Networks as strategy: a Waitomo persepctive
Strategic alliances and networks are a recently recognised form of management theorising. They involve a change of thinking from a strictly economic perspective to a paradigm where the competitive process exists within a broader framework of co-operation. These broader social exchanges become a powerful influence in the development and management of the relationships involved in the competitive process. Current research literature however says little on the processes involved in how these relationships are formed and managed. This paper is a work-in-progress of theory development within network analysis. It takes an ethnographic approach, using the Waitomo Caves village community, of exploring a process of interlocking and interdependence of relationships within the network. Ethnography, through a deep understanding of a specific context, seeks to describe and interpret the web of collective meanings that emerge from individual perspectives. As meaning is attached to events, it can only be understood through interconnected and complex patterns of on-going actions, through the observation, description and interpretation of multilayered and interrelated individual situations. Within the tourism context, it is these social practices that are being observed in the shaping of the destination. How and why managers interlock, the affect of their actions on others, and how individual actions influence the network system. While this paper is largely theoretical, the presentation will include anecdotal references to the Waitomo Caves tourism community.
With tourism now being claimed as the single largest earner of foreign exchange in New Zealand, the challenge now facing the industry is how to sustain this momentum in the long term. The tourism industry is characterised by significant sectorial interdependence, as clusters of seemingly unrelated products and services collaborate together to form a system or network of firms in order to access the tourism market. This process however, creates a system of interdependencies among firms, where the actions of one firm will be influenced and affected by the actions of another. The management of complex but interdependent issues such as resource sustainability, risk management and the provision of quality experiences becomes critical to the long term sustainability of tourism in New Zealand. Yet the management of these network interdependencies has had little theoretical attention and these process issues remain vague. This paper is an exploration into the theoretical constructs of how these interdependencies are managed from a system or network perspective.
Networks as social exchanges
Network analysis focuses on social exchange from a system-wide perspective of interconnection (Easton 1992). That is, from an overarching web observing the totality of relationships among firms engaged in the production, distribution and use of goods and services, and those stakeholders affected by their actions. Central to network analysis is the patterns and relationships that connect and influence organisations (Aldrich 1979; Easton 1992). These interdependencies are derived from the resource dependence perspective (Pfeffer & Salancik 1978), which argues that to survive, organisations must interact with others to acquire the resources they need. As organisations form exchange relationships to reduce uncertainty and to ensure access to needed resources, a collection of network interdependencies emerge. These relationships reinforce an open-system environment whereby organisations cannot operate in isolation but are affected and influenced by their relationships with others around them (Burns & Stalker 1961).
Network patterns of social exchange are typified by horizontal patterns of transactions, interdependent flows of resources, and reciprocal lines of communication (Powell 1990). With individuals 'engaged in reciprocal, preferential mutually supportive actions' (Powell 1990, p.303), there is an implicit assumption of co-operation and mutual dependency as a precondition for any exchange process. Network analysis then looks at modes of organising activities through interfirm co-ordination and co-operation. While there are two dialectic processes of competition and co-operation within networks, the picture of relationships provided by the network approach emphasises co-operation, complementarity and coordination (Easton 1992, p.23).
Networks then, are socially embedded exchange processes that flow across multiple boundaries for multiple purposes. Their economic or strategic value becomes overshadowed by the exchanges that occur in a wider social system. Network relationships are rarely contractual arrangements. Rather they are open-ended relationships built up over indefinite time frames, causing the nature of reciprocity, obligation and equivalence to be much less precise in a network system (Powell 1990). The interdependencies of ties resulting from a system of exchange means that exchanges do not flow in lineal dyadic patterns, but through complex systems of thick linkages. Because reciprocity and obligation are then embedded in long term exchanges, they may not appear equivalent at any immediate point. This highlights the essence of network exchanges, that 'to give, to receive and to return' (Powell 1990, p.304) are not necessarily rational calculations. Rather the construct of mutual benefits may involve what appears to be unequal sharing, but is based on the 'shadow of the future' (Axelrod 1984).
Indeed, what emerges from network analysis which assumes a paradigm of co-operation, is that in giving benefits to others, there are gains for oneself. This reaffirms the basis of social organisation; that relationships provide inclusion, predictability and security (Ring & Van de Ven 1994), and systems of complementarity and interconnectiveness are essential for survival (Baum & Oliver 1992). This is particularly relevant in a network dependent on the reputation of all its members. The manner in which all firms act has an influence on the direction of the system, as no individual firm is able to act unilaterally and singularly control the management process (Burt 1992).
