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City, University of London Institutional Repository Citation: Spedale, S. (2000). The emergence of the network supply-chain: a study of cooperation and performance in supply-chain relationships in the UK fibre-optics industry. (Unpublished Doctoral thesis, City University London)

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THE EMERGENCE OF THE NETWORK SUPPLY-CHAIN A study of co-operation and performance in supply-chain industry fibre-optics in UK the relationships

A Doctoral Thesis Presented By

Simona Spedale

Submittedto City University BusinessSchool Departmentof Human ResourceManagementand OrganisationalBehaviour

In fulfilment of the requirementfor the awardof the degreeof Doctor of Philosophy

October,2000

TABLE OF CONTENTS I

page CHAPTER 1- THE NATURE OF THE RESEARCH

page I page 2 page 4 page 6

Introduction 1.1 Researchobjectives 1.2 Researchcontributionto the existingbody of knowledge 1.3 Structureof the thesis

8 page 0

CHAPTER 2-A REVIEW OF THE EMPIRICAL EVIDENCE 2.1 The natureof changesin supply-chainmanagement 2.1.1 The role of the leadfirm 2.1.2 The network supply-chain:key issuesin the emergenceof a new organisationalform 2.2 The relationshipbetweenorganisationalnetworks,co-operativeinter-organisational relationships,and organisationalperformance 2.3 Gapsin the literatureandnew directionsfor research CHAPTER 3- THE THEORETICAL 'ORGANISATIONAL

FRAMEWORK: NETWORKS'

A DEFINITION

3.1 The network organisation:an overview 3.1.1 The contributionof OrganisationStudies 3.1.2 The contributionof OrganisationalEconomics 3.1.3 The contributionof Strategy 3.2 An overview of the different contributions

page 9 page 13 page 15 page 17 page 23

OF page 25

page page page page page

25 26 33 44 49

page 52

CHAPTER 4- THE RESEARCH CONTEXT 4.1 Opto-electronics:a technologicaldiscontinuity 4.1.1 Optical communicationsystems:technicalaspects 4.1.2 The evolution of opto-electronicstechnology 4.2 The economicsof optical communications 4.3 The marketfor optical communicationsystems 4.4 The supply side 4.5 Summary:a few strategicimplications CHAPTER 5- THE RESEARCH FRAMEWORK

page page page page page page page t,

53 55 57 60 61 62 66

page 68

5.1 The researchquestions 5.2 The network supply-chain:a working definition 5.3 Network supply relationships:operationalisation 5.4 Organisationalperformance:definition and operationalisation.

page page page page

68 69 71 75

CHAPTER 6- RESEARCH STRATEGY AND METHODOLOGY

page 79

6.1 Researchstrategy 6.2 The selectionof a suitablecontextfor the study 6.3 Researchmethodology 6.4 Data collection andthe unit of analysis 6.5 The questionnaire 6.6 The sample

page 79 page 82 page 84 page 86 page 87 page 100

ii

CHAPTER 7- SURVEY FINDINGS: THE EVIDENCE ON ORGANISATIONAL PROCESSES

7.1 Responserate and generalcharacteristicsof respondents 7.2 The organisationalstructureof purchasing 7.3 Generalevidenceon changein supply-chainmanagement:an analysisof traditional indicators 7.4 The evidenceon the six organisationalareas 7.5 The emergenceof the network supply-chain:the caseof the UK optical communicationssystemsindustry CHAPTER 8- CO-OPERATIVE SUPPLY RELATIONSHIPS PERFORMANCE: THE FINDINGS

page 102

page 103 page 109 page 113 page 119 page 134

AND ORGANISATIONAL

8.1 Overall trendsin organisationalperformanceof the samplefirms 8.1.1 Efficiency 8.1.2Innovation 8.1.3Generalfinancial performance 8.1.4 Summary 8.2 The correlationanalysis 8.2.1The correlationcoefficients 8.3 Network supply relationshipsand organisationalperformancein the UK optical communicationssystemsindustry CHAPTER 9- THE FOLLOW-UP INTERVIEWS 9.1 Casesampleand interview structure 9.2 The mini-casestudies 9.2.1 The caseof manufacturers 9.2.2 The manufacturers:a comparison 9.2.3 The caseof installers 9.2.4 The installers:a comparison 9.3 Integratingsurveyand interviews:a discussionof the casestudies 9.3.1 Differencesbetweenmanufacturersand installers 9.3.2 Differencesamonginstallers 9.3.4 The role of the contract CHAPTER 10- CONCLUSIONS

page 138

page 138 page 139 page 142 page 146 page 147 page 149 page 155 page 168 page 171 page 171 page 174 page 174 page 178 page 179 page 187 page 189 188 45 page page 190 page 192 page 193

10.1Industry characteristicsandthe sample page 194 10.2Researchfindings: the relationshipbetweengovernanceforms in the supply-chain, technology, and organisationalperformance page 196 10.3Exploring the relationshipbetweengovernance,performanceand technology: The exploitativeand explorativemodelsof network supply relationships 202 page 10.4A few researchimplications page 210 LIST OF REFERENCES

page 214

APPENDIX A- SURVEY QUESTIONNAIRE

page 233

APPENDIX B -The componentsof a fibre-optics communications system

page 243

APPENDIX C- CONFERENCE PAPERS AND PUBLICATIONS

page 248

iii

LIST OF FIGURES Figure2.1 AntagonisticversusCo-operativeModel (adaptedfrom Matthyssenand van den Bulte, 1994) Figure2.2 A comparisonof supplymanagementmodels(adaptedfrom Dyer, SungCho, and Chu, 1998) Figure 2.3 Information Codification/PowerRelationsMatrix (adaptedfrom Scher, 1997) Figure 3.1 The governanceof contractualrelations(adaptedfrom Williamson, 1985) Figure4.1 Miyazaki's model appliedto opto-electronics Figure4.2 An optical communicationssystem(adaptedfrom the EuropeanFibre Optics Directory and Report) Figure4.3 The structureof the optical communicationssystemsindustry Figure 6.1 ResearchStrategyMatrix: a Comparisonof Alternatives Figure 7.1 Size:scatter-plotof respondentsaccordingto annualrevenueand employees Figure 7.2 Distribution of respondentsby sizeand primary activity Figure 7.3 Ownership:distribution of respondentsby size Figure 7.4 Number of employeesin purchasing:distribution of firms Figure 7.5 Macro-classesof denominationof the unit in chargeof purchasing:distribution of respondents Figure 7.6 Line of reporting:distribution of respondents Figure7.7 Major rationalefor changein supply-chainmanagementstrategy Figure 7.8 Trend in the numberof suppliers Figure 7.9 Trend in the numberof suppliers:small versuslarge firms Figure 7.10 Recenttrend in importanceof the key supply strategies Figure 7.11 Collaborationin researchand conceptdesign:Small vs. Large Figure 7.12 Collaborationin designand engineering:Small vs. Large Figure 7.13 Collaborationin installationand distribution: Small vs. Large Figure 7.14 Collaborationin researchand concept design:Manufacturersvs. Installers Figure 7.15 Collaborationin designand engineering:Manufacturersvs. Installers Figure 7.16 Collaborationin installationand distribution: Manufacturersvs. Installers Figure 7.17 Intensity of useof selectioncriteria Figure 7.18 Transparencypractices:degreeof utilisation Figure 7.19 Degreeof specificationof the contract:manufacturersvs. Installers Figure 7.20 Conflict resolutionmechanisms:All respondents,Manufacturersand Installers Figure 7.21 Relationshipsassessment mechanisms Figure 8.1 Price, Overall product-costand Order-to-deliverytime Figure 8.2 Productivity improvement Figure 8.3 Time-to-marketfor new innovation Figure 8.4 Generalfinancial performance Figure 10.1A positioning matrix

iv

page II page page page page

12 22 36 53

page 56 page 63 page 80 page 104 page 106 page 107 page 110 page III page 112 page 115 page 116 page 116 page 118 page 121 page 121 page 122 page 123 page 123 page 124 page 125 page 128 131 page page 132 page 133 page 141 page 142 page 144 page 147 page 206

LIST OF TABLES 32 Studies Organisation form: Network page the contributionof Table 3.1 The definition of the Table 3.2 Distinguishingcharacteristicsof forms of transactions(adaptedfrom Ring and van de 38 page Ven, 1992) page 43 Table 3.3 The definition of the Network form: the contributionof TransactionCost Economics 46 1994) form Hedlund, (adapted page M-form: 3.4 N-form Table and a comparison 48 Strategy for: definition page Network 3.5 The the contributionof Table of the 54 1995) (from Miyazaki, page Table 4.1 Matrix of opto-electronicsrelatedmarketsandtechnologies 58 page Table 4.2 The evolution of optical communicationstechnology 62 (1992-1997) fibre-optics page European 4.3 Table communicationscomponents applicationssalesof Table 4.4 Estimatedmarket sharesof fibre-opticscommunicationscomponentsfor the major 66 1992) Sullivan, page (Frost and suppliersto the Europeanmarket 71 page Table 5.1 Threealternativeways of managingsupplyrelations Table 5.2 A comparisonbetweenalternativeeconomicinstitutionsfor regulatingsupply 74 page key organisationalareas relations: page 78 Table 5.3 Performanceindicators 103 page 7.1 Analysis Table of the overall responserate page 107 Table 7.2 Manufacturersvs. installersby size:a comparison page.109 Table 7.3 Spatialdistribution of respondentsaccordingto size page 109 Table 7.4 Spatialdistribution of respondentsaccordingto primary activity Table 7.5 Degreeof strategicimportanceof the main six itemspurchasedby the firm page 114 114 Table 7.6 Availability in the marketfor the 196 itemslisted by the respondents page Table 7.7 Averagelengthof supplyrelationships:frequency page 119 Table 7.8 Selectioncriteria: trend in importance(percentageof respondents) page 126 page 130 Table 7.9 Performanceevaluationcriteria: trend in importance(percentageof respondents) Table 8.1 Percentageof salesfor different categoriesof new products(percentageof 145 page respondents) Table 8.2 Correlationanalysis:independentand dependentvariables page 149 151 8.3 Composite page Table variables:an overview Table 8.4 Teamworkacrossorganisationalboundariesand performance:whole sample page 155 156 Table 8.5 Teamworkacrossboundariesand performance:primary activity and size page Table 8.6 Spanof competenciesin selectioncriteria and performance:whole sample page 158 Table 8.7 Spanof competenciesin selectioncriteria and performance:primary activity and size page 159 Table 8.8 Commitmentto suppliersandperformance:whole sample page 160 161 Table 8.9 Commitmentto suppliersandperformance:primary activity and size page 162 Table 8.10 Supplier'sperformanceevaluationandperformance:whole sample page Table 8.11 Supplier'sperformanceevaluationand performance:primary activity and size page 163 Table 8.12 Role of the contractand performance:whole sample page 164 Table 8.13 Role of the contractand performance:primary activity and size page 165 Table 8.14 Conflict resolutionandperformance:whole sample page 166 Table 8.15 Conflict resolutionand performance:primary activity and size page 167 Table 8.16 Correlationanalysis:key findings page 169 Table 9.1 Key characteristicsof the firms includedin the sample page 173 Table 9.2 CompanyA: selectioncriteria for 'partnering suppliers' page 176 Table 10.1Independentand dependentvariablesis the correlationanalysis page 197 Table 10.2Correlationanalysis:key findings page 199 Table 10.3Behaviouralpattersof co-operationin supplyrelationshipsamongfour typesof firms page 205 Table 10.4Two modelsof co-operationin supply relationships page 207

V

ACKNOWLEDGEMENTS This thesiswould not have beenpossiblewithout the help and support of many people. In particular, I would like to thank: Professor Chris Hendry, my supervisor. Chris has always shown me enormous support and understanding, and has never stopped encouraging me in my efforts - even when my own self-confidence was put to severe test. He has been a challenging supervisor, but always constructive and helpful in his criticism. I have learrit a lot from him, and am very grateful. Professors Franco Amigoni and Sergio Beretta for their support and encouragement during my years at Bocconi University, Milan and, most of all, when evaluating the opportunity to pursue Ph.D. studies abroad. My thanks also go to Bocconi University for contributing part of the funding for the first two years of the Ph.D.

All the people - both membersof staff and Ph.D. students- from the Departmentsof Human Resource Management and Organisation Theory and Marketing and International Strategy, who have contributed their help and advice during seminars, workshops,and more informal meetingsin the past five years.Specialthanks go to Jim Brown, whose expertisein the area of my researchhas been very helpful and whose comments have always been illuminating. I also have a debt of gratitude to all the peoplewho have contributedto the research- managersand practitionersI interviewed for for interest in their for time, their my studies, and sharingtheir knowledgewith me. My fellow Ph.D. studentsat CUBS. Thank you all for sharingwith me the good and bad times, in the ResearchRoom as well as outside. A Ph.D., especially in an unfamiliar environment, can be a very lonely and disheartening experience, but I have been extremely lucky and have madegood friends along the way. So, very simply, thank you Peter,Alex, GeorgeA., John,Mohammed,Amir, Moala, Oliviero, Mara, GeorgeK. and the rest of the 'gang'. A very specialthanks goes to Peter McNamara. From the very first day at CUBS, Peterhas beenthere for me as a sourceof inspiration and new ideas, as a benchmarkto measuremy progressagainst,as an invaluable adviserand counsellor, and, aboveall, as a friend. I really appreciatethat, and hope somedayto be able to return the favour.

I cannotfind wordsgoodenoughto expressmy gratitude love for and my family, who havealwayssupportedme andstoodby be. My husbandDavehadthe unenviabletask of puttingup with meat my worst,anddid sowith incrediblepatience.I only hopeboth Daveandmy family knowhow importanttheyall areto me,andhow closeto my heart.

DECLARATIONTO THE LIBRARIAN I grant power to the University Librarian to allow this thesis to be copied in whole or in part without further reference to me. This permission covers only single copies made for study purposes, subject to normal conditions of acknowledgement. vi

ABSTRACT This study focuseson the emergenceof a new governanceform, the network supplyit industry. doing In two in UK the so, pursues systems optical communications chain, objectives. The first is to investigatethe extent of the shift from market-orientedto co-operationfocus is The the in on oriented mechanisms governing supply relationships. impact the in technology the on this of on change and, particular, contingenciesof developmentof co-operativeforms of governance. The secondobjective of the researchis to test the linkage betweengovernanceforms in the supply-chainand organisational.performance,particularly efficiency and innovation. Again, the impact of technologyon this relationshipis put to test. The study relies on a combination of secondary,survey and interview data. The key finding is that the degreeof maturity of the technologyhasan impact on both the type of form co-operative governing supply relationships and its relationship with organisationalperformance. For performance,co-operativegovernanceforms in the supply-chain have a positive impact on efficiency (both global and partial) and innovation when the core technology is firm is When technology the a radically new mature. still emerging, the network of impact limited has on efficiency (partial only) and a negative a positive supply-chain industries, in innovation. Moreover, the network supply-chain can emergent one on hamperand delay technologicaldevelopment. For the type of co-operative form, we identify two models of co-operative supply These the the are exploitative and relationships,respectivelynamed explorative model. ideal-types that take into account the connection between technology, governance mechanisms,and organisationalperformance,and can be found in more or less pure form in real contexts.The exploitative model is consistentwith environmentswhere the technology is well established;'exploitation' is the main strategicdriver; and efficiency and incrementalinnovation the predominantobjectives. The explorative model is consistentwith environmentswhere a specific technology has not yet establisheditself as the dominant one; 'exploration' is still a strategic priority; and the searchfor opportunitiesto diffuse the emergenttechnology is the fundamental objective. Both the exploitative and the explorativemodelsneeda 'trigger' to develop in dominated by contexts previously market-orientedmechanisms.In other words, the changein governanceforms in the supply-chainonly occurs in responseto an external event or condition.

vii

ChapterI- The natureof the research

CHAPTER 1- THE NATURF, OF THE RESEARCH

Intro uction In the wake of the "organisationalrevolution" (Miles and Snow, 1992) of the 1980s, increasedattention is being given to subcontractingsystems.Supply-chainsare not a recentphenomenon,and for many decadesthey have constitutedthe traditional way of dividing and allocating activities among independentfirms in various industries. The by interest in this renewed particular organisationalarrangementshared academicsand practitioners, however, is due to two elements.First of all, supply relationships are increasinglyusedas an efficient way of organisingeconomicactivities. Their diffusion has spreadbeyond the traditional scope of the sub-contractingsystem. New supplyinvolving have from chains emerged major restructuringand re-organisationprocesses large integratedfirms. Large firms have, in a significant number of cases,fragmented their value chains and, while concentratingon few core activities, have out-sourcedor sub-contractedthe others.

Secondly, a substantialqualitative changein the way both new and old supply-chains itself is is Supply-chain taking management progressivelyreshaping are managed place. from the "stable and largely ignored processin the background of the leading firm" characteristic of the past (Brown and Hendry, 1998) into a critical and strategically relevant activity. Traditional supply relationships,basedon a sharp appreciationof the different roles played by the parties involved, are changing in favour of relationships basedon sharedrecognition of mutual interdependence.

From a researcher'spoint of view, two aspectsdeservespecialattention.The first is the way buyer-supplier relationships are governed. There is growing evidenceof a shift from market-orientedto co-operation-orientedforms to govern supply relationships, so that buyer and supplier think of themselvesas partners.Most of the evidence so far available is, however,basedon the study of a limited number of industries.To broaden the analysis by collecting fresh data across different sectors is of fundamental importanceif the changeis to be regardedas structuraland pervasive.

I

ChapterI- The natureof the research

The second aspect is the impact of co-operation in the supply-chain on is is the It that thought co-operation commonly organisational performance. fundamentalkey to competitivenessbecauseit createsthe right organisationalcontext for both increasedefficiency and enhancedcreativity and innovation capability. Marketbasedrelationshipstend to be seenas negativebecausethey are one-sided.They may development hamper but immediate the of creativity may also efficiency gains, promote is if is the case,under what innovation in long Whether this true this the term. and, and issue. important fundamentally is conditions and contingencies a

1.1 Research objectives This study focuseson the emergenceof a new governanceform, the network supplychain, in the UK optical communicationssystemsindustry. The researchconcentrates forms from to the governing supply co-operation-oriented market-oriented on shift this investigate in industry First, two the to this of extent objectives. with relations Optical in impact its technology. the particular of contingencies, and change and industry by is the co-existenceof - and oncharacterised an communicationssystems fibre-optics, 'established' 'emergent' between two technologies, copperand going race development in it ideal test the the to technology therefore role of context and offers an of co-operativeforms of governance. The secondobjective of the researchis to test the linkage betweengovernanceforms in the supply-chainand organisationalperformance.Is it possibleto correlatethe adoption of co-operation as the fundamental principle to govern supply relationships with improvementsin efficiency and innovation?Does technologyhave a significant impact between the relationship governanceforms and performance? on

' For the purposesof the presentstudy market, hierarchy (i. e. vertical integration) and co-operation (or networking) are consideredthree alternativeinstitutional settingsfor co-ordinating economicexchanges (Jarillo, 1993).Three co-ordinationmechanismscan also be identified - that is price, authority and trust. However, there is no direct and complete correlation between a specific economic institution and a specific co-ordination mechanism.Each institution usesall three mechanismsto some degree(Bidault and Jarillo, 1995).

2

ChapterI- The natureof the research

The conclusionsof the study arepresentedin detail in Chapter10. The primary outcome identification is the the of two models of co-operativesupply relationships, of research into the take that the the account model, and explorative exploitative named respectively connection between technology, governance mechanisms, and organisational is the The where environments with consistent exploitative model performance. technology is well established,'exploitation' is the main strategicdriver and efficiency is The innovation incremental the predominant objectives. explorative model and itself has technology not yet established consistentwith environmentswhere a specific for is dominant 'exploration' the search as the one, still a strategic priority and opportunitiesto diffuse the emergenttechnologyis the fundamentalobjective. From a methodologicalpoint of view, the researchconstitutesan attempt at developing an original and practical way to operationalisethe key concept of co-operation or 'networking". Co-operationis not operationalisedthrough the immediateapplication of derived from literature. definition definition Indeed, the theoretical the of coa proposed 4). 3 integrates different Chapters (see theoretical and contributions operative network Instead,a processapproachis used for operationalisingthe concept of networking and interkey the the our measurementeffort concentrateson relevant characteristicsof organisationalprocessesthat underpinevery supply relationship.

By focusing on the two objectiveshighlighted above, the researchfield is accordingly restricted.Someimportant issuesare excludedfrom the boundariesof the study and left unexplored that are potentially interesting areas of research. A few examples are presentedhere, but others emergein the course of the study. First of all, the present study is not concerned with exploring the fundamental reasons for adopting cobasis for inter-organisationalrelationshipsin the supply-chain.This is an operationas a important areathat is left in the background.The main rationale for this choice is that this is the very issue most studies in this area up to the present time have been concernedwith, and it seemsnow necessaryto move the researchscope further on. Most studies take for granted that the shift towards more co-operative forms of ' For the purposesof the present study co-operation and 'networking' are used indiscriminately to indicatethe third economicinstitution availablebesidesmarket and hierarchy.

3

ChapterI- The natureof the research

is but organisingsupply relations a pervasivephenomenon, strongerempirical evidence is requiredto substantiatethis assumption. Equally, the study does not addressthe issue of whether the changesrepresentthe outcome of emergent strategiesor constitute realised strategy, or to what extent an intendedstrategyis put into practice.Another fundamentalissuethat is not addressedis the influence of personalrelationshipson co-operativebehaviourbetweenorganisations level individual is interaction interplay levels the that the and two of analysis, and of the organisationallevel. This study concentrateson the organisationalone.

1.2 Research contribution

to the existing body of knowledge

The researchcontributions to the existing body of knowledge are both theoretical and practical. First of all, the researchconcentrateson an under-researched context such as the UK optical communications systems industry and, consequently, offers new empirical evidence for the study of co-operation in supply relationships. This new is diffusion the the that of co-operativesupply relationships not evidencesupports view but industries to technologies, traditional confined with established such as automotive, affects high-tech industries and industries where the technology is still at a developmentalstage.

Secondly,the researchidentifies an environmentalvariable the degreeof maturity of the technology - that affects both the form and the outcome of co-operationin supply relationships.The two models of exploitative and explorative co-operation summarise the relationship betweengovernanceform, organisationalperformanceand technology and offer a starting point for a deeper understanding of the complexity of interorganisationalrelationshipsand behaviours.This is valuable for both researchersand practitioners.It is valuable for researchersbecausethey can approachthe study of cooperation starting from a more refined conceptualisationof the phenomenon.It suits practitioners becausethey find themselvesbetter equippedto make senseof the jungle of directions all generically pointing to co-operation as the key to improved performance.

4

ChapterI- The natureof the research

The study adds,in fact, to the short list of contributionsthat take a more critical view of co-operationas a recipe for competitive success.It improves our understandingof the conditions and contingenciesunder which the adoption of co-operativearrangementsis truly beneficial and helps clarifying the relationship between different types of cooperation and performanceimprovements.The practical implications are immediately obvious at two critical levels. The first is the level of the individual organisation,whose managerscan engagein co-operativestrategiesthat are more in line with their expected results. The secondis the level of industry and policy making. This knowledge could contribute to direct more effectively the efforts of institutions and agencieswhose main concernis to promotethe competitivenessof nationally key industries. Finally, the study puts an original methodologicalapproachto the study of co-operation to test. There is no general consensuson what 'networking' is, or on the specific characteristics of co-operative organisational structures. Different disciplines offer different definitions, and provide different setsof criteria to measureco-operation.From a researchpoint of view, the problem is that most of these criteria prove extremely difficult to translate into operational measuresthat can be used in concrete research projects.

The study suggestsa way out of this problem. The solution proposedis to concentrate on organisational processesas a tool to measure co-operation. Instead of directly applying the theoreticaldefinition of co-operationto find the metrics, this study looks at the expectedeffects of co-operationon a number of key organisationalprocessesand areas. The characteristicsof these processesare more readily observable and can provide a surrogatemeasureof the degreeand nature of co-operationunderpinning the relationship. The theoretical issue of the definition of 'networking' and co-operative organisationalstructuresis addressedin the literature review carried out in Chapter3. It always lies in the background.However, in order to get out of the 'jungle' of too many, not-so-operationalisabledefinitions, a processapproachis suggestedand a manageable way of measuringco-operationis proposed.

5

ChapterI- The natureof the research

1.3 Structure of the thesis Chapter 2 and 3 are devoted to the analysis of the existing literature and the development of the theoretical framework. A number of theories and conceptsare derived that help clarify the boundaries of the present research and sustain the Chapter 2 In concentrateson the changescurrently methodologicalchoices. particular, for it draws the doing, to in In need attention occurring supply-chainmanagement. so from more empirical evidenceon the extent of the shift towards co-operationand away industries. length is artn"s relationships, and whether this pervasive and affects all Chapter2 also addressesthe relationshipbetweenco-operationin the supply-chainand organisationalperformance.The case for a better understandingof the complex and 3 Chapter is between co-operationand performance reinforced. ambiguousrelationship is devotedto the theoreticalissuesin defining the network organisationand identifying its founding characteristics. Different theoretical perspectives are introduced and different is integration theoretical the of suggestedas a contributions and analysed, fruitful way to derive a suitableworking definition.

Chapter 4 concentrateson the analysis of the research context, the UK optical communications systemsindustry. Particularattentionis devotedto the understanding knowledge A technology. the of of specific characteristicsof opto-electronics general the technology, of its overall development,and of its impact on the competitive game provides the necessarybackgroundfor understandingindividual firms' behaviours and strategies.

Chapter 5 is devotedto the operationalisation of the key variables used in the study. A number of key definitions and conceptsare introduced.In particular, a definition of co-operativenetworks in the supply-chainis derived from a review of the literature in Chapters2 and 3. However, as already suggested,the practical operationalisationof the key variables and conceptsof the study relies on a processapproach.A number of key organisationalprocessesand areasare identified whose characteristicscan be used as

6

ChapterI- The natureof the research

indirect measures of the existence and type of a network-based

relationship

between

buyer and supplier. Chapter 6 outlines the research strategy and detailed methodology. The research led iterative design by to their described that the process are presenting strategy and final shape. Special attention is also given to the development of the survey instrument, identified. the that the so connections with research concepts and variables are clearly

Chapter

7 reports the survey flndings

descriptive survey data. Chapter

and concentrates on the presentation of

8 follows immediately with the results of the

is to data. The this the analysis of correlation analysis on relevant survey main objective correlate specific characteristics of the organisational processes and areas (independent variables) selected to operationalise co-operation in supply relationships with efficiency and innovation, the selected dimensions of organisational performance (dependent variables).

Chapter 9 reportsthe findings of the follow-up interviews with a number of managers installation firms involved in and of optical communication systems. of manufacturing The interviews concentrateon a number of issuesraisedby, but not fully accountedfor in, the survey. The findings are presentedin six mini-case studiesthat reveal valuable information for a deeperunderstandingof the developmentof supply relationshipsin the UK optical communications systems industry. Chapter 9 concludes with a general discussionbasedon the integrationof surveyand interview data.

Chaptcr 10 summarisesthe conclusions of the study and presentsthe key findings on the relationship between governance forms in the supply-chain, organisational performance and technology. It also presents the two models of explorative and exploitative co-operationin the supply-chainand highlights the conditions under which they develop. Finally a few implications of the study for academicresearchand for practitionersare presented.

7

Chapter2-A review of the empirical evidence

CHAPTER 2-A REVIEW OF THE EMPIRICAL EVIDENCE Chapters2 and 3 developthe theoreticalframework for the researchissuesin Chapter IThe literature review is primarily driven by the need to narrow and clearly define the boundariesof the empirical study. Also, the identification of significant gaps in the literature legitimises the researchand highlights its original contribution to the existing body of knowledge. Chapter 2 concentrates on the changes currently occurring in supply-chain idea the The to of a management. needto gathermore empirical evidence corroborate diffusive adoption of co-operation as the fundamental principle to regulate supply issue the is Chapter 2 the of given relationships special attention. also addresses relationship

between co-operation in the supply-chain and organisational

far for better The the poorly understandingof complex and so case a performance. idea The is between co-operationand performance reinforced. understoodrelationship that co-operation, with no further qualifications, contemporaneously fosters all dimensionsof performancein all casesand circumstancesis thereforequestionedas not for This the the the way real phenomenon. paves effectively representative of introduction in Chapter 10 of a new variable - the degreeof maturity of the technology form has in impact the that supply and outcomes co-operative of a shaping significant relationships.

Chapter 3 is devoted to the theory of the network organisation and to identifying its founding characteristics.Different theoreticalperspectivesare introduced and analysed. The lack of a comprehensivetheory encompassingall aspectsof the life of networkbased organisational structures is highlighted. The integration of contributions from different disciplinary fields is suggestedas the most promising and practicable way to move empirical researchforward.

The structureof Chapter2 is, in consequence,as follows. First, we considerthe issue of the nature and actual extent of the changesoccurring in supply-chain management. Second, we analyse the relationship between organisational.'networks' (and co-

8

Chapter2-A review of the empiricalevidence

operative inter-organisational relationships) and organisational performance, with particular attentionto supply-chains.Finally, relevantgapsin the literature are identified and the boundariesof the researchmore clearly defined.

2.1 The nature of changesin supply-chain management A growing body of literature suggeststhat advancedeconomiesare experiencing a substantial economic restructuring, with an increasedrole for small, independent firms engaging in co-operative partnerships with customers and suppliers. In the impact is have inter-firm there that process, growing recognition a significant relations on economicperformance.Conceptssuch as flexible specialisation(Hirst and Zeitling, 1989; Piore and Sabel, 1984),just-in-time systemsof production (Shoenberger,1982; Voss, 1987), and the lean production system(Womack, Jones,and Roos, 1990) are all part of this debateabout the changingnature of inter-firm relations and the emergence of co-operativebuyer-supplierrelationships.

A number of causes are suggested in the literature to justify the shift from relationships based on power and bargaining positions to partnerships based on trust and co-operation. Examples include the impact of the so-called 'new competition' (Best, 1990; Speckman,Kamauff, and Salmond, 1994); the increasing importanceof quality-basedand time-basedcompetition (Blackburn, 1991;Jones,1985; Stalk and Hout, 1990); and the growing uncertainty of product markets (Sabel, 1992). These factors contribute to the crisis of the traditional mass-production system. Alternative emerging systems,like the "lean production" system (Womack, Jones,and Roos, 1990), tend to reducethe relative importanceof once fundamentalelementssuch as high volumes, standardisation,economiesof scale and the experiencecurve in the pursuit of cost-minimisation and efficiency. Efficiency and cost-minimisation are always fundamentalobjectives,but their achievementis more and more the result of a complex and inter-functional process of continuous improvement rather than of a thorough application of mass-productionprinciples. Cost reduction,timeliness (in terms of both time-to market and punctuality), and quality are no longer alternativeobjectives. They can be pursuedtogether by meansof an accuratefine-tuning and scheduling of

9

Chapter2-A review of the empirical evidence

activities throughoutthe overall productionprocess(Schonberger,1982; Ferdowset al., 1986;Imai, 1985;Ferdowsand De Meyer, 1989).

The boundariesof organisationalunits that constitute the 'production set' both within increased dynamism firm following blur. Moreover, the tend the to of the and outside environment and the rising level of competition, the ability to generatea continuous flow of innovationsand to reducethe period betweeninvention and market introduction hasbecomeparamount(Bolwijn and Kumpe, 1990). In the literature two different approaches can be found when discussing the changing nature of supply relationships. In one, authors list the types of changes occurring in inter-firm supply relationships (Lamming, 1989; Lyons, Krachenberg and Henke, 1990;

Lorenzoni, 1992;Normann and Ramirez, 1993). The most common changesidentified are:

0 Firms pay increasingattention to the individual characteristics of suppliers, both in the selectionstageand during the managementof the relationship. There is a marked tendencytowards a reduction in the number of suppliers, even though the overall number of supplierscan still be remarkably high. The numberof suppliersand sub-contractorstendsto stabilise,with few newcomers and few exits. The division of labour is always functional, but objectives other than sheer cost efficiency and cost reduction are gaining importance and are now openly recognised as valuable. As a consequence,the balance of power betweenthe lead firm in the supply-chainand its suppliersand sub-contractors tends to shift towards the latter, whose contribution (in terms of flexibility, innovation, knowledge of the markets, etc.) is actively sought and considered of strategicimportance. E The boundaries of different organisations operating in the supply-chain tend to be blurred by the frequencyand intensity of the relationshipsinvolved and by the emerging awarenessthat the supply-chain operatesas a unitary system in direct competition with other similarly structured systems in the

10

Chapter2-A review of the empiricalevidence

sameindustry.

The secondapproachis to develop generalmodels that systernatiseexisting empirical evidence,mainly in the automotive industry. Thesemodels vary quite significantly in depth and scope.Somesimply summarisecomplex changesby contrastingand labelling 'old' and 'new' ways. For example,Matthyssensand Van den Bulte (1994) comparethe 'antagonistic' and 'co-operative' models in buying attitudes (see Figure 2.1) and behaviourand identify a few causesfor the shift. Excessiveattention for short-termcost savings at the expense of innovation, quality, and reliability, and increasing and unmanageablecomplexity play a major role. Figure2.1 AntagonisticversusCo-operativeModel (adaptedfrom Matthyssenand Van den Bulte, 1994) FROM

TO

ANTAGONISTIC MODEL

CO-OPERATIVE MODEL

Tough negotiations(annually)

Interactionand communication(on-going)

Price is central

Quality and competenceof the supplier are central

Shortterm contracts

Long term, closerelationship

'Multiple sourcing', several suppliersfor eachcomponent

Tendencyto dual and single sourcing

Threatof buying the supplier

Outsourcingand co-makership

Tactical purchasing

Other authorsintroducean historical perspectiveinto the debateand describethe in a specificindustryover time. This is the caseof evolutionof supply-relationships Lamming's(1993)four-phasemodelof the automotiveindustryin the UK, Europeand North America.The "traditionalmodel" of supplyrelationships basedon bargaining power and antagonism- is supplantedin the mid-1970sby a "stressmodel". Buyers exploittheir bargainingpowerandimposea numberof practiceson their suppliers(such as open books and quality control) mainly in pursuit of immediateincreasesin efficiency. The third phase stretchesfrom the mid-1980sto the 1990s and is

11

Chapter2-A review of the empirical evidence

by "resolved is There the adoption characterised of a model". growing recognition of the importanceof collaborationand the number of practicesinvolving suppliersin a closer relationshipwith their buyers increases,even if thesepracticesare still perceivedas an imposition and resented. In the 1990s a fourth phase emerges with a powerful "partnership model". Relationships between buyers and suppliers become more entangledand give origin to complex networks,with strong focus on inter-dependence and mutual assistancealongsidea strongeconomicbasis. Dyer, Sung Cho, and Chu (1998) have developeda more prescriptive model basedon the idea of strategic supplier segmentation. By comparing supply practices in the U. S., Japan, and Korea, these authors identify three models of supply-chain management -

respectivelynamedthe 'arm's-length', the 'durable arm's-length', and the 'partnership' models (see Figure 2.3). Three characteristicsdiscriminate between the three: (a) the intensity of investment in dedicated or relation-specific assets; (b) the degree of information-sharingand mutual assistance;and (c) the degreeof trust and the length of the relationship. Figure 2.2 A comparisonof supply managementmodels(adaptedfrom Dyer, SungCho, and Chu, 1998)

Relation-Specife

Information-sharing And assistance

Trust/Length of Relationship

Assets

ARNI'S-LENGTH MODEL

DURABLE ARNI'SLENGTH MODEL

PARTNERSHIP MODEL

Low

Low

High

Low

Medium

High

Low/Short

Medium/Long

High/Long

Dyer et al. (1998: 68) suggest that there is not a 'one-size-fits-all' strategy for procurement,but that "suppliers should be analysedstrategically and then segmented into two primary groups:one group of suppliersthat provide necessarybut non-strategic

12

Chapter2-A review of the empirical evidence

inputs; and another group that provide strategicinputs." For inputs that are necessary but not strategic, "firms should employ durable arm's-length (quasi-market) (quasi-hierarchies)" "strategic they partnerships should employ relationships" while 69-70). inputs 1998: (Dyer et al. with strategic In more general terms, the need to shift towards a more co-operative and less in is the buyer between recognised widely and suppliers opportunistic relationship literature.The ideal model for the successfulbuyer-supplierrelationshipseemsto be the Japanesevertical keiretsu (Lincoln and Gerlach, 1992), where exclusive (or semithe focus the and efficiency exclusive) supplier-purchaserrelationships on maximising effectivenessof the entire value chain (Dyer and Ouchi, 1993). The shift towards coin in documented has been car operation supply relations most thoroughly lean following diffusion Japanese to the the production manufacturing of approach (Lamming, 1989; Oliver and Wilkinson, 1988;Heide and John, 1990; McMillan, 1990; Cusumanoand Takeishi, 1991; Helper, 1991b;Turnbull, Oliver, and Wilkinson, 1992; Dyer and Ouchi, 1993; Richardson, 1993; Oliver, Delbridge, and Lowe, 1996; Dyer, 1996; Langfield-Smith and Greenwood,1998;Dyer, Sung Cho, and Chu, 1998). Others havealso identified electronics(Morris and Imrie, 1993).

2.1.1 The role of the lead firm Notwithstanding the

rising

importance of

sub-contractors and the

wide

acknowledgementof their contribution to the successof the supply-chain as a unitary lead in in industry, the the system competition with similarly structuredentities same firm remains a fundamental actor. This may seem paradoxical. On the one side, it denied be from that the cannot a competitive towards a co-operativerelationship shift betweenthe lead firm and its (now stableand relatively few) suppliers reducesthe gap in the balance of power in favour of the latter. A high degree of reciprocal interdependenceis generally recognisedas intrinsic in supply-chainrelations basedon coRichardson, 1993; Wilkinson, (Turnbull, Ouchi, Oliver, 1992; Dyer operation and and 1993), whereasthe traditional supply-chainis characterisedby a marked dependenceof the supplierson the nearly absolutepower of the leader.

13

Chapter2-A review of the empiricalevidence

On the other hand,the role playedby the lead firm continuesto be confirmed as vital for his In the the seminal analysis of supply-chain. the successand competitivenessof "strategic networks", Jarillo maintains that "essential to this concept of strategic in fact, is "firm the firm' 'hub The that, 'hub firm"'. is the up sets the that of network More 32). (1988: if' in recently, the care of network, and takes a pro-active attitude Baden-Fuller and Lorenzoni point out that "it is becoming increasingly apparentthat those networks that are not guided strategically by a "centre" are unable to meet the demandingchallengesof today's markets" (1995: 146-7). Baden-Fuller and Lorenzoni (1995) also identify four main features in the critical role of

the strategiccentreor lead firm as creatorof value:

Strategic Outsourcing.The strategiccentreoutsourcesand requirespartnersto be more than doers,and expectsthem to be problem solversand initiators. " Capability. The strategiccentre developsthe core skills and competenciesof forces to them and membersof more effective competitive, make and partners the network to sharetheir expertisewith others in the network and with the firm. central " Technology.The strategiccentreborrows ideas from others that are developed and exploited as a meansof creatingand masteringnew technologies. "

Competition. The strategic centre explains to partners that the principle dimension of competition is between value chains and networks, that the between link, is its and encouragesrivalry network only as strong as weakest firms inside the network in a positive manner.

In the transition from a traditional supply-chainto a co-operativesupply-chain,the role of the buyer seems,therefore, far from limited by the growing importance of the its it be On that to tends the own of as contrary, as much enrichedand valued suppliers. counterparts, and the purchasing process becomes a critical value-adding activity (Spekman,Kamauff, and Salmond,1994).

14

Chapter2-A review of the empiricalevidence

The importance of the lead firm is pre-eminent also when objectives other than immediatecompetitiveadvantageare taken into account.In their analysisof the supplychain as a vehicle for organisationallearning, Hendry and Brown (1998: 14) point out that in those supply-chainswhere the buyer-supplierrelationship is of the co-operative type, "greater learning, specifically directed towards getting more performanceout of the supply-chain" seemsto be a primary objective, "rather than in the case of the industrial district where there is a lack of strategicintent." In the industrial district, the lack of a clearly identified leadercan lead to the inability to institutionalisethe learning to a sub-optimalutilisation of its potential. The role of generated,and, as a consequence, the centre in the supply-chainis, therefore,crucial in orchestratingthe knowledge and the capabilities existing within the overall system, so that the system itself can take advantageand benefit from them (Baden-Fullerand Lorenzoni, 1995).

2.1.2 The network supply-chain: key issues in the emergence of a new organisational form

The available empirical evidenceseemsto suggestthat, at least in a few industries,the traditional supply-chain is undergoing an evolutionary process. Traditional supplychainsare transformingthemselvesand this processis likely to lead to the emergenceof a network-basedorganisationalentity, or network supply-chain (Ferlie and Pettigrew, 1996).

This claim, however, has a number of problematic aspects. First of all, a sound assessmentof the actual extent of this transformationacrossdifferent industries is still missing. Before claiming that a new organisationalform has emergedas the dominant form for the future, it is necessaryto expandthe empirical researchbeyond the limited boundariesof the few industriesthat have so far constitutedthe field of study. The risk of generalisinga phenomenonthat is in reality industry-specificmust be recognisedand avoided by directing the attention to sectorswith different characteristics.Secondly, alongside the problem of variation between sectors lies the problem of possible variation between countries and national cultures.

15

Chapter2-A review of the empirical evidence

The UK constitutes a very good example of the difficulties in these two areas.As high-trust benefits literature (1998), by Korczynsky the the of on most of suggested by UK from the the study notable exception of with outside the relationships comes Sako on the automotive industry (Sako, 1992). Within the UK there are, moreover, discordant voices. Some authors claim that there is a shift in inter-firms relations firms benefit towards co-operation, to the particularly of small and medium sized (Baxter et al., 1989; Murray, 1985). Others,however, highlight some critical areas.In his review of the literature on co-operative supply relations in the UK, Korczynsky (1998) mentionsthe following aspects.First of all, most of the early researchfocuseson the successstories,ignoring the difficulties and indulging in "cheerleading" (Harrison, 1994:34). The overemphasison successcan be related,accordingto Korczynsky (1998: 789) to "the lack of focus upon power relations." Moreover, in the international literature the UK is always presentedas an exampleof traditional arm's length relations (Casson,1991; Dore, 1983; Hirst and Zeitling, 1989),and this raisesthe suspicionthat shifts in the UK may be different from shifts occurring in other countries. In their review of the literature on buycr-supplierrelations in the UK, Morris and Imrie (1993: 59) conclude that: "there is some empirical evidence which reinforces the buyerin involved is industry British that a reappraisaland reorganisationof perception supplier relations. However the evidence indicates that the transformations are concentratedin particular industrial sectors." Korczynski (1998: 790) reinforces these conclusionsby claiming that "in the UK large firms continue to be dominant, that they use this dominanceto pass on costs to smaller firms, and that while there is limited by beset increased inter-firms be information-sharing, to evidenceof relations continue low trust" (p.790). In research on the UK engineering construction industry, for example, Korczynski (1998) arguesthat managementcontractors have predominantly adopteda low-trust route to improved performance,and identifies a number of potential constraintsto the adoptionof high-trust relationsgenerally.

Finally, the dynamics of the transformationas well as the contingenciesthat can affect its final outcomehave not yet beenidentified and analysed.The role played by the lead firm in the supply-chain,as well as the nature of the overall strategiespursuedby the

16

Chapter2-A review of the empiricalevidence

firms involved in the transformation,are examplesof grey areaswhere further research

is needed. To summarise,it seemspossibleto identify four major gaps in the existing literature on the changes occurring in supply-chain managementand the emergenceof the network supply-chain.The first gap is concernedwith the degreeof diffusion in the shift from market-oriented to co-operation-orientedgovernancemechanismsin different sectors. In other words, is the changewidespreador is it limited to a restrictednumber of industries?And, if this is the case,why is that?The secondgap is about the degreeof diffusion of co-operationas the fundamentalprinciple to govern supply relationshipsin different countries and national contexts. In other words, is the changeworld wide, or is it localised?And what is the relative position of the various countries,and of the UK in particular? The third gap is about variation among firms of different sizes at different levels of the supply-chain. In other words, is the changeoccurring for small as well as for large firms, at the bottom end of the supply-chainas well as at the top? The fourth gap is to do with the dynamics and contingencies of the transformation. How are both inter-organisationalprocessesand individual firms' behavioursaffected by the transformation?

2.2 The relationship between organisational networks, co-operative inter-organisational relationships, and organisational performance Evaluating the outcomeof network-basedorganisationalentities is complex from both a theoretical and a practical point of view. Ho Park (1996: 796) maintains that "the measurementof network performancedependson the context and the level of analysis in eachstudy and it is not possibleto havea universalmeasure." From a theoreticalpoint of view it is possibleto distinguishbetweenthe two conceptsof network effectivenessand organisational performance (Provan and Milward, 1995). Network effectivenessrelates to "outcomes of the network as a whole" (Provan and Milward, 1995: 2), such as stability, and is particularly appropriatein the public and

17

Chapter2-A review of the empiricalevidence

individual Organisational the to of performancerelates outcome not-for-profit sectorS3. dimensionsý. entities encompasses a number of and organisational Most studieson the impact of increasingco-operationin the suPply-chaindeal with the The level relationship performance. organisational and concentrateon organisational between the adoption of a co-operative organisational structure and organisational in literature. found be is debated the Two performance a very main positions can area. The first, also chronologically, is very optimistic about the existenceof a positive and strong

relationship

between co-operation

and

improved

organisational

performance. The second, developed in more recent times, is more sceptical and critical. The literature in favour of a positive correlation between networking and improved organisationalperformancepoints to a great number of advantages deriving from codiffusion The innovation technological operation. most recurring onesare creativity, and (von Hippel, 1985 and 1986; Clark, 1989; Womack, Jonesand Roos, 1990; Clark and Fujimoto, 1991;Turnbull, Oliver, and Wilkinson, 1992; Dyer and Ouchi, 1993); higher to environmentalchange quality (Nishiguchi, 1994);time-to-marketand responsiveness (Ohmae, 1982; Imai, Nonaka and Takeuci, 1985; Johanssonand Nonaka, 1987); and increasedflexibility (Jarillo, 1993).

For some,co-operation is in itself a source of competitive advantage (Jarillo, 1993). Differential performancebetweenfirms (and systems)operating in the same industry can be attributed to the adoption of a more-or-less network-oriented organisational structure. The rationale lies in the network-based organisational structure being inherently characterisedby the "right" combination of elementsto match the changed nature of competition (Miles and Snow, 1992). This blend facilitates the creation of ' Provanand Milward (1995)maintainthat issuesof networkoutcomesand effectiveness are mostly ignored.This is partially due to the intrinsicdifficultiesof identifyingthe appropriatemeasuresand is Thereis howeveranotherpossibleexplanationin thatnetworkeffectiveness measurement procedures. especiallysalientin the public andnot-for-profitsectorswherea public interestmotiveis involvedand is the"rationalefor organisations to accomplish than ends organisational co-operating systemgoalsrather oftenstrongerthanin theprivatesector"(ProvanandMilward,1995:3).

18

Chapter2-A review of the empiricalevidence

dynamic increasingly in environment. complex and an competitive advantages According to Jarillo, the strategicnetwork is "winning over in more and more industries becauseit is able to capture the main advantagesof two organisations- that is the divisional flexibility functional the the the one of organisation and efficiency of firms 11-12). All (1993: the within the network are consideredmutually exclusive" itself benefit from to provide the to this network enhanced ability of supposed opportunitiesand to reinforce individual efforts. When flexibility is fundamental, the most commonly acknowledged advantages provided by the network-basedorganisationalforrn lie in the area of technology and innovation. Hagedoorn (1993), in his analysis of inter-organisationalmodes of cooperationand sectoraldifferences,has contributed a broaderunderstandingof strategic technology partnering'. The motives - and the competitive advantagessought through the adoption of a network-basedorganisational structure - change according to the degree industry. Different in differences the the of natureof motives are associatedwith technological intensity of the industry, with the degreeof maturity of the sector, with the importanceplayed by technologicalcomplementarity,and with the nature and level of competition.

Moreover,differentnetwork-based solutionsare enactedin orderto achievedifferent forms - complex types of advantage.Hagedoomidentifiestwo major network-based strategic technologyalliances,"motivatedby both market and technology-mediated objectives",andcontractualstrategictechnologicalalliances,"primarily aimedat more focusedandnarrowtechnologicalachievements" (1993:375).

' For reviews of the problemsposedby measuringeffectivenessat the organisationallevel seeGoodman and Permings,1997,and Cameronand Whetten,1983). ' In general terms, and adopting a "somewhat linear interpretation of the innovation process from developing science and performing R&D down to market entry and the joint introduction of new products", the alternativeconcretemotives for strategicinterfirm technology co-operation,both vertical and horizontal, are the following (Hagedoorn,1993):(a) motivesrelated to basic and applied research, and some general characteristics of technological development; (b) motives related to concrete innovationprocesses;and (c) motivesrelated to marketaccessand searchfor opportunities.

19

Chapter2-A review of the empirical evidence

The belief in the superiority of the network-basedorganisationin pursuing both cost fact, is, in however, There innovation is growing unchallenged. not, efficiency and from deriving the adoption of co-operative concern over potential shortcomings arrangements,and co-operative supply relationships are not always seen as a magic remedy. Miles and Snow (1992) raise the problem of potential failures of network structuresat the theoretical level. According to their classification, the supply-chain constitutes a in its is has form "organisational that roots the structureand stable netivork, which an "on based is logic functional 63), (1992: the a set of operating and of organisation" componentfirms, eachtied closely to a core firm by contractualarrangements,but each maintaining its competitive fitness by serving firms outside the network" (1992: 63). For the effectiveness of the overall network, it is extremely important that sub"overkeep in both touch the the contractors with market, and avoid risks of specialisation" and "over-dedication". Low quality, rising costs (and prices), and decaying technological expertise and flexibility are the inevitable negative effects of in decreasing the external market. According to Miles and suppliers' participation Snow, the lead firm in the supply-chain plays a fundamentalrole in maintaining the effectivenessof the overall system,by both carefully using a balancedset of subsidies and incentivesand avoiding excessivelyauthoritativeand defensivebehaviours.

On a similar theoretical level, Uzzi (1997) maintains that there are a number of clear advantagesin embeddedforms of exchange and network structures. In his words "embeddednessis a logic of exchangethat promotes economiesof time, integrative agreements,Pareto improvements in allocative efficiency, and complex adaptation" (Uzzi, 1997: 35). However thesepositive effects are not unlimited. A threshold exists "embeddedness derail after which can economic performance by making firms vulnerableto exogenousshocksor insulating them from information that exists beyond their network" (Uzzi, 1997: 35). According to Burt (1992) isomorphism within the network decreasesdiversity. A concentratedlevel of exchangewith a few partners reducesnon-redundantinformation and accessto new opportunities.

20

Chapter2-A review of the empiricalevidence

At a more practical level, the mixed results achieved by Western firms trying to introduce "Japanese-like" practices" also call for a re-assessmentof the actual benefits deriving from the adoption of co-operation as a fundamental co-ordinating UK, (Turnbull, In the the the of car-industry principle. unsatisfactory performance Oliver, and Wilkinson, 1992;Richardson,1993;Oliver, Delbridge, and Lowe, 1996)has originated a debate on the relative advantagesand disadvantagesof co-operative approachesin supply-chainmanagement. Two main alternative explanationsare offered to explain poor performancelevels by UK firms shifting towards co-operativepractices.On the one side, the advocatesof the adoption of Japanesepracticesby Western firms (Dyer and Ouchi, 1993; Richardson, 1993) claim that the introduction of Japanese-likemethodsin the UK has been carried out superficially. In particular, UK firms seem to have adopted only the "colourful, people-oriented aspects" of these techniques, without paying due attention "to the harder, process-control oriented aspects" (Oliver, Delbridge, and Lowe, 1996). According to Voss (1987), UK firms are ready to introduce the "easy-to-implement" elements of the Japanesemodel rather than the most useful ones, those that really explain Japanesesuccessand superiority.

On the other side, there are a number of researchers who impute the differential performances of Japanese andUK firms to moregeneralfactors,andin particularto the structureof the industry.The high degreeof fragmentationof the industry,the lack of trust and co-operativespirit betweenlong-standingantagonists,and the presenceof multiple standardsmust be given special attention when explaining differential (Turnbull,Oliver,andWilkinson,1992). performance Whatever the real cause, there is a growing awarenessand understanding of the Japanesesystem and its true complexity, which is far higher than commonly thought. The Japanesesystem is, in fact, characterisedby a fine-tuned mixture of "hard" and ' The relationship establishedbetweena Japanesefirm and its sub-contractorstends to be qualified as "partnership" (Dyer and Ouchi, 1993). An alternative definition is given by Sako, who describesit in terms of "obligational contractualrelation" (Sako, 1992).

21

Chapter2-A review of the empirical evidence

"soff' elements, reciprocally interdependentand reinforcing, and its final outcome depends also on the characteristicsof the general competitive environment. Scher (1997) addressesthe issueof potential network failures by focusing on the performance of Japaneseinter-organisationalnetworks in the light of the current economic crisis. Scher maintainsthat the "concept of trust in Japaneseorganisationalrelationshipsand the practicescommonly associatedwith it are at root merely a metaphorof convenience based by for highly on used social scientists a elaboratedschemaof relationships" "relational access"'(Scher,1997:3). Based on previous contributions', Scher develops a model for codifying interorganisational relationships along two dimensions (see Figure 2.3). The first is the degree of information codification codified versus un-codified. The second is the natureof power relations- hierarchicalversushorizontal. Figure 2.3 Information Codification/PowerRelationsMatrix (adaptedfrom Scher,1997)

Codified information

Un-codified information

BUREAUCRACIES

MARKETS

FIFES (PatrimonialBureaucracy) KEIRETSU - (Vertical) AsymmetricalPowerrelationships Subsidiary-likeaffiliations

CLANS (Kinship Network) KIGYO SHUDAN - (Horizontal) Collegial relationships Non-CompetitiveSynergisticAlliances

merarcnicai power reiations

Horizontal power relations

Thedebateon the impactof networkingon organisational from is far close performance ' "Relational access"is definedasa "highly nuanced continuumof relationships- informal, invisible, and inescapable- by which the gradation of interfirm relations from insider to outsider are determined" (Scher, 1997:4). ' Schercites the following as direct sourcesfor his model: Boisot and Child (1988); Durkheirn (1933); Hall et al. (1977); Hofstede(1991); Ouchi (1980); Weber(1921); Williamson (1975).

22

Chapter2-A review of the empiricalevidence

to a definitive solution. However, it is more and more widely acknowledgedthat the itself, by determine does a specific structure not, adoption of a given organisational identification it is these Other the to of at play, and variables are outcome. directed. be future that must researchefforts contingencies

2.3 Gaps in the literature and new directions for research From the analysis of this literature, two key issues arise that require further investigation.The first is the emergenceof the network supply-chain and the actual extent of the transformation. There is growing evidence to suggest that a new involves form, is the a which organisational so-callednetwork supply-chain, emerging, major shift from market-orientedto co-operation-orientedmechanismsto govern supply relationships. However, it is not at all clear what is the actual extent of the transformation.It is important to extend the investigation to industries other than the few so far intensely researched,primarily car-making, construction, engineering and electronics. This could also contribute to the clarification of issues regarding the help this transformation, to identify and contingencies of

industry-specific

is In characteristics. other words, the move towards co-operationa genuinely pervasive in Does the same way and under the same the transformation one? process occur its in industry, there that significant contingencies circumstances every affict or are developmentand, consequently,its final outcome? The same questions can be raised when comparing the transformation process in different countriesand national contexts.The UK seemsto representan interesting area for further researchdue to the contradictory and mixed nature of the evidence so far available. And again, a similar approachcould be used to analyse relations between companiesat the bottom end of the supply-chain,given that most of the studiesfocus on the relationshipsexisting betweenthe top firms and their first or secondtier suppliers.In other words, is the transformation affecting all firms in the supply-chain, without distinction in terms of sizeand level - that is position - in the overall chain? A second key issue is the actual impact of co-operative inter-organisational

23

Chapter2-A review of the empiricalevidence

is issue Again, the one of arrangements on organisational performance. for basis Does the the managing adoption of co-operation as primary contingencies. increased Are bring in there terms of performance? positive outcomes supply relations trade-offs to be managedand resolvedbetweendifferent dimensionsof performance? And again, are there different routes to co-operation that might lead to different in do how if is And they this they, the and what emerge, outcomes? case,what are direction do they affect a firm's performance?Is there any geographicalor industry variation in this area? It is the main objective of the presentresearchto contributeto the clarification of some both issues just In the the the of of aspects mentioned. particular, researchaddresses geographicaland industry variation in the adoption of co-operative arrangementsin supply-chainmanagementby gathering evidencein a fresh field - that is, the optical communications systemsindustry - in a problematic country - that is, the UK. As to the impact of co-operation on organisational performance, the research gathers evidenceon the correlation existing between specific inter-organisational processes and practices and organisational performance. Some of the contingenciesaffecting this relation should also becomeclearer.

Chapter3 now considersthe important theoreticalissueof the definition of the network organisation.This is a fundamentalsteptowardsthe clear definition of the boundariesof the empirical work and the developmentof an appropriateresearchmethodology.

24

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

FRAMEWORK:

CHAPTER 3- THE THEORETICAL OF'ORGANISATIONAL

A DEFINITION

NETWORKS'

defining issue the fundamental is Chapter theoretical the to address The purposeof this of for the the network supplythe of operationalisation starting point as network organisation hybrid fact, is, in type The 5. of one particular network supply-chain chain in Chapter organisational arrangement.

from form, issue each Many theoreticalperspectivesaddressthe of the network organisational Chapter In this tools. we their their own particular point of view and with particular analytical because Strategy Economics Organisation Studies, Organisational and presentonly three for the directly the issues focus of study therefore, they relevant most and are, on governance the Our on research the of set selectionexcludesa whole network supply-chain. emergenceof but, important to is dynamic a that very propertiesof organisationalnetworks structural and certain extent,lies outsidethe boundariesof our interest. The structure of the Chapter is as follows. First, each perspectiveis briefly presentedand highlighted, The different Secondly, their are main gaps analysed. contributions. we evaluate develop fields disciplinary for to boundaries a the the and various need crossing the of key is Finally, definition the elements the workable of network organisation advocated. characterisingeachdisciplinary field are summarised.

3.1 The network organisation: an overview Burt statedin 1982that "... networksare a terminologicaljungle in which any newcomermay from have different disciplines (Burt, 1982). Since tree" then, addressed plant a many scholars the study of co-operativeorganisationalstructuresand relationships.Their common objective is to explain the emergenceof co-operativeorganisationalforms, and in so doing, identify their founding characteristics.The result of the past two decades of research is that, notwithstandingundeniablestepsforward in the common understandingof this organisational. jungle is A healthy the terminological there, variety of still ever. phenomenon, as as definitions are used, and each discipline has developeda specific languagefor this area of 25

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

is No theory available, and the combination of elements from the various study. unifying contributionsseemsat the momentthe most fruitful direction of enquiry. Contributions from the fields of Organisation Studies, Organisational Economics, and Strategyare reviewed and analysed.As anticipatedbefore, these fields are selectedbecause they emphasisegovernance-relatedaspectsand are, therefore, close to our approach.It is perhapsuseful to remind the reader that for us the term network organisation refers to a specific form of governance- that is a way of "co-ordinating economic activity" - that is distinct from and in competition with markets and hierarchies (Powell, 1990). This distinguishesour particular view of the network from the idea of the network as a "construct of the investigator" (Aldrich and Whetten, 1981).Aldrich and Whetten (1981: 400) maintain that "networks are essentially constructs created by researchersto aid the process of " Consequently,all the contributions that use network conducting organisational research. analysis - an analytical tool and research methodology for investigating the patterns of relations among social entities and their implications (Kenis and Knoke, 1998)- to highlight structuraland dynamic characteristicsof organisationalnetworks lie outsidethe boundariesof the research.Referencein passingto a few key studiesbasedon the idea of the network as a constructis only madeto illustrate the generaldevelopmentof a broad disciplinary field.

3.1.1 The contribution of Organisation Studies The contribution of Organisation Studies to the analysis of 'organisational is networks' potentially rich but under-exploited.Tichy's criticism that there is "very little systematic theorising" (Tichy, 1981: 227), with theorieshighlighting different aspects,still holds true9. Still, organisationalnetworks are "increasingly identified as important empirical phenomena7' " Kenis and Knoke (1998) quote the following passagefrom Mayntz's 1991 keynote speechto the European Group for OrganisationalStudies(EGOS):

26

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

in 1998: 5). A Knoke, to (Kenis and number of seminal references emergent structures March (1978); Kahn Katz (1950); in (1938); Homans Barnard be and organisationscan traced (1967). Thompson (1958); Simon and Within the contingency approach, Thompson's study is a paradigmatic example (Lomi, 1992). In maintaining that "the design, structure,or behaviour of organisationswill reflect importance the (1967: 161) Thompson in explicitly recognises variations task environment", between he In a specific the existing of the environment. particular, emphasises relationships inputs its focal and outputs, which the sourcesof organisation,acting as organisation,and focal the its the The way together constitute organisation set. organisation set and different in determining the it fundamental organisation'srelationshipswith are structuredare implicit. is idea "networking" The that the configurations of organisationcan assume. A more direct contribution to the study of networking and co-operativeorganisationalforms comes from the area of

inter-organisational

relationshipslo. Inter-organisational

linkages "relatively flows, that defined transactions, the and enduring relationships are as occur among or betweenan organisationand one or more organisationsin its environment" (Oliver, 1990: 241). The inter-organisationalrelationshipsliterature explicitly recognisesthat "organisationstypically operatein a relational context of environmental interconnectedness and that an organisation'ssurvival and performanceoften dependscritically upon its linkages to other organisations"(Oliver, 1990:241). However, an in-depth review of this literature (Gray, 1990; Oliver, 1990) shows its lack of uniformity and its substantialfragmentation.An integratedtheory on the natureand formation inter-organisational of relationshipsis missing.In Oliver's words, " It is here (in policy research), and not in organisation research proper, that interorganisationalnetworks- under the nameoftolicy networks- had their mostsuccessfulscientific career.Nor is this surprising. Organisationresearchfocusesattention on the mesolevel, its basic unit ofanalysis andpoint of referencefor theoreticalgeneralisationis the single organisation (or category of organisations).In spite of the interest in inter-organisational relations, the interorganisational network therefore never becamea javourite unit of analysis in the sociology of organisations. Understandablyso, since networks composed of organisations pose entirely different questionsfrom thoseaskedin organisation research: their theoretical relevancelies on the macro level ofsociety, not on the mesolevel" (Kenisand Knoke, 1998,p. 3). Organisationaltheorists devoted to the study of interorganisationalrelationships are, among the others, Aldrich and Whetten, 1981; Evan, 1966; Laumann, Galaskiewicz,and Marsden, 1978; Galaskiewicz, 1985; Pennings,1981;Perrow, 1979;Schermerhorn,1975;Van de Ven, 1976;Whetten,1981.

27

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

" We no longer know what we know about theformation of inter-organisational little been have in ) Many (. and types ofsettings, studied a variety relationships. literature into been integrate has the to generalisable made either attempt between distinguish formation to what causessuch or predictors of relationship (Oliver, occur" the conditions under which such relationships relationships or 1990: 241).

Following the growing recognition of the embedded nature of behaviour (Granovetter, 1985), the importance of the social environment of an organisation has emerged as a fundamental issue in the organisational literature". Embeddednessexplains how dyadic exchangesand the overall structure of relations influence economic actions and outcomes (Granovetter,1992).Granovetter(1985,1992) distinguishesbetweenrelational embeddedness dyadic depth tie, embeddedness to the structural a single and of which and refers quality The the concept of to the relations. which refers overall structure and architecture of dependence in In incorporated been has theories. resource a number of embeddedness theory, for example, the interconnectednessof the organisational environment, resource interfundamental factors the three affecting munificence, and resource concentrationare Salancik, 1978). behaviour (Pfeffer and organisational of an organisation

II The recognition of the importanceof the social environmentsof an organisationhas given origin to a specific type of organisationtheories,that is theoriesbasedon the so-called"social behaviour model" (Pfeffer, 1997). According to Pfeffer (1997) there are five generalheadingunder which all existing organisationtheoriescan be classified, the other four being the economic model of organisationalbehaviour, the retrospectively rational behaviour. For behaviour, behaviour, interpretive, the of an the model model moral of of cognitive and model (1998). Knoke based "social Kenis bahaviour theories the the and of various on analysis moder, see

28

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

importance terms the of network dependence theory power"in of Resource also reaffirms inter-organisational in fundamental the influence of study variable as a centrality and Boje 1978; Salancick, Pfeffer 1976; Pfeffer, and Aldrich 1976; (Aldrich, and and networks Whetten, 1981). in be "accrued interdependencies, an and can Power is derived from control over strategic (Boje and by types resources" valued of gaining control over various exchangenetwork Whetten, 1981: 378). Burt (1977b) identifies three aspectsof power: control of resourcesas into and basis power; of basis the manifestations the of power of power; processesconverting the network of influencerelationsas manifestationsof power.

" The relevanceof power issuesin inter-organisationalnetworksemergesin two different areasof debate.Ile first is in connectionwith the study of the relationship betweenthe conceptsof network centrality, Influence and power. From an exchangeperspective,two dimensionsof inter-organisationalnetworks are fundamental. The first is the "horizontal differentiation of transactionsinto more or less stable subsysteme' (Boje and Whetten, 1981: 378). The secondis the vertical differentiation of organisations,with the emergenceof power differentials and other patterns of vertical dominance (Aldrich, 1972; Benson, 1975; Cook, 1977). More recently, the power-dependencyperspective (Emerson, 1962; Cook, 1977) and the resource dependency perspective(Aldrich, 1976; Aldrich and Pfeffer, 1976; Pfeffer and Salancick, 1978; Boje and Whetten, 1981) havereaffirmed the importanceof power in the study of inter-organisationalnetworks.The relationshipbetween (Hinings influence been investigated level has both intra-organisational et the centrality and at power, network Whetten inter-organisational (Laumann 1979; Pappi, 1974) 1976; Galaskiewitcz, and the and and one al., Aldrich, 1979; Boje and Whetten, 1981). The secondarea of debatewhere power is used in connectionwith inter-organisationalnetworksis in the disputeover the relative importance of efficiency and power to explain the existence and form of organisations. Two factions confront themselves.On the one side mainstream for fundamental the organisational centrality of efficiency as criterion organisationaleconomics reinforces design. Williamson and Ouchi maintain that "Inasmuch as power is very vague and has resisted successive is it to whereas efficiency more clearly specifiedand the plausibility of an efficiency operational, make efforts be by is buttressed tests, that made the centre piece of we analysis urge efficiency ecological survival analysis the study of organisationaldesign" (1981: 364). On the other side, radical organisationtheoristsproclaim that debate, this 1990: (Littler, 72). and an For 64organisations of are all about power" a comprehensivereview Procter Rowlinson (1996) Ingham and building bridge between and the two radical perspectives,see a attemptat (1997).

