HOW SOCIAL STRUCTURES AND PROCESSES ENHANCE
ADAPTING, COORDINATING AND SAFEGUARDING EXCHANGES
IN NETWORK ORGANIZATIONS
Define how solving problems of adaptation, coordination, and safeguarding solve problems of exchanges and make an org’l form viable and stable. Need to define network vialibilty--the likelihood that a network organization will arise. Stability is the persistence or longevity of a network organization is employed for exchanges.
Networks enhance coordination in two ways: 1) restricting access of exchange partners stabilizes the system by reducing variability in exchanges and enhances learning and the development of routines needed for team interdependence in complex, innovative tasks, 2) loose coupling among autonomous units facilitates flexibility by allowing resources to be moved easily among network members and, 3) industry culture establishes congruent expectations of and parameters for behavior by instilling shared norms, roles and conventions among exchange parties.
Understanding how network organizations facilitate coordinated adaptation under uncertain conditions is important to explaining the emergence of this form, but it does not resolve a fundamental puzzle: how do networks safeguard transactions against opportunistic behavior? Since network organizations involve both specialized investments and high uncertainty, they seem particularly ripe for opportunism. However, network organizations increase the capacity for monitoring among exchange partners. This ability to monitor unique resources determines whether firms rent or internalize them. As Alchian and Woodward (1988:68) argue, "with cheap detection, the unique resource is likely to be rented rather than owned." We identify four social mechanisms used in network organizations to safeguard against opportunism: 1) restricted access enhances mutual monitoring by compatriots to provide timely and realistic information, and strengthens the identification among parties by increasing their frequency of interaction, 2) structural embeddedness facilitates spreading information about reputations across groups and reduces the problem of information asymmetry, 3) outcome interdependence aligns partners’ interests and reduces the incentives for opportunism and, 3) collective sanctions increase the costs of opportunistic behavior. These social structures and processes allow customized exchanges to take place among autonomous parties.
The social aspect of the institutional environment has been recognized as critical since Granovetter’s (1985) widely cited critique, but, as Williamson (1995: 85) acknowledges, "network relations are given short shrift" partly because of TCA’s preoccupation with dyadic relations. Thus, one goal of this section is to extend the TCA framework to specify more formally how the social structure in an institutional environment influences the cost of using alternative forms of governance.
Restricted Access to Network Membership Enhances Adaptation, Coordination and Safeguards Exchanges
Restricted access involves limiting the number of core parties who exchange within a network. The number of core (or long-term) relationships in a network is significant since it influences the ability of network members to act toward common goals, to sustain the network, and to achieve competitive advantage (Gomes-Casseres, 1994). Too many partners places overwhelming demands on resources (time, energy, financial, etc.) as well as on the ability to define a common goal while minimizing competing claims. "The maintenance of ongoing relationships is easier in Japanese industry than U.S. industry because Japanese firms deal directly with far fewer suppliers than U.S. firms...For example)... In response to Japanese competitors, Xerox reduced its pool of suppliers from over 5,000 companies to 400"(McMillan 1990:39,41). By limiting the number of core exchange parties, "restrictive micronetworks" result. Micronetworks have "a lower average number of relationships per actor, and a lower average volume exchanged per relationship" (Baker, 1984:784). Network organizations to form around micronetworks within an industry. They are indicated by subgroupings (or clusters) of dense direct and indirect paths of short distance among some members. However, micronetworks should not be isolated cliques for two reasons: a) availability problems injects new partners into the micronetwork as parties search for viable alternatives. The desired partner may not be available when needed, especially in project networks such as architecture, film, music, and construction; and b) need for steady supply or second sources. In semiconductor, auto and electronics industry, manufacturers second source to maintain uninterrupted supplies.
