NETWORK MODEL OF ORGANIZATION-ENVIRONMENT INTERFACE
What is referred to below as the network model is the outcome of a fairly broad research program dealing primarily with the functioning of business markets, which originated in the mid-1970s at the University of Uppsala. The research program has spread to a few other research institutions, mainly in Europe. The program can be described as a collection of studies with a largely common frame of reference (Hagg and Johanson, 1982; Hammarkvist et al., 1982; Mattsson, 1985; Kutschker, 1985; Ford et al., 1986; Turnbull and Valla, 1986; Thorelli, 1986; Hakansson, 1982, 1987, 1989).
The network model of the organization—environment interface stems originally from casual observations that business organizations often operate in environments which include only a limited number of identifiable organizational entities (actors). These entities are involved in continuous exchange relationships with the organization. In such cases each individual party exerts considerable influence on the organization. This situation is encountered most often by industrial companies operating in business markets which include a limited number of suppliers, competitors and customers. However, some more extensive empirical studies (Turnbull and Valla, 1986; Hakansson, 1989) suggest that this type of situation may be the rule rather than the exception for a wider population of business organizations in general. The propositions of the network model refer to situations and cases in which the environment of the organizations is of a concentrated and structured kind, i.e. it is constituted by a set of other active organizations.
When the entities constraining and impinging on the behavior of the organization are few in number, they are usually treated as unique counterparts, i.e. each one is endowed with a distinct identity. As a result of an organization's interactions and exchange processes with any of these, relationships develop that link the resources and activities of one party with those of another. The relationships (linkages) are generally continuous over time, rather than being composed of discrete transactions. They are often complex, consisting of a web of interactive relations between individuals in both organizations.
Within the framework of such an interorganizational relationship, a complex set of interdependencies gradually evolves. Activities within one party are connected with activities carried out in the other. Activities are carried out by actors pursuing their own goals and possessing their own perceptions of the interacting party's activity pattern, among other things. Activities undertaken by the parties in a relationship cannot, therefore, be connected without the active and reciprocal involvement of both parties. The establishment and development of an interorganizational relationship requires a "mutual orientation" (Ford et al, 1986).
Relating the activities of the two parties to one another entails adaptations and the establishment of routines on both sides. Given the distinctive nature of the parties, the interdependencies in the relationship become further strengthened. Through their relationship either party can gain access to the other's resources. To some degree actors can therefore mobilize and use resources controlled by other actors in the network. An organization's relationships with others represent the framework and form for the exchange process with other parties.
The interaction between the parties in a relationship entails more than just passive adaptation. While the two parties are interacting, their problems are confronted with solutions, their abilities with needs, etc. Reciprocal knowledge and capabilities are revealed and developed jointly and in mutual dependence by the two parties. Distinct capabilities are thus generated and have meaning in an organization only through the medium of other parties. They are unique to each party, since no two sets of related organizations are alike. In this sense the identity of an organization is created in interaction with its major counterparts.
When the environmental conditions of a business organization are of the kind described, when it is gravitating towards a set of other active organizations, then analogous environmental conditions can be assumed for the whole set of organizations with which the focal organization is interacting. The organization is I hen embedded in relationships with identifiable counterparts. This web of relationships can be called a network. One of the salient properties of such a network . consists of the interdependencies between the different relationships (Cook and Emerson, 1978). These interdependencies exist as regards activities, resources and actors. The activities in two different relationships can complement each other, if I hey are part of the same activity chain. Or they may be in competition. Similarly resources used, accessed or exchanged in one relationship can complement or compete with those used, accessed or exchanged in another relationship in which the organization is involved. Actors can use the existence of complementarity or competitiveness in their relationships in different ways, as they interact with one another. This can create not only triangular relationships, but even "dramas" involving four, five, six, or more participating business organizations.
The performance and effectiveness of organizations operating in a network, by whatever criteria these are assessed, become dependent not only on how well the organization itself performs in interaction with its direct counterparts, but also on how these counterparts in turn manage their relationships with third parties. An organization's performance is therefore largely dependent on whom it interacts with.
Before we can summarize the propositions of the network model, we must mention the concept of the environment of the organization. What appears to give a business organization its identity and to define its field of operations in the network view, cannot be fruitfully covered by the concept of the "environment", or by the more circumscribed concept of the "relevant environment". The environment is not a meaningful concept in these situations; more meaningful is the set of related entities. Moreover, the (inter) dependence of an organization on other entities makes it difficult to disconnect the organization from its network, since a business organization without its interactive environment loses its identity. It therefore seems useful to adopt the concept of the "context" of an organization rather than its environment, when we want to refer to the entities that are related to the organization. The context is enacted, it is created by the organization itself, and in a sense it even constitutes the organization itself. The propositions of the network model can at this point be summarized as follows:
1. Business organizations often operate in a context in which their behavior is conditioned by a limited number of counterparts, each of which is unique and engaged in pursuing its own goals.
2. In relation to these entities, an organization engages in continuous interactions that constitute a framework for exchange processes. Relationships make it possible to access and exploit the resources of other parties and to link the parties' activities together.
3. The distinctive capabilities of an organization are developed through its interactions in the relationships that it maintains with other parties. The identity of the organization is thus created through relations with others.
4. Since the other parties to the interaction also operate under similar conditions, an organization's performance is conditioned by the totality of the network as a context, i.e. even by interdependencies among third parties.
When and if organizations operate under the conditions described above, then acceptance of the propositions of the network model calls for a review of the assumptions underlying the business strategy management doctrine. We will undertake such a review in the following discussion. Our intention is to contribute to the development of a frame of reference for the strategy management doctrine, relevant to organizations operating under the kind of conditions for which the network model has proved its descriptive adequacy. We shall try to see how far the present frame of reference for business strategy can be enriched to become a more effective conceptual tool for intervention in the functioning of an organization if and when the organization is operating under the circumstances assumed by the network model.