29

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Uzzi (1997) relies on the conceptof relational embeddedness(Granovetter,1992)to identify different forms of exchange. In particular, he distinguishes between arm's length and features distinctive identifies the ties, of embeddedrelationships. some of and embedded Embeddedrelationships "have three main componentsthat regulate the expectationsand behavioursof exchangepartners:trust, fine-grainedinformation transfer, and joint problem"belief is Trust (Uzzi, 1997: 42). that an exchange the expressedas solving arrangements" is based 43) 1997: (Uzzi, in on and partner would not act self-interestat another's expense" heuristic processing,not calculative ones.Information exchangesare more tacit and holistic than in market transactions.Joint problem-solvingarrangementsconstitutea "mechanismthat fly'. These 'on functions the to enables actors co-ordinate and work out problems arrangementstypically consist of routines of negotiation and mutual adjustmentthat flexibly resolveproblems" (Uzzi, 1997:47). The concept of structural embeddednesslies at the core of Jones,Hesterly, and Borgatti's general theory of network governance(1997). They maintain that "network governance involves a select, persistent, and structured set of autonomousfirms engagedin creating products or servicesbasedon implicit and open-endedcontractsto adapt to environmental contingenciesand to co-ordinate and safeguardexchanges"(Jones, Hesterly and Borgatti, 1997: 914). Their approachintegratesTransactionCost Economics (see following section) and social network theory, and identifies structural embeddednessas a key factor in explaining the emergenceand diffusion of network-basedgovernancestructures. In recenttimes, a network theory of organisationscombinedwith the adoption of a structural analysis approachhas been advocatedas a tool for studying emerging organisationalforms (Alter and Hage, 1993;Kenis and Schneider,1991;Knoke and Guilarte, 1994; Powell, 1990). Structural analysis is a relatively new approach in social analysis (Emibrayer, 1997). It focuseson the study of patternsof "relationships amongbasic units within social structures, and seeks to discover what effects these connections have on units that are or are not

30

Chapter3- The theoreticalfrwnework: a definition of 'organisationalnetworks'

13 build Kenis Knoke (Kenis Knoke, 1998) to to them" a network attempt and and connected . theory of inter-organisationalrelations where macro-level phenomenaare linked to microlevel ones. They maintain that (1998: 2) "the structural properties of inter-organisational individual behaviours inter-organisational the organisations", and that of networks affect "whether an organisation creates or dissolves various types of connections to other it is broader forms is the the which within networks of organisations conditional on depending " identify five broad They types on their embedded. of macro-level network (c) (a) information (b) transmissions; power exchanges; substantive content: resource however, The boundary (d) (e) theory, relations; penetration;and, sentimentalattachments. focuses on inter-organisational communication as the primary macro-level network that shapesthe micro-level strategiesand actionsavailableto individual organisations". Table 3.1 surnmarisesthe contribution of OrganisationStudiesto the developmentof network theory.

"Wellman (1997) identifies five characteristicsof the structuralanalysisapproach:(a) behaviour is interpreted in terms of structuralconstraintson activity, ratherthan in terms of inner forceswithin units... ; (b) the analysis focuses on the relations between units, instead of trying to sort units into categoriesdefined by the inner attributes (or essences)of these units; (c) a central considerationis how the patternedrelationships among multiple alters jointly affect network members' behaviour. Hence, it is not assumedthat network members engageonly in multiple ductswith separatealters;(d) structureis treatedas a network of networks that may or may not be partitioned into discretegroups... ; (e) analytic methodsdeal directly with the patterned,relational natureof social structurein order to supplement- and sometimessupplant- mainstreamstatisticalmethodsthat demandindependentunits of analysis. " "(.. ) our theory privileges inter-organisational communication as the primary relation. Information transmission takes many forms, ranging form such relatively low-cost interactions as verbal and written messagesto more intensecommitmentsof time and resources( ). Information is antecedentto the formation ... and persistenceof all other types of interactions.Communicatingpreferences,intentions, values, normative expectations,and other varieties of data is a necessaryprelude to establishingresource exchanges,power, penetrative,and sentimentalties. Communicationprovides a foundation on which organisationalagentsbuild trust among partners, and thus is a requisite for organisationsto proceedtoward more complex and riskier collective actions" (Kenis and Knoke, 1998:22).

31

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Table 3.1 The definition of the Network form: the contributionof OrganisationStudies

DISCIPLINARY

ORGANISATION STUDIES

FIELD

KEY CONTRIBUTORS

KEY CONCEPTS FOR THE DEFINITION OF THE NETWORK FORM

Thompson (1967)

Contingency theory: importance of relationship its between the focal organisation and organisation set

Aldrich aand Whetten (1981) Evan(1966) Laumann, Galaskiewicz and Marsden (1978) Galaskiewicz (1985) Pennings (1978) Perrrow (1979) Van de Ven (1976) Whetten (1981)

Studies of Inter-organisational relationships: importance of relational context of environmental interconnectedness

Granovetter (1985)

Embedded nature of behaviour. Difference between relational and structural embeddedness

Aldrich and Pfeffer (1976) Pfeffer and Salancick (1978) Boj e and Whetten (198 1)

Resource dependence theory. Importance of interconnectedness of the focal organisation's environment. Power is a critical factor

Uzzi (1997)

Distinction between arm's length and embedded ties. Trust, fine-grained information and joint problem-solving as key components of embedded ties

Jones, Hesterly and Borgatti (1997)

Integration of TCEs and social network theory. Structural embeddedness is key for the diffusion of network governance

Kenis and Knoke (1998)

Network

theory of organisation based on a structural analysis approach and the use of network analysis

32

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

3.1.2 The contribution of Organisational Economics Transaction Cost Economics derivesfrom the convergenceof two disciplinary fields, is by Williamson's The theory. promoted convergence economics and organisation attempt to operationalise Coase's institutional comparative approach to economic organisation (Coase, 1937; Williamson, 1975). Though not rejecting the generalCoase (1937) traditional provides an equilibrium assumptionof standardeconomics, innovative explanation of the existence of the firm and argues for the individual transactionas the elementaryunit of analysis.This, in turn, is derived from Commons' proposition (1934: 4-8) that "the transfer of goods or servicesacrossa technologically separableinterface" should be the elementary unit of analysis. The firm is not a production set,but an "island of consciouspower" in a decentralisedmarket. In order to explain why firms exist, Coaseintroducesthe concept of "the cost of using the price mechanism"(Coase,1937: 33), that is "transaction costs". Both markets and firms are institutions aimed at facilitating exchange,and their primary function is one of coordination. The entrepreneur"is the person or personswho, in a competitive system, take the place of the price mechanismin the direction of resources"(Coase, 1937: 33) when the costsof "organising a transaction"becomelower than the costsof "carrying it out through the markef'.

Williamson (1985: 4) recognisesthat "unlessthe factors responsiblefor transactioncost differencescould be identified, the reasonfor organisingsometransactionsone way and other transactionsanother would necessarilyremain obscure". His explanation lies in that "transactions, which differ in their attributes, are assigned to governance structures,which differ in their organisational costsand competencies,so as to effect a discriminating, mainly transactioncost economising,match".

Transactioncostsareboth ex-anteandex-post.Ex-antetransactioncostsare "incurred in draftingandnegotiatingagreements, to andvary with the designof the good/service be produced".Ex-postonesincludethe "setup and running costsof the governance structureto which monitoringis assignedandto which disputesarereferredandsettled, the mal-adaptation coststhat areincurredfor failureto restorepositionson the shifting

33

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

bonding the of haggling costs that and the adjustments attend costs contract curve; 20-22). (1985: effecting securecommitments" differ individual transactions are respectively The attributes according to which Asset frequency. identified in the condition of asset specificity, uncertainty, and locomotive" "big is the fundamental however, as regarded and role, a plays specificity, (1985: 56) of the theory. The degreeof assetspecificity dependson whether or not a in durable, transaction-specific assets", investments by is "supported transaction given in with Asset (1985: 53)". "lock-in" conjunction determine specificity, that effects determines what bounded rationality/opportunism"' and the presenceof uncertainty, bidding "large defines fundamental numbers Williamson transformation7: a as "the thereafter" bilateral into is supply the transformed of outset effectively one condition at (1985: 61). Recurringtransactionsalso matter,becausefrequencycan reducethe cost of in high the presence assetspecificity. structure of governance a specialised

" According to the most recent developments(Williamson, 199b: 281), there are six different kinds of assetspecificity: "(1) site specificity, as where successivestationsare locatedin a cheek-by-jowl relation to eachother so as to economiseon inventory and transportationexpenses;(2) physical assetspecificity, suchas specialiseddies that are requiredto producea component;(3) human assetspecificity, that arises in learning by doing; (4) brand name capital; (5) dedicatedassets,which are discrete investmentsin generalpurposeplant that are madeat the behestof a particular customer;and (6) temporal specificity, which is akin to technologicalnonseparabilityand can be thought of as a type of site specificity in which by on-sitehumanassetsis vitar'. timely responsiveness 16TransactionCost Economicsis basedon two behavioralassumptionsthat distinguish it from standard behaviour human derived first is bounded is from The Simon's that and economics. rationality, statement is "intendedly rational, but limitedly so" (Simon, 1947:xxiv). The secondis opportunism,that allows for distorted disclose information in Economic to and are selective agents permitted a self-interestwith guile. manner (Williamson, 1990). Given bounded rationality, "all complex contracts are unavoidably incomplete", while given opportunism,"contracts-as-promiseunsupportedby credible commitments is hopelessly naive" (Williamson, 1990: 12). Apart from bounded rationality and opportunism, Williamson's theory underliesa third behavioral assumption,which is very rarely mentionedbut which this "unlike According two Williamson, important the assumptions, to other role: risk neutrality. plays an (a) for He is an assumption: using such gives three alternative reasons one patently counterfactual". (c) "this be it (b) between firms, individuals; and is managed; can not emphasis on transactionsoccurring assumptionhelps to disclosecore efficiency featuresthat go unnoticed or are misconstruedwhen risk 1985: 388(Williamson, three is the aversionassumptionare employed",which the most compelling of 390).

34

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Although the conditions of uncertainty to which the transactionsare subject and the trading context (customs,mores,habits, legal institutions) in which the transactionsare locatedinfluenceboth the ex-anteandthe ex-postcostsof contracting,thosefeaturesare forms Three (i. three taken organisational as given. governancemodes e., mainly - all of (1985: based) transactions to are available co-ordinateeconomic which are contractually 72-78). They are,respectively: both for Market transactions occasional of governance, suitable a. non-specific and recurrentcontracting; b. Trilateral

governance, suitable for occasional transactions of the mixed and

highly specific kind; and

c. Relational contracting, suitablefor recurring transactionswith high and mixed is it domain Within the assetspecificity. possible general of relational contracting, to distinguish betweenbilateral governance,which occurswhen the autonomy of the parties is maintained, and unified structures, which occurs when the transactionis removed from the market and organisedwithin the firm subject to an authority relation (vertical integration).

Thesealternative modesof governanceof contractualrelations are illustrated in Figure 3.1.

35

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Figure 3.1 The governanceof contractualrelations(adaptedfrom Williamson, 1985)

Investment Characteristics

Non-specific

Mixed

Idiosyncratic

Trilateral governance (Neo-classical contracting)

Occasional transactions

Market governance (Classical contracting)

Bilateral

Recurrent transactions

governance (Relational

Unified governance

contracting)

Governancestructures differ in 'competencies', that is to say that each of them is characterisedby a specific set of incentives and control mechanismsin order to keep transactioncostsas low as possible.In particular, standardcontracting- the market - has higher-poweredincentivesthan the unified structure- bureaucracy while hierarchy is more efficient in adaptability respects.This implies that the market is generallybetter at preventingopportunismex-anteby meansof incentives,while hierarchytendsto rely on ex-post,administrativecontrols andon "fiat".

Williamson's attention is primarily focused on the two extreme poles of market and hierarchy (Stinchcombe,1990; Williamson, 1991b) leaving a "significant void in our understandingof alternatives" (Ring and Van de Ven, 1992: 484). As a matter of fact, hybrid forms are not even contemplatedin the first version of the Transaction Cost Economics approach(Williamson, 1975), and, in any case, they are not regarded as stable. Little effort is consequentlydevoted to their analysis, and to the study of their

36

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

". fill In incentives to in inherentproperties terms of their respective order and controls in describe integrate Williamson's have tried to approachand these gaps, researchers form. intermediate detail the the governance characteristicsof more de Van 1983; Ring (Dore, The concept of recurrent and relational contracting and Ven, 1992)is one form of this. According to Ring and Van de Ven (1992), co-operative type of a represent through contracts agreementsgoverned either recurrentor relational inter-organisationalrelations which is very little explored in the traditional stream of "' A number of criticisms accompaniedthe first formulation of the TransactionCost Economics(TCEs) both due (Williamson, 1975) to developments following approach and refinements as well as the Williamson (1985) and his supporters(Klein et al., 1978;Grossmanand Hart, 1986).The most recurring remarksare: 1. TCEs tendsto concentrateon the polar forms (Jarillo, 1988and 1993;Powell, 1987;Ring and Van de Ven, 1992; Stinchcombe,1990).The intermediateform, which probably constitutesthe most interesting one - at leastwhen recentdiffusion is considered- is generallyaddressedin residualterms and is poorly exploredfor its own sake. 2. The view of the transactionas the elementaryunit of analysisis limitating becauseit doesnot capture the overall complexity of the relationship (Dore, 1983; Doz and Prahalad, 1991; Lorenzoni, 1992 Thorelli, 1986;Johansonand Mattsson,1987). 3. TCEs heavily relies on the behavioralassumptionof opportunism,while ignoring the potential role playedby trust in reducingthe impact of transactioncosts(Bidault and Jarillo, 1995;Bradachand Eccles, 1989; Dore, 1983; Granovetter,1985; H&kansson,1989; Jarillo, 1988; Johansonand Mattsson, 1987; Lincoln, 1990;Ouchi, 1979,1980; Powell, 1990;Perrow, 1986; Ring and Van de Ven, 1992; Thorelli, 1986). Williamson himself (1985: 406) recognisesthe potential importance of both trust and the institutional settingwheretransactionstake place.It is importantto notice that trust is generallyperceived as ambivalent,in the sensethat it canbe regardedas much a pre-requisitefor a transactionas a product of it (Buckley and Casson,1988;Gulati, 1995;Ring and Van de Ven, 1992).It can also be embeddedin the in behaviour "trustworthy triggering towards and preference attitute overall social system, a general relationships"as opposedto more diffident and cautiousones(Granovetter,1985; Ouchi, 1980; Wilkins and Ouchi, 1982). 4. TCEs is based on efficiency, but other elementscan explain the organisation's survival in the environment(Nelson and Winter, 1982;Johansonand Mattsson, 1987). Moreover, it is static and does not reject the generalequilibrium assumption.Organisationalprocessesare completely neglected(Foss, 1993).The mode of analysisis the comparativeinstitutional: entrepreneurshipis a factor of production whosefunction is to reducethe costsof combiningother factorsinto somegiven final output. 5. The conceptof transactioncostsis vagueand even ill defined, and there is little empirical evidence that econornisingis a good explanationof, or even a major motive for, vertical integration (Goshal and Moran, 1996;Johansonand Mattsson,1987; Kogut, 1985;Pettigrew, 1979). 6. The ability of the model to predict how actual transactionswill be carried on in reality is limited (Bidault and Jarillo, 1995).Most of the evidencegatheredin favour is basedon the interpretationof one (or few) specific situation (Simon, 1991), and is not focusedon the confirmation of its hypotheses.In particular, the assumptionof opportunismis given too much importance,while neglecting the potential role played by trust in lowering the level of transactioncostsand reducing the need for ex-post control mechanisms.As Bradach and Eccles (1989) also point out, there are three ways of co-ordinating is important is, In the conceptof that trust. this activity, and economic price, authority respectparticularly "clan" developedby Ouchi (1979,1980).

37

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Transaction Cost Economics. They identify a set of distinguishing characteristics fonns the various of transactions(seeTable 3.2). associatedwith Table 3.2 Distinguishing characteristicsof forms of transactions(adaptedfrom Ring and Van de Ven, 1992) Distinguishing Characteristics

Discretemarket transactions

Forms Hierarchical contracting Relationalcontracting managerial Recurrent transactions transactions transactions

Natureof exchange One-timetransferof propertyrights

On-goingproduction and rationing of wealth

Episodicproduction andtransferof propertyrights

Sustainedproduction andtransferof property rights

Terms of exchange

Clear, complete and monetized, sharp in by agreement, sharp out by pay and performance

Authority structure superior hires subordinate obeys or quits the employment relationship

Certain, complete contingent on prior performance; plans for experimentation on safeguards

Uncertain, open and incomplete; plans for bilateral learning safeguards and conflict resolution

Transactionspecific investment

Non-specific

Idiosyncratic

Mixed

Mixed and idiosyncratic

Temporalduration of the transaction

Simultaneous exchange

Indefinite

Shortto moderateterm

Moderateto long tenn

Statusof the parties

Limited, nonunique relation between legally equaland free parties

Structuralfunctional command-obedience role relationship betweenlegally unequal parties

Unlimited, unique relation between legally free and equal parties

Extensive,unique social-embedded relation betweenlegally equaland free parties

Mechanismfor disputeresolution

Externalmarket normsand societal legal system

Internalconflict resolutionby fiat and authority

Norms of equity and of reciprocity and societallegal system

Endogenousdesigned by the partiesandbased on trust

Relevantcontract law and governance structure

Classicalcontract marketgovernance

Employmentcontract unified governance

Neo-classicalcontract marketgovernance

Relationalcontract bilateral governance

Their analysis of the main featuresof co-operative agreements modifies some of the assumptionsunderlying Williamson's perspective.In particular:

7. Williamson's "simplistic" assumptionscanhavepotentially damagingconsequences when the theory is used in a strongly normativeway (Goshaland Moran, 1996; Pfeffer, 1994).In particular, the possibility to attenuateopportunismthrough control is questionedand the need for taking into considerationthe different "institutional logics" of both market and hierarchy is maintained(Goshaland Moran, 1996: 3132).

38

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

1. They introducethe conceptof risk. Risk is associatedwith uncertainty, and the in direct in inherent transaction "degree of risk generally will rise any 488); (1992: information in decreases time, and control" proportion to 2. They substitute the behavioural assumption of opportunism with that of 487); (1992: behaviour" "open, defined and, trustworthiness, other-regarding as 3. Thanks to the use of trust, that operatesboth as an ex-antecondition and as a limit the to between they a the pose transactions parties, same result of repeated importancegiven by Williamson to ex-postcontractimplications and, therefore, to ex-postcontrol mechanisms. An interesting implication of the model developed by Ring and Van de Ven is that, is in dynamic the that terms, the when observed emergence of relational contracts emergence of hybrid organisational forms - is the outcome of a time-consuming process by This idea trust-building the where play an essential role. reinforces expressed various authors (Thorelli, 1986; Powell, 1987) that a long-term perspective is essential to the hybrid. Thorelli the existence of

(1986: 41) views trust "as confidence in the

continuation of a mutually satisfying relationship and in the awareness of other parties based is Trust their on this performance as network members". of what requires of "reputation,

"past

performance",

and social

bonds established in

day-to-day

interactions". All these elements require time to be effectively built. Powell (1987: 82) qualifies a long-term perspective as a "cornerstone of network forms".

According to Granovetter(1985), the trust building process is triggered by time and experience.Repeatedinteractionwith the samepartneris the best sourceof information

because:

"(q) It is cheap; (b) one trusts one's own information best, (c) individuals be have has to with whomone a continuing relation an economicmotivation trustworthy, so as not to discouragefuture transactions; and (d) departing from future economicmotives,continuing economicrelations often become overlaid with social content that carries strong expectationsof trust and abstentionfrom opportunism" (Granovetter,1985: 481-510).

39

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Ouchi's (1980) notion of clan also exploresin more detail Williamson's intermediate in identifies two form. Ouchi (1980) transaction the costs of sources governance his In incongruence view: ambiguity. and performance conditions,namely goal "different combinationsof thesecausesdistinguish three basic mechanisms of mediation or control: markets, which are efficient when performance ambiguity is low and goal incongruenceis high; bureaucracies,which are efficient when both performance ambiguity and goal incongruence are moderatelyhigh; and clans, which are efficient when goal incongruenceis low andperformanceambiguity is high " (Ouchi, 1980: 129). Socialisation constitutes the basis of the clan, the intermediate governancestructure associated with hybrid organisational forms. Both bureaucracy and clan are characterisedby a certain degree of goal congruence,though this commonality of purposeis moderatein the former and high in the latter. The conceptof goal congruence form is the underlying clan akin to Durkheim's concept of "organic solidarity" (Durkheim, 1933),wherethe union of objectivesbetweenindividuals derivesfrom their necessaryinter-dependence.The clan form is basedon the assumptionthat individual "interests are better servedby a completeimmersion of each individual in the interests of the whole" (Ouchi, 1980: 136; Kanter, 1972: 41). The role of reciprocity and authority, respectivelycharacteristicof the market and the bureaucracy,is diminished. Larson (1992) concentrateson entrepreneurialsettingsand developsa processmodel of the formation of network dyads, defined as setsof stablerelationships.The formation of network dyads is seen as an alternative to organic growth for the firm. Larson emphasisesthe importance of social controls arising from norms of trust and reciprocity as opposed to formal contract and written arrangementsin governing dyads. He also recognisesthe inherentvulnerabilities of thesestructures,which network are not necessarily permanent. Changes in competitive conditions may lead to a prematuretermination of network relations but there are also in-built risks. Particularly dangerousare heavy reliance on a partner and the fact that in-house capacitiesare not

40

Chapter3- Thetheoreticalframework:a definitionof 'organisational networks'

cultivated.

The problem of gaining a better understandingof the intrinsic features of hybrid Demsetz's the recent the on remarks of core constitutes structures governance developmentsof TransactionCost Economics.Demsetz(1993) directly addressesthe "more170), " (1993: firm-like? is "when where a nexus of contracts more question firm like" can be interpretedas "hybrid-like". He maintainsthat the "defining contentof firm. the literature theory the in of on the nexus of contractsremainsrather vague the We may as well recognise that we have no clear notion of firm-like contractual arrangements"(1993: 170). He subsequentlyidentifies three aspectsof the nexus of contracts that influence "firm-like" co-ordination or hybrid governance structure These direction. namely, specialisation, continuity of association, and reliance on characteristicsare "productive in many circumstances",somerelated to transactionand monitoring cost considerations,somedependenton other conditions. According to Demsetz,(1993: 74) "transaction costs will influence the decision (as to The but it form is important to the adopt) not which governance only consideration. decision also turns on the productivity benefits derivable from different arrangements. Particularly important in

determining these benefits are knowledge-based

firmfor it Continuing the samepersonsmakes easier considerations. associationof specific and person-specificinformation to be accumulated. The importanceof information flows and knowledge considerationsin the explanation of hybrid forms is maintainedalso by other researchersin the strategy field and in the field of industrial organisation(Powell, 1987). Hybrids, when comparedto vertically integrated structures, constitute a faster means of acquiring sources of know-how located outside the legal boundaries of the organisation (Powell, 1987; Teece and Pisano, 1989), and are also less costly, less irreversible, and more feasible (Porter and Fuller, 1986). Moreover, they seem more able to deal with tacit knowledge (Powell, 1987),that is knowledgethat is difficult to codify and difficult to transmit. Network-like "efficient, for forms is there reliable a need organisational are particularly apt when information" (Powell, 1987: 82). According to Kaneko and Imai (1987), information

41

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

in information is "thicker" the than the market, and through obtained network passed "freef" than information communicatedwithin a hierarchy. Table 3.3 summarises the contribution of Transaction Cost Economics to the developmentof network theory.

42

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Table 3.3 The definition of the Network form: the contributionof TransactionCost Economics

DISCIPLINARY FIELD

TRANSACTION ECONOMICS

COST

KEY CONTRIBUTORS

KEY CONCEPTS FOR THE DEFINITION OF THE NETWORK FORM

Commons(1934)

Transactionasunit of analysis

Coase(1937)

Transactioncosts

Williamson (1975,1985)

Market versushierarchy. Opportunism,bounded rationality, uncertainty and asset specificity determinethe "fundamentaltransformation". Threegovernancemodes,all contractuallybased, are in competition: market governance,trilateral governanceand relational contracting (with the two options of bilateral governanceand unified structure)

Dore (1993) Ring and Van de Ven (1992)

Recurrent and relational contracting. Risk, trustworthiness and repetitiveness are key assumptions

Tborelli (1986)

Trust basedon reputation,past performanceand socialbondsfrom day-to-dayinteractions

Powell (1987

Long-termperspectiveis a cornerstone

Ouchi (1979)

Markets, bureaucracy and clan as basic mechanisms of mediation and control. Goal congruence,and performanceambiguity are the key determinants.Socialisationis the basisof the clan Larson(1992)

Network dyads as stable, sustainedrelationships governed by social controls based on norm of trust and reciprocity. Inherentvulnerabilities

Demsetz(1993)

The firm as nexus of contracts. Firm-like coordination is based on specialisation,continuity of association and reliance on direction. Importanceof knowledgebasedconsiderations

Powell (1987) Kanekoe Imai (1987) Uzzi (1997)

Information flows and knowledge considerations are critical. Information in networks is thicker and freer than within a hierarchy

43

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

3.1.3 The contribution of Strategy The existenceof the hybrid as a permanentactor in the economicenvironment - one whose importanceis constantlygrowing in terms of both relevanceand diffusion (Powell, 1987)- is strongly advocatedby researchersin the fields of businesspolicy and strategicmanagement. Terms such as "hybrids" or "networks" are widely usedin the strategicmanagementliterature as a metaphorto label non-standardorganisationalforms. Joint ventures,strategic alliances, co-operativeagreements,strategicnetworks,partnerships,coalitions, consortia,constellations, franchises(Contractorand Lorange, 1988; Eccles and Crane, 1988; Friedlanderand Gurney, 1981;James,1985;Jarillo, 1988;Lincoln, 1990;Lorenzoni, 1982;Ouchi and Kremen-Bolton, 1988; Perlmutter and Heenan,1986; Porter and Fuller, 1986; Powell, 1990) are all examples of the variety of forms, and labels,developedin this area. A key issue in the strategyfield is to describehow organisationsinteract with their external environment in general,and with other organisationsin particular, in order to achieve longterrn competitive advantages.According to this perspective,hybrids can representa viable organisational.solution when pressuresdue to rapid changes in technology, increasing competition, growing uncertainty and complexity, and the like become particularly high (Powell, 1987;Ring and Van de Ven, 1992).

Despite rising interest, however, the topic of organisational.hybrids in strategy still "lacks a generally acceptedconceptualframework, with enoughtheoretical depth to help understand the plentiful anecdotalevidence"(Jarillo, 1988:3 1). The reasonsfor this lack depth may lie of in the conceptof network being difficult to conceptualisebecauseit "was coined outside the strategyfield ( ... ) and it doesnot fit well within the basic paradigm of competitive strategy" (Jarillo, 1988:31).

A major contributionin the directionof a more comprehensive theory of network-oriented organisationalforms hasrecentlyemergedthanksto the developmentof the resource-based knowledge-based the and views of the firm. Within the theoreticalperspectiveof the resource-based view of the firm, Ring (1996)proposesa frameworkfor predictingthe useof He maintainsthat(1996:9): collaborativeinter-organisational relationships.

44

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

"Managersoffirms will considerreliance on network organisation as a source of Thesefive depending their are: offivejactors. views upon resources, 1.

Their strategic intent (Hameland Prahalad, 1989);

2.

Theirprior relationshipswith thefirms with whomthey are contemplatingcollaboration;

3.

Theresourcesthey are seeking,

4.

Theuseto which theseresourceswill beput; and

5.

Thegoverningprinciples they will employin their dealings."

The strategic intent of managers is to create extraordinary economic rents through coduplicated be based or that operatively sustained advantages, on resources cannot easily imitated and that are not consequently available on the market. The only way to access these resources is therefore through collaboration with the firms that control them. A key determinant of the willingness to collaborate is the experience matured during past between firms involved in the exchange, which if positive leads to reliance the relationships on trust as opposed to preference for safeguards.

Alternatively, Hedlund (1994) developsa model of knowledge management based on the interplay of articulated and tacit knowledge. Differences in patterns of knowledge managementbetween Western and Japanesefirms are related to specific organisational characteristics.Hedlund distinguishesbetween two basic organisational structures, the Mform and the N-form, on the basisof six major features(seeTable 3.4):

45

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

Table 3.4 Worm and M-form: a comparison(adaptedfrom Hedlund, 1994)

Technological interdependence People interdependence Critical organisational level Communication network Top management role Competitive scope Basic organisational form

N-form

M-form

Combination Temporaryconstellation, Given pool of people Middle Lateral Catalyst,architect,protector Focus,economiesof depth, Combinableparts Heterarchy

Division Permanentstructures, Changingpool of people Top Vertical Monitor, allocator Diversification, economiesof scale parts and scope,semi-independent Hierarchy

Hedlund also identifies the weaknessesof the N-form, and comesto the conclusion that "a Nbe for for M-form the casecould made comparativeeffectivenessof exploitation, and of form for exploration (March, 1991; Hedlundand Rolander,1987,1990)" (Hedlund, 1994: 86). Although Hedlund's ideas apply directly to organisationsas individual entities, some of the characteristicsof the N-form can also be extendedto network-orientedtypes of organisational. arrangements.Starting from a knowledge-basedperspective,Grant and Baden-Fuller (1995) from the to the the costs of economic organisation to the attention emphasise need shift benefits, especially in terms of knowledge creation. In their view, network-based organisationalarrangementsare more suitableto act as knowledgeintegratorsthan the market or the hierarchy.

A different perspective is adopted by Mohr and Spekman(1994) who try to identify the characteristics of partnership success,instead of concentrating on the antecedentsof partnershipformation and the featuresof co-operativeinter-organisationalrelationships.There are two indicators of partnership success.The first is objective (the sales volume flowing betweendyadic partners);the secondis subjective(satisfactionof one party with the other). A depends degree intensity the success partnership's of on of three behavioural characteristics. These include attributes of the partnerships,such as commitment and trust; communication behaviour, such as participation and information sharing betweenthe partners; and conflict resolution techniques,suchasjoint problem solving and the use of persuasionand consensus. The higher the intensity of thesecharacteristics,the more successfulthe partnership.

46

Chapter3- The theoreticalfrmnework:a definition of 'organisationalnetworks'

Within the broad field of strategy,a quite unique perspectiveon the emergenceof networkbasedorganisational.forms is offered by two parallel streamsof research,originated from the Geography Economic in labelled Networks (1920) Marshall and and respectively work of Industrial Networks (Araujo and Easton, 1996). In the field of Economic Geography, Fordist the demise of emergence the and the of production mode of on attention concentrates traditional, firms to the alternative an as networks of geographically concentratedsmall (Capecchi, districf' industrial "new The 1984). firm Sabel, integrated (Piore and vertically 1989) is inherently flexible, and its flexibility lies primarily in the network of relationships (Araujo firms between in and and their ability to changeconfiguration very rapidly existing Easton, 1996). The geographical concentration of the firms representsa key factor and physical proximity is regardedas a fundamentaldimension. The field of Industrial Networks is connectedto this in that it focuseson the empirical study by developed dyadic in industrial Its it is is of relationships markets. peculiarity that mainly Swedishscholars(HAkansson,1982;Tumbull and Valla, 1985;Johansonand Mattsson, 1994) The distinctive Swedish the therefore the conditions of and reflects economic environment. ftom is a theoretical point of view. Unlike the majority of unique also perspective quite its focus but hybrid is transactions on the arrangements, contributionson organisational not on developmentand institutionalisation of economic exchangerelationships between industrial companies.Its core characteristicis the extensionof dyadic studies to a systemic level of analysis through the use of the concept of connectedness(Easton, 1992; Anderson et al. 1994; HAkanssonand Snehota,1995).As Araujo and Easton(1996) point out, "complex and multi-level patterns of exchange (surround) each transaction episode in a buyer-supplier relationship" (Araujo and Easton: 22). Each transaction is also embeddedin a relational atmosphere,that is a set of local rules and norms that are characterisedby variables such as conflict vs. co-operationand power vs. dependence(Mansson, 1982).

Table 3.5 summarisesthe contribution of Strategyto the developmentof network theory.

47

Chapter3- The theoreticalframework:a definition of 'organigationalnetworks'

Table 3.5 The definition of the Network forin: the contributionof Strategy

DISCIPLINARY

STRATEGY

FIELD

KEY CONTRIBUTORS

KEY CONCEPTS FOR THE DEFINITION OF THE NETWORK FORM

Contractor and Lorange (1988) Eccles and Crane (1988) Friedlander and Gurney (19 8 1) James (1985) Jarillo (1988) Lincoln (1990) Lorenzoni (1982) Ouchi and Kremen-Bolton (1988) Perlmutter and Heenan (1986) Porter and Fuller (1986) Powell (1990)

jungle: hybrids, joint terminological alliances, co-operative ventures, strategic agreements, strategic networks, partnerships, coalitions, consortia, constellations, franchises. Hybrids as a viable option in highly uncertain and complex environments

Ring (1996)

Resource-based view of network formation. Importance of strategic intent, the nature of the resources and their use, prior relations and experience, and governing principles

Hedlund (1994)

N-form vs. M-form: weaknesses and strengths (exploitation vs. exploration)

Grant and Baden-Fuller (1995)

Shift the attention from the costs of economic benefits. Network organisation to the organisation as knowledge integrator

Marshall (1920) Piore and Sabel (1984) Capecchi (1989)

Networks in Economic Geography and the New Industrial District. Importance of physical proximity and concentration of small firms. Flexibility lies in the network

HAkansson (1982) Turnbull and Valla (1985) Easton (1992) Johanson and Mattsson (1994) HAkansson and Snehota (1995)

The Swedish School of Industrial networks. Extension of dyadic studies to a systemic level. Importance of connectedness

48

The

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

3.2 An overview of the different contributions

The literature overview shows that the emergenceand definition of network-based disciplinary fields issue. Many is indeed a very complex organisationalarrangements far debate, but to the them capableof offering a unified and seemsso contribute noneof In formation the theory the organisation. network of comprehensive of antecedentsand in the a to the organisation network other words, none seemsable predict emergenceof in different The disciplines this respect. three no reliable way. presentedaboveprove Organisation Studies identifies a few elements that appear crucial for the formation of network-based organisational structures, such as the importance of power relations and the inherently embedded nature of behaviour. Both elements tend to emphasise the importance of time as a key variable at play in the creation and development of intermediate organisational forms. The most developed approaches within

this

disciplinary field, however, limit themselves to the identification of different typologies inter-organisational of relations without addressing the issue of predictors of network formation. The particular contribution of Organisation Studies is to raise questions about the organisational set that should constitute the focus for an empirical study - is it sufficient to focus on dyadic relationships, or do we need to view the wider structure of relationships (Granovetter, 1985)?

Strategy mainly uses the label 'network organisation' to identify non-standard organisationalforms. The network organisationalwaysremainsa loosely defined object, whosemain featureis its ability to copewith a changingexternal environmentand, as a consequence,provide a basis for competitive success.This approachis inherent to the field of Strategy,which traditionally focuseson the characteristicsof the environmentto identify a firm's most adequateresponsegiven its ultimate objective of securing a sustainablecompetitive advantage.In so doing, the emphasisis generally on what firms do - that is their behavioursand their strategies and only secondarilyon their structure is, how firm is that In they the themselves. the organise of a structure other words, meansto an end, and is rarely given attention in its own right. The sameapplies to the network organisation.Attention focuseson its suitability for the challengesposedby an

49

Chapter3- The theoreticalfrarnework:a definition of 'organisationalnetworks'

increasinglycomplex environment,but what constitutesthe network organisation that is, its actual configuration - remains undefined and blurred. The resource-basedview breaks with this tradition in that it assumesthe firm as the starting point of strategy making instead of the external environment and emphasisesprocessesof knowledge management.However, attentionconcentrateson what the organisationis 'good at' and not on what it is 'like'. Of the three disciplines reviewed, OrganisationalEconomicsis the only one to address directly the issue of network formation in the sense that it concentrateson the identification of predictors for the three governancestructures market, hierarchy and intermediate forms. The approach is fundamentally static, and the three alternative structuresare comparedon the basisof their relative efficiency at a given point in time. This lack of dynamism is a key limiting factor for the developmentof this approach, mainly becauseit confines it to an under-socialisedworld of opportunistic actors, guided only by economic rationality. The importance of social relations in organisationalphenomenais under-rated,and this opensthe door for endlesscriticism. In this respect,the substitution by Ring and Van de Ven (1992) of the assumptionof 'trustworthiness' for 'opportunism' and the emphasison risk and uncertainty (which leadsto a focus on time) offers a betterway forward. On the whole, it seemsthat no individual perspectiveis able, within its own traditional boundaries, to offer a sufficiently articulated and comprehensive response to the formation of the network organisation and the identification of its founding characteristics. At the present time, the most promising contributions for the developmentof our knowledge of the network organisation from come a number of classifications of inter-organisationalrelations based on a combination of different theoretical perspectives.The difficulty in precisely classifying these contributions as belonging to a specific disciplinary field is symptomaticof the generaldirection recently taken by researchers- namely, the convergence and cross-fertilisation of different perspectives. In particular, the most fruitful approachfor both theoretical and practical development seems the convergence of the revised Transaction Cost Economics perspectivewith Social Network theories (Uzzi, 1997; Jones,Hesterley and Borgatti,

50

Chapter3- The theoreticalframework:a definition of 'organisationalnetworks'

1997) and the concernwith behaviouralcharacteristicsand information flow processes in the work of Ring and Van de Ven (1992), Mohr and Spekman(1994), and Uzzi (1997). This is the avenuefollowed in the presentresearch. In Chapter 4, a general definition of the network supply-chain is derived from the integration of the contributionsreviewedhere.On the basisof that definition, as well as inter-organisational key illustrated three the processes of someof considerations above, buyer-supplier identified in that relationships. are play a major role shapingco-operative Theseprocessesrepresentthe lens through which co-operationis observedand provide the pillars for the operationalisation of the key variablesof the study.

51

Chapter4- The researchcontext

CHAPTER 4- THE RESEARCH CONTEXT This Chapterprovides an overview of the optical communicationssystemsindustry, a build is it important to For the a research, sub-sectorof opto-electronics. the purposeof development. its both the technology the and good understandingof characteristicsof These two elementsaffect quite dramatically the strategiesand behaviours of firms, including the developmentof supply relationships. Opto-electronicsmeets all the requirementsof suitability for the study. First of all, 1993), Rosenberg, (Nelson and optical communications systemsare complex systems which makesit very difficult for a single firm to cover the entire rangeof competencies different between Co-ordination to and skills required satisfy customers' needs. is key a organisations element. Fibre-optics communications systems are, typically, assembledproducts (Utterback, 1994)and supply relationshipsplay a critical role. Secondly, optical communications systems can be classified as a "demand-pull" (Griffin, 1993) type of industry. It is therefore an interesting field to observethe way levels industry lower the the top themselves supply-chain of reproduce at changesat end down, in lower firms' behaviours the area of purchasing and supply-chain and affect managementin particular. Moreover, fibre-optics communications systems are an example of how firms assimilate, and react to, a radical emerging technology. The industry provides an 'extreme' environment, which represents an ideal field for challengingand testing ideasgeneratedin more traditional technologicalsettings. This Chapter consists of a generaloverview of the opto-electronicsindustry, with its inter-related markets and technologies. A few technical aspects of fibre-optics communicationsare illustrated, and the generalevolution of opto-electronicstechnology is describedthrough major innovations and key firms. Second,the basic economicsof optical communicationsas a product are considered,with the relative advantagesand disadvantages of fibre-optic technology compared to traditional copper-based communications.The structureof the market is then presented,and particular attention is devotedto the analysisof the supply side. Finally, the key elementscharacterisingthe

52

Chapter4- The researchcontext

for framework industry the these the provide a since are set out, of environment strategic data. interpretation the of research subsequentanalysisand

4.1 Opto-electronics: a technological discontinuity Opto-electronicsis a technologybasedon the distinctive propertiesof two elementsof the atom, the photon and the electron26.it can be classified as an example of technological discontinuity, and more precisely of "scientific fusion" because it "exemplifies the merging of optical and electronic properties at the atomic level" (Miyazaki, 1994: 50). The three-level model proposed by Miyazaki to analyse an industry technological base fits opto-electronics. The model is based on the interconnectionof componentgenerictechnologies,key components,and systems,each representinga different level of technology(seeFigure 4.1).

Figure 4.1 Miyazaki's model appliedto opto-electronics

End-User Products and Systems

Key Components

Generic Technologies and Materials

CNe;;

oDrks Displays

Lasers

Glass

Sensors

Wafers

Storage

Optics

Fibre

Telecommunications Night Vision Systems Optical storage Process Control Image Systems

Lasers Fibre Optic Cables Light Emitting Diodes Sensors Optical Assemblies

Optical Glass Epitaxial Wafers III-V Materials II-VI Materials Glass Fibre

" Photonsare ideal for long-distancetransmissionof information due to their resistanceto attenuation; electronsare ideal for information processingactivitiesdue to their high interactionproperties.

53

Chapter4- The researchcontext

The opto-electronicsindustry is also characterisedby the presenceof technological interdependencies.As Itami and Roehl (1987: 105) put it, " the logic of technological interdependencemeansthat the various elementsoperateon the samelevel. Unless all are brought up to the level of the strongestone, having a standouttechnology is of no use". The implications for the competitive game are that "firms have to strive to maintain an effective linkage betweensystems,key componentsand componentgeneric technologies.They have to choosewhether to acquirethe componentsthrough markets or by in-houseproduction" (Miyazaki, 1994:64). In terms of end markets,opto-electronicsis a strategicallycore technologyfor a number of different industries. An overview of its related markets and technologies is shown in

Table 4.1. This indicatesthe importanceand variety of the componenttechnologiesfor different markets.

Table 4.1 Matrix of opto-electronicsrelatedmarketsand technologies(from Mivazaki. 1994) TECHNOLOGIES Materia

Transmission & Switching

Components for comms

systems

systems

Optical Information Processing

Communicationss

M

Information Systems Consumer

*

Military

*

Automotive

K

Aerospace

E

Medical

T

MateriafPr -ocessing

S

Process Control Safety Energy

54

Optical Storage

Displays

Imaging

Sensors

Lasers

Chapter4- The researchcontext

One of the biggest end-marketsfor opto-electronicsis telecommunications.This is have UK Western telecommunications the countries, where and particularly true of UK industry. In development key driver for the been the technological the the of always for three-quartersof the overall opto-electronics telecommunications account optical market. The study concentrateson a sub-sectorof the overall opto-clectronicsindustry, that is the important to Two understand optical communications systems. aspects are technological and competitive backgroundof firms in this sub-sector.The first is the technicalcharacteristicsof optical communicationssystems.The secondis the evolution of opto-electronicsin relation to its applicationto telecommunications.

4.1.1 Optical communications systems: technical aspects An optical communications" system is obtained by assembling a number of key componentsand by combining two key technologies,the electrical and the optical. Figure 4.2 is a schematic diagram of an optical communications system. Detailed information about the single componentsof a fibre-optics communicationssystem can be found in Appendix B.

"' In telecommunicationsthe fundamentalproblem today is still how to ensurethat the messagereceived is the one that the senderintended.The first efforts usedthe conceptof syncronisation,where both sender and receiver use the samefrequency and electrical impulses are decodedimmediately. These attempts were frustratedbecauseelectricity suppliesin different places could not be guaranteedto be identical. The searchfor an asyncronoustechniquebegan. Initially the telephoneconnectionswere point to point, but subsequentlytelephoneexchangeswere built. The needfor an automatic"switching" device- that is a device able to separatethe signals, emerged.The first switches were designedfor use with analogue transmissions,while today most of the transmissionsare digital. The signals can be decoded and regeneratedusing electronicdevicesand switching can also be carriedout electronically.

55

Chapter 4- The research context

Figure 4.2. Ail optical comrnun ications system (adapted from the European Fibre Optics Directory and Report, 1992)

Tx

Rx

INPUT SIGNAL (WITUTSIGNAL

MODULATOR

IIII

DE-MODUL.

I

LASER DIODE

Lý

DIODE DET.

AMP COUPLER

I, 1

ý 1:0

A light-transmitting

COLIPLER FO I

component (Tx) and a light-receiving

component (Rx) are

connected to each other by a fibre-optics channel (FO). Between transmitter and receiver is the amplifier or regenerator (AMP), which amplifies the fibre-optics signal after it has reduced to a certain threshold level2s.The input signal can be audio, video, or data, or a combination ofthe three, and is impressed or modulated into the light emitting device (LED or laser). In the case of digital transmission the light is merely switched off and on, with the presence of light representing a "I" and the absence a "0". In the case ofanalogue transmission, tile information may be represented by either direct intensity modulation (i. e. the intensity of the light is proportional to the amplitude of tile information signal), or frequency modulation (the frequency of the optical signal is proportional to the amplitude of the information signal).

The light is directed into a tibre-optics cable by means of an optical coupler.

The

fibre-optics the attenuation of signal limits the length of the fibre that can be used. On km. Optical couplers are also used to connect average. amplification Is required after _30 the fibre to the amplifiers. and eventually to the reccivcr. In the receiver, the light is

11This phenomenon is generally known as attenuation

56

Chapter4- The researchcontext

by captured a photo-detector,and the electrical output is demodulated so that the original digital or analoguemessagecanbe read.

4.1.2 The evolution of opto-electronics technology

Both the characteristicsof the technologyand the industry's technologicaldevelopment are crucial elementsfor a clear understandingof firms' strategiesand behaviours,and for interpreting the data on supply-chainmanagementfrom the survey (Chapter 7) and the follow-up interviews (Chapter9).

Opto-electronics is a field characterised by a clear pattern of innovation, from laboratory discovery in the 1960s, to a decade leading 1970s in to the of uncertainty successful commercialisation and rapid diffusion in the 1980s. The initial technological driver for opto-electronics was optical for but the communications, mass spark production was led by demand for CD players. This is, however, only partially true for Europe. It is definitely not true for the UK, where BT has played a fundamental role so that telecommunications has always been the strategic driver for the development of opto-electronics technology. Two objectives have driven the development of optical communications

systems technology

-

increasing

transmission

capacity

and

increasing transmission distance. These have also influenced the development of the key components in fibre-optics communications systems, specifically, light emitting components, light transmitting components, and light receiving components. The technological interdependencies implied by this can be seen in the four major phases in the development of optical communications. This is summarised in Table 4.2.

57

Chapter4- The researchcontext

Table4.2 Evolution of optical communicationstechnology The 1960s The emergenceof optical communications as a potentialreality

The 1970s Optical communicationsbecomesa reality

The 1980s Commercialisationandrapid diffusion

The 1990s New technologicalchallenges

0 (1966) Kao and Hockmanof the Standard Telephonesand Cableslaboratory(STC) show theoreticallythe possibility of using optical communicationsif optical fibre transmissionloss is reducedbelow the thresholdlevel of I Odb\km. 0 (1970) Panishand Hayashiof Bell Labs discover semiconductorlasersoscillating at room temperature. 0 The first commerciallyviable laser(the Gallium Arsnide,which produceslight at the 0.85 jim wavelength)is produced the possibility of low0 (1970) Coming demonstrates lossoptical fibres. Silica-basedmulti-mode optical fibres with a transmissionlossof 20 db/krn at 0.8 pm wavelengthare developed. E (1972) Coming (US) developsthe OutsideVapourPhaseOxidisation(OVPO) processfor optical fibre manufacturing. 0 (1974) Bell Labs (US) developthe Modified ChemicalVapour Deposition(MCVD) processfor optical fibre manufacturing. 0 (1975)NTT (Japan)developsthe Vapour-phase Axial Deposition (VAD) processfor optical fibre manufacturing. 0 (1975-1976)Researchers at SouthamptonUniversity (UK) and at NTT (Japan)report that light in the 1.3 gm wavelengthbandis more transparentin silica fibre than the previouslyused0.8 gm. Successively,dispersionis found evenlower at 1.55 gm. Optical communications switchesfrom shortto long wavelength. 0 (1975) The Indium Gallium Arsenidelaser,which produceslight at the 1.3 pm wavelength,is developed. 0 (1976) In the US the first trial of long-distance, public optical communicationssystemtakesplace. E (1977) Britain becomesthe first country to carry public telephonetraffic through optical fibres. X (1985) At&T (US) proposesthe Asyncronous TransmissionMode (ATM). 0 (1986) The Distributed Feedbacklaserdiodes (DFBs), operatingat the 1.55 pm wavelength,become available. E Optical amplifiers, digital switching and routing systems

The first phase (1960s and first half of the 1970s)is characterisedby two contrasting factors. The difficulty in producing low-loss fibres is Paralleledby steady progress in the developmentof suitable opto-electronicssourcesof light. During the second phase

58

Chapter4- The researchcontext

(mid-1970s to mid-1980s) this 'technological bottleneck' is removed by the developmentof successivegenerationsof fibres. Progressin the developmentof other is light first The two systemcomponents- particularly sourcesof also achieved. phases are predominantly characterisedby technologicaldevelopment,while the third phase (mid-1980s to early 1990s)coincides with the commercialisationand the diffusion of optical communications systems in the market. Great emphasis is put on mass Fibres key lowering the play a components. production and on manufacturingcost of fundamental role. The fourth phase (the 1990s) is characterisedby significant differencesbetweenthe rate of growth of the overall industry on the one hand, and that of someof its sub-segmentson the other. At a generallevel, the optical communicationssystemsindustry is still expandingat the present time and there is still scope for radical innovations. However, the picture in relation to individual componentsshows quite remarkabledifferences.Optical fibre is now a mature product, characterisedby falling prices and high volume production. Transmission capacity is no longer a key technological problem, and priority in innovation is now given to fibre connectionand to the developmentof digital switching and routing systems.This meansthat while the overall sector is growing, the strategic environment for firms operating in different sub-segmentscan vary considerably. In particular, at the lower end of the industry supply-chain,fibre cable manufacturersface a very high level of price-basedcompetition. Fibre cable manufacturerstend to be big players,and their strategiesbasically follow Porter's "cost-leadership"model, with high manufacturingvolumes and massproduction techniques.A key strategicissue for these firms is, therefore,to increasetheir market shareand expandtheir customerbase.This has a strong impact on the developmentof supply relationshipsfurther up the supplychain, where cable usershave to deal with very aggressivesuppliers. This situation is made even more complex by the resilience of traditional technology in cable manufacturing,basedon copper.Coppercablesare, for a number of applications,still a good alternative- and a cheaperone in most cases- to fibre cables.This meansthat fibre cable manufacturerscompete against each other and also against copper cable manufacturersin getting accessto the market. These aspectsare all inter-related and

59

Chapter4- The researchcontext

The in fundamental the managed. way supply relationshipsare structuredand role play a implications arevery clearly illustratedin the interviews in Chapter9.

4.2. The economics of optical communications From a technological point of view, the fundamentaldifference between optical and by is information fibre in is carried that cables optical communications copper-based key The in is beams, light while electrical current the carrier conventionalcoppercables. lies forms of communications advantageof optical communicationsover conventional in the different carrying capacity of optical cables and metallic cables.The capacity of an optical fibre cable is three orders of magnitude higher than copper coaxial cables

five and ordersof magnitudehigher than copperpairs. Other advantagesderive from or are connected to this overpowering transmission capacity.First of all, optical cablesprovide larger bandwidth, so that they can transmit between100 and 1000times the amountof information carried by metallic cables.Tens be Second, transmitted thousands optical channels can and received. of of simultaneous fibres suffer lower transmissionlosses,therefore significantly decreasingthe need for (up far less Third, fibres to component. optical weight amplifiers, a relatively expensive far less hundredth) Fourth, take than optical and also up cables, metallic space. one interference, dielectric is immune from transmission a as via signalsare electromagnetic and not a conducting medium. This is particularly important for a few specific applications,especiallyin military and aerospace.Finally, optical cablesare intrinsically in this safe, and representsan advantage areas where conducting cables or radio frequencysignalscould be hazardous.

There are, however, two major disadvantages.The first is that connecting two optical fibres is much more difficult than connectingtwo copper cables.The secondis that This losses fibres bent, transmission meansthat minimally. optical when even suffcr they have to be careftilly protectedfrom stressand temperaturevariation. As a result, in fibre-optics to cables a variety of copper cables still representa viable alternative applications.They tend to be cheaperto install and easierto connect,and are therefore

60

Chapter4- The researchcontext

for features important high huge transmission are speedof capacityand preferredunless

the enduser. Recentdevelopmentsin optical technologyare reflected in parallel changesin the cost light The emitting of cost structure of the average optical communicationssystem. decade. The in dropped lasers, has the can same past significantly such as components, be said of optical fibres, and prices keep falling quite dramatically. This means that transmissioncostsare becominga smallerpart of the total cost of a telecommunications service. Moreover, new technological developments,such as optical amplification, optical switching and routing signals according to their wavelength, all reduce dependenceon conventionalelectronic switching technology.This makesthe provision of high-reliability transmission and service delivery more and more economically viable, so that fibre-optics systemscan be delivered directly to businesspremisesand individual homes.

4.3 The market for optical communications systems In the UK, telecommunications transmissions have so far constituted the main formed for fibre have the they systems, and also optical communications application been has for In R&D there target times, a programmes. recent pioneering principal sidewaysdiffusion of fibre-optics communicationssystemsto other applications, such links between in both computers on-site as short-haul communications point-to-point in in LANs, telemetry, and and sensingsystems.Six different applications can video, be identified:

1. Public SwitchedNetworks (PSTN, divided into Trunks and Local Systems).These are long haul trunks and junction systems,traditionally operated by the various With Telecommunicationss Post national and administrations.

increasing

deregulationin Europe,independentcompanies- such as Mercury in the UK - have startedbuilding commercialnetworks. 2. Local Loop or Subscriberconnections.Theseentail the extensionof the public long haul or junction systemsto the individual subscriber,both residentialand business.

61

Chapter4- The researchcontext

3. Local Area Networks.Theseare networkswherethe maximumdistancebetween tenninalsis 1 km. 4. Metropolitan Area Networks and Cable TV. These are networks where the is km. 50 between distance terminals maximum 5. Military & Aerospace.Theserelateto communicationssystemswithin aircraft, ships ortanks 6. UnderseaSystems. The market is growing for all types of applications,with Public SwitchedNetworks and LANs leading the pack. Table 4.3 shows the Europeandata for sales of fibre-optics componentsfor the six applicationsbetween1992and 1997. Table 4.3 Europeanapplicationssalesof fibre-opticscommunicationscomponents(1992 - 1997) ($ in) 1997 1993 1995 1992 877.6 Public SwitchedNetworks 539.1 698.9 484.7 LocalLoop 68.1 41.7 7.3 52.5 381.5 Local Area Networks(LANs) 156.2 185.4 263.5 133.3 MetropolitanArea Networks(MANs) 70.7 76.8 98.1 and CABLE TV 48.4 55.4 Military and Aerospace 49.4 52.0 97.4 187.9 110.8 UnderseaSystems(only Europe) 144.0 864.7 1703.7 1003.2 TOTAL 1309.0

4.4 The supply side Figure 4.3 showsthe typical structureof the optical communicationssystemsindustry.

62

Chapter4- The researchcontext

Figure4.3 The structureof the optical communicationssystemsindustry

OMCAL OP'nCALFIBILE MANUFACTURERS

I

CABLE I MANUFACIUILEItS

IMANUFACTUREILS DEVICE

SOURCES

N ItECEIVERS

I EQLqPMENT MANUFACTURERS

SYSTEM INTEGRATORS

SPLICINGEQUIPMENT TESTEQUIPMENT MANUFACTURERS SYSTEM OPERATORS

Cable production involves two basic technologies, silica-glass fibre manufacturing is There high-tech three fibre Silica-glass are a manufacturing process. and cabling. different manufacturing methods that are commercially successful: (a) the outside developed Coming (b) Glass (US); (OCVD) the deposition vapour at process vapour Sumitomo; developed (c) (VAD) deposition the modified chemical at and, process axial developed Pirelli. (MCVD) deposition at process vapour

All of them involve the

formation of a pre-form (or crystalline mass) by depositing silica and dopants using a is heated drawn into fibre. The method of The then pre-form chemical vapour process. depositing the silica differs, but the common driver for improvements in the manufacturing process is to fabricate larger pre-forms to provide scope for longer continuous fibre lengths.

Silica fibre manufacturingtechnologyis regardedas a maturebusiness.New materials are under investigation,but no revolutionary changeis expectedin the medium term. The agendafor immediateimprovementis efficiency enhancementthrough larger preforms and improvementsin the fibre drawing process.Competition is characterisedat both the national and internationallevel by falling prices and by the threat of overcapacity. New applications for optical fibres are actively sought by leading manufacturers.

63

Chapter4- The researchcontext

Cabling optical fibre is not as high a technology as silica-glass manufacturing, but knowledge it and expertise. specialist of nonetheless requires a considerableamount Optical fibres are fragile and their performanceis affectedby applied stress.The driver for improvementsin cabling researchand developmentis to produce cables that are fibre. do but the not stress sufficiently strongto withstandenvironmentalconditions involves between distinguish it is which In fibre connection, splicing, necessaryto joining two cableswith one another,and termination, that is connectingcablesto other Two technologies main transmitters, and amplifiers. receivers componentssuch as is US in first splicing, in The the mechanical used compete splicing. widely more in fibre hold device the involves to ends the manufacturingof a mechanical which fusion is in UK where The the splicing, alignment. adopted widely more secondlocalisedheat is appliedat the interfacebetweentwo butted,pre-alignedfibres in order to softenand fusethem. Connectormanufacturershaveeasily adaptedto the various changesin fibre dimension, for driver 'Me fibres. between differences though thereare multi-mode and single-mode future developmentsis the use of ceramicsinsteadof metals,with better tolerancesat improvement is the continuous attempt to Another traditional area of reduced cost. The loss light the to cost of good quality connectors,especially a minimum. reduce of when comparedwith that of othersystemcomponents- typically fibre - remainshigh. In manufacturing optical sources - mainly light-emitting diodes and lasers - thin layers of semiconductorsare grown on top of each other. The early driver for the developmentof this technologywasthe identificationof the semiconductormaterialthat would emit light at sufficiently long wavelengths.Much of the fundamentalresearch in big laboratories but large the carried out research was of organisations, subsequent Today, fostered by formation the the commercialisationwas of spin-off companies. from is Apart technology. specialist on volumes and on packaging emphasis applications, the fundamentaldriver for future developmentsis improving existing technology and enhancing efficiency. A possible threat to established lasers

64

Chapter4- The researchcontext

manufacturerscomes from the developmentsachievedin the high-volume market of lasers for CD-players. CD lasers are a somewhat different technology from telecommunicationslasers,but the experienceacquiredin CD lasers can be partially transferred.This is a matter of concern for Western manufacturers,since Japanese have leading lasers devoting in CD the a and are companies position supply of increasingattentionto the telecommunicationsmarket. In light receiving technology, the principles of photo-detection,which are at the base of the devicescurrently used,havenevercreateda bottleneckcomparableto the one that affected light emitting devices in the early stagesof opto-electronicsdevelopment. Avalanche photodiodesare more sensitive than PIN photodiodes,but are also more expensiveand are affectedby temperature.The driver for researchand developmentis, consequently,the improvementof the sensitivity of PIN detectors. Table 4.4 shows the estimated market shares of fibre-optics communications componentsfor the major suppliersto the Europeanmarket.

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Chapter4- The researchcontext

Table4.4 Estimatedmarketsharesof fibre-opticscommunicationscomponentsfor the major suppliersto the Europeanmarket(Frostand Sullivan, 1992)

Transmitter,receivers, trans-rcceivcrsandactive modules(LEDs and lasers) Passivedevices(couplers and wavelengthdivision multiplexers) Connectors

Splicersand splicing kits

Fibre-opticstestequipment

Manufacturers Siemens BT&D Honeywell ABB Hafo Coming Aster SIFAM Amphend Radiall AT&T 3M AMP Ericsson NorthernTelecom Sumitomo Furukawa Anritsu Schlumberger York HewlettPackard Wandel& Goltermann Popo

Multi-mode fibre cable Single-modefibre cable

Fort NKT Pirelli BICC (OF) STC SIECOR

Market share 7% 7% 5% 5% 20% 5% 5% 12% 10% 5% 5% 5% 10% 10% 8% 8% 15% 10% 7% 5% 5% 7% 7% 7% 20% 12% 10% 9%

4.5 Summary: a few strategic implications The optical communicationssystemsindustry is, on the whole, a growing industry, with applicationssuch as Public SwitchedNetworks and Local Area Networks driving the growth process. The fundamentaltechnology is relatively old, which explains the presenceof relatively old and big companies in areas such as fibre-cable manufacturing,

or connectormanufacturing.However, new technologicaldevelopmentsin not-mature areasof the industry, together with the relatively recent commercialisationof many applications,account for the great number of young, small and medium sized firms operatingin the industry.Most of thesetend to be highly specialised.

66

Chapter4- The researchcontext

The market is growing but competition is tough, especially for some of the key Big is, in Fibre product. and mature cable particular, a standardised components. large industry, the this where volumesand massproductioncharacterise sub-segmentof is level The increase fight to also their of competition market share. companies heightenedbecauseof the resilience of traditional, copper-basedtechnology. Copper to for alternative practical more and viable a a greatvariety of applications, cablesare, fibre-opticscables.Also, it is not unusualto find both typesof cablein the samesystem. For example,in a typical LANs application such as providing accessto an industrial park, fibre cablescould be usedto connectdifferent buildings, and coppercablescould be usedto extendthe network to eachindividual terminal or deskwithin a building. It is interestingto note that there are quite significant differencesin the strategypursuedby in Old this companies area. coppercable manufacturers,such as old and new particular BICC, have moved into fibre-optics cables and are now general providers of have BICC integrators for both installers (although since and systems components fibre in Firms from 1999). that this and component started as optical withdrawn be They to tend are not threatening and specialist. manufacturersare much younger directly the 'copper side' of the business,and their challengeto the generalprovidersis basedon the developmentof substituteproductsin the optical technologicaldomain. The interplay betweencopper-basedand optical technologiesis compoundedby the firms (Itami Roehl, inter-dependencies 1987). As technological presenceof and a result, operatingat different stagesof the industry supply-chain,or in different sub-segments, sharethe generalindustry context of growth but can also face very different levels of competition in their own specific areaof business.This is an important elementwhen consideringthe empirical evidence,and will constitutea central factor in interpreting the developmentof supply-chainrelationshipsin the industry.

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Chapter5- The researchframework

CHAPTER 5- THE RESEARCH FRAMEWORK The main purposeof this Chapteris to presentthe two broad researchquestionsthat drive the empirical investigationand to identify the variablesused in the researchand their operationalmeasures.

5.1 The research questions The research focuses on the diffusion of intermediate governance forms for regulating It industry. in UK concentrates optical communications systems supply relationships the forms from to govern supply to the co-operation-oriented shift mark-et-oriented on relations in this industry with two objectives.

First, to investigatethe extentof this changeand its contingencies,and in particular the impact of technology.Optical communicationssystemsis an industry characterisedby the co-existenceof - and on-going race between - two technologies, 'established' it ideal the test to fibre-optics, 'emergent' therefore context and offers an copper and first The forms in development technology the of co-operative of governance. role of broadresearchquestioncanbe formulatedas follows: What is the relevance of co-operative governance forms for regulating supply Does UK industry? in the optical communications systems relationships technology have an impact on the development of co-operative forms of governance in the supply-chain?

The secondobjective of the researchis to test the linkage betweengovernanceforms in the supply-chain and organisational performance, and to verify whether or not technology is an intervening variable. The second broad researchquestion can be formulatedas follows: Is it possible to correlate the adoption of co-operation as the fundamental principle to govern supply relationships with improvements in efficiency and 68

Chapter5- The researchframework

innovation? Does technology have a significant impact on the relationship betweengovernanceformsandperformance? The fundamentalassumptionunderlying this secondquestionis that co-operationshould have a positive impact on organisational performance. The role of technology is, however,a grey areaand its investigationgive an exploratoryedgeto the research.

5.2 The network supply-chain: a working definition The two researchquestionsabovedrive the entire empirical investigation and constitute the starting point for identifying the variables for the study. We start with giving a working definition of the network supply-chain. This definition reflects the trend towards the convergence and cross-fertilisation of different disciplinary fields highlighted in Chapter 3. In particular, it is basedon the integration of elementsfrom OrganisationalEconomicsand Social Network Theory. The network supply-chain is defined as

A way of governing inter-organisational relations which is alternative to both the traditional

based supply-chain, on the market governance

structure, and the vertically integrated firm, based on hierarchy as its governing principle.

The idea of co-operation as an independent governance structure is derived from , OrganisationalEconomics, but the emphasisis on relations as opposedto individual exchanges.The influence of Social Network Theory appearsin the characteristicsof a network (co-operative)supply relationship.The first is that in a network supply relation the use of power is restrained. Firms operating in a supply-chain are formally autonomousand independent,but power is not necessarilyevenly distributed among them, their relative endowmentof critical resourcesand assetsbeing the major sourceof power differentials. When co-operationis preferredto both antagonisticsupply relations and vertical integration,the more powerful firm doesnot exploit its superiority in full in the short term. On the contrary, the use of power is restrainedin the name of future and

69

Chapter5- The researchframework

uncertain benefits. Buyer and supplier openly recognisetheir mutual inter-dependence, which incorporatethe notion of "commitment to sacrifice" (Gulati, Khanna,and Nohria, 1994).

A secondcharacteristicof network supply relations is that buyer and supplier openly adopt a long-term view of their dealings.As Chapter3 noted,a long-term perspectiveis increasinglyrecognisedas intrinsic to co-oPerativeorganisationalforms. Some authors refer to the repetitive and stable nature of the exchangesoccurring betweenthe actors involved in the relationships. Oliver defines inter-organisational relationships as "relatively enduring" (1990: 241); Williamson definesrelational contractingas "suitable for recurring transactions" (1985: 72-78); Demsetz highlights the importance of "continuity of association7(1993: 74). Other authorsemphasisethe nature of the longterm advantagesconnectedwith the network organisation(Powell, 1987; Ring and Van de Ven, 1992). Finally, a great many reinforce the importance of a long-term in indirect perspective an way by introducing trust and past experienceas fundamental characteristicsof the network organisation(for examplessee Uzzi, 1997; Dore, 1993; Thorelli, 1986; Ouchi, 1979; Ring, 1996). The adoption of a long-term perspectiveis also mentioned in several contributions on the types of changesoccurring in supplychain managementand is incorporatedin most of the models describing these changes (seeChapter2).

A third characteristicof network supply relations is the common strategicintent shared by buyer and supplier. The needfor co-operatingorganisationsto shareat least a 'sense of direction' is repeatedlymentionedin the literature. Ring (1996) explicitly introduces strategicintent as a fundamentaldeterminantof network formation. A few authorsfrom different disciplines share this view. For example, Demsetz (1993) maintains that "reliance of direction" is a fundamentalaspectof the "firm-like" governancestructure. Ouchi (1980) points out that a high degree of goal congruenceand commonality of purpose is one of the key elements to differentiate the intermediate governance structure. More can be addedby analysingthe literature on supply-chainmanagement. According to Wissema et al. (1989) and Matthyssensand van den Bulte (1994) the nature and the overall developmentof the relationship betweenbuyer and supplier is

70

Chapter5- The researchframework

determinedby the purchasingstrategy of the former. Three archetypesof purchasing strategiescan be identified: (a) the power strategy(supplier and buyer are opponents); (b) the tuning strategy(supplier and buyer distribute tasksbetweenthemselves);(c) the co-operationstrategy(supplier andbuyer havemutual goalsand overlappingactivities).

