By facilitating access to information, resources and opportunities, and by helping to overcome coordination difficulties, interorganizational networks can improve firm performance and help make it more innovative and perform better. While this is accepted, fundamental disagreement remains about what type of network structure facilitates these effects, or indeed, how an organization should go about building it. Colemans (1988) network closure theory vindicates the benefits of a network where partners are closely linked to one another. On the contrary, Burts (1992) structural hole theory stresses the benefits coming from forming alliance networks with otherwise unconnected partners, which creates opportunities for brokerage between those partners.
Martin Gargiulo, Associate Professor of Organizational Behavior and Jonghoon Bae, PhD candidate at INSEAD, attempt to redress this imbalance in network theory by studying the effects of 68 alliances conducted by 54 telecommunications firms in the US between 1991 and 1998. Looking at revenue growth and profitability, they focus on the endogenous micro-dynamics of these networks, empirically testing the opposing network theories. Direct and indirect ties linking a principal firm to its network partners are identified. Among these, a distinction is made between the value of forming new (non-redundant) direct ties that link a firm to new partners unconnected to the firms existing network and cohesive-enhancing indirect ties between two partners.
Consistent with the predictions of structural hole theory, the authors find that new direct ties that bring non-redundant links into an organizations alliance network have a positive effect on that organizations performance, whereas new indirect ties bridging across previously separate groups in the network had a negative effect on the principal organizations performance. Yet they also find that new indirect ties that solely increased the cohesiveness of an already existing group in the network also enhanced the principal organizations growth rate and profitability, a prediction that is consistent with network closure theory..
In being partially consistent with both theories, these results identified the dynamic conditions under which each theory holds. They also identified a new and unexpected phenomenon, namely, that while the formation of indirect ties around an organization initially negatively affected its performance, further additions of indirect ties within an already formed group could actually enhance performance. The authors extrapolate from this suggesting that the optimal network strategy for an organization is <i>selective</i> expansion to separate groups to gain from brokerage benefits, while taking advantage of, or even stimulating, close collaboration within those clusters.
These recommendations are framed with the warning that efficient partnership strategies must take into account the endogenous dynamics of the network. Network structures are ultimately the product of strategic interactions between players and thus the outcomes of an organizations intended action are contingent on the actions taken by other players in the network. As each firm seeks to occupy the most central position in the network from which it brokers relationships between disparate partners, a competition takes place. With each actor in the network pursuing its own best interests, a firms attempts to better its position can be thwarted by others. Thus, while central brokerage positions in a network are advantageous, they are typically short-lived. The authors suggest that once undermined, an organization would do best to actively promote further indirect ties to cement the cohesion, rather than seeking to reestablish a new brokerage position at any cost.