Network Structure

Breaking Down Network Organizational Structure

The network organizational structure (also called virtual network structure) is a temporary or permanent arrangement of otherwise independent organizations or associates, forming an alliance to produce a product or service by sharing costs and core competencies.

The network-based organizational structureOpens in new window is built around alliances between organizations within the network. Each associate or organization of the network focuses on its core competency and performs some portion of the activities necessary to deliver the products and services of the network as a whole.

Organizational network-based structure simply means that the firm outsources or subcontracts many or most of its major processes to separate companies and coordinates their activities from a small headquarters organization.

Outsourcing or subcontracting has become an important strategy for many firms as recognized during the late eighties and nineties, partly due to an increased pressure towards downsizing and a growing recognition of possible advantages of cooperative inter-firm relations.

Citing Miles & Snow (1986), “organizational network structure is the basic principle to achieve flexibility, adaptability to the market and quick response in a highly complex environment”.

Why the Structure Is Important

The knowledge and physical resources associated to the development and production of most of today’s products often exceed what a single firm is able to accomplish.

To solve the problem of the lack of resources that could bring to the firm a competitive advantage, the firm simply searches for operation with other companies, under several formats, ranging from the well-known solutions of subcontracting other companies or creating strategic partnerships or joint-venture associations.

Partnerships, alliances, and other complex collaborative forms are now a leading approach to accomplishing strategic goals, especially because many managers and other strategy experts suggest that a company should focus on its distinctive competencies and outsource the other things.

The Core Competence Theory (Prahalad & Hamel, 1990) outlines that success and failure of an organization are necessarily based on its unique or specific potentials, assets, or resources. Core competencies are a competitive advantage and should provide access to a wide range of markets, should substantially contribute to the benefit of the product and should be visible for the client and also hard to copy and out of competitors reach.

Fashion wear companies like Nike, for example, frequently produce none of their own clothing, focusing instead on building brand value through comprehensive marketing efforts and exercising tight control over their suppliers. Essentially, in a network-based structure, partners contribute with its best practices and core competencies to achieve the highest competitiveness of the structure as a whole.

How the Structure Works

At the core of network organizational structure is an organization viewed as a central hub surrounded by a network of outside specialists. The figure below illustrates the network organizational structure in quite a simplistic form.

Virtual Network Approach to Organizational Design
Figure: Network-Based Structure to Organizational Design

Rather than being housed under one roof, services such as accounting, design, manufacturing, and distribution are outsourced to separate organizations that are connected electronically to the central office. The central organization simply coordinates the activities of others so that the product reaches the ultimate consumer in an effective and efficient way.

Networked computer systems, collaborative software, and the Internet enable organizations to exchange data and information so rapidly and smoothly that a loosely connected network of suppliers, manufacturers, assemblers, and distributors can look and act like one seamless company.

One of the numerous advantages of network approach to organizational design is that a company can concentrate on what it does best and contract out other activities to companies with distinctive competence in those specific areas, which enables a company to do more with less. Companies in countries such as India and Malaysia, as well as European sites such as Scotland and Eastern Europe manage call centre and technical support for multinational corporations including financial companies, computer vendors and mobile phone companies.

Similarly, entire chunks of aeroplanes manufactured by Canada’s Bombardier and Brazil’s Embraer are engineered and built by outside contractors, often outside Canada and Brazil respectively. Fiat Auto is involved in multiple complex outsourcing relationships with other companies handling logistics, maintenance and the manufacturing of some parts.

These interorganizational relationships reflect a significant shift in organization design. The network organizational structure otherwise called virtual network structure has become much more feasible as a result of advances in information and communication technologies.