Marita Haas The Formation Process of SME Networks

Marita Haas The Formation Process of SME Networks

WIRTSCHAFTSWISSENSCHAFT

Marita Haas

The Formation Process of SME Networks A comparative case analysis of social processes in Austria, Belgium and Turkey

With a foreword by Prof. Rudolf Vetschera

Deutscher Universitäts-Verlag

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Dissertation Universität Wien, 2006 Gedruckt mit Unterstützung durch die Österreichische Forschungsgemeinschaft

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Foreword Virtual Organizations (VOs) and other forms of cooperation among firms are gaining popularity in particular among SMEs as a way to strengthen their position in an era of global competition. Consequently, public institutions at the regional, national and supranational level like the European Union are actively promoting and supporting the formation of networks and virtual organizations. But despite all the efforts spent on promoting cooperation and the numerous projects aimed at supporting the development of virtual organizations, our understanding of the success factors for the development of VOs is still rather limited. While the ultimate goal of virtual organizations is to improve economic performance, economic factors alone are not sufficient to explain success or failure in establishing a VO. In her thesis, Marita Haas has introduced a new perspective on the formation process of virtual organizations by interpreting the formation of a virtual organization as a group development process between the key actors in each participating company. This person-centered approach is particularly valid when considering SMEs, which in many cases are strongly influenced by the personality of the founder. Applying phase models from small group research enables Marita Haas to identify critical phases and transitions in the formation process and develop adequate intervention strategies to support the VO members in their efforts. The research presented in this thesis not only offers new insights into the formation of virtual organizations. It is also an excellent example of methodologically sound casebased research. By integrating data from various sources, Marita Haas offers deep insights into the VO formation processes that took place during the EU-funded research project VERITAS, which enables her to draw conclusions that reach far beyond the scope of this specific project. Her work therefore provides a solid basis for the better understanding and successful guidance of virtual organizations during their critical initial stages. Prof. Dr. Rudolf Vetschera

Preface Cooperation as a reasonable form to strengthen SME’s business was the main driver for the research project VERITAS1 that aimed to create stable SME Networks in Austria, Belgium and Turkey within a 19 months’ research period. As a scientific member of the University of Vienna, I was part of the consortium that managed the project. By establishing these networks, we followed a comprehensive time schedule in order to reach this goal within project time. Soon, we realized that establishing cooperation is far from being easy: informative workshops were characterized by high absenteeism and fluctuation; most participants and potential cooperation partners asked for the concrete benefit of their organization, or seemed to be simply not interested in working with each other. Well-known explanations of synergy effects in production, or better market force because of size only led to moderate enthusiasm. Thus, in particular the first months of the network formation process was characterized by low interest and low commitment of involved companies. We looked at other projects and networks for helpful insights in order to find a way to deal with the situation and to anticipate problems. However, the websites of former research projects that aimed at establishing networks often did not remain for longer than a few months after finishing a project and some of the previous networks disappeared or became part of large corporate groups. This means that those entrepreneurs that could report on critical success factors, problems and challenges were to a large extent not available: only successful cooperation survives, cooperation that failed and reasons for failure are not reported in any literature. Based on the above mentioned experiences during the first months of the project and the difficulties to find best-practice examples, I gained the impression that economic concepts might not be appropriate to explain the difficulties properly. Whenever I talked to members of successful networks or VOs, including the Virtuelle Fabrik Nordwestschweiz-Mittelland2 or Swiss Microtech Network3, it was mentioned that the crucial factor in the networks are people, not technology or resources, but the commitment and active involvement of all parties. Some explanations went even further and highlighted the need for friendship between partners. In every successful 1 2 3

VERITAS, IST 2004-511013, Contract for Specific Support Action, Annex 1- Description of Work. For more information cf. http://www.veritas-eu.com, accessed in October, 2006. http://www.virtuelle-fabrik.ch, accessed in October, 2006. http://www.swissmicrotech.ch, accessed on 23rd of October, 2006.

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case involved people mentioned the ”network of heads and hearts“. These informal talks led me to the conclusion that a network of companies is only able to work if a stable network of the people behind it is working as well. This insight reflected a turning point in my research process. First of all, my personal background is very much related to social structures, teams and human resource aspects, as this was my main focus during business studies and during three and a half years of professional experience. Relationships and social structures have ever been important to my work and me. I finally decided to investigate what happened on a relational level during the formation process of a network in order to i) have an explanation for the behavior of potential partners in our research project and ii) provide implications how to deal with such challenges in the future. Having explained how I happened to select the area of my research, I would like to put in words how much motivation was given to me from other people to continuously work on the topic and to finalize it. This work would not have been possible without the support of my supervisors and many other people. First of all, I want to thank the assessors and evaluators of this work. By at the same time appreciating and critically discussing my work, Univ.-Prof. Dr. Rudolf Vetschera and Ao. Univ.-Prof. Dr. Sabine Köszegi allowed me to cut my own path in research. Both of them played a decisive role for my future professional activities. Ao. Univ.-Prof. Dr. Christine Strauss, my second tutor, pushed me to work when I thought it would take me another couple of years to finalize this PhD (thank you Christine, it was the right way!), and the working atmosphere at the University of Vienna as well as at the Research Institute EC3 gave me enough freedom and time to develop my own ideas. I would also like to thank Astrid Schmidtchen, M.A., who proofread this work and delivered the new version in a very short time frame. Special thanks goes to Michel Pouly from EPFL Lausanne who was the first person who discussed the concept and problems of networking with me in a very open way. The same holds for Dr. Adrian Plüss from the University of Applied Sciences Northwestern Switzerland who introduced me to the whole community of VOresearchers at the IFIP World Computer Congress in Toulouse in summer 2004, and who gave me a lot more information than I had asked for or even expected. I additionally had a lot of interesting discussions with Charles Huber and Guido Besimo about their work at Virtual Factory Nordwestschweiz-Mittelland. I also want to thank Prof. Dr. Patrick N. Kenis and Prof. Dr. Leon A.G. Oerlemans from the University of

