Photo © Nathan Mandell

Kellogg Faculty Research: Ranjay Gulati, MORS

How the network adds to the net worth

Many firms may not realize the full value of their ties to other organizations through strategic alliances. Professor Ranjay Gulati's new book tells how to manage these 'network resources'

By Matt Golosinski and Adrienne Murrill

Countless advertisements and annual reports tout the idea of "socially responsible" companies. But what about "social" companies? What benefits might they gain from their connections to other firms?

Until recent decades, even the concept of inter-company partnerships was less familiar than that of competition between them. Competition, after all, is the historical basis of capitalism, with firms determined to outpace one another in pursuit of the most profitable value propositions. But, faced with mounting commoditization and increasingly demanding customers, many organizations have turned to cooperative arrangements with other firms to gain advantage.

"Most of us recognize that firms have internal resources that make them successful," says Kellogg School Professor Ranjay Gulati, an influential scholar of strategic and organizational issues, who has been ranked among the 10 most-cited researchers in economics and business by ISI-Incite. Such resources typically include intellectual property, factories and plants, technology, human capital — anything a company holds that can produce value for it. "We have long recognized and studied the value of these resources residing within the firm," says Gulati, the Michael L. Nemmers Distinguished Professor of Strategy and Organizations. "But a firm's connections to other firms through ties such as strategic alliances enhance its access to its partners' internal resources."

In addition, there are "more subtle resources stemming from the firm's connection to other companies," Gulati says. These include valuable information flows and timely access to new technological developments in the industry, as well as the ability to identify future alliance partners through referrals from current and prior allies. And in today's global economy, managers must recognize and use all available assets — within and external to their firms.

To create a framework for these complex dynamics, Gulati has introduced the concept of "network resources" as an important but overlooked factor in understanding organizational behavior. Network resources accrue from a firm's past and present connections with external constituents, such as strategic alliance partners, suppliers and customers, among others, and as such are distinct from resources that reside within the company's boundaries. Gulati says any business leader will admit that an extremely important asset for their firm is the connections they have built with important stakeholders. Yet very little research has sought to understand and articulate the antecedents and consequence of holding these valuable resources.

Gulati's new book, Managing Network Resources: Alliances, Affiliations, and Other Relational Assets (Oxford University Press, 2007), will help managers and researchers appreciate the breadth of resources available to companies. The text synthesizes more than 15 years of the professor's research on the dynamics of firms embedded in networks of alliances and other ties that influence their performance and behavior. According to Gulati, this body of work reflects a more comprehensive view of the resources available to firms, assets that are increasingly important in today's business context where going it alone is not an option. The research also accounts for "the complex interplay that may occur among the disparate networks of ties in which a single firm can reside." The book considers many issues, including how network resources help shape governance structures used to formalize ties, and how network resources accruing from a firm's connection to key stakeholders influence perceptions of its legitimacy among financial institutions and potential investors.

The relationships that generate network resources can be interpersonal, as well, including affiliations of the firm to other companies based on interlocking board memberships or past ties of upper echelon managers. Based in part on this observation, Gulati writes, "It is not simply the magnitude of a firm's prior ties that matters, but rather the distribution of those ties across current partner firms and past allies." In other words, who you know is at least as important as how many people you know.

Gulati suggests that a firm's network resources can provide it both with direct access to partners' resource bases, and a broader set of physical and informational assets, thereby shaping its alliance-formation behavior, decisions related to the governance of future alliances and, ultimately, its performance. An important but under appreciated benefit of a firm's prior ties, Gulati says, is the firm's ability to leverage those ties to gain access to timely information that reduces uncertainty and may trigger future ties. Many such contemporary ties are initiated "in the contexts of past or existing sets of relationships that are conduits for valuable, behavior-influencing information," Gulati suggests. He illustrates this principle and others related to network resources using examples from his doctoral dissertation at Harvard and multiple lines of subsequent research.

One example involves Starbucks, which Gulati considers a "relationship-centered company rich with network resources." By outsourcing a range of activities to key suppliers — Gulati terms this "shrinking the core" — and partnering with allies to provide a broader and higher value set of offerings to customers, or "expanding the periphery," Starbucks has maintained enviable growth and profits. The operating principle here is "leverage." By building a network of partnerships, Starbucks can leverage those ties to focus on what it does best and leave the rest to its partners, creating a much larger footprint of offerings and activities than it could have by itself.

Gulati notes that because of increasing commoditization — or homogenization of products and services across a wide swath of the economy — managers must consider redefining the very architecture of their firms to differentiate cost-effectively. Two major tactics for accomplishing this are shrinking the core and expanding the periphery, which are impossible to carry out without network resources, he says.

The more knowledge and insights managers can gain about the value and function of their firms' network resources, the more they will be able to realize the full potential of these assets. One important goal of Managing Network Resources, then, is to raise managers' awareness of these important but often overlooked assets. A second is to establish a "conceptual anchor" management scholars can use to develop a common vocabulary and research base that will enable a more coherent and applicable body of knowledge related to network resources.