Causes of Failure in Network Organizations

During the early and middle 1980s, articles began to appear (a) forecasting network forms of organization [e.g., Miles Raymond Snow Charles , “Fit, Failure and the Hall of Fame,” California Management Review (Spring 1984)]; (b) describing the form's key characteristics [e.g., Thorelli Hans , “Networks: Between Markets and Hierarchies,” Strategic Management Journal (January/February 1986); and Miles Raymond Snow Charles , “Network Organizations: New Concepts for New Forms,” California Management Review (Spring 1986)]; and (c) debating the costs and benefits of network structures [e.g., “The Hollow Corporation,” Business Week, March 3, 1986]. A few years ago, a rash of books and articles appeared exploring and generally endorsing various types of network structures, including strategic alliances, value-added partnerships, global market matrices, and so on [e.g., Drucker Peter , The New Realities (New York, NY: Harper & Row, 1989); Handy Charles , The Age of Unreason (Boston, MA: Harvard Business School Press, 1990); Reich Robert , The Work of Nations (New York, NY: Knopf, 1991); Johnson Russell Lawrence Paul , “Beyond Vertical Integration—The Rise of the Value Added Partnership,” Harvard Business Review (1988)]. Most recently, a cover story in Business Week [“Learning From Japan,” January 27, 1992, pp. 52–60] details numerous examples of U.S. firms creating and benefiting from network structures.

For a brief description of both Rubbermaid and Wal-Mart, see the Report Special , Business Month (December 1988), pp. 38 and 42.

For an early discussion of how large firms have disaggregated their operations and spread them across multiple, smaller elements along the value chain, see Piore Michael J. Sabel Charles E. , The Second Industrial Divide (New York, NY: Basic Books, 1984). See also Johnson and Lawrence, op.cit.

A more detailed description of these three types of networks, and the forces shaping them, is provided in Snow Charles C. Miles Raymond E. Coleman Henry J. Jr. , “Managing 21st Century Network Organizations,” Organizational Dynamics (Winter 1992), pp. 5–20.

Cooperative, entrepreneurial behavior of this sort is being increasingly encouraged both inside and across firms. See Quinn James Brian Paquette Penny C. , “Technology in Services: Creating Organizational Revolutions,” Sloan Management Review, 31 (Winter 1990): 67–78.

There are two main types of keiretsu. Many stable networks in the U.S. resemble “supply” keiretsu, which are groups of companies integrated along a value chain dominated by a major manufacturer. To date there are no American counterparts to “bank-centered” keiretsu, which are industrial combines of 20–45 core companies centered around a bank. For discussions of keiretsu-like networks in the U.S., see Ferguson Charles H. , “Computers and the Coming of the U.S. Keiretsu,” Harvard Business Review (July/August 1990), pp. 55–70; and “Learning From Japan,” Business Week, op. cit. See also “Japan: All in the Family,” Newsweek, June 10, 1991, pp. 37–40.

IBM announced a major restructuring along these lines late in 1991. See “Out of One Big Blue, Many Little Ones,” Business Week, December 9, 1991, p. 33. For a complete description, see Kirkpatrick David , “Breaking Up IBM,” Fortune, July 27, 1992, pp. 44–58.

Gelb Thomas , “Overhauling Corporate Engine Drives Winning Strategy,” The Journal of Business Strategy (November/December 1989), pp. 91–105.

See Mills General , Annual Report, 1985.

See Nike , Annual Report, 1991.

See Taylor William , “The Logic of Global Business: An Interview with ABB's Percy Barnevik,” Havard Business Review (March/April 1991), pp. 91–105.

See, Magidson Jason Polcha Andrew , “Creating Market Economies Within Organizations: A Conference on Internal ‘Markets’,” Planning Review, 20 (January/February 1992): 37–40.

Business Week used the term “hollow corporation” pejoratively in its March 3, 1986 cover story, op. cit. However, recognizing that thoughtful outsourcing does not cause an organization to lose its critical expertise, Quinn, Doorley, and Paquette discuss how firms are “learning to love the hollow corporation.” See Quinn James Brian Doorley Thomas L. Paquette Penny C. , “Technology in Services: Rethinking Strategic Focus,” Sloan Management Review, 31 (Winter 1990), p. 83.

These and other examples are discussed in companion articles in the February 1992 issue of The Academy of Management Executive [ Bettis Richard A. Bradley Stephen P. Hamel Gary , “Outsourcing and Industrial Decline,” pp. 7–22; and Welch James A. Nayak P. Ranganath , “Strategic Sourcing: A Progressive Approach to the Make-or-Buy Decision,” pp. 23–31]. However, while both pieces bemoan the negative impact of faulty outsourcing decisions on U.S. competitiveness, each recognizes that outsourcing, if properly handled, can be an important management tool, and Welch and Nayak propose models to assist with strategic outsourcing decisions.

See Daly James Sullivan-Trainor Michael , “Swing Your Partner, Do-Si-Dough,” Computerworld, December 23, 1991/January 2, 1992, pp. 21–25.

In contrast to the widely publicized and potentially damaging alliances emerging among major computer firms, many small Silicon Valley firms have built profitable dynamic network relationships. In these networks, many firms do nothing but design custom computer chips while others specialize in manufacturing these designs. In some instances, designers have even shared some of their expertise with large concerns in return for access to manufacturing competence. Such networks emerge and are maintained by trust and by the recognition of unique competencies and mutual dependencies. See Case John , “Intimate Relations,” INC. (August 1990), pp. 64–72.

Miles Snow (1986), op. cit., p. 65.

“Learning From Japan,” Business Week, op. cit., p. 59. Similar relationships based on full cost and profit information sharing among Silicon Valley chip designers and manufacturers are described in Case John , op. cit.

Snow Miles Coleman , op. cit.

“Learning From Japan,” op. cit., p. 59.