RESEARCH PROPOSAL

MANAGING STRATEGIC PARTNER UNCERTAINITY IN NETWORK

ORGANIZATIONS: CENTRALITY AND STATUS

CAN ERERDİ

SUBMITTED TO THE COURSE:

AD 587 – SPECIFIED TOPICS IN ORGANIZATION STUDIES

INSTRUCTOR: ARZU İŞERİ SAY

JUNE 06, 2016

1. INTRODUCTION

In an increasingly connected world, network theory is also gaining importance from

researchers and business people around the world. It is argued that organizations in

the modern era are more connected to each other, and thus the environment in

which organizations continue to exist is also expanding. “If scholars previously

modeled and encapsulated the environment within measures of competitiveness in

product or supplier markets, we know now that the organization's environment is

much broader encompassing its social network of external contacts.” (Gulati,

Dialding, Weng, 2002) It is also known that “firms organized in networks have higher

survival chances and that prestigious partners help firms go to IPO faster and gain

higher valuations at IPOs than firms which do not have these partnerships.” (Gulati,

Dialding, Weng, 2002)

In the modern research on networks, the perceived network consists of certain

elements:

The focal organization, (ego)

Set of organizations who have ties with the focal organization (alters)

In the beginning of the research, I have examined strategic alliances within networks

and the problems organizations face before selecting their partners for these

alliances. Through this examination, I have defined two problems arising in selecting

partners, mainly because of the lack of information and the uncertainty of the future

actions of the partners. Then I have proceeded to look at Network Organizations,

and defined Centrality as one of the key components for selection, as it is empirically

proven in research. In exploration of the research, I tried to examine the relationship

between organizational status and network position, and the strategic decisions

that have to be made in order to select the right partner in strategic alliances.

a. Literature Review

Theories on Strategic Alliances

Organizations tend to overcome outside contingencies by trying to shape the

environment around them. The nature of these agreements though, is ever-

changing. “They range from contractual and legally binding document based

agreements such as joint ventures to arms length contracts” (Gulati, Gargiulo, 1999)

Due to the changing business environment and globalization, strategic alliances

occur much more compared to the past. “Empirical evidence suggests that the

number of interorganizational alliances prior to 1980 was very small, but there has

been a virtual explosion since that time (e.g., Hergert and Morris 1988)

As with all business processes, strategic alliances are also suspicable to certain

pitfalls and disadvantages: (Gulati, 1995, 1996

a. “Organizations have difficulty in obtaining information about the

competencies and needs of potential partners”

Both sides of the equation needs to benefit from the alliance in order to complete its

objective, so this information is crucial for the adequacy of the potential partnership.

The applicability aspect of the alliance lies in this problem, as an organization with

the knowledge of competencies and needs of its partner is in a position to more

accurately assess wheter the alliance would be benefical for both, or for just one

side. And although it is very crucial to have this information before the beginning of

the alliance, it is rather difficult to obtain this information.

b. “The scarcity of information about the reliability of the potential

partners, whose behavior is a key factor in the success of an alliance”

Organizations know little about each other before they form an alliance, so there is a

high level of uncertainty on the future actions of the partner. “Organizations

entering alliances face considerable moral hazard concerns because of the

unpredictability of the behavior of partners and the likely costs to an organization

from opportunistic behavior by a partner, if it occurs (Kogut 1988; Doz, Hamel, and

Prahalad 1989).” Some characteristics of immoral actions by partners is free riding or

opportunistic behaviors.

Theories on Centrality

Centrality

“A firm's network centrality refers to the degree to which the firm has a strategically

important position in the network (Freeman, 1979)

Centralization is considered a good aspect for organizations within a network, and it

is empirically studied that it brings certain competitive advantages:

1. Information Advantages

a. Access

b. Timing

c. Referral

2. Control Benefits

3. Learning

Powell et al. (1996) predict and show that firms that have higher centrality in terms

of shorter path-length connections with other members of the network tend to form

more alliances.“ Forming new ties with other players in the organization is a way for

organizations to enhance their own visibility and be more attractive to central

players as a future possible partner. Central organizations tend to reject peripheral

organizations when determining potential partners because they tend to offer none

to some advantage to the focal company.

There are three types of centrality, which conveys the different ways an organization

is able to extract value from its organizational network:

Degree Centrality: From a network theory perspective, the degree of an

organization is represented by the number of organizational ties that an

organization has. When an organization’s centrality is high, it means that the

organization could be in a more advantageous position than others. This

could be explained by the fact that the increased number of ties represents

increased number of relationships, thus and increased ability to manage

resource dependence. Organizations with high degree centrality measures

are more closely located to resources dispersed within the network, and they

have superior access and ability to call on those resources when needed.

High degree centrality brings certain competitive advantages to the

organization:

o Makes a firm more visible to others

o Facilitate the magnitude of the value the organization extracts from

the network

o Leads to positive performance consequences

o More cooperative experience & more capabilities in possession (As

prior experience facilitates value creation through learning

,

Example of Degree Centrality

It is also argued that degree centrality is not a complete indicator of the

centrality of an organization within a network. Degree centrality is only

interested with the number of ties that an organization has, and doesn’t give

the information of the location of the ties within the network.

Closeness Centrality: While degree centrality is concerned with the number

of the ties that an organization has within the network, closeness centrality is

concerned with how close the organization is to the other organizations

within the network. It is fair to say that while degree centrality is related to

size, closeness centrality is related to proximity and connectivity, both

directly and indirectly. “Closeness centrality is computed as the shortest path

distance of each actor from others in the network “(Freeman, 1979) As the

path from itself to others will be quick, a central organization is more likely to

rapidly acquire necessary resources from others, such as information about

business opportunities and innovations. On the opposite side of the

spectrum, a central firm is easily accessible for others, thus making it more

open to opportunities and rewards coming from others within the network.

