Vertical and horizontal networks

As highlighted in Chapter One, in-depth research into the different types of inter-

organisational arrangements offers insight to why some of the less traditional cooperative arrangements succeed, and how these may affect the wider industrial marketing system. When studying business networks and their embedded inter-organisational relationships, a common first step is to classify the direction of the linkages, or in other words, the types of firms involved (Fyall & Garrod, 2005). In most cases, networks are described as either being vertical or horizontal.

50 Researchers applying traditional network theory have largely focused on the vertical arrangements and dyadic relationships between members of a supply chain, such as suppliers, manufacturing firms, distributors and intermediaries (Achrol, 1997; Easton & Araujo, 1992; Håkansson, 1982; Stern, 1996). Vertical networks are a form of

cooperative arrangement between two or more heterogeneous members of a supply chain, who require different resources but are related because the output of one firm is an input for another (Hart & Rice, 1988). Vertical networks tend to be more common than

horizontal networks because they offer substantial opportunities for buyers and sellers to cooperate through information sharing, distribution, and producing complementary products. Given the industrial marketing origins of the network approach, the extent of academic research on vertical networks is also more substantial (Chetty & Wilson, 2003). However, over the past few decades, several authors (see, for example, Easton, 1990; Easton & Araujo, 1992; Milward & Provan, 2003; Tidström, 2009) have highlighted the need for more research examining the nature of relationships and networks between homogeneous firms that are located at the same point in the supply chain (i.e. competitors).

As early as the 1970s, scholars observed that the traditional roles of organisations in industrial markets were not static, and that they were changing (Stern, 1971). With the introduction of network theory, researchers agreed that organisations are not strictly competitors and independent entities, but rather they cooperate and experience conflict just like any other social group (Håkansson & Snehota, 1995). Some firms may even compete in some activity areas, while simultaneously cooperating in others (Bengtsson et al., 2003). For example, two or more businesses may cooperate in order to gain access to external resources, or in areas that are away from the customer, such as procurement and research and development (Bengtsson & Kock, 1999; Laine, 2002). At the same time, they may fight for competitive advantage through adopting sophisticated marketing strategies or having superior manufacturing capabilities. The paradoxical relationship that emerges when two firms cooperate in some activities, and at the same time compete with each other in other activities, is known as „co-opetition‟ (Bengtsson & Kock, 2000; Brandenburger & Nalebuff, 1996; Laine, 2002; Morris et al., 2007; Walley, 2007). The

51 internal logic of co-opetition rests on the premise that competitors are in many ways complementary partners (Bengtsson et al., 2003). That is, they share much of the same understanding, capabilities, and market interests.

Traditionally, the mere existence of such commonalities would have created an

environment of pure competition. However, in a network economy, a move towards more cooperative relationships can be beneficial to all parties involved. In a horizontal network context, cooperative relationships indicate that two or more competitors have a shared interest in working towards a common goal (Bengtsson et al., 2003). Relationships between competitors grant organisations access to resources they could not obtain individually, and can represent the means by which they can penetrate markets they would otherwise be unable to enter (Morris et al., 2007). However, a key issue that remains unanswered by the literature is: how can competitors within a network resist from acting in conflict with one another in order to achieve the goals of the network (Bengtsson & Kock, 2000).

Previous research has suggested that more than fifty per cent of cooperative relationships involve competitors (Harbison & Pekar, 1998). The benefits of such arrangements rest largely on the opportunities to generate significant economic advantages and economies of scale, and achieve superior performance and capabilities over the long-term (Gnyawali & Madhavan, 2001; Lado, Boyd & Hanlon, 1997). Although some scholars argue that collaboration between competitors may inhibit healthy competition and facilitate collusion (see, for example, Porter & Fuller, 1986), others argue that inter-competitor cooperation is the one of the most advantageous forms of all inter-organisational relationships (Bengtsson & Kock, 2000). However, based on the work of Easton and Araujo (1992), Bengtsson and Kock (1999) argue that the co-opetitive relationship is the most demanding of the four different inter-competitor relationships17.

17 _{The four different types of inter-competitor relationships Bengtsson and Kock (1999) identified are:}

coexistence, cooperation, competition, and co-opetition. When competitors simply coexist, the relationship involves merely information and social exchanges. However, bonds are not present. When competitors are involved in a cooperative relationship, the exchanges are more frequent, and are along business,

information and social lines. Social, knowledge, legal and economic bonds can, therefore, all be present. A purely competitive relationship means that competitors follow each other. That is, if one launches a new

52 In their study of co-opetition as a small business strategy, Morris et al. (2007) found that cooperation between competitors had a positive effect on business performance, and in particular, enabled small firms to coordinate their product lines and technological

diversity. Horizontal networks have also been found to provide firms with the opportunity to access external knowledge sources and engage in organisational learning (Bengtsson & Kock, 2000; Morris et al., 2007). Furthermore, competitors engaged in cooperative relationships can obtain access to a large volume of network resources, acquire advanced knowledge of important developments in their industry and developing markets, and increase their ability to control information and resource flows within a network (Gnyawali, He & Madhavan, 2006).

In the past two decades, some research on the network linkages and relational ties among competing firms has emerged. This trend supports similar trends taking place in practice, where it has been reported that over fifty per cent of new inter-organisational alliances are between competing firms (Harbison & Pekar, 1998). Others have suggested trade associations provide a popular mechanism for formal cooperation between horizontally- integrated firms (Easton & Araujo, 1992; Oliver, 1990). The success of this form of networking is, however, affected by the number of firms involved, and the range of benefits the association offers. Trade associations allow competitors to enhance their own image, collectively lobby public regulators, obtain economies of scale, reduce legislative uncertainty, and promote the industry at a collective, rather than individual, level (Buttery & Buttery, 1998; Oliver, 1990). Competitors within the same industry may also enter networks for the purposes of developing industry standards (Grundström & Wilkinson, 2004), breaking into new markets (Welch et al., 1998), and liaising with public bodies such as government and universities (Welch & Wilkinson, 2004).

Empirical research on horizontal networks between competitors is varied in its scope and findings. Some authors have argued that horizontal networks are inferior to vertical networks because of their predisposition to internal conflict and reduced intra-group

product, the other will immediately follow. Finally a co-opetitive relationship involves both economic and non-economic exchange.

53 cohesion (Welch et al., 1998). A similar finding was made by Andresen, Lundberg and Roxenhall (2009), whose longitudinal study revealed that Swedish firms are generally unwilling to coordinate their individual activities with those pursued by other firms in their horizontal network. From a somewhat different perspective, Butler et al. (1990) found that network linkages between competitors can have a positive influence on firm performance, because they encourage competitors to compete more efficiently and effectively, and provide a valuable means of information and knowledge sharing. Furthermore, horizontal networks can result in superior value and efficiencies because competitors often use the same suppliers and technology, and are regulated in the same way (Wilkinson, 2008).

As introduced in Chapter One, horizontal networks comprise homogeneous firms positioned at the same point in the supply chain or same position in an industry (Buttery & Buttery, 1998; Chetty & Wilson, 2003; Easton & Araujo, 1992). Unlike vertical networks, which primarily involve economic exchange, horizontal networks are characterised by more intangible forms of exchange, such as information sharing and social activity (Bengtsson et al., 2003; Easton & Araujo, 1992). Because horizontal networks involve relationships and interaction between competitors, how they operate, the goals they pursue, and the extent of resource sharing is remarkably different from networks containing vertically-integrated firms (Buttery & Buttery, 1998; Tidström, 2009). Most of these differences arise because networking with competitors carries significantly more risk for a firm (Laine, 2002). This, in turn, creates complexity in managing firm behaviour and activities within horizontal networks (Möller et al., 2005).

Most horizontal networks are initiated by unforeseen environmental changes or by an external party, such as a government agency. Conversely, vertical networks tend to be initiated more independently by the firms themselves (Bengtsson & Kock, 1999).

Structurally, horizontal networks contain a high degree of crossover between the domains and resources of the firms involved. This influences the extent to which the actors

54 Although horizontal networks are predominantly defined according to the relationships between homogeneous firms, these networks occasionally interact with government agencies, non-profit organisations, research institutes, and universities (Möller et al., 2005). Government agencies, for example, have a key role in funding and supporting a horizontal network‟s activities, while universities and other institutions may have a vested interest in the industry and are, therefore, stakeholders of the network. Horizontal networks may also comprise firms from complementary industries or product lines, such as wine and tourism. In which case, the network may be referred to as a „diagonal network‟ (Hart & Rice, 1988; Morrison, Lynch & Johns, 2004).

Despite the clear structural differences between the two main types of business networks, horizontal networks represent a relatively neglected area of study. Around the 1990s, some initial research was conducted on the relationships between competitors in a horizontal network setting, rather than the traditional buyer-seller arrangement

(Bengtsson & Kock, 1996; 1999; Easton & Araujo, 1992). Since then, horizontal network research has been predominantly of a conceptual nature, and has a clear focus on the structure of horizontal networks rather than the nature of interaction. Further research in this area would contribute to the development of a framework that not only captures the complexity of inter-competitor relationships, but also delineates the key antecedents and barriers to this relatively uncommon form of business network (Bengtsson & Kock, 1999; 2000; Bengtsson et al., 2003; Tidström & Ǻhman, 2006).