Espacios. Vol. 34 (7) 2013. Pág. 16
Network organizations. A review on structural efficiency in business
Organizaciones de Redes. Un vistazo a la eficiencia estructural en empresas
Paul VALDIVIESO G. 1
Recibido: 17-06-2013 - Aprobado: 13-06-2013
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The article firstly covers the evolution of network analysis as the starting point for the review of applied network concepts within the scope of business-minded organizations and how efficient information flows represent a core advantage in the modern economy.
A review of the network analysis’ evolution follows including an overview of key concepts. The analysis of organizations as network structures is developed next, highlighting the special role of networks for the efficient transfer and sharing of information within business organizations. Ultimately, some considerations into the efficient design of network architectures for business organizations are developed.
2.1. Origins of network analysis
As mentioned by Newman, Barabasi, and Watts (2006), networks as a topic of interest have been studied since the 18th century, ever since Euler analyzed the mathematical problem referred to as the Königsberg Bridge Problem which revolved around the city of Königsberg’s urban design marked by multiple islands and bridges. Such simple real-life situation made Euler wonder about the existence of a possible single path that could cross all of the city’s bridges only once. The nature of the task itself was not especially relevant, although it served as the first documented situation where the study of networks was brought to attention.
This was mainly due to two aspects: 1) as the beginning of the study of efficient paths (through the analysis of the Eulerian path, which was the route which crosses each bridge only once) and, 2) by acknowledging that graph theory is the key tool for exploring the relations between the network’s components in order to understand its importance (Harary 1995; West 1996) as quoted by Newman et al. (2006). It can be derived at this stage that the network’s components (i.e. the city’s islands as nodes and the bridges as links) can actually represent a large variety of animate and inanimate components, while the crossing of the bridges can represent the flow of anything across the different components. Therefore, the network concepts are in fact applicable to a wide array of natural or artificial phenomena, thus being applicable to a number of disciplines.
It was within sociological applications that network theory continued its evolution in the early part of the 20th century, as sociologists noticed that individuals or nodes could be represented within their social group in function of their mutual relationships or links and that such structure could be represented graphically through graph theory (Scott, Baggio and Cooper, 2008). From then onwards, the use of network analysis and graph theory has expanded greatly within the fields of sociology, math, physics, informatics, biology, and business and economics (Ganguly, Deutsch and Mukherjee, 2009).
2.2. Later tendencies on network analysis
Network analysis continued to evolve, lately incorporating businesses and organizations and the on-going connections within organizations (i.e. their internal network) and the environment (i.e. external networks), which enabled the formation of networks of networks. Currently, the study of networks considers their application for three particular aspects related to the networked organization in the modern world.
First, the modern networks’ approach aims at modeling real-world networks which arise more often in a relatively unplanned and decentralized manner. Clear examples of this are the study of social networks and of the Internet (Newman et al., 2006). This aspect is relevant to organizations as these are social systems aiming at fulfilling a given objective and all of this occurring within the real world, and as such under constantly evolving threats and challenges.
Second, networks and their study is currently considering network structures as evolving ones, in clear contrast to past views, which regarded networks as static structures (Barabasi and Albert 1999, Watts 1999). This is relevant to organizations as these evolve continuously precisely due to their quest to achieve its objectives within an evolving environment. As such, in order to survive in the modern environment organizations need to constantly adapt, in other words, constant adaptation becomes the evolutionary response.
Third, networks are currently seen as internally dynamic systems (Newman et al., 2006). The internal dynamicity within the organizations comes from the variable behavior of the network’s components, thus, the overall network and the manner in which it operates is determined by the continuous interaction of internal components each of these with variable reactions. The reason for this is that the building block of the organization is the individual, which is susceptible to both rational and irrational behavior occurring at any point during any possible interaction with other network’s components; furthermore, even in severely structured organizations it is not possible to expect the social organization to function under a fully mechanistic approach.
These three factors can be summarized by the view of the organization (i.e. the networked organization) as resembling a living system (Capra, 2002), which is essentially composed by other living entities. It should be highlighted that in the modern economy in the same way as traditional structures are shifting towards more networked organizations, the restricted view of the organization’s boundaries is also shifting as for the organization to survive in the modern markets, needs to expand its internal network to incorporate clients, suppliers, service providers and all other related entities; even though these might officially be outside of the firms’ legal frontiers (Barabasi 2003). This trend can be expected to continue under globalization processes and the advent of network economies.
3.1. Network business organizations and notions on structure
According to Van Alstyne (1997), the interpretation of the organization as a network would need to consider that within the organization’s operations, the process of decision making and all continuous flows of information depend on the individual and its technical as well as personal characteristics. Furthermore, the overall functioning of the network is affected by the behavioral component within each of the individuals which are additionally constrained by the organization’s rules and procedures and the environment in which they function. The network organization can be seen as a pattern of social relations over a set of individuals and their positions, the groups they form (either formally or informally) and the comprehensive organizations they ultimately shape (Sailer, quoted by Van Alstyne, 1997).
The concept of network organization is related to systems’ theory as systems are characterized for: 1) having a structurethat is defined by its parts and processes, 2) receiving inputs and producing outputs, 3) having parts with structural relationships, and 4) presenting some degree of integration and sharing of a common objective among the parts or components. Evidently, these traits are shared by the network organization as it has an integrated network structure (both with internal and external components), which processes inputs or employs resources allowing it to complete objectives.
Business organizations per se are systems with economic objectives and composed by social individuals interacting with other systems within the society. Nevertheless, on a more traditional view, organizations consists of levels, starting from each member, each group and ending in the whole organizational structure being shaped by hierarchical relations. These relations have a direct impact into the manner in which the work is actually developed for the completion of objectives. Basically, traditional hierarchy locates decisions concerning the organization as a whole at the top (Hannan and Freeman 1977) or in essence, at the upper levels. Moreover, traditional hierarchical relations are closely related to bureaucracy as bureaucratic structures include an element of order into human relations within the organizations, ideally making them more efficient, or put differently; bureaucracies serve as a tool to determine who should be given authority (Hatch and Cunlife, 2006). In effect, the authority which is assigned to each position within the organization is defined by its relative position in the hierarchy and evolves in accordance to the bureaucratic arrangements for the organization.
However, these views correspond to a traditional framework under which organizations are highly hierarchical and inflexible structures; nevertheless, under a modern approach, this relatively static view has been adapted to current fast-paced economic conditions. At the present, it might be argued that strict bureaucracies and more hierarchical structures have been displaced by more rapid-response entrepreneurial and strategic configurations (Casey 2004); evidence of this is the advent of network organizations within the network economy. This adaptation can be seen as a trend resulting from globalization processes and the increasing relevance of knowledge transfer as key to survival in the marketplace.
3.2. Network organization and information transfer and sharing
One of the main issues related to organizations as networks relates to the flow of information or rather to the fact that being part of the network allows its components to gather required information (Cross, Parket, Prusak and Borgatti, 2001). Needless to say, the process of gathering information is not only done through official or formal channels (i.e. those resulting from their position within the hierarchical structure), but also through unofficial or informal channels (i.e. those resulting from all types of connections that the individual might have in its network). In essence, the universe of connections that the individual might have within its network, results from the network architecture itself, it includes the official hierarchies and structures but also the informal one which originate in accordance to the organization’s nature and how it allows or fosters the creation of informal connections.
The knowledge that the organization as a whole possesses is one of its main assets, for such knowledge to be useful, in addition to being generated and continuously updated or improved, it should also be readily available as only timely availability and transfer efficiency enable value creation through the use of such piece of information, otherwise, it is irrelevant. Relationships or links (i.e. among people) allow for efficient transferring and sharing when: “1. the members know which person knows and thus when to turn to them; 2. it is possible to gain timely access to that person; 3. there is willingness of the person to engage in problem solving rather than dump information; and, a degree of safety in the relationship exists that promotes learning and creativity” (Cross et al., 2001).
The previously mentioned consideration for a successful flow of information is based on the effects of social networks developed for organizations. Needless to say, within any network, there are some components which do have higher strategic importance than others as such, network analysis should be able to identify key components, but also should employed to correct flaws affecting the efficient flow of information, or even identifying underutilized components (Cross et al., 2001).
Successful network organizations have as key component significant inter-personal trust among its members (Van Alstyne, 1997), this refers not only to trust between individuals but also trust combined with a safe organizational environment with a certain degree of freedom which foments components’ interaction, collaboration and sharing. Overall, a less hierarchical organization that is more open to informal processes in addition to the individuals’ common view towards the completion of the group’s objectives is a requirement for a properly functioning network organization.
4.1. The network structure
The network’s structure (or topology) can be extremely varied, for instance, within man-made machine networks such those developed within computer sciences, their structuring is determined by the fact that it is composed by machine components and as such the components’ behavior and potential rate and type of failures can be more accurately anticipated. This is why the design of such networks can be based on more constant (although scalable) structures (McCabe, 2007).
Even though there are some similarities between machine networks and those composed by humans, human-components are susceptible to being affected by behavioral variations, as well as, by inconstant performance and even interpersonal conflicts. In addition, networks which are composed by humans will evolve continuously resulting from the components’ on-going evolution or change.
