Dr.

Leonidas Baziotopoulos 12-01-09

Inter-firm networks: structures, members, and processes

Author: Dr. Leonidas Baziotopoulos (Logistics Consultant)

Introduction

For several years inter-firm networks have been receiving considerable attention from
strategy theorists and practitioners (e.g. Grandori and Soda, 1995). Many argue that these
networks represent an organizational form which is particularly well suited to meet the
requirements resulting from today’s turbulent changes in the firm’s environment (e.g.
Miles and Snow, 1986; Jarillo, 1993; Alter and Hage, 1993; Hinterhuber and Levin, 1994.
More specifically, inter-firm networks have been changing over time, which is something
that patterns of inter-firm linkages are linked to the life cycle development of an industry.
Major trends today indicate that legally independent firms trying to create a competitive
advantage by building and maintaining linkages with other organizations. Inter-firm
linkages can consist of the exchange of information, or resources and/or joint ventures.
Characteristic examples of the dynamics of inter-firm linkages has been given throughout
the years by many scholars regarding several industries, such as the “Global
Pharmaceutical Industry”, the “US Computer Industry”, and the “Italian Furniture
Industry”(Lorenzoni and Ornati, 1988; della Valle and Gambardella, 1993; Ring and van
den Ven, 1994; Hobday, 1994; Wieandt and Amin, 1994; Pisano and Wheelwright, 1995;
Gemser et al., 1995, 1996).
The term “inter-firm network” depicts a complex arrangement of reciprocal, cooperative
rather than competitive, relationships between legally independent but economically
interdependent organizations (Sydow, 1992; Sydow et al., 1995). Networks in which the
firms are primarily connected by supply relationships and collaborate to produce tangible
goods are accordingly designated supply or production networks (Pfohl and Buse, 2000).
As the dynamics of change is usually seen as the dominant challenge to firms in today’s
economy, interest has recently focused on those types of networks that offer a high degree
of structural-or strategic-flexibility and enable adaptation to rapid and extensive changes.

i) Network structure: Types of inter-firm network structures and components

Network Structures

In a production network the extent to which the advantageous properties of inter-firm

networks can be realized depends for a large part on the organizaton of the logistics
processes connecting the firms (Pfohl and Buse, 2000). For the spatially and temporally
distributed performing value adding activities, which is a consequence of the joint
production in a network of independent firms, makes great demands on the coordination
and operation of the logistics processes.

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Moreover, in the field of logistics the recent popularity of production networks has its
counterpart in the strong interest in the concept of supply chain management, which also
emphasizes cooperative relationships, integration of processes and information systems,
and inter-firm problem solving (Glaskowsky et al., 1992; Cooper and Ellram, 1993;
Pfohl, 1994; Cooper et al., 1997). However, empirical results on the positive effects of
supply chain management or its individual components (e.g. cooperative vertical
relationships) seem to confirm the usefulness of the concept (e.g. Dyer and Ouchi, 1993;
Waldmann, 1996; Spekman et al., 1998), it also has some weaknesses, which are partly
due to problems of implementation and partly of a conceptual nature. Problems which
arise because firms are often not part of just one supply chain but can at the same time be
integrated into various chains with different logistical requirements are not sufficiently
addressed.
Furthermore, the linear view does not take into account the complexity-and the potential
for improvements-which can result from different types of relationships (Pfohl and Buse,
2000), such as:
• Horizontal relationships (two suppliers cooperate in competing logistical
requirements. For instance they bundle their delivery volumes or one of the suppliers
acts as logistical service provider for the other supplier);
• Lateral relationships (a supplier supplies one customer and the at the same time
supplies another supplier of that customer);
• Circular relationships (in which the customer at the same time acts as supplier to his
supplier); or
• General reciprocal dependencies (the performance of a supplier depends directly on
the activities of other suppliers: the customer might change his production plan due to
delivery problems of one supplier which in turn can result in problems for other
suppliers).

