STRATEGIC NETWORKS Ranjay Gulati, Nitin Nohria, Akbar Zaheer ...

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1) Industry StructureThe industrial organization school, which has had a major impact on the field of strategy,began with models of perfect competition and argued that oligopoly, or greater concentrationgenerally, led to increased profitability for the firms in an industry (Scherer and Ross, 1990). Inthis way, industry structure -- which is characterized by the extent of concentration, marketpower relative to upstream or downstream industries, and the extent of collusion, tacit orotherwise -- jointly have a pervasive influence on industry profitability. The entry of new firmsinto profitable industries is impeded by the presence of barriers to entry and thus the differencesin profitability across industries can be sustained (Porter, 1981).We propose that a consideration of strategic networks allows a more refinedunderstanding of industry structure – since industry participants can be seen as embedded innetworks of resources, information, and other flows. Such networks can influence the nature ofcompetition in the industry and the degree of profitability beyond traditional measures ofindustry concentration. For instance, tacit collusion is far easier to sustain in an industry inwhich the major players are connected in a dense network of interfirm ties than in one in whichthey are disconnected.In order to illustrate the implications of viewing the industry level of analysis from anetwork perspective, we consider three types of relational characteristics: network structure,network membership, and tie modality, (Galaskiewicz & <strong>Zaheer</strong>, 1999). Network structure refersto the overall pattern of relationships within which the industry is embedded. By networkmembership we mean the composition of the network – the identities, status, resources, access,and other characteristics of the focal industry’s alters and other nodes. Tie modality is the set ofinstitutionalized rules and norms that govern appropriate behavior in the network. While these6
are sometimes spelled out in formal contracts, most often they are simply understandings thatevolve within the dyad and the network (Laumann, Galaskiewicz, & Marsden, 1978)There are numerous structural network characteristics that can affect the profitability ofthe firms in an industry. Network scholars have identified various factors such as networkdensity, structural holes, structural equivalence, and core versus peripheral firms, each of whichcan affect the profitability of industries and of the firms within them. For instance, denseinterfirm ties within the industry may be conducive to oligopolistic coordination, tacit orotherwise (Scherer and Ross, 1990). Research by Eccles and Crane (1988) and Podolny (1993)vividly shows how the ties among the top-tier investment banks sustain the high returnscharacteristic of that industry. Similarly, research by Baker and Faulkner (1991) shows howchanges in the pattern and density of ties in the US movie industry over the years has influencedthe rate of entry and profitability of the firms in the industry.Structural holes can be another important factor in influencing industry returns. Theyexist when two industry trading partners are connected only through the focal industry. Structuralholes in an industry’s customer-supplier network may confer power through control, andultimately profitability. Based on an analysis of input-output tables that define the network offlows among industries, Burt (1992) has shown that industries that occupy structural holes enjoygreater returns by being able to appropriate a larger share of the resources that flow throughthem.Network membership also influences the location of an industry in a broader network ofresource flows that might influence its profitability. For example, the status of the alters (i.e. theindustries the focal industry is tied to) can influence the focal industry’s profitability. One needlook no further than the declining fortunes of defense contractors (supplying a contracting7
Page 1 and 2: STRATEGIC NETWORKS 1Ranjay Gulati,
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Page 24 and 25: generating resources would not only
Page 26 and 27: REFERENCESBaker, Wayne E., Faulker,
Page 28 and 29: Gomes-Casseres, Benjamin (1994).
Page 30 and 31: Kogut, B. (1988) "Joint ventures: T
Page 32 and 33: Richardson, G.B. (1972). ‘The org
Page 34: Zukin, S., and Dimaggio, P. (1990).

STRATEGIC NETWORKS Ranjay Gulati, Nitin Nohria, Akbar Zaheer ...

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