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This chapter is from the book

The Network That Is This Book

It takes a network to understand a network. In this book, we have assembled scholars from business disciplines and experts from outside to help you understand network-based phenomena and its implications for management. These experts offer a multifaceted view of the emerging implications of our networked world. We have drawn together the broadest possible kaleidoscopic view from diverse disciplines in social sciences; computer, natural, and life sciences; and diverse business disciplines. The contributors came together for a major conference at the Wharton School in November 2007, sponsored by the INSEAD-Wharton Alliance, where they brought their different views together in a common crucible. The result is this book. Let us briefly examine insights that will be explored by these authors in the following sections of the book.

Part I: The Network Challenge

The first section of the book considers the way networks challenge our fundamental views of organizations, leading to a rethinking of innovation, knowledge management, and leadership. Among the challenges presented by networks are these:

  • Challenge of network-based innovation—In Chapter 2, “Creating Experience: Competitive Advantage in the Age of Networks,” CK Prahalad, who was a pioneer in framing the discussion on core competencies more than two decades ago, discusses the role of networks in the design of product and service offerings. He considers how the locus of innovation has moved from the firm to the network and presents examples of networked models that have been applied in medical technology, such as cardiac pacemakers, and in an innovative system for diabetes management in India. Instead of merely assembling a supply chain to produce a product, companies can bring networks together to create a customer experience and value.
  • Challenge of knowledge management—Networks have tremendous power for remembering and sharing knowledge, but Alan Kantrow notes in Chapter 3, “Knowledge as a Social Phenomenon: ‘Horse Holding’ and Learning in Networks,” that sometimes networks need the ability to forget and examines the role of networks in knowledge management strategies. Organizational routines often continue in force long after the old practice is obsolete. But memory is rarely lost entirely. It usually lingers, in distributed fragments, in an organization’s social networks and can, if needed, be reassembled.
  • Challenge of network-based leadership—Networked organizations, particularly cross-cultural networks, present challenges for leaders, as Russ Palmer discusses in Chapter 4, “Cross-Cultural Leadership in Networked Global Enterprises,” where he considers the new leadership that is needed. The kind of leadership style that works in global networks is different from the “do it and do it now” approach that might work in hierarchical organizations. Leaders need to understand that what works in one culture may not work in another.

Part II: Foundations

While business organizations have begun to recognize the need to build and understand networks, business certainly didn’t invent networks. The second section of the book turns to rich and varied research on networks, from online dating to food chains to leaf-cutter ants. Among the insights are these:

  • With the rise of social networks, you’ve lost control—Beginning with a discussion of a panicked run on Hong Kong cake shops, Dawn Iacobucci and James Salter consider the implications of the rise of “social networks” in Chapter 5, “Social Networks: You’ve Lost Control.” In a discussion that moves from online dating to marketing, they show that as power shifts from firms to social networks, companies have less control over their own destinies and need to pay more attention to networks.
  • Size and linking improve productivity and survival in biological networks—Biological networks are as old as life, and in Chapter 6, “Biological Networks: Rainforests, Coral Reefs, and the Galapagos Islands,” Sonia Kleindorfer and Jim Mitchell take us on a journey into rainforests, coral reefs, and Darwin’s Finches on the Galapagos Islands to understand the structure and evolution of biological networks. They note that biological networks adapt over time, network size is related to productivity, and networks need a balance of strong and weak links to survive.
  • From bees to ants, networks need a system of communication—The impact of information and communications on network dynamics did not arrive with the rise of computers and cellphones. In Chapter 7, “Information Networks in the History of Life,” Robert Giegengack and Yvette Bordeaux consider lessons from bee dances to the complex agricultural communities of leaf-cutter ants. These biological networks have systems for filtering noise, specialized roles, and mechanisms for signaling, all of which are also important to human networks.
  • Cooperation and competition lead to different outcomes in networks—Beyond natural biology, our computer “creations” have their own evolving life in the form of artificial intelligence. In Chapter 8, “Artificial Intelligence: How Individual Agents Add Up to a Network,” Steve Kimbrough, using agent-based models, shows how outcomes from strategies of cooperation and competition depend on the surrounding environment and on the nature of the interactions embodied in the information and resource networks that connect agents.

Part III: Innovation and Coordination in Networks

Networks are transforming our view of innovation and coordination. After this broad view of networks, in the third section of the book, we turn our attention to specific business implications, beginning with innovation and coordination. Innovation, product design, and new product development are no longer centered in a single firm, so companies need to understand how to get the best ideas and develop products through networks. Among the insights are these:

  • Different networks are needed for different types of innovation—In Chapter 9, “Network-Centric Innovation: Four Strategies for Tapping the Global Brain,” Satish Nambisan and Mohan Sawhney show how organizations can tap into the “global brain” for innovation. But they make it clear that not all networks are the same. A jazz band and an orchestra are both networks but operate in very different ways. In particular, the writers identify four models of network-centric innovation—which they call Orchestra, Creative Bazaar, Jam Central, and MOD Station—and outline how companies can select, prepare for, and pursue the approach that best fits their particular business and innovation context.
  • Design networks need coordination—Complex products such as airplanes or automobiles are now designed by networks of teams working on different components, often across organizations and countries. The challenge in managing these networks is to decompose the project into manageable pieces but then coordinate the entire network to produce the best overall design. In Chapter 10, “Coordination Networks in Product Development,” Manuel E. Sosa considers approaches to engineering design based on the information and resource requirements of a given design problem, as captured in tools such as the design structure matrix to drive decisions such as organizational team structure and modularity in design.
  • Networks sometimes need “inefficient” overlaps to ensure broad search and avoid lock-in—In Chapter 11, “Organizational Design: Balancing Search and Stability in Strategic Decision Making,” Nicolaj Siggelkow and Jan Rivkin examine the intersection between organizing and strategizing. Centralized decision making may be more stable and efficient but can lead to “premature lock-in” rather than a broad search for fresh perspectives. Using a simulation approach motivated by network-based approaches to artificial intelligence, they look at how “inefficient” overlaps across a network can sometimes be desirable in balancing search and stability.

Part IV: Strategy and Business Models

Networks lead to new views of strategy and new business models, as examined in the next section of the book. Among the insights are these:

  • Organizations increasingly must recognize the “network effects” of complexity theory in developing strategy—Complexity theory addresses the “network effects” that result from interactions between many independent actors. In Chapter 12, “Complexity Theory: Making Sense of Network Effects,” Colin Crook explores issues such as fads and crowds, reflecting the spread of shared information and technology, and the use of agent-based simulations to understand interaction effects in networks. He considers the implications of complexity theory for business, and how network effects influence key management areas such as making sense of complex environments, strategy formulation, and organization design.
  • Business is moving from supply chains to supply networks—As manufacturing supply chains have moved from vertically integrated factories to diffused networks, manufacturers need to manage complex, global webs of suppliers. In Chapter 13, “Supply Webs: Managing, Organizing, and Capitalizing on Global Networks of Suppliers,” Serguei Netessine examines how companies such as Airbus and Boeing have used technology to coordinate and integrate far-flung supply networks.
  • Marketing is increasingly network-based, depending on “social contagion”—In Chapter 14, “Leveraging Customer Networks,” Christophe Van den Bulte and Stefan Wuyts consider the increasing role of networks in marketing, accelerating the spread of new products, strengthening brand beliefs and preferences, improving corporate status and reputation, coordinating distribution channels, and accessing resources. They consider the key role of social contagion in marketing.
  • Networks create and distribute value in new ways—In contrast to firm-centric views of value creation such as Porter’s value chain, network-based business models build value through different mechanisms. In Chapter 15, “The Business Model as the Engine of Network-Based Strategies,” Christoph Zott and Raffi Amit identify four major interlinked value drivers—efficiency, complementarities, lock-in, and novelty—and discuss their role in new business models that are consistent with network-based strategies.
  • Networks can improve the organization’s “peripheral vision” to see opportunities and threats at the edges of the business—In addition to their direct function, many networks serve as antennae to scan, sense, and adapt to new and important signals from the organization’s strategic environment beyond its core focus. In Chapter 16, “Extended Intelligence Networks: Minding and Mining the Periphery,” George S. Day, Paul J. H. Schoemaker, and Scott A. Snyder explore how companies can use existing networks and design new ones to gather intelligence and create “strategic radar” to recognize emerging threats and opportunities sooner.

Part V: Organizing in a Networked World

Networks are changing the design and management of our organizations. The next section of the book explores how networks demand new capabilities in orchestrating networks, managing a new generation of networked employees, finding and hiring staff, and managing alliances. Among the insights are these:

  • Core capabilities may be located outside the organization, drawn together through capabilities in “network orchestration”—In Chapter 17, “Network Orchestration: Creating and Managing Global Supply Chains Without Owning Them,” Jerry Wind, Victor Fung, and William Fung describe the innovative model of Li & Fung for “competing in a flat world” by orchestrating a far-flung network of suppliers brought together into temporary networks to fulfill a specific customer order. Its connective capabilities in “network orchestration,” in contrast to traditional views of core competencies, allowed the company to become one of the top global contract manufacturers without owning a single factory.
  • Companies need to change the way they manage “instant messaging generation” employees—The IM generation has different views of work, loyalty, decision making, and even reality. In Chapter 18, “Managing the Hyper-Networked ‘Instant Messaging’ Generation in the Work Force,” Eric K. Clemons, Steve Barnett, JoAnn Magdoff, and Julia Clemons consider how organizations need to adapt their training, their managerial styles, and their expectations of employees’ motivations.
  • Effective human resources management depends on harnessing networks—While HR management has traditionally focused on the individual, in Chapter 19, “Missing the Forest for the Trees: Network-Based HR Strategies,” Valery Yakubovich and Ryan Burg point out that core HR processes such as recruitment and hiring, training and development, performance management, and retention all depend on networks. Employees come to organizations through networks, “structural holes” within organizations can challenge employees to develop new skills, and networks also increase the potential for “lift outs,” in which one departing employee takes many others. Effective human resources management requires seeing this larger forest instead of focusing only on the trees.
  • Relational capabilities are crucial to successful alliances—In a networked world, alliances are central to success, but more than half of alliances fail. In Chapter 20, “Relating Well: Building Capabilities for Sustaining Alliance Networks,” Prashant Kale, Harbir Singh, and John Bell discuss their research on the importance of building relational capabilities to design and manage alliances effectively. Using the case of Royal Philips, they explore the role of strategy, structure, systems, people, and culture in alliance success, underlining the central role of relational capabilities in an increasingly networked world.

Part VI: Network-Based Sources of Risk and Profitability

Networks transform our view of risks. Risk management is less about fortifying the walls around a single firm and more concerned with understanding how many links among network partners lead to greater security or vulnerability. The next section explores insights on this challenge, including these:

  • Interlinked global financial systems create new risks—Our financial systems are networks, and today these networks have grown increasingly complex and interlinked. In Chapter 21, “Networks in Finance,” Franklin Allen and Ana Babus examine how a network perspective can help you understand and address challenges such as financial contagion and freezes in the interbank market. They examine how social networks can improve investment decisions and corporate governance, and the role of networks in distributing primary issues of securities.
  • Risks in networks are interdependent, as are solutions—The effectiveness of airline security depends on the level of security of the “weakest link” in the network, as tragically demonstrated when a bomb introduced on a Malta Airlines flight made its way onto the trans-Atlantic PanAm Flight 103. In Chapter 22, “The Weakest Link: Managing Risk Through Interdependent Strategies,” Howard Kunreuther explores how such interdependent security risks often require interdependent solutions, involving all parts of the network and sometimes requiring a combination of public and private strategies.
  • Global logistics networks present new risks and demand new strategies—As global logistics networks have grown and developed, they also have presented new challenge in managing risk and volatility across these broad, global networks. In Chapter 23, “Integration of Financial and Physical Networks in Global Logistics,” Paul Kleindorfer and Ilias Visvikis discuss changes in logistics and financial instruments such as derivatives that have emerged to value and hedge the cost of capacity and services in these markets. The approaches to address risks in global logistics illustrate the emerging tools and competencies that have been needed to manage new network risks.
  • Networks can lead to battles between those who seek greater control and those who advocate greater freedom—Although telecom is a “networked” industry, incumbents have often fought against a network view of strategy and business models. In Chapter 24, “Telecommunications: Network Strategies for Network Industries,” Kevin Werbach contrasts the worldview of “Monists” such as AT&T, who see the infrastructure as inseparable from the network, and “Dualists” such as Google, who see the network and its applications as distinct from the underlying infrastructure. He suggests that a more modular future might bridge the gap between those who seek to own and capitalize on the network and those who seek to expand it through more neutral offerings.
  • Addressing political and social risks requires a deep understanding of networks—Companies such as an oil company seeking drilling rights face complex risks from interactions among political leaders, media, and social activists. The company’s fate often is in the hands of a complex set of actors. In Chapter 25, “Network-Based Strategies and Competencies for Political and Social Risk Management,” Witold Henisz examines how information about the structure of political and social networks can be integrated into data acquisition and analysis, as well as strategy implementation, to better manage political and social risks.

Part VII: A Double-Edged Sword: Contagion and Containment

Networks have a dark side. They speed the flow of communication and commerce, but diseases, terrorism, computer viruses, and other threats can ride on these same smooth rails. Extended chains with more partners in different countries create channels for contagion. The final section of the book explores the dark side of networks and strategies for addressing challenges, including these:

  • Network-based global terrorism demands a network-based solution—Al-Qaeda and other global terrorist networks have moved from hierarchy to a resilient, network-based structure and leadership. In Chapter 26, “Terrorism Networks: It Takes a Network to Beat a Network,” Boaz Ganor examines how the evolving structure of these networks is redefining global terrorism, and how antiterrorist agencies have had to build their own networks to address them. As he notes, “It takes a network to beat a network.”
  • Diseases spread through global networks, so countries need to join together to prevent them—In Chapter 27, “Global Diseases: The Role of Networks in the Spread (and Prevention) of Infection,” J. Shin Teh and Harvey Rubin examine the role of global networks of air travel and connections in the spread of infectious diseases. Networks can help to meet these challenges, such as those that contribute to the development and distribution of drugs and vaccines for infectious diseases. Network-based analyses help to better model the spread of diseases. The authors also argue that effectively addressing the risks of global infection requires a collaborative international solution, or “global compact,” that will allow effective diagnosis, prevention, and treatment of infectious diseases.
  • Interpersonal social networks spread diseases but also can help prevent them—In Chapter 28, “Lessons from Empirical Network Analyses on Matters of Life and Death in East Africa,” Jere R. Behrman, Hans-Peter Kohler, and Susan Cotts Watkins explore the impact of informal social networks in preventing HIV infection in Kenya and Malawi, using longitudinal quantitative and qualitative data from more than a decade. They show that both the context (e.g., the degree of market development) and the density of networks matter (possibly interactively), as well the endogeneity of network partners.

These chapters, collectively, represent a multidimensional view of the shifting landscape. They help managers to raise important questions about a networked world and wrestle with the core issues they need to address in meeting the network challenge: How do we need to rethink our approach to innovation? What new coordination mechanisms do we need? What strategies do we need to compete effectively network against network rather than firm against firm? What business models will help us create and appropriate value in a networked world? How do we need to redesign our organization and change our approach to managing our employees? What new risks are created by networks, and how can we address their dark side?

As noted previously, these approaches are not either/or. We are not in a completely networked world. In each area, we need to be able to see the network as well as the individual nodes. Both perspectives are accurate and important. Firm-level strategies and competencies still need to be part of management thinking, but these decisions need to be made in the context of the broader network.

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