Institut de Recherche de 1'Entreprise

INTERACTIONS, HIERARCHIES AND NETWORKS

by

Jean-Paul VALLA

Director of IRE (Management Research Institute in LYON)

Professor of Marketing LYON GRADUATE SCHOOL OF BUSINESS

Paper presented at the 6th IMP Conference Milano, September 24-25,1990

Comments welcome at following address:

IRE / LYON GRADUATE SCHOOL OF BUSINESS93, chemin des MouillesBP2669131 ECULLY CEDEX

Groupe ESC LyoriIMA (iR MX \TK SUM NN. UK Bl SINKSS

93,chemin des Vlouilles / B.P. 26 / 69131 Ecully Cedex / France /Tel m» r> 79.30.47 /Telex ESC \,W\ 900.486 F/Te^copie (33) 78.33.33.70

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INTERACTIONS, HIERARCHIES AND NETWORKS

BY

JEAN-PAUL VALLA

IRE/LYON GRADUATE SCHOOL OF BUSINESS

INTRODUCTION

The need for theory building in marketing has long been established, and is now accepted by anyone

who believes that marketing can become a scientific discipline. For that purpose a rigorous thinking

methodology needs to be applied not only in the study, but also in the theorizing of the field.

It can be admitted that the pursuit of marketing theory is also important in that it may eventually

enable marketing to be more efficient and effective as a managerial technology.

However, the peculiarities of marketing as a field of study and the methodological difficulties that

arise from the analysis of a complex multidimensional behavioral phenomenon lead to a risk of

conceptual and methodological anarchy.

This is one basic reason for considering so important to discuss global conceptual issues in a

metamarketing perspective. Indeed, in the history of marketing thoughts, some of the conceptual

frameworks that were proposed at very initial stages have proved to be long lasting, and still

influence marketing thinking today even though they may not always be very well founded.

Moreover, some of these frameworks, such as the 4 Ps framework (McCarthy 1960), are associated

with implicit epistemological positions that are not clearly stated most of the time (in that particular

case, a neo-classical view of the market concept). This is clearly today one of the weaknesses of our

field.

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As far as theoretical discussions are concerned, the specific area of "interorganizational

marketing" within the general field of marketing, presents the interesting characteristic of having

recently been influenced by reconceptualizations that may become of importance in the future.

One of these evolutions is the proposal by the IMP group of researchers of an Interactive approach to

industrial international marketing (Turnbull and Cunningham 1981, Hakansson 1982, Tumbull

and Valla 1986) and its subsequent developments. The second evolution is related to radical changes

in the way some economists deal with the concept of market and with microeconomic issues

concerning the theory of the firm. Williamson's propositions on Transaction Cost Economics and

his use of the concept of Hierarchy provide marketing researchers with potentially useful theoretical

tools (Williamson 1975, 1986).

More recently, researchers from Interorganizational Marketing have borrowed from sociology

another concept to fill up a gap in Interactive theoretical constructs (Mattsson 1983, Easton and

Araujo 1986, Easton and Smith 1986, Hakansson 1987, Easton and Lundgren 1988, Spencer and Valla

1989 among others), this concept is the Network concept.

Interaction, Hierarchy and Network constitute now a potential system of core concepts which should

provoke discussions between marketing researchers.

Thorelli (1986) proposed his own vision of the relationship between another triad of concepts,

Networks, Markets and Hierarchies, under a strategic management point of view. To our

knowledge, no answer has been given so far to his proposal, which should deserve more attention.

The purpose of this paper is indeed to tackle one of the most challenging issues in

Interorganizational Marketing theory : could we progressively agree on what is the central focus of

Interorganizational Marketing research and on a global conceptual system (a paradigm ?) that

would federate our present and future theoretical constructs, and have the potential for becoming a

stable referent in our field ?

With this very ambitious - and long term - general objective in mind, a first -and modest- step is

proposed here.

In a first section, we shall try to adopt a clear global research focus and present a set of core concepts

for the study of Interorganizational Marketing. The second section will be based on a critique of

Thorelli's proposal. Finally, in a last section, we shall propose an alternative to Thorelli's view.

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A RESEARCH FOCUS AND A SET OF KEY CONCEPTS FOR THE STUDY OF

INTERORGANIZATIONAL MARKETING

There was always (and there may be still for many) an ambiguity as to the "object" of marketing as

a scientific discipline. The choice of object or focus of analysis by marketing researchers has

oscillated between market (the exchange place and process), supplier ( the marketing behavior and

strategy) or customer (the purchasing behavior and strategy) perspectives.

Of course, the choice of focus in the study of marketing is not indifferent in theoretical terms. For

instance, an important part of the studies based on the observation of suppliers' marketing activity

have soon adopted a supplier's point of view, therefore producing a biased, unbalanced, one-way-

active vision of marketing. Marketing seen in that way is rightly restricted to the status of a

technology of the firm, and however legitimate it may be, can not possibly provide under that form a

basis for the constitution of a scientific discipline.

Exchange: a relevant focus for marketing research.

A significant progress was achieved when exchange became accepted by many marketing scholars

as the core concept of marketing (Alderson 1957, Kotler 1972, Bagozzi 1975, Hunt 1976). Nevertheless,

such a progress may also be limited to a superficial change after all.

Kotler (1984) for instance states that exchange implies five conditions :

(1) There are two parties.

(2) Each party has something that could be of value to the other.

(3) Each party is capable of communication and delivery.

(4) Each party is free to accept or reject the offer.

(5) Each party believes it is appropriate or desirable to deal with the other party.

Through this statement it becomes quite obvious that chosing exchange as a core concept does not

necessarily imply a change of paradigm. More exactly, the paradigmatic position of a marketing

researcher depends both on his choice of focus and on the theoretical conception he has of his research

object.

In the case of Kotler's statement, the adoption of an "exchange of values" rather than just a

traditional neo-classical "economic exchange" point of view does reflect a shift in perspective which

extends the scope of the marketing concept. At the same time, it does not consider the possibility of a

reciprocal influence between the two parties (interdependance, offering or reciprocal benefits

negociations) which would change the exchange inputs and outputs during the exchange process

itself, through interaction between the parties. This view of the functioning of some industrial

markets is for instance the one that is shared by the researchers from the Interactive School of thought

(Kakansson 1982, Turnbull and Valla 1986, op. cit.). A change of focus can thus be done without a

major change of underlying theoretical assumptions.

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The adoption of exchange as the focus of marketing research is an important first step, but is not

enough to provide a coherent structure for the discipline, in spite of its many advantages. Its first

advantage of course is that conceptual and methodological issues concerning exchange have been

well-discussed in other disciplines such as economics, sociology, psychology and anthropology. It is

obviously a key concept for a wider field of research concerned with human behavior. Another

positive aspect is that the position of "marketing exchanges" as a specific field of study within a

"general theory of exchange" have rather well been established (Houston and Gassenheimer 1987).

In the sub-field of Interorganizational Marketing, Valla (1986) also proposed a simple classification

scheme to isolate a proper field of research as illustrated in diagram 1.

1. The general theoretical field

2 . First level of classification ( )

3. Second level of classification ( )

THE STUDYII EXCHANGE

transfer of products or services

DIAGRAM 1 The focus of marketing research

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Let us assume for the purpose of this discussion that a rigorous formulation of an exchange

perspective in marketing theory is well under way. The question still remains : do we need a theory

of exchange or do we need a theory of marketing ?

In many ways Bagozzi (1979) may well answer the question when he calls for a "formal theory of

marketing exchanges". It is of course not just a question of wording. Indeed, it is our position to

consider that we are primarily concerned with business exchanges, and that it is a weakness to have

adopted in some instances such a large definition of the marketing concept. A similar comment

may apply to the concept of exchange. "The notion of exchange is universal and as ancient as man

himself ... Each discipline has conceived of exchange in a narrow, specialized way ... Typically,

the conceptualization found in a particular discipline is tied implicitly or explicitly to the

Weltanschauung of that discipline" (Bagozzi 1979, op. cit. p 431). If we follow a similar position we

need (1) a coherent conceptualization of exchange, (2) a paradigm of exchange environments

adapted to marketing exchanges, and (3) a theory for explaining marketing exchanges. Our

objective is here to contribute toward the satisfaction of the first two needs.

Originally, exchange is concerned with the transfer of (something : goods, prisoners of war, blows,

words, ... ) between two parties. Marketing exchanges consist of a passing of value and benefits

between consuming and supplying groups. They refer to satisfaction-seeking behaviors founded on

needs and goals by individuals and organizations. Marketing exchanges ultimately imply the

transfer of goods and/or services from one party to the other and for a counterpart value.

However, exchange (the process) is broader than transfer of ownership or transaction (the legal or

material result). Marketing exchanges contain interpersonal and interorganizational social

exchange dimensions as much as (and sometimes more than ) material ones.

The recognition of the multidimensionality of exchange in marketing theory is possibly what

distinguishes most marketing theory from economic theory. We are concerned with the study of the

behavior of actors. We need to understand the actors' behavior in order to understand the exchange

processes and outputs, and we are not interested in the homo economicus , even with his new modern

characteristics, because in the eyes of many marketing specialists, homo economicus is just another

word for "black box".

In our specific field of Interorganizational Marketing, the context of the study of exchange is the

market and/or the relationship between a buying and a selling organization. The latter may

correspond to a dyad (buyer - seller), or a triad (buyer - intermediary - seller), or a more complex

relational exchange system. Understanding markets and relationships functioning and dynamics

is a crucial goal for marketing researchers.

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Empirical analysis of interorganizational buyer-seller relationships show that under certain

conditions such relationships tend to be long-lasting and may become institutionalized. In such

instances, both parties play an active part in the exchange process and its outcome can not be

understood without an in-depth analysis of the relationship between the two organizations.

The interaction concept was used to conceptualize exchange processes in an interorganizational

environment. The Interaction Model was produced (Hakansson 1982, Turnbull and Valla 1986, op.

cit.) to propose a renewed paradigm for the study of exchange between organizations.

Interactions, Networks and related concepts.

A set of related concepts was also articulated from the Interactive Approach. The resulting conceptual

framework helps understand the market/relationship context and was exposed on several occasions.

What follows is adapted from Valla (1986, op. cit.).

Organizational sellers and buyers alike are constantly involved in a number of relationships in the

industrial system. The management of such relationships may require important resources on

either side in some instances. Considering the potentially long lasting effect of this allocation of

resources, it may be properly seen as an investment. Both sellers and buyers invest in relationships

(micro-investments) and in market positions (macro-investments).

Differences in investments lead to heterogeneity in the network of relationships of which a given

firm is a part.

Long-lasting relationships are a stabilizing factor in industrial markets, but the observation of

industrial markets show that they are characterized by both stability and change. Change factors

may be related to buyers' needs, to technology, competition between sellers, or legal, social and

economic events.

The forces at play, their impact on the behavior of the organizations within the industrial system,

explain the particular characteristics of industrial markets at a given point in time. They also

explain industrial market dynamics. Regulation of the system can eventually be obtained through

interaction between its parts, i.e., between the actors.

For instance, organizations perceive risks in relation to the level of uncertainty characterizing the

system in which they act. For organizations acting on industrial markets, risks endanger the

achievement of their objectives. Perceived risks may therefore strongly affect their exchange

behavior, considering their effort to reduce risks to an acceptable level in the exchange

environment.

Some buyers tend to handle risk through interaction with sellers. Others prefer not to rely on

external interaction in order to reduce risks. The resulting dependance upon external counterparts

may be perceived as a greater danger.

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Indeed, buying and selling organizations on interorganizational markets may be seen as being

largely interdependant. In order to increase its relative independance, a particular organization

may try to influence the general balance of the system as a whole, or of one of its parts. An

organization may pursue power goals through interaction in direct buyer-seller relationships or in

networks of relationships.

The respective efforts of the organizations for the control of the system result in a power structure,

which is the image of the nature of the relationships between the parts of the system. We may call

strategies the formalised and intentional efforts of organizations (buyers or sellers) to influence the

state and the evolution of the system to which they belong. Considering the characteristics of

industrial markets; the actors' strategies will be mostly implemented through relationships (and

thus interaction) with the other organizations.

Inter-connected relationships between actors on industrial markets may reach a certain degree of

complexity. In order to be adequately studied, sub-systems of this kind call for a higher level of

conceptualization than the one provided by the Interaction Approach. Researchers of the field have

proposed to use the Network concept for that purpose. "A network is a set of interconnected relations

involving people and organizations called actors, and forming a structured sub-system within a

larger system of actors ... They are involved in a finalized process, with the ultimate purpose of

allowing and facilitating the exchange of goods or services between a supplier and a customer, or a

set of them."(Spencer and Valla, 1989, op. cit. p 13).

The study of networks of relationships is now being undertaken by a significant number of

Interorganizational Marketing researchers. Empirical findings start to emerge, and conceptual

and methodological discussions are produced. The IMP Group of researchers is currently

conducting a large empirical study on International Networks of relationships in seven different

countries, and it is hoped that a new conceptual framework will later be produced on the basis of this

research program.

As it can be seen from this section, a rather strong preliminary conceptual system is now emerging

in the field of Interorganizational Marketing and is opened for critique and discussions.

One of its problems is that it has not yet been fully related to other theoretical constructs, either in its

own field of research, or in connected ones such as economics.

Based on Exchange, Interaction and Network conceptual frameworks, our conceptual system should

naturally be related to Williamson's work for instance. Thorelli's attempt at an integration of

Market, Hierarchy and Network perspectives give us an opportunity to discuss the issue.

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NETWORKS BETWEEN MARKETS AND HIERARCHIES : A DISCUSSION OF THORELLFS

VIEW

Thorelli (1986, op. cit.) has produced one of the first attempts at the formulation of a Network

paradigm in management research. Our purpose here is not really to take issue with Thorelli's

proposal since it is positionned in the Strategic Management field and does not in fact address

marketing issues as such. However, we wish to discuss the status he gives in his article to the

Network concept, because this has indeed a direct relation with our previous theoretical discussion.

In summary, Thorelli's presentation of the network from a strategic perspective is that it provides an

alternative between the open market and the internalization of activity.

"Organizations exist due to economies of scale and specialization, and ability to reduce transaction

costs. The resultant division of labor is manifested by a great variety of institutional

arrangements...At one end of the spectrum is what we may call the open market. At the other we find

the firm which is relatively self-sufficient in terms of vertical or functional integration. In some

ways these distinctions are analogous to Williamson's (1975) markets and hierarchies, although he

would likely include as part of markets a number of in-between forms where we would rather apply

the generic term networks."(Thorelli 1986, op. cit. p 37).

An interpretation of what Thorelli explains could be worded in the following way : networks are tools

used by firms to control their environment, without making the (strategically) costly and sometimes

unnecessary move towards integration. It is meant for the control of inputs or outputs while

maintaining transaction costs at the lowest possible level and avoiding tying up too much resources.

This interpretation may be supported by Thorelli's metaphor of the invisible wall : "Under

conditions of pure competition the market is guided by an invisible hand. Using an analogous

metaphor we may say that the network is surrounded by an invisible wall of varying thickness and

height."(Thorelli 1986, op. cit. p 42).

It is natural then that Thorelli would consider power as the central concept in network analysis. "A

position" (in the network)" is a location of power to create and/or influence networks"(p 40).

Thorelli's positioning of the network concept raises two sets of questions : the first one may be

derived from the absence of a precise distinction between market, network and hierarchy (when does

one stop and where does the other start ?) ; the second one is the apparent conflict between Thorelli's

conception and empirical knowledge (we learnt about "technical networks" between firms from

Hakansson's work, we also know that there are networks between hierarchies).

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Thorelli proposes to think "in terms of a spectrum of (institutional) arrangements" where networks

would constitute an "in-between form". Therefore, by construction, there is no clear-cut difference

between markets, networks and hierarchies. Networks may take a variety of different forms in

Thorelli's viewpoint and he gives a very broad definition of such forms : "The term networks in this

article refers to two or more organizations involved in long-term relationships"^ 37) and "we are

taking the network concept to connote a special type of system, one whose internal interdependencies

generally change over time"(p 39).

The problem here is of course one of semantic validity. The network concept under such a broad

definition may mean several different things according to the observational situation : it may be

equivalent to the established concept of buyer/seller relationship, or to vertical system, or to

seller/distributor relationship. If it were restricted to this, one would not see the purpose of adding

complexity by introducing an "enveloppe concept" that is really not necessary. It would be sufficient

to state that there is a continuum of institutional situations between markets and hierarchies, a fact

already acknowledged by Williamson.

Actually the probable reason why this does not bother Thorelli is that he does not seem to really intend

proposing a new paradigm for theoretical purposes. On the contrary, there are strong normative

aspects to Thorelli's discussions of the network concept, and he simply appears to wish to introduce a

strategic alternative in the firm's competitive allocation of resources. For instance, when

discussing network dynamics he writes that "at least four distinct dynamic processes characterize

network membership : entry, positioning, repositioning, exit."(p 42).

Another issue is raised by Thorelli's holistic conception of a network, which originates from his

business strategy perspective. Hakanson and Laage-Hellman (1984) for instance have discussed

how companies get involved in co-operation strategies with parallel units such as competitors or

producers of complementary products, thus constituting a technological network. Networks in some

instances may have a limited purpose and are not necessarily directly connected with market

transactions. Conceptually, such networks could hardly be placed between markets and hierarchies,

even though they may be directly related to a market strategy.

In very much the same way, two hierarchies, i.e. modern, integrated, asset-specific corporations,

may be connected in networks in many different situations, for instance on foreign markets or for

pre-competitive R. and D.investments, thus co-operating in the context of what is now called

"strategic alliances"(a particular case of network).

As it has been argued above, the choice of an epistemological position for the network concept in

Interorganizational Marketing theory is an important issue. Thorelli's view in that respect does not

seem to constitute an adequate answer. If we could propose another status for this concept according to

previous theoretical developments in our field of research, we could still integrate a large part of

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Thorelli's proposals on other issues, especially his interesting discussions and conceptualizations of

"the politics of the market place".

In a last section, we shall now try to formulate our own proposal.

INTERACTIONS, HIERARCHIES AND NETWORKS : AN ARTICULATION.

Our conception of the adequate position for the network concept is based on three ideas :

(1) Interaction is an adequate framework for the conceptualization and the study of

exchange in an interorganizational context.

(2) The concept of Hierarchy borrowed from Transaction Cost Economics, could be

extended in our field to include all conventions that go beyond an open market contract.

(3) The concept of Network is of a higher degree than the concepts of Interaction and

Hierarchy.

Interaction is a universal concept. Applied to Interorganizational Marketing it stresses the

complexity in many instances of interorganizational contact patterns, but does not imply that there

is always such complexity. There is no centra-indication for including simple purchasing agent/

salesman face-to-face negociations within a global Interaction paradigm. In other words, there is no

problem in considering that the Interaction concept covers marketing situations from classical

market transactions to long term supplier/customer relationships.

On the contrary, researchers from the Interactive school of thought believe that relationships change

over time, and that periods of intense and complex supplier/customer interaction may be followed by

long periods of minimal interface.

In our view, intemalization can be achieved in many different ways. Make-or-buy decisions for

instance are not always simple mutually exclusive choice patterns. Likewise, the control of outputs

is not necessarily easy to achieve even though it may appear that transaction costs call for it. When

control is reached, we can also observe that firms may wish to leave "a door opened" in order to avoid

a bureaucratization of internal (hierarchical) transactions. Numerous forms of intemalization

may thus take place and go from informal conventions to formal integration. Because our research

focus is exchange, and not transaction as it is the case for Transaction Cost economists, we need to

take into account intermediary forms of internalizations because they fit into a global Marketing

Exchange paradigm.

The distinction between Interaction and Hierarchy in this conception can therefore only be based on

"intentionality". Hierarchies link units or firms in such a way that the other party is not free to

accept or reject the bond (we are using here one of Kotler's conditions for defining exchange). One of

the parties at least should be identified as intendedly pursuing quasi-internalization.

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Finally, it is also our view that the Network concept should be placed above the Interaction and the

Hierarchy concepts. We do not share the view that "networks...refer to two or more organizations

involved in long term relationships" (Thorelli op. cit. p 37).

Networks refer to sets of interconnected relationships that may not necessarily be long term. During

their existence however, networks do form structured sub-systems, but their creation is not always

intentional. In some instances even, exchange (and thus transaction) can not take place without the

creation of an ad hoc network to handle the global marketing task.

In order to be clearly distinguished from both Interactions and Hierarchies, the Network concept

should only be used to designate relationships between more than two organizations or units. Some

researchers even support the view that a critical mass of relationships is required before one can talk

about network.

Having stated the elements of an integrated framework, we may now formalize our proposal in the

form of diagram 2.

INDUSTRIAL SYSTEM

NETWORKS

INTERACTIONS HIERARCHIES

market relationship convention integration

DIAGRAM 2 - Interactions, hierarchies and networks : an articulation

Apart from setting a formal relationship between the three key concepts of our approach to

Interorganizational Marketing, diagram 2 also positions our conceptual system within a broader

systemic context.

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