BUSINESS GROUPS AND INTERFIRM NETWORKS

1. BUSINESS GROUPS AND INTERFIRM NETWORKS PROF. MARK FRUIN COLLEGE OF BUSINESS SAN JOSE STATE UNIVERSITY AT WASEDA UNIVERSITY, Summer 2005

2. WHY THIS TOPIC? • GEOFF JONES, ROCK CENTER FOR ENTREPRENEURSHIP, HBS, ASKED ME • CHAPTER IN THE FORTHCOMING OXFORD HANDBOOK OF BUSINESS HISTORY • LIMITED DISCRIMINATION BETWEEN BUSINESS GROUPS & INTERFIRM NETWORKS • BURGEONING LITERATURES ON BUSINESS GROUPS IN EMERGING ECONOMIES & LIMITS TO ORGANIZATION/SOURCES OF INNOVATION

3. SEMANTIC & CONCEPTUALCONFUSION • BUSINESS GROUPS: OWNERSHIP & CONTROL CENTRALIZED; SUB-UNITS ENJOY LIMITED AUTONOMY • INTERFIRM NETWORK: SUB-UNITS ENJOY MORE AUTONOMY WITH RESPECT TO OWNERSHIP, CONTROL & OPERATIONS • DEGREE OF LOOSE OR TIGHT COUPLING RARELY SPECIFIED

4. SPECIFICITY CAN BE ADDED • OWNERSHIP • CONTROL • LEVELS OF INTERNAL/INTRAGROUP TRANSACTIONS • RECOGNIZE THAT LEGALLY BOUNDED NATURE OF FIRMS AFFECTS BEHAVIOR AND GOVERNANCE

5. ORGANIZATIONAL FORM & LEVELS OF OWNERSHIP, CONTROL & TRANSACTIONS Intragroup/Internal Levels of Transactions Low High LOW OWNERSHIP AND CONTROL H IGH

6. STANDARD OF COMPARISON • NOT INTERESTED IN EVERY BUSINESS GROUP OR INTERFIRM NETWORK • APPLES TO APPLES COMPARISON • ORGANIZATIONS WITH SCALE, SCOPE & SPEED • IN OTHER WORDS, “MODERN” FIRMS: DIVERSIFIED & DIVSIONALIZED

7. 4 ORGANIZATIONS MEET STANDARD • MODERN FIRMS: FIRMS INTERNALIZE RESOURCES & CAPABILITIES • BUSINESS GROUPS: FIRMS WORK TOGETHER BASED ON COMMON OWNERSHIP & CONTROL • INDUSTRIAL DISTRICTS: FIRMS WORK TOGETHER BASED ON LOCATION, SHARED RESOURCES & COMMON AGENDA • INTERFIRM NETWORKS: FIRMS WORK TOGETHER BASED ON SHARED INFORMATION, FREQUENT INTERACTIONS & MUTUAL BENEFIT

8. 3 OF 4 REPRESENT ORGANIZED COOPERATION • INTERESTINGLY, WE FOCUS ON ONE ALTERNATIVE (FIRMS) BUT NOT SO MUCH ON THE OTHERS • JONATHAN ZEITLAND IS WRITING A SEPARATE CHAPTER ON INDUSTRIAL DISTRICTS - SO THIS ALTERNATIVE DROPPED FROM MY CHAPTER

9. COMPETITION & COOPERATION IN BIOLOGY • SINGLE-CELLED PROKARYOTES (no membrane around nucleus) ARE ORIGINS OF LIFE • COMPETE NON-INTERACTIVELY WITH OTHER PROKARYOTES FOR SURVIVAL • MULTICELLED EUKARYOTES INTERNALLY SPECIALIZED - SPECIALIZATION INCREASES FUNCTIONALITY, VARIETY AND VULNERABILITY

10. WHICH IS OLDER (BETTER)? • PROKARYOTES APPEARED 3.75-4 BILLION YEARS AGO • EUKARYOTES APPEARED 2 BILLION YEARS AGO • PROKARYOTES TWICE AS OLD • BOTH ARE TERRIBLY OLD AND USEFUL/ FRUITFUL ADAPTATIONS ARE NOT A FUNCTION OF TIME