Morphology of networks
The shape or structure of the network reveals how information and resource flows move around the network. This mapping of relationships through star-and-spoke patterns of interconnections identifies a global pattern of relationships, an overall web of interrelationships. The structure also reveals the internal location of nodes, suggesting certain obligations and demands that may emerge affecting the nature and dynamics of competition and co-operation within the network.
The positional location within the network provides a language to express the nature of these interfirm connections. Positions within the global structure will reveal an asymmetrical or symmetrical distribution of power and interests, dictating the way in which the network both operates and develops. Some firms in the network will have access to more and better resources than others, rendering them more powerful than others (Easton 1992). As power becomes central to network analysis, the demands and obligations resulting from its influence becomes the indicator of whether this power is being exercised (Thorelli 1986). The firm at the centre of a web of relationships may both constrain and provide opportunities. A single powerful firm may dominate the network and want to remain in control at the expense of others, creating an asymmetrical balance of power. Conversely, in more symmetrical networks, more equal distributions of power provide more evenly spread opportunities for development (Easton 1992). These positions within the network shadow how firms conform to the demands, obligations and expectations of the other firms.
Centrality refers to how critical an organisation is to the networks' global structure. It suggests that the more central a position an organisation has, the more important it is to the network's coordination functions. Centrality allows quicker access to more information, speedier action and implementation, which enables the organisation to secure a competitive advantage. Centrality enables the organisation to shape its reputation and generates visibility by providing access to resources via benefit-rich networks (Powell et al. 1996).
Density refers to the number of ties within the network through a pattern of linkages and connections. Doz and Prahalad (1991) argue that the adaptive capability of an organisation depends on the density of the network relationships. Organisations with diverse linkages, i.e. lateral and diagonal, are more adaptive because they can reconfigure themselves more readily as environmental contingencies become important. A variety of contacts or ties with other organisations improves organisational exposure to richer information channels, and provides first mover advantages.
Granovetter (1973) was the first to identify the importance of strong or weak ties. Social scientists have long found that strong relationships tend to develop between people with mutual interests (Burt 1992). People live and work among clusters of strong relationships, with each person knowing what the other knows as information is able to circulate with velocity. These relationships are cohesive and structurally equivalent, and hence lead to the same sources of information, which ultimately makes some of them redundant for information purposes (Burt 1992). This can result in a proliferation of network size but with a clustering of similarity of information exchanges. However Granovetter (1973) argues that to gain new ideas and opportunities, contacts need to come through people in further away or weaker clusters. These weaker ties are those that are disconnected with the stronger social groups either directly through having no contact with each other, or indirectly through contacts that exclude others. The weak-ties argument is about the strength and diversity of the relationships, and their location.
Burt (1982) expands the causal effect of these weak-ties through what he identifies as 'structural holes'. He argues that while 'ties' describe the bridges of information flows, 'structural holes' capture the conditions responsible for these flows. With the structural holes being the buffer between the two non-redundant contacts, they generate information and control benefits. Burt argues that 'structural holes can determine who knows about opportunities, when they know, and who gets to participate in them' (1992, p.75). He suggests that actors with a wide span of structural holes enjoy access to timely information and response capabilities that enable them to control independent information flows.
Yet because networks are a collection of relationships, they are fluid, they transform and shift focus as their members change over time. There is a constant pattern of changing and modification of relationships. Implicitly, a change in the position of one firm will affect the position of other firms. For some, this may mean a more central position in which it may acquire more access to resources and more control over its destiny. However, the reverse can also happen. A firm closely connected to a central firm can loose its connections and information rich relationships if changes move the power focus of the web. Easton (1992) argues that it is these continuous interactions and information flows between firms within the network that provides a stability, a solid foundation or platform for incremental change. It provides the forum for flexibility and innovation for operating in the external environment which can result in the network structure dramatically changing over time.
Institutional theorists have widely recognised that these strong interconnections enhance the growth and survival of the population over time (Scott & Meyer 1983; Zucker 1987). It particularly highlights the population's relational density, 'the number of formal relationships between the members of a population and the key institutions [government agencies and community groups] in the population's environment' (Baum & Oliver 1996, p.1380). These linkages with the institutional environment confer advantages on individual organisations by providing them with resources and legitimacy (Scott & Meyer 1983). Institutional theory emphasises that legitimacy is a cognitive phenomenon which is reflected in taken-for-granted assumptions which are embedded in relational networks and normative codes of conduct (Meyer & Rowan 1977; Zucker 1987; Di Maggio & Powell 1983). That is, that institutional embeddedness influences a population's sociopolitical legitimacy by signalling its conformity to social and institutional expectations (Baum & Oliver 1996). These population-level dynamics then, highlight the sociopolitical processes through which certain organisations come to be regarded as legitimate.