In addition, production networks can as a whole be distinguished with regard to form and
content of the inter-firm relationships between the involved firms (Sydow, 1992). The
dimensions can be used to describe different ideal types pf production networks. Miles
and Snow (1992) distinguish each type of network by a specific operating logic, which
describes its potentials and limits. Briefly, the different kind of typology of inter-
networks are presented (Sydow, 1992; Jarillo, 1993; Semlinger, 1993; Arnold et al., 1995;
Mertens et al., 1998; Picot et al., 1998;; Klein, 1996):

• Strategic network: Strategically guided by a lorge-core firm, which is often a retailer

or manufacturer close to the final customer, the network is relatively stable and
oriented towards the joint achievement of strategic advantages. The member firms are
usually closely linked to the core firm, but also offer their products to customers
outside the network to preserve their autonomy and competitiveness (Figure 1). Well-
known examples of strategic networks are supply networks in te automotive industry
and the Italian manufacturer Benetton.
• Virtual enterprise: Independent firms are working together based on shared values
and a common way of doing business to exploit a particular business opportunity by
jointly manufacturing a product. The firms have specific competencies, which can be
combined synergistically, and the intensive use of information and communication
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Dr. Leonidas Baziotopoulos 12-01-09

technologies are regarded as constitutive characteristics (Fig. 2). Examples of virtual

enterprises are the production of the small car in Hambach (France) or the assembly
of trucks in the Volkswagen factory in Resende (Brasil) with the use of high-tech
facilities.
• Regional networks: Small, highly specialized firms situated in spatial proximity of
each other cooperate repeatedly. While the individual relationships do not have to be
stable, the firms have latent relationships, face-to-face interaction and large trust with
a larger number of potential partners, which can be activated depending on the current
demand (Fig.3). Cited examples can be found in the northern Italy (Harrison, 1994;
Lazerson, 1995), but there are also efforts to create such networks in the USA
(Human and Provan, 1997).
• Operative network: Member firms can quickly get access to other partner’s
resources, especially free production or logistics capacities. The transactions are
relatively standardized and concern single value adding activities rather than complex
processes, and the network shows some similarities to an electronic market (Fig. 4).

Figure 1: Strategic Network

Distributor, Logistics Service Provider

Focal or Core Firm

Logistics service provider

Supplier (1st tier)

Supplier (2nd tier)

Figure 2: Virtual Enterprise

Designer Manufacturer, Assembler

Broker

Supplier,
Log. Service Provider Marketer, Distributor

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Figure 3: Regional Network

Figure 4: Operative Network

Supplier Broker Service provider

Log. Service Provider Manufacturer

Supplier Manufacturer

From the existing literature, basically, a lot of things can be written about the different
types of networks in that phase. However, for an analysis of organizational issues the
network typology has to be complemented by a suitable approach from the domain of
organization theory and strategy. An approach often used in regard to cooperative
supplier-manufacturer relationships (e.g. Hanke, 1993; De Toni and Nassimbeni, 1995) is
the transaction cost theory.
Intending to gain some new insights, it would seem appropriate to choose a different
theoretical approach, which is the resource-based view of the firm and the related
concepts of organizational capabilities and learning (Prahalad and Hamel, 1990; Barney,
1991) including also the integration and the development of relational capabilities
(Sydow et al., 1995; Pfohl and Buse, 1999; Dyer and Singh, 1998; De Toni and
Nassimbeni, 1995), the logistics-related capabilities in strategic networks (Dyer, 1996;
Pickernell, 1997; Lincoln et al., 1998; Lorenzoni and Baden-Fuller, 1995), the grounded
theory approach (Strauss and Corbin, 1990; Pfohl and Buse, 2000), the structures and
practices of collaboration in JIT (Just-In-Time) logistics processes (Andreu and
Ciborra,1996; Vickery et al., 2003), and the logistics-related capabilities in virtual