11. WHICH IS A BETTER MODEL OF EVOLUTION? • CHARLES DARWIN - SURVIVAL OF FITTEST AT THE INDIVIDUAL LEVEL OF SELECTION • CLOSER TO PROKARYOTE, SINGLE-CELL, INDIVIDUAL UNIT OF SELECTION MODEL • DARWIN DID NOT HAVE THE BENEFITS OF TODAY’S CELLULAR & MOLECULAR BIOLOGY, BIOCHEMISTRY, PHYSICAL CHEMISTRY

12. ALTERNATIVE TO DARWIN • DR. LYNN MARGULIS ADVANCES THE ENDOSYMBIOTIC HYPOTHESIS IN 1981 (Origin of Species, 1859) • EUKAROYOTIC CELLS ORIGINATED AS PROKARYOTIC ELEMENTS THAT ENTERED HOST CELLS • HOST CELLS & FOREIGN ELEMENTS DEVELOP MUTUAL & SYMBIOTIC RELATIONSHIPS

13. ANOTHER EVOLUTIONARY PATHWAY • “LIFE DID NOT TAKE OVER THE GLOBE BY COMBAT, BUT BY NETWORKING,” Symbiotic Planet, 1998. • ENDOSYMBIOSIS --> MULTICELLULAR LIFE --> SYMBIOTIC VARIATION --> SOURCES OF EVOLUTIONARY NOVELTY

14. DARWIN WAS HALF-RIGHT • BUT DARWIN GOT THERE FIRST • HIS COMPETITION & SURVIVAL OF THE FITTEST AT THE INDIVIDUAL UNIT OF SELECTION MODEL --> CORNERSTONE OF NATURAL & SOCIAL SCIENCES • IN ECONOMICS, MARKETS AND HIERARCHIES ARE COMPETITION-BASED MODELS OF ORGANIZATION

15. COMPETITION, NOT COOPERATION, IS THE MODEL • COMPETITION AS THE MODEL OF SURVIVAL, GROWTH & EVOLUTION (EVEN THOUGH IT OFTEN FAILS TO EXPLAIN WHY SOME FIRMS SUCCEED) • COOPERATION IS INFERIOR TO COMPETITION, ILLLEGITIMATE, AND POSSIBLY ILLEGAL • EXAMPLES OF COOPERATION IN BUSINESS ARE SUSPECT, OF LIMITED IMPORTANCE & IRREVEVANT

16. BUSINESS GROUPS & CONGLOMERATES • CONGLOMERATES IN SAME SOUTHWEST QUADRANT AS BUSINESS GROUPS • AS A SINGLE LEGAL ENTITY, HIGH LEVELS OF OWNERSHIP & CONTROL IN CONGLOMERATES • OR, IF OWNERSHIP IS DISPERSED, CONTROL REMAINS HIGH • CONTROL ALLOWS USE OF COMMON & COMPLEMENTARY RESOURCES/CAPABILITIES

17. BUSINESS GROUPS, BY CONTRAST • EACH BUSINESS A SEPARATE LEGAL ENTITY • WHY SEPARATE ENTITIES? MANY POSSIBILITIES BUT TWO STAND OUT • CANNOT BE RELATED MEANINGFULLY (NO SYNERGY) • MANAGERS DO NOT HAVE SUFFICIENT TOOLS, INFORMATION & EXPERIENCE TO MANAGE MULTIPLE BUSINESSES AS SINGLE ENTITY

18. INTERFIRM NETWORKS • INTERNALIZED/INTRAGROUP TRANSACTIONS ARE HIGH BUT LEVELS OF OWNERSHIP & CONTROL ARE LOW • ONLY TWO POSSIBILITIES • OFTEN NEEDED RESOURCES & CAPABILITIES ARE SOURCED WITHIN GROUP OF FIRMS • OUTPUTS OF SOME FIRMS IN GROUP ARE THE INPUTS OF OTHERS

19. JAPAN & SILICON VALLEY • OFFER GOOD EXAMPLES OF BOTH TYPES • INTERMARKET FEDERATIONS OF FIRMS OFFER BANKING, LOGISTICS, ENGINEERING, TRADING & MISC. SERVICES TO EACH OTHER IN JAPAN • ACCOUNTING, LEGAL, VENTURE CAPITAL, HEADHUNTING & CONSULTING FIRMS WORK TOGETHER IN SILICON VALLEY

