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The Network Imperative: Community or Contagion?

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Network-based models for business challenge the traditional firm-centric view of competencies and strategies that are the focus of most business education and management thinking. This chapter makes it clear that the opportunities and threats presented by networks cannot be ignored.
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Abstract

The rising importance of networks creates challenges and opportunities for business enterprises. On the one hand, networks lead to contagion and other risks, as can be seen in the rise of global terrorism and the spread of the 2008 global financial crisis. On the other hand, networks present opportunities for building community, as can be seen in the rapid rise of companies such as eBay, Google, Facebook, and other network-based enterprises. In this chapter, the editors of The Network Challenge point out that network-based models for business challenge the traditional firm-centric view of competencies and strategies that are the focus of most business education and management thinking. The authors challenge managers to consider the implications of networks in addressing issues such as risk management, strategy, marketing, human resources, and value creation. They emphasize the need to take diverse viewpoints on networks, including drawing upon fields such as biology, infectious diseases, and other areas with a long history of studying networks. Finally, the authors offer a summary of the key sections and chapters in The Network Challenge, which provide a broad, multidisciplinary view of networks and their implications for business. This chapter makes it clear that the opportunities and threats presented by networks cannot be ignored.

The network-based nature of our businesses and financial systems was clearly evident in the deep global financial crisis that unfolded across the summer of 2008. The collapse of U.S. subprime mortgage markets led to a ripple of effects across all sectors of the U.S. economy, necessitating the rescue of Bear Stearns, Fannie Mae and Freddie Mac, and insurer AIG. The U.S. government passed a hastily developed $700 billion bailout package designed to help unfreeze the banking industry, and other governments around the world have followed suit. The ultimate outcome of these emergency measures remains to be seen. However, network contagion and the complexity of cause and effect in a networked world are now routinely put forward as the reasons for the continuing crisis in financial markets. In explaining the conflagration of global markets, network dynamics have become the new phlogiston—a mysterious and ultimately fictitious substance used to explain combustion prior to the discovery of oxygen in the 1770s. We clearly need a deeper and more precise understanding of network interactions.

The network challenge can also be seen in the Chinese “toxic-milk scandal.” A few years ago, the logic of outsourcing manufacturing to China and other low-cost producers was irresistible. Any manufacturer who wanted to remain competitive needed to be able to meet the so-called “China price.” But a series of problems, including tainted pet foods, recalls of toxic toys, and the spreading scandal of tainted milk powder in China, have revealed the hidden risks of unbundling strategies, with their ensuing more complex supply chains and difficulties in governance of global networks. The results of the tainted-milk event will take months or even years to play out, with global recalls of baby formula, candy, and other food products containing powdered milk now underway. The sheer complexity of uncovering and recalling all potentially contaminated products that have been shipped globally is formidable. The economic damage to the reputation of China’s food industry will be staggering as the scandal has heightened concerns in the United States and Europe about the quality of Chinese products. One evident lesson from the toxic-milk scandal is that the spread of information and the measures that are needed to reestablish trust in global networks are of a different and far more complex nature than single-channel, controlled marketing and distribution networks of the past.

At the same time, networks have emerged as a tremendous source of value creation. Companies such as eBay, Google, Facebook, YouTube, and Twitter have risen from the primordial swamps of cyberspace to become major players based primarily on the power of their networks. Established corporations such as Procter & Gamble and Toyota are harnessing networks to tap into new sources of innovation around the globe or engage in word-of-mouth marketing for new products. The successful 2008 U.S. presidential campaign of Barack Obama has been attributed to his deft ability to mobilize and manage an unprecedented network of volunteers and contributors. Networks of suppliers are creating and delivering products through supply webs that stretch around the globe and can be reconfigured rapidly. Networks are now a powerful driver of value creation across society, but they follow different rules than command-and-control hierarchies. To tap into the value of networks, managers need a deeper understanding of how they work.

Companies and governments today face a dilemma: They cannot compete without networks to access resources or markets, but these networks present new risks and challenges that must be managed. The threats that face our world today—from financial crises to global competition to terrorist attacks to global diseases—are network-based. Effective solutions, in many cases, are also network-based. In such an interlinked world, we need a deeper understanding of networks to drive growth and manage risks. We need to understand what makes networks tick. This book is an attempt to provide a starting point for understanding the nature of networks and their implications for business. We brought together a broad cross section of researchers from diverse fields within business and outside—from biologists to antiterrorism experts—to help understand the nature of networks more broadly, and the specific knowledge that managers need to work in a networked world.

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