For weaker or less central organisations, a conscious move to establish ties to more reputable or legitimate organisations is likely to contribute in benefits to weaker links in the form of greater legitimacy, status, buffering and resource accessibility (Baum & Oliver 1991; Pfeffer & Salancik 1978; Scott & Meyer 1983). For populations dependent on the reputation of all its members, mutual interdependencies, exchanges and support provides an avenue to improve the position and status of individual organisations, thereby establishing legitimacy for the whole population. This protection of reputation is also alluded to by Hannan, Carroll, Dundon and Torres (1995) who conclude that 'cognitive legitimacy operates at a higher level of analysis because cultural images flow more freely across social system boundaries than do material resources'. This reinforces the images of reputation and delivery to be as critically important as economic resources not only for the individual organisations but also for the network system. This point was also earlier proposed by Baum and Oliver (1992) who speculated that organisational success and failure was not based exclusively on economic resources, but rather on the processes of legitimation through institutional ties. They contend that for populations characterised by social and human service elements, these relational density elements provide the clearest evidence for population success (as opposed to more technical populations where ecological processes of rivalry for economic resources may be more significant), as they embed populations within higher-order collectives within the broader organisational field (Brittain & Wholey 1989; Hannan & Freeman 1989; Fombrun 1986).
Baum and Oliver argue that 'as a population grows and its social or public impact becomes more widely recognised, other social actors take an increasingly active role in monitoring population members activities, distributing endorsements and sharing rewards, and shaping the rules and standards about what are legitimate activities and outputs for the population' (1996, p.1386). The population is viewed as more isomorphic because of the monitoring and linkages between the institutional environment and its related organisations, creating an increased public expectation of the population as being more worthy of support (Di Maggio & Powell 1983). This attachment to the institutional environment endorses the population's legitimacy in attracting customers and providing a strong foundation for its long term success.
The way in which these relationships are formed and the political framework within which they operate are influenced by, and dependent on, the various perspectives, aims and purposes of those involved. There is a need to understand how these 'socially contrived mechanisms for collective action are continually shaped and restructured by action and symbolic interpretations of the parties involved' (Ring & Van de Ven 1994, p.96). The network story is a complex process of interaction tempered by adjustments to both social and economic conditions (Powell 1990). Granovetter (1985), for instance, has argued that all economic relations take place within a web of pre-existing social relationships. These webs provide the foundation of social coordination, both constraining the direction and liberating the form in which economic relationships can develop. These social relationships are established in day to day interaction. That is, with interactions being the informational and resource exchange aspects of everyday behaviour (Easton 1992), they develop into relationships that are more general and long term in nature. These relationships then are durable. They are manifested by mutual feelings of belongingness and interdependence (Thorelli 1986), creating an 'indebtedness and reliance over the long haul' (Powell 1990, p.302). Over time, partnering becomes emergent and routinised, as it occurs more readily with less effort from informal and non premeditated ongoing relationships (Powell et al. 1996).
Embedded in the continuation of a mutually satisfying relationship is a dialogue of trust and integrity (Ring & Van de Ven 1994). While trust is a future oriented concept, it is based on past performance. On-going interactions and flows of information over time have built up a bond of confidence that future expectations can be relied upon to be achieved. Trust, then, is a cumulative product of repeated past performance (Ring & Van de Ven 1994). This is a significant departure from transaction cost economics, which assumes that the agent within the principal/agent relationship is not to be trusted. Here the assumption is that agents are self seeking opportunists with guile (Williamson 1985). Yet within a network construct it is argued that 'the prospect of repeat business discourages attempts to seek a narrow short term advantage' (Ring & Van de Ven 1992, p.489). While the standard strategy in a competitive market transaction is to drive the hardest possible bargain, these traders are viewed as petty and untrustworthy in networks (Powell 1990). The widespread preference to do business with firms of established reputation is an incentive not to cheat and damage one's reputation (Granovetter 1985). This desire for long term relationships shifts the focus on trust from an immediate short term dyadic relationship to a broader social mechanism (Hosmer 1995).