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Tilburg for offering me the participation in the Tilburg Summer School 2005. During this time I had the possibility to reconsider my research approach and benefited a lot from the discussions with other students and teachers. Regarding the VERITAS team, I owe thanks to my project colleagues Sonja and Nicole who showed a lot of commitment and always brought up interesting and critical aspects of cooperation. I especially would like to thank Serdar for his helpful contribution with the project – ranging from simultaneously translating a four-hoursmeeting of Turkish network participants to investigating cultural differences between Austria and Turkey in his diploma thesis. Furthermore I would like to thank Matthias who showed me that team work really produces better and more interesting results than working alone; Leyla, who became a really good friend (I will never forget the nice breakfast in your house, Leyla); Notis, who always told me that I had “too much energy” when I asked one of my critical questions or had another idea what we could do about the lethargic cooperation partners. Dirk, who brought out the best in me – especially while jogging in Athens; Yavuz, who was the best tour guide ever, and Thomas, who also supported this work with information after the project had already been finished. During the project, I have learned a lot from Sylvie’s professionalism and critical attitude. All of them supported me in my academic but also personal development during this time, but – most important – the idea to regard the network process as a group process arose during an intensive talk with Dr. Doris Weyer. Thank you, Doris! The message for my parents is simple: I would like to thank them for all their love and education that gave me the self-confidence I needed in order to reach my ambitious goal. I especially want to thank my mum for all the talks and reflections during the last years (and before). Thanks to my husband Max for being with me all the time. Last but not least I think that writing a PhD thesis is definitely not possible without having friends who encourage you during the difficult phases. I would like to thank Eva for her support during the whole PhD process; Lea, who provided me with citation guidelines and formal hints especially during the last weeks of writing; and Sandrine for her helpful comments on my work, discussed in night working sessions via Skype. Enjoy reading. Marita Haas

Index 1

Introduction ........................................................................................................... 1 1.1

Objectives and Research Contribution............................................................. 1

1.1.1 Background of the VO Concept for SMEs.................................................... 2 1.1.2 Research Approach ...................................................................................... 6 1.2 Structure of Work........................................................................................... 11 2

State of the Art..................................................................................................... 15 2.1

Literature Analysis ......................................................................................... 15

2.1.1 Definition and Main Characteristics of Virtual Organizations ................. 15 2.1.2 Origin of Virtual Organizations ................................................................. 18 2.1.3 Evolution of the Virtual Organization Concept ......................................... 23 2.2 Empirical Investigation in Virtual Organization Practice.............................. 29 3

Framework Development ................................................................................... 41 3.1 Cooperative Network Concept and Implications........................................... 41 3.2 Life Cycle Concepts and Phases of Networks ............................................... 49 3.2.1 Corporate Life Cycle Models ..................................................................... 49 3.2.2 Virtual Life Cycle Models........................................................................... 52 3.3 5-Phases Model .............................................................................................. 54 3.3.1 Background: Groups and Group Formation Process................................ 55 3.3.2 Framework for Cooperative Networks....................................................... 59

4

Design of Analysis................................................................................................ 67 4.1 4.2

Sample: Veritas Project.................................................................................. 67 Research Method: Case Study Research........................................................ 73

4.2.1 General Aspects of Case Study Research................................................... 73 4.2.2 Application of Case Research .................................................................... 76 4.2.3 Instruments of Evaluation .......................................................................... 79

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Index

Empirical Data: Network Formation Processes ............................................... 89 5.1 The Austrian Case .......................................................................................... 89 5.1.1 Initiation ..................................................................................................... 93 5.1.2 Forming .................................................................................................... 103 5.1.3 Storming ................................................................................................... 110 5.1.4 Norming.................................................................................................... 123 5.1.5 Performing................................................................................................ 128 5.2

The Belgian Case ......................................................................................... 131

5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.3

The Turkish Case ......................................................................................... 151

5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 6

Initiation ................................................................................................... 133 Forming .................................................................................................... 142 Storming ................................................................................................... 148 Norming.................................................................................................... 149 Performing................................................................................................ 149

Initiation ................................................................................................... 155 Forming .................................................................................................... 163 Storming ................................................................................................... 171 Norming.................................................................................................... 189 Performing................................................................................................ 190

Comparative Analysis ....................................................................................... 193 6.1

Result of Network Formation ...................................................................... 193

6.1.1 Network Description and Visualization ................................................... 193 6.1.2 Planned Activities..................................................................................... 197 6.2 Comparison of Phases.................................................................................. 200 6.3 Country-specific Behavior ........................................................................... 211 7

Conclusions and Outlook on Further Work ................................................... 217

References.................................................................................................................. 225 Appendix.................................................................................................................... 241

Figures Figure 1: Research Framework..................................................................................... 12 Figure 2: Working Definition of Virtual Organizations ............................................... 18 Figure 3: Case Description Puma ................................................................................. 34 Figure 4: Case Description Virtual Factory Nordwestschweiz-Mittelland .................. 35 Figure 5: Definition of Cooperative Networks ............................................................. 42 Figure 6: Tuckman's Group Model............................................................................... 57 Figure 7: Formation Model of a Cooperative Network ................................................ 60 Figure 8: Virtual Factory ............................................................................................. 69 Figure 9: Research Design ............................................................................................ 78 Figure 10: Formation Process Austria ........................................................................ 129 Figure 11: Formation Process Belgium ...................................................................... 150 Figure 12: Turkish Network Initiatives ...................................................................... 172 Figure 13: Formation Process Turkey ........................................................................ 191 Figure 14: Model of the Austrian Network ................................................................ 194 Figure 15: Model of the Turkish Network(s).............................................................. 195 Figure 16: Comparison of Length of Phases .............................................................. 200

Tables Table 1: Development of VO-characteristics ............................................................... 28 Table 2: Virtual Profiles .............................................................................................. 33 Table 3: Comparison VO and Cooperative Network.................................................... 48 Table 4: Comparison of Models ................................................................................... 59 Table 5: Attributes of 5-Phases Model ......................................................................... 62 Table 6: Relevant Situations for Different Research Strategies ................................... 75 Table 7: Data Matrix..................................................................................................... 78 Table 8: Company Description Pre-Questionnaire....................................................... 81 Table 9: Interview Sample ............................................................................................ 82 Table 10: Material for 5-Phases Model ........................................................................ 87 Table 11: Trust Issues in Austrian Interviews ............................................................ 120 Table 12: Austria: Network Project Overview ........................................................... 123 Table 13: SWOT Analysis Network Belgium ............................................................ 146 Table 14: SWOT Analysis of the Turkish Manufacturers.......................................... 163 Table 15: Skill Matrix Super Structure Network........................................................ 173 Table 16: Product-market Matrix Super Structure Cooperators................................. 174 Table 17: CompressorNet Participants' Characteristics.............................................. 176 Table 18: Interview Description Turkey..................................................................... 187 Table 19: Network Description................................................................................... 199

1 Introduction Coming together is a beginning Keeping together is a progress Working together is a success Henry Ford 1863-1947

Henry Ford revolutionized work in the automotive industry by establishing mass production through detailed assembly line planning. He motivated his workers with a concept of high wages so that every employee was able to afford a car produced by the Ford company.4 Ford's ideas – often referred to as “welfare capitalism” – were amplified to a global vision on international cooperation which he examplified through collaboration activities with Agnelli of Fiat in Italy.5 Based on the above quotation, he was aware of the difficulties of making people and companies work together, which perfectly describes the topic of this dissertation: Cooperation is challenging. The reason behind this is the fact that human beings are involved.

1.1 Objectives and Research Contribution This work is based on the concept of cooperation between small enterprises and investigates social processes that emerge when people work together in the context of network formation. The background of the work was the participation of the 19-month research project VERITAS (Virtual Enterprises6 for Integrated Industrial Solutions)7, with the goal of establishing Virtual Industry Clusters (VIC) in Austria, Belgium and Turkey. VICs 4

5 6

7

However, Henry Ford’s ideas were not restricted to supporting employees; on the contrary, he established a quite hierarchical, dictatorial corporate culture and for example never allowed unionization. More information to be found at for example http://en.wikipedia.org/wiki/Henry_ford, accessed in October, 2006. More information to be found at http://en.wikipedia.org/wiki/Henry_ford, accessed in October, 2006. In various literature sources the terms Virtual Enterprise and Virtual Organization are used as synonyms (cf. Bauer/Koeszegi, 2003). In this study, the term Virtual Enterprise will be substituted by Virtual Organizations when possible. VERITAS, IST 2004-511013, Contract for Specific Support Action, Annex 1- Description of Work. For more information cf. http://www.veritas-eu.com, accessed in October, 2006.

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Introduction

correspond to networks of loosely-coupled companies that assure the cooperation preparedness of their members and enable them to form Virtual Organizations (VOs) whenever a joint business opportunity arises (Camarinha-Matos et al., 2004). A VO is described as a “(…) cooperative organization to explore business opportunities that one enterprise itself would not be able to work out.” (Sieber/Griese, 1998, p. 213) and regarded as „(…) a temporary network of independent companies – suppliers, customers, and even rivals – linked by information technology to share skills, costs, and access to one another’s markets“ (Byrne et al., 1993, p. 36). In the literature, it is commonly agreed that VOs are able to diminish typical problems of small enterprises. Cooperation is believed to increase flexibility and to enrich the product portfolio of specialized corporations. The author amplifies existing research on networks and VOs by investigating the network formation process from a social perspective. Small enterprises are in the author’s view supposed to be driven by risk-averse business-owners and therefore characterized by the need to establish long-term relationships among cooperation partners. Based on the model of Tuckman (1965) the group formation process is extended and applied to VOs. 1.1.1 Background of the VO Concept for SMEs Today’s economy is characterized by ongoing globalization, fast changing technologies and a turbulent business environment. These changes affect today’s enterprises’ production processes as well as their internal structures. Especially for small and medium enterprises (SMEs) this is not without problems. SMEs often lack sophisticated know-how or the financial background to respond to new market requirements and therefore need special consideration or even support to defend their market position and to survive. According to the official definition, SMEs occupy a maximum of 250 employees and their turnover does not exceed an annual amount of 50 million Euros.8 The European business landscape is a landscape of small enterprises: In the year 2003 the average European company employed seven people, and 99.8% of all companies situated within the European Union (EU) are classified as SMEs. These enterprises provide 8

http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_124/l_12420030520en00360041.pdf, accessed on 23rd of October, 2006.

Objectives and Research Contribution

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around 70% of the employment and 57.3% of the turnover in the private sector.9 This means that the performance of SMEs is highly important for the welfare of the society on a social and economic basis. Therefore the European Commission (EC) has taken steps to improve the situation of SMEs by strengthening their competitiveness and support their survival in the market. EU policies shall ensure economic growth and facilitate job creation for the whole region. Based on the Lisbon Plan of March 2000,10 the objective of the European economy is to become the most competitive and dynamic knowledge-based economy in the word. One of the main points discussed in this development plan is the fact that a lot of disadvantages of SMEs are mainly attributed to their size. While large enterprises can easily customize their products and services according to their clients’ needs, SMEs are likely to be more vulnerable in a changing business environment. They do not dispose of enough resources to assure flexibility and to quickly adopt for example production procedures in case of new customers’ requirements. In case of strategic reorganizations or the introduction of new products, the risk is quite high: Failure of SMEs can lead to insolvency, while larger enterprises are able to compensate losses with earnings of other parts of the enterprise. A possible solution to this dilemma is to enhance cooperation between SMEs. Cooperative structures and common production, selling or marketing processes are able to strengthen the competitive position of SMEs by giving them virtual size. This means that networks of smaller companies are able to act like larger ones. Of course, cooperative structures face also problems for SMEs: the main barriers of cooperation are seen in the risk to become a dependent supplier of a large company but also the fear to be forced to reveal secret or protected specific knowledge.11 To overcome these problems, the European Commission as well as national institutions invests in Research and Development (R&D) activities that promote new ways of business.12 Business models are created to face the global challenges and to provide 9

10 11

12

More details in the Observatory Report “SMEs and cooperation”, http://www.europa.eu.int/comm/enterprise/enterprise_policy/analysis/doc/smes_observatory_2003 _report5_en.pdf, accessed on 15th of September, 2005. For more details about the Lisbon Plan cf. http://www.europarl.eu.int/summits/lis1_en.htm, accessed on 23rd of October, 2006. ESNR Enterprise Survey 2003, reported in: http://www.europa.eu.int/comm/enterprise/enterprise_policy/analysis/doc/smes_observatory_2003 _report5_en.pdf, accessed on 15th of September, 2005. For more information about European Projects, go to http://www.cordis.lu/en/home.html, accessed on 23rd of October, 2006.

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Introduction

solutions for embedded organizations. One of these business models is the above defined concept of Virtual Organizations (VOs), i.e. best-of-everything-network, where different companies or individuals combine their core competencies in order to explore business opportunities that could not be handled by one single company (e.g. Sieber/Griese, 1998; Byrne et al., 1993). Best practice examples of VOs can be found in various literature sources: Wüthrich et al. (1997) or Goeransson and Schuh (1997) describe Puma13 as a representative VO, as only brand management and administrative issues are carried out centrally, while all other services like product development or R&D are outsourced to different partners and even countries. Airbus14 or Smart Car15 represent examples of VOs in the transport manufacturing sector where different companies come together in order to produce one single product or product line (Wüthrich et al., 1997). Rosenbluth International16, situated in the sector of transport and travel, combines different subsidiaries all over the world (Mertens/Faisst, 1997) and Amazon17 manages to transfer most of its business areas to the World Wide Web. Driven by these examples and business models, VOs like Agile Web18 – a federation of different manufacturing companies in the US – or IECOS19 – a Mexican Industry Cluster – came into existence. Sieber and Griese (1998) or Bremer et al. (2001) highlight the example of VIRTEC, a cooperation platform of Brazilian SME manufacturers as best practice example (Wüthrich et al., 1997; Müller-Stewens, 1997). Although the benefits of VOs and networks – like cost sharing, access to new markets or increased flexibility –- are widely known and discussed (e.g. Davidow/Malone, 1993; Sieber/Griese, 1998; Mertens et al., 1998), the realization of the concept remains challenging (Haas et al., 2007). Looking behind the scenes, a lot of the above-named VOs disappeared over time or became more traditional organizations. Today, the general company information of Puma20 or Airbus21 reflects the structure of mutual

13 14 15 16 17 18

19 20 21

http://www.puma.com, accessed in October, 2006. http://www.airbus.com, accessed in October, 2006. http://www.smart.com, accessed in October, 2006. http://www.rosenbluth.com/home.html accessed in August, 2004. http://www.amazon.com, accessed in October, 2006. Further information on http://www.beepknowledgesystem.org/ShowCase.asp?CaseTitleID=134&CaseID=610, on 24th of October, 2006. http://www.iecos.com, accessed in October, 2006. http://www.puma.com, accessed in October, 2006. http://www.airbus.com, accessed in October, 2006.

