Origins of Network Advantages – “Matthew Effect” or “Managerial Design”?

Concerning innovation performance, management research is quite clear about one thing: the firm’s network is an important success factor. Networks with advantageous structural attributes help firms access valuable external knowledge, increase the likelihood of receiving new ideas and insights, and open up opportunities for learning. In sum, the firm’s network is a crucial strategic asset and network advantages can have wide-ranging competitive impact. Consequently, firms have a vital interest to build networks that facilitate innovation.

The key question, however, is how to achieve this endeavor. As most previous studies in strategic and innovation management employed networks as antecedent and not as outcome variables, firms’ positions within the network have usually been treated as given. On the other hand, scholars that discuss the origins of network structure usually focus on opportunity differentials between firms and refer to their size, reputation, or the historical development path of their networks. In other words, as those works attribute network advantages to a better “starting position”, they mainly describe a “Matthew effect” (i.e., the rich will get richer). Hence, there is a need for a better understanding of how firms can actively “make a difference” and consider the role of skillful “managerial design” in network development.

Network Management as Key Enabler of Network Advantages

In our recent research published in the Journal of Management Studies, we tackle this important issue and explore the role of firm-level network management as a potential predictor of network advantages. By network management, we describe a number of deliberately enacted processes and routines within the firm that serve to initiate, nurture, and restructure network ties to external partners. We contend that the more firms engage in those processes, the more they should be able to cultivate networks with advantageous structural attributes.

To this end, we argue that there are three network attributes that strongly drive firms’ innovation performance: (1) centrality, i.e., being well-connected and able to reach distant and diverse partners; (2) complementarity, i.e., being connected to partners who bring in expertise that the firm itself does not possess; (3) tie strength, i.e., being involved in repeated interactions with trustworthy partners. Developing networks with either of those characteristics is, however, a challenging task. To arrive at high levels of centrality, complementarity, and tie strength in their networks, firms must overcome various obstacles and roadblocks.

Based on original data from the largest inter-firm network in the German energy industry, we demonstrate that deliberate network management helps firms better overcome the obstacles of network development. Consequently, firms with sophisticated network management capabilities are occupy more central positions, compile more complementary partners, and cultivate stronger collaborative relationships. Those network attributes in turn result in significant increases in firms’ innovation performance. In all, our research demonstrates that firms innovate more successfully if they invest into developing adequate internal skills and practices for network management.

“Partnering” vs. “Networking” – Two Pathways for Effecting Network Change

Now, what are those exact network management processes and routines in which firms should engage? Based on previous research, we discern two distinct bundles of managerial practices, namely relationship management and portfolio management. Relationship management comprises processes that are needed to cultivate individual network ties to external partners. Here, the firm must engage in practices of coordination, communication, and bonding, e.g., conflict management and the development of mutually agreed-upon standards of collaboration with the partner firm. In contrast, portfolio management describes practices that address the firm’s network in its entirety. Among others, portfolio management encompasses searching potential partners, coordinating interdependences, and monitoring the performance of the firm’s overall network.

Our data analysis shows that both relationship and portfolio management help the firm construct a network that facilitates innovation, the two capabilities serve distinct functions. Portfolio management helps firms handle the information needs and interdependencies associated with network centrality, and enables them to realize first-mover advantages in the search for complementary partners. Relationship management, in turn, helps firms bind complementary key partners, and increases the effectiveness and efficiency of strong tie formation. Finally, our results suggest that both capabilities operate largely independently instead of reinforcing one another. Firms thus are offered two discrete options for creating network advantages: (a) “networking”, i.e., the thoughtful configuration of the overall pattern of the firm’s network ties based on high-level portfolio management; (b) “partnering”, i.e., maximizing the value of individual key ties based on high-level relationship management.

The full article is available at the website of Journal of Management Studies and can be accessed here: https://onlinelibrary.wiley.com/doi/full/10.1111/joms.12768

Keywords: strategic networks; network structure; network management; organizational capabilities; innovation