The science of networks illuminated the analysis of business organizations as Walter W. Powell of Stanford took issue with the classic division of business organizations into "market" or "hierarchy." In a 1990 paper, he challenged views that described a continuum of transaction forms from "market" at one end to "hierarchy" at the other, with some hybrid forms like joint ventures in between. "Neither Market Nor Hierarchy: Network Forms of Organization." Research in Organizational Behavior, Vol. 12. Pp. 295-336 (1990).
Powell took issue, and set out "to identify a coherent set of factors that make it meaningful to talk about networks as a distinctive form of coordinating economic activity." Powell, pp. 300, 301. "When the items exchanged between buyers and sellers possess qualities that are not easily measured, and the relations are so long-term and recurrent that it is difficult to speak of the parties as separate entities ... When the entangling of obligation and reputation reaches a point that the actions of the parties are interdependent, but there is no common ownership or legal framework ... such an arrangement is neither a market transaction nor a hierarchical governance structure, but a separate, different mode of exchange, one with its own logic, a network." Id. p. 301.
Discussing years of research in this paper, he noted findings that participants move toward network forms to reduce uncertainty, get fast information access, and provide a reliable, responsive system. Network forms are largely self-regulating, without formal enforcement processes, because of mutual trust and mutual desire of each participant to continue with the network over the long term. In later papers (see below), he applied these findings to particular networks within the pharmaceutical industry. He found that high levels of activity in the industry networks, or "centrality," was a prime determinant of financial success for the firms, and that this centrality came from the experience and diversity of contacts resulting from participation in cooperative R&D efforts.
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In the 1990 paper, reviewing past published research, he laid out what he saw as key differences among markets, hierarchies and networks. For example, unlike market forms, networks involve indefinite, sequential transactions within the context of a general pattern of interaction. In networks, participants avoid using legal sanctions against each other. They prefer to create indebtedness and reliance over a long-term basis, and often involve the participants at a personal level.
Networks are better than markets or hierarchies at facilitating learning and the transfer of technological know-how. Perhaps as a result, they are better than hierarchies at responding to sharp fluctuations in demand and unanticipated changes. In networks, the parties gain by pooling resources, and such sharing requires the parties to adapt and accomodate other network participants, sometimes to their own short-term disadvantage.
"Networks, then, are especially useful for the exchange of commodities whose value is not easily measured. * * * The open-ended, relational features of networks, with their relative absence of explicit quid pro quo behavior, greatly enhance the ability to transmit and learn new knowledge and skills." Id. p 304.
Powell notes findings that a key element of network operation is reciprocity, the benefits of which are more apparent to those with a long-term viewpoint. Expectations of future benefit, "the shadow of the future," broadens one's view of one's own self-interest and encourages reciprocal cooperation.
Construction, publishing and the film and recording industries have been shown to exhibit network forms, he notes. Such industries display strong craft industry characteristics, with a special kind of skilled labor pool that has production experience and is capable of generating new products in response to changing customer demands. Their participants tend to have strong work ties within teams and with members of other organizations.
In the film industry, for example, he cites observations that "distinct networks crystallize out of a persistent pattern of contracting when particular buyers of expertise and talent * * * with given schedules of resources and alternatives, settle into self-reproducing business transactions with distinct (and small) sets of sellers." Id. at p. 308.
Powell noted studies of similar behavior among craft style industries that cluster in geographical areas to take advantage of the pool of skilled labor and expertise, and to engage in mutual assistance. Swedish scholars Hagg and Johanson found such characteristics among Swedish firms that shared R&D efforts. "Instead of a competitive environment, there is a sharing of risks and resources and a pooling of information. * * * [T]hese arrangements eliminate costly safeguards and defensive measures and are better adapted to uncertainty. Competition in intermediate producer markets is not eliminated, rather coalitions of firms compete with other coalitions, not on the basis of price, but in terms of product development and knowledge accumulation." Id. p. 313.
In conclusion, Powell highlights three factors as critical components of networks:
* Know-how. Where skills aren't of the type that can be kept exclusively with the high bidder, and where shared information builds common values, networks flourish.
* Demand for speed. Networks favor fields requiring responsiveness to innovation and rapid translation into action.
* Trust. Networks exhibit the development of "generalized reciprocity" and an expectation of continued future association. Mutual desire for continued participation results in self-regulation without formal oversight processes. Participants' reputation for reliability is very important.
Powell also noted the importance of particular contexts of legal, political and economic factors to the development of networks, including relaxed antitrust standards and national policies promoting research and development and linkages between industry and academia. He closed with an agenda for future research, including the need for studies of the relevance of state policies, the durability of networks, the performance liabilities of networks and whether network participation affects the likelihood of future collaboration.
"Neither Market Nor Hierarchy" won the American Sociological Association's Max Weber Prize and has been translated into German and Italian.
Powell's later studies of the pharmaceutical industry.
Statistical studies were done with industry data available for several hundred firms over a period of ten years, testing a hypothesis drawn from the published literature. Powell and his colleagues hypothesized that centrality, or activity in the network of cooperation within the pharmaceutical industry, would be positively correlated with financial success. The data showed that it was; the more active firms got more patents and more nonoperating income, grew faster and had larger sales revenue.
Analyzing deeper for the criteria that led to centrality, Powell and his colleagues found that cooperative R&D developed experience and diversity (multiple linkages with a range of partners), which together were the best predictors of centrality. They concluded that "collaborative R&D drives the interorganizational network in biotechnology.""Network Position and Firm Performance: Organizational Returns to Collaboration in the Biotechnology Industry" Powell, Koput, Smith-Doerr and Owen-Smith. Networks In and Around Organizations. 1999. p. 24.
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