One of the earliest definitions of trust is an optimistic expectation on the part of an individual about the outcome of an event or behaviour of a person (Hosmer 1995). Deutsch (1958) first identified the non-rational choice a person faced over an uncertain event, when the expected loss was greater than the expected gain. The decision then was not an economic one, because if that trust is broken, then that person would be worse off than if there had been no trust. Trust implies an awareness that there is something of importance to be lost.
Zand (1972) acknowledges that while trust is made by one person, the consequences of that decision are dependent on the actions of another. This exposes a vulnerability and lack of control over the actions of others, highlighting the dependability and vulnerability aspects of trust. Yet implicitly there is a confidence, an overall optimism that the associated events will take place. Part of this confidence is an assumption of competence in the person being entrusted, that this person has the ability or expertise to deliver on the expected outcome. Yet this confidence is also a conscious acceptance of the risk involved, that dependence and vulnerability may lead to disappointment and loss (Luhmann 1980).
As the focus shifts to the person whose behaviour is being entrusted, reliability and dependability become characteristics worthy of that trust (Zucker 1987). Baier (1986) makes a distinction between trusting others and merely relying on them. He believes trust is a reliance on the goodwill of others, rather than just the reliance on their regular habits. Stitched throughout the trust literature is a steady echoing of goodwill and responsibility, implying some morally correct dimension to the construct of trust. Barber (1983) explicitly states that trust implies a fiduciary duty of placing the interests of others before the interests of the person being trusted. Gambetta (1988) also embellishes the concept of co-operation to include achieving an ultimate net good. Ring and Van de Ven (1994) argue that the norms of equity are a prerequisite to trust through reciprocity, fair rates of exchange and distributive justice. Trust will only emerge after repeated market exchanges can confirm that perceived norms of equity and dependability result from that reliance. For many researchers then, some moral responsibility becomes an explicit prerequisite to trust.
Social Control Mechanism
This suggests a common thread of trust as a 'collective attribute' basing the relationships between people within a larger social system than just the individual recipients (Lewis & Weigert 1985, p.68). Zucker (1987) states that trust is a set of social expectations, including broad social rules of fair, right, and taken for granted assumptions over common understandings that are shared by everyone involved in the economic exchange. Coleman (1984) too acknowledges that the relationship between two actors may well be conditional on the placement of trust on other related actors. The 'withdrawal of trust by one actor may have a domino effect on a system of interactions' (Coleman, 1984, p.85). Significantly, he likens this to a grid effect with highly sensitive configurations predisposed to breaking down at a single weak point. For networks then, the performance and position of the weakest element is important to the functionality of the total network.
Entangled strings of reputation, friendship, interdependence and altruism become integral parts of the relationship, based upon foundations of trust and standards that no one individual alone can determine (Powell 1990). This assumes that at some point parties must forgo the right to pursue their own interests at the expense of others, and further, that all members will be acting for the common good of the organisational network. Human choices, however, are based upon individualised purposes, values and expected outcomes (Commons 1950). These choices are individualised because all conceptions of future actions and consequences are based upon prior experiences. Weick (1969) explains that we make sense of our world through a reconstruction or re-presentation of past experiences as a process of 'enacting' the present. Because all experiences are likely to be different, mutual norms, motives, sentiments and expectations of future actions too are likely to be different. Dispute and conflict are likely to emerge and trust itself may not be enough to guarantee mutually beneficial behaviour. Shapiro (1987) for instance, believes that the temptation to lie, steal and misrepresent the safety and security of others continues to exist despite social control mechanisms. Granovetter (1985) too acknowledges that malfeasance, kickbacks and political coalitions are likely to emerge under conditions of unregulated common good. Reliance on trust may need to be conditioned by legal systems to guide processes of concrete transactions for co-operative behaviour. These enable a mutual congruence of obligations stemming from diversity (Ring & Van de Ven 1994).
Regulation and Legislative Systems
Regulation is defined as where 'industry operators ensure they [their members] comply with current legislative requirements without the direct policing actions of and subsequent interference by various regulatory authorities' (Smith & Tombs 1995, p.620). This assumes a voluntary process signalling 'seriousness of intent' (Zucker 1987, p.460), rather than enforced compliance from legislative processes. Industry specific processes that emerge from self-regulation however, can become focused on cure rather than prevention. Relationships are frequently context bound, with the regulatory processes simply highlighting reactive abstractions (Smith & Tombs 1995). This can be reinforced as managers react with less discipline and control as trust and reliance becomes a second preference to industry regulation (Ring & Van de Ven 1994). Nevertheless, it is argued that the utility of these self regulatory intermediaries is that they 'smooth the transactions via a quasi-insurance form of completion, without opportunism or malfeasance, by focusing on the transaction itself and remaining indifferent to the outcome' (Zucker 1987, p.454).
