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Strategic alliances, network organizations, and ethical responsibility.

Corporate Strategy and Strategic Alliances

The goal of corporate strategy is to define the organization's domain, i.e., the business areas in which a firm wishes to participate to maximize long-term profitability. The firm may concentrate on a single product line, but it often finds that it can create more value by leveraging resources across a larger number of business activities. This is why many corporations rush into vertical integration and diversification. However, this method of leveraging resources requires large dedicated investments, increases organizational complexity, and leads to problems of coordination and bureaucratic bu·reau·crat  
1. An official of a bureaucracy.

2. An official who is rigidly devoted to the details of administrative procedure.

 inefficiency. In short, vertical integration and diversification may create bureaucratic costs that exceed their benefits. For example, Ramanujam and Varadarajan (1989) found that extensive diversification tends to depress de·press
1. To lower in spirits; deject.

2. To cause to drop or sink; lower.

3. To press down.

4. To lessen the activity or force of something.
 rather than enhance corporate profitability.

Is there a way to reap the benefits of vertical integration and diversification without the associated bureaucratic costs? It has been found that, under certain circumstances, firms can attain the benefits through long-term strategic alliances among firms to share the costs, risks, and profits of business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets . Through these alliances, firms narrow their internal focus and deepen their expertise in selected areas, relying on their partners to specialize in other areas of functional or technical competence technical competence,
n the ability of the practitioner, during the treatment phase of dental care and with respect to those procedures combining psychomotor and cognitive skills, consistently to provide services at a professionally acceptable level.
. In the process, they share the risks of specialized investments, reduce internal complexity and administrative costs administrative costs, the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided.
, and achieve greater adaptability and responsiveness to the environment. There is an extensive literature on how firms can avoid the pitfalls and reap the benefits of these alliances, e.g., Harrigan (1985), Reich & Mankin (1986), Ohmae (1989), Geringer & Hebert (1989), Hamel Ham´el   

v. t. 1. Same as Hamble.
 (1991), Kanter 1994, and Lei, Slocum, & Pitts (1997).

In addition to creating economic opportunities, strategic alliances also create challenges and threats. For example, profits must be split and knowledge shared. In the case of international joint ventures, local laws could diminish flexibility and cooperation can create competitive foreign firms (Hall, 1984). Because firms specialize in selected areas of competence, expertise and information become fragmented. For this reason, a firm may lose a critical competence in an activity that has been outsourced or may become dependent on its strategic partners.

One of the major advantages of strategic alliances is the opportunity to learn from one's partners (Ciborra, 1991). However, the learning opportunities may not be symmetrical, i.e., one firm may learn more than the other. For this reason, strategic alliance can be considered an arena of competition or even a learning battlefield (e.g., Hamel, 1991; Lei & Slocum, 1992). The term "coopetition (COOPEration compeTITION) Cooperation between competing companies. In the information field, coopetition means settling on standards and then developing products that compete with each other using those standards. " has been coined to describe this relationship of cooperation and competition (Dowling, Roering, Carlin car·line or car·lin  
n. Scots
A woman, especially an old one.

[Middle English kerling, from Old Norse, from karl, man.]
, & Wisnieski, 1996). Yet, amid all this fragmentation and competition, coordination and control are necessary among firms that work together. All the firms that work together (e.g., in a network) must trust each other and accept the norms of the relationship. Strategic alliances often connect organizations to each other in a very intense way and involve contracts that must be honored if the alliances are to succeed. This is a problem of control and ethical responsibility.

Efficient Contracting and Ethical Responsibility

To analyze the nature of contracting, economists have used three approaches: transaction cost economics (Williamson, 1975), agency theory (Jensen & Meckling, 1976), and team production (Alchian & Demsetz, 1972). Williamson (1975) uses transaction costs to explain the choice between contracting internally (hierarchies) and externally (contracts). This is relevant to the choice between vertical integration (hierarchies) and strategic alliances (contracts). Williamson explains the problems with contracts, e.g., the danger of opportunism Opportunism
Arabella, Lady

squire’s wife matchmakes with money in mind. [Br. Lit.: Doctor Thorne]

Ashkenazi, Simcha

shrewdly and unscrupulously becomes merchant prince. [Yiddish Lit.
 (a seller has more information than the buyer) and the hold-up problem (the reluctance to invest in specialized resources for fear that the buyer may renege on Verb 1. renege on - fail to fulfill a promise or obligation; "She backed out of her promise"
go back on, renege, renegue on

countermand, repeal, rescind, revoke, annul, vacate, reverse, overturn, lift - cancel officially; "He revoked the ban on smoking";
 the contact). Agency theory looks at the situation in which one party (the agent) acts for another (the principal). The problem here is that the agent and the principal may have conflicting goals and different tolerance for risk. This results in inefficient contracting because of the costs of monitoring (of the agent by th e principal) and bonding (to prevent harm to the principal). The team production approach deals with situations in which the actual contribution of each team member cannot be measured precisely. Because the rewards depend on team rather than individual performance, there is an incentive for the team members to contribute less, resulting in "social loafing An editor has expressed concern that this article or section is .
Please help improve the article by adding information and sources on neglected viewpoints, or by summarizing and
" and the "free rider Free rider

A follower who avoids the cost and expense of finding the best course of action simply by mimicking the behavior of a leader who made these investments.
" problem. The divergence divergence

In mathematics, a differential operator applied to a three-dimensional vector-valued function. The result is a function that describes a rate of change. The divergence of a vector v is given by
 of team and individual goals incurs costs in terms of reduced team output and the need to monitor individual performance. While this latter approach focuses on intragroup rather than interorganizational contracting, similar dynamics can be seen in networks. Organizations in networks can also demonstrate opportunism, conflicting goals, divergent tolerance for risk, and unwillingness to contribute their fair share to the common task.

The three theoretical frameworks (transaction cost economics, agency theory, and team production) indicate that the opportunity to take advantage of another party (cheating) results in inefficient contracting and negates the advantages of strategic alliances. Several authors have suggested that the solution lies in replacing opportunism with cooperation, e.g., Buckley & Casson (1988), Hill (1990), Madhok (1995), Das & Teng (1998), and Hutt, Stafford, Walker, and Reingen (2000). This can only be achieved through ethical conduct. For this reason, Velasquez (1996) argues that ethical behavior in business is more rational, more intrinsically valuable, and more profitable than unethical unethical

said of conduct not conforming with professional ethics.
 behavior. He uses the "prisoner's dilemma" to explain how ethical behavior facilitates mutually beneficial Adj. 1. mutually beneficial - mutually dependent
interdependent, mutualist

dependent - relying on or requiring a person or thing for support, supply, or what is needed; "dependent children"; "dependent on moisture"
 cooperative relationships with corporate stakeholders Stakeholders

All parties that have an interest, financial or otherwise, in a firm-stockholders, creditors, bondholders, employees, customers, management, the community, and the government.
. When one party takes advantage of another, retaliation RETALIATION. The act by which a nation or individual treats another in the same manner that the latter has treated them. For example, if a nation should lay a very heavy tariff on American goods, the United States would be justified in return in laying heavy duties on the manufactures and  results. In a world in which corporations are interconnected through strategic alliances, mutual trust is necessary, and it can only be founded on ethical conduct. Ethical conduct is the basis for good reputation, which is becoming increasingly important in an alliance-based world. Good reputation reduces the problems of transaction costs, agency relationships, and team production (Weigelt & Camerer, 1988). The good reputation of a partner (a) allays the fear that the partner may be opportunistic, (b) reduces the cost of monitoring an agent, and (c) lessens the likelihood that a partner may shirk shirk

In Islam, idolatry and polytheism, both of which are regarded as heretical. The Qu'ran stresses that God does not share his powers with any partner (sharik) and warns that those who believe in idols will be harshly dealt with on the Day of Judgment.
 responsibilities. By reducing costs and the problems of contracting, reputation should have a positive effect on the success of an alliance.

In an empirical study, Saxton (1997) found a positive relationship between reputation and the outcomes of alliances. He considered this conclusion to be counterintuitive coun·ter·in·tu·i·tive  
Contrary to what intuition or common sense would indicate: "Scientists made clear what may at first seem counterintuitive, that the capacity to be pleasant toward a fellow creature is ...
, to some extent. He suggests that it might be reasonable to assume that the value of reputation would be reflected in the initial terms of the transaction, and that the value of reputation would be discounted through the cost of entering into the transaction. The positive relationship between reputation and the outcomes of alliances suggests that the contribution of reputation is significant and is not completely discounted or bargained away in the transaction.

The Evolving Nature of Network Organization

Changes in business strategy have been reflected in the evolving organizational structure, which also displays problems of contracting and the need for ethical conduct. As Chandler (1962, 1977) points out, structure responds to changes in organizational strategy and the need for information processing information processing: see data processing.
information processing

Acquisition, recording, organization, retrieval, display, and dissemination of information. Today the term usually refers to computer-based operations.
. Mter the Industrial Revolution, three forms of business organization were dominant, each in its time. The vertically integrated functional organization was dominant in the late 19th and early 20th centuries, when the most successful firms were high-volume, standardized, low-cost, production-oriented businesses, e.g., Ford and the Model T. This structure worked well in a relatively stable market environment with simple preferences. After World War I, the multidivisional form began to replace the functional form, e.g., Alfred Sloan at General Motors. This form allowed organizations to cope with a market characterized by a greater variety of tastes and preferences. However, as market preferences and product techno logies became even more complex and changed more rapidly, the multidivisional form could no longer provide the cross-functional coordination that was needed. As a result, the matrix form became popular in the 1960s and 1970s, providing greater crossfunctional coordination through its emphasis on lateral relationships and dual lines of responsibility and authority. However, the increasing pace of technological change, the dramatic increase in managerial and technological knowledge, and the elimination of economic and political boundaries soon required even more flexible organizational structures. In this environment, the network organization emerged in the 1980s (Achrol, 1997). It is interesting that organizations interacted in relationships similar to networks even before the existence of network organizations was recognized. For example, Eccles (1981) points out that contractors and subcontractors often have relations that are stable over time. He calls this a "quasifirm," which falls between pure market tra nsactions and formal vertical integration. The glue that holds quasifirms together is mutual friendship and trust. The formal network organization, however, represents the evolution of strategic alliances.

Strategic alliances range from preferred vendors to the modern boundaryless organization. Organizations have evolved through (a) preferred vendors, (b) licensing arrangements, (c) original equipment manufacturers, (d) contractual alliances, (e) partnerships and joint ventures, and, finally, (f) the boundaryless network organization. This continuum reflects a progressive removal of boundaries and a growing interaction among individuals and organizations. In the process, organizational structures have evolved toward greater flexibility. We have seen increased use of outsourcing, the practice of letting other organizations perform important functions. Outsourcing is not limited simply to buying parts, but can include basic functions such as manufacturing. The trend is to remove barriers among people, organizational units, and organizations. In the process, organizations have become leaner, flatter, and more focused on their contribution to the value chain. They are becoming like nodes in a network of complex rel ationships.

At the end of this continuum is the boundaryless organization that Jack Welch For the illustrator named Jack Welch, see Jack Welch (illustrator)

John Francis "Jack" Welch, Jr. (born on November 19 1935 (1935--) (age 73) 
 tried to create at General Electric. He wanted a company that operated like a family grocery store, eliminating barriers that separate employees and the company from customers and from other stakeholders (Industry Week, 1994). The boundaryless organization, like other forms of network organizations, is a response to the environment in which firms now operate, i.e., a borderless marketplace. The model pursued by GE is that of an internal market network, which resembles the dynamic networks of multiple organizations. The transition from traditional centralized cen·tral·ize  
v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es
1. To draw into or toward a center; consolidate.

 hierarchies to decentralized de·cen·tral·ize  
v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es
1. To distribute the administrative functions or powers of (a central authority) among several local authorities.
 internal markets has been described as a transition "from hierarchy to enterprise" through perestroika perestroika (pər`ĕstroy`kə), Soviet economic and social policy of the late 1980s. Perestroika [restructuring] was the term attached to the attempts (1985–91) by Mikhail Gorbachev to transform the stagnant, inefficient command  (Halal ha·lal   Islam
Meat that has been slaughtered in the manner prescribed by the shari'a.

1. Of or being meat slaughtered in the prescribed way: a halal butcher; a halal label.
, 1994). The analogy is to the collapse of central planning in the Communist Bloc and the movement toward free markets. In the face of complex technologies, global markets, intense competition, and turbulent change, corporations must also chan ge from hierarchy to market-driven systems. This latest stage in the organization evolution is the manifestation of a major social transition, the information revolution.

The relationship between the information revolution and organizational structure is evident in the effects of advanced manufacturing technology. Lei, Hitt, and Goldhar (1996) argue that to utilize the capabilities of advanced manufacturing technology, a firm's organizational design must often be transformed to include both "loose couplings" and an "open system's" modular perspective. They suggest that computer-aided design and manufacturing promote strategic flexibility by facilitating the integration of networks of internal (e.g., design, manufacturing, marketing) and external (e.g., suppliers, customers) stakeholders. In this new world, organizations become clusters of autonomous divisions that behave like separate firms (Halal, 1994) without rigid and well-defined tasks and roles. The climate is one of trust rather than authority. The new structure is buttressed but·tress  
1. A structure, usually brick or stone, built against a wall for support or reinforcement.

2. Something resembling a buttress, as:
a. The flared base of certain tree trunks.

 by a culture of entrepreneurship, individual initiative, and mutual support. Dynamic networks of multiple organizations and internal market networ ks are responses to the same forces, requiring constant change, the processing of increasing amounts of information, and greater efficiency.

Achrol (1997) suggests four types of networks: (1) internal market, described above (e.g., a company such as Asea Brown Boveri which is organized into internal enterprise units operating as independent profit centers), (2) vertical market (e.g., a company such as Sun Microsystems Sun Microsystems, Inc. (NASDAQ: JAVA[3]) is an American vendor of computers, computer components, computer software, and information-technology services, founded on 24 February 1982.  that has subcontracted sub·con·tract  
A contract that assigns some of the obligations of a prior contract to another party.

intr. & tr.v. sub·con·tract·ed, sub·con·tract·ing, sub·con·tracts
 chip manufacturing, distribution, and service functions, (3) intermarket (e.g., a multifirm alliance such as the Japanese keiretsu keiretsu: see zaibatsu.

In Japan, a strong alliance of related organizations that shares knowledge and cooperates to control its sector of the business, including the supply chain and distribution.
 or the Korean chaebol chae·bol  
n. pl. chaebol
A conglomerate of businesses, usually owned by a single family, especially in Korea.

[Korean chaeb
 that cuts across a variety of unrelated industries), and (4) opportunity market (e.g., a set of companies forming an alliance around a particular project and then dissolving). The fourth type of network does not yet fully exist. The closest thing that we have is the Japanese-style general trading company, or sogo shosha Sogo shosha (総合商社 sōgō shōsha . All of these network types are families of independent companies (or units of one company) that are free to compete as they think best but united in their ability to help one another.

The evolution of the dynamic network can also be understood as going from the "modular" to the "virtual" to the "barrier-free" organization (Dess, Rasheed, McLaughlin, & Priem, 1995). The modular organization outsources nonvital functions and retains strategic control. This arrangement permits the company to reduce costs and focus on areas where it holds competitive advantage. Often cited examples are Nilce, Liz Claiborne This article is about the corporation Liz Claiborne Inc. For the fashion designer who founded the company, see Liz Claiborne (fashion designer).

Liz Claiborne Inc.
, and Dell Computer, which outsource most or all of their production. The virtual organization is an evolving network of companies linked to share skills and costs. Companies in the entertainment industry, like Paramount and Time-Warner, are examples because of the convergence of computing, publishing, communications, and home electronics. The virtual organization is a network of companies (suppliers, customers, competitors, etc.) linked to share skills, costs, and market access. The modular, virtual, and barrier-free organizations are network organizations, i.e., functionally organized firms tied together through cooperative exchange relationships.

We might ask what lies ahead beyond these network structures. It has been suggested that the next stage is the "cellular organization" (Miles, Snow, Mathews, Miles, & Coleman 1997), suggesting a living, adaptive organization. The analogy is to cells in living organisms that can act alone to meet a particular need but, by acting in concert, can perform more complex functions. Evolving characteristics, or learning, when shared across all cells, can create a higher-order organism. Like the biological model, the cellular organization is made up of cells (self-managed teams, autonomous business units, etc.) that can operate alone or interact with other cells to produce a more potent and competent organization.

The evolution of organization structure seems to have gone from the vertically integrated functional structure to the multidivisional form, to the matrix, to the network, and finally to the predicted cellular form. The common thread is the need for increasing coordination and information. This need for information processing, which is particularly clear in the last stage of the evolution, is expressed in the ideal of virtual integration. In virtual integration, the links along an industry's value chain are no longer bound by hierarchical chains within one organization but are captured via advanced information technology and interfirm alliances.

Information technology seems both to facilitate and require more flexible organizational structures. It promotes flexible structures by connecting people, groups, and organizations in different parts of the world for the completion of a task. But requires flexible organizational structures because the full potential of information technology cannot be realized in a rigid hierarchy characterized by a narrow chain of command, top-down channels of communication, and rigid rules and procedures. Rather, the full potential of information technology must be realized in the environment of a learning organization, in which an empowered workforce is free to search for answers and innovate in free association with individuals and groups within and outside the organization. This implies a flexible structure and a lack of boundaries.

Flexibility and lack of formal boundaries mean that efficient contracting is more important and more difficult than in the past. The contract between the employee and the firm is difficult not only to control but even to define. People are not hired for specific tasks but to contribute to ongoing projects according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 their skills. Sometimes these tasks are accomplished in collaboration with employees of other firms. Efficient contracting is difficult when organzations consist of fluid teams that mesh with similar teams from other organizations. For this reason, our attention turns to the need for a climate of trust built on shared values, moral character, and ethical conduct.

Ethical Responsibility

As we move from the traditional to the boundaryless organization, it becomes increasingly difficult to monitor behavior and enforce contracts. Traditional bureaucratic approaches will not work. For this reason, organizations must use "clan control" (Ouchi, 1980), which uses social factors, such as corporate culture, traditