UNDERSTANDING A FOCAL FIRM S NETWORKING ABILITY A PROPOSED CONCEPT AND EMPIRICAL FINDINGS

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1 UNDERSTANDING A FOCAL FIRM S NETWORKING ABILITY A PROPOSED CONCEPT AND EMPIRICAL FINDINGS Thomas Deigendesch, Interbrand, Zintzmeyer & Lux, Zürich, Switzerland Uta Jüttner, Cranfield University, England and University of Applied Sciences Lucerne Stefan Michel, Thunderbird University, USA While the study of business relationships from a network perspective has been widely researched over the last three decades, managerial aspects of a focal firm's networking ability have only recently been addressed. If a firm s ability to develop and manage successfully its relationships with other firms is viewed as a core competence, research is needed to investigate exactly what networking ability is. This paper builds on the few conceptualisations of a networking ability and investigates empirically the main determinants of effective network management. A conceptual framework is developed which comprises configuration and coordination as the main dimensions relevant at both levels; the relationship -specific as well as the cross-relationship management level. Qualitative and quantitative findings from the production network of Europe s most successful private TV station are summarised. Suggested Track: Business and Network Marketing Contact Address: Uta Jüttner Cranfield University/ School of Management Cranfield, Bedford MK43OAL, England Phone: 0044/1234/751122; Fax: 0044/1234/ U.B.Juettner@cranfield.ac.uk or Uta Jüttner HSW Lucerne, University of Applied Sciences Zentralstrasse 9 Postfach Lucerne Switzerland ujuettne@hsw.fhz.ch

2 UNDERSTANDING A FOCAL FIRM S NETWORKING ABILITY A PROPOSED CONCEPT AND EMPIRICAL FINDINGS While the study of business relationships from a network perspective has been widely researched over the last three decades, managerial aspects of a focal firm's networking ability have only recently been addressed. If a firm s ability to develop and manage successfully its relationships with other firms is viewed as a core competence, research is needed to investigate exactly what networking ability is. This paper builds on the few conceptualisations of a networking ability and investigates empirically the main determinants of effective network management. A conceptual framework is developed which comprises configuration and coordination as the main dimensions relevant at both levels; the relationship -specific as well as the cross-relationship management level. Qualitative and quantitative findings from the production network of Europe s most successful private TV station are summarised. INTRODUCTION Network contexts in business have been addressed by the Industrial Marketing and Purchasing Group for the last twentyfive years. The basic idea is that network structure constitutes the arena in which business is carried out and that the network relationships in which a firm is embedded in, both enable and constrain its performance (Ritter et al. 2004). From a strategic viewpoint, these relationships are thus the source of efficiency and effectiveness and, finally, of competitive advantage (Hakansson and Snehota 1995; Wilkinson and Young 1994). Still, despite the consensus of the crucial role of network relationships for the firm s success, there is also a long debate about the extent to which the individual firm can manage network relationships. For a number of years, a range of authors seemed to suggest that a network is unmanageable (see e.g. Hakansson 1987; Hakansson and Ford 2001; Gadde et al. 2003). However, more recently, a more differentiated, situation-specific assessment of a firm s ability to manage network relationships is proposed (Ritter et al. 2004). From this perspective, understanding a focal firm s networking ability becomes an important, yet fair ly new research issue. This paper aims at contributing to our understanding of a focal firm s networking ability. Such a networking ability has to be conceptualised not only at a relationship level, but needs to embrace the cross-relationship tasks reflecting the linkages between the individual relationships (Ritter et al. 2004). Moreover, the networking ability needs to be linked to relationship performance measures. The two research questions we want to answer in the paper are first, which dimensions and management tasks build an integrated networking ability, and secondly, which of the management tasks identified, are related to relationship performance. The paper is structured into two sections: in the first section a conceptual model for an integrated networking ability is derived from the literature. In the second section, the conceptual model is applied to the production network of Europe s most successful private TV station, RTL. Here, the findings from a qualitative and a quantitative study designed to answer the two research questions are summarised. DIMENSIONS OF A NETWORKING ABILITY Any approach to conceptualising a networking ability needs to consider the different network levels or in fact management levels within networks. Whilst slightely different terms and varying numbers of levels have been discussed by different authors (see eg. Ritter 1999; Ford 1980, Hakansson et al. 1997), Möller and Halinen 1999, Ritter et al. 2004), the distinction

3 between the dyadic relationship level and the cross-relationship level as the two levels which can be influenced by a focal firm, are most relevant for the network ability concept. We refer to the dyadic relationship level as the microlevel, where the focal firm needs to select, develop, use and, if necessary, dissolve individual relationships with network companies. By managing dyadic relationships at the microlevel, the firm defines its position within the relationship (Easton 1997). By contrast, the cross-relationship level refers to the management of a portfolio of different relationships through a focal firm. Here, the simultaneous management of connected relationships enables the firm to manage its position within the network (Low 1997, Easton 1997). For the higher network management level the term macrolevel will be used. Both management levels are related and therefore, an integrated network ability concept needs to consider management tasks which capture these interdependencies. Most contributions describing management tasks within networks address either the microlevel, or the macrolevel, or both levels independently. For example, a vast body of literature can be traced which looks at constructs such as commitment, trust, or communication as the basis for successful microlevel network management (e.g. Sheth and Sharma 1997; Möller and Wilson 1995; Wilson and Möller 1995). Moreover, especially in the german-speaking literature, network management tasks such as selection, allocation and evaluation are suggested at the macrolevel (e.g. Sydow and Windeler 1994). Finally, in their approach to conceptualising a network ability at both levels, Ritter et al. (2004) suggest exchanging and coordinating (e.g. goods, services, information) as the main tasks to be performed at the microlevel and planning, organising, staffing and controlling tasks at the macrolevel. We want to build on these works and suggest an integrative framework with the main management tasks relevant for both levels. The two main dimensions configuration and coordination appear to meet this requirement (Weiner et al. 1997; Müller-Stewens 1997). Configuration means managing the structure of the network (Riggers1998). Due to the dynamic network nature and its blurred boundaries, configuration is crucial because it determines the identity of the network (Wildemann 2000). The main configuration tasks are the selection of companies as well as contract management. Selecting the right partner has been widely acknowledged as a strategic network management task (Galbraith 1998, Easton 1997). It s been suggested to select potential partners based on their strategic or cultural fit with other network members, ie their organisational compatibility (Child and Faulkner 1998; Medcof 1997). Selection has to be understood in a dynamic way and involves the removal and replacement of network companies if necessary (Sydow 1992; 1999). Contract management refers to formal contracts as well as contractual norms such as flexibility, reciprocity or contractual solidarity (Mcneil 1980). Once selected, contracts should formalise the relationship between the network parties and hence support its structure. However, in a dynamic network context, formal contracts cannot anticipate any eventualities and therefore contractual norms play an important role. Several empirical studies confirm the effect of contractual norms in situations of high uncertainty, where they restrain opportunistic behaviour and provide unwritten guidelines of conduct (e.g. Heide and John 1992; Lusch and Brown 1996). In a network context in particular, maintaining flexibility in the relationships can be seen as an important contractual norm which can supplement formal contracts. Flexibility can be defined as the ability to adapt to unexpected situations without loosing focus of the agreed outcome in a relationship (Noordewier et al. 1990). Both configuration tasks can be related to the micro- as well as the macrolevel of a networking ability. For example, when the focal company selects or replaces new network members, each individual company is evaluated at the microlevel. However, assessing the organisational compatibility of a single company with the network implies macrolevel

4 considerations. Similarly, contractual norms are developed or contracts are signed within the individual relationship. Still, the focal firm s decision e.g. to formalise a dyadic relationship by setting up a contract could also be influenced by this company s central position within the network. Wheras the configuration dimension takes a network structuring perspective, coordination focuses the process coordination within the network structure. In the literature, the positive effect of coordinating behaviour on relationship satisfaction has been confirmed in an empirical study by Anderson and Narus (1990). Coordination comprises any tasks the focal firm applies in order to facilitate the value creating processes within the network. Interface management as well as managing the interactions are among the specific coordination tasks which have received most attention in the literature. In order to increase the value created jointly within the network structure, the focal firm needs to allocate resources and differentiate as well as integrate the activities within as well as between the network members. Allocating, differentiating and integrating tasks are inextricably linked to interface management. Interface management is an important task of a networking ability which places specific emphasis on the internal relationships within companies (Aranjo et al. 99). This internal role is stressed by Ritter et al. (2004) who suggest that network management involves marrying the external relationships to and via the internal relationships (p. 180). In addition, Ritter and Gemünden (2003) propose an integrated internal communication structure as an important part of the development of a firm s networking ability. The value creating processes within the network do not only span multiple interfaces but are implemented through social interactions. Interactions as short, relationship building episodes have been discussed not only in the network literature but also within the relationship marketing literature. Social interactions take place in a context, where atmospheric elements (Krapfel et al. 1991) like cooperation and competition, trust and control or autonomy and dependence need to be balanced. Among the constructs which are known to have a positive influence on the development of interactions into relationships are trust, commitment and communication (see e.g. Morgan and Hunt 1994; Anderson and Weitz 1989; Mohr and Spekman 1994). Whereas trust as well as commitment have often been defined as the outcome of good relationships (e.g. Kumar et al. 1995; Crosby et al. 1990; Ruyter at al. 2001), the perspective relevant for our networking ability is that trusting and commited behaviours influence the relationship success (e.g. Anderson and Narus 1990; Goodman and Dion 2001). Trusting behaviour is important because network relationships take place in a context of uncertainty and limited information (Giddens 1990). Commitment in turn is needed because it involves investments into a relationship if the long-term value is perceived to be high (Gundlach et al. 1995; Söllner 1997). Communication as the final interaction management task can be defined as the formal and informal, timely exchange of relevant information (Anderson and Naurs 1990). Communication enables the effective coordination of the value creating processes within the network (Wilson and Kothandaraman 1998; Mohr et al. 1996). Interface management as the first main coordination task is equally relevant at the mirco- as well as the macrolevel of a networking ability. In a complex network, a focal company will have to manage interfaces within and across relationships. Finally, interaction management is likely to be more relevant at the microlevel, however, for example in the context of open communication, it can also be applied at the macrolevel. The following figure summarises our discussion and proposes a concept for an integrated networking ability of a focal firm. All tasks within the main dimensions of configuration and coordination are relevant at both network levels. Moreover, the linkages between the network relationships imply that management activities on the macrolevel will effect the dyadic

5 relationships at the microlevel and vice versa. Finally, a recursive link is characteristic for the dimensions confirguration and coordination. Any configuration involves changes to the network structure which in turn are likely to trigger coordination activ ities within the modified network structure. Microlevel Macrolevel Configuration Selection Contract Management Interface Management Coordination Interaction Management Figure 1: A concept for an integrated networking ability THE EMPIRICAL STUDY The main dimensions and management tasks proposed within the networking ability concept have been applied to the production network of RTL, a private TV station in Germany. RTL as the focal company met the following three selection criteria: (1) it s a focal firm within a powerful and controlling position (Ritter et al. 2004); (2) RTL successfully manages its networks; (3) RTL has a large number of different network relationships. Moreover, TV stations have been recognised as a network-driven yet underresearched industry (Jones et al. 1997). The empirical study focused on the production network, first because we had to limit the complexity of the study in order to win RTL s commitment to participate and secondly, because relationships with suppliers specialising in different aspects of the value creating process have been recognised as an important source of competitive advantage (Dyer et al. 1998). The empirical study was conducted through two consecutive phases. In the first, qualitative phase the first research question regarding the dimensions and management tasks that build an integrated networking ability, was investigated. Twenty interviews with RTL managers from various functions (fifteen) as well as selected network suppliers (five) were conducted, taped, transcribed and analysed in order to test the concept. Overall, the findings provide substantial support for all configuration and coordination tasks. Interestingly, the configuration dimension with the specific tasks of selection/reselection and contract management appeared to be even more important than coordination. This could be explained by the dynamic nature of a TV network, where new networks have to be constantly set up for each production. Also, the relational norm flexibility was more important than formal contracts. This finding could be explained by the overall rather informal nature of the network relationships which one interviewee compared with a rural cattle market. However, another possible explanation is that the better the networking ability of a focal firm, the less the relationships rely on formal contracts. Within the coordination dimension, the task which was managed most formally was interface management. Great effort was given to defining processes and the roles and

6 responsibilities of the various business functions within these processes. Moreover, the suppliers tried to mirror the inte rface structure set up by RTL. Finally, the findings give evidence that all tasks have to managed at the micro- and macrolevel and provide illustrations of the connections between both levels. Having gained sufficient support for the proposed networking ability concept, in the quantitative study, the second research question regarding its effect on the relationship performance was tested. Following an intensive discussion on suitable performance indicators in networks, the decision was made to use the relationship effectiveness as perceived by the network members as the performance measure (Bucklin and Sengupta 1993). Overall, the following seven hypotheses linking the networking ability concept to the performance measure were tested: (1) the stronger the organisational compatibility between the focal firm and the network partners, the higher the perceived effectiveness of the relationship; (2) the better the contracts are managed by the focal firm, the higher the perceived effectiveness of the relationship; (3) the more flexibility the focal firm provides, the higher the perceived effectiveness of the relationship; (4) the better the focal firm manages the interfaces within and between the companies, the higher the perceived effectiveness of the relationship; (5) the more trusting behaviours the focal firm displays, the higher the perceived effectiveness of the relationship; (6) the more commited the focal firm is towards its network partners, the higher the perceived effectiveness of the relationship and (7) the more open the focal firm communicates, the higher the perceived effectiveness of the relationship. A questionnaire was sent to all 248 members of the production network. 74 usable questionnaires were returned, leading to a response rate of 30%. The small sample size didn t allow the use of structural equation modelling, a familiar problem within empirical network research. The results from the multiple regression analysis are shown below. configuration organisational compatibility flexibility 0.270*** 0.183** coordination interface management trusting behaviour open communication ns 0.509*** 0.270*** 0.396*** perceived relationship effectiveness Commitment R = 0.530**; R2 = (the contract norm construct had to be removed due to low convergent and discriminant reliability) Figure 2: Multiple regression results from the survey Overall, the empirical findings provide additional support for the proposed networking ability concept. With the exception of interface management, which has been very important from the focal firm s perspective but is not significant from the network members view, all other management tasks have a significant influence on the perceived relationship effectiveness.

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