Example of Closeness Centrality

Betweenness Centrality: The third and last measure of centrality is

betwenness centrality, which as the name implies measures between what

the organization is positioned within the environment. “It is computed as the

frequency with which an actor falls between two other actors on the shortest

paths connecting them” (Freeman. 1979) Betweenness centrality is often

linked to the strategic position of the firm in the network. As an organization

is situated between two non-adjacent firms, it has an advantageous position

as to having greater control over the relationship between the non-adjacent

firms. In that sense, a firm with high betwenness centrality has the ability to

extract more valuable resources from the network than a firm with low

betweenness centrality. “Betweenness characterizes the kind of brokering

role ascribed to firms that fill structural holes” (Walker, 2005)

Theories on Organizational Status

In a sociological perspective, an actors status denotes his position within a social

hierarchy, where “higher-ranking positions are associated with greater esteem,

honor, and respect” (Goode, 1978) In the economical and organizational sociology

sense, there are two sources of an actor’s status:

1. Past Performance

2. Status of the affiliates

Podolny (1993) depicts that quality and status are correlational and have a loose

linkage between them. He claims that “two factors produce and maintain the

positive correlation between status and quality” Thus, status has some advantages

that it brings to an organization:

1. Status enables actors of social standing to create quality products at a lower

cost and achieve greater returns to quality

2. Status acts as a lens through which performance is evaluated

Organizational status is also highly linked to the “pattern of relations and affiliations

in which the actor does and does not choose to engage; audiences esteem those

who associate with high-status actors and who avoid relations with low-status actors

(Podolny, 2005).”

In that context, it is fair to say that two organizations producing the same product

would accrue different rewards from the same product, based on their status within

the network

Network Position of the Focal Organization

Network position of the focal organization refers to the centrality of the organization

within the strategic alliance process. A high Network position means a central

organization in terms of three types of centrality: Degree, Betweenness and

Closeness.

Organizational Status of the Partner Organization

Low (Peripheral) High (Central)

Low

Network

Position of

the Focal

Organization

(Centrality)

High

Collaboration

Example: Start-Ups

Resource: Knowledge Transfer

Alignment

Example: Umbrella Organizations

Resource: Status Transfer

Monitoring

Example: Suppliers

Screening Affiliate Relationships

Resource: Resource Transfer

Utilization

Example: Monopolistic Organizations

Cultural Fit

Resource: Culture Transfer

Organizational Status of the Potential Partner Organization

Organizational Status of the Potential Partner Organization refers to the

organization’s position within a hierarchy in the network. The two sources for

organizational status are past performance and affiliate status.

Hypothesis

H1: When the network position of the focal organization is Low (Peripheral), and the

status of the partner organization is Low

The status of the partner organization is one of the key aspects when choosing a

strategic partner. In this case, the status of the partner organization is low. In that

case, the partner organization could be perceived as a low quality organization, as

Podolny (1993) proposed that “status acts as a “signal of quality,” with status and

quality having a “loose linkage.” The second source of status is past performance,

thus it could be said that the partner organization in this context has either poor

performance in the past, or low quality. On the other hand, the focal organization in

this hypothesis has a low position in the network, which also means that it’s

peripheral within the network. As discussed before, network position is dependent

on three factors, which are closeness, betweenness and degree, and it is deductible

that organizations who are de-centralized within a network are lacking in these sub-

dimensions.

When peripheral organizations form strategic alliances with low status organizations,

the suggested method of partner selection is Collaboration. As both firms lack in

network position and status, it is necessary for these firms to collaborate in order to

facilitate the strategic alliance process. This collaboration process happens through

knowledge transfer and informal information sharing. The lack of resources at both

ends of the alliance makes it crucial for these organizations to communicate

effectively, share existing knowledge with each other and create formal and informal

ties in order to

H2: When the network position of the focal organization is Low (Peripheral), and the

status of the partner organization is High

Peripheral organizations tend to be far from other organizations and relationships

within the network, and they are less quick in allocating necessary information and

resources. On the other hand, organizations with high status within the network

deducted this status from their past performance and the status of their affiliates, so

it is fair to say that they are more advanced in resource allocation capabilities. When

a strategic alliance happens between these two types of companies, it is best to

employ Alignment strategies.

H3: When the network position of the focal organization is High (Central), and the

status of the partner organization is Low

As mentioned in the first hypothesis, a low rating in the organizational status means

either perceived low quality of services or bad experiences in the past. From this, we

can deduct that organizations in this scale lack primary resources and knowledge to

be selected for strategic alliances. On the other hand, our focal organization in this

box is high on the network position scale (Central Organization) As mentioned

before, central organizations are quicker to achieve needed resources from the

environment.

One of the main aspects of low organizational status is the status of affiliates. A low

rating on this scale therefore could be an indicator of bad relationships with

affiliates, or affiliate organization which are bad in shape could potentially effect the

focal organization. In order to avoid future problems, affiliate relationship

monitoring strategies should be implemented.

H4: When the status of the partner organization is High, and the network position of

the focal organization is High (Central):

High status organizations tend to have good relationships with their affiliates and a

good past performance view on the network. As these two conditions gather to

create a high status for the organization, the other organization in the equation is

also on a Central position In the centrality scale. This means that this organization is

closer, more in between and quicker in responding to resource allocation

opportunities.

In the strategic alliance of these two types of organizations, utilization is the strategy

to imply because both organizations are high on the scales.

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