accessed


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shareholding.22 Other VO-project’s websites are not updated or maintained: Kiesel23, a virtual competence center in the environmental sector still provides information of the idea of bringing partners together, but obviously has no contact point to get in touch with. Agile Web, VIRTEC and VW Resende (Wüthrich et al., 1997) even no longer have a proper website. The same holds for Prolion, a best practice example described by Bultje and van Wijk (1998). Above all, the reader gets lost in general project information looking for example for the EC-funded project e-mmediate24 that aimed at establishing a handful of VOs around Europe. Reported failure of VO can be read about at the Cargo Lifter case, a former showcase of a VO in the air transport industry.25 On the other hand, the Virtual Factory Nordwestschweiz-Mittelland26 or Swiss Microtech Network27 are two representative, often-mentioned examples for wellestablished VOs (Goeransson/Schuh, 1997; Pouly et al., 2002). Both networks deal with the manufacturing sector (Swiss Microtech Network28 especially in microtechnologies), based on the main ideas of the Virtual Factory concept of Schuh et al. (1998): partners agreed on a stable platform of partners, forming project teams according to customers’ needs. Also KFS-Net29, founded on the principle of capacity sharing, represents a well-working VO that, like the two Swiss networks, seems to have adopted the concept according to its partners’ needs. While the concept obviously works in some cases, it does not fulfill participant’s expectancies in others. Although the best practices do not shed light on the relationship between size of the involved companies and the successfulness of the cooperation behind, the (perceived) risk for SMEs seems to be higher: While larger companies are able to cooperate in less important areas of their business, small corporations enter network relationships often because of economic reasons or even because of the 22

23 24 25 26 27 28 29

Although one of the main characteristics of a VO is the “one-face-to-the-customer” - philosophy that would not allow insights in internal structures, Airbus is known as one single - fully integrated - company since 2001 (http://www.airbus.com/en/corporate/people/company_evolution/, accessed in October, 2006) and Puma has become a large group with preferred partners during the late 90s (http://about.puma.com/puma.jsp?type=company&parent=13&id=13&lang=de, accessed in October, 2006). http://www.kiesel.de, accessed in October, 2006. http://www.eu-emmediate.com/main.htm, accessed in August, 2004. http://www.cargolifter.info/, accessed in October, 2006, or http://www.net-lexikon.de/Cargolifter.htm, accessed in August, 2004. http://www.virtuelle-fabrik.ch, accessed in October, 2006. http://www.swissmicrotech.ch, accessed in October, 2006. http://www.swissmicrotech.ch, accessed on 23rd of October, 2006. http://www.kfsnet.de/, accessed on 28th of February, 2006.

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Introduction

request to survive or being able to compete against larger corporations. Hence, SMEs might fear to lose their specific, specialized know-how and therefore require more stable and trustful partners, as they do not want to put themselves at high risk. The assumed risks for SMEs are on the one hand the problems associated with sharing know-how, because competitive advantage of small companies are mostly based on unique production procedures that are not shared with potential competitors. On the other hand, high flexibility is required from potential partner companies: every company should be able to quickly react and cooperate with the others and adapt internal structures as well as production procedures. This means that on the one hand, VOs are seen as helpful concept for VOs, on the other hand it might be very difficult for them to overcome SME specific challenges in the context of cooperation. Hence, the question arises, which aspects might be necessary prerequisites for success. 1.1.2 Research Approach Critical success factors often mentioned in the context of VOs highlight the necessity of trustful relationships between partners (e.g. Byrne et al., 1993; Jägers et al., 1998; Scholz, 1996) or the implementation of collaboration tools and advanced Information and Communication Technology (ICT) as the most important enabler for success (e.g. Camarinha-Matos/Afsarmanesh, 2004; Sieber, 1998). Other authors like Krystek et al. (1997) focus more on the qualification of VO’s employees. Sherer (2003) identifies the importance of “soft factors” in a study of 159 manufacturing networks and regards trust, commitment, information technology, the process of partner selection, and the intermediary support conduciveness of the external environment as the crucial factors. Despite investigation into critical success factors, there are no indications why in some cases the VO-concept works and in other cases does not. Although the factors identified via different studies overlap, they are mostly described in a qualitative way and do not reveal concrete guidelines how to establish a successful VO. On the one hand, external factors like the specific industrial or economic situation of a country may as well influence the establishment of successful cooperation as internal factors like the level of commitment or trust (e.g. Handy, 1995; Köszegi, 2001). Trust was introduced as a social amplification of neoclassical models that are based on opportunistic behavior and is seen as an instrument of coordination (Das/Teng, 1998; Jägers et al., 1998; Klaus, 2002; Scholz, 1996) next to price and hierarchy (Noteboom,