For network organizations, information flows occur in accordance to the selected network structure. As such, an increased efficiency in transfer and expanded information availability are consistent with higher number of connection points. From a structural point of view, it should be considered that business organization networks are composed by humans, therefore, an organized formal structure and set relationships are useful to set ground or base conditions, however, the human components continuous change should also be exploited as human-based networks evolve on a permanent basis as new connections and informal links develop constantly.
4.2. The structuring of the network architecture in business organizations
The structure of networks applied to business organizations has essentially two opposing extremes, the first one, one of total randomness and complete absence of any structural considerations in its preparation, ultimately resulting in an anarchical development and lack of coordinated effort, referred to as “random” networks. On the other extreme, there are networks prepared exclusively as formal and static structures, and can be referred to as “regular” networks. Regular networks as a structural choice can be applied to those composed by machines; such mechanistic view is to some extent mimicked by extremely hierarchical organizations even though no network organization can fully replicate a system composed entirely by machine components.
The Small-world network builds on the notion that any two people in the world are connected through a number of intermediaries (Watts, 2003, 2004). In general terms, for network organizations, the Small-world model is seen as a mid-point between total randomness and a fully structured mechanistic approach.
Figure 1. Regular, Small-world and Random network structures
Source: Watts and Strogatz, 1998
Essentially, real-world network cannot be seen as neither completely ordered nor completely random, but rather both (Watts 2003 & 2004). This is a key consideration related to the ideal network structure for a network business organization. From a business organization point of view it is possible to grasp the concept of some structuring being necessary to achieve the necessary coordination or establishing basic ground rules or procedures to fulfill the organizational objectives. Although a network organization is not supposed to fully follow a machine-based approach this does not mean that all components are to be considered as equal, as evidently some nodes might be more important than others and therefore some degree of hierarchical structure is warranted as can serve as the basis for the flourishing of the network (Jones, Conway and Steward, 2001). Moreover, the base structure, should also allow for the adaptation to real-world characteristics of human-based networks by allowing for the creation and change of random links (i.e. those outside of the planned structure).
The core aspect is that the ultimate goal of being a networked organization is to allow for the correct flow of information, basically by enabling efficient creation and sharing of knowledge for the completion of the organization’s objectives. In fact, both cohesion and relations ease knowledge transfer (Reagans and McEvily, 2003); moreover, sheer organizational size (i.e. internal or external networks) can enhance information availability. However, regarding organizational size it is important to clarify that the organization viewed as a legal entity, has borders demarking the jurisdiction where it operates, the functions it performs, the assets it owns and the risks it assumes. Nevertheless, the organization’s legal boundaries should not constrain its ability to connect outside of the organization’s frontiers when efficiency gains or the minimization of certain risks can be obtained from forming networks involving external entities, in other words, an ideal approach allows for the circumventing of the organization’s borders, thus expanding the size of the organization’s networks, commonly through the use of other intra-organizational networks at first and later by incorporating external networks.
Under ideal conditions the organizational structure per se will tend to increase in size, expanding outsize of the borders of the organization. Even though the official size of the organization might be relatively small, its “extended” network (i.e. nodes which are not officially part of the legal entity) will increase continuously as the true network organization must necessarily incorporate external links to its environment.
The article developed a review on organizational design issues for network business organizations in the modern economy. Networked organizations must take into consideration the network architecture as a relevant factor towards facilitating efficient information transferring and sharing, while keeping the fulfillment of the organization’s objective as ultimate goal.
From the analysis of network considerations applied to organizations, it can be concluded that networked organizations are more efficient the closer their structure is built around a Small-world network model, as under this approach there is a base formal structure, while additionally allowing for the formation of some random connections enhancing information flows. In terms of organizational size, an efficient network organization is able to create and exploit competitive advantages not due to being necessarily large in terms of the legal entity’s size, but more importantly due to its ability to expand the scope of its networks. In fact, the organization’s legal boundaries should not act as a limiting factor to the need for connecting outside of the organization’s legal frontiers. This considerations support the creation of flexible organizations which are constantly evolving towards the formation of networks of networks, both incorporating internal and external entities and components.
Moreover, the establishing of structured networks is not to be considered as the goal itself but rather as the tool for the completion of the main business organization objectives of creating and maintaining a competitive advantage. Under ideal conditions the structure will tend to increase in size both by expanding internal networks and even more importantly by expanding outsize of the borders of the organization. This can be specially the case for nominally small legal organizations whereas their “extended” network (i.e. nodes which are not officially part of the legal entity) increase continuously. This potential for expansion should be seen as the evolutionary path for a successful organization, one that can expand both internally and externally since its organizational structure allows it to do so, which in turn determines the planning and execution of their business operations.
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