20. PREWAR & POSTWAR • CLEARLY, ZAIBATSU ARE BUSINESS GROUPS • POSTWAR KIGYO SHUDAN/GURUPU (BOTH LEGACY AND NON-LEGACY) ARE WEAK INTERFIRM NETWORKS • POSTWAR KEIRETSU ARE STRONG INTERFIRM NETWORKS

21. MORE THAN A METAPHOR • NETWORK ORGANIZATIONS ARE MODELS OF HOW THINGS WORK IN THE WORLD • NETWORK ORGANIZATIONS EMBODY A THEORY OF LIFE : EVOLUTION MOVES BY SPECIALIZATION, VARIATION, SYMBIOTIC & STRUCTURED INTERACTIONS

22. INTERFIRM NETWORK Formal Definition • “NETWORK ORGANIZATIONS ARE COMPOSED OF SETS OF INDEPENDENT ACTORS WHO COOPERATE OFTEN FOR MUTUAL ADVANTAGE AND, IN THE PROCESS, CREATE COMMUNITIES OF PRACTICE,” • Fruin, Network, Markets & the Pacific Rim, Oxford University Press, 1998, 4

23. KEY WORDS • SETS • INDEPENDENT ACTORS • COOPERATE OFTEN • MUTUAL ADVANTAGE • COMMUNITIES OF PRACTICE

24. TYPES OF NETWORKS (BIOLOGY & SOCIAL SCIENCE) • REGULAR NETWORKS (HUMAN DESIGNED) • SCALE-FREE, SMALL WORLD (HUB-BASED) • HIERARCHICAL, NESTED NETWORKS • CHAOTIC (REGULAR OSCILLATION BETWEEN LIMITED ALTERNATIVES)

25. EXAMPLES OF EACH TYPE EASY TO FINE • REGULAR: HOT SPOTS IN MOBILE PHONE NETWORK; SALES OFFICE & CONVENIENCE STORE LOCATIONS • SCALE-FREE: WHICH HOSPITAL TO VISIT; WHICH LAWYER TO HIRE • HIERARCHICAL/NESTED: TOYOTA’S MULTI-TIERED SUPPLIERS • CHAOTIC: TMC DESIGNERS vs DEVELOPERS vs PARTS MAKERS vs SYSTEM SUPPLIERS

26. BUSINESS GROUPS & NETWORKS IN NEOCLASSICAL WORLD • NETWORKS SUPPLEMENT & COMPLEMENT MARKETS & FIRMS • THE TRANSNATIONAL FIRM • NETWORK ORGANIZATIONS SUBSTITUTE WHEN MARKETS & HIERARCHIES FAIL • THE METANATIONAL FIRM • (BOOK DOESN’T GO THIS FAR; SOMEWHERE IN-BETWEEN)

27. IS THE FIRM DEAD? • NO, BUT FIRM ISN’T VERY GOOD AT HANDLING LARGE, COMPLEX PROBLEMS • OR, RISKY, UNFOCUSED, CONGLOMERATE-LIKE PROBLEMS IN EMERGING ECONOMIES • IN NATURE & LIFE, LARGE, COMPLEX & RISKY PROBLEMS BEST HANDLED COOPERATIVELY • COOPERATION IN LARGE COMPLEX, NETWORK SYSTEMS DIFFERS FROM FIRM-BASED, QUASI-NETWORK (DECENTRALIZED), LARGE FIRMS

28. COOPERATION-AS-LIFE (AND A LIFE-WINNING STRATEGY) • COOPERATION AS STRUCTURED SYMBIOTIC INTERACTIONS IN NETWORKS • GLOBALIZATION REQUIRES COOPERATION • NEW TECHNOLOGIES ENABLE COOPERATION • NEW INDUSTRIAL DISTRICTS OFFER GLOBAL MODULARIZATION • BUSINESS GROUPS (?) & INTERFIRM NETWORKS ====> MORE SIGNIFICANT & CENTRAL GOING FORWARD

29. FROM 2X2 TO 3X3:THE VARIETIES OF COMPLEX ORGANIZATION LEVELS OF INTERNAL/INTRAGROUP TRANSACTIONS LOW MEDIUM HIGH LOW MED HIGH PRIVATE OWNERSHIP & CONTROL