7

1996; Ring/Van de Ven, 1992; Zaheer/Venkatraman, 1995). It reduces complexity and opportunistic behavior in relationships and helps to overcome conflict situations (Granovetter, 1985; Handy, 1995). The examination of trust in the context of VOs reveals two main problems. First, the formation process of trust is unclear. Trust is considered to be reciprocate (Das/Teng, 1998; Jarvenpaa et al., 1998) and it takes time and personal contacts (Jarvenpaa et al., 1998) to establish trustful relationships. Additionally, there are theories that claim trustful people on the one hand, and mistrusting people on the other hand (Rotter, 1967; Rotter, 1980; Gräff, 1998). The second problem with trust is the question whether trust is really able to eradicate problems in cooperation. If a VO or a network fails, people say that there was no trust in each other. Critically spoken, this means that whenever something goes wrong, the problem can be attributed to the lack of trust. Although the discussion of trust allows a deeper insight into human attitudes, it is only partly able to explain problems and behavior in cooperation, since the relation between trust and performance is still contentious (Zaheer et al., 1998; Smith/Holmes, 1997) and the discussion and concepts of trust – at the current state of the art – are not able to overcome the problems of cooperation. Granovetter (1985) analyzed the basis of trust and as well rejected institutional arrangements as generalized morality, but argued that all (economic) action is embedded in social structure. He contradicts the theory of rational actors and ideal conditions for business transactions, and states that whenever there was trust in the past, there will be trust in the future, because of being embedded in a certain group where the individual would like to stay a member in the future (Hosmer, 1995). This social structure and the personal embedded relationships holds for networks as well: A network of institutions, especially of small and medium-sized enterprises (SMEs), is, first of all, based on the network of owners or CEOs behind it. From a social or individual point of view the author therefore states that the underlying (social) concept of a network is a group, i.e. “(…) two or more persons who are interacting with one another in such a manner that each person influences and is influenced by each other person” (Shaw, 1976, p. 11). While the discussion on the formation of VOs widely neglects the existence of human beings and their emotions (Sieber, 1998; Katzy/Dissel, 2001), the argumentation of the group model is based on the fact that the formation of a network of institutions requires the formation of a network of people, and refers to that fact that in a first step, it is not the organizations are linked to each other but the managers working in these organizations.

8

Introduction

At first sight, friendships and stable relationships are a new aspect for VOs. No matter if competitive or institutionalized arguments are considered, or if VOs are simply regarded as a possible new organizational form, all approaches are based on rational actors that join forces whenever it is necessary. The concept of VOs is constructed on the “homo oeconomicus” – an approximation of the homo sapiens that is maximizing its utility based on given preferences. Although often criticized (e.g. Keynes, 1936; Simon, 1997), the rational model serves as a basis for diverse organizational and economic concepts. For SMEs, however, the author assumes that people want to develop a network of actors where everybody can rely on each other and which enables a stable and balanced commitment from all cooperation partners. Social aspects and relationships are therefore concluded to be crucial in the formation process of a group or a network, respectively. While establishing a network among business owners it should be thought of as establishing a group or a team.30 In respect to this specific situation for SMEs the author develops a model that i) focuses on social aspects of networks and ii) concentrates on the very first phase of network formation. i) Different to former models, the author states the hypothesis that a network of companies is fundamentally just a network of people – or a group of people – that come together and try to form a well working team. Organizations cannot be formed without human beings and these human beings and their needs in an organizational context follow emotional processes. Brewer and Kramer (1986) as well as Dawes and Thaler (1988) argued that the identification with a certain group, called “group identity”, facilitates cooperation. The group forming model is also concordant with Granovetter (1985) who rejected both institutional arrangement and generalized morality as a basis for trust and, instead, argued that (all) economic behavior is embedded in informal social relationships. Embeddednes refers to i) historical or cultural aspects, ii) structural aspects like role behavior, but also iii) individual embeddedness in a social structure. The first two dimensions are often treated as specific determinants: cultural scientists (e.g. Hall, 1990; Adler, 1997; Trompenaars, 1995) investigated 30

In the literature, the difference between group and team is described by interaction with one another and the self-perception as a group for any social group (e.g. Schein, 1980) and a special focus on working within the same institution and with each other for teams (e.g. West, 2004). The author does not distinguish between these two terms as the literature on teams is based on the group concepts.


9

in behavior and characteristics of people coming from the same region and institutionalized responsibility is able to explain certain characteristics and attitudes out of role concepts (Lenk/Maring, 1998; Sichler, 2004). Both aspects are considered in economic transactions, but Granovetter (1985, p. 487) adds that “(…) actors do not behave or decide as atoms outside a social context nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete ongoing systems of social relations.” ii) Except for the attempts to establish simple Virtual Life Cycle models (Sieber, 1998; Katzy/Dissel, 2001) that describe the most important phases of business transactions in VOs, the process of VO and network formation has been neglected in the literature. Based on the idea of Life Cycle models,31 every organization follows a pre-defined process of development over time. Assuming that this also holds for VOs, the investigation of the different stages of development is a basic requirement for analyzing VOs. Cooperation between companies does – additionally – require special concern of social and relational factors in the beginning of a cooperation: Different stakeholders’ opinions have to be considered and high risk and dependencies might prevent actors from joint business activities. Furthermore, the owners of the different organizations generally do not know each other or have not worked with each other before. Risk-averse cooperation partners have to get to know each other and establish trustful relationships before they start working. Although there exist suggestions for Life Cycle models of VOs, including detailed descriptions about the activities to be carried out in every phase, the implementations often last longer than anticipated or a planned cooperation fails before it really can start. The starting phase seems to be crucial for any organization: Turnover and the number of involved people are still low and sales channels or customers have to be established (Shahidi, 1997). Comparable to new industries, in the emergent phase of an organization, the market potential is still unclear and growth rates cannot yet be predicted. Thus, the stability of market shares is very low at this stage and customer loyalty has not developed. Greiner (1972) and later Scott and Bruce (1987) agree that the specific disadvantages of an early stage of an organization can only be overcome by creativity, depending mostly on the entrepreneur him or her. The author claims that this also holds for network organizations and VOs. Although in the beginning, the organization is 31

For a detailed overview cf. Höft, 1992.

