

Questions

Outsourcing, inter-organizational collaboration and networks are forms of inter-organizational relationships (IORs). In this book, that generic term is adopted from Christine Oliver (1990). The term ‘organizations’ goes beyond ‘firms’, but while the analysis is aimed at organizations in general, in this book the focus is on firms.

Inter-firm relations are not new. They go back at least as far as Adam Smith's argument for division of labour between firms, for the sake of productive efficiencies of specialization. Such specialization in firms by definition entails outsourcing of the production of inputs, upwards in the supply chain, and the distribution and use of products downwards in the supply chain. That entails inter-organizational relations and networks. Collaboration entails mutual adjustment, needed for the utilization of complementary resources from different organizations. Collaboration does not always entail balance of mutual value, dependence and power. Often, there is both collaboration and conflict of interest, in rivalry or even outright competition. This tension between collaboration and conflict of interest, and how to deal with it, in the governance of relations, is a central theme of this book.

The upsurge of renewed interest in inter-organizational relations is due to developments in technology and markets. In technology, there is fast development and proliferation of novel opportunities, e.g. in information and communication technology (ICT), micro-mechanics, optics, sensors, their combination in robotization, biotechnology, new materials and surface technologies. In markets, there is renewed globalization,¹ partly as a result of new opportunities offered by ICT. Globalization does not necessarily lead to convergence of ‘business systems’ (Whitley 1999). It does entail that there are new opportunities for entering foreign markets, of both products and inputs, new threats of competition from abroad and new needs and opportunities for international alliances. ICT offers new opportunities for co-ordinating activities across markets and organizations. Such effects of ICT are taken for granted, and will not be analysed in any detail.

As usual, in this book the term product includes anything that has added value, including both physical goods and more or less intangible services.

As a result of emerging complexity and rapid change of markets and technology, competition has increasingly become a ‘race to the market’ with new or improved products. To have any chance of winning such a race, one needs to shed activities, as much as strategically possible, that are not part of the ‘core competencies’ (Prahalad and Hamel 1990) that constitute competitive advantage. Other, complementary, competences must then be sought from outside partners. Such outside sourcing also maximizes the flexibility in configurations of activities that is needed under rapid change. For example, in order to reduce development times of new products and to reduce risks of maladjustment to customer needs, suppliers should be brought in as partners in developing and launching a new product.

The sourcing decision — what to make and what to buy — is a special case of the more general decision what to do inside one's own organization, and what to do outside, in collaboration with other organizations. Sourcing entails vertical collaboration, in the supply chain, including marketing and distribution. Relations may also be horizontal, with competitors, or lateral, with firms in other industries.

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A famous example of horizontal collaboration between competitors is the co-operation between Sony and Philips in setting the standard for the compact audio disc (CD). While Philips and Sony co-operated in setting the technical standard for the CD, in other markets they kept on competing, and they resumed competition in CDs once the standard had been set. This co-operation was based on their experience from the debacle in the market for video-recorders. There they both had technically superior products (the Betamax of Sony and the Video 2000 of Philips), but the competing VHS system (operated by JVC and Matsushita) won by achieving a breakthrough in market acceptance. This type of effect obtains especially in markets with ‘network externality’, where the usefulness of a piece of equipment depends on how many others have equipment of the same technical standard. The VHS system won due to a better fit to market demand in the supply of software (video-tapes) that was compatible only with the VHS standard built into the hardware (recorders). This included length of play for recording baseball games, and more extensive distribution of recorded tapes for hire. This gave a head start in the market, with supply according to that standard reinforcing itself, so that a consumer choosing an alternative from Sony or Philips ran an accelerating risk that the supply of appropriate software would fall back and stop.

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Next to the question what to do inside or outside, and why, there are the questions with whom to collaborate, and how: in what forms of organization, with what instruments for governance, and in what kind of process. These are the questions addressed in this book. The focus is on strategy and organization rather than on operational matters of partner selection and evaluation, project design and management, staffing, accounting and control.