Exchanges in network organizations are restricted in two ways: status similarity or relational contracting. Status is derived from "past demonstrations of quality" or exchange partners status and serves as a proxy for quality when quality is difficult to predict or direct experience lacking (Podolny, 1994: 460, 479). Status gains access to resources and opportunities, especially in uncertain environments such as financial services (Podolny, 1994), traders in a securities market (Baker, 1984), biotechnology (Zucker et al., 1995), and movie making (Jones & DeFillippi, 1996). Relational contracting, the second strategy for restricting access, involves long-term, repeated but not exclusive exchanges. Relational contracting is defined by a) "commitment" between parties where a long-term orientation is signalled through equity ownership, rewinning contracts, committed assets, and open-ended agreements and b) extensive information sharing about how to develop new products, improve processes, products, and services (Bolton, Malmrose, and Ouchi, 1994; Helper, 1991; McCauley, 1968). Scholars have observed relational contracting in the French mechanical engineering industry (Lorenz, 1988), between Japanese suppliers and manufacturers (Bolton, Malmrose, and Ouchi, 1994; Dyer, 1994), auto manufacturers in the US (Helper, 1991), the Maine lobster market (Acheson, 1985), and entrepreneurial settings (Larson, 1992).
Network organizations cope with high uncertainty, especially information asymmetries and product demand volatility, and task complexity by restricting access of exchange partners to enhance adaptation, coordination, and safeguard exchanges. Restricted access enhances adaptation in uncertain environments by increasing identification among parties. Since parties choose their partners and interact more frequently, it establishes the conditions for strong ties (Granovetter, 1973). These strong ties are especially important in adapting to "severe change and uncertainty" since parties have a greater vested interest in helping one another (Krackhardt, 1992: 218). When such identification exists, parties see their interests and needs as aligned rather than competing (Granovetter, 1992; Provan and Gassenheimer, 1994). This increased identification enhances adaptation to uncertain environments.
Restricted access enhances coordination in two ways. First, it reduces transaction costs of coordinating complex tasks across organizational boundaries by a) reducing variance in expectations, skills, and goals that parties bring to exchanges and b) providing continuity so that team members learn each other's work methods (Eccles, 1981; Faulkner & Anderson, 1987:892) and establish routines (Bryman et al., 1987:280). Recurring relations over time may substitute for internal processes of probation and socialization (Bryman et al., 1987:267). Second, increased information sharing among parties enhances the transfer of tacit knowledge across boundaries which speeds the development processes and innovation of firms providing a source of competitive advantage for firms. This has been found in the biotechnology industry (Powell, Koput, and Smith-Doerr, 1996), auto industry (Clark and Fujimoto, 1989) and management of innovation (Von Hipple, 1988). Thus, restricting access reduces transaction costs of interfirm team coordination for complex tasks since parties better understand one another’s needs and approaches; it also enhances innovation through increased information sharing.
Restricted access safeguards exchanges by reducing the amount of information and monitoring required among network members. From a transaction cost perspective, restricting partners reduces problems of bounded rationality and enhances safeguarding exchanges since there are fewer partners to monitor. This is important because "large size interferes with efficient communication and observation of opportunists, allowing opportunism to go largely unabated" (Baker, 1984: 782-3). Fewer partners decrease the amount of information and communications needed and also increase the ability of compatriots to monitor and sanction behavior through informal means (Merry, 1984). For example, Faulkner (1985:102-104), in his study of studio musicians, finds that among the elite at the center of the industry where entrance is restricted and where dense relations facilitate the spread of information about performances, more policing occurs. At the periphery, where entrance is less restricted, policing occurs less frequently and information is more fragmented and spreads less quickly. In addition, identification among parties can be a powerful incentive for refraining from opportunistic behavior (Granovetter, 1992).
Network organizations use restricted access under conditions of uncertainty to enhance adaptability to changing environments, coordination for complex tasks, and safeguarding of asset specific tasks. These not only reduce transaction costs but also increase innovation and diffusion of knowledge which provide a source of competitive advantage for fims using this governance mode. Thus,
Proposition 2: Restricted access enhances adaptability to uncertain environments, coordination among parties for complex tasks, and safeguards exchanges. The enhanced adaptation, coordination and reduced costs increase the viability (probability) and durability (persistence) of network organizations in an industry.
Restricted access can also impede competition and innovation if it creates a "closed system." For example Japanese markets are considered closed to American competitors due to the high recontracting rate between prime contractors and subcontractors (McMillan, 1990). Retail prices in Japan are notorously high, lacking world wide competition, due to restricted market entrance of international retail firms. The "Not-Invented-Here" syndrome that impedes innovation within firms and is used to describe the failure of US automanufacturers and their macroculture (Abrahmson and Fombrun, 1994) develops from restricted access creating a system closed to new ideas. Thus, it leads to participants "wallowing in their collective ignorance." We suggest that the degree of access is critical and follows an inverted U shape where a) too much openness impedes coordination for tacit and complex tasks, increases the potential for opportunism with these assets and tasks, and undermines adaptation except through standardization and b) too much restricted access reduces the source of new ideas and alternatives for improving the system. Network organization excel if they can optimize restricted access to provide stability infused with new ideas. The problems of availablility mentioned earlier are a solution to too much restricted access.
Decoupling the Value-Chain Increases Adaptation
Decoupling refers to the ability of different components of a system to vary independently of one another (Aldrich, 1979: 325-26). In the case of network organizations, disaggregation into autonomous units facilitates decoupling. One form of decoupling is through vertically disaggregating the value chain and subcontracting or outsourcing for needed goods or services (Mariotti & Cainarca, 1986; Snow, Miles & Coleman, 1992). In effect, unique resources are rented or exchanged rather than owned. For example, in the computer industry, computer manufacturers increasingly outsource the manufacture of their products to electronics manufacturing services (EMS’s) and focus on design and marketing. (Lachica, 1995).
Decoupling the value chain enhances organizational adaptation by (a) increasing flexibility, and (b) creating the conditions for better performance from each individual element in the value chain. Decoupling increases flexibility--which is tha ability to respond to a wide range of contingencies--because resource bundles, now exchanged or rented rather than owned, can be cheaply and quickly reallocated to meet changing environmental demands. A decoupled value-chain is better able to adjust changes in demand, discontinue obsolete products and develop new products, and enhance product quality while reducing lead time. For example, the network structure (also called flexible specialization) of the textile industry in Prato, Italy, enhanced firms’ ability to respond quickly to changes in fashion (Piore & Sable, 1984: 215). The semiconductor industry of Silicon Valley shows how networks facilitated the rapid and flexible deployment of tacit knowledge across organizational boundaries to develop and disseminate new knowledge and products (Saxenian, 1994). ***This example is too vague*** In Japanese keiretsu, decoupling enhanced organizational flexibility as parties learned from one another which reduced lead times, increased quality levels, and cut inventory compared to non-networked American and Eurpean firms (Clark and Fujimoto, 1989; Nishigushi, 1994).
Decoupling creates the conditions for better individual performance by promoting specialization and preserving high-powered incentives. Greater specialization allows each autonomous unit in the network organization to fully develop its core competencies (Dyer, 19**; Hill, 19**). This allows the network organization to apply greater expertise in its specialized tasks. Besides the immediate benefit of greater specialization , disaggregation and decoupling serve as an incentive for innovation and cost reduction, thus preserving the high-powered incentives characteristic of markets (Zenger & Hesterly, 1996). In film production, the move toward networks of independent producers facilitated product innovation and adaptation to changing product demand because independent producers had greater incentives to identify and make "hits" than did producers within the film studio (Robins, 1993). United Artists, the only film studio founded as a network organization (never owning studios, stars, etc.) foundered on the verge of bankruptcy when the movie market was stable, but outperformed other studios in terms of box office revenues and Academy Awards once the market shifted to rapid, unpredictable changes in consumer preferences (Balio, 1987).