Table 5.1 summarisesthe three forms of governancein terms of the three characteristics, power, time and strategic intent.

Table 5.1 Three alternative ways of managing supply relations

ECONOMIC

USE OF POWER

TIMEPERSPECTIVE

STRATEGIC INTENT

INSTITUTION

MARKET-ORIENTED SUPPLY RELATION

NETWORK SUPPLY RELATION

Power is asymmetric and fully exercised through the

Power is asymmetric but there is commitment to sacrifice

Power is asymmetric and exercised in the form of legal authority

Short-term

Medium to long-term

Long -term

Total independence leads to conflicts of interests

Recognition of mutual inter-dependence leads to commonality of interests

One-way dependence leads to commonality of direction

application of a strict efficiency rule

VERTICALLY INTEGRATED ORGANISATION

5.3 Network supply relationships: operational isatio n The literatureoffers few examplesfor operationalising the conceptof networksupply relationship, and most of these are based on the adoption of a single theoretical perspective.The most common is Transaction Cost Economics, and the key variable usedto operationaliseforms of network governanceis the degreeof assetspecificity.

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Chapter5- The researchframework

Exemplary applicationsof this approachcan be found in Dyer (1996,1997) and Dyer interhybrid is by degree Ouchi (1993). The the and of governancestructure measured firm specialisationor the degree of asset specificity in three forms - physical asset specificity, site specificity and human asset specificity (Dyer, 1996,1997; Dyer and Ouchi, 1993).

Our definition of network supply relationship is basedon contributions from different disciplinary fields and this affects our approach to operationalisation issues. Our in is based the that a real co-operation measurement effort on assumption firms' looking by detected be actual at organisational context can more easily behaviours in a few critical areas. In other words, the focus for observation and itself from to the the the shifts measurement characteristicsof co-operativerelationship actual behaviours of the co-operating firms. The organisational areas subject to from identified basis the their a observation are on of relevance and poignancy governanceperspectivein the study of supply relationships.Theseare: 1. Teamworkacrossorganisational boundaries.This relatesto the existing division of labour betweenbuyer and supplier. The more suppliers are involved and actively in the early stages of the overall production process, the more coparticipate operativethe natureof the mechanismgoverningthe relationship.

2. Supplier selection. This relatesto the span of criteria used to select suppliers: the wider the span, including criteria that go beyond past performanceto encompass factors such as potential for innovation and technologicalcapabilities, the more cooperativethe relationship.

3. Commitmentto the supplier. This relates to the level of commitment of the firm

towardsits suppliers,which is expectedto be higherin co-operativerelationshipsbetweenthe two firms - than in wherethereis a sharedsenseof inter-dependence market-basedones. The use of 'transparencypractices' such as open books, exchange of strategically sensitive data, exchangeof key personnel, and idiosyncraticinvestments that is, supplier-specificinvestmentsof both tangible -

72

Chapter5- The researchframework

(for example, shared facilities) and intangible (for example, training) nature its firm level to the suppliers. of commitmentof a constitutesa measureof

4. Supplier's performance evaluation. This relates to the span of criteria used to (beyond the the cost-reduction, span suppliers' performance: wider evaluate timeliness and compliance to specifications to include also less objective and measurabledimensionsof performance),the more co-operativethe relationship. 5. Role of the contract. This relatesto the value given to the contract, either written down in law or in oral form, as a means to specify the expectations of the legal by Thanks the to the negotiating parties". protection and enforcementoffered system,the contract is a form of safeguard".The higher the degreeof specification of the contract,the lessco-operativethe relationship. 6. Conflict resolution. This relatesto the use of legal enforcement- as guaranteedby the contract versustrust-basedmechanisms- in caseof conflict betweenbuyer and supplier. The more conflict resolution is basedon trust, the more co-operativethe firm's in degree 'voice' is The the conflict resolution our measureof of relationship. relianceon trust.

The three governancemodesin Table 5.1 - that is, market-orientedsupply relationships, be integrated network-oriented supply relationships and vertically structures - can differentiatedin terms of thesesix critical areas.Table 5.2 comparesthe three.

" For a reviewof the legalfoundationof exchange in intermediate marketsseeGundlachandMurphy (1993),andLuschandBrown (1996).SeealsoDyer (1997).It is possibleto distinguishtwo different typesof legal contractthe classicalcontractandthe neo-classical one.The classicallegal contractis in thatall theobligationsof eachpartyareexplicitlywritten"within thefour comers perfectlyexhaustive, of thedocument"(Mcneil,1978).Theneo-classical contractis morecomplexin that it includesadequate betweenthepartiesasmarket safeguards to allow for equitableadjustments suchascontingency clauses, conditionschange(Mahoney,1992). '9 This mechanismis also describedas "self-enforcing (Telser, 1980)and as "private agreements" ordering(Williarnson,1985). 73

Chapter 5- The research framework

Table 5.2 A comparison between alternative economic institutions for regulating supply relations: key on-lanisational areas ECO, 1V0M1C1N. 5T1TUT1O, N.V

MARKET SUPPLY RELATION

NETWORK SUPPLY RELATION

VERTICALLV INTEGRATED ORCANISATION

ORG. IA LVA71O.VA L I RLIV

TeaniNNork across boundaries

Activities are allocated to specialised units Separateoutputs from independent

I75% of company sales

Significant upgrading 61% 32% 7%

66% 10% 12% 12%

-

145

Minor improvement 67% 18% 15% -

Chapter8- Co-operativesupply relationshipsand organisationalperformance:the findings

The number of firms, both manufacturersand installers,with a high percentageof sales coming from totally new products developedin the past 5 years is quite small. For a firms of minority and only in the caseof totally new products,however, this percentage is over 75%. For installers, products that are upgrading or minor improvement over For for 50% than previous versions never account of overall company sales. more for in for 16% 50% they to up manufacturers, account up of cases,and of companysales to 75% of companysalesin 32%. Apart from a strong emphasison innovation, other factors can influence the percentage of overall company sales derived from new products. One is age. Firms that are relatively new, with young and growing ranges of products, tend to have a higher percentageof sales based on innovation. A second factor is diversification. Firms entering new segmentsof the fibre-optics market - maybe switching from mature segmentsto growing ones - could be in the processof substantially renovating their product ranges.

8.1.3 General financial performance Ten firms (24% of respondents, equally distributed between installers and manufacturers)preferred not to disclose any data. Figure 8.4 shows the data for the remaining 31 (76% of respondents).

146

Chapter 8 -- Co-operative supply relationships and organisational performance: the findings

Figure9.4 General financial

performance

100 1 80

0

60

10% by than more (:]Decreased 10% by to Decreased up (:I

40

M Not changed

10% by to Increased up E3

20 0

10% by then Increased more M 177

=J1111111

=II

20 Turnover

PBIT

Return on Capital (ROC)

Financial performance indicators

The data show significant improvement in firms' performance, with a very small percentage reporting

deteriorating

financial

performance

in

an

environment

characterised by falling profit margins and increasing competition. Manufacturers seem to bave fared better than installers. None of the manufacturers reports a reduction in either ' Furnover' or 'Return oil Capital' in the past five years, while 12% of installers do in both

in TBIT, Moreover, 7% only manufacturers of report a reduction areas.

In

the past five years against 29% ofinstallers.

These difterences must, however, be treated with caution. Some ofthe firms that did not disclose any tinancial data might have done so because they had poor results In tile past tive years. Because the amount of data available is quite small and not completely reliable, due to the possibility of bias highlighted above, it seems better to exclude financial indicators of performance from the correlation analysis.

8.1.4 Summary

This section has spelt out the performance measures used in the study, and presented sorne overall findings that highlight trends in the industry.

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Chapter8- Co-operativesupply relationshipsand organisationalperforinance:the findings

The UK optical communicationsindustry is characterisedby increasing price-based falling competition,as marginssuggest.Falling prices and overall Product-costs- while the cost of specific inputs, suchas labour, increases- suggesthow efficiency gains are actively pursued and achieved.The trends in order-to-delivery time, cycle-time and time-to-market indicate that, in the face of increasing price-basedcompetition, some firms are trying to defend their competitive position by up-grading their offer and moving towards more sophisticatedsegmentsof the market. This involves increasing levels of complexity throughout a firm's production process,andjustifies deteriorating performancewhen time is the relevantdimensionfor measurement. The data on innovation show how manufacturersand installers differ in terms of their respective involvement in the development of new products and processes. Manufacturers- with researchand designand manufacturingas their core activities - are more directly involved in innovation than installers, whose primary role is to pass the outcomeof the innovation efforts of the industry chain on to the end-customers.These different roles, and their impact on supply-chain management, are more directly investigatedin the follow-up interviews.

Finally, financial performancedoes not seemto constitute an immediate problem even in the face of toughening competition. The low responserate in this area, however, invites caution in interpretingthe data.

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Co-operative supply relationships and organisational performance: the findings

Chapter 8

8.2 The correlation analysis .Fhe alm of the correlation analysis Is to establish the sign and strength of association betvveenco-operation in supply-chain and organisational performance, and to explore The the the role oftechnology in shaping outcomes of co-operative supply relationships. underlying assumption. supported by interview data, was that the adoption of cooperation as the fUndamental principle to regulate supply relationships

should lead to

improved effilciency and innovation.

Table 8.2 illustrates the variables included in the analysis.

Table 8.2 Correlation analysis: independent and dependent variables

Co-operation in supply relationships Feani\%orkacross boundaries Supplier selection Commitment to supplier Supplier's performance evaluation Role ofthe contract Conflict resolution Organisational performance Ef Global

Partial

F-

\ ariable

!

-

--

,! 14 110LIndaries 0coree ot teani\Nork (from research to installation) LICI-OSS Span of competencies in selection criteria Degree of commitment to supplier Span of performance evaluation criteria Dc, ree of specification ofcontract -, Deoree of 'voice'

At. Overall product-cost (trend) A2. Order-lo-delivery time (trend) Bl. Labour productivity (trend) B2. Material productivity (trend) B3. Equipment Litilisation (trend) B4. Cycle-tinie (trend)

Innovation Process -

Cl. Time-to-rnarket (trend)

Output -

DI. New products developed in the last 12 months D2. New products developed In the last 5 years W. % of sales of products developed in the last 5 years that are totally New D4. % of sales of products developed in the last 5 years that are up(Tradingover previous generations D5. % of sales of products developed in the last 5 years that are rninor Improvement

149

Chapter8- Co-operativesupply relationshipsand organisationalperformance:the findings

The data collected in the questionnairehave beenpartially transformedfor the analysis. In most cases, this required re-coding and the creation of composite variables to measurethe level assumedby the operational indicator used in the correlation. For example, one of the operational measuresfor the process of inter-organisational coordination is the 'degree of teamwork' between the firm and its suppliers. The questionnaireaskedthe firm to gradeits degreeof collaborationwith suppliersin a five level qualitative scale ('very low' to 'very high') for three macro-activities - research and conceptdesign, design and engineering,and installation and distribution. The first step in data processingwas to transform the qualitative scaleinto a quantitative one by re-coding the labels - thus, 'very low = V, 'low = 2', 'medium = 3', 'high = 4', and 'very high = 5'. The secondstepwas to createa new compositevariable, called 'degree of teamwork'. This was achievedby adding the values for the three activities (research and concept design, design and engineering,and installation and distribution) so that eachfirm could be associatedwith a number- an index - expressingits overall degree of collaboration with suppliers.The higher this number, the more the processof interorganisationalco-ordinationis of the co-operativetype. Similar transformationshavebeenusedto derive eachof the other processvariablesand

levels.Table8.3 summarises their measurement the transformationfor all the variables included in the analysis.

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Chapter8- Co-operativesupply relationshipsand organisationalperformance:the findings

Table 8.3 Compositevariables:an overview

Composite Variable

Re-coding

Questionnaire data

Five level qualitative scale('very low' to 'very high') for three activities - researchand concept design,design and engineering,and installationand distribution Span of competencies Classificationof 13 in selectioncriteria selectioncriteria accordingto intensity of usewith potential suppliers('always', 'in specialcases','not at all')

Degreeof teamwork

From qualitativeto quantitativescale(I 4very low' to 5= 'very high')

From qualitative classificationto quantitative: Not at all =I In specialcases=2 Always =3

Degreeof commitment to supplier

Classificationof 5 transparencypractices accordingto intensity of usewith suppliers('with all', 'with the majority', 'with a minority', 'with none')

From qualitativeto quantitative: With none=1 With the minority =2 With the majority =3 With all =4

Span of performance evaluation criteria

Classificationof 4 evaluationcriteria in termsof their growing importancefor the firm on a five level scale ('significantly more important' to 'significantly less important')

From qualitativeto quantitativescale(I 'significantly less important' to 5= ' significantly more important')

Degreeof specification of the contract

Threemutually exclusive options, expressingdecreasing levels of specificationof the contract ('exhaustive', 'relatively detailed', 'not very precise')

From qualitative to quantitative: Not very precise= Relatively detailed 2 Exhaustive=3

151

Transformation The sum of the individual scores for the three activities for each firm gives its position in terms of degreeof teamwork The sum of the individual scores of the thirteen criteria for each firm gives its position in terms of spanof in competencies selectioncriteria The sum of the individual scores of the five transparency practicesfor each firm gives its position in terms of the degreeof reciprocity in information exchangeand knowledge transmission The sum of the individual scores of the four evaluationcriteria for eachfirm gives its position in terms of the span of performance evaluationcriteria used No transformation required

Chapter8- Co-operativesupply relationshipsand organisational. performance:the findings

Degreeof voice in conflict resolution

Overall product-cost

Order-to-delivery time

Labour productivity

Material productivity

Equipment/Plant' utilisation

Cycle-time

Time-to-market

New products developedin the last 12 months New products developedin the last 5 years

Threemutually exclusiveoptions, expressingincreasing levels of voice (use lawyers', 're-negotiate the contract', 'sort things out') Five level qualitative scale('significantly increased'to 'significantly decreased')expressing the performancetrend Five level qualitative scale('significantly increased'to 'significantly decreased')expressing the performancetrend Five level qualitative scale(significantly increased'to 'significantly decreased')expressing the performancetrend Five level qualitative scale('significantly increased'to 'significantly decreased')expressing the performancetrend Five level qualitative scale('significantly increased'to 4significantly decreased')expressing the performancetrend Five level qualitative scale('significantly increased'to 'significantly decreased')expressing the performancetrend Five level qualitative scale('significantly increased'to 'significantly decreased')expressing the performancetrend Actual number

From qualitativeto quantitative: Use lawyers=I Re-negotiatethe contract 2 Sort things out =3

No transformation required

From qualitativeto quantitativescale ('significantly decreased' =1 to 'significantly increased'= 5)

No transformation required

1

From qualitativeto quantitativescale ('significantly decreased' 5 to 'significantly increased'= 1)

No transformation required

From qualitativeto quantitativescale ('significantly decreased' =1 to 'significantly increased'= 5)

No transformation required

From qualitativeto quantitativescale ('significantly decreased' =1 to 'significantly increased'= 5)

No transformation required

From qualitativeto quantitativescale ('significantly decreased' =1 to 'significantly increased'= 5)

No transformation required

From qualitative to quantitativescale ('significantly decreased' 5 to 'significantly increased'= 1)

No transformation required

From qualitative to quantitativescale ('significantly decreased' 5 to 'significantly increased'= 1)

No transformation required

No transformation required

Actual number

No transformation required

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Chapter8- Co-operativesupply relationshipsand organisationalperformance:the findings

% of salesfrom products developedin the last 5 years that are totally new

% of salesfrom products developedin the last 5 years that are up-grading over previous generations % of salesfrom products developedin the last 5 years that are minor improvement

Classificationaccording to four intervals: below 25% of sales 25% to 50% of sales 50% to 75% of sales More than 75% of sales Classificationaccording to four intervals: below 25% of sales 25% to 50% of sales 50% to 75% of sales More than 75% of sales Classificationaccording to four intervals: below 25% of sales 25% to 50% of sales 50% to 75% of sales More than 75% of sales

From interval to rank: below 25% of sales=I 25% to 50% of sales=2 50% to 75% of sales=3 Morethan75%of sales=4

No transformation required

From interval to rank: below 25% of sales=I 25% to 50% of sales=2 50% to 75% of sales=3 Morethan75%of sales=4

No transformation required

From interval to rank: below 25% of sales=I 25% to 50% of sales=2 50% to 75% of sales=3 Morethan75%of sales=4

No transformation required

The level of measurementof the variablesis predominantly ordinal. A high scorefor an independentvariable for a firm correspondsto a strong presence of the 'network element' in supply relationships for that firm. The exception is the 'degree of specification of the contract', with a high score associatedwith the predominanceof market-oriented mechanisms.In other words, a high degree of specification of the contractis a 'contra-indicator' of co-operationbetweenbuyer and supplier. The strengthof associationbetweenindependentand performancevariablesis expressed by correlation coefficients, with significance measured at both the '5' and the T percent levels. In particular, correlation is measured by Speakman's correlation

in coefficients,which areconsistentwith the ordinallevel of measurement predominant the analysis.The sign of the correlationcoefficientis consistentwith the sign of the betweenthevariables. association Each independentvariable is individually correlatedto each performancevariable. The analysis is carried out for the whole sample (41 firms) first, and then repeated by discriminating firms on the basis of (a) primary activity (Manufacturers versus Installers) and, (b) size (Small versusLarge).

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Chapter8- Co-operativesupply relationshipsand organisationalperformance:the findings

No attemptis madeat summarisingthe independentvariablesin a single indicator of the overall degree of 'networking' for the firm. Similarly, no attempt is made at summarisinga firm's performanceby meansof a single indicator. The main reasonfor keeping the analysis at a disaggregatedlevel is that both inter-organisational cooperationand performanceare complex multi-dimensionalconcepts. As to the independentvariables, different aspectsof co-operationmight be associated with different dimensions of performance. Equally, different performance variables might be more (less) relevant for specific categoriesof firm. Combining independent and performance variables in single indicators of, respectively, 'networking' and performancemight hide thesedifferencesand a great amount of information would be lost. A fairly disaggregatedlevel of analysis,though less elegantfrom a formal point of view, seemsmore appropriategiven the richnessand complexity of inter-organisational relations.

Another element that works in favour of keeping the analysis as simple and straightforwardas possible is the small size of the sampleand the need to preservethe reliability of the data,given the level of measurementadopted.More sophisticatedtypes of analysis would have required a larger data set and a more precise level of measurementof the variablesto producemeaningful results.

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Chapter 8- Co-operative SLIpplyrelationships and organisational performance: the findings

8.2.1 The correlation coefficients This Section presents in great detail the results from the correlation analysis between coin behaviours firm's focusing by the six on measured relationships operation in supply to boundaries, commitment selection, teamwork supplier across crucial areas of the contract and conflict resolution of role evaluation, supplier's performance suppliers,

9.3. in Section findings key The surnmarised are organisational performance. and -

Teamwork

across organisational

boundaries

8.4 the Table correlatlon shows -

boundaries for teamwork and performance. across organisational coefficients

Table 8.4 Teamwork across organisational boundaries and performance: whole sample Dei! ree of Teamwork 153) 018 -.

Overall product-cost Order-to-delivery time Labour

productivitý

-319

240 .

Material productivity I'lant/Equipment productiN ity Cycle-time Innovation Time-to-market New products (12 months) New products (15years) 'Voof sales from totally new products "/0 of sales from products that are upgrading of sales from products that are minor improvement

028 . 000 . ()ýo -. 003 . 081 . 240 .

There is evidence of significant, positive association between the 'degree oftearnwork' Significant, by efficiency and plant/equipment and measured cycle-time productivity. here and throughout the analysis, means 'statistically significant'.

'File significance

levels. when appropriate, are indicated in the tables as, respectively, (*) for significance at the five percent level and (**)

for significance at the one percent level. The

correlation is also positive for labour productivity and material productivity. This involvement that the of suppliers at early stages of a firin's production process suggests is associated with improved performance in manufacturing, in terms of both time-based efficiency gains and a rriore efficient use of production inputs.

155

Chapter 8- Co-operative supply relationships and organisational performance: the findings

Table 8.5 shows the same correlation coefficients when primary activity and size are introduced in the analysis Fable 8. ý Teamwork across boundaries and performance: primary activity and size

Installers fliciency . . Overall product-cost Order-to-delkerv time Labour productivity Material productivity Pla nt/Eq u ipment productiN it) CNAC-tinle Innovation Time-to-inarket New products (12 months) New products (5 years) ')/q,of sales from totally new products 'V,,of sales from products that are upgrading "/o of sales from products that are minor inwrovenient

-

372 -. 126 -. 928* . 114 . 509* . I 1 _-, 804** -. ** 671 -. 560* -. 010 . 174 . 138 .

Degree of Teamwork Manufacturers Small M 414 691 -. . 114 165 -. . * 675* 312 -. . 462 021 -. . * 730* 423 -. . 16* * 542* .9 .

ýý

616* . -213 423 -. 217 -. 272 -. 050 .

260 -. 557* -. 423 -. 073 . 315 . 467 .

Large

Ilagmg

620* . 398 . 129 -. 1833 -. 354 -. 100 -. 497* . 372 . 180 . 311 -. 388 -. 067 -.

I'liere is still evidence of positive correlation between the degree of teamwork and efficiency, but with significant differences between Installers and Manufactures. For Installers, teamxvork across organisational boundaries is significantly and positively associated with partial efficiency gains (labour and equipment productivity).

For

Manufacturers the degree of teamwork is negatively associated with Input-based measurcsofefficiency but positively and significantly associated with global ones.

A possible explanation is tile different organisation of tile production process. Given that every installation pro'ject IS unique and there are few opportunities tor II I increasing standardisation ofthe production process, installers' major interest in seeking II degrees of' tearnmork is linuted to the efficient use of individual resources. Time is relevant, but not in the sense that a constant and uninterrupted flow of activities - and output - must be guaranteed t1orefficiency purposes. On the contrary, Manufacturers tend to adopt standardisation and the principles of mass-production Lis tile basis tor manufacturing organisation. A smooth, constant and finely tuned flow of activity from the acquisition of inputs to the delivery of the output is to essential guarantee increasing levels of efficiency, and co-operation with suppliers is instrumental in

156

Chapter8- Co-operativesupply relationshipsand organisational. perfonnance:the findings

high degree Global the achieving a and timeof control over production enviromnent. basedmeasuresof efficiency becomemore relevantthan simple input-basedones. A major difference with the data in Table 8.4 is the presenceof significant correlation betweenteamwork across organisationalboundariesand innovation. Again, there are differencesbetweenInstallersand Manufacturers.For Installers,the degreeof teamwork is negatively and significantly associatedwith time-to-market and with the number of new productsdevelopedin the past 12 months and 5 years.The associationwith timeto-market is positive and significant for Manufacturers. In interpreting these data, it is important to remember that Installers are not the key in actors the overall industry innovation processand this may influence the significance of the results.The negativeassociationbetweenthe early involvement of suppliers and innovation might be explained in terms of this structural, industry-based,division of tasksbetweenManufacturersand Installerswhen it comesto innovation. When discriminating accordingto size, differencesemergebetweenthe two groups.For Small firms, the degreeof teamwork acrossboundariesis positively and significantly associatedwith input-basedmeasuresof efficiency and with cycle-time. Large firms show very low - if not negative- associationbetweenteamwork acrossboundariesand input-basedefficiency indicators.The correlation is positive and significant with overall product-cost(a global measureof efficiency). As to innovation, for Small firms teamwork across organisational.boundaries is negatively correlated to measuressuch as time-to-market, new Products developed in the past 12 months (significantly), and new products developed in the past 5 years, which all relate to a direct involvement of the firm in researchand development.The correlation is positive, though not significant, for measuresexpressinginnovation in terms of the contribution of new productsto the overall companysales.For Large firms, the degreeof teamwork is positively correlatedto innovation measuresthat indicate a direct involvement of the firm in research and development. The is correlation significant in the caseof time-to-market.

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Chapter 8- Co-operative supply relationships and organisational performance: the findings

In trying to interpret the data on Small and Large firms, it is important to remember how this distinction partialiv overlaps with that between Installers and Manufactures (see Figure 7.2 and 'Fable 7.2 in Chapter 7). In other words, the explanations offered in analysing the data for Installers and Manufacturers may also apply to similar patterns of behaviours shown. respectively, by Small and Large firms. 'rhe two discriminating This however. perfectly correlated. variables - size and nature of activity - are not, firms Large differences Small between that the are not entirely means observed and explained by the nature of activity. These other factors remain, at this stage, obscure and 8. Chapter interviews for further follow-up the in constitute will an oýject enquir-y in

Supplier selection - Table 8.6 shows the correlation coefficients for the span of competencies in selection criteria and performance.

IFable 9.6 Span ot'competencies in selection criteria and performance: whole sample Span of competencies in selection criteria Overall product-cost Order-to-deli% cry time Labour productivity Material productivity Plant/Equipment productivity Cycle-tilue

052 . 325* . 059 -. 148 . 169 . 452** .

Innovation Time-to-niarket New products (12 months) New products (5 years) 'V,,of sales from totally new products "/0 of sales from products that are upgrading of sales from products that are minor iniproN enient

There evidence ot'significant.

339 138 . 227 . 144 -. 005 . 147 .

positive association between the span ofcompetencies

it,

selectioncriteria and order-to-deliverytime and cycle-tirne. The use ofselection criteria based on both past and potential performance seems connected to opportunities t.or timebased efficiency improvements throughout a firm's production process. In other words, the chain of activities that contributes to a firni's output appears to run more smoothly

and in tune. 158

Chapter 8- Co-operative supply relationships and orgamsational performance: the findings

The correlation with innovation is always very low. Tile only exception is with time-tobetween link Tile however, the adoption of a not signiticant. market - which is, forward-looking approach in selecting suppliers and time-based pertormance gains is, nonetheless, reiril'orced.

I-able 8.7 shows tile same correlation coefficlents when primary activity and size are taken into account. Table 8.7 Span of competencies in selection criteria and performance: primary activity and size Span of competencie s in selection criteria mantaacturers Large Small Installers L' ONcrall product-cost Order-to-deli%ery time Labour productivity Material productivity Phant/Equipment producti% itý () Cie-tinle Time-to-market Ne%sproducts (12 months) New products (5 years) 'V0of sales from totally neNNproducts % of sales from products that are upgrading 'Yoof sales front products that are minor iulDrovement

213 . 124 . 099 . 483* . 037 -. 059 -.

065 -. 537* . 180 -. 129 -. 294 . 715* * .

191 . 025 -. 175 . 490* . 055 . 359 .

064 -. 545* . 229 -. 080 -. 252 . 464* .

012 -. 279 . 579 . 309 -. 042 -. 106 -.

659* * . -329 453 -. 009 . 053 . 319 .

270 . 231 -. 156 . 036 -. 059 . 496* -.

344 . 184 . 140 . 363 -. 127 -. 594* .

I'licre is evidence ot'positive correlation between the span ofcornpetencies in selection criteria

and efficiency,

but with

significant

ditTerences between Installers and

Manufactures. For Manufacturers, the span of competencies in selection criteria is positively and significantly associated with global and partial measures of efficiency and also with innovation (process). For Installers, the association is positive and significant only with partial efficiency.

When discriminating according to size, differences emerge between the two grOLIPS.For Small firms, the span of competencies in selection criteria is positively and significantly associated with partial measures of efficiency whereas for Large firms the association is

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Chapter 8- Co-operative supply relationships and organisational performance: the findings

both (global) time and cycle-time order-to-delivery positive and significant with (partial).

As to innovation, the correlation for Small firms is generally very low, if not negative (signiticantIv so for the % of sales from products that are minor improvement). For Large firms. the correlation is positive and significant for the % of sales from products that are minor improvement (innovation output).

Commitment

to the supplier - Table 9.8 shows the correlation coefficients for the

degree ot'cornmitinent tO SLIppliersand performance for the whole sample.

Fable 8.9 Commitment to the suppliers and perfonnance: whole sample Degree of commitment to suppliers 338* 3-1 087 . 199 . 242 . 018 . 289 -.

Overall product-cost Order-to-delivery time Labour productivity Material prod uctivity Plant/Equipment productivity ()cIc-time Innovation Time-to-market New products (12 months) New products (5 years) 'Voof sales from totally ne%% products 'VOof sales from products that are upgrading 'V,,of sales from products that are minor improvement

068 . 285 . 282 . 002 -. 135 . 118 -.

I'lic degree of commitment to suppliers is positively and significantly correlated only mth overall product-cost. an indicator of global efficiency. With all the other efficiency measures. the association is positive (except for cycle-time) but very weak. As For innovation, the degree of degree of commitment to suppliers is positively correlated to indicators that suggest an active involvement in research and development (such as the

in the past 12 months and in the past 5 years), but the number of new products association is weak. With other indicators, the correlation is either very weak or negative.

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Chapter 8- Co-operative supply relationships and organisational performance: the findings

Table 8.9 shows the same correlation coefficients when primary activity and size are taken into account.

Table 8.9 Commitment to suppliers and performance: primary activity and size Degree of commit ment to sup pliers Large Manufacturers Small Installers E.f Overall product-cost Order-to-deliverv time Labour productivity Material productivity I'lant/Equipment productivity Cvcle-time Time-to-market Nei,N products (12 months) New products (5 years) 'V0of sales from totally new products 'Voof sales from products that are upgrading I'%of sales from products that are minor improvement

157 . 001 . 328 . 035 -. 087 -.

339 3 069 . 401 . 243 . 026 . 443 -.

485 . 225 . 184 . 099 . 149 -. 378 -.

239 . 102 . 202 . 315 . 060 . 222 -.

091 -. 313 . 4337 . 085 . 245 . 110 -.

086 . 340 . 018 . 114 -. 056 . 074 -.

674* . 286 . 189 . 004 . 124 . 3100 -.

156 -. 392 . 262 . 018 . 122 . 032 .

The data do not reveal any major difference between Installers and Manufacturers, and degree The the overall with of commitment to suppliers is still positively sample. correlated with overall product-cost for the two groups. However, the individual coefficients are not statistically

significant.

There is also evidence of positive

association (though not significant) with labour productivity for Manufacturers and with rnaterial productivity for both categories.

As for innovation. the data are consistentwith that observedfor the whole sample.The degreeof commitment to suppliersis positively correlatedto indicators that suggestan active involvement in researchand development(such as the numberofilcw products in the past 12 months and in the past 5 years), but the associationis weak. With the other indicators,the correlation is either very weak or negative.

When size is taken into account, the degree of commitment to suppliers is still positively correlated NNIthoverall product-cost, and significantly so Ior Small firms. The general positive - it' weak - association with input-based efficiency is confirmed, the only exception being plant/equipment productivity for Small firms. Time-based rneaSUresof

161

Chapter 8- Co-operative supply relationships and organisational performance: the findings

degree the to the suppliers, commitment of with correlated negatively efficiency Lire firms for being i Small (positive though not time order-to-del very only exception signIt icant).

As for innovation, there is a positive and significant association between the degree of commitment to suppliers and time-to-market for Small firms, while the association is between for difference Large is This the two groups. with the negative ones. only major The but the weak correlation. all other innovation indicators showing a positive correlation is. however, always stronger with measures indicating the presence of active research and development such as the number of new products.

Supplier's performance evaluation - Table 8.10 shows the correlation coetl-icicnts for the span ot'pert'Orniance evaluation criteria and performance for the whole sample. 'Fable 8.10 Supplier's perl'Ornianceevaluation and performance: whole sample Span of performance evaluation criteria hfficiency Overall product-cost Ordcr-to-deliverv time Labour productivity Material productivity I'lant/Equipment productivity Cycle-tinie

-310 238 . 106 -. 153 . 281 . 615** .

Innovation Time-to-inarket Ne%%products (12 months) Nev., products (15years) %0 of sales from totally new products (Voof sales from products that are upgrading "/o of sales from products improvement

310 . 108 . 103 . 083 . 243 . 355*

that are minor

I'lic span of performance evaluation criteria is positively correlated to time-based measures ofefficiency.

and the association is signiticant for cycle-time. The results for

the other efficiency indicators are inconclusive, the only notable one being a negative (though not significant) correlation with overall product-cost. The span ot'perl'ormance evaluation criteria is also aNvays positively correlated to innovation indicators, with a

162

Chapter 8- Co-operative supply relationships and organisational performance: the findings

from for the products that are minor sales percentage of signiticant association improvement and a relatively strong one with time-to-market.

Table 8.11 shows the same correlation coefficients when primary activity and size are taken into account.

Fable 8.11 Supplier's performance evaluation and performance: primary activity and size Span of performance evaluation criteria Large Small Overall product-cost Ordcr-to-deli%erý time Labour

productivity

Matcrial producti% itý Ilia nt/E(I u ipment productivity CNcle-tinle Innovation 'Finic-to-mark-et Nc%ýproducts (12 months) New products (5 years) 'Voof sales from totally ne%% products 'Voof sales from products that are upgrading of sales from products that are minor inlDrovement

.

133

001 -.

A 309 .

177 -.

477* -. 130 -. 213 .

328 -. 13* .5 173 -.

065 . 191 . 042 .

013 -. 209 . 718** .

410 . 442 . 755** .

001 . 392 . 574** .

528* -. 047 -. 018 -. 034 -. 488* -. 353 -.

507* . 580* . 513 . 219 . 190 . 249 .

089 -. 295 -. 135 -. 128 . 3106 . 011 -.

267 . 242 . 268 . 037 -. 156 . 690 .

W"lien discriminating oil primary activity. differences emerge between Installers and ManUfiaCtUrers.The span ot'performance evaluation criteria is still positively correlated with tinle-based measuresofefficiency for both groups, but the association is significant and very strong for Manufacturers. 'File negative correlation with overall product-cost found for the whole sample is also confirmed for both Installers and MallUfacturers.