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enterprises (Heppner, 1997; Pfohl, 1994; Pfohl and van der Hoop, 1995; Pfohl and Buse,
2000).
Furthermore, the phenomenology of networks is vast and complex and different network
structures exist. According to the organizational structure model developed by Mintzberg
(1979, 1983), the term “network” includes three main categories of inter-firm links which
are: a) “supply networks; b) “agreements and joint ventures”; and c) “regional industrial
systems”.
a) Supply networks: the main objective is the realization of operations synergy between
the units; the main area involved is the operating core of the members; and the main
interaction of the units. Networks constituted by supply relations give rise to two
kinds of configuration, depending on the nature of the end product (Cusumano and
Takeishi, 1991; Dyer and Ouchi, 1993; Fruin, 1992; Hines, 1994).
b) Agreements and Joint Ventures: the main objective is the realization of “functional”
synergy ( in R&D, in marketing, etc) between the units, and the main integration
element is the expertise flow and the skills exchange within the network units (Garrett
and Quelin, 1994; Bertodo, 1990)
c) Regional industrial systems: these are industrial settlements made up of numerous
firms linked at a technical-productive level, characterized by a prevalent production
typology. The common element is a limited geographical area, within which
interaction and synergy are established. Examples can be found in the Japanese car
supply system, whose development supported by country-specific factors (e.g.
Keiretsu groups) (Lamming, 1990; Sriram and Mummalaneni, 1990; Reese and
Geisel, 1997;).

Components

Inter-firm market orientation can occur within a single relationship (e.g. when a
manufacturer and a retailer exchange intelligence and cooperate to adapt the products
better to consumer demands) or in organizations or arrangements involving a larger
number of firms (e.g. a trade association that collects market data) (Kwaku, 1998). In
general there is a large discussion in the literature about inter-firm market orientation and
structures (Lorange and Ross, 1992; Morgan and Hunt, 1994; Day, 1994; Gulati, 1995;
Hakansson and Snehota, 1995; Ford et al., 1998; Elg, 2000;). A general assumption in the
literature is that vertical marketing systems should comply with the needs and wants of
customers. Below, Kohli and Jakorski (1993) indicate three components on the inter-firm
level:

a) Joint intelligence generation: occurs when several firms in a distribution network do

something together that provides knowledge about their customers. One example is
the British food retailer (Elg and Cerne, 2001). This retailer initiates special project
groups that involve representatives of both the retailer and significant manufacturers.
b) Intelligence dissemination: of customer data between firms in the distribution chain
is likely to influence market performance because each company will get a better
knowledge of consumer wants and needs. For instance, the sales force of a
manufacturer often acts as a distributor of information within the channel during daily
meetings with individual retailers.

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c) Collective responsiveness: takes place when firms coordinate their activities to

respond better to the consumers’ needs and wants. This happens if members of a
channel meet to plan the channel’s marketing activities decide how different activities
of the value chain are to be performed and coordinated.

ii) What is the impact of the logistics function when network structures,
components and processes are different?