We summarize the discussion in this section with the following proposition:
Proposition 2: Increased decoupling of the value-chain allows firms to adapt to rapid and unpredictable changes in product demand. Ceteris paribus, this increased organizational flexibility creates competitive advantage for its firms***over hierarchical firms***, and increases the viability (probability) and durability (persistence) of network organizations within an industry.
While decoupling enhances flexibility and competence, it requires coordinating across firm boundaries to complete steps in the value chain. However, there are some tightly-coupled technologies (Perrow, 1984) that are not amenable to vertical disaggregation. Perrow (1984: 93-94) identifies four conditions that require tight coupling: Time-dependent processes, invariant production sequences, unifinality, and little slack. Time-dependent processes refer to situations where delays cannot be tolerated. For example, some production process do not allow for cooling and reheating. Or, in the case of some chemical processes, reactions are almost instantaneous and cannot be delayed or extended (Perrow, 1984: 93). In invariant production sequences, the steps involved in a production or service process must be completed in a certain order. Perrow (1984: 93) cites nuclear plants, chemical plants, and pharmaceutical production lines as examples which require invariant sequences. Moreover, some tightly-coupled processes involve unifinality, which means they have processes that allow only one way to complete production. Finally, tightly coupled systems are characterized by less slack. There is less tolerance for waste, shutdowns, or failures in general.
Macroculture Enhances Interfirm Coordination
Macroculture is a system of widely shared assumptions and values comprising industry, occupational, or professional knowledge that guide actions and create typical behavior patterns among independent entities (adapted from Abrahmson and Fombrun, 1991, 1994; Gordon, 1991; Phillips, 1994: 384). This knowledge-base is derived from assumptions about customers, competitors, suppliers, and society (Gordon, 1991). Macroculture is something which is shared by all participants of an interfirm setting (profession, industry, or occupation) --- not just top managers (Abrahmson and Fombrun, 1994). Macroculture specifies roles, role relationships and conventions--accepted approaches and solutions to problems--to be employed by participants (Becker, 1982); thus, macroculture coordinates interdependent activities among independent entities so that complex tasks may be completed.
Macroculture evolves out of repeated interactions among participants; the "webs of direct and indirect relationships" (Abrahmson and Fombrun, 1991: 181), as well as institutional sources () and the larger national and global cultures within which it is embedded. The more connected (denser) and more frequent interactions among industry participants, the more widely shared these values, assumptions, and role understandings are likely to be (Abrahmson and Fombrun, 1991; Reddy and Rao, 1990). Interfirm movement of participants diffuses norms, values and expectations among those within the industry (DiMaggio & Powell, 1983; Pfeffer & Leblebici, 1973). In Silicon Valley, the industry norms and understandings have emerged and are reinforced by the proliferation of strategic alliances, subcontracting and frequent job hopping of individuals among firms which "blur the boundaries between independent firms" (Saxenian, 1990: 100).
In addition, macrocultures are diffused and institutionalized by three other means. First, socialization received in professions and crafts shapes decisional premises among disperse participants that creates strongly shared macrocultures (Kaufman, 1960; Light, 1979; Van Maanen & Barley, 1984). Socialization is often provided by third parties through formal schooling such as in law, and medicine, or through apprenticeship programs such as guild and trade associations. For example, the Directors Guild provides a limited number of highly coveted apprenticeship slots with the major studios for training directors. In addition, Guilds or Unions in the film industry also set wage rates, working hours and conditions, collect workmen’s comp and provide portable benefits such as healthcare. Second, trade journals or industry newsletters disseminate information throughout the industry (Abrahamson & Fombrun, 1994). Film industry participants refer to their primary trade journal, Daily Variety, as the "Bible" of the industry (Kent, 1991). In Silicon Valley, the San Jose Mercury serves this function (Saxenian, 1994). Third, industry events such as trade shows, film festivals and conferences diffuse norms and values by providing role models, setting standards and exchanging information among participants (Jones, in press). This suggests that macrocultures evolve out of long-term repeated interactions, especially among core members, but that they are sustained by an institutional infrastructure.
Macroculture is critical to understanding network organizations because their complex products and services require shared social processes and structures for effective exchange and resource movement among autonomous partners. Macroculture enhances coordinated adaptation among autonomous parties in three ways: 1) by creating "convergence of expectations" so members do not work at "cross-purposes" (Williamson, 1991:278), 2) by allowing for idiosyncratic language to summarize complex events and information (Williamson, 1975:99-104, 1985:155) and 3) by specifying "broad tacitly understood rules...for appropriate actions under unspecified contingencies" (Camerer & Vepsalainen, 1988:115). Macroculture facilitates efficient exchange among parties because the ground rules among differing parties do not have to be recreated for each interaction (Faulkner, 1987:92-93). The high failure rate of recently formed alliances reveals how important established social processes and structures are to sustaining interfirm interactions (Gulati, Khanna & Nohria, 1994). Research in international joint ventures also show high failure rates because IJV’s it is difficult to manage cultural differences among parties (Contractor and Lorange, 1988).
All of this suggests that macrocultures reduce transaction costs by increasing the ease with which exchanges are coordinated among autonomous parties in rapidly changing environments. Thus, macrocultures provide a source of comparative advantage over other forms of interfirm coordination (e.g., joint ventures, alliances, consortia etc.) because these cannot shift and coordinate interfirm resources as easily.
Proposition 3: A strong macroculture enhances coordination among interfirm parties which reduces transaction costs. The presence of a macroculture increases the comparative advantage of network organizations in an industry.
Although a strong macroculture enhances a network organizations viability and durability, they are difficult to establish. Because networks involve disseminating cultural beliefs and values among many autonomous exchange parties, it may take decades to establish the shared understandings, routines and conventions for complex and uncertain tasks and to institutionalize these by socializing new members. For example, the network organization in the film industry emerged from interfirm exchanges among the major studios during the 1930s and 1940s which excluded the minor studios (Faulkner & Anderson, 1987). In Silicon Valley, the network developed from second sourcing agreements among initial semiconductor manufacturers (Saxenian, 1990). As Larson (1991) shows, even establishing congruent expectations and norms in dyadic exchanges takes years. In general, macrocultures are enhanced by close geographic proximity because it increases the likelihood and ease of interaction. Macrocultures tend to rise in geographically concentrated areas such as the Claifornia Wine industry (Philips, 1994), Silicon Valley (Saxenian, 1990, 1994), Hollywood (Faulkner, 1987), Prato, Italy (Piore and Sabel, 1984; Lazerson, 1995), and Japanese auto and electronic suppliers primarily located around Tokyo (Nishigushi, 1994) Hence, we expect to find network organizations in geographically concentrated areas.
It should also be noted that the above discussion does not take any account of the content of macroculture. Macrocultures that emphasize the dangers of commercial exchanges, seeing them as opportunities for deception and theft, or which view cooperation between firms, especially competitors, as unethical collusion could presumably hinder the development of network organizations.
STRUCTURAL EMBEDDEDNESS ENHANCES ADAPTATION AND SAFEGUARDS EXCHANGES
Structural embeddedness is the extent to which a"dyad’s mutual contacts are connected to one another" (1992: 35). Structural embeddedness is a function of how many participants interact with one another, how likely future interactions are among participants, and how likely participants are to talk about these interactions (Granovetter, 1985, 1992). With structural embeddedness, various actors in differing parts of the industry are linked extensively through indirect ties--A tells C about B. Structural embeddedness allows for information about parties to be dispersed quickly and easily. This enhances detection of deceptive behavior and reduces the "noise" about partners which impedes cooperation (Parkhe, 1993). When participants in a system can easily access information, reputation effectively safeguards transactions. For reputation to be effectively dispersed requires a social structure of many groups linked together by linking pins or weak ties allowing information to move across group boundaries (Friedkin, 1982; Granovetter, 1973, 1982). This allows specialized exchanges to occur under a wider range of governance mechanisms (Williamson, 1991:290-91).
