Ministry of Education Term Paper: Network Organizations and Management

This term paper examines network organizations, defining them as integrations of independent companies that coordinate to function as a larger entity. It explores internal, stable, and dynamic network types, highlighting their characteristics and advantages, such as transaction cost analysis and conditions favoring their implementation. The paper analyzes the comparative advantages of network organizations over vertically integrated companies and open markets, using transaction cost analysis to explain why companies choose to outsource certain functions. A real-world example of Woolworths Holding Limited is used to illustrate the applicability of network organization concepts, followed by recommendations for improvement. The paper concludes by summarizing the strengths and weaknesses of network organizations and their application in today's business environment.

MINISTRY OF EDICATION AND SCIENCE IN UKRAINE
DEPARTMENT OF MANAGEMENT IN PRODUCTION
TERM PAPER
ON THE COURSE: FUNDAMENTAL OF MANAGEMENT
ON TOPIC: NETWORK ORGANISATIONS
ACCOMPLISHED
BY THE STUDENT OF GROUP:
SUPERVISOR: OLGA B. MOSIY, PHD

Contents
Introduction......................................................................................................................................1
Main Body.......................................................................................................................................1
Network organization......................................................................................................................1
Types of network organizations.......................................................................................................1
Comparative advantage of network organizations..........................................................................3
Conditions favouring networking organizations.............................................................................5
Strengths of network organization...................................................................................................7
Disadvantages of networking organization.....................................................................................8
How it can applied in today’s organization (Woolworths Holding)................................................8
Recommendation.............................................................................................................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
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Introduction
In this report discussion is made by focusing on network organization, which are generally
legally independent subsidiary or units of primary business that utilize different technique to
coordinate and control their interaction so as to function like a large entity with independent
decisions and control. The discussions will be made focusing on characteristics of network
organization followed by identifying types of network organization and their comparative
advantage and conditions that make them favorable. Also for clear understanding a real life
example of organization Woolworths Holding limited that is operational in South Africa is taken
to relate to concept of network organization strengths and weakness as well as applicability in
their business. Further recommendation for future improvement is given that can be considered
for applicability at Woolworths Holdings Limited.
Main Body
Network organization
A network organization is defined as an integration of independent companies or units which as
a single larger organization, by utilizing social mechanisms in order to coordinate and control
among each other. As stated by Ivancevich, Matteson and Konopaske (2007) the entities which
are comprised in a network organization are generally legally free organizations or differentiated
company but not in all cases. Some of the firms involved in a network organization can be
wholly owned subsidiaries by nature or can even be units of the company, but accordingly are
considered as different organizations which sell to customers who are outside in nature. There
are three types of network organization that can be identified based on their nature and
characteristics namely internal network organization, stable network organization and dynamic
network organizations
Types of network organizations
Internal Network
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According to Evtodieva et al. (2016) an internal network is defined as a large organization which
utilizes its various units or subsidiaries as separate profit centers of the organization. Internal
Networks can accordingly inspire their various units or subsidiaries for selling their products and
services exterior to the company as well which for instance can be seen in the case of General
Motors and its spark plug division. One of the vital rationales for allowing the units of the
company to sell their products even to the outside customers of the company is that the
companies believe that if the units require operating with the prices which are set by the market,
the units and subsidiaries have the incentive for improving performance and regarding reduction
of prices. In internal network organizations, the corporate headquarters of the units functions as
broker, which resembles the role of the Government of Japan regarding doing business.
Stable Network
The stable network organization consists of a central or hub organization which outsources
majority of their operations to separate entities. One of the most popular examples of stable
network organization which outsources work to other organizations is BMW, as the company
outsource close to 65% of their total production cost of a car of the company.
As opined by Zaraychenko et al. (2017) in a stable network the central or hub organization
mostly possess long term relationships with the suppliers of the company, those having access to
the computer system of the company and might be available at private sessions of planning of the
company. The central or hub organization can also possess various joint ventures, alliances, long
term contracts, etc. operating with different companies.
Dynamic Network
As stated by Scott (2015) the dynamic networks organizations outsource larger volume of their
operations to other companies. Generally, an integrator organization recognizes and combines
the assets which are owned by other organizations. Basically, the integrator organization is a
downstream entity whose core competency lies in the understanding of the market and its current
conditions. For instance, Footwear and Accessories Company Nike is considered as the focal
point of a dynamic network organization as the sole functions of the company comprises of
Marketing and Research and Development. Dynamic networks are most commonly observed in
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the fashion industry, toys industry, publishing industries, motion pictures industries, and biotech
industries.
Market Networks
According to Papa, Daniels and Spiker (2007) apart from the above mentioned types of network
organization, there can exist another type of network organization, which can be termed as
market network organization. Market network organizations do not have a central organization
that remains responsible for coordinating with the others organizations. As stated by Balestrin
and Verchoore (2014) instead, a market network organization is a combination of organizations
which trades in the market are categorized into a constant relationship pattern which gradually
becomes strong. Originally, members of the market network organization might not be
knowledgeable regarding the fact that they have started belonging into this pattern. The main
examples of market network organizations can be natural "subassemblies” of the economy
Comparative advantage of network organizations
As opined by Petković, Ana Aleksić Mirić, and Čudanov (2014) the first query which can be put
forward in terms of network organization is that what are the substitutes of network
organizations? There exists two basic substitutes of network organizations namely companies
which are vertically integrated in nature and the open market. The other queries which come up
regarding network organization is that how do the network organizations determine regarding
what functions to perform by their own and which function to outsource to other companies and
why all functions of the company are not outsourced to other companies operating in the market?
The answer to the above two queries taking the help of an example is as follows:
Transaction Cost Analysis
For instance if we consider a company which manufactures a commodity depending on a certain
kind of computer microprocessor, it is observed that the company purchases the micro-
processors from limited different suppliers on a recurring basis. The market requirement for the
chips varies differently at different time and also the availability and prices of the product are
never fixed. Additionally, there are large quality differences as the silicon wafer technology has
not yet been successful in solving some common problems regarding production. Every batch of
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micro-processor which are purchased needs to be checked and analyzed carefully and
accordingly defective micro-processors have to be returned and replaced. As opined by
Kowalska (2016) the differences regarding availability and price force the organization to buy
products in excess and accordingly maintain warehouses which are full of supplies in order to
ensure that the assembly lines of the company do not require to be closed with differences in the
processor market. By possessing a large number of inventories, the company can cushion their
technological processes which are core in nature and allocating the microprocessor in a
controlled and dependent stream. The main problem with the organization is that, maintaining a
large volume of inventory is costly in nature, and mainly when the micro-processors change
frequently and old models become obsolete in nature.
As stated by Wincent, Thorgren and Anokhin (2014) the problem gets worse when the
organization requires specific micro-processors from their suppliers in the form of customized
products which they have self-designed. Or, in another way, individual micro-processor
company does things in a different manner, and the producer has to adapt their designs to
specific micro-processors.
According to Cummings and Worley (2004) under the conditions such as frequent transactions,
supply uncertainty and customization of products, organizations will prefer to develop the
function by themselves or in-house or in other words it can be stated that they will integrate in a
vertical manner. The main rationale behind he decision is that contracting with other
organizations under the above mentioned conditions prove costly in nature as there are costs
which are involved regarding the maintenance of inventories, costs which are involved in
monitoring the exchanges for any sorts of wrongdoing, the costs which are involved in the
searching of suppliers for the company, the costs involved in stating legal contracts, etc.
Additionally, as the organizations are working with customized product of the suppliers there are
lacks of alternative sources of supply which are available in nature and as a result the
organization in all possibilities can be charged a premium price.
As opined by Denison, Haaland and Goelzer (2004) while, for the functions which do not require
repetitive exchanges, the functions which do not suffer from supply uncertainties and the
functions that does not need customization, firms will enter into contract with outside
organizations, as it will be financially feasible for the company in doing that. The costs
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associated with manufacturing and keeping an eye on the transactions by the company will not
be restrictive, as it provides advantage to the firms regarding hiring of specialists in order to
perform the tasks. The specialist organizations will help in delivering products of higher quality
and can frequently do it in a cheap manner as the result of the high volume of production of the
company which they do. Based on economic theory, in a perfectly competitive market, it is
always advantageous to outsource a process until the costs of transaction and outsourcing are not
expensive in nature.
Conditions favoring networking organizations
Network organizations are actually a combination of the market and the organization. They are
considered to be in the middle path of vertical integration and market disaggregation. The
specific conditions which favor network organizations are as follows:
Frequent transactions- Exchanges which are not frequent are dealt with in the best possible
way in the market.
Demand Uncertainty- According to Tobias-miersch (2017) uncertainty regarding demand is
defined as the inability regarding predict how well a product of the organization will sell in the
market. It has nothing to do with uncertainty regarding supply. For instance, the film industry
suffers various issues regarding its inability to forecast which films will be successful in the
market and which will be not.
Customization- It is also termed as specificity of assets and is defined as the exchanges which
comprise of individually customized products or services.
Task Complexity- It is defined of the measure regarding how complicatedly is the commodity
being manufactured.
Structural Embeddedness- It is defined as the limit to which organizations and its units are
linked to one another through a host of ties, in order to ensure that information regarding each
other is always available which helps in the coordination and controlling of the companies.
As stated by Naseri, Rouhani and Anvari (2014) it is evident that, majority of the conditions are
similar to those which favors companies instead than markets. Network organizations resemble
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more like companies than markets but they happen in time where uncertainty regarding demand
facilitates vertical integration of companies a bad choice. When technology and markets are
evolving at a fast rate, it is not feasible for an organization for investing in an entire division as
when things change they remain embedded in the entire infrastructure which have become
obsolete by now. Therefore they decouple by taking the sections out which are highly volatile in
nature but, because of all the other conditions, they require to maintain control in order to ensure
that they don't outsource it in the market.
A network organization resembles a daily organization which does not possess a system of direct
supervision, nor have set standard of rules and procedures which apply in the entire firm.
Therefore accordingly, they need to combine and control their divisions in various ways which
are as follows:
Joint payoffs- Networks are organized accordingly revolving particular products or projects.
Payments regarding work are arranged depending on the end commodity, so that even if the
product fails to work, none gets any money which provides incentives for everyone in order to
give their best.
Restricted access- As stated by Bass and Bass (2008) network organizations do not outsource to
anyone available in the market and instead they regulate their exchanges to just a few partners
who are long term in nature which make the companies more reliant on one other, in order to that
there is more cost involved in defaulting. Additionally, but enhancing the possibility of future
exchanges, which develops the conditions for currently avoiding an ineffective deal in order to
receive future rewards.
Reputation- In the film industry, every member interacts with each other. If an individual is
found hard to work with, or does not pull their weight, every member hears about the same
which affects the ability of those individuals to get future jobs.
Macro culture- As opined by Cantino et al. (2017) the presence of a shared culture of industry
helps in greasing the wheels regarding coordination. Every member communicates with the same
language, possess same expectations and understandings regarding the activities, and therefore
more can be implicit rather than explicit.
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Strengths of network organization
The network organization is based on the concept where different entities in an organization are
linked through informal networks and demand of activities and do not have a formal
organizational structure. The network organization emphasize relationship, teams and
communities rather than reporting structure. As such the strengths of such informal structure
within network organization such as Woolworths Holdings Limited allows for:
 Wider scope by linking subsidiaries throughout the globe with core entity and although
subsidiaries are related to main company but most of their decisions are taken
independently by subsidiaries itself at their respective locations (Balestrin and Verchoore
2014). The design of their structure is based suiting to their operations which hence
requires limited decisions to be made through centralized involvement of headquarter.
 It also allows organizational culture cut beyond traditional structure to share information
and resources amongst subsidiaries in a flexible way which helps to maintain
competitiveness in changing business scenario.
 Governance in network organization like Woolworths Holding Limited helps to lower
costs of governance as it enhances communication with potential suppliers on online
medium
 As all firms may not be effective in every operation so network organizations like
Woolworths Holding Limited offer better synergy as they work together and derive
leverages from combined operations and strengths that leads to better outcome than sum
total of outcome attained independently(Balestrin and Verchoore 2014). It even helps to
lower overhead expense of principal firm as each business entity performs with
specialized operation that drives efficaciousness and cost of economy.
 Also issues linked to human resource management is less in network organizations like
Woolworths Holding Limited as relationship are maintained for better coordination with
identification of emotion, needs and perception of each resources which helps to maintain
better control over quality of operations.
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Disadvantages of networking organization
As network organizations are stronger supplement of primary organization so they add extra
element to traditional hierarchy but are not perfect substitute hence there can be diverse outlook
which can bring certain weakness like:
 Primary organization may not have control over exercise of subsidiaries which may lead
to coordination issues. Also as structure in subsidiaries like Woolworths Holding Limited
varies from parent firm, so such structure change can lead to poor collaboration between
subsidiary and primary firm (Petković, Ana Aleksić Mirić, and Čudanov 2014).
 Also social interaction between subsidiary arm like Woolworths Holding Limited and
their primary firm is less so there is lack of exchange of ideas and experiences between
both entities.
How it can applied in today’s organization (Woolworths Holding)
Concept and principles of Network organization can be applicable to Woolworths Holding
Limited so as to build clear focus where their main focus can be on building core competency
through network organizational structure. Also network organization can help Woolworths
Holdings to use their time in doing what can be best done with optimal resource consumption as
decision can be taken independently which thus allows flexibility. Also network organization in
Woolworths Holding Limited can lower cost as most of their operations are specialized and
functional which helps to offer better quality product/service due to expertise in specific work
without adding on additional costs (Bass and Bass 2008). Further network organization can be
applied to Woolworths Holding Limited to enhance flexibility which can allow them to modify
production technique, design and quantity without facing much resistance as is common in
traditional structure, which can enable Woolworths Holding Limited to remain responsive to
change in demand that can be advantageous for customers, hence network organization concept
will allow win-win situation due to flexible scope for changes.
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Recommendation
Woolworths Holdings Limited can unlock flexibility of network organization further to make it
more evolved at different stages as these network organization do not have formal hierarchical
structure that gives rise to culture based models. Hence Woolworths Holding limited can focus
on disruption that is built by technological advancement to accelerate flexibility in their structure
and remain focused on being largely competitive by flexibly adapting to dynamic changing
scenarios. Woolworths Holdings Limited can learn from failed business experiences and leap
frog to next phase of evolution i.e. by focusing on flexibility within network organizations where
agility can help to address new challenges, with collaborative efforts across all functions, so as to
ensure flexible and powerful adaptation to constant change (Ivancevich, Matteson and
Konopaske 2007). It is recommended that more flexibility to adapt new change can be
underpinned by Woolworths Holding Limited by making organizational design decisions based
on system thinking rather than seeing organization structure which will help to focus on
initiatives that can benefit from incubating at edge. This will help Woolworths Holding Limited
identify opportunities to break silos through focused vision and commitment around outcomes
which will make network model concept in organization drive cultural change to empower staffs
through autonomous and improved decisions. Also visibility of network organization interactions
can help Woolworths Holding Limited bring in more flexibility by unlocking power of teams
that will permit them adapt to uncertainties.
Conclusion
Hence it can be concluded that network organization helps in better utilization of resource and
adaptability to environment as it allows rapid information flow between functions where entities
operate independently and takes own decisions by analyzing needed information. Also it allows
rapid intelligence filters to distribute information and make prompt decision so allows more
flexibility which together enables focus towards innovation and efficiency where combined
intelligence of process and people are utilized with informed decisions for resource consumption
to strive towards growth without any formal structure or silos and hence are more advantageous
to adapt to new demands in business.
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Appendix
Appendix: Type of organization and intended vs. actual structure of cooperation
inside the organization
Source: PeterLang.com (2019)
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