Scope

The time is ripe for a unified theory, connecting and integrating perspectives and arguments that have emerged in recent advances, from different disciplines. This book is intended as a comprehensive survey. It aims to provide an integrated text for students, scholars and practitioners. Most of the elements of the book are not new. What is new is the attempt to integrate, in a coherent fashion, elements from a widely dispersed literature.

The book does not take the customary approach of first giving an introduction to theory and a survey of the (very large) literature on IORs, prior to application. In each chapter it goes directly into a discussion of the different features of collaboration. These features are: goals of collaboration (Chapter 2), the structure of its organization, in firms and networks (Chapter 3), governance (Chapter 4) and the process of relationship development (Chapter 5). After a summary of the feature, what follows, in each chapter, is a summary of concepts and theory used at that point. These are needed for proper understanding and application. Much of it will be familiar to scholars and advanced students. For them, there is a subsequent discussion of ‘advanced topics’, which in teaching can be taken as electives. References to literature will also be given where they are relevant. Illustrative examples are inserted in the text, to aid recognition, understanding and application.

The account is integrated in several respects, as follows:

1. It considers a wide variety of goals and types of inter-organizational relations. It includes sourcing and distribution, in ‘vertical’ relations, ‘horizontal’ collaboration between firms in the same industries, and ‘lateral’ relations between firms in different industries. It includes goals of efficiency (scale, scope), positioning in markets, learning and innovation. It considers different degrees of integration, from mergers/acquisitions, through equity joint ventures, and non-equity alliances, to ad hoc contracting. It includes a variety of scope and strength of ties.
2. It combines a ‘competence’ and a ‘governance’ perspective. In the first, it analyses inter-organizational relations for pooling competences, and for developing competences, in learning and innovation. In takes a governance perspective for the analysis of ‘relational risk’. It offers a toolbox of instruments for design and governance of relations, and contingencies for their selection.
3. It looks not only at the positive but also at the negative side of relationships; at both collaboration and conflict. Ongoing relations may create rigidities that block innovation. There is a need to look not only at how a relation is to be set up, but also at how it is to be adapted to changing conditions, and how it is to be ended.
4. For theses purposes, the book integrates insights from different disciplines: economics, sociology, social psychology, cognitive science, business studies and (some) economic geography. It looks at considerations of rational design as well as social and psychological aspects of motivation, cognition and relational dynamics.
5. It incorporates strategy, design, management and development of relations.
6. Beyond dyads of collaborating firms, it includes effects of network structure and position.

Of course, such an integrated approach runs the risk of becoming eclectic, incoherent or even contradictory. However, the claim of this book is that it yields a coherent whole. This claim is reviewed at the end, in the final chapter, in the summary and conclusions. There are several opportunities for such coherence. One, in particular, lies in an underlying theory of knowledge, which will be discussed in this chapter. For an adequate understanding, there is an urgent need for integration. In particular, there is a need to combine perspectives of competence and governance (Nooteboom 1992; Williamson 1999). From the competence perspective, there has been a focus on the development of competences and learning, with a neglect of relational risk and its governance. Transaction cost economics (TCE) has focused on relational risk (of ‘hold-up’) and the hazards of opportunism. However, while transaction cost economics focuses on static efficiency, trading off production costs, transaction costs and costs of organization, given a certain state of knowledge, technology and preferences, a perspective of dynamic efficiency or innovation is also needed, incorporating shifts of knowledge, technology and preferences. It is now a priority for firms to develop ‘dynamic capabilities’.

In the literature, important new insights have been generated, but they tend to focus on few aspects, resulting in one-sided conclusions. For example, opinion seems to have settled on a rather extreme view in favour of outsourcing everything that is not part of ‘core competences’. However, that may go too far (Teece 1986; Bettis et al. 1992; Chesbrough and Teece 1996). The question of course is what, exactly, is to be seen as part of core competence, and what is meant by the qualification, given above, that one should outsource as much as ‘strategically possible’. When is something not to be outsourced even if it is not part of core competence?