Network organizations establish both the importance of and structural conditions for information sharing about reputation. When uncertainty is high, exchange parties’ experience more concern with their own reputation and the reputation of others (Kollock, 1994). Thus, information about reputations becomes more important to parties. Reputations have economic consequences for participants in network organizations. In the film industry, for example, those "with successful performances and track records move ahead in their careers, those with moderate reputations do not, those with poor reputations experience employment difficulties" (Faulkner & Anderson, 1987:881). Because subcontractors and professionals move frequently among both firms and fellow professionals, this establishes the conditions for linking differing groups together and spreading information about third parties among those within the network.
Structural embeddedness enhances adaptation and safeguards exchanges. It enhances adaptation because parties gather informtion regarding potential opportunities, synergies, and exchange partners through indirect links (Gulatti, 1995). This increases the number of possible permutations beyond those available by direct experience. It safeguards exchanges because parties know that information regarding reputations, forbearance, learning, and contributions will be diffused throughout the network. This enhanced adaptation and safeguarding expands the range of governance form under which asset specific exchanges are viable and allows network organizations to arise and endure. Thus,
Proposition 5: Increased structural embeddedness enhances information flows about and monitoring among partners. Thus, structural embeddedness increases the viability (probability) and durability (persistence) of network organizations in an industry.
***Steve and Bill- Any boundary conditions?***
Joint Payoffs Reduce Incentives for Opportunistic Behavior
A payoff structure defines how costs, risks, profits, and revenues are distributed among exchange parties. Prior research shows that payoff structure shapes exchange strategies (Deutsche, 1980; Tjosvold, 1988; Tjosvold, Johnson & Johnson, 1984). Joint payoffs--where parties share both costs, risks, or profits--increase information sharing, mutual orientation and cooperation. Since both parties benefit from improvements under joint payoffs, it enhances the likelihood that knowledge and innovations are shared among parties in the network. In contrast, zero-sum payoffs, where one party benefits at the expense of another, create coercion, restrict information flows and impair coordination in exchanges. Consequently, payoff structure is important for predicting opportunism or cooperation among exchange parties.
Joint payoffs work effectively when information is available and verifiable. Japanese contractors demand extensive data from their suppliers. If suppliers bid either too high or too low, the prime contractor adjusts the price; they also provide solutions to increase the suppliers efficiency and quality (Nishigushi, 1994). In film, effective joint payoffs are based on percentage of box office revenues since these data are gathered and released daily and publicly by both studios and exhibitors. In contrast, net profit participation does not generate joint payoff conditions since directors or producers rarely gain income from it; cost information is not only controlled but closely guarded by film studios. The producer Joseph E. Levine explains that "they pay you a pecentage either of the gross or the net. If you ever make a picture, forget the word ‘net’. Never say it to yourself. Think of gross, and you’ll get rich" (MCBride, 1983: 37). Director Sidney Pollack describes how "it is only in rare instances that one realizes money from profit participation" (Squire, 1983: 23). This suggests that high levels of interpersonal trust are not critical for joint payoffs to generate cooperation and align interests. The Japanese subcontractors demand sensitive data and complete information in order to subcontract with them. What seems critical is some means for gathering and disseminating information by which joint payoffs are defined and monitored by exchange parties. It is also important to note that joint payoffs both reduce power asymmetries and discourage parties from exploiting them when they do exist, since potentially more powerful firms’ performance are affected by the performance of those that are less powerful. When outcomes are aligned and each party depends on the other for completion of complex tasks, this changes dependence from assymetric to bilateral and alters the exchange dynamics (Williamson, 1985). As Provan & Glasshiemer (1994) show in their research on office furnitre industry, those with bilateral dependence are less likely to use and exploit power. Again, the example of the Japanese auto industry is instructive. While imbalances in dependence clearly exist between assemblers and suppliers, most accounts suggest assemblers are quite restrained in exploiting their power differentials (McMillan, 1990).