Legislative conditions too can undertake a more coercive approach to monitoring behaviour with punitive measures for failing to comply. Yet the extent to which these legislative frameworks impinge on managerial behaviour, reducing the ability for mutually beneficial actions remains problematic. Over-formalised constraints can conflict with entrepreneurial autonomy, individualism and flexibility, resulting in a undistinguishedness and lack of complementarity with increased conflict, dispute and direct competition (Ring & Van de Ven 1994).
The process of managing interdependence then, is suggested to occur within a framework of trust, regulation and legislation (Figure 1).
As the level of trust diminishes, and individuals' actions are no longer seen to be in the best interests of the broader social network, industry level regulations can be used as a method of obtaining compliant behaviour. Alternatively, the legislative process provides an institutional-level redress in obtaining not only compliance, but also acting as a punitive measure of enforcing socially acceptable behaviour. The dynamics of this model work still remains to be explored. Does the use of regulation, legislation or litigation have a direct converse relationship to the levels of trust? What are the relationships between trust and the legislative process? Are they seen differently by those in different network positions? How do the strength of network ties influence these relationships?
Networks of organisations do provide a context to obverse these managerial practices of coping with interdependence. The network story is 'a complex one of contingent development, tempered by an adjustment to the social and economic conditions of the time. The absence of clear developmental patterns and the recognition that network forms have multiple causes and varied historical trajectories suggest that no simple explanation ties all the cases together' (Powell 1990, p.323).
Doz and Prahalad (1991, p.158) claim that 'organisational theories have usually operated on too high a level of abstraction to capture the issues and variables of process'. They argue that the detail provided from quantitative research has been too conceptual to arrest the specific operational technicalities of how and why processes happen. For this reason case studies are often embraced when social complex social phenomena is to be examined (Yin 1994). Case studies provide a rich in-depth context to observe the 'black box' of managerial decision-making in a way that explores the working relationships through a process of collective negotiations and meaningful characteristics of everyday life. Indeed it has been stated that while organisations form populations, it is the networks that fuse them into communities, allowing a valuable context within which to explore not only a microlevel approach for organisational analysis, but also macrolevel societal outcomes (Fombrun 1986).
Using a tourism destination provides a multiple system of analysis. It is a population of tourism businesses, a community, and yet also involves sectorial interdependency. These structures and the exploration of networking social practices lends itself to an ethnographic approach of research. The ethnographic function is to describe and interpret the web of meanings. It becomes a study which involves a deeper comprehension of what is happening within a specific context, of how and why specific meanings are created through a diversity of different experiences (Hammersley 1992). As meaning is attached to events, it can only be understood through interconnected and complex patterns of on-going actions, through the observation, description and interpretation of multilayered and interrelated individual situations (Fetterman 1989). It is descriptive in that it is an observation of social practices, of the features and characteristics of certain phenomenon; and it is explanatory in that it seeks to explore those features and the social meanings that generate them.
The strength of ethnography is its inductive ability, of being able to generate theory through its intimate connection with reality, with its emphasis on the exploration of meanings and processes rather than consequences, and of organic wholeness rather than independent variables (Eisner 1979). Within the tourism context, it is these social practices that are being observed in the shaping of the destination. How and why managers interlock, the affect of their actions of others, how their actions influence the whole system; how they characterise a social situation and make their activities rationally accountable. An interpretive approach is being followed where the story emerges from the data.
All tourism operators within the destination of Waitomo Caves were asked to participate. The research involved a series of open-ended interviews which each operator, allowing the grounded theory development to emerge. The first stage was to explore the organisational boundaries, strategies, products, markets; the philosophies, concerns and reflections of the business operators. The second stage identified themes as they applied to a network perspective of destination interdependency. A thorough review of the literature provided a framework of process which guided further analysis. The stories emerging from the data could then be integrated with theory analysis. Finally the third and most rigorous stage followed up key elements that may add insights to theory generation.
This paper has explored the theoretical constructs of network processes. With networks being socially embedded relationships, economic transactions are embedded with a construct of reciprocity and obligation emersed within mutually beneficial repeated exchanges. While centrality and power relationships are predeterminable, a system of equivalence becomes less precise as indebtedness can be an interconnected paradigm not measured by economic analysis. Trust, regulation and legislation become transparent processes that guide co-operative behaviour. It is argued that because networks are social exchanges, they offer an alternative view of the world to that of undisputed economic rationalism.
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