10

Introduction

rather unstructured and cash generation is clearly negative, commitment of the involved people and creative solution finding will lead to joint growth. Nevertheless, because of different interests of all parties, this phase is the one to decide future cooperation activities. Based on the two presented aspects, the author extends the (Virtual) Life Cycle model to classic social theories on group development (e.g. Tuckman, 1965; Bion, 1961; Bradford, 1964; Francis/Young, 1989) and creates a phase concept that includes five different phases describing how people get to know each other and become a team. Fundamentally, four of the five phases resemble Tuckman’s group formation model (Tuckman, 1965), but are applied for a network of companies. Therefore, the model includes a first phase, called Initiation where potential group members are contacted and selected. During the Forming phase, the need for leadership and the establishment of a Network Manager are considered and orientation and testing requirements of network partners are included. During the Storming phase, when conflicts and struggles about the power in the Network may arise, the effort of independence of partners has to be recognized. The establishment of rules and roles is essential during Norming, which should lead to the agreement of partners. Finally, after all four phases have been passed; the group starts to work as a team (Performing). The aim of this work is to gain deeper insights into the social structures of networks in order to derive hypotheses how to support the establishment of relationships between cooperation partners. This means that the deductive approach to establish a phase model is extended to an inductive verification and adoption. The initially descriptive approach that analyzes how the group and the characteristics of the network developed over time allows a diagnosis which – in a further step – lead to valuable insights how to systematically encourage and support the formation of VOs. The idea of the available research is based on the implication that if one is able to identify those factors that are responsible for being successful, suggestions for how to systematically encourage and support the formation of a VO can be derived. This could, in turn, prevent or at least advise future networks from failure. The main focus of this dissertation is to give a contribution to the scientific community and to close the gap between social and economic arguments in the sector of networks and VOs. In addition, the detailed and demonstrative research report also provides helpful guidelines for practitioners and industry people while establishing cooperation.

Structure of Work

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By reading this dissertation, the complexity of a network formation process will be better understood from economic as well as social preconditions.

1.2 Structure of Work The remainder of this work is organized as follows: Chapter 2 analyzes the theoretical background of VOs and discusses the different approaches that have been brought up by scholars. The literature review contains the accurate definitions of VOs as well as the origin and evolution of the organizational concept. The adoption of the VOconcept is related to a timeline in order to observe the evolution over time. A further part of the chapter reports on an empirical analysis of 30 VO examples (Haas et al., 2007). The analysis is based on cases that have been reported as best practices of VOs in the literature and includes documented reports but also current interviews and analysis of existing web sites. The sample includes examples that failed or adopted other strategies over time as well. Based on this study the author shows that two different types of VOs exist in today’s business environment: emerged vs. initiated VOs, clustered according to the drivers that led to network creation. Emerged VOs are driven by the business idea of one focal company that seeks its partners and organizes the network by appointing its strategy and formalization mechanisms. While most of these emerged VOs were founded during the 1990s, today’s VOs are more equalized and follow a jointly-defined strategy. These networks, initiated and/or funded by a public institution are the topic of interest during the analysis. Based on an extensive literature study about the evaluation of the concept of VOs over time, they are called Cooperative Networks. Based on definition and evolution of theory on the one hand, and the application of VOs on the other hand, a model of an ideal Cooperative Network, according to today’s business environment and the requirements of SMEs is derived in chapter three. Related to the theory of social embeddedness (Granovetter, 1985) the author shows that the formation of an initiated VO or a Cooperative Network in the context of an SME Network rather follows the concept of a group-building process (Tuckman, 1965) than the concepts of Virtual Life Cycles (e.g. Katzy/Dissel, 2001; Rabeol et al., 2004).

12

Introduction

The argumentation is based on the following two major propositions: Today’s VOs adopt a certain form of a Cooperation Network that is based on a long-term oriented stable platform of cooperation partners, supported via national or international institutions. For the establishment of a Cooperative Network of SMEs a personal network of the SME-owners has to be established. Group effects and group theory (e.g. Moreno, 1996; Bion, 1961; Kauffeld, 2001) are used to define requirements of personal relationship building. The model is applied to three network formation cases that were set up in order to strengthen competitiveness of SMEs in the manufacturing sector. All three of them have been accompanied and analyzed by the author for more than one and a half years. The research framework is displayed in figure 1.

Literature Analysis (Davidow/Malone, 1992; Bremer et al, 2001; Bultje/van Wijk, 1998; Camarinha-Matos/Afsarmanesh, 2004; Erben/Gersten, 1997)

Empirical Analysis (Agile Web, Behr, Cargo Lifter, e-mmediate, Euregio Bodensee, Flexcell, IECOS, IMPRO, KFSNet, Kieel, Konkraft Manufacturen, metalnet, mobile solution group, myteq, Nintendo, Prolion, Puma)

Conceptual Framework

Cooperative Networks “Cooperative Networks are stable and long-term platforms of cooperation.Equalized partners combine their businesses according to the jointly established strategy of the network. Cooperation is supported by agreed rules and roles and by trustful relationship between partners.”

