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Another key characteristic used to classify business networks is their governance structure, or the degree to which the network is managed as a formal collective (Gomes- Casseres, 1994). Networks can be classified according to the connectivity and closeness of their actor, resource and activity linkages. Thus, they can range from loosely

connected to very formal and integrated. How a network is governed, and which individuals or groups of companies maintain control, affects not only what the network

55 can achieve, but also the fate of individual members (Gomes-Casseres, 1994). Further, classifying networks according to their hierarchical structure (Gulati, 1998), provides insight into the nature of network decision making, the type of activities pursued by the network, and the extent of resource sharing between actors. Further, the distinction between formal and informal networks is also important as it provides some indication of the role of trust and social exchange (Brito, 1999).

At one end of the continuum, networks may be held together by an informally-accepted code or set of behavioural norms, which members accept as the basis for governing their behaviour and actions (Easton & Araujo, 1992; Morrow, Hansen & Pearson, 2004; Palmer, 2002). At the opposite extreme, network actors adopt a rigorous system that uses rules and procedures to govern their relationships and activities, and written agreements that stipulate how resources will be organised and distributed (Morrow et al., 2004; Palmer, 2002). Formal networks may also be classified as those which comprise firms that have come together for a specific commercial purpose or aim, or as networks that are characterised by contractual obligations or agreements (Dean et al., 1997; Easton & Araujo, 1992; Hall et al., 1997). Examples of formal networks may include formal industry associations, in which members cooperate for marketing or supply purposes (Morrow et al., 2004).

Formal agreements and contracts within networks not only regulate firm behaviour, but they also define the rights and obligations of the firms involved (Williams, 2005). Formal networks that are controlled by a governing committee of network representatives imply that certain firms or individuals have more power and control than others (Gomes-

Casseres, 1994). Because of their rigid structure and preference for rules and procedures, formal networks must be managed carefully so to avoid member conflict and

opportunism (Williams, 2005). Similarly, IMP researchers have found that formal contracts are often insufficient for resolving the uncertainties, conflicts and crises that a business network is bound to go through over time (Håkansson & Snehota, 1995). In which case, rather than exercise control and authority through a hierarchical structure or contract agreement, academics have suggested that committees are an effective means of

56 using socialisation and peer review in reaching consensus (Achrol, 1997). Actors in positions of seniority, or processes undertaken for the purpose of tradition, also play an important role in managing networks and the actions of certain individuals (Achrol, 1997).

Most formal networks, however, emerge from informal gatherings between business owners and managers (Zeffane, 1995). It is during these meetings that firms develop confidence and familiarity with one another. Over time, they begin to influence the values and behaviour of each other, after which point, the network becomes more structured and formal rules and procedures are developed (Zeffane, 1995). As networks evolve into more formal associations and their governance mechanisms develop, a certain image and credibility status becomes embedded in the network (BarNir & Smith, 2002).

Previous research has revealed strong support for the influence of a formal governance style on network outcomes. For example, Palmer (2002) found that some of the most effective networks in the United Kingdom tourism industry were those that were

governed by formal rules and conditions. Such networks are often managed externally by government agencies and industry associations, and these bodies have an important role in providing funding and administrative support to networks (Palmer, 2002). Government bodies have also been found to assist networks in organising regular social meetings and trade fairs between otherwise competing firms in the same industry (Gemser & Wijnberg, 1995). In contrast, Rosenfeld (2005) argued that the most successful and valuable

networks were those that the actors themselves created and managed, rather than those that were forced by external government agencies and policy. However, governments may also play a role in „kick starting‟ inter-organisational collaboration and providing incentives for innovation (Rosenfeld, 2005).

In their review of network literature published between 1985 and 2005, Provan et al. (2007) analysed the findings of empirical research according to the nature of network governance and decision making. They found that most networks make both strategic and operational decisions at a collective level, in which the allocation of activities and

57 interactions between members. A small number of networks may also be governed by a focal firm, or small group of firms. In such cases, the allocation of activities and

responsibility is controlled by representatives of the focal firm, who are also responsible for maintaining the network and seeking out valuable external relationships. Finally, networks may be governed by an organisation that is specifically created to oversee the network‟s activities and resources. However, the role of such an organisation is primarily support, hence, some decision making may still occur at the collective or focal firm level (Provan et al., 2007).

In contrast to formal networks, informal networks encompass individual representatives of firms that meet mainly for social purposes and/or to exchange information (Dean et al., 1997; Easton & Araujo, 1992; Lynch & Morrison, 2007). In which case, informal

networks may comprise small business owners networking or socialising with past and present business associates, (Morrow et al., 2004; O‟Donnell, Gilmore, Cummins & Carson, 2001). Others have defined informal networks as those that are based on the notion of trust, social bonds, and mutual benefit, in contrast to formal networks in which actor relationships are underpinned by rules and structure (Bengtsson & Kock, 1999; Easton & Araujo, 1992).

Prior research has found that informal networks generally have higher levels of

cooperation and lower threats of opportunism because the firms are more motivated to share resources and cooperate and there is less risk involved (Dyer & Singh, 1998). Furthermore, informal networks generally lead to longer lasting relationships, which in turn can make them more valuable than their formal counterparts (Welch et al., 1998). More recently, researchers have argued that informal networks provide a more suitable conduit for knowledge transfer, because information can be exchanged more freely when the networking between firms takes place outside of contractual boundaries (Taplin, 2010). Advocates of the IMP network approach also agree that informal mechanisms are more effective than formal contracts in the development of trustworthy and long-term relationships (Håkansson & Snehota, 1995).

58 A review of business network literature revealed that academics use a range of terms when classifying networks according to their degree of formality. For example, some distinguish between networks that are „hard‟ and „soft‟ (Buttery & Buttery, 1995; Rosenfeld, 1996; Sherer, 2003), or „strategic‟ and „social‟ (Birley, 1985; Burt, 1992; Johanson & Mattsson, 1988; Gulati, Nohria & Zaheer, 2000; Inkpen & Tsang, 2005) rather than the traditional classification of formal and informal.

Similar to formal networks, hard networks involve firms cooperating for the purposes of joint production, marketing, or entering a new market (Rosenfeld, 1996; Sherer, 2003). As such, they require formal agreement and contractual understanding. Hard networks are usually smaller in size because their membership is more exclusive and based on a

specific set of criteria. Expectations of member behaviour are also very high, and duly regulated in hard networks (Buttery & Buttery, 1995).

In contrast, soft networks are more informal, and include firms that simply come together to share information, ideas, and learn new skills (Buttery & Buttery, 1995; Rosenfeld, 1996). Traditionally, „soft‟ networks were an industry‟s trade association(s), whose role was to organise social events and gatherings for the firms in an industry. Thus, soft networks are generally larger in size, and the extent to which firms are expected to be involved in the network, is more relaxed and care-free (Buttery & Buttery, 1995). Previous researchers have argued that soft networks were vital to the development of many industries, as they enabled firms to build the level of trust required prior to them instigating more formal business dealings, relationships, and networks in the future (Rosenfeld, 2005). A summary of the key differences between hard and soft networks, or formal and informal networks, is depicted in Table 2.4.

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Table 2.4 The characteristics of formal and informal networks

Formal/hard networks Informal/soft networks

Contract commitment Casual association

Membership is exclusive and based on

level of strategic input Membership is open and based on loose criteria of eligibility Usually small in size Usually large in size

Formal structure, with clear expectations regarding contribution

Informal and casual structure, not necessary for all members to contribute, except for paying an annual fee

Frequent attendance at network events

and meetings required Occasional attendance accepted Members cooperate for the purpose of

purchasing, product development, production and marketing

Purpose is usually limited to providing information to members and organising functions

Source: Adapted from Buttery and Buttery (1995)

As mentioned previously, networks may also be classified as either strategic or social depending on their objectives and the type of actors involved. Social networks, in which the owner/manager is involved, comprise family members, friends and colleagues (past and present), or a manager‟s personal relations and contacts (Birley, 1985; Burt, 1992). As such, they support the definitions of informal networks cited previously. On the other hand, strategic networks can be defined as networks of relationships between a firm and its customers, suppliers, distributors and competitors (Johanson & Mattsson, 1988), or simply as networks with strategic significance (Gulati, Nohria & Zaheer, 2000; Inkpen & Tsang, 2005). The term „semi-formal network‟ has also been advocated by some

researchers, in which case a network‟s social interactions are given equal importance to the more formal and strategic aims of the network (Gibson, Lynch & Morrison, 2005).

From a horizontal network perspective, competitors may cooperate for both formal and informal purposes (Easton & Araujo, 1992). Formal inter-competitor networking may involve joint activity in the areas of production, procurement, research and development,

60 promotion, or investment in third parties (i.e. customers). When competitors engage in informal networking, social norms, information and people are generally transferred. The focus of this thesis relates primarily to the formal networking activities listed above. However, it makes the assumption that the transfer of social norms and information may enhance the formal networking activity competitors are engaged in.

2.9 Chapter summary

In the absence of comprehensive literature regarding the nature of interaction within horizontal networks, this chapter has reviewed theory and research as it relates to other forms of inter-organisational networks, alliances and dyadic relationships. It began with a review of the developments in industrial marketing and the network paradigm. This incorporated a description of the interaction approach, which originated from the IMP Group‟s research on the relationships and nature of exchange between buyers and sellers. Since its introduction, this approach has gained acceptance for its application to a range of network and relationship phenomena. The range of definitions for the term „network‟, and more broadly, inter-organisational relationships, were also analysed and placed in context with other relationship-oriented terms, such as „alliance‟, „cluster‟, and

„networking‟. This chapter concluded with a discussion of the different forms business networks can take, according to firstly the vertical or horizontal direction of relationships, and secondly, the degree of formality.

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CHAPTER three