From hierarchical to eco-systems thinking

At a time of intense competition and rapid change in almost all relevant framework conditions, a rethinking of organizational forms and structures is indispensable. Many companies can no longer meet the demands placed on them with well-known methods and as lone fighters. In this article I show how the formation of network structures in companies makes it possible to deal with complexity and to overcome the limits of traditional organizational thinking.

“There are many signs that the world is moving both quantitatively and qualitatively in a completely different direction than we were used to. This is a period of transition, if not one of the great phases of transformation. Such times demand new philosophies, languages and practices of organization and management” (Bleicher).

A paradigm shift has been taking place around us for some time now, especially in connection with companies: Innovative information and communication systems offer a wide variety of possibilities for worldwide networking and are driving internationalization and globalization at a rushed pace. Rapid technological progress, growing pressure to innovate, and flexible customer solutions combine in a dynamic, complex and unpredictable environment with high competitive intensity; this forces companies to rethink fundamentally the way they organize processes based on the division of labor.

In addition, the massively increased presence and development of countries such as China, India and, of course, our Eastern European neighbors, increasingly upset our familiar environment in known structures. Against the background of a further accelerating dynamic of change, it becomes clear that it is less the increased complexity that causes difficulties than the rapid pace of change we have to promote through our actions and at the same time reprocess.

1. Cooperation and Competition

In his paper “The Death of Competition,” James Moore pointed out an interesting phenomenon explaining the change in the meaning of competition and contention for organizations: In a world of rapid and global economic development, the tendency is to soften divisions between business sectors and to redefine competitive advantages. Instead of classifying companies as belonging to only one industry and looking at them in isolation, it is possible to combine a whole range of industries into a so-called “business ecosystem.”

Microsoft, for example, has such a business ecosystem consisting of four different industries: personal computers, consumer electronics, information and communication.

The growing importance of cooperation within business ecosystems lies in the fact, that individual companies are no longer able to cope by themselves with the growing competitive pressure; as a result, they are in some respects dependent on each other.

Many companies are beginning to understand that they can strengthen their own ecosystem through cooperation with similar or related industrial companies for the benefit of all concerned, rather than weakening it through rivalry. The advantages lie, for example, in the joint creation of closer customer and supplier relationships or in cooperation, such as in the creation of technical standards and in joint research and development activities. Cooperation — even with direct competitors — can improve conditions for all.

Some large American companies such as Intel, Wal-Mart or Disney have already redefined their “competitive advantage.” For them, competitive advantages are based on cooperative network relationships with their competitors. The basic idea behind this is to identify the surrounding economic systems and to find ways to cooperate. The management therefore is challenged to think and act on a larger scale and to develop an understanding of the opportunities offered by networks.

In my view, working in a network can, therefore, also offer a great opportunity to implement part of the world attitude (von Foerster, Bröcker, 2002). In other words, it enables becoming consciously active, even inventively, instead of seeing things as “given” from a peephole position and having to “react” accordingly — as is often the case in conventional companies(von Foerster, Bröcker, 2002).

2. New Paradigms — Old Organizational Patterns

A wide-ranging search for orientation, new structures and systems in management has led to finding ways to shape technologies, markets and economic relations efficiently.

Above all, flexibility, market proximity and strong customer orientation are required. The fact that these aspects have often been underestimated and neglected in Western European companies is having an increasingly painful effect. Many of these companies have spent the longest time dealing primarily with themselves — saving costs, realizing synergies, reducing employees, realizing restructuring, processing mergers, increasing shareholder value — doing a lot of strenuous and time-consuming activities without noticeably increasing the qualitative value of customer work.

Diversification strategies, expansion of the depth and breadth of services as well as company acquisitions have led to highly-complex, matrix organizations, and that has resulted in coordination and management problems. The basic principles of the organizational form have changed very little, with altered objectives resulting in an extension of the existing structures. Overloading top management and extending response times have reduced the competitive advantages expected from growth and acquisitions. Nevertheless, the classification of subsidiaries or new business areas in the conventional structure according to purely hierarchical principles is still common management practice.

Just as the industrial revolution demanded revolutionary innovations in the coordination of work-sharing processes (such as the invention of assembly line work), today we are once again in a position to adapt the organization of economic companies under the pressure of external developments; in turn, this frees us from old ways of thinking in the conventional sense.

This does not mean, for example, that the management approaches and organizational forms of recent decades have been bad or even nonsensical; after long periods of growth, restructuring became absolutely necessary for the companies that had become somewhat comfortable. However, the phase of stable growth and continuous development, which allows the past to continue into the future, has given way to the phase of continuous change. Transferred to the change of companies, this is not adaptation in the sense of thawing — changing — freezing. Instead, it means creating organizational forms that have a broader framework, that allow for many things and are flexible and stable at the same time:

“What is needed are agile, bright, decentralized units with a high degree of networking capability” (Liebhart).

3. Company Network in the Area of Tension between Market and Hierarchy

In principle, the concept of networking is nothing new. It is a pattern according to which social societies, communities of countries, politics and generally all units pursuing common interests organize themselves.

In recent decades, there has been an increasing tendency towards network structures within company organization. Examples include profit centers, semi-autonomous working groups, manufacturing islands, project organizations, outsourcing, the creation of shared services and competence centers, as well as strategic alliances.

Company networks can be understood as systematic networking of companies in a new form. This can be described neither as a market nor as a hierarchy. Corporate networks are, therefore, often referred to as hybrids whose characteristics move on a continuum between the two forms of coordination, market and hierarchy. While markets do not show any structural coupling between the elements, hierarchies are characterized by fixed coupling of the elements involved. In turn, networks represent a synthesis of both extreme points: They combine the presence of autonomous actors typical for markets with the pursuit of selected goals through coordinated action and a shared purpose typical for hierarchies.

The combination of the poles — market and hierarchy — previously regarded as incompatible in a network-like organization is seen as a great opportunity to create both efficient and market-oriented structures.

3.1 Economic and Legal Autonomy

The economically independent units (companies) that make up a corporate network are called network companies or network members. The relationships between the network members are usually governed by long-term contracts and can be of a technical, procedural and organizational, social, contractual, personnel or financial nature.

Legal independence distinguishes corporate networks from structurally-similar groups. Further differences lie in the uniform management, which may be present in corporate networks, but which, unlike in corporate groups, is not constitutive in nature. Moreover, as a rule there is no competition between group companies; therefore, an essential characteristic of company networks would be missing, because there are also market elements in these networks in the form of internal competition between the network members.

Strategic alliances have similarities with corporate networks, but generally refer to collaborations between two or more companies that link only certain aspects of their activities; otherwise, unlike corporate networks, they appear separately on the market as competitors.

3.2 Coordination between Market and Hierarchy

Company networks have a shared purpose and shared goals: Decisions must be made, actions coordinated, and the network managed. In corporate networks, the individual activities of a large number of members must be coordinated in a targeted manner in order to ensure the effectiveness and efficiency of the network. The special feature of the requirements for coordination instruments in corporate networks is that there is no higher authority in networks, so that the use of purely hierarchical instruments is not sufficiently possible. There is a demand to overcome the advantages of market and hierarchical coordination and to combine their advantages.

The tasks and requirements for coordination instruments in company networks are manifold.

The less explicitly the individual coordination instruments are designed, the greater the maneuver room for individual network companies. In order to achieve high contributions and a high performance of the network members, coordination instruments should be used which restrict as little as possible the room for maneuver and the freedom of decision.

In the case of low dependencies within the network, more market-based coordination instruments are used. Regarding central coordination via explicit rules of conduct and partial centralized control, the autonomy of the individual network companies is more restricted by explicit rules of conduct of a central company.

Fig. 3: Characteristics of behavioral norms and coordination

The coordination instruments and mechanisms for corporate networks can thus be differentiated according to whether they tend to be hierarchy-centralistic, market-decentralized or informal coordination instruments, on the basis of mutual economic dependencies and the size of the individual scope for action.

The limits of traditional coordination mechanisms will soon be reached, not only in corporate networks, and it is now a question of discovering alternatives and making them usable for new applications.

Some ideas are presented in the following part:

3.2.1 Coordination through Trust

Shared norms and values as well as mutual trust are of great importance for the formation, reproduction and integration of networks (although not of constitutive importance). Network actors must be able to trust that the other actors, both vertically and horizontally, will keep their promises about services that are often difficult to specify and control.

In addition, trust contributes to reducing bureaucratic coordination and control costs, saving negotiation time, practicing a more open exchange of information and perhaps even dispensing with a far-reaching written fixation of contracts and formalization of inter-organizational regulations.

An example of the successful implementation of trust relationships is an Australian company network that operates in the IT sector and consists of 24 legally-independent, and to a large extent, economically-independent companies. In the course of the cooperation, ten rules of trusting cooperation have developed which, as an “interorganizational governance structure,” form a network-wide basis for fairness, openness and trust and thus implicitly also have coordinating functions (Probst, 1987).

