BUSINESS GROUPS AND INTERFIRM NETWORKS

PROF. MARK FRUINCOLLEGE OF BUSINESS

SAN JOSE STATE UNIVERSITYAT WASEDA UNIVERSITY, Summer

2005

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

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

SPECIFICITY CAN BE ADDED

• OWNERSHIP • CONTROL • LEVELS OF INTERNAL/INTRAGROUP

TRANSACTIONS• RECOGNIZE THAT LEGALLY BOUNDED

NATURE OF FIRMS AFFECTS BEHAVIOR AND GOVERNANCE

ORGANIZATIONAL FORM & LEVELS OF OWNERSHIP,

CONTROL & TRANSACTIONS Intragroup/Internal Levels of

Transactions Low High

INTERFIRM

NETWORKS

BUSINESS

GROUPS MODERN FIRMS

LOW

OWNERSHIP AND CONTROL

H IGH

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KEY WORDS

• SETS• INDEPENDENT ACTORS• COOPERATE OFTEN• MUTUAL ADVANTAGE• COMMUNITIES OF PRACTICE

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)

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

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)

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

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

FROM 2X2 TO 3X3:THE VARIETIES OF COMPLEX ORGANIZATION

LEVELS OF INTERNAL/INTRAGROUP TRANSACTIONS

STATE-OWNED ENTERPRISE

BIG SIX FEDERATION

INTERFIRM NETWORK

(MULTIPARTNER)

MIXED OWNERSHIP (PRVT/PUBLIC; LOCAL/MNC; etc.)

OLD

INDUSTRIAL

DISTRICT

NEW I.D./

INNOVATION CLUSTER

(MULTIPOINT)

BUSINESS GROUP

CONGLOMERATE & HOLDING COMPANY & Sony’s C-form

MODERN FIRM (DIVISIONALIZED & DIVERSIFIED)

LOW MEDIUM HIGH

PRIVATE OWNERSHIP & CONTROL

LOW

MED

HIGH