The new ‘Knowledge Economy’

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Chapter 2 The literature review

Introduction

In this chapter an overview is given of aspects pertaining to virtual networks and the implementation of virtual organizing (with a virtual network of partners) as the means to participate in the e-marketplace. It is only appropriate to define the organization at this early stage of the discussion. Many definitions of organizations exist in the literature but for the purposes of this discussion the organization will be defined as:
“The organization is composed of people and groups of people in order to achieve some shared purpose through a division of labour integrated by information-based decision processes that continues through time” (Galbraith, 1977, p.3)
The various interpretations by different authors of the term „virtual organization‟ are also discussed in this chapter. This central role of networking capabilities in coordinating virtual activities is highlighted and some theoretical and philosophical background is provided on aspects of virtual coordination activities of the entrepreneur leading to effective virtual organizing.
The chapter is divided into four sections. First, the history of organizational constructs and their development is discussed. The next section considers important concepts including virtual coordination, competency as well as the resource-based theory, virtual value chain networks and how they relate to e-commerce. Third, the role of the entrepreneur with regard to critically important aspects such as information management, trust formation and value creation is discussed. Section four provides a critical review of the relevance of network capabilities for supporting the entrepreneur in virtual organizing. Finally, some conclusions are provided.
Chapter Two covers a broad spectrum of relevant issues and topics as outlined above. It is to be expected that such a broad and holistic approach to the issue unfortunately means that Chapter Two needs to cover a large amount of different and lengthy concerns.

Theoretical perspectives of organizational constructs

Globalization not only influences the way business is conducted but impacts on the type of organizational constructs adopted by small and medium- sized organizations (SME‟s) in the global marketplace. SME‟s participating in the global marketplace are therefore forced to respond to the increasing competitive global business environment by implementing new forms of organizational structures to improve their competitiveness. Section two begins with a conventional review of recent literature on organizational development, organizing the literature around widely accepted research aspects pertaining to hierarchical structures and pointing to current developments in hierarchical as well as network organization constructs. Due to the rapid increase in network organizational research in management we will review and classify related aspects pertaining to existing network structures and what is being done in the area with regards to new concepts such as virtual organizations.
The purpose of this section is to evaluate the differences between traditional hierarchies and network organizations. We also discuss various interpretations of what constitutes the virtual organization and draw some conclusions regarding virtual organizations. The discussion in this section concludes with an analysis of how virtual organizations can be implemented successfully in the global marketplace by SME‟s participating as web-based business entities.

Defining the various organizational constructs

The earlier organizational evolution differentiates four broad forms of organizational constructs, namely, functional, divisional, matrix and network. The main issue with the application of various organizational forms is what impact on each type‟s success. Miles and Snow (1992) consider market and technological changes to be two important considerations that impacts on the effectiveness of a particular organizational form. Various researchers recognize how an organizational form only seems to perform optimally within certain limits (Miles and Snow, 1992; Lucas and Baroudi, 1994). Each of the recognized organizational forms can be linked to specific strengths and weaknesses. The following discussion highlights more important aspects regarding the logic of each form of the hierarchical construct, which follows the discussion of Miles and Snow (1992).

The Functional form

This organizational form allows for specialization that is centrally coordinated. Firms would integrate forward and backward in an attempt to secure the efficient sale of their products and services (forward) as well as reliable movement of needed input to secure efficient operation (backward). The more important cause of failure of the functional form can be traced to the fact that it does not easily adapt to product or service diversity.

The Divisional form

The divisional form of organization allows for divisional autonomy that is linked to centrally based control. The division therefore does not get to evaluate its own performance while resource allocation in the company is conducted separately. The divisional form reacts faster to new opportunities and saves on the cost of reacting to new market opportunities. Miles and Snow (1992) indicate that „the divisional form achieves both flexibility and economies of scale by its ability to rapidly focus clusters of assets on new or expanding markets‟.

