Business Alliances and networks

1. Business Alliances and networks Gerrit Rooks 21 October

2. Today's lecture • Some leftovers • Toyota's supplier network • Ajuha networks and innovation performance • Powell et al "learning in networks" • The assignment • network characteristics • what you have to do • Ucinet and netdraw

3. What is not a strategic alliance? • A buyer and supplier who integrate their logistics • Three universities co-developing one educational program • Two firms that create one new firm to develop new products • A firm that buys another firm

4. What is not a strategic alliance? • A buyer and supplier who integrate their logistics • Three universities co-developing one educational program • Two firms that create one new firm to develop new products • A firm that buys another firm

5. According to resources dependence theory, firms enter alliances because • they lack internal resources • alliances are a strategy to ensure predictability of access to resources • mergers are often too costly • this is a strategy to reduce competitive interdependence

6. According to resources dependence theory, firms enter alliances because • they lack internal resources • alliances are a strategy to ensure predictability of access to resources • mergers are often too costly • this is a strategy to reduce competitive interdependence

7. Transaction costs are: • the cost of the product • the costs of contracting • the costs of production • tranportation costs

8. Transaction costs are: • the cost of the product • the costs of contracting • the costs of production • tranportation costs

9. according to transaction costs theory, firms enter alliances because • the risks of market transactions are too high • the governance costs of alternatives are too high • the transaction costs of vertical integration are too high • the uncertainty in the environment is too high

10. according to transaction costs theory, firms enter alliances because • the risks of market transactions are too high • the governance costs of alternatives are too high • the transaction costs of vertical integration are too high • the uncertainty in the environment is too high

11. What are the two basic assumptions about human behavior of transaction cost theory? • uncertainty and risk • opportunism and bounded rationality • uncertainty and bounded rationality • bounded rationality and risk

12. What are the two basic assumptions about human behavior of transaction cost theory? • uncertainty and risk • opportunism and bounded rationality • uncertainty and bounded rationality • bounded rationality and risk

13. transaction cost theory neglects • that firms depend on their environment for resources • that not all individual and collective actors are opportunistic • that transactions take place within a social context that might influence transaction costs • that specialized assets might have a positive effect on trust

14. transaction cost theory neglects • that firms depend on their environment for resources • that not all individual and collective actors are opportunistic • that transactions take place within a social context that might influence transaction costs • that specialized assets might have a positive effect on trust

15. In a repeated prisoners dillema the rational choice is always to defect • correct • incorrect

16. In a repeated prisoners dillema the rational choice is always to defect • correct • incorrect

17. The Toyata supplier network • Japanese automobile makers are more and more productive, US is lagging • WHY? • Dyer and Nobeoka: "Creating and managing a hihg performance knowledge-sharing network: the Toyota case"

18. Knowledge sharing routines • What is knowledge? • Explicit knowledge or information • Tacit knowledge or know-how • Dilemmas associated with knowledge sharing • how can self-interested network members openly share valuable knowledge? • how to prevent free-rider problems? • how to maximize the efficiency of knowledge transfers?

19. Overcoming knowledge sharing dilemmas • Creating a network 'identity' through network-level knowledge-sharing routines • Network `rules' for knowledge protection and value appopriation • Creating multiple knowledge-sharing processes and sub-networks in the larger network

20. Why create an 'identity'? • Social identity theory (Tajfel and Turner, 1986) • Categorization: We put others (and ourselves) into categories. • Identification: We associate with certain group (our ingroups), which serves to bolster our self-esteem. • Comparison: We compare our groups with other groups, seeing a favorable bias toward the group to which we belong.

21. Social identity theory • Experiment: • Rabbie and Horwitz (1969) “The arousal of ingroup-outgroup bias by a chance win or loss.” Journal of Personality and Social Psychology, 13: 269-277. • Randomly assign individuals to a blue and a green group • Individuals were unknown to each other and were told that they would not meet again • Based on the toss of a coin a price was given to one group • Group members evaluated each other more positively and were more willing to cooperate with each other than non group members

22. How did Toyata create a network 'identity'? • Toyota's network is known (labeled) as the `Toyota group'. • Toyota creates a shared network identity by developing multiple groups • The supplier association • Toyota's operations management consulting division • Voluntary small group learning teams (jishuken) • (Interfirm employee transfers)

23. Supplier association • Kyohokai: Toyota's supplier association was established in 1943 • Suppliers must be close to each other • Tokai (150 members) • Kanto (65 members) • Kansai (29 members)

24. Supplier association • Suppliers association has general (high level) meetings every other month • Quality committees. • Excellent plant tours allow network members to visit `best practice' plants • Quality management conference held once a year • lectures from directors, senior managers + six success ful supplier cases of quality improvement

25. Consulting teams • Toyota's Operations Management Consulting Division (OMCD) • 6 senior executives, 50 consultants • Direct free `on-site' assistance for suppliers • periods ranging from one day to many months • on average suppliers are visited about 4 times a year with an average visit lasting 3 days • emergent problem solving: cross divisional problems solving teams helping a supplier • What kind of social capital is this according to Coleman?

