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Structural Holes and Smart Business Structural Holes and Smart Business Network OrchestrationNetwork Orchestration

N. ViswanadhamIndian Institute of Science

Bangalore- 560012

n.viswanadham@gmail.com

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AgendaAgenda

Social Networks , Social Capital & structural Holes

Smart Business Networks

Examples: Li & Fung, 4PLs, Food Security

Governance: Partner Selection, Coordination & Execution of Global networks

Conclusions

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Social Networks, Social Capital Social Networks, Social Capital and Structural Holesand Structural Holes

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Social NetworkSocial Network

Social network is a social structure made up of a set of actors (Individuals or Organizations) and the dyadic ties between these actors.

Social network sites are web-based services that allow individuals to construct a public or semi-public profile and share the connection with others.

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s““Strength of Weak Ties”; ““Small World”

Phenomenon

Strength of Weak Ties: Ego has a collection of close friends-a densely knit clump of social structure; Ego also has acquaintances who are new to one another.

Each of these acquaintances have their own closely knit different clumps of social structures.

The weak tie between Ego and his acquaintance bridges two densely knit clumps of close friends.

Small World Phenomenon: People at great geographic distance communicate with one another through surprisingly few intermediaries because of bridges between social worlds; on average, six individuals en route—thus the phrase “six degrees of separation”

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Financial, Human & Social Capital

A person has three kinds of capital: 1. Financial Capital Which Is Cash On Hand, Reserves In The Bank;

Assets, etc

2. Human Capital: natural abilities, health, intelligence, looks combined with education and experience to excel in certain tasks

3. Social Capital which is relationships with other players who get opportunity to use his financial and human capital.

Similar definitions apply to companies as well

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sSocial Capital

Certain people do better by receiving higher returns to their efforts. Some people enjoy higher incomes, quickly become prominent and lead more important projects.

The human capital explanation of the inequality is that the people who do better are more able individuals; they are more intelligent, more attractive, more articulate, more skilled.

Social structure is a kind of capital that can create a competitive advantage for individuals in pursuing their ends. Better connected people enjoy higher returns.

In a firm some deliver quality product but there could be rain makers who deliver clients. The former does the work but the latter makes it possible to benefit from the work.

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The Social Capital The Social Capital of Brokerageof Brokerage

Robert and James have both six strong connections & one weak tie.

James is connected to people within group B, a densely connected network.

Robert is tied to everyone within group B & also has strong relationships with contacts 7 and 6 who connect him to different groups A and C.

Robert has the benefit of connections with different social groups .

People whose networks bridge the structural holes between groups have access to diverse information & can translate information across groups

These holes in social structure i.e. Structural Holes create a competitive advantage for an individual whose network spans the holes.

This is the Social Capital of brokerage

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sStructural HolesStructural Holes

People focus on activities inside their own group, which creates holes in the information flow between groups. Structural hole refers to the social gap between two groups.

Structural holes are the weak connections between clusters of densely connected individuals. Holes act like insulators.

Structural holes create opportunities for new ideas.

Success in innovation, often depends on the ability to interact with outside organizations and third parties.

Brokers exploit the structural hole that connects the two groups and focus on benefitting by establishing ties between disconnected groups.

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Four Levels of Brokerage that Create Value

Make people on both sides of a structural hole aware of interests and issues in the other group.

Transferring best practice is the second level of brokerage. People familiar with activities of two groups can transfer best practice of one group to the other group.

A third level of brokerage is to draw analogies and transfer beliefs & practices between groups ostensibly irrelevant to one another to create value .

– Southwest Airline operates a business model borrowed from interstate bus transportation in airlines.

– McDonald uses brought traditional assembly line techniques in fast food business.

Synthesis is a fourth level of brokerage. People familiar with activities in groups in an industry vertical can orchestrate new opportunities

that combine capabilities of all the groups.

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s“I invented nothing new, I simply

assembled into a car the discoveries of other men behind whom were centuries

of work.” Henry Ford

Ford and his engineers combined people, materials, and manufacturing equipment from the bicycle, carriage, granary and brewery, and meatpacking industries.

Ford exploited the emerging infrastructure of railroad roadways, & gasoline distribution

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Smart Business NetworksSmart Business NetworksSupply / Service Chains

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sInterInter--Organizational NetworksOrganizational Networks

An inter-organizational network consists of multiple organizations linked towards achieving a common goal.

Network members linked through information, materials or financial flows or shared resources or services, or social or Government connections.

Relationships are nonhierarchical and participants have substantial autonomy.

Connections can be trust based or through contracts.

Hospitals, SMEs, Cooperatives,……

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Product-service bundles are offered by IntegratedForward-Reverse supply chains

Integrated Manufacturing & Service NetworkCradle to Cradle Protocol

ii ii ii

Supplier OEM Distributor

Customer

B2B Logistics Chain B2C Logistics Chain

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iService Center Logistics

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sMulti Tier Supply Chain Network

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Source: National Research Council Staff (2000). Surviving supply chain integration: strategies for small manufacturers. Washington, DC: National Academies Press. Adapted from Lambert et al., 1998.