The Matrix form

The operating logic of the stable portion of the matrix form is similar to that of the functional form, namely, centrally coordinated specialization. That section of the matrix form that responds to unique or changeable markets emphasizes local operating autonomy that is similar to the divisional form. Miles and Snow indicate that with the matrix form a firm should be careful not to extend its operations „beyond the capability of its structure‟.
Hierarchically structured organizations came into being with the industrial revolution with its emphasis on supply-side controlled markets. Hierarchically structured organizations would attempt to gain cost-advantages with economies of scale which used to be created with the emphasis on their production lines. Each of the above discussed hierarchical organizational forms give optimal results but only as long as their operating logic is not violated (Miles and Snow, 1992). Presently companies still implement hierarchical structures with a great amount of success although it must be said that co-operation and connections with independent companies have always been present, or as Hakansson and Snehota (1995) points out: “No business is an island”. Firms with a hierarchical organizational construct adopt elements of the network organizational structure in order to compensate for deficiencies of a structural nature.
The network organizational structure is more effective and supports important aspects such as relations and cooperation between independent businesses (Lucas and Baroudi, 1994). Moller et al. (2005) refer to Axelsson and Easton (1992) when distinguishing between a „network of organizations‟ and a „network organization‟. Moller et al. (2005) highlight that according to the Industrial Network Approach (INA), any market can be described as a kind of macro network, or a „network of firms‟. Achrol (1997) again stresses the density, multiplicity and the reciprocity of ties and the shared value-system that define membership roles and responsibilities as a means to identify the „network organization‟.
The deficiencies of the functional, divisional and matrix organization structures have led businesses to consider the network organization structure as an alternative that is capable of overcoming the problems experienced with the hierarchical organizational structure (Hinterhuber, 2002). Miles and Snow (1992) identified three variations of the network type of organization that organizations need to consider, namely, the stable, the internal and dynamic network. The operating logic associated with each variation needs to be well understood in instances where managers attempt alterations to the basic network form (Miles and Snow, 1992).
The following discussion highlights the more important aspects regarding the logic of each form of the network organizational construct, which again follows the discussion of Miles and Snow (1992).
The Stable Network
The stable network can be related to the functional organization with relation to its structure and operating logic. The stable network integrates firms with independently owned specialized assets along a given product or service value chain. Miles and Snow (1992) explain how „the stable network substitutes a set of component firms, each tied closely to a core firm by contractual arrangements, but each maintaining a competitive fitness by serving firms outside the network‟.

The Internal network

The internal network creates a market that exists within the firm. Units within the organization trade goods and services amongst themselves at prices that are market related. Units also do business outside the network in the open market. The main advantage with the internal network is the exchange of managerial and technical know-how. This type of network gains competitive advantage through shared utilization of scarce assets.

The Dynamic network

The dynamic network links independent firms together for the once-off production of a particular good or service. The dynamic network achieves its full potential when various partnering firms participate in the virtual value chain. Any of these firms must be ready to be pulled together for a „project‟ to be released to another „project‟.
The internal network relates to the internal coordination of a firm while the stable network allows for external coordination and the dynamic network is a short-term network implemented for once-off projects or single products. The definitions of the types of networks are not very clear (Belussi and Arcangeli, 1998) and management researchers have since identified a fourth type of network. This development impacts on the other three types of networks where different terms and interpretations seems to be attached to each one and will be discussed in more detail in sub-section 2.2.2.
It is important to consider the applicability of a specific organizational construct to the needs of a specific business active in the global marketplace. Miles and Snow (1992) acknowledge that „if managers understand the logic of the form their organization implements, and if they keep that logic visible to themselves and others associated with the organization, the benefits of proposed changes can be weighted against the strains they impose on the total system‟. Miles and Snow continue and suggest that „if managers understand the operating logic of alternative forms, they can explore the possibility that environmental changes have pushed their organization outside the boundaries of one form and into those of another‟.
Any firm that implements a web-based organization with the aim to participate in e-commerce will need to consider at least some form of network organizational structure. Firms tend to opt for the network organizational structure when its functioning requires complementarities, ongoing relationships, and reciprocity between a core firm and its network partners (Ching et al. 1996). They indicate that the participating partner firms in a network configuration are more flexible in their operational functioning with regard to possible central administrative control. This is in contrast to relationships between participants in a firm with a hierarchic organization structure that tends to be fixed and inflexible. Participating firms in a network tend to complement each other‟s strengths. Firms that participate in a network configuration have a tendency and commitment to establish and cultivate ongoing relationships while in the open market prices tends to be the principle means of coordination (Ching et al., 1996).
The above discussion highlights the difference between the network and the traditional hierarchical type of organization. The next sub-section considers the relevance of the network organizational construct and its applicability to the way international firms conduct their business.