26. Voluntary learning teams • Jishuken: 60 of the key suppliers `voluntary study groups' • Each group consists of roughly 5-8 suppliers • geographic proximity • no direct competitors in the same group • level of experience with Toyota • Groups are reorganized every 3 years (Why?) • After determining theme, the group visits each member to develop suggestions • Member of OMCD monitors (to assist and to learn)

27. Voluntary learning teams (II) • Jishuken are reported to be very valuable (especially in transmitting tacit knowledge)

28. Network rules for knowledge protection • Creating an identity isn't enough to solve sharing and free riding problems • Toyota sets a norm/rule by sharing its own knowledge • eliminating the notion that there is `propriety knowledge' • Suppliers must be willing to open their plants to other network members to other network members • reciprocal obligations: We will help you, but in return, you must agree to help the network. • reciprocity norm is enforced by implicit threat of withdrawal of business

29. Network rules for knowledge protection • Tacit rule about value appropriation • The recipient of knowledge may appropriate 100 percent of the savings in the short run, but over time will be expected to share a proportion of those savings with the network • Compare Toyata practice with the GM consultancy teams (PICOS)

30. Creating multiple knowledge sharing processes How to maximize efficiency? Toyota established variety of bilateral and multilateral processes, each designed to facilitate different types of knowledge

31. The creation and evolution of Toyata's US knowledge sharing network • 1988: Toyota begins producing cars in Georgetown, Kentucky • Suppliers had virtually now contact with each other, how did Toyota implement its knowledge management ? • Phase 1: Developing weak ties among suppliers • Phase 2: Developing strong ties with Toyota • Phase 3: Developing strong ties among suppliers

32. 1. Developing weak ties 1989 Toyota initiates supplier association (BAMA)

33. 2: strong ties with Toyota Free of charge well trained consultants made available to BAMA members

34. 3: strong ties among suppliers • Toyota divided suppliers in small learning teams • -no competitors • -rotation • -equal capabilities

35. One large network with core firm as hub Bilateral relationships Weak ties/arm's lenght relations Structural holes Explicit knowledge Members motivated to demonstrate commitment Power game self-interest independence closed formal contracts Large network plus multiple nested networks Multi-lateral relationships Strong/embedded ties in nested networks with core firm Dense network Both explicit and tacit knowledge reciprocity; benefits of participation outweigh isolation Trust game fairness interdepence open informal contracts

36. Two types of network benefits Resource sharing Access to knowledge spillovers Direct ties knowledge sharing complementary skills scale economies Indirect ties knowledge spillovers Ahuja: Collaboration networks, structural holes, and innovation.

37. Effects of direct ties • The more direct ties, the higher the innovation output • Knowledge sharing • Complementarity • Economies of scale • High maintenance costs

38. Effects of indirect ties • The more indirect ties, the higher the innovation output • Information gathering devices • Screening device • low maintenance costs

39. Interaction of direct and indirect ties • The greater the number of direct ties, the smaller the benefits of indirect ties.

40. Benefits of indirect ties are quite low Indirect ties play two roles: resources <-> competitors Having many direct and indirect ties is not necessarily better Substitution possibilities between direct and indirect are limited. According to Ahuja benefits depend on context: exploration vs exploitation Direct and indirect ties

41. Closure/cohesion Redundancy of (strong) ties Trust / opportunism reduction / shared norms Fine grained information transfer / cope with information ambiguity Structural holes Non redundant ties Access to mutually unconnected partners, distinct information Brokerage opportunities Closure vs structural holes

42. Firms that are embedded in dense, cohesive networks have higher patenting rates than firms with open networks For patenting rates resource sharing is more important than access information spillovers Whether closed or open networks are good or bad depends on the context, again: exploration vs exploitation Results and conclusion

43. Uzzi (1996) 'The paradox of embeddedness' Study of the apparel industry in New York Overembedded-ness ossification, no new, novel info. relief organization feuding extinction effects About optimal network structure

44. Powell, Koput and Smith-Doerr • Technological sophistication technology of an industry -> number of alliances • When knowledge is broadly distributed and brings a competitive advantage, the locus of learning is found in a network of interorganizational relationships

45. The assignment

46. Basic network demographics • You need these demographics for the assignment. They are the basic characteristics of a network, and should be reported (in the assignment) • Network size • Number of actors • Number of relations • Components • Number of components • Size of components

47. The concept of centrality is closely related to (competitive) power Why is A in a better position in the top graph? More connections (degree) Closer (closeness) Between others (betweenness) Ucinet measures for centrality degree centrality power closeness (beware) betweenness Centrality

48. Density Cliques Clustering Closure \ cohesion

49. Structural holes (ego-network) • Effective size • is the number of alters that ego has, minus the average number of ties that each alter has to other alters.  • Efficiency • Effective size / actual size • Constraint • is a summary measure that taps the extent to which ego's connections are to others who are connected to one another.  • Hierarchy • measures whether constraint is concentrated in one actor

50. Ego-network of A A A A C B C C B B * Ucinet ego-network density is not calculated, since the ego network of A (=B, C) are not connected. The density of the whole network is 0.67