5-Phases Model Based on models of group-building (Tuckman, 1965), Integration of (virtual) Life Cycle Models Focus on small enterprises

Model Development Case 1

Case 2

Case 3

Austria

Belgium

Turkey

Figure 1: Research Framework

The study uses a case survey approach in which multiple levels of analysis, including for example individual interviews, quantitative questionnaires, or process observation are used to develop a comprehensive picture of single cases. A detailed description of the methods of analysis as well as the evaluation procedure and the general research

Structure of Work

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design is explained in Chapter 4. Chapter 5 comprises the empirical observations and results of the network formation process in three different countries. The established phase concept is successfully applied to three cases. The attitudes of the network members can definitely be assigned to group formation behavior. A crosscase comparison, taking place in section 6, shows that, although developed diversely in the three countries, the main challenges in the phases resembled each other. Most similarities in people’s comportment were detected in the Initiation phase, characterized with a strong need for leadership. Main distinctions among the three cases were observed during the Storming phase, where particularly Turkish network participants showed activity and commitment, the Austrian network members behaved in a skeptical and resistant manner. Nevertheless, both attitudes showed a strong relationship to typical behavior during the related phase and therefore highlighted the validity of the model in unequal economic and cultural settings. The study is completed with conclusions and implications for further research in section 7. Here, the author concludes that only by jointly overcoming the challenges of every phase, a network will start to generate efficient results. The aspect of relationship building was successfully combined with current research in the field of VO and network theory. By developing a framework that is able to differentiate between developmental stages of a network formation process, the author managed to establish a prescriptive instrument for the network formation process. Limitations of the study and future research possibilities are highlighted at the end of work.

2 State of the Art In the following section, an extensive literature analysis as well as a comparison of 30 VOs and networks is reported. The discussion of current empirical and theoretical aspects serves as a basis for the study carried out in the empirical part of this work.

2.1 Literature Analysis This chapter highlights the theoretical background of VOs and describes how the concept changed over time. It points out how virtual structures developed over time and which aspects of virtuality, including for example coordination mechanism or the reaction on business opportunities changed and which remained. 2.1.1 Definition and Main Characteristics of Virtual Organizations Davidow and Malone (1992) were among the first authors to discuss the concept of Virtual Organizations. They argued that future companies would assume different organizational forms than before and developed the vision of a dynamic network of organizations, suppliers and customers that work together. Their ideas were based on, for example, Toffler (1987), who introduced a concept where the customer plays an important role in the design of a product – s/he decides how a product should look and which features it should display. This means that the supply chain was extended to the customer. In the view of Davidow and Malone (1992) work groups, departments and specialists should be combined as required by the current market demand, forming a VO. The term “virtual” is related to an artificial world, based on cyber technology. “Virtual” means “not real”, but at the same time describes something that is “apparent” or “could-be” reflecting an “as-if”-scenario.32 Therefore, no real building or office would hold the actors together but the network would consist of links in information and relationships. Davidow and Malone (1992) talk about a “virtual revolution”33, based on developments of ICT. At the same time they highlight the difficulties for companies that would have to change internal structures, and invest more in high skilled and self-organized workers. 32 33

For a definition cf. “(…)for the most part; almost wholly; just about.” in http://www.infoplease.com/ipd/A0728128.html, accessed in October, 2006. They compare the “virtual revolution” the technical revolution in 1770, pointing out the power of change on behalf of technology.

16

State of the Art

The concept does not follow a generally accepted definition. After Davidow and Malone (1992), several other authors picked up the idea and drafted definitions. Byrne et al. (1993, p.36) define a VO as ”(…) a temporary network of independent companies – suppliers, customers, and even rivals – linked by information technology to share skills, costs, and access to one another’s markets.“ Sieber and Griese (1998, p.213) similarly describe VOs as “(…) an appropriate kind of cooperative organization to explore business opportunities that one enterprise itself would not be able to work out.” Bultje and van Wijk (1998, p.9) also point out that in VOs „(…) companies quickly unite to exploit a specific opportunity and will disperse afterwards.” and Erben and Gersten (1997) add that “(…) each company contributes only what it regards as its core competencies.” It is commonly agreed that the aim of VOs is to explore business opportunities that could not be handled as a single company (e.g. Krystek et al., 1997; Bultje/van Wijk, 1998). Nevertheless, it is more common to describe a VO by a list of its specific characteristics. The main organizational features are the following: i) Focus on core competencies: Collaborating companies focus on their individual core competencies. These resources and know-how are pooled in order to form a best-of-everything network (Balint/Kourouklis, 1998). Differentiation from competitors is the main source of competitive advantage, because today’s markets require a high-competence portfolio (Erben/Gersten, 1997). If a company decides to focus on only a few products or services, the need for cooperation partners emerges immediately. Several authors argue that the focus on and the dynamic combination of core competencies enable VOs to meet the customers’ requirements in a very efficient way, and to react faster and more flexibly (e.g. Sieber, 1998; Bauer/Koeszegi, 2003). ii) One face to the customer: Services or products of a VO are offered from one contact point. This can either be a brand name of the VO or a focal company acting in the name of the whole organization. For the customer, a full-service supplier is always more attractive than several small companies that have to be coordinated. As long as the contact point ensures quality issues and liability, for the customer there is no need to know suppliers or partners of the main company. iii) Internationality: Due to the fact that VOs do not have a common shop or office where all employees are located, the network can non-restrictively expand to