Joint payoffs are widely used in network organizations. In Japan, firms share risk with their subcontractors by allowing the subcontractor to pass on costs so that changing prices in material supplies are not born by the subcontractor alone; however, the subcontractor, in return, makes price concessions based on expected learning and innovation from manufacturing the items supplied--typically 4% per annum (McMillan, 1990). In French mechanical engineering firms, joint payoffs are created by firms agreeing to purchase a fixed percentage of goods from their subcontractors regardless of product demand. Subcontractors can maintain equipment and skilled workers while the consuming firms have a steady supply of goods (Lorenz, 1988). In film, directors, producers and actors share the risk of a film’s success or failure by receiving points of gross revenues (not profit sharing) rather than fees for services (Balio, 1987). These examples suggest a variety of ways in which exchange parties create joint payoffs to align interests, motivate best contributions of skilled specialists, and reduce incentives for opportunism.
Joint payoffs generate competitive advantage ***over markets*** because they increase the likelihood of parties transferring learning and sharing innovations to enhance quality and reduce costs of products and services for those within the network. Thus,
Proposition 6: Increased use of joint payoffs reduces the likelihood of opportunism and enhances the transfer of knowledge and learning among firms. This reduces costs and improves products providing a competitive advantage ***over markets*** for network firms, and and increasing the viability (probability) and durability (persistence) of network organization.
Collective Sanctions Increase the Costs of Opportunism
Collective sanctions involve group members punishing other members who violate group norms, values, or goals. They range from gossip and rumors, ostracism (exclusion from the network for short periods or indefinitely) to sabotage. Collective sanctions increase the costs of opportunism and provide powerful incentives for compatriots to cooperate, to monitor one another's behavior and to contribute best efforts in their tasks. They are more effective than individual rewards or punishment for influencing behavior because they place greater pressure on individual compliance to norms, values and standards due to group pressures (Heckathorn, 1990:374-375).
When individuals must enforce social norms, they often do not because of the costs involved (Olson, 1971). Thus, metanorms are developed to enforce social norms (Axelrod, 1985). A metanorm is a norm for punishing those who do not punish deviants. In network organizations, one's reputation is hurt by recommending someone whose performance does not meet the expected standards. For example, Howard Becker describes his experience of getting jobs in the music network based on the recommendation of a colleague who "interrogated" him about his abilities to do the job effectively. The colleague told Becker that "..if you can't it's my ass. In fact, it's not just my ass, it's three or four different asses. [He was recommending me to someone who was recommending me to someone else through a chain of several links]" (1982:87). In effect, this punishes those who do not adequately screen or punish poor performers reducing behavioral uncertainty in exchanges.
Several types and degrees of social sanctions are employed in network organizations. In Maine lobster trapping "interlopers" who violate fishing territories and accepted norms are sanctioned "through surreptitious destruction of their traps" (Acheson, 1985: 386). In the film industry, ostracism is used for violating accepted behaviors. The experience of those involved in making the film Heaven’s Gate is especially instructive (Bach, 1985: 309, 319-22). Contrary to previous agreements, Michael Cimino attempted to make the film artistic rather than commercial. In the process, the film went extensively over budget. After the excessive costs and box office failure became known through out the industry, sanctions ensued. The perceived misbehavior eventually "led to at least temporary unemployment for almost everyone associated with the picture" (Balio, 1987:339). Social sanctions define and reinforce the parameters of acceptable behavior by demonstrating the consequences of violating norms. The consistent use of social sanctions by network members increases the cost of opportunism, thus decreasing its likelihood. This provides competitive advantage to network firms by reducing the cost of monitoring to any one firm and enhancing learning and innovation due to easing the transfer of asset specific and specialized skills among network members. Thus,
Proposition 7: The consistent use of social sanctions decreases the likelihood of opportunistic behavior in networks and enhances innovation and learning among network members. Thus, social sanctions increase the viability (probability) and durability (persistence) of network organizations in an industry.