Logistics excellence has become a powerful source of competitive differentiation

(Mentzer et al., 2001). Specifically, logistics researchers have made little effort to build a
unified theory of logistics (i.e. a theory of the role of logistics in the firm). Although,
there have been attempts to build logistics theories (e.g. Pisarodi and Langley, 1990;
Cooper et al., 1997; Bienstock et al., 1998), they are limited to particular components of
logistics (e.g. customer service, logistics quality etc.).
However, firms engage in collaborative relationships to add value or reduce cost in inter-
firm exchanges (Anderson, 1995). Accordingly, Bowersox et al., (2000) argued that the
goal of integrated logistics, both inside and outside a firm within a supply chain, is to
enhance end-customer value. Creating customer value requires inter-functional
coordination and as a result, the boundaries between functions become blurred (Min and
Mentzer, 2000). Therefore, collaboration, rather than conflict, should be the norm
between functions in firms that seek competitive advantage.
While there are many environmental factors a firm encounters, there are two significant
factors vital to firms: technology and global competition. Organizational processes such
as manufacturing, order processing, and inventory management can become more
effective and efficient as a firm adopts new technology. Indeed, firms can achieve a
competitive advantage through capitalizing on differences in resources and capabilities
(including logistics capabilities) (Mentzer et al., 2004).
Logistics capabilities can be categorized into demand management capabilities- supply
management interface capabilities, and information management capabilities (Morash et
al., 1996; Zhao et al., 2001; Bowersox et al., 1999). These capabilities, also, called
customer-focused (Zhao et al., 2001), value-added (Lynch et al., 2000), or customer
integration capabilities (Bowersox et al., 1999). These capabilities assist a firm target a
given customer base, and meet or exceed their expectations by providing unique value-
added activities.
Therefore, as many scholars empirically stated, logistics capabilities play a distinctive
role in the integrative strategic process, due to the expected benefits of improving
efficiency (cost and capital reduction) and effectiveness (customer service) via two-way
communication and information processing (information management) in a strategic
context (creating customer value) (Porter, 1985; Bowersox and Closs, 1996; Seth and
Thomas, 1994). As Porter (1985) proposed that vertical linkages reflect
interdependencies between a firm’s activities and the value chains of suppliers and
distributors. Coordinating and jointly optimizing with suppliers (inbound) and customers
(outbound) can lower costs and/or enhance differentiation.
In other words, a review o the theories of the firm leads to the conclusion that the role of
logistics is to provide the boundary-spanning, demand and supply coordinating,

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capabilities the firm needs to create customer value to satisfy customers (Bahatnagar et
al., 1999; Bienstock et al., 1998; Bowersox, 1990; Bowersox and Closs, 1996; Bowersox
et al., 1999; Christopher, 1994; Cooper et al., 1997; Ellram and Cooper, 1990; Emerson
and Grimm, 1996; Langley and Holcomb, 1992; Lynch et al., 2000; Mentzer et al., 1999;
Mentzer et al., 2001; Moore, 1998; Morash et al., 1996; Murphy and Poist, 2000;
Olavarrieta and Ellinger, 1997). Even in the supply network the processes and the
components are different, the role of logistic capabilities is just that, to make process and
components more coherent, more particular and more united. Specifically, it can help the
firm cooperate with supply chain partners (i.e. suppliers, distributors etc.) in coordinating
supply and demand flows to deliver customer value (Mentzer et al., 2004).
The attention paid to logistics has progressively shifted from the management of tangible
goods to the management and transfer of intangible resources. Two major consideration
have been made through empirical studies: a) Business logistics implicitly supports a
system of tangible and intangible flows, affecting both the internal and the external
environments; and b) From its support for the relational network, logistics can become
the very object of the relationship and can favour outsourcing phenomena (Bowersox et
al., 1992). Particularly, a study of the reorganization of Unilever-Sagit’s logistics system
highlights the crucial role logistics has played (Calza and Passaro, 1997).

Conclusion

The discussion of issues of the management of logistics in production networks by many

scholars from an organizational capabilities perspective has shown that the tension
between specialization and integration has consequences for the development of logistics-
related organizational capabilities. In the strategic network co-specialization, mutual
adjustment and collaborative development of capabilities can be identified as important
mechanisms, which can ensure a high efficiency of the inter-firm logistics system.
However, much research has to be done about the logistics capabilities that impacts inter-
firm network structures, in order to identify the pros and cons of such capabilities on
inter-firm network structures and processes. It would be crucial to consider, how the role
of logistics can provide a competitive advantage in today’s changing environment, and
how different network structures and processes in inter-firm relationships can be
integrated, that is a proper fit between strategy and structure in the new competitive
environment. Therefore, coordination of inter-firm and intra-firm activities and processes
at geographically dispersed and organizationally distinct locations must be further
examined.

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