The network organizational construct and its application in the global marketplace

Knowledge and technology have an impact on the way business is conducted and on organizational constructs. The networking of the economy forced firms active in the global marketplace to redesign their organizations structures (Belussi and Garibaldo, 1996). Ojasalo (2002) refers to Moller & Wilson (1995) when mentioning that the term “network” refers to relationships between various firms that interact with each other. Achrol and Kotler (1999) identify four types of networks, namely internal, vertical, intermarket and opportunity networks. Hinterhuber and Levin (1994) also identified four different types of networks with very similar descriptions to that of Achrol and Kotler (1999) namely, internal, vertical, horizontal and diagonal networks. The four variations to the network construct as identified by Hinterhuber and Levin (1994) differ in their application within organizations. Firms which implement internal networks aim to reduce the level of hierarchy and to be more open to their environments. Firms which implement the vertical network structure tend to maximize the productivity of serially dependent functions by means of partnerships with interdependent skill-specialized firms. Intermarket networks enable and leverage horizontal synergies across various industries as needed. Firms which implement opportunity structured networks organize their activities around customer needs and existing market opportunities (Ojasalo, 2003). Each variation of the network organizational construct is applicable to a different set of needs and the firm needs to consider this when making the decision to implement a specific type.
When considering organizational constructs in international business and how organizational constructs have evolved over time, the movement towards virtual strategic networks can be explained. Hinterhuber and Levin (1994) indicate that the organizational construct typical of international businesses developed from „uncontrolled chaos‟ into conglomerates and then into focused business units. This process continued with the reorganization of enterprises into a collection of units where each one contributes core competencies, thereby creating a network of strategically structured networks. Figure 2.1 indicates how company networks can be analysed in terms of capital (equity) and operational (strategy) linkages in their evolution to strategic networks.

Chapter 1 Introduction
1.1 Introduction
1.2 Important impacts of globalization on business thinking
1.2.1 The new ‘Knowledge Economy’
1.2.2 The importance of information technology in the global e-marketplace
1.2.3 The opportunities e-commerce presents to the entrepreneur
1.2.4 Virtual networks competing in e-commerce
1.3 Virtual organizations and virtual organizing
1.4 Motivation for this study
1.5 Problem statement
1.6 A road map to the thesis
1.7 Chapter summary
Chapter 2 The literature review
2.1 Introduction
2.2 Theoretical perspectives of organizational constructs
2.2.1 Defining the various organizational constructs
2.2.2 The network organizational construct and its application
2.2.3 The need for virtual networks in the global marketplace in the global marketing
2.2.4 The concept of the virtual organisation
2.3 The role of information technology with web-based organizations implementing virtual networks
2.3.1 Virtual organizing in virtual networks
2.3.2 Resources-based and competencies-based theories and their relevance in virtual networks
2.3.3 Virtual value chain and its application to virtual networks
2.3.4 The impact of e-commerce on virtual organizing and the virtual value chain
2.4 The critical importance of entrepreneurship in virtual networks
2.4.1 The role of the entrepreneur in creating virtual networks
2.4.2 Competitive value creation in virtual networks
2.4.3 Information management supporting virtual organizing in e-commerce
2.4.4 Trust formation in virtual networks
2.5 The role of networking capabilities with virtual organizing
2.5.1 Internal capabilities in strategic business networks
2.5.2 The contribution of capabilities in a virtual supply network
2.5.3 Networking capabilities in inter-organizational relations
2.5.4 The literature review on networking capabilities
2.6 Summary
Chapter 3 The research objective and research approach
3.1 Introduction
3.2 The research objective
3.3 The research question
3.4 Research approach
3.5 An overview of the Grounded Theory method
3.6 Summary
Chapter 4 Developing the preliminary framework
4.1 Background 139
4.2 Preamble to the development of a preliminary framework
4.3 Articles used in the literature case
4.4 Hierarchical processes of coding of the literature case data
4.5 Implied contribution of the preliminary framework
4.6 Summary
Chapter 5 Developing the concluding framework
5.1 Introduction
5.2 The case studies
5.3 Theoretical sampling of case study data
5.4 Hierarchical process of coding of the case study data
5.5 The concluding framework
5.6 Implications of the concluding framework
5.7 Summary
Chapter 6 Defining the role of the entrepreneur in the virtual value chain of partners
6.1 Introduction
6.2 An ANT perspective of the Grounded Theory
6.3 The formation of a virtual supply network of partners
6.4 The Due Process Model perspective
6.5 The formation of the virtual network of partners
6.6 The role of information technology in the virtual value network
6.7 Defining the role of the entrepreneur in the virtual value network
Chapter 7 Evaluation of the research
7.1 Introduction
7.2 Overview of the research study
7.3 A set of principles for conducting and evaluating interpretive field studies in Information Systems
7.4 Evaluating the contribution of the research
7.5 Dell’s case study
7.6 Conclusion
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