As for imiovation, the span of performance evaluation criteria is almost always negatively correlated with innovation for Installers, while the opposite is true for M anti facturers. with significant levels for time-to-inarket and new products developed in the past 12 months.

When discriminating on size, differences emerge between Sn-iall and Large firms. The span of performance evaluation criteria is positively and significantly correlated with time-based measures of efficiency for both groups, the only exception being order-to-

163

Chapter 8

Co-operative supplý relationships and organisational performance: the findings

delivery tinie t'or Small firms. The negative correlation with overall product-cost found I'or the whole sample is also confirmed for both Small and Large firms. and it is significant for the former.

As for innovation. the span of performance evaluation criteria is almost always iicuatively correlated xNith Innovation for Small firms. the only exceptions being the percentageofsales froin totally new products and the percentage of sales from products that are upgrading. The opposite is true for Large firms. with significant levels for the percentageofsalcs frorn products that are minor improvements.

Role of*the contract

for Fabic 9.12 the the the role of coefficients shows correlation contract an,I perl'ormance for the whole sample.

]'able 8.1 Role ofthe contract and performance: whole sample 22 Degree of specification of the contract Ljficieitcy O%erall product-cost Order-to-delkerN time Labour producti% it), Material productivity Plant/Equipment productivitý C%Cie-tinlc

3 56* -. -305 515** . W** 458* . 066 .

Innovation Tinic-to-market Nc%ýproducts ( 12 months) N'c%% products (5 ý cars) "ýOof sale%from totallý ne,.s products 'ý/(,of sales from products that are upgrading "/o of sales from products that are minor impro%ement

182 . 053 . 184 . 448** . 244 .

Hic degrec tit' specification of the contract shows verY strong posltl%,, e correlation with input-based measures of efficienc-N, and negative correlation with the two global efficlency indicators, overall product-cost (significant) and order-to-del i very time. It is also negatively and significantly correlated with tirne-to-niarket, the measure of innovation that focuses on the process and incorporates tinle as a relevant dimension. With all the other innovation indicators, the correlation is positive, though significant only for the percentage of sales froin products that are upgrading. As prcvIously mentioned in this Chapter, the higher the degree of specification of the contract, the

164

Chapter 8- Co-operative supplý relationships and organisational performance: the findings

data its These firm between the and suppliers. more inarket-oriented the relationship seern to suogest that niarket-oriented torms of governance in supply relationships are innovation this is negatively associated with perton-nance- either efficiency or when measured globally and \Oien time is a relevant dimension, but the opposite is true when partial nicasures are adopted.

I'able S. 11 shows the saine correlation coefficients \vhcn primary activity

and size are

taken into account.

II Role ofthe contract and performance: primary activity and size Deg ree of specifica tion of the co ntract Large Manufacturers Small Installers 1.Ili( -it'll (j.

O%crall product-co%t Order-to-delkerN time Labour producti, it-, Material

148 -. 230 -. 280 .

productiN itN

5 10* -. -382 937** .

13 7

Plant/Equipinent productiON CNCie-finle Milo valioll Tinic-to-market

3,45 012 -.

Nc,ýs products ( 12 montho New products 0; ýcars) of sales from totall) ne%sproducts of sales from products that are upgrading

18* 6 -. ýC)J* _. 503* -. 171 -.

of sales front products im pro,. c in en t

that are minor

688** .

.43,4 045 -. 673, -. 219 . 440 . 627** . 773* . 052 -.

22 4

168 -. 038 . 427 . 260 .

363 . 3,2

370 -. 52 1 -. 6 10* -. 324 -. 2 15 -. .255

455* -. 374 -. 492* .

667** .

485 . 001) .

663* -. 292 . 436 . 706** . 791 . 167 .

The Patterns I'm-Installers and Manufacturers are similar, and consistent xvith the general findings. The degree of specification of tile contract is positively correlated with *InputII based measures of efticiency. and significantly so for Manufacturers. It is also iieuatively correlated with order-to-delivery time, cycle-time and overall product-cost (significantly

for

Manufacturers). This confirms

the idea that market-oriented

mechanisms are negatively associated with global measures of efficiency and with measuresthat incorporate time. but there is evidence of positive association at a more *Iocalised* level.

Fhe relationship between the degree of specification consistently negative for Installers and significantly

165

of the contract and innovation

so for time-to-market,

is

new products

Chapter 8

Co-operative supply relationships and organisational performance: the findings

from in 5 I the the of sales and percentage past years past -' months. nexNproducts in totally ne\\ products.

Hie eNidence is more mixed for Manufacturers. The degree of specification of the contract is negatively associated with time-to-niarkct (significantly), but it is positively for is The the significant correlated \\ ith most ofthe other measures. positive correlation from for from the totally percentage of sales percentage of sales ne\\ products and products that are UpgradingConflict

resolution

Table 8.14 the shows correlation -

coefficients

for conflict

rc,,ol tit lon and pcrfo rniance t'or the whole sample.

I ahleg 14 Contlict resoItit ion and performance: whole sampie Degree of 'voice' in conflict resolution ONerall product-cost Order-to-deliNen

5N 168 -.

time

Labour productiN itý Material productiN itý Plant/1'quipment

211 . 1015 -. 079 -.

productkitý

Cýc le- ti IIIc Innovation Ti in c- t o- nia r ket N'e%% products ( 12 months) Ncý%products (5 ýears) ".,, of sales from totallý nc%% products "/o of sales from products that are upgrading (Voof sale%from products that are minor impro%ement

477 009 . .3533 275 . 015 . 022 . 152 -.

I'lic degree of voice in contlict resolution is negatively associated with time-based effliciency measures. and the correlation is significant ý,vith cycle-time. The other data are inconclLISI\e. As for innovation. the association is generally positive (the only exception being the percentage of sales from products that are minor improvement) but ý\cak. 1'\ýo indicators - nex\ products in the past 12 months and new products in the past 5 years - slimý comparatively high coefficient, though not significant ones.

166

Chapter S Co-operative supply relationships and organisational performance: the findings

IFable 8.15 shows the same correlation coefficients when primary activity and size are taken into account.

I able 8.15 Contlict resolution and perfomiance. prinlarý actiNitý and size Degree of 'voice' in conflict resolution I La rge Installers I manufacturersI Small I'lliciencl (herall product-co%t Order-to-delken time Labour productiN itý Material producti% itý Plant Ftluipment protiticti,. ( )Cie-tillic

-101 512* -4()0* 122 itý 611** -.

592** . 089 . 055 -. 436 -. 000 . S03 -

183 . 050 -. 054 -. 62 1 -. 198 . 578* -.

633** . 121 -. 069 . 009 -. 644** -. 532* -.

404 . 126 . 274 -. 298 -. 079 -.

188 -. 453 . 186 . 332 . 307 . 121 .

303 . 231 . 056 . 260 -.

1111101-ation I mic-to-market NeNNproduct% ( 12 montli%) NcN%products, (5 ýears) of %ales from totallý neN%products of sales from products that are upgrading 0 of %alcs from products that are minor

401 141 290 408 169 -

impro% enmit

m

121 -. 42' .

IFhe degree of% oice in conflict resolution is negatively and significantly associated with tinle-hased eftliciencý measures for both Installers and Manufacturers. Tile only exception is order-to-delivery time for Manufacturers, with a positive - though weak association. Flie degree of voice in conflict resolution is also positively correlated with labour productivity for Installers. while all tile input-based measuresof efficiencly show neu,ative correlation in the case of Mail Llfacturers. Another difference between tile two orOUPSis that klanutacturers show a positive and significant association between the degree of \oice in conflict resolution and overall product-cost, while tile correlation is negative t'OrInstallers.

Fhe data on innovation sho\\ a positive association though a not significant one for ne\\ products in the past 12 months and new products in the past 5 years in both groups. Installers also show positive (not significant) association with the percentage of sales forin totally new products and with the percentage of sales from products that are Upgrading. while the correlation is negative for Manufacturers.

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Chapter8- Co-operativesupplyrelationshipsandorganisationalperformance:the findings

When size is taken into account,the degreeof voice in conflict resolution is negatively The firms. Small Large for both time-based and efficiency measures associatedwith in degree in both The is for conflict of voice cycle-time cases. correlation significant The input-based is of efficiency. measures resolution also negatively correlatedwith firms for is for Small and plant/equipment correlation significant material productivity between for is Large However there correlation evidenceof positive productivity ones. the degreeof 'voice' in conflict resolution and overall product-cost,and the association is statistically significant for Large firms. The data on innovation show a positive association- though a not significant one - for both in in in 5 12 the the groups. new products past monthsand new products past years Small firms also show positive (not significant) associationwith the percentagesof sales from totally new products and with the percentageof sales from products that are upgrading,while the correlationis negativefor Large ones.

8.3 Network supply relationships and organisational

in performance

the UK optical communications systems industry The major objective of the researchis to test the linkage betweengovernanceforms in the supply-chain- and co-operationin particular- and organisational,performance.The basic assumptionis that co-operativesupply-relationshipsboost both efficiency and innovation.The study also investigatesthe role of technologyas environmentalvariable affecting both governanceandperformance.Doestechnologyhave an impact? The UK optical communicationssystemsindustry offers interesting insights into these issues.In our sample,the two groupsof manufacturersand installers can be associated with different technological environments. Manufacturers represent the mature technological environment, whereas installers represent the dynamic one. By discriminating betweenthesetwo groups,the impact of the degreeof maturity of the technology on the relationship between governance and performance can be investigated.

168

Chapter8- Co-operativesupplyrelationshipsandorganisationalperfonnance:the findings

Table 8.16 presentsthe key findings from the correlationanalysisbetweenco-operation in supply relationships- measuredby focusing on firm's behavioursin the six crucial areas of teamwork across boundaries,supplier selection, commitment to suppliers, supplier's perfonnanceevaluation, role of the contract and conflict resolution - and organisationalperfonnance.Table 8.16 shows the signs of the correlation coefficients for the two groupsof manufacturers- the maturetechnologicalcontext - and installersthe dynamic technological context - when the association between co-operation in the

supply-cbainand pcrformanccis statistically significant. Table 8.16 Correlation analysis: key findings CO-OPERATION Teamwork across

boundaries

IN SUPPLY RELATI ONSHIPS Span of selection Spanof performance criteria evaluationcriteria

Manufact Installers Manufact.

P E R F * * A N C E

Efficiency (global)

N

Efficiency (partial)

of the specification contract Installers Manufact Installers Manufact Installers

N

N

M

N

N

Innovation output

Innovation process

M

Degree of

0

N

0

N

0

On the basisof the differencesbetweenmanufacturersand installers,we maintain that at a generallevel the following relationshipexists betweenco-operativegovernancein the supply-chainand organisationalperformance: The network supply-chain has a positive impact on efficiency (both global and partial) and innovation when the core technology of the firm is established and mature. Whena radically new technologyis still emerging,the network supply-chain has a limited positive impact on efficiency (partial only) and a negative one on

169

Chapter8- Co-operativesupplyrelationshipsand organisationalperformance:the findings

innovation. In emergentindustries,the network supply-chain can hamper and delay technologicaldevelopment.

Technology,and in particular the degreeof maturity of the core technology of the firm, is a fundamental variable affecting not only governancemechanisms(as Shown in Chapter7), but also performanceoutcomes.One question,however, emergesfrom the combinedanalysisof the resultsfrom the surveyandthe correlationanalysis.If it is true that 'technology matters' and the adoption of the network supply-chaintranslatesinto significant efficiency and innovation gainsonly in technologicallymaturecontexts,why are firms in technologically dynamic contexts - such as many installers in the UK optical communications systems industry - moving from market-oriented to cooperativeforms to governsupplyrelationships?What benefitsare they pursuing? The answerto thesequestionscomesfrom a closer analysisof firms' behavioursin the UK optical communicationssystemsindustry, supportedby an in-depth study of six exemplarycasesrepresentativeof various positions within the industry. This analysisis the focusof Chapter9.

170

Chapter9- T'hefollow-up interviews

CHAPTER 9- THE FOLLOW-UP INTERVIEWS So far, our study of the UK optical communicationssystemsindustry has highlighted that the degreeof maturity of the technologyhas an impact on the relationship between co-operation in supply relationships and organisational performance. In particular, Chapter 7 shows how manufacturers- the representativesof a mature technological environment - and installers - the representativesof a more dynamic technological environment- differ in their approachto co-operationin the supply-chain. In other words, the degreeof maturity of the core technology of the firm affects the form of governance- in this caseof co-operation- usedin supply relationships. Chapter8 reinforcesthe idea that 'technology matters' and showshow the adoption of the network supply-chain to govern supply relationships translates into significant efficiency and innovation gains only in technologically mature contexts.If this is true, why are firms in technologicallydynamic contexts- such as many installers in the UK optical communications systems industry - moving from market-oriented to cooperativeforms to govern supply relationshipsas shown in Chapter 7? What benefits arethey pursuing?

The answerto thesequestionscomesfrom a closer analysisof firms' behavioursin the UK optical communicationssystemsindustry, supportedby an in-depth study of six exemplarycasesrepresentativeof various positions within the industry. The six cases are introduced by a brief descriptionof the sample and interview methodology, with information about the interviewees,the interview structure and the nature of the questions.

9.1 Case sample and interview

structure

Accessto firms was first soughtduring the survey by meansof a specific question.All the respondentswho agreed in principle to follow-up interviews (13 firms) were contactedby telephone.Out of this round of preliminary contacts,a sampleof six firms was selected.

171

Chapter9- The follow-up interviews

The composition of the sample is influenced by the nature of the issues under investigation, and offers a comprehensive and balanced mix

of different

large installers, All the and small and positions perspectives. relevant - manufacturers, firms - are representedand this contributes to the validity of the final analysis and discussion.

The sample includes two manufacturersof components-a general provider and a specialist one - and four systemsinstallers. While the difference between general and specialist providers emerged quite clearly as potentially meaningful to discriminate amongmanufacturers,no clear discriminating factor could be inferred for installers. As a consequence,the guideline in determiningthe number and types of firms included in this group was to try and capture as much variety as possible. This was achieved by doubling the number of installers relative to manufacturersand by selecting firms with obvious different attributes in terms of size and location. Table 9.1 shows the final compositionof the sample,with somekey datafor eachfirm.

172

Chapter9- The follow-up interviews

Table9.1 Key characteristicsof the firms includedin the sample Location

Name'

Company A

Hampshire

Size (employees and turnover) 203 L20m.

Hampshire

135 2

Company C

f 16.5 m Buckinghamshire 50

Company E

West Midlands Dorset

structure

Surrey

NO

f 2.4 m 79 2 f 4.1 m. 22 3

Company F

ent or Group Group

Introduction of supplier quality rating Early involvement in design process Reorganisation Change in reporting

3 Company D

Independ

purchasing 5

Company B

Change in strategy

N. of employees in

L. 97 m 30

NO Introduction of quality system Segmentation

strategy

General manufacturer

Group

Specialist manufacturer

' 7i-ndepende 7 Approved installer nt Independe nt

Approved installer

Independe

Approved installer

nt Independe

3

Typeof

NO

nt

Approve installer

L 1.3m

The interviews were semi-structured,with questionsfocusing on a few specific issues:

9 The generalstrategyof the firm and its impact on purchasingstrategy 0 The firm's attitude towards co-operationin supply-chain managementand its key supply practices- including the role of the contract 40Innovation and its potential sources

'Fictitious namesare usedto concealthe real identity of the firms. The intervieweesproved, in general,quite open and willing to provide detailedinformation, provided that confidentiality is guaranteedin public presentationof the data.

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in firm, in the charge of person Two interviews were carried out one with each both to This access need our reflected manager. senior a with one and purchasing firm, the specific and information of the position competitive and strategy about general few With a details about its purchasing arrangementsand supply relationships. in interviewees, to both capture to order the were asked same questions exceptions, When 50 a interview lasted differences. Each possible' minutes. average on meaningful interview integrate to notes. tape-recorderwas used and complement

9.2 The mini-case studies The frame of the casestudiesreplicatesthe structureof the interview, so that the general firm's a impact firm its to provide the purchasing the approach on and strategy of innovation. its for its background position on supply-chain managementpractices and The presentationmakes extensive use of direct quotations from interview notes and transcriptsin order to preservethe richnessof the original data. The casestudiesare divided into two groups,contrastingthe caseof manufacturerswith different installers. distinction This their that of approach to co-operation as reflects in the key 7), (see Chapter in element the and constitutes a survey emerged interpretation of the data. Each case is also labelled in a way that evokes the firm's from derive labels These in generalattitude to co-operation supply-chainmanagement. between facilitate data, interpretation the theoretical comparisons and should of the cases.

9.2.1 The caseof manufacturers Two firms representthe group of manufacturersof fibre-optic components.Company A is a general manufacturerwhile Company B is a specialist provider. This distinction key interpret to a offers

differences

in behaviours

between the two, and highlights

I Given the small size of the firms, in all but one casethe seniormanagerinterviewed was the Managing Director. I Subjectto the consentof the intervieweeand the circumstancesof the interview. 174

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factorsthat may influence a firm's approachto supply relations. The two manufacturers being bigger few organisations. of as part such characteristics, sharea COMPANY A: THE PARTNERSHIP INSTIGATOR

General and purchasing strategy - Company A underwent a major strategic change following its acquisition in 1996 by a multinational group, and the incorporation of five managerial figures at the top level - including finance, operations, and quality. After six months, the The history. in for first the time the company position of purchasing manager was created increase by firm is "expanding To their appeal, the volume wherever we can". strategy pursued OEM direct long-term from to Apart the and a sales come products with a warranty. all installers. distribution heavily the of registered system, company relies on a network proprietary This network is a critical area for growth in the future, and the firm's approach is to support its installers "training with and pricing". certified

Supply-chain management - The appointment of a purchasing manager, who replaced a buyer, was given a blank-papermandateto "bring the people up to speedwith what was senior required in purchasing in the long term". The driver driving for reorganising the purchasing function was "lowest cost of acquisition, which incorporates quality and service". A list of preferredsupplierswas createdby meansof a quality rating systemand this lead to a reduction in the number of suppliers. The best five suppliers (45% of the company's purchasing expenditure)are integrated in a "partnering agreement",which means that they are regularly communicatedthe firm's aims and are constantly in touch with its marketing and quality functions. The normal contract with the partnering suppliers is two years compared to the averagesix months for the industry. With all the other firms included in the list of preferred suppliers the company uses"purchasing agreements"instead of traditional contracts4to set a few ground rules and detail the working practices. Different mechanismsare used to monitor supply relationships.Each supplier receivesits relevant statistics on performanceon a monthly basis. This report is followed by a quarterly review which takes place alternately at the company's premisesand at the supplier's "to let them know we are interested".The real check is, however,the annualreview when two setsof selectioncriteria are respectively applied to update the list of preferred suppliers and to select the five "partners". The selection is always basedon both past performanceand potential for future performance.Location is not relevant. " The purchasingmanagerof the companysaid: "I call them purchasingagreements.I do not like to call them contractsbecausethat's not what they are". 175

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The selectionprocessfor the five best suppliersis very tough and basedon the criteria listed in Table 9.2.

Table 9.2 CompanyA: selectioncriteria for "partnering suppliers" Supply chain profile Financially stableand profitable Commitmentto reinvest for future trends Responsiveand accurateinfo for manufacturingneeds Competitive and market leaderin their product group High quality control performance Lower the total cost of acquisition Opennessand risk manager/sharer Designand engineeringsupport Time to market reduction Reductionin design& prototypeturnaround Manufacturing led design concepts Formalisationof agreedworking practices Profit improvementsuggestions

The company considers the development of a partnership approach with its suppliers as a fundamentalelement to securefuture successin the face of growing competition. There are, however, external and internal barriers to change. Internal ones are perceived as more demandingto overcome.In the words of the purchasingmanager "There was very much of a reliance upon historical usage and relationships built in 14 or 15 years and that had to be broken. Getting rid of the senior buyer was a necessarystep to speedup change." Innovation and co-operation with suppliers The parent company demandsthat 35% the of firm's revenuescome from new products, so there is strong emphasison innovation. Suppliers are considereda fundamentalelement in providing the company with a regular stream of new ideas.They are involved from the early stagesof product design,becausein "The market place we cannot always keep abreast of new technologies and new techniques. We do not have all the knowledge. Other manufacturing

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be have ideas that passed can good the can that suppliers same use companies on. the involvement early because barriers at the internal of suppliers of There are still considerable design. The purchasingmanagersaid: of product stages "It is my great barrier, I have not beenable to break it down completelysofar. Thesuppliers are more than ready to be involved, becauseif they are involved from barriers The are in design inevitably they are going to get theproduction. design engineerswhofeel threatenedand see their roles overtaken. They are " being it to assisted prepared see as not

COMPANY B: THE INDEPENDENT

General and purchasing strategy - Company B underwent a major process of reorganisation internal In the of following wave in 1997, a general organisational. re-design of the group. but function there no line were the the changed, purchasing of of reporting changes, is The discontinuities in the company's purchasing strategy. company's general strategy the Being fibre 64 traditional provider, the a specialist cables". optics against case of promoting develop is to from for general providers growth - given growing competition only possibility the in fastest fibre-optics long-term the of niches the growing applications of and support

market. "Our customerscontinue telling us that lowering system-installationcosts is a development havefocused ourfibre programs to addresstheir priority and we n rn it

Supply-chain management - Even if there has been no clear-cut change in the company's formal strategy towards its suppliers, there is growing recognition of the importance of "maintaining good working relationships with them". The company has always used lists of Most has been in the that time. of the current number of suppliers suppliers, so preferred stable been in for have the past 5-10 years. Different selection criteria are place supply relationships importance to the and nature of the items purchased.Technological potential used according into innovation taken are and capabilities account selectively. Location is not considered

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important. The relationship with a supplier is always basedon a written contract, but this is detailed basis for conflict resolution. Performance the constitutes very and never never evaluationgives importanceto innovation and new ideasgeneratedby suppliers,but selectively. Supply relationshipsare monitored regularly with meetingson a quarterly basis followed by an designed development highly The extensive annual review. structured and carefully of a partnershipapproachis not a priority. A certain degreeof co-operationis already in place, and "Even if there is always scope for improvement, we are quite happy with the

way things are. Which is also the way things havealways beenfor us." The key driver for future successlies in technical and market developments,and in particular on the viability of fibre-to-the-desk.

Innovation and co-operation with suppliers -A early stagesof product design,because

few key suppliers are involved from the

'Ve can learnftom them,and it speedsthings up at later stages.Suppliers can cut down on what we needto do. " A positive role for suppliers in bringing about innovation is therefore recognised, but its limitations are also explicitly recogniseddelineated: "Suppliers can help, but it is not realistic to think that the kind of radical innovationsthe industry needsto changegear might comefrom them."

9.2.2 The manufacturers: a comparison Both CompanyA and B face intensecompetition, but the pressureis clearly higher for the general manufacturer. The imperative of "selling volume" affects the overall

strategy,which revolvesaroundwaysof increasingmarketshareandexpandingmarket facethe samepressureon standardproducts,but penetration.Specialistmanufacturers find respitein non-standard specialistapplications,wherecompetitionis basedon the technologicalcharacteristics andinnovationcontentof the productmore than on price. Generalmanufacturers, moreover,dispersetheir energiesover copperand fibre-oPtic 178

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component,while specialistsconcentrateon fibre-optics and are more competitive in this area. As a consequence,the big manufacturerstend to develop more aggressive marketingtactics to securea shareof the market. This difference in competitive pressurepartially explainsdifferent attitudestowards cooperation with suppliers. It is a vital matter for companiesthat - like Company Acompeteexclusively on cost and need to exploit every available source of competitive advantage.Companiesthat - like CompanyB- concentrateon the long-term objective of imposing fibre-optics as the dominant technology in the marketplace are less preoccupiedwith close co-operationin the supply-chain.Collaboration is welcome, but it is not a matter of survival.

9.2.3 The caseof installers Four firms representthe group of installers. COMPANY C: THE INFORMAL COLLABORATOR General and purchasing strategy CompanyC is a small company founded 10 years ago by the owner-managerto provide completeLAN and WAN solutions. Its strategyis summarisedin the owner's favourite motto: "large enoughto cope, small enoughto care". Successdependson the ability to strike a balancebetween growth opportunities in the market and the company's ability to maintain the high standardof quality and servicethat has allowed it to survive without "becoming the arm of one of the big guys". The competitive frame is

one where

"The market is growing, and the problem is not for us, but at the root of the supply-chain becausetheir prices are coming down and they need to do more volume. With our prices it is different. Most of the cost of installation is labour cost, so asfar as the customergoes he will not seeany reduction in prices. But the big manufacturers are trying to make their customers the installers becomepartners becausethey would like to tie them in and get their business to securevolumes."

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A strategyusedby the manufacturersto createa special bond with the installers is by offering a long-term guaranteeon their products.In the owner's description: "Most of the componentscomefrom the manufacturerswith a guarantee, that is 15-20yearsfor copper and 2 yearsforfibre. But to be honest,the guarantee isjust a peace of mind, and is therefor marketing. It does nothing, given also the speedof technological developmentin the industry. Thefirst year, thefirst few days are critical. If it is going to be a problem, it will show up then. It is in installers by locking-in the a to to the only a way gain access end market long-term relationship. We do not want to give away our independenceto the have do is to a to so manufacturers,and as a small company the only way " big in the the strongposition marketand avoid guys as much aspossible. Supply-chain management- Most of the suppliersare specialistproviders and this reflects the company'sattemptto retain its autonomy: "A fundamental criterion is good technical support, and in any casewe prefer to deal with small and mediumsizedfirms. " All the suppliersare local, and this is very important to reducethe cost of keeping stocks. The in has increased due the to the of expansion of suppliers recent years moderately strong number business.The contract is not very important, and potential problems are solved amicably. "In the end - says the MD - it is down to the people. Our key buyer is very good at dealing with people. He does not need to put things down on paper becausehe knows whom he is dealing with, and they do the same. They know him and things get sorted becauseof that. The seniorbuyer reinforcesthis view:

"We have a formal procedure to deal with our suppliers which is part of IS09000, but whether we stick to it is another matter. We use a list of selected suppliers, and there is a formal quarterly assessment,but things normally happenmore effectivelyout of theformal procedure. "

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The company takes a scepticalview on the partnership approachas implemented by general providers of components,which is seen as a threat to its own independence.But it remains, however

"Very keenon co-operationwith our suppliers whenco-operation is left to the people and notformalised in procedures.Peoplecan makethings more official, but our way is an efficient way and gives us an edge." Innovation and co-operation with suppliers - Co-operationwith suppliers is not particular relevant given the special role the company seesfor itself in the overall industry innovation process. "Our fundamental role is to sort out the good from the bad, A lot of people come up with ideas and it is a big melting pot. Wejust take the best of it and stick to it. We tend to use the samegood technologiesrather than any fancy novelty that we know is not going to work There is a lot of scopefor great innovation at the componentlevel, but our innovations are small things, low tech, close to the customer'send." The company believes that its fundamental role is to act as "filter" of innovations, and to provide a service to the end customersby helping them to define the characteristicsof the systemthey need. Co-operationwith customersis probably more important than co-operation with suppliers, and the company puts great emphasis on its ability to establish good relationshipswith its customers.The MD summarisesthe company's strategyas follows: "Ae decision as to what to install is always the installer's. 7he customer is at the mercy of the people deciding the specifications. We know before the customer,so we can tell the customer what they needfor what they want in terms offunctionality of the overall system.We do not use strict contracts. We give a quotation and a time to completethe work. Theygive us the order, and with noformal contract we carry out the order in our own terms. The decision betweenfibre and copper comesout of discussion. We know what is available; they know what they want to do with it. We give them the options and their relative costs.Fibre-to-the-deskis normally out of the question becauseit is so very expensive,and eveniffibre companiestry to convince us to tell customers

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to usefibre, we simply cannotjustify the cost. So most of the systemsare a " building between them. the andfibre mixture, copper within

COMPANY D: THE WILLING

PARTNER

General and purchasing strategy - Company D was founded seven years ago by two ex-BT by has been Its to the to operating as substrategy end-market always get access engineers. is for bigger firms. key in A tool contractor marketing securing contracts the close partnership few development has in lead to the time of a well-known manufacturers, which with

"an

impressive portfolio of approvals". The company's registration and certification as approved installer of warranty products is regarded as an important strategic asset. Once a contract is secured, the priority becomes to comply with the specifications and deliver the service required to the best possible standards.

Supply-chain management - Right from the start, the company has developed a close few with very partnership suppliers.This policy hasbeenmaintainedin time, so that the number of suppliers has not varied much. The suppliers are predominantly big manufacturers of components,typically generalproviders5. Location is not important. Becauseof the emphasis posedon certification as the building block of the company's strategy,the terms of the supply relationshipsare laid down more by the suppliersthan by the company in its own right. In other words, this strategyhasdriven the companyinto "Being chosen as a reliable installer in a game decided elsewhere" more oftcn than "heing master of our own destiny and having to navigate the turbulent waters of tough competition."

The conditions of a normal buYer-supplierrelationship, with the buyer selecting the supplier, are reversed.In this case,it's the supplier who "selects" the buyer by granting it the certification of approvedinstaller. The relationship betweenthe company and its suppliers resemblesquite between franchiseeand franchiser. that closely "We may he perceived as an appendix of our mostpowerful suppliers, but it's working for us and we have no problems with it as long as the business is

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to try is is, know We we and of us, required what and what our role successful. be the mostprofessional and reliable ofpartners. If that meansthat ourfuture is closely connectedto the future of our key suppliers, that is it. When you The have because to take the its risks. of advantages,you choosematrimony firms lot direct be in is of small a competition with on our own alternative to like us, struggling to survive in an environment that is certainly going to becomemore and more competitive. I do not know whether I would prefer it that way." Innovation and co-operation with suppliers - Innovation is not a priority, and the company does not even act as "filter" of what works and what does not. Its ability to choose is limited by the close relationship with its suppliers, who often impose the products they want to push on to the market by offering very favourable conditions. This strong dependency puts severe design and constraints on the company's offer and service, with activities such as system technical advisory ruled out from the start.

COMPANY E: THE SCEPTICAL PARTNER

General and purchasing strategy - CompanyE is a small firm founded by the owner-manager in 1983.Ile companystartedas equipmentsupplier and moved into installation in 1987. Since then, it hasbeeninvolved in both designand installation of complete systems.Its ability to offer definition from the of the technical characteristicsof the systemto the solution, spanning a wide installation, is the of of practical problems recognisedas the primary strategic success solution factor.

"A lot ofpeople in this industry do not bother and ask the customer.In fact we find that a lot of customersdo not want to know, theyjust say do it. We have always made sure that even if the work does not show anywhere, it is always done technically well, effectively, efficiently and it is clean. ( ) Whether we ... recommendcopper or fibre it is horsesfor courses. If the customer has any ideas of what he wants and where he is going we can guide him. But they do do. The average customer is not really interested in the technology not often

I One of them is CompanyA. 183

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details. 'Do not blind me with science, give me the system' is the typical attitude." Becauseof its remote location, the company has developeda strong local market and deals primarily with medium sizedfirms. Co-operationwith customersis a strategicpriority. Supply-chain management - In 1996 the company revised its purchasing strategy following the introduction of a quality system. Its total purchase was divided into the two classes of standard and specialist supplies, put under separate management. The number of suppliers has slightly decreased since. The composition of the supply base is mixed, with general providers co-existing alongside specialist ones. The reason for this is the growing importance of product kit "the we can buy" - relatively to more traditional criteria, such as price, supply range regularity, working relationships and service. The impact on purchasing strategy is that:

" We have selecteda few big providers for the key componentsand stick to them. Theflip side of the coin is that, becauseof the warranty systemimposed by the big manufacturers,we had to becomeapproved installers and we are now locked in. 77iis is partly balanced by the fact that it mainly applies to copper. For most of thefibre components,the big manufacturers can't really competeon price with the specialists,so we have selectedsome specialists as well. "

Location is not fundamentalelement.Written contractsare used as a basis for re-negotiation in case of problems. The degree of structuring and fortnalisation of the mechanisms used to monitor supply relationships dependson the type of suppliers. It is quite high with general providers, while things are managed in a more informal way with specialist ones. The company'sphilosophy in this areais:

"We needto be close to our suppliers but we do not need a terrible

amount of

integration. When thinking of other industries, such as the automotive, it's probably an in-betweenlevel we are after. " Innovation and co-operation with suppliers The company feels that its fundamental role in the industry innovation process is to keep up-dated on the technological developments introducedby manufacturersand to test them in the field so that "only the best solutions reach

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the market". This function is naturally connectedto the company's strategyof offering a very its to customers,and acting as the customer's adviser in defining the technical wide service characteristicsof the system.Co-operationwith suppliersis:

"Necessaryin the sensethat we act as intermediariesbetweenthe market and the fundamental sources of innovation, so that research efforts point in the right direction. We are the transmission-chainbetweenthe customersand the manufacturers, and to do our job properly we should be able to keep our independence of judgement. The problem is that more ofIen than not manufacturersare not really interested.Theyhavea standardproduct and they want to squeezeit to the limit. All they seemto wantftom us is to convince the customersthat it is the right thingfor them as well, which might not always be the case."

CONIPANY F: TIIE IIOSTILE PARTNER

General and purchasing strategy - CompanyF was founded by the owner-manager10 years ago and offers a completeserviceof designand installation of optical communicationssystems. The company did not follow a precise market strategy, but because soon became deeply involved in a few niches of the market6. A distinctive expertise in these areas is now a recognisedstrategic strength. Customersare divided into two categories,depending on their knowledge of the technology. relative

"On the one hand there are people who are very technically aware of what is available in terms of solutions and have already done a lot of the design work With thesecustomers,thepossibilities to influence the specification of the work are quite limited At the other extreme, we have customers who are totally ignorant. 7here is no correlation between the size of a company and its knowledgeof the technology,but in the secondgroup the biggest tend also to be very conservativeand to retreat in their comfortable areas. Dealing with themrequires very specific skills. "

Theseare communicationssystemsfor the pharmaceuticaland banking industries and security systems for the military.

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Supply-chain management - The company procurement strategy reflects the particular nature of the projects in its area of expertise. Some of the projects are fairly standard, but others especially the security systems for the military - require a considerable amount of specialist The company relies on two main sources of supply. A few key suppliers provide equipment. for installation products standard mainstream projects. Price is an important factor, but product range is far more so. Because of the extensive use of long-term warranty, the company became installer for some of its biggest suppliers of standard components. For non-standard a certified applications, the company relies on a number of specialist suppliers - many located in the US. Location is never an issue. The mechanisms used to monitor supply relationships vary depending on the type of supplier. They are quite formalised and structured with general providers, and tend to be very informal with specialists. Access to US specialist providers was firstly secured through personal connections of the owner and has proved a key factor in shaping the company's offer. The possibility to get specialist equipment that is not commonly in UK lead the to a strong market position in specialist areas. The relationship between available the firm and the US suppliers is informally and personally managed by the owner, who regards it as:

"Our best chance to retain our independencefrom the aggression of the big manufacturers.If we did not have thepossibility to offer somethingrare in the UK we wouldprobably end up as a powerlesspawn in the hands of one of the bigplayers. "

The company takes a very negativeview of partnership in supply relations involving general providers of standardcomponents.The purchasingmanager,who is in charge of mainstream supplies,shareswith the owner the view that:

"The big suppliers - such as X, Y and Z7 are desperatelytrying to lock-in the installers. Weare their revenuegenerators,but the respect is not there and this is not partnership. 77dsalso means that what should be at the core of the business- the technicalperformance of the systemand thefact that it is easy to use - has degeneratedinto a sale issue where cost and commercial viability dominate."

' The namesof thesecompaniesare kept secretfor confidentiality reasons,but it is interestingto note that one of them is CompanyA. 186

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Innovation and co-operation with suppliers - The companyis "In love with the lechnology. Our mission is to be at the front edge all the time, and to help the diffusion of optical applications by educating the customersand informing them of the hugepossibilities it offers. (Co-operation with suppliers is) important to keepinformed,evenif we do not take active part in the actual innovation process. Becauseof the close contact with the endcustomers, we can help the diffusion of innovation, but we might as well prevent it. It all boils down to one's own businessethics."

9.2.4 The installers: a comparison CompaniesC and D are examplesof extremeapproachesto supply-chainmanagement. Company C is a small firm dealing in a very informal way with similarly small D People basis for Company the and personal relationshipsare suppliers. co-operation. is a small firm dealing in a very formal way with a few big suppliers.The emphasison leads to a situation where the traditional roles of buyer and and certification approvals supplier are reversed.The supplier carefully monitors the buyer, and the relationship closely resemblesthat betweenfranchiserand franchisee.The relationship is also very formalised. and structured

Both Company C and D are very happy with their approach,while this is not the case for the other two installers. CompanyE and F are satisfied with their relationship with is informal definitely to the suppliers which relatively specialist and close not 4partnershipmodel' - and very critical of big manufacturers.Two major complaints are laid at the door of the generalmanufacturersof standardcomponents.The first is that they are trying to develop a partnershipapproachwith installers only to securemarket but "behind the nice word - partnership- there is exploitation and dependency". share, The second is that, by imposing their own conditions, the big manufacturers are underminingthe successfulstrategyof those installers whose core businessis to provide the customerswith the "system they need, not the system the manufacturerswant us to give them".

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CompanyF fearsthat the technologicalknowledgeand expertisethat allows it to offer a high quality serviceto its customerswill be ultimately compromisedby the pressureon basis individually Tailor-made industry. the the of a on crafted solutions, salessweeping deepunderstandingof the customers'specific needs,might be replacedby standardised installers, for but degrading for the the and ultimately manufacturers ones, good for unsatisfactory the users.

9.3 Integrating survey and interviews: a discussion of the case studies In the light of the information offered by the casestudies,it is now possible to address the questionsraisedby the survey and introduced at the beginning of the Chapter.The from finding is distinction between the that case studies our manufacturersand major installers as representativesof, respectively, a mature and a dynamic technological is for our samplebut is only partially representativeof the reality. environment valid The degreeof maturity of the technologyis, in fact, a variable that cuts acrossthesetwo is between distinction that the real manufacturers and installers operating groups, so (copper) environment predominantly and manufacturers and installers a mature i4thin dynamic environment (fibre-optics). The remaining operating ivilhin a predominantly inter is devoted Section intra this to the analysis of of and part group differences.

9.3.1 Differences belhveenmanufacturers and installers The survey indicates the firms primarily involved in manufacturing differ from firms primarily involved in installation in their approachto co-operation in the supply-chain. The case studies reinforce the idea that manufacturers and installers operate in segments of the opto-clectronic industry characterised by different levels of competitive pressure.

Manufacturersof componentsoperate - with the exception of the specialists in an by characterised mass production and standardproducts and compete on environment high volumes and low prices. Installers face an expandingmarket and offer a product 188

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is installation design that the never standardisedeven of communicationssystemsand different is inherently installation Every based project on standardcomponents. when its depending factors on suchas the technical requirements own, and posesproblemsof knowledge degree functionality technological the the of the of system; of and overall customer and its ability to define the specificationsof the system; the nature of the installation project in terms of environmentalconditions,type of premises,and amount building work. of Becauseof the different nature of competition in their industry segment,installers can rely on a wider variety of strategies than manufacturers. They can more easily concentrateon protected niches of the market and pursue successful differentiation four The casestudiesoffer contrasting examples.Company C concentrates strategies. on quality and on its ability to advise small and medium seizedcustomers;Company D focuseson being the ideal sub-contractorand relies heavily on close partnershipwith a few big suppliers; Company E is similar to company C, but it also exploits a remote location develop local to a strong geographical market; CompanyF basesits strategyon advancedtechnologicalknowledgefor specialistapplicationsand on unique connections in the USA.

Fundamental differences in the nature of competition at the level of industry or in.dustry segment can explain differences in purchasing strategies between groups When in firms. competition the industry segmentis based on price, efficiency and of cost reduction are paramountfor a firm's survival. All available sourcesof efficiency and cost effectivenessare exploited to the full, and close supply relationships play a fundamentalrole in securingthis objective. Incremental innovation another source of efficiency gains - can be promoted by integrating the 'best' suppliers in the firm's development product process. Manufacturers and installers operate in two substantially different competitive environments, and this explains the different approach to the development of network-oriented supply relations observed in the two groups.

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9.3.2 Differences among installers differ but from they differ installers also The casestudiesindicate that manufacturers, Qualitative in development relationships. the supply themselves co-operative of among data show that installers' purchasing approaches vary significantly in terms of deal D Company C Company a single base with exclusively and composition. supply E Company and type of supplier - specialist and general manufacturersrespectively. Company F deal with a combination of both types. The relative importance of in to differences be to to approach related specialist versus general providers seems in co-operation supply relations. The proportion of specialist versus general providers depends, ultimately, on a in the driver to business the compete chosen specific strategy and on company's Some from Three the studies. types of strategies emerge analysisof case marketplace. in involved installers confine themselvesto the role of sub-contractorsand are not the 'Willing Partner' - whose has This driver is strategy certified quality and reliability as sub-contractor. competitive

Company Dis design. This the of case systems

led the company to develop a very close partnership with a few general providers. CompanyD doesnot complain about the limitations imposed by the close relationship is is intrinsically its its because also and consistent overall strategy suppliers with successful. Other installers operate exclusively in a 'small world' of small and medium-sized 'Informal is CThis Company the the case of customersand specialist suppliers. Collaborator' - whose competitive driver is attention to the customers' need and the By to types of customers. provision of a very comprehensiveservice well-identified itself to specialistproviders the company avoids the pressuresof maintaining confining being locked-into big their competitive game. without with manufacturers a relationship The price to pay is to keep growth under control - that is, to stick very carefully to the specific and protectedniche of the market that is consistentwith the strategy. Finally, some installers find themselvesin a more uncertain position. These firms have far in operated relatively protected areas of the market, but their competitive so

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impact if is being the of stronger endangered, not positively eroded,under advantage forces.This is the caseof CompanyE and F- who also happento be the smallest in the local in the location Remote the characterise market very strong position and a sample. does Partner''Sceptical ECompany this not the monopolist advantage and successof if This the be immediately threatened. company to even why, explain might appear disguised "ill impose to their the partnership", of rules manufacturers"attempt criticises for dramatically The is this criticism situation changes not tinged with resentment. CompanyF- the 'Hostile Partner' - who openly and strongly resentsthe actions of the big manufacturers.This strong feeling is very likely fuelled by fearsthat the company's 'volume the the tailor-made aggressionof specialistsolutions will not resist strategyof have foot W'. "a that they sellers', now

On the whole, this analysis confirms the idea that the degree of maturity of the technology is a variable that cuts across our simplistic distinction between installers. The difference is between and real manufacturers and manufacturers installers operating within a predominantly mature environment (copper) and dynamic installers environment operating within a predominantly and manufacturers (fibre-optics). Factors such as the level of competitive pressure,the composition of the be the type of strategy can all connected to the nature of the core and supply-base technologyof the firm and its degreeof maturity.

The general conclusion is that firms in emergent industries - many installers and in from to manufacturers our study move co-operationspecialist market-oriented oriented governanceforms that are different from those developedby firms in mature industriesand pursuedifferent objectives.In other words, there are different types of cooperative supply relationships and they produce different outcomes. The question is what types and what outcomes?

An answerto this questionwill be suggestedin Chapter 10.

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Chapter9- The follow-up interviews

9.4 The role of the contract The surveyraisesthe issueof the role played by written contractsin co-operativesupply in be impression The that the used contracts can casestudiesreinforce relationships. different ways and the discriminating factor is not necessarily the adoption of coin supply-chainmanagement. approaches operative The casestudieshighlight a generaldislike in the opto-electronicindustry for the word 6contract',always associated'with antagonisticrelationshipsand aggressivebehaviours. Ile majority of the firms interviewed use a written document to detail the rules of documents identified these are as partnershipor purchasing supply relations, and often Gagreements'.

There are, however, notable exceptions.A few firms - such as CompaniesC and F in deals in do There documents to things seal writing. cases not put are no written some betweenthese firms and their suppliers,and supply relationships are entirely regulated by meansof personalcontactsand negotiations.Two common traits characterisethese both first is firms The dealing they that small are one cases. with similarly small suppliers; the secondis that supply relationshipsclosely resemblea dialogue between both firms that the given and their suppliers are specialist companies. This experts, in 'small individuals that a world of specialists' suggests and personalitiesplay a key role. Size and the specialistcontentof the activity emergeas discriminating factors.

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Chapter10 - Conclusions

CHAPTER 10 - CONCLUSIONS This study focuseson the emergenceof a new governanceform, the network supplyin industry, in UK the and concentrates, optical communications systems chain, forms from to the governing shift market-oriented co-operation-oriented particular, on industry. doing in In it has the two objectives. so, supply relations The first is to investigate the extent of this change and its contingencies and, in industry is impact Optical the technology. an of communicationssystems particular, by between, two technologies the co-existence of, and on-going race characterised 'established'copperand 'emergent' fibre-optics - and thereforeit offers an ideal context to test the role of technology in the developmentof co-operativeforms of governance. The secondobjective of the researchis to test the linkage betweengovernanceforms in the supply-chainand organisationalperformance.Is it possible to correlatethe adoption fundamental the as co-operation principle governing supply relationships with of improvementsin efficiency and innovation? Does technology have a significant impact forms between the relationship and performance? governance on

The primary outcome of the study is the identification of two models of co-operative supply relationships,respectivelynamedthe exploitative and the explorative model, that take into account the connection between technology, governance mechanisms, and organisationalperformance.The terms exploitative and explorative are derived from March (1991) and have no intrinsic connotations,negative or positive. The two models presentedhere are ideal-types that can be found in more or less pure form in real The is exploitative model contexts. consistentwith environmentswhere the technology is well established; 'exploitation' is the main strategic driver; and efficiency and incrementalinnovation the predominantobjectives.

The explorative model is consistentwith environmentswhere a specific technology has not yet establisheditself as the dominant one; 'exploration' is still a strategic priority; for the and search opportunitiesto diffuse the emergenttechnology is the fundamental

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Chapter10-Conclusions

in develop 'trigger' Both to the the explorativemodelsneeda exploitative and objective. by dominated market-oriented mechanisms.In other words, the contexts previously in forms in in the supply-chainonly occurs responseto an external change governance eventor condition. This Chapter summarisesour key findings on the relationship between governance forms in the suPply-chain, performance and technology in the UK

optical

industry. ideal-types We two of co-operative systems also present communications supply relations- namely, the exploitative and the explorativemodel - and highlight the conditions under which they develop. The degree of maturity of the technology, firm's few Finally the technology with orientation, combined a plays a crucial role. implications of the study for academicresearchand for practitionersare presented.

10.1 Industry characteristics and the sample Due to its particular technological dynamics, the optical communications systems industry is a stimulating, if complex, environment for our study. Two interrelated aspectsdeserve attention. First, firms in opto-electronics have to manage complex betweendifferent technological levels, and in particular technologicalinterdependencies betweenkey components- such as lasers,cables and optical assemblies and generic technologies and materials - such as glass and fibre. Some of these 'participating' technologiesare mature- for example,cables- but in other areasthere is great scopefor innovation in for interdependencies The logic example, routing and radical splicing. of and the rapid expansion in the range of applications for the technology dictate that, beyond the different degrees of maturity of the participating technologies, optical communicationsas a whole is an emergenttechnology. The common view is for optoelectronicsto replacetraditional copper-basedtechnology sometime in the future. The issue is How timing. one of real quickly is this processgoing to take? This leadsto our secondconsideration.Contrary to early expectations,the race between established copper-basedtechnology and emergent fibre-optics in communications systemsis far from over. Copperis proving very resilient and is reacting vigorously and

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Chapter10 - Conclusions

the This systems that, end-user threat. at present, means the to substitution effectively the or one technologies, of the two based and prevalence of on a combination aremostly for degree a specific depends the of sophistication required the other ultimately on designer. discretionary the system the of choice as on well as application is, is heterogeneous, industry that is for that the The main implication our study distinction from Apart in the traditional differ firms by that significant ways. populated firm the is based installers the of activity betweenmanufacturersand core on which firms industry in levels different also the traditional supply-chain to and corresponds differ in terms of their relative involvement with the two competing technologies. firms is, that into the two groups of generalmanufacturersManufacturerssplit clearly involved in manufacturing activities based on both copper and optical technologies for As involved is, firms technology. with optical exclusively and specialistones- that installers, the distinction is less clear cut, becauseinstallers need to operatewithin the is, It both to technologies offer complete systemssolutions. copperand optical realm of however, possible to distinguish between installers more or less actively orientated towardsthe developmentof the new technology.

Beside the heterogeneityof the firms in terms of primary activity and predominant technological focus (copper versus optical technology), the rapid growth of the market identify it difficult in the to the the of applications makes clearly range expansion and boundariesof the industry. All thesefactors are taken into account and reflected in our defined We described 6. in for Chapter the target our study as population choice of the target population as all UK firms involved in manufacturing and installation of optical in firms involved the with exclusion of activities such as systems, communications distribution, systemsmaintenanceand equipmenttesting which are normally included in by industry. The frame derived data the combining sampling was on publicly available two existing lists - the membersof the Fibre-optics Industry Association (167 corporate Lasers Opto-Electronics Fibre-optics, Directory (126 companies). the and members)and The total sampleconsistedof 132 firms.

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Chapter10-Conclusions

Alongside secondarydata, new empirical data were collectedby meansof a survey and follow-up interviews. We received 53 questionnaires,of which 41 were usable for the indicated A no analysisgiving a31% responserate. preliminary analysisof respondents Size in in favour bias terms was activity. of size or of specific categories major According to indicators by two and employees. annual revenue of measured means both indicators, all respondentscan be classified as SMEs and this confirms previous industry studies (Brown and Hendry, 1998) which show how the industry is still fragmented,particularly at the top end of the supply-chain.

10.2 Research findings: the relationship

between governance forms in

the supply-chain, technology and organisational performance The researchhas dealt with various aspectsrelating to the use of co-operation as the fundamental principle for governing supply relationships in the UK

optical

9. fully 7,8 industry. These developed in Chapters and are communicationssystems The issuesthat, however, stand out among all others is the associationbetween coin the supply-chain and organisational performance, and the role of operation technologyin shapingthe form and the outcomesof co-operativesupply relationships.

What is the relationship betweengovernanceforms in the supply-chain, organisational To technology? answerthis question we studied the correlation - that and performance is, the strengthand sign of the association- betweenthe use of co-operation in supply The by performance. underlying relationshipsand organisational assumption,supported interview data, was that the adoption of co-operation as the fundamental principle to lead improvements in both efficiency and to supply relationships should govern innovation.

The variablesusedin the analysisto measureco-operation in supply relationships were initially derived from existing literature and subsequently validated by means of interview and other qualitative data collected in the preliminary stagesof the research (see Table 10.1). These concerned processesof co-ordination, information transfer, control, and conflict resolution. For performance,the analysis includes two dimensions 196

Chapter 10 - Conclusions

is, both that time speed with measures at global and partial cost and ofefiliciency. level. Global efficiency (A] and A2 in Table 10.1) refers to the whole organisation. B4 Table 10.1) is firm's (BI to the in a measure of ability to whereas partial efficiency in Innovation best terms ofthe Output 01' the is measured use ot'critical resources. make the overall innovation process (DI to D5 in Table 10.1) as well as in terms ofthe speed 'Fable 10.1). Time-based (C] the process itself measures of performance are in of included in tlik:

because time is a fundamental competitive dimension throughout

the industr\

Table 10.1 1ndependent and dependent variables in the correlation analysis

Co-operation in supp relationships Teamwork across boundaries Supplier selection C0111111itinCIII to Supplier Supplier's performance evaluation Role ofthe contract Conflict resolution Organisational performan

Variable I

i

De--ree of teamwork across the overall production process (from research to installation) Span of competencies in selection criteria Deoree of commitment to suppliers Span of performance evaluation criteria Del-'reeofspecification of contract Degree ot"voice' in conflict resolution

(I 1011al

At. Overall product cost (trend) A2. Order-to-de Ii very time (trend)

Partial

131.Labour productivity (trend) B2. Material productivity (trend) B I. Equipment utilisation (trend) B4. Cycle time (trend)

11711ovatioll

Process -

C 1. Time-to-market (trend)

output -

DI. New products developed in the last 12 months D2. New products developed in the last 5 years D3. % of sales of products developed in the last 5 years that are totally new D4. 'o of sales of products developed in tile last years that are up-S grading over previous generations D5. % of sales of products developed in the last 5 years that are minor Improvement

To take the impact of technology into account, the analysis discriminates between manUt'aCtUrers and installers. The group of manufacturers represents the technologically

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Chapter10 - Conclusions

is being firms technological core mature context, predominantly composedof whose have diversified into optical technology in response technology copper-based and who to the threat of substitution. The associationbetweenthe group of installers and the context of a radical emerging technology is less rigorous. An analysis of the characteristicsof the firms in the sample, however, offers a few justifications for our installers First, firms are young choice. comparedto manufacturers- about 10 years old on average- with little if any history in an exclusively copper-dominatedenvironment. Second,a significant proportion operates- if not exclusively - in sophisticatedniches of the market, where being at the forefront of the new technology is a necessaryrequisite to meet customerneeds.Third, information about the strategicmission of the firm and the circumstancesconnectedto its birth - such as, for example,the background of the founder - supportour assumption.The interpretationof the results, however, must take into accountthe imperfect correlationbetweenthe group of installers and the context of a radical emergingtechnology.

The key findings are summarisedin Table 10.2.This showsthe signs of the correlation coefficients for the two groups of manufacturers(the mature technological context) and installers (the dynamic technological context), where the association between coin operation the supply-chainand performanceis statistically significant.

'The specialistmanufacturersare excludedfrom this analysis. 198

Chapter10 - Conclusions Table 10.2Correlationanalysis:key findings CO-O PERATION IN SUP PLY RELATIONSH IPS Degreeof Spanof performance Spanof selection Teamworkacross boundaries specificationof the evaluationcriteria criteria contract Manufact Installers Manufact. Installers Manufact Installers Manufact Installers

P E R F * * M A N C E

EfTiciency (global)

N

N

Efficiency (partial)

N

N

N

Innovation

M

0

H

0

output

Innovation

N

0

process

On the basis of these results, we maintain that at a general level the following in between the supply-chain and governance co-operative exists relationship organisationalperformance:

1. The network supply-chain- that is, co-operativesupply relationships of all types - has a positive impact on efficiency (both global and partial) and innovation when the core technologyof thefirm is mature. 2. When a radically new technology is still emerging, the network supplyhas limited positive impact on efficiency (partial only) and a chain a negativeone on innovation. 3. In emergent industries, the network supply-chain can hamper and delay technologicaldevelopment.

Technology,and in particular the degreeof maturity of the core technology of the firm, is a fundamental variable affecting not only governance mechanisms, but also performanceoutcomes.

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Chaptcr 10 - Conclusions

The results from the correlation analysis, combined with qualitative data from interviews and casestudies,led to the identification of six organisationalareasthat are critical in the analysis of co-operative supply relationships (teamwork across boundaries, supplier selection, commitment to the supplier, supplier's performance evaluation,role of the contract,and conflict resolution).Theseare describedbelow, with from the UK optical communicationssystemsindustry: relevantevidence 1. Teamworkacrossorganisational boundaries.This relatesto the existing division of labour betweenbuyer and supplier. The more suppliers are involved and actively participate in the early stages of the overall production process, the more cooperativethe nature of the mechanismgoverning the relationship. Our data on the UK optical communicationssystemsindustry show that a significant percentageof firms heavily involve their suppliers in activities such as research and concept design (45%), and in design and engineering (38%). These percentageschange when primary activity is taken into account, and become 74% and 59% for manufacturersrespectively,and 22% and 19% for installers. 2. Supplier selection.This relatesto the span of criteria used to select suppliers the wider the span, including criteria that go beyond past performance to encompass factors such as potential for innovation and technological capabilities, the more cooperative the relationship. Our data show that in the UK optical communications systemsindustry this span is wide, with time, delivery, quality and price as the building blocks of a multi-dimensional systemof selection.Thesebasic criteria are, in fact, complementedby others that expressa supplier's potential contribution in areas such as innovation and technological development (34% use this type of criteria regularly and 57% selectively), or reflect its R&D capabilities - 22% (regularly), 54% (selectively). A significant proportion of respondents also use criteria that capture'soft' dimensionsof a supplier's profile, such as its managerial culture and practices - 37% (regularly), and 49% (selectively) - and ease of communication-62% (regularly), and 32% (selectively).

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Chapter10 - Conclusions

3. Commitment to the supplier. This relates to the level of commitment of the firm towards its suppliers, which is expected to be higher in co-operative relationships, where there is a shared senseof inter-dependence between the two firms. The use of 'transparency practices' constitutes a measure of the level of commitment of a firm to its suppliers. These include open books, exchange of strategically sensitive data, exchange of key personnel, and idiosyncratic investments - that is, supplier-specific investments of both a tangible (for example, shared facilities) and intangible (for examp!e, training) nature. Our data show that 49% of respondents use at least one of these transparency practices, the percentages being 53% and 42% respectively for installers and manufacturers. Also, the most frequently adopted practice is supplierspecific investments for manufacturers and exchange of key personnel for installers.

4. Supplier's performance evaluation. This relates to the span of criteria used to evaluate suppliers' performance: the wider the span (beyond cost-reduction, timelinessand complianceto specifications),the more co-operativethe relationship. Our data show that in the UK optical communications systems industry new dimensions are taken into account in evaluating suppliers' performance. For example,the contribution offered by suppliers in terms of new ideas for improved efficiency and innovation hasbecomemore important in the past five years for 50% of the respondents.

5. Role of the contract.This relatesto the value given to the contract,either written down in law or in oral form, as a meansto specify the expectationsof the negotiatingparties.Thanksto the protectionand enforcementofferedby the legal system,the contractis a form of safeguard.Our data show that firms in the UK opticalcommunications systemsindustrytendto recognisethe valueof the contract that allowsfor the rulesof the relationshipwith their supplierto be asa mechanism made explicit. Contracts are, consequently,as detailed as the negotiating circumstances allow. 6. Conflict resolution. This relatesto the use of legal enforcement as guaranteedby the contractversustrust-basedmechanisms- in caseof conflict between buyer and

201

Chapter10-Conclusions

is based The on trust, the more co-operative the conflict resolution more supplier. firm's in is degree 'voice' The the conflict resolution our measureof of relationship. firms in data UK Our that the trust. show optical communications on reliance legal industry the protection of the contract as the very rarely rely on systems 'put basis for Moreover, 50% the of respondents conflict resolution. exclusive for in their opt methods aside' case of conflict with suppliers and contract exclusively basedon trust. On the whole, our data show that a significant proportion of firms in the UK optical industry fundamental the systems uses principle to co-operation as communicatidn's from findings This supply relationships. corroborates and previous reinforces govern Normann (Lamming, 1989; 1992; Lorenzoni, and Ramirez, 1993),and confirms studies that the diffusion of the network supply-chainis not confined to traditional industries with establishedtechnologies,such as automotive, but affects high-tech industries and industrieswherethe technologyis still at a developmentalstage. The data,however, also show that this pattern is not homogeneousacrossthe industry. Firms differ in terms of the areasmost affectedby the shift from market-orientedto cooperation-orientedforms of governanceand the element that discriminates between firms by different of characterised approachesto co-operation is the degree of groups firm. Whether a firm is operating within the the the of core-technology of maturity context of an establishedtechnology or of an emergent,dynamic one has an impact of the form of governanceusedto regulatesupply relationships.

10.3 Exploring the relationship between governance, performance and technology: the exploitative and explorative models of network supply relationships

It is not unusual to start a researchwith a hypothesis to test and end up with a more exploratorypiece of work. In our case,we startedwith the assumptionthat co-operative governancein the supply-chainshould lead to efficiency and innovation improvements

202

Chaptcr 10 -Conclusions

in UK to test this the assumption out a new we set context, optical communications and systemsindustry. Our analysis, however, moves beyond our initial intent and adds an exploratoryedgeto the research. The main result so far is that 'technology matters', and the adoption of the network supply-chain to govern supply relationships translatesinto significant efficiency and innovation gainsonly in technologically maturecontexts.If that is true, why are firms in technologicallydynamic contexts- such as many installersand specialistmanufacturers in the UK optical communicationssystemsindustry - moving from market-orientedto forms co-operative of governing supply relationships?What benefits are they more pursuing?

The answer to these questions comes from a closer analysis of firms' behaviours, by in-depth an supported study of six exemplary cases representative of various industry. in Firms the within positions emergent industries - which includes many installers and specialistmanufacturersin our study - move from market-orientedto coforms that are different from those developedby firms in governance operation-oriented industries mature and pursuedifferent objectives.In other words, there is more than one kind of co-operative supply relationship and these produce different outcomes. The is question what types and what outcomes? The UK optical communicationssystemsindustry offers an insight into this issue. The follow-up interviews and the casestudiesoffered the opportunity to get a great amount data qualitative of on the actual behaviours,and underlying motivations of the different types of firms operating in the industry. Firms in the UK optical communications industry fall into one of four categories: systems

0 General manufacturers:These are the incumbents, firms originally involved in copperthat have diversified into opto-electronics.Copper remains, however, the core technology. The incumbents' main interest is to maintain their market position by exploiting their investmentin copper and, at the sametime, keep the developmentof opto-electronicsunder control.

203

Chapter10-Conclusions

have firms These that the Specialist never 0 are new entrants, manufacturers: been involved in traditional copper technology. Their core technology is optofuture development its is interest the to as promote electronicsand their main dominanttechnology. 0 'Technology-neutral'installers: Theseare installersthat mainly follow market technology. for to specific a special allegiance with no growth opportunities They are, in other words, technology-neutraland tend to operate in the less is Because the a competitive still copper market. sophisticatedsegmentsof involved firms in these these technology are quite substantially market segments, with coppertechnology. 0 7cchnology-driwn' installcrs: Theseare installers that take an active interest in the development of opto-electronics and consider themselves the ideal diffusion for The technology. this and successof optorevolutionary promoters focus is their their the strategy, and of centre on this technology electronics at leads them to operate mainly in specialist market niches with sophisticated applications. Firms in thesefour categoriesshow different patternsof behaviour in their approachto More in the specifically, general manufacturers and supply-chain. co-operation technology-neutralinstallers show similar characteristicsfrom specialist manufacturers between Table 10.3 highlights installers. differences technology-driven the main and thesetwo groupsin the six critical areasfor co-operationin the supply-chain.

204

Chapter 10 -Conclusions

Table 10.3 Belim loural patterns ot'co-operation in supply relationships arnong four types offirm

A

B

General manufacturers & Tech nology-neutral installers

Specialist manufacturers & Teehnology-d riven installers

S'Lippliersare heavib, involved at the earlý stages of the overall production process and coordination is mainly achieved by means of sýstern integration

Suppliers are involved but tile relationship is not fornialised in structures. Their involvement is based on social interactions at the individual level that lead to high relational capital Selection is important but organisational fit is not tile priority. A certain amount of diversity and noncomplementarity is required to generate new knowledge Low degree of commitment at the organisational level but high at the individual level, which leads to high relational capital

Key areas fOr co-operation in stil)I)IN- relationshivs TeatnworA acrovk organi. kational houndarie, %

Supplier. selection

is fundamental in order Selection to secure a high degree of or-anisational fit and,

Commitment ItoAupplier

consequentlý, promote efficiency and reduce control and conflict resolution costs High degree of commitment at the organisational level, that leads to high relation specific investments and the creation of idiosýncratic relationship knowledae

Supplier's perjormance evaluation

Predominantly fonnal and structured

Mainly informal and unstructured

Fhe relationship is between organisations'. The contract plays a fundamental role in defining the operational rules and making the expectations of the parties explicit. It is used as a

The relationship is between 'people'. 'File contract is

Heavily engineered integrative conflict manacyement tý

Informal integrativecontlict management.Relationalcapital is the ftindamentalmechanism

Role of the contract

Cotiflict resolution

relatively unimportant, whereas trust-based personal relationships

Besides shomng different approaches to co-operation in the supply-cham, firms in the

t'K optical communicationssystemsindustry can also be classified in terms of two dimensions. The first Ondustry-specific) is the degree of maturity of the technology. The second (firni-related) is tile firin's strategic driver for co-operation In the supply-chal". By cornblimig, these tNNodimensions we obtain a positioning matrix in terms of"niature versus dynainic' and 'cost versus learning*. Fig. 10.1 shows firms' current positi i ions as four these as potential movenlems across quadrants. vvell

205

Chapter 10- Conclusions

Fig. 10.1A positioningmatrix

Dynamic Specialist manufacturers Technology-driven installers

Tech ology-drivcn alIers nscl

Degreeof maturity of the technology

Technologyneutral installers

1, General manufac ers

General manufacturers IV

Mature Cost

Learning Strategic driverfor co-operation in the supply-chaln

From the analysis of behavioural patterns and positions, we derive the general develop firms in technological that contexts mature co-operative supply conclusion developed from different by firms in dynamic technological those that are relationships different they that objectives. For analytical purposes, we also pursue contexts, and describe these different approachesin terms of two ideal-types - exploitative and from These derived March terms relationships. are explorative co-operative supply (1991), and refer to the fact that firms that pursueco-operativesupply relationships aim to exploit existing technological opportunities, whereas the explorative kind is in innovation learning an emerging technological environment. concernedwith and Generalmanufacturersand technology-neutralinstallers tend to adopt the exploitative model, whereasspecialistmanufacturersand technology-driven installers tend to adopt the explorativeone.Table 10.4comparesthe two.

206

Chapter10 - Conclusions

in supplyrelationships Table10.4Two modelsof co-operation EXPLOITATIVE MODEL

EXPLORATIVE MODEL

General market strategy

Cost-leadershipand standardisation

Differentiation and/or focus in the sophisticatednichesof the market

Strategic orientation

Exploitation- cost-related

Exploration- learningrelated

Protectingexistingmarket position and investments. Defensiveattitude

Developmentof a new marketposition. Aggressive attitude

Strategic rationale for cooperation

Securethe stability of externalenvironmentand control over it

Encouragethe development and successof the new technology

Approach to co-operation in the supply-chain

Highly formalisedand structured.Requiresstability to function smoothlyand is intrinsically rigid

Highly informal and in Thrives unstructured. diversity and is intrinsically flexible

Focus of co-operative efforts

Processes Peoplematter. matter. Sharedidentity is Sharedidentity is not fundamentalto lower the cost encouragedbecauseit of communicationand suffocatesdiversity and limits opportunitiesfor new control, to facilitate copknowledgeby denying ordination and to build idiosyncraticknowledge. accessto nonProceduresand processesare complementaryor engineeredto help develop compatibleideas sharedidentity II

The two models are similar in that both use vertical-co-operation as a source of competitive advantage(Dyer and Singh, 1998), but the rationale for this is profoundly different. Firms adopting the exploitative model are predominantly engaged in exploitation-oriented strategiesand use vertical co-operation mainly to achieve costrelated types of benefits (Hagedoorn, 1993; Kale, Singh and Perlmutter, 2000). Their fundamental objective is to enhancetheir competitive position through market power and efficiency, to preservethe existing and build on it. Firms adopting the explorative model are predominantly engaged in exploration-oriented strategies and mainly use vertical co-operationto pursue leaming opportunities and to accessexternal knowledge (Cohenand Levinthal, 1990).Their fundamentalobjective is to develop an entirely new

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Chapter10 - Conclusions

forefront be firms These the to to at want position, not maintain and preservean old one. do domain to knowledge in technological their so. sources and useall available core of The need for inter-organisationalco-ordination - that is principles that support 'cobut in both is high firms' 2000) the (Kogut, models, ordination among specialised processesthat fulfil this need are different. The exploitative model primarily uses integration of systems to achieve co-ordination. This means that firms put in place formal mechanisms and procedures to regulate their activities and those of their These investment. inevitably incur high levels suppliers, and of relation-specific resourcescannot easily be re-deployedwithout huge costs, and therefore stability and identity', 'shared in development the The the relationshipsare valued. of a continuity Zander, (Kogut between firms in and shared senseof purpose engaged co-operation 1996; Dyer and Nobeoka, 2000), is also fundamentaland actively encouraged.Shared identity reducesthe costs of communication and control, facilitates co-ordination and sustainsthe developmentof idiosyncratic partnershipknowledge.