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Global Supply ChainsGlobal Supply Chains

Networks of companies forming a goal specific chain.

Inter-organizational social network with strong & weak ties

Strong ties promote commitment.– Keiretsu (Japan), Chaebol (Korea), Guanxi (China)

– The buyers may feel socially obligated to partners with obsolete capabilities & compelled to ignore more competent new comers.

Weak ties (arm length relationships) – Can severe ties if not competitive.

– Incentivizes partners to be on the cutting edge (cost & innovation)

Tension between Weak and Strong Ties

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sStructural Holes in Global SCN Context

Global supply chains have several structural holes. Brokers harvest the value buried in them.

– Hole between a suppliers (China) and US manufacturer

– Holes between Suppliers and Logistics Providers

– ……

One can call this Chasm or Distance. The broker need to bridge differences Social and Govt. laws, regulations and practices in resources (power , water, human, financial) and also in delivery infrastructure.

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Orchestrator- Supply Chain Network

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Orchestrator is highly embedded in the supply chain, all the actors will interact with it and fills several structural holes

The relationship with the firms provides O access to valuable resources. Firms also benefit from O’s know-how and relationships.

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ExampleExample

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Li & Fung Business Model

Li & Fung “orchestrates” the production of goods by others, drawing on a vast global network of highly focused providers to arrange for private-label manufacturing, primarily on behalf of US and European clothiers.

For a specific product or client, Li & Fung assembles a customized set of specialized providers to handle everything from product development to the sourcing of raw materials, production planning and management, and, eventually, shipping .

If glitches pop up at any stage of the intricate process along the network, the company can quickly shift an activity from one provider to another.

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sOrder Flow at Li & FungOrder Flow at Li & Fung

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European retailer

Li & Fung’s division

Order for x garments

Order processing• Procurement • Production & control• Logistics

Yarn procurement fromKorea

Weaving and dyeing in Taiwan

Zippers from JapanAnd China

Manufacturing in Thailand

Plant 1 Plant 2 Plant 3

Delivery to customer

Zippers from JapanAnd China

Useful materialAnd accessoriesfrom other partsof Asia

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Orchestrator Business ModelOrchestrator Business Model

Supplier 2 & 3 PLsContract

Manufacturer

Execution

Governance, Coordination and Overall Responsibility

CustomerOrders

OperationalStatus

Plans

Material Flow

Payment

Service

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sLi &Fung offers Social Capital to Clients:

Network, Relationships & Knowledge

Relationships with factory owners and managers: Suppliers often gave priority to orders from Li & Fung , because of payment on-time and fair evaluation of finished goods.

Connections (“government contacts in Hong Kong and Beijing,”, “ability to reduce impact of quota restrictions”)

Li & Fung has in depth Knowledge of the manufacturing capabilities, special skills, and business practices of each supplier and can offer choice to its customers.

Li & Fung managers keep themselves informed, in each country they operate, changing Govt. attitudes, labor costs, trade restrictions, tariffs or quotas, trade agreements, etc

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Multilayer Governance, Coordination & Execution

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sThree Types of Network Governance

The network may be brokered or may follow participant shared model.

In the participant shared governance model members divide responsibilities among themselves (Cooperatives)

Network governance could be through– Highly Centralized Network External Broker (Li & Fung, Olam Intl.)

– Participant Shared Network Governance (Healthcare, (Dairies,(Amul))

– Participant Shared Network Governance With a Lead Player

Producer-driven (Cisco And Nike)

Buyer-driven (Wal-Mart, Carrefour, Levi)

All three governance forms are in practice & none proved superior.

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Governance: Partner Selection, Coordination & Control

The supply chain is an inter-organizational network

A separate chain is formed for each order

Partner selection based on– Structural features (asset specificity, capabilities)

– Relational ties ( govt., social organizaions., cluster managements, etc.)

Coordination : Determining who does what and when and communicating to everyone

Execution: Monitor order status so that processes work as per plan & control exceptional events

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Transaction CostsTransaction Costs

Delivery

Resource

Institutions

Shipping, Inventory, Hard & Soft

Infrastructure

Clusters, Human, Financial, Power

Water

Taxes, Tariffs, SEZs, FTAs,

Social groups

Transaction Cost

Supply ChainProduction,

Quality, Transport

Coordination Costs Broker fees

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Governance: Partner selection, Governance: Partner selection, Coordination & ExecutionCoordination & Execution

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OtherAgencies

Coordination

Partner Selection

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sConclusionsConclusions

We attempted fusion of Social networks and supply chain networks with useful results.

Orchestration is a governance mechanism suitable for global service/supply chains.– Applicable to service value networks: complex services (an

assembly of several component services) from an open pool of diverse standardized service module providers.

Mathematical Models for Design of Governance Mechanisms– The partner selection problem can be formulated as Fuzzy AHP

or MIP problem.

– Coordination, scheduling problems can be solved using OR

– Decision support systems, Case based reasoning & Hybrid control are used for Exception Management and Execution

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Outsource if you do not have enough social capital .

Select a partner with high Social capital

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