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Philips Electronics is a user of chips (semiconductors) as components in many kinds of consumer electronics. A compact disc player, for example, requires a combination of mechanics, laser technology, electro-technology, control technology and informatics. Should Philips make its own chips, or contract them from specialist producers? The production of chips entails high-tech surface technology, to affect, at a microscopic level, the conducting properties of a silicon disc by means of sophisticated physical and chemical processes. That does not seem to fit with Philips's core competences. So, according to the maxim of sticking to core competences, it seems reasonable to have it contracted out. But there are strategic complications. The first is that the world-class producers of chips are the same Japanese companies that compete with Philips in the market for consumer electronics. Should one become dependent for supply on one's main competitors? The second complication is that the development of technology and markets is very rapid, and new products often arise from novel combinations of existing technologies, and often one needs to react fast to novel opportunities. The ‘window of opportunity’ is narrow and passes fast. For this reason one may need to maintain competence in an area that in a static situation one should surrender. The production of semiconductors requires sophisticated (miniaturized, uncontaminated and perfectly accurate) technology, with physical and chemical processes for etching micro-patterns on the surface of silicon slices, and modifying conductive properties in those patterns. Similar technology can also be used for the deposition of thin layers on surfaces for other purposes, such as hardening materials, coating photovoltaic cells or the production of sensors. Thus the technology of chip production is a ‘platform’ technology, which contributes to other products than chips, which might fit well in Philips's product portfolio. To keep such future options open, chip production may have to be seen as part of core competence.

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Disciplines

From economics this book employs notions of efficiency, such as effects of scale and scope, trade-off between opportunities and costs, including costs of opportunities forgone (opportunity costs), ‘sunk costs’, effects of market structure from industrial organization economics, some results from game-theoretic analysis of strategic interaction (including what one might call the ‘temporal embeddedness’ of relationships), elements from transaction cost economics, evolutionary economics, institutional economics and from a range of innovation studies.

From sociology it takes insights from network analysis, for ‘structural embeddedness’, and from theories of social exchange and social learning, for ‘relational embeddedness’. The latter is necessary, in particular, for the analysis of trust. Outside network studies in sociology there still is a tendency to look only at pairs of organizations (dyads). This chapter also looks at network effects of multiple partners and indirect linkages (Granovetter 1973; Coleman 1988; Powell 1990; Burt 1992; Uzzi 1996). It matters greatly how organizations are embedded, in terms of network structure, position in that structure, and types of ties between organizations. Organizations often gain access to resources, and risk loss of resources, in indirect relations. Structure and types and strength of ties have important implications for both competence and governance. In various literatures a variety of definitions of networks have been given, and they will not be enumerated here. In this book, the term ‘network’ simply means that more than two organizational actors are involved, with both direct and indirect linkages.

From social psychology this book takes heuristics people use in decision making, and in their attribution of characteristics (competences, intentions) to people and organizations, on the basis of observed events. This is needed, in particular, to analyse the development and breakdown of trust.

From business studies this book takes insights from strategic management, organization and internationalization of business. However, while the analysis is conducted in the context of internationalization, it does not aim to give an exhaustive, specialized treatment of international alliances.

From geography this book takes certain notions such as externalities of location, and certain themes such as the role of distance and the development of ‘industrial districts’.

From cognitive science it takes insights from ‘situated action’ or ‘activity’ teory of knowledge. This will be discussed below.

Finally, this book avoids claims of universal best practice. What forms of organization and governan...

Table of contents

• Cover
• Inter-firm Collaboration Learning and Networks
• Full Title
• Copyright
• Contents
• List of illustrations
• Preface
• 1 Introduction
• 2 Goals
• 3 Structure
• 4 Governance
• 5 Process
• 6 Summary and conclusions
• Appendix Specification of variables
• Notes
• References
• Name index
• Subject index