3.2.2 Coordination through Voluntary Commitment

Self-regulation is a form of coordination in which the actors involved commit themselves to behaving cooperatively and not to exploit short-term possibilities for opportunism. Self-regulation as a coordination instrument can reduce opportunism in transactions that allow scope for opportunism and minimize behavioral uncertainty without the transactions having been explicitly coordinated beforehand on the basis of hierarchical instructions, programming or control. While hierarchical coordination aims to limit the scope for opportunism, self-regulation aims to reduce the tendency to exploit the scope for opportunism and can dispense with extensive and cost-intensive coordination mechanisms.

Compliance with the respective self-commitment leads to greater trust: Self-commitment and trust are, therefore, interdependent and condition each other.

3.2.3 Coordination through Organizational Culture

It provides the basis for a shared understanding of basic organizational issues and provides the framework for the development of shared goals and values. In this way, a shared orientation of the actions of network members to the overarching goals is achieved without formal regulations, thus reducing the formal coordination effort (Rilling, 1996). The network culture exerts a considerable influence on the success and stability of the network and fulfils an important coordination function by setting shared values.

3.2.4 Coordination through Personnel Transfer

Personnel transfers between the individual network companies serve a further coordination of service relationships and the building of trust through personal contact. Personnel transfers also fulfill specific, less frequently occurring coordination requirements, such as the management of know-how transfer during the first application of production technologies or during production start-ups, which would otherwise have to be worked out at great expense.

Personnel interdependencies usually take the form of joint teamwork during audits and research and development tasks and, through intensive cooperation, also enable flexible coordination processes outside official coordination committees (Wildemann). In an empirical study of various production associations, the significance and benefits of personnel transfer as a coordination instrument were classified as medium to high (Rillin.

3.2.5 Coordination through Knowledge Transfer

The institutionalization of knowledge transfer in company networks is a very useful tool for the promotion of inter-organizational development and competitiveness. Structural measures for the dissemination of knowledge (such as the appointment of internal consultants, the organization of internal training courses and internal documentation, communication and information structures) create the basis for a systematic transfer of knowledge. Institutionalized networking meetings, a shared network culture and personnel transfer can contribute to the development of knowledge exchange, which is particularly important for the coordination of cross-company research and development projects.

3.2.6 Coordination through Self-organization

The organization members are not bound to restrictive hierarchies but act freely according to their individual competencies and objectives.

Control mechanisms can be omitted and the organizational structure arises from the self-coordination of the organizational members. There is no separation between the organizing, shaping or directing part and the organized, shaped or directed part.

This does not mean that hierarchy is completely excluded but rather that a completely different, more flexible, process-oriented and holistic view is promoted.

In the coordination of decision-making, the principle applies that those elements of the system that have the highest relevant level of information act in a formative manner. Self-organization, therefore, means that a system regulates and adapts itself.

4. And who decides?

The special feature of decision-making in corporate networks is that, despite cultural differences and relative autonomy, the companies involved must make collective decisions, often without the possibility of formal instructions. Since corporate networks are complex systems, many premises and influencing factors have to be considered in decision-making; many decisions are interdependent and affect other organizational units, making good quality decisions very important. Furthermore, collective group decision-making plays a far greater role in enterprise networks than in many other decision-making systems.

Decentralization of decisions is a particular concern of corporate networks (Hayek, 1945).

Decision-making competence close to the relevant process/decision problem means significantly greater network flexibility through many decentralized and customer-oriented control loops and the elimination of long and error-prone decision paths. Ideally, the distribution of tasks and decision-making authority change with each new problem situation depending on the strength (professional qualification, competence, experience, persuasive power, etc.) of the individual actors in the network. Instead of waiting for instructions, problems are identified and solved with the help of all relevant knowledge carriers (Davidow/Malone).

5. Conclusion

The idea of the company network has already taken shape in various forms and could increasingly become a good alternative to the formation of giant corporations, some of which are characterized by enormous inefficiencies and are often very difficult to control.

Principles and ideas of the network concept can also be applied within hierarchical companies and thus increasingly contribute to increasing flexibility and competitiveness. For this, however, it is necessary to move away from the idea of control and the attitude of striving for power and to engage in new ways of cooperation.

This text was originally published in 2006 in a German Magazine based on my Master Thesis on "Koordination und Entscheidungsprozesse in Unternehmensnetzwerken" from 1999.