The explorative model achieves inter-organisational co-ordination by means of spontaneousinteractions between people. Finns are close without being integrated, thanks to the on-going dialogue and conversation at the individual level. Formal mechanismsand structures are kept at a minimum, if not completely avoided as a potential obstacle to flexibility and mutual adjustment. People's knowledge of each other and personaltrust, both basedon past history, are the key mechanisms.Relational capital, defined as the level of mutual trust, respect, and friendship that arises out of between interaction individual level the close partners (Kale, Singh and Perlmutter, at 2000), is the fundamentalorganisationalmechanismfor control and conflict resolution. The developmentof a sharedsenseof identity is not actively encouragedbecauseshared identity comesat a cost (Kogut, 2000; Gulati and Lawrence, 1999). It, in fact, reduces diversity and limits the opportunitiesto generatenew knowledge.

The two ideal-types can exist in pure forms. More often, however, firms tend to mix elements from the two, or develop only a few aspects of the complex systems of organisationaland social processesrequired to implement the models fully. Some firms

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Chapter10 - Conclusions

in our samplefall in this category.Theseare mainly installers that beganas technologydriven firms and have moved beyond the boundariesof their original focus, losing their hands in firms find the These themselves of strongercompetitive strategiccohesiveness. forceswith no clear direction. They are, in Porter's words, "stuck in the middle" (Porter, 1985).This unresolvedstrategicsituation is mirrored by a mixed strategyin the supplyfrom the exploitative and the explorative models. chain, with a combination of elements It is as if two firms co-existedwithin the sameorganisationalboundary, one in pursuit focus. Coknowledge in and of growth and volume expansion,and the other pursuit of operationwith suppliersis a major sourceof tension. We can now answer the initial question, what types of co-operative supply relations ips

and what outcomes?

1. In mature industries,firms moveftom market-orientedto co-operativeoriented supply relationships of the exploitative type in pursuit of Exploitation is their predominant strategic and cost-related objectives.

strategy. 2. With radical emergenttechnologies,firms movefrom market-orientedto in type the of explorative co-operative oriented supply-relationship Exploration learning-related is their predominant objectives. pursuit of strategy.

In situationswherean establishedtechnologyand an emergentone co-exists,and the technologicalraceis still in place,different modelsand strategiesdevelopin parallel within the same industry. Technology-drivennew entrants(such as the specialist manufacturersand the technology-driveninstallers in the optical communications systems industry) develop explorative types of co-operation. Incumbents and installers in (such technology-neutral the optical communications those as new entrants systemsindustrythat do not favouronetechnologyover the otherbut limit themselves to exploitmarketopportunities)developthe exploitativetype.

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Chapter10 - Conclusions

10.4 A few research implications In maintaining the importanceof the degreeof maturity of the technology in shapingthe form of vertical co-operation,we shareHagedoorn's(1993) claim that industry factors inter-firm diffusion fundamental for the establishment and of co-operative are different find We that horizontally both coevidence also and vertically. relationships different types of competitive advantage to operative solutions are enacted achieve (Hagedoorn,1993).

Our study in the UK optical communicationssystemsindustry has led us to the general conclusionthat in mature industriesco-operativesupply relationshipsof the exploitative In developed in emergent type are pursuit of strategic and cost-related objectives. industries, co-operative supply relationships of the explorative type are developed in development learning-related Our the of that researchalso shows objectives. pursuit of does in forms not occur supply relationships co-operation oriented governance UK by factor. In likely but is the optical triggered an external more spontaneously, by is industry, the substitution triggered the exploitative model communicationssystems threat posedby fibre-optics to copper-basedtechnology,whereasthe developmentof the difficulties fibre-optics the to by is the win of material explorative model stimulated technological race once and for all. Fibre-optics needs powerful champions in the is its diffusion form that critical at this stage. promotes market, and any of co-operation Theseresults have important implications. First, market-orientedgovernanceforms still in both in mature and emergent governing supply relations play a significant role industries, and the move towards co-operation based ones is not inevitable. Cois is but it in the operation supply-chain a useful answerunder specific circumstances, not the ultimate recipe for a firm's success.Also, co-operation in the supply-chain be in for but the a substitute complements a sound and coherent strategy cannot marketplace.Firms stuck in the middle of contrastingbusinessstrategiesare unlikely to benefit from any type of co-operative supply relationship. Firms also run the risk of choosing the 'wrong' type of co-operativemodel and therefore of nurturing unrealistic expectationsof performance. If a firm adopts the explorative model in the hope to

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obtain massive efficiency gains, it should come as no surprise if the results are disappointing.The sameappliesto any firm that wanted to pursue learning opportunities by meansof highly engineered,exploitative types of vertical co-operation.The expected outcomeis more likely to be a failure. This risk is even worse for firms that have lost clarity in their strategicvision and, perhaps,do not even know for sure what objectives are worth pursuingin the first place. The researchimplications for academicsand practitioners become,consequently,clear. In terms of future directions for research, academics are encouraged to adopt a contingencyapproachto the study of vertical co-operationand recogniseexplicitly the role of environmentalfactors- suchas the degreeof maturity of the technology - on the is diffusion forms. But there another, emergence, and outcomes of co-operative probably better,way to carry this researchforward. Our research takes a limited view on organisational networks (see Chapter 3) to issues (buyer-supplier dyadic relationships)and governance concentrateon relationships (market versus co-operation-orientedmechanisms).The wider network, which is the focus of important theoretical contributions in the fields of Organisational Sociology is 'supply-chain' The that the is Network Analysis, se per and not our central concern. levels different different that of the same actors at connect entire set of relationships value chain - is not the focus of our efforts. This does not mean, however, that the generalperspectiveon organisational networks future fact, is for In With be the true. research. opposite concern should not of a matter our improved understandingof the variablesaffecting relationshipsand outcomesat the dyadic level (the micro-level) we can now go back and refine the generalmodel of cooperativebehavioursand structures(the macro-level).

More researchis neededto validateandrefine the two ideal-typesof exploitativeand explorativeco-operation.Othertypologiesof vertical co-operationmight be developed on the basisof a growingbody of empiricalknowledge.But it is not only about 'new organisationalforms'. It is alsoa matterof connectingmicro and macrolevels,dyadic

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idea Moreover, that network-oriented the relationships and wider network structures. forms, managementand the environmentinteract and co-developshould be given proper attention. Research should, consequently, proceed in different directions. At the organisationallevel, the actual processesand competenciesrequired to implement the When forms the consideration. careful various of vertical co-operation need environment is taken into account, other factors besidesthe degree of maturity of the technology may affect the form of vertical co-operationand its outcome. These factors need to be clearly identified. Finally, new organisational forms and their outcomes generate environmental changes that, in turn, feed new adaptation processes.The dynamic relation between organisation and environment is at present inadequately explored.

Apart from setting a future research agenda on forms of co-operation in vertical relationships, their antecedentsand their outcomes, our study also contributes to a discussion debate. We to the on-going on the particularly controversial area of refer complexitiesof replicating the 'partnership' approach(Lamming, 1993; Dyer, Sung Cho and Chu, 1998),developedwith great successin the automotive industry by firms such as Toyota and Honda and applying this in a variety of contexts, involving different kinds of firm, industriesand countries.We agreewith thosewho maintain that, although the 'partnership' model - in our view very similar to the exploitative type of vertical cooperation - is well known in its more superficial aspects,the details of the 'how to' implement it and make it work are not (Dyer and Nobeoka, 2000). We also agree that sometimes it is a question of time, of allowing enough time for the complex organisational.and social processesthat constitute it to develop fully. We also recognise the validity of the argumentsthat focus on cultural and institutional factors as potential obstacles(Casson, 1991; Dore, 1983; Korczynski, 1998). Our original contribution to this debateis, however, to highlight the possibility that firms might choosea model of vertical co-operation that is not consistent with their technological environment and their pursuedstrategy,and thereforenurture false expectationsof performance. The implications of the study for practitioners are also very clear. Practitioners are encouragedto developa deeperunderstandingof the complexities underlying the choice

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of vertical co-operation. It is not only an issue of implementation - no matter how important that might be but also of choosing the appropriate form of vertical cooperation,in the full knowledgethat co-operationin the supply chain doesnot substitute a soundand coherentbusinessstrategy.

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232

AppcndixA -The sun cy questionnaire

APPENDIX A- SURVEY QUESTIONNAIRE NA,'NIEAND OIIGANISATIONAL POSITION OF THE PERSON COMPILING THE QUESTIONNAIRE

SECTION 1: SUPPLYCHAIN RELATIONSHIPS This section focuses on the w3y relationships bet%%-ccn the company and its suppliers are organised, as well as on recent developments in the company's supply strategy.

1. Ilow is the supply/purchasingfunction currently organisedwithin the company? a. Numberof people: b. Title of the unit:

c. To %hich functiotVposition does the supply/purchasing function report? (Please give title)

2.1 lave therebeenany major changesin the company'sstrategyfor supplychain managementand purchasingin the pastfi%e years?(Pleasetick the appropriatebox) YES NO If

Le-S.

2.1 In mhat)-car(s)?, 21 %%Iiat wasthe main reasonfor the change(s)7

23 In uhat did the change(s)consist?

3. What has been the trend in the number of suppliers during the past five years? (Pleasetick as appropriate) a. Substantiallyincreased(over 30 OwO more) b. Moderatelyincreased(10 to 30 01110 more) c. No big change(between- 10 and + 10 %) d. Moderatelydecreased(10 to 30"vefewer) e. Substantiallydecreased(over 30 % fewer) 4. Pleaselist the six most important materiaWparts/components in terms of company purchasing expenditureand indicatethe approximatepercentageof overall companypurchasingexpenditurethey eachrepresent. NIateriallpa rt/com ponent

1.

Percentageof overall company purchasing expenditure

1

233

%]

Appendix A- The surveyquestionnaire 5. How important are these six materiaWparts/componcntspurchased by the company for the functionality of its f mal products? (Pleasetick as appropriate) Nlaterials/parts/components [as listed in Q. 41

Extremely important

Quite importan t

Important

Relatively important

Not important

2. 3. 4. 5. 6.

6. How many suppliers are potentially available in the market for the provision of these six (Pleasetick as appropriate) materials/components/parts? Nlateria Is/parts/components

A great many more than 20) IIII11

1. 2. 3. 4. 5. 6.

Very few (fewer than 5)

Not quite so many 5 to 20)

7. Which of the following practices is the company currently adopting for the supply of these six (Pleasetick as appropriate) materiaWparts/components? Materia Is/parts/components

Multiple sourcing

List of preferred suppliers

Parallel sourcing of selected suppliers

Single supplier

2. 3. 4. 5. 6.

8. Have any of the following practicesbecomemore or lessimportant for the companyin the past five years?(Pleasetick as appropriate) Significantly more important a. Multiple sourcing b. List of preferredsuppliers c. Parallelsourcingof selectedsuppliers d. Single supplier

234

Moderately more important

No change

Moderately less important

Significantly less important

Appendix A- The survey questionnaire

9. How long hasyour companyhad a commercialrelationshipwith your suppliersas a whole? (Please tick asappropriate) more than 10 years

less than 5 years

5 to 10 years

a. More than 75% b. 50% to 75% c. 25% to 50% d. Fewer than 25%

10. With what proportion of suppliers is the company currently adopting any of practices? (Please tick as appropriate) With all

With the majority

a. Exchange of personnel and key human resources b. Shared physical facilities /resources c. Open books* d. Supplier-specific investments" e. Exchange of data on internal processes***

the following

With a minority

With none

Openbooks:transparencyin private information relatedto costsand other accountingdata Investmentsin training, or specialmachinery,or similar for a specific supplier * Internalprocesses,suchastechnologicaldevelopmentand R&D, strategicplanning, marketing

11. Which of the following criteria are currently used by the company in selectinga supplier?(Please tick as appropriate)

a. Financialperformance b. Price C.Time and delivery d. Quality e. R&D designand capability f, Technical innovation 9. Soundmanagerialpractices h. Compatibleculture i. Productionflexibility 1.Easeof communication m. Willingness to invest and sharerisk n. Good skill baseand training o. Location P. Other (specify):

Always used

235

Used only in special cases

Not used at all

Appendix A- The survey questionnaire

12. Have any of the following criteria for selectinga supplier becomemore or less important for the companyin the pastfive years?(Pleasetick as appropriate) Significantly more important

Moderately more important

No change

Moderately less important

Significantly less important

a. Financialperformance b. Price c. Time and delivery d. Quality e. R&D designand capability f. Technicalinnovation g. Soundmanagerialpractices h. Compatibleculture i. Productionflexibility 1.Easeof communication m. Willingnessto invest and sharerisk n. Good skill baseand training o. Location p. Other (specify):

13. Have any of the following factorsfor evaluatingthe performanceof a supplier becomemore or less important for the companyin the pastfive years?(Pleasetick as appropriate) Significantly more important

Moderately more important

No change

Moderately less important

Significantly less important

a. Compliancewith technical requirements/specifications b. Warrantyperformance c. Delivery/Service d. New ideasgeneratedby the supplier e. Other (specify):

14. What is the averagelevel of detailed specificationof the contract with a supplier on non-technical issues(such as penalties,clausesfor reassessingprices, provisions for unpredictableevents,etc.?) (Pleasetick as appropriate) a. The contractis very detailedand exhaustive b. The contractis relatively detailed,but there is scopefor flexibility and adjustments c. The contractis not very preciseand things are specifiedalong the way 15. If somethinggoeswrong during the life of a contract,what is the normal companyreaction?(Please tick as appropriate) a. Stick to the contractand usethe lawyers b. Renegotiatethe contract,and listen to the supplier's reasons c. Put the contractaside,andtry to "sort things out"

236

Appendix A- The survey questionnaire

16. Doesthe companyuse any of the following mechanismsfor assessingthe soundnessof the overall relationshipwith its suppliers?(Pleasetick all that apply) a. Regularmeetingsfor openand informal discussion b. Occasionalmeetingsfor openand informal discussion c. Periodicaland formal grading againsta check-list of well specifiedcriteria) d. Self certification e. Other (specify):

17. It could help if you could indicateany significant actionsor initiatives that have resultedfrom such reviews in recentyears

SECTION H: THE MAIN PRODUCTS AND ITS GENERAL COMPANY'S MANUFACTURING ORGANISATION This sectionfocuseson the company'smain productsand the way it organisesits activities concerning both existing and newly developedproducts 18. Pleaselist the company's four most important products in terms of overall salesand indicate the approximatepercentageof overall company salesthey each represent.(If the company has fewer than four products,pleaseindicateaccordingly) Main products

Percentageof overall company sales

1

1.

%]

19. How important are these products for the company's future strategy and competitive success? (Pleasetick as appropriate) Main products

Extremely important

Quite important

Important

Relatively important

1. 2. 3. 4.

Not important

20. Whatis thecurrentmarketsituationfor eachof thesemainproducts?(Pleasetick asappropriate) Main products

New market

Fastgrowing market

1. 2. 3. 4.

237

Market closeto maturity

Mature market

Declining market

Appendix A- The survey questionnaire

21. How much collaboration is there betweenthe company and the following for the research and conceptdevelopmentof new products? (Pleasetick as appropriate) very high

high

medium

low

very low

a. Suppliers b. Customers c. Externalresearchinstitutes d. University laboratories e. Parentcompany(if relevant) f. Other companies g. Other (specify):

22. Have any of the following becomemore or less important in the past five years for the research and conceptdevelopmentof new products?(Pleasetick as appropriate) more important

no change

less important

a. Suppliers b. Customers c. External researchinstitutes d. University laboratories e. Parentcompany(if relevant) f. Other companies g. Other (specify):

23. How much collaboration is there between the company and the following for the design and engineering of new productsto developthem for production? (Pleasetick as appropriate) very high a. Suppliers b. Customers c. External researchinstitutes d. University laboratories e. Parentcompany(if relevant) f Other companies g. Other (specify):

238

high

medium

low

very low

Appendix A- The survey questionnaire

24. Have any of the following becomemore or less important for the design and engineering of new productsto take them into production in the pastfive years?(Pleasetick as appropriate)

more important

no change

less important

a. Suppliers b. Customers c. Externalresearchinstitutes d. University laboratories e. Parentcompany(if relevant) f. Other companies g. Other (specify):

25. What is the relative importanceof "ntake" (internal manufacturing)versus"buy" (externalsupply) for the company's main products as listed in Q. 18? (Please indicate the approximatebalance between"make" and "buy" as a percentage) Main products [as listed in Q. 181 MAKE %] %] %] %]

1. 2. 3. 4.

BUY %] %] %] %]

= = = =

100% 100% 100% 100%

26. What was the situation in relation to theseproductsfive yearsago (or when they were introduced, if lessthan five yearsago)?(Pleaseindicatethe approximatebalancebetween"make" and "buy" as a percentage) Main products MAKE %] %] %] %]

1. 2. 3. 4.

BUY %] %] %] %]

= = = =

100% 100% 100% 100%

27. How much collaboration is there between the company and the following for the distributionfinstallation of the company'smain products? (Pleasetick as appropriate) very high

high

a. Suppliers b. Customers c. Partners d. Other (specify):

239

medium

low

very low

Appendix A- The survey questionnaire

28. Have any of the following becomemore or less important for the distributionrinstallation of the company'smain productsin the pastfive years?(Pleasetick as appropriate) more important

no change

less important

a. Suppliers b. Customers c. Partners d. Other (specify):

SECTION III: EFFICIENCY AND INNOVATIVENESS This section focuses on the company's recent performance in terms of efficiency and innovativeness, both measured through a variety of indicators.

29. What hasbeenthe trend in the price of the company's main products as listed in Q. 18 during the pastfive years(or sincethey were introduced,if lessthan five years)?(Pleasetick as appropriate) Main products [as listed in Q. 181 1.1 2. 3. 4.

Significantly increased

Moderately increased

No change

Moderately decreased

Significantly decreased

1[III[I11

30. What hasbeenthe trend in the overallproduct cost of thesefour main productsduring the past five years,or sincethey were introduced(if lessthan five years)? (Pleasetick as appropriate) Main products

1.1

Significantly increased

Moderately increased

No change

Moderately decreased

Significantly decreased

1111111[1

31. What has been the trend in the order-to-defiverythne (from the moment an order is received to delivery) for thesefour main productsduring the past five years?(Pleasetick as appropriate) Main products

Significantly increased

Moderately increased

1. 2. 3. 4.

240

No change

Moderately decreased

Significantly decreased

Appendix A- The survey questionnaire

32. What has beenthe trend in productivity in manufacturing for the company during the past five yearsin termsof the measuresindicated?(Pleasetick as appropriate) Significantly increased

Moderately increased

No change

Moderately decreased

Significantly decreased

a. Labourefficiency b. Material efficiency c. Plantutilisation d. Productcycle-time 33. Haveoverall productionvolumes changedsignificantly for the companyduring the past five years? (Pleasetick as appropriate) Significantly increased Productionvolumes

Moderately increased

No change

Moderately decreased

Significantly decreased

IIIIIIIIII

34. What has been the trend in the ffine to market (from researchand conceptdevelopmentto first manufacturingfor sale) for the company'snew productsduring the past five years?(Pleasetick as appropriate) Signiricantly increased Time to market

Moderately increased

No change

Moderately decreased

Significantly decreased

IIIIIIIIII

35. How many new productshas the companydevelopedin (a) the last 12 months, and (b) in the past five years?(Pleaseindicatethe numberof new products) a. in the last 12 months b. in the past5 years 36. What is the relative importance,in terms of overall companysales,of new products developedby the companyin the pastfive years? (Pleasetick the box correspondingto the appropriatecategory) Percentageof present company sales more than 75%

50% to 75%

25% to 50%

below 25%

a. Productsthat are totally new b. Productsthat are significant up-grading over previousgenerations c. Productsthat are minor improvements over previousgenerations 37. What percentageof current salesderivesfrom productslicensedto you by other companies(Please indicatethe approximatepercentage) a. Percentageof current salesderived from productslicensedto you by other companies

241

%]

AppendixA- The survey questionnaire

38. What percentageof current revenuederives from products which the company has ficensed to others? a. Percentageof current revenuederived from productsyou have licensedto other companies

%]

SECTION IV: GENERAL DATA ABOUT THE COMPANY This sectionfocuseson generaldata aboutthe company,suchasrecentfinancial performanceand size, to complementthe information gatheredin the previousthree sections If you prefer not to disclosethe dataof Q. 39, pleasego directly to questionn. 40. 39. What has beenthe trend in companyfinancial performanceduring the past five years?(Pleasetick as appropriate) Increased by more than 10%

Increased by up to 10%

No change

Decreased by up to 10%

Decreased by more than 10%

a. Turnover b. Royalties(if relevant) b. Profit before interestand tax c. Returnon Capital 40. Number of company'semployeesat presenttime: 4 1. Current annual sales revenue:

42. What is the approximatepercentageof salesin the UK and abroad? Percentageof overall company sales a. Salesin the UK b. Salesabroad

%]

[ 100 Fýmpýanyname

If you would be interestedin receiving a shortreport of the resultsfrom the research,pleasegive your and address,or attacha businesscard. Companynameand address:

Could you also indicate,by ticking the box, if you would be willing to contributeto possiblefollow-up interviews? YES NO

THANK YOU!!

242

Appendix B- The componentsof a fibre-optic communicationsystem

APPENDIX

B-

The components of a fibre-optic

communication

system Light cmitting componcnts

Light emitting componentsare of two different kinds, LEDs and lasers.LEDs are used for short-distancecommunications.Infrared-emitting diodes are used in the range up to 200 Mbit/s and 2 krn span.In many cases,a glassor a sapphiresphereon top of the chip is used to focus the emission onto the front face of the fibre, thereby bridging the gap between chip and fibre. Infrared-emitting diodes in the 0.8 [im range are based on Gallium Arsenide (GaAlAs), while those in the 1.3 [tm are based on Indiurn Gallium Arsenide Phosphide(InGaAsP). Lasers consist of a medium in which light amplification takes place between a pair of in forming They from hetero-structures which a thin mirrors a resonator. are made family from between is formed Elements the of passivecladding regions. active region IIIN semi-conductorsare normally used. Changing the thickness, structure and the formation, different hetero-structure lasers semi-conductor with materials of characteristics(in terms of the wavelength emitted, output power, electrical and optical characteristics,and noise). There are, in fact, two categoriesof semi-conductorlasers, long wavelength and short in long The the 1.3-1.5 ýLrnand are used for longwavelength ones operate wavelength. distancetrunk-line communications.Materials such as InGaAsP are used. The short wavelength lasers(0.6-0.8 ýtm, visible region) are used in other applications, laser disks suchas optical prints. and The combination of fibre characteristics(silica glass) and laser characteristicsaffect the level of signal regenerationrequired, and hence the number of repeatersnecessaryto completethe transmission.

Light transmission components Optical fibre is made of two types of glass (see Figure A). The core has a higher refractive index' than the glass surrounding the core (the 'cladding'). If light is shone into one end of the fibre it will passalong the core of the fibre and most of the rays of light that lit the interface betweenthe core and cladding will be reflected back into the core. In this way light can propagatesubstantialdistancesand passaround bends in the fibre. The pure silica glassusedfor optical fibre has particularly low attenuationat three ' The speedof light varies depending the on medium it is passingthrough. It is fastestin a vacuum. When light passesfrom one medium to another(e.g. from air to water from glassto air) its or path of travel is bent (refracted)due to the changein velocity. The refractive index of a material is the speedof light in a vacuumdivided by the speedof light in the material, and also relatesto the amountthe light beam is bent as it entersor leavesthe material. The refractive index of air is approximatelythe sameas a vacuum,that is 1. When light hits the surface between two media at a sufficiently shallow angle, it is reflected completelyratherthan passingthrough. It is this property that is the basisof the operation of optical fibre.

243

Appendix B

The components of a fibre-optic communication system

first, the third the the to and windows as second, often referred \xavelengths. specific for design The 1.55 transmitters 0.9-5.13 use with optical of ýim). (respectively and fibres has concentrated on these wavelengths. Fiu,ure A. Optical fibre: section

1 ':

I)uI

ý ,, uonhý

loT

Flie schematic spectral loss curve for high silica glass is showed in Figure B. Figure B. The spectral loss curve

A T T E N u A

800

---1600

1200

--- WAVEa-

LEN

GHT

(N

The number offibres in a cable varies between two and 260 in typical applications. The cable's overall thickness is approximately one inch - much less than a typical copper cable of lower carrying capacity. Optical-librc cables are not subject to inted'erencc by

244

\ppendix B

The components of a fibre-optic communication systern

feasible that lines. It are many to technically cables produce optical-fibre is 1)o%\cr hundreds of kilornetres long from one pre-formed block. Such cables would oftcr due less be to the smaller number of there attenuation would oreater performance as heavy drums huge However special and the\, carrier would require joint.,; required. lifting gear to be used, as well as a greatly increased hold capacity in cable-laying ships. I'liese factors normally mean that the maximum length of cable fabricated in one piece is around 25 Kin. The intrinsic qualities of the glass, combined with its thinness, long length and other Three types of properties. affect the performance of a telecommunications system. optical fibres. coniciding, with three basic design configurations, are available: multiThe performance mode step-index, inulti-niode graded-index, and single-mode. A. 'Fable different types three are surnmarised in characteristics ofthe 1c 'N II,-f-fiwillmice cIIaracteristics of the different tv Desof Ilibre ( Cherin. 1983) 1:11) Step Multi-mode f. Craded Multi-mode f. Single-mode fibre 'D laser or 1.1', laser or LED laser Source 0 Mliz-Kni 20OMhz to ')Ghz-Kni 3 Gliz-Kin IN n(Iý% id th but but difficult difficult difficult possible Splicing possible verv link data Application trunk connection submarine cable 1('ost

I moderately expensive I

most expensive

I

least expensive

ýJ

I lie first lo\ý-Ioss fibres produced \\ci-c of' tile multi-mode step-index type. This type is has between boundary by the the a which core and cladding, a sharp characterised The lower than the problem With tile MUlti-mode step core. index refractive slightly fibre is that tile different modes of light travel at difilerent speed, and therefore do not known This destination as Inter-Illockal phenomenon, simultaneously. arrive at dispersion effect - tile light pulse is spread out in time - limits tile fibre's transmission bandwidth capability, and consequently its information-carrying capacity. Ill order to overcome this problem, the mUlti-mode graded-index fibre was developed in the early 1970s. This fibre is characterised by a parabolic refractive profile, which fibre that the the means refractive index of gradually decreases From a maXII111.1111 Value This the to the centre a minimurn value of normalises tile propagation times Lit cladding. of the variLios modes of light transmitted. By 1993), Improvements Ill coupling technology have made tile single-mode fibre a realistic option. The single-mode is high bandwidth, is by for long-distance that a It so particularly suited characterised transmissions. It, however, requires more sophisticated sources of light. Its commercial diffusion has recently increased to the point that its price has t'allen down tile price of the multi-niode graded-index fibre.

Fibre-connecting components Since fibrcs can only be manufactured in lengths of several kilornetres. while the minimum distance between the source of light and the first receiving component (see below) Is about 30 kilonietres. fibres have to be connected together. Fibre-to-fibre connectors fall into two types: permanent splices and demountable connectors.

245

\ppendix B- The components ot'a fibre-optic communication system

Permanent splices may be divided into fusion splicing - where connection is localised heat butted, betv,, by the two at interface een preapplying accomplished fuse fibre the they that where soften and and mechanical splicing ends so alluned libre end are hold in alignment by means of a mechanical device. De-rnountable connectors are used in special applications (such as military systems or computer nemorks) \\here connections have to be changed frequently. Connectors are also used to link- cables to optical transmitters and receivers pigtails.

Light recei-, ing components P., At tile receivillý" Cild 01' a light-wave communication. the optical signal must be converted back into an electrical signal. The fundamental principle is that of photodetection. I'wo different types of devices are available in this area, PIN photodiodes and Avalanche photodiodes. They also differ according to tile type ofmaterial used, silicon, Ill-V semiconductors. oerrilarili. 1111. or t,

Compared to PINs. Avalanche photodiodes have a more complex structure and achieve internal levels through amplification of the detected signal. oreater ofsensitivity Repeaters are electromechanical devices used to amplify the signal when it is attenuated below a threshold level. The number of repeaters necessary to complete the transmission in Table B. dependent as shown a variety offactors, is on Fable B. How the components of an optical fibre network affect the requirements for repeaters. In this table the photo-detectors (which pick up lipht signals) are either photodiodes (PIN) or Avalanche photodlodes, (APD) LED Fibru i-lodulation Detector Wavelength 01111) Repeater spacing (Kill)

Multi-Illode Step index A AM PIN 15,io 850

Multi-mode graded index A 1) PIN APD 850 1550

Multi-mode step index A/D D PIN APD 950 1550

2- 3

81

1

20-30

20-30

LASER DIODE multi-mode graded index A/D 1) APD 850 1550 10

Single-mode

API) 1 5 850 -ý

20-30

10 I

I

File number of receivers represent a critical factor in all optical comillull icat lolls devices due key high these to the to of mainly cost when compared other systerns, elements. At tile moment, the cost for repeaters and amplifiers represents almost 40"/0 of tile overall cost of a communication systern. In recent times there has been a new technological development, the optical amplifier, that might substantially affect the cost of the overall transmission service. Optical arnplifiers are repeaters that do not convert the light signal into an electrical signal to be re-converted into a light signal with increased intensity. There are two types: (a) the Erbium Doped Fibre Amplifier (EDFA), which completely eliminates tile need I'm signal conversion and re-generation. The longest Lin-repeated span can be increased

246

\ppendix B -- The components ot'a fibre-optic communication system

Kill (current maximum distance) to 400 Kill (submarine systems); and, (b) from -200 11F's Optical Amplifier. Instead of carrying 1,900 simultaneous coilvcrsati oils, a single be be 80,000. Moreover, to transmit able will almost no repeaters optical-tibre \\III limit. for 33OKm distance I OOKnl the of present as compared with needed a Passive dc%ices

Couplers are passive devices used to combine two or more light beams into one or to split one light beam into mo. Wavelength Division Multiplexers allow two or more fibre. This different be to optical signals at \\avelengths coupled into or out of a increases tile data-carryini, capacity of a fibre. The ability to provide this type of multiplexing on any fibre has long been a selling point offibre optic cabling, as it holds the promise ofincreasim, the usable bandxvidth of installed fibres merely by the addition ol'a new device at each end ofa link.

Si%itching systems

III 1111.11t1plexed digital transmissions the electrical signals are 'switched' - i. e., separated known This technology. technology as 'softvvare and redirected - Lising semiconductor is from it taking the this and then input switching" and cable, storing process Involves transferring it to an output channel. 'rhe whole operation is carried out by a computer and niust take place extremely rapidly. Switching equipment currently comprises a very high proportion ofthe cost of a telecommun Ications system. being based 'hardware the technology, on idea of switching'. is \01ch is ,\ ne%N developed and in based on optical fibre transmission. ATM, first proposed by A'I'&, 'I' III 1995. is defined as a transfer mode in which information is organised into cells and which is asynchronous in the sense that the recurrence ot'cells containing iril'ormation frorn an individual user is not necessarily periodic. One further advantage is that this type of cells can be switched using hardware rather than software and this leads to t.urther speed benefits. Reasonswhy it is sound to believe that ATM will be highly implemented are: Lwnv. 1. ATM is technology-, -ardly compatible \vith the existing tCleCO11111IL1111cations 2. ATM IS Upwardly compatible with emerging telecornIII Unications technologies, ATM \\-III have an enormous impact on Local Area Networks (I. ANs), that is networks ofPcs ill a single location; 4. ATM is suitable for Multimedia applications that require a large bandwidth: in general for those applications \vhere large bandwidth is required I-or relatively short periods of time, 5. Existence of ATM Forurn: group formed by interested industrial concerns Ill 1992 (more than '350 members).

247

CONFERENCE

PAPERS AND PUBLICATIONS

S. Spedale(1998). "Explorative and Exploitative Inter-organisationalRelationships in the Supply-chain.The Caseof the UK Fibre-optics Industry", Paperfor the 14" EGOS Colloquium, Maastricht. S. Spedale(1997). "From Antagonismto Co-operation.Patternsof Evolution in Vertical Inter-OrganisationalNetworks", Paperfor the 13' EGOS Colloquium, Budapest. A. Arcari and S. Spedale(1996). "Outsourcing Staff Activities: the Italian Case", Paper for the 19th Annual Conferenceof the EuropeanAccounting Association,Bergen. A. Arcari, A. Pistoni and S. Spedale (1995). "The Governance of Network Organisations:Assessingthe Role of Traditional ManagementControl Systems",Paper for the 18th Annual Conferenceof the EuropeanAccounting Association,Birmingham.S. Spedale (1995) Chapters 1,11, and VII (in Italian), in A. Arcari, Managing cooperation in Network Organisations,EGEA, Milan. D. Pierantozzi and S. Spedale (1995). "Activity Based Costing & Value Based Management:Lessonsfor the SMEs" in Finanza,Marketing e Produzione,2.

248