Summary. Decoupling the value-chain increases organizational flexibility for network firms which enhances adaptability to rapidly changing environments. Restricted access and macrocultures establish common expectations, language, and routines which facilitate coordinating customized and specialized skills among interdependent network firms. Restricted access, structural embeddedness, joint payoffs and collective sanctions safeguard semi-specialized or specialized exchanges in network organizations. These four social mechanisms decrease the opportunity and incentives for deception, increase the likelihood for cooperation, and ease the transfer of learning and innovation among network members.
These social mechanisms provide strong incentives for cooperation. As Kelley and Stahelski (1970: 77) point out "even competitors are likely to behave cooperatively in settings where there are strong social pressures to do so." Indeed, network organizations promote cooperative behavior at the same time that they thwart the development of problems that some have characterized as social dilemmas (Schroeder, 1995). "[Social] dilemmas are defined by two simple properties: (a) each individual receives a higher payoff for a socially defecting choice … than for a socially cooperative choice, no matter what the other individuals in society do, but (b) all individuals are better off if all cooperate than if all defect" (Dawes, 1980: 169. Restricted access, structural embeddedness, joint payoffs, and collective sanctions align well with Putnam’s (1993: 166) review of the conditions that favor cooperation in the face of collective or social dilemmas: "the number of players be limited, that information about each player’s past behavior be abundant, and that players not discount the future too heavily" along with "graduated sanctions against violators." Restricted access limits the number of players, structural embeddedness facilitates abundant flows of information about each network participant’s actions, outcome interdependence and graduated sanctions both discourage participants from yielding to incentives for short-term opportunistic behavior. Thus, the social mechanisms of network organizations enhance cooperative behavior needed for complex tasks with customized inputs under conditions of uncertainty. These social processes and structures allow learning and innovation to be disseminated among those within the network and provide a source of competitive advantage over firms under similar conditions but under different governance forms.
Summary. Network organizations enhance coordinated adaptation to uncertain environments by restricting access to the network which enhances adaptation through increased idnetification, coordination through establishing routines, by decoupling among autonomous parties which facilitates shifting resources as needed among those in the network, and by establishing industry culture which provides congruent expectations of and parameters for behavior. The presence of these social mechanisms under conditions of environmental uncertainty and team interdependence increases both the probability and durability of network organization in an industry.
Restricted access, structural embeddedness, outcome interdependence and collective sanctions safeguard semi-specialized or specialized exchanges in network organizations. When these social mechanisms are present, they decrease the opportunity and incentives for deception and increase the likelihood for cooperation by increasing the costs of opportunism and by facilitating the ease of monitoring those within the network. As Kelley and Stahelski (1970: 77) point out "even competitors are likely to behave cooperatively in settings where there are strong social pressures to do so." Indeed, network organizations promote cooperative behavior at the same time that they thwart the development of problems that others have characterized as social dilemmas (Schroeder, 1995). "[Social] dilemmas are defined by two simple properties: (a) each individual receives a higher payoff for a socially defecting choice … than for a socially cooperative choice, no matter what the other individuals in society do, but (b) all individuals are better off if all cooperate than if all defect" (Dawes, 1980: 169. The four mechanisms discussed in this section align well with Putnam’s (1993: 166) review of the conditions that favor cooperation in the face of collective or social dilemmas: "the number of players be limited, that information about each player’s past behavior be abundant, and that players not discount the future too heavily" along with "graduated sanctions against violators." Restricted access limits the number of players, structural embeddedness facilitates abundant flows of information about each network participant’s actions, outcome interdependence and graduated sanctions both discourage participants from yielding to incentives for short-term opportunistic behavior.