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This chapter is from the book

The Rise of Networks

A network may be defined mathematically as a set of nodes and the arcs that connect specific pairs of these nodes. These interlinked structures serve as conduits for information, human resources and capital, material flows—and associated risks. The origin of interest in networks in business and economics goes back to studies of transportation networks and mathematical programming solutions for various classes of production and transportation problems in the 1950s (e.g., Dorfman, Samuelson, and Solow 1958; Ford and Fulkerson 1962). Network-based theory also developed rapidly in sociology (as in the work of the renowned sociologist Coleman 1990). The early work was typically grounded in the analysis of a prespecified network, but a number of important contributions have now emerged regarding endogenous network formation (the activation of potential links between various nodes) and information exchange in economic and social networks (see, for example, Jackson 2008). Researchers in other fields have also addressed network phenomena, either explicitly or implicitly. This book presents many of these perspectives on networks. We have not tried to reduce all of these perspectives to a single, general definition of network-based effects, but all of these perspectives imply informational and resource links between actors in some given context. These links, whether preexisting or dynamically activated, imply interdependencies between these actors (see sidebar). It is the study of the nature and evolution of these interdependencies that has provided new insights on the changing landscape of global business, and that provides the major backdrop and rationale for this book.

Sharp declines in the cost of communications, information technology, and logistics have led to explosive growth of outsourcing and offshoring, as global work migrates to where it can be completed best at lowest cost. Cross-border trade has skyrocketed. Total manufacturing exports increased 10% annually between 2000 and 2006, growing at twice the rate of world GDP.1 While global business once moved from developed to developing countries, now global competition means “competing with everyone from everywhere for everything,” as Boston Consulting Group’s Hal Sirkin, Jim Hemerling, and Arindam Bhattacharya write in their book Globality (2008). We have seen waves of mega M&A activity that have created new industries (AOL Time Warner) and reshaped existing ones (Chrysler and Daimler-Benz, Sony and Columbia Pictures, JP Morgan and Chase).

Consumers are networked through interactive and empowered relationships, including the rapid rise of social networking sites such as MySpace and Facebook. By 2009, there are expected to be as many as 250,000 social networking sites. On eBay alone, more than 276 million users bought and sold more than $59 billion in products in 2007, almost equal to the $61 billion in sales by Target in the same year.2 eBay sellers trade more than $2,000 in merchandise every second. New multinational regulatory models and business models are emerging to meet the network challenge. Investors also are placing a high value on network-based firms, as shown by Microsoft’s $240 million purchase of a stake in social networking firm Facebook in October 2007, based on a $15 billion valuation of the privately held company that was launched less than four years earlier (Greene 2007).

Companies are using networks as sources of innovation and customer service. We are seeing the rise of consumer-generated advertising and consumer-led R & D and design. Dell’s IdeaStorm site has received thousands of suggestions from consumers for new products or services, and consumers then vote for those they think are most important (www.ideastorm.com). As Don Tapscott and Anthony D. Williams write in Wikinomics (2006, 10), “We are entering a new age where people participate in the economy like never before. This new participation has reached a tipping point where new forms of mass collaboration are changing how goods and services are invented, produced, marketed and distributed on a global basis. This change represents far-reaching opportunities for every company and for every person who gets connected.”

The classic network battle in videocassettes, in which Matsushita triumphed over Sony’s superior Betamax technology in the 1970s by building a network of content and equipment, has given way to more complex battles. Even as Sony was battling with Toshiba for next-generation DVD standards (Blu-ray versus HD-DVD), companies such as Apple and Netflix were building their own networks for online movie downloads and other new channels for delivering entertainment (Anthony 2008). Standards wars are just part of a broader competition of network against network.

No One Is Exempt

Every organization is affected by the rise of networks. There are very few quiet backwaters where managers can comfortably take a firm-centric view of their work. This applies to all industries, all sizes of firms, and all countries. All branches of the military are moving to more network-centric models in institutions that had once defined “command and control” hierarchical structures. Networks have both direct and indirect impacts on strategy and competencies, as the chapters in this book make plain. Networks are transforming markets and many of the most important modes through which business and government organizations generate value, assume risks, ensure their long-term viability, and interact with their environment.

We are just beginning to recognize the implications of these changes for how we think about companies and how we design and run our businesses. Companies have experimented with a variety of new models to take advantage of these network opportunities, but we are still in the early stages of discovering what new opportunities and risks are presented by this shift from a firm-centric view to a network-centric view. This book considers some of these implications and opportunities.

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