March 2011

"Human beings, by change, renew, rejuvenate ourselves; otherwise we harden."

Johann von Goethe

Abstract

This article presents four models of business renewal within networks based on a theoretical framework developed from earlier literature. According to the typical dimensions of business development, our framework distinguishes between the exploitation of present knowledge for efficiency and the exploration of new knowledge for new business development. Furthermore, the two network development and governance types (i.e., hub-spoke and multiplex) form the other dimension of the framework. The framework was empirically tested with five case companies and their business networks. The framework of network models may help managers to structure the business network and its renewal based on the strategic targets of a firm. Furthermore, the theoretical contribution of the paper deepens the understanding of how co-creation and interaction between the participants differ according to business focus and complexity of networks.

Introduction

Today there is a wide spectrum of business network types, ranging from supply chain networks and strategic alliances to networked innovation. As the dynamics of change are often seen as the dominant challenge to firms in today's economy, research interest has recently focused on those business networks that enable flexibility or agility, renewal, and even exploration of new business opportunities. This practical challenge of firms’ business development has been studied separately from several research perspectives. Our intention is to bridge the gap between several perspectives, and study how in practice firms utilize the business networks within their strategic development work.

The practical purpose of this study is to create new knowledge for managers and business developers about development and management within business networks. A central point in this study is the question of renewal within the business networks. Here, renewal is understood as a network's joint efforts to gain competitive advantage through co-creation in a rapidly changing environment. According to the business development needs of network actors, the focus of co-creation can be on either efficiency or innovation.

A Framework of Business Network Renewal

The theoretical framework of this article consists of four network models (Figure 1), which are constructed in the light of earlier research. The two basic models for network governance are a hierarchical hub-spoke model and a multiplex model (Doz, 2001) and thereby similar models can be distinguished in network development (Eccles, 1981). The network governance structure influences the complexity of a network and network members’ willingness and ability to participate in co-creation. In our framework, we distinguish between two types of network complexity: bilateral relationships of independent actors and multilateral relationships between interdependent actors.

While our focus was on the business development of firms, we distinguished between the exploration of new knowledge and the exploitation of new knowledge. First, we consider those activities that increase an organization’s innovativeness and stock of knowledge – what March (1991) refers to as “exploration,” and Spender (1992) calls “knowledge generation.” Second, we consider those activities that deploy existing knowledge to efficiently create value – what March refers to as “exploitation”, and Spender calls “knowledge application.” This forms the other dimension of our theoretical framework.

Figure 1. A Framework for Renewal and Co-Creation Models in Business Networks

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The hub-spoke model is founded on the activities of the core company (i.e., the hub firm). The major objective is to increase the efficiency of the present operations of the core company. Typically, development responsibility belongs only to the core company. The main point in the model is to use present resources of networks, and therefore the model is labelled as an exploitation dimension. The strategic network model is by its nature normally a multilateral network where several firms co-operate with each other. The firms in the network can set common goals and objectives for businesses to find new solutions together. However, the main target is to exploit strategic assets. The strategic alliance model is based on integrating different competences. The aims are to explore new business opportunities and reach new markets and customer groups. By combining technological or other knowledge bases, it is possible to achieve new business opportunities. Some of the network partners may also be competitors, which makes it difficult to discuss further measures and agree on common targets. The open innovation model is source of intense discussion (Chesbrough, 2003). Typically, there are many parallel and loosely coupled networks, and only some network partners join together and start new businesses development.

In earlier literature, a distinction has been made between different types of co-creation within networks, and some authors (e.g., Brown & Keast, 2003; Keast et al., 2007) summarize these as: cooperative, coordinative, and collaborative, or as originally proposed by Ellis et al. (1991), the 3C’s: communication, coordination and cooperation. In both the cooperative and coordinative business networks, participants are independent organizations that come together for a specific purpose. In a collaborative network, the participants are interdependent and co-creation occurs in several levels of network organizations.

Research Design and Case Studies

With this research, we aim to support the development of businesses and organizations by using knowledge based on research data. We also aim to create new conceptual knowledge that can be generalized. When solving business and network problems with case companies, a cyclical development procedure has been applied. Each stage of the development process has been assigned certain tasks, actors (i.e., an organization), and development results. Naturally, the progress is not linear from one stage to the next.

The cases represent different models of renewal and co-creation in business networks, as summarized in Table 1. In the sections that follow, the case descriptions are described in more detail, including an examination of the different dimensions of co-creation based on the theoretical framework.

Table 1. Case Summaries

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Case A: Open Innovation Model of a Small IT Company

The software products of case company A are partly focused on free/libre open source software (F/LOSS) and its employees are participating in certain open source communities. IT consulting services to both industrial and public markets form more than half of its turnover. The company has actual business partnerships with the core companies of F/LOSS communities. These core companies offer commercial products based on F/LOSS and the case company also utilizes these solutions. In order to explore new business opportunities, the CEO and owner of the company has also led the employees to participate in certain discussion forums. From these connections and interaction with potential customers, the company has found opportunities to offer its services to new customers, who have been looking for knowledge related to the utilization of new IT tools. Although case company A operates continuously in different open communities and social networks with multiplex relationships, its CEO has a clear vision about knowledge sharing and protection in business networks. For this reason, the case company also has several models of co-creation within business networks, and they vary from co-operation with larger companies to collaboration in communities.

Case B: Strategic Network Model of a Technical Trading Company

The major customer segments for Company B are the metal industry and building industry. Its services include machine deliveries, installation, implementation, training, maintenance, and replacement part services. In case B, a new service concept was developed jointly in a network of interdependent companies, including its partner offering material handling systems and customers in the metal industry customer segment. The new concept seeks improved exploitation of present competences of network members. The plan was for the case company to sell the total solution and manage the customer relationships in the chosen customer segment; the partner company would offer technical support and documentation. Therefore, the network consists of bilateral relationships and co-creation has characteristics of both coordination and collaboration. The co-creation of the new business concept was based on complementary resources. The companies have each defined their roles, motives, and goals for co-creation to find mutually beneficial opportunities.

Case C: Strategic Alliance Model of a Subcontractor

Case C company is an SME offering industrial services, metal products, and subcontracting to global product companies in the technology industry. During the last ten years, its customers have been outsourcing their production and the case company has taken larger responsibilities. In order to cover an even broader range of customer needs and to offer life-cycle services, the case company has built relationships with partners with complementary resources. The target was exploitation of partners’ complementary resources and their integration with business solutions of the core company. The partner companies are a small engineering company, an electrical installation company, and a maintenance service company. The companies have experience in co-operation but they started the collaboration with a joint strategy process. Within this process, the companies co-created the joint business concept and defined the roles, responsibilities, and share of risks and benefits of the collaboration. Still, the case company wanted to ensure the commitment of partners and interdependence was strengthened with cross ownerships between the case company and partners. The co-creation was founded on bilateral partnerships between case company and partners and the case company’s strong governance and coordination of joint processes.

Case D: Strategic Alliance Model of Marketing Companies

Case D involves a group of six companies offering marketing services in the areas of marketing, advertising, business consultancy, printing, media planning, and market research. The case companies are part of a larger group and they form a network with multiplex relationships, both with each other and with other companies. Particularly large customers are common to the group, although the companies also serve customers that are independent of the network. Accordingly, the group’s management plans to take the responsibility of the co-ordination work and offer the customer the entire service package. According to their view, their customers would benefit in many ways from this more coordinated way of selling marketing and advertising services. The business development focus was on exploration of knowledge and competences at a network level. The group has already described the networked service concept on some levels, including for example, common aims, processes, some tool,s and documentation procedures. Further development work and co-creation between the group members will be undertaken to develop a common understanding of the service concept of the network and a unified way of managing the network. Thus, because co-creation existed in several levels, it can be described as collaborative.

Case E: Hub-spoke Model of a Wood Product Company

Although the case E company has in recent years moved into services, wood products are still an essential component in its service business. The company has four of their own assembly factories and some component factories. Many part assemblies and materials are acquired from outside the company. Production has been trimmed to be as efficient as possible. Thus, production makes a great demand of the supply chain and its development. The network co-operation focused on exploitation. The manufacturing costs of products are only a small part of the total price when products are sold to clients and customers. Besides, service functions deliver all products to all clients and customers. Service functions have developed a new kind of services for client and customers. They co-operate with new partners and develop new services together with their new partners. This activity has increased the complexity of networks and thereby led a shift in the relationships from bilateral to multilateral. The company is strategically moving in a new direction, however the production side will still continue in exploitation mode in the future.

Empirical findings

As described above, the case companies simultaneously have several network operations, but still they have been located on the framework according to the main focus of business development at the studied time (Figure 2).

Figure 2: Case Companies Located on the Renewal and Co-Creation Framework

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First, cases C and E represented the hub-spoke model, where the co-operation relationships were typically bilateral and the focus was on knowledge exploitation. In case C, the present development needs related to the service business have guided the network to knowledge exploration. However, in Case E, the service business development has led its network to the direction of the strategic network model. Second, case B illustrates a more complex network where three companies have developed a new service concept together. The service concept was based on coordination and complementary resources of companies, and it did not require intensive exploration of new knowledge. Third, case D stands for the strategic alliance model with horizontal collaboration and knowledge exploration between the companies, who belong to same group. Because of this ownership situation, the legal relationships and sharing of risks and benefits between the companies were clear and the complexity of network was constrained. Finally, case A portrays a more open innovation model where the case company intentionally utilized parallel network models. Within this kind of innovation model, it is important to have a clear vision about knowledge sharing and protection.

Network renewal has emerged based on co-creation process (i.e., the interaction and relationships of network companies). In the case descriptions, we distinguished the level of co-creation as 3C’s (cooperative, coordinative, and collaborative) (Brown & Keast, 2003; Keast et al., 2007). The cases highlighted how exploration of new business opportunities led the network actors to more intensive, multiplex, and collaborative relationships. Still, even in case D’s network, where case companies were part of a larger group, the customers bring out how network companies appeared to be targeting their own interests before the network’s targets.

After the recursive recycling of lessons learned from the literature, the theoretical framework and case findings, we were able to identify the focus of renewal and co-creation together with pros and cons of each network model. These aspects of co-creation within business networks are summarized in Table 2.

Table 2. Aspects of Co-Creation Within Four Network Models

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The importance of joint intents and shared understanding for collaboration become evident in all cases. Only one of the case companies was able to utilize more open models of innovation, and thereby its business model was mainly based on services and consulting when sharing of its software solutions was not harming the business goals. The others were utilizing co-creation networks for business renewal when the competences of network actors were clearly complementary and interests of participants were not conflicting. Still, too often their own competence base was described as too broad and the companies could benefit if they opened their innovation process.

Conclusion

Typically, firms and their managers have more experiences of certain business networks, and one important challenge is to understand that different network situations require different approaches. Hence, the characteristics of network members influence their willingness and ability to take part in development work. The development of closed, vertical, and rather hierarchical hub-spoke networks can thereby quite easily be foreseen and managed. In these networks the focus of renewal was on operative issues: efficiency and productivity of network level processes. Within strategic alliances and networks, co-creation required more negotiations between the network members and the ability to discuss future business opportunities. Still, quite often the strategic approach to business networks was missing and the firms did not distinguish the network models.

The practical implications of this article are connected to the strategic management of business networks. The framework of network models may help managers to structure the business network based on the strategic targets of a firm. The theoretical contribution of the paper deepens the understanding of how co-creation and interaction between the participants differ according to business focus and complexity of networks.

The empirical material about renewal in business networks was based on activity research into five case networks. Due to the multiple-case approach and business networks being the main unit of analysis, it was not possible to give deeper consideration to entrepreneurship and strategic management. Still, several case examples demonstrate that the role of managers and entrepreneurs in network organizations is challenging. Therefore, one important subject for future studies would be to research entrepreneurship and networks as strategic choices.

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