Working The Corporate Network
New study sheds light on the ins and outs of network dynamics and corporate alliances.
ANN ARBOR, Mich. — One of the ways companies defray high research and development costs is by forming alliances with other firms. Much of the research on network dynamics has focused on the behavior of companies firmly embedded in the network.
But a new study by Gautam Ahuja, Harvey C. Freuhauf Professor of Business Administration and professor of strategy at Ross, focuses on new issues and asks different questions. How does a company outside the network work its way in, and what dynamics are at play when that happens? How do the highly networked firms act?
The results show such network dynamics are more complex than initially thought and can serve as a guide for companies as they look to form joint ventures and other alliances. The study, "Structural Homophily or Social Asymmetry? The Formation of Alliances by Poorly Embedded Firms," was published in the Strategic Management Journal.
"In the past, we have focused on the strong natural effect of the firms in a network to work with each other. The rich get richer," Ahuja says. "We suggest it doesn't operate that way completely."
For one, Ahuja finds companies established in the network reach a point of diminishing returns when they continue partnering with each other. Previous research has shown that these firms tend to form alliances with other established firms in the network, especially companies that will move them toward a more central position.
But after a while, those companies stop reaping benefits. The smarts ones start to look for smaller, nimbler players that bring something new to the game.
"Another centrally embedded firm is going to be similar to what you are," Ahuja says. "They're going to have similar kinds of thought processes, systems, and arrangements. So if you're trying to go after a technology to solve a techno-economic problem and all the companies in your network look like you, they're going to bring your type of thought to the solution. But if you have a company that doesn't have those resources or the same way of thinking, they may come up with a completely different way of looking at the problem. Some of those solutions are going to be more efficient. So it makes sense for the big guys in the network to establish ties with these smaller guys to make sure they are tapping into different streams of thought and knowledge."
The study highlights the strategic implications of that finding. A common way for a smaller firm outside the network to work its way in is to offer favorable trade terms. That's partly because of their desire to form the alliance and partly due to the superior bargaining position of the larger, networked firm. This often takes the shape of the smaller firm accepting a minority position in the joint venture.
But there is some risk in that for the smaller firm, the study finds. Offering favorable trade terms may help the smaller firm gain initial entry into the network, but it does not help the smaller entity form pacts with other firms central to the alliance.
"It might be a necessary evil sometimes, because without your accepting the minority stake, it's not clear the big company will work with you in the first place," Ahuja says. "But with the minority position, your ability to link with a more central player is actually diminished."
For a company outside the network, a better way to creep toward the center is to hold off on forming an alliance until a technology, product, customer base, or process is valuable enough to form more of a parity relationship with the larger embedded firm.
"Even though that's more difficult, that would probably be more effective than taking a minority stake and moving on," Ahuja says.
The study advances the research on network alliances by showing the previous theory on structural homophily offers only a partial explanation of why companies make their partnering choices.
"In reality, network dynamics are going to be more complex than simply the rich getting richer," Ahuja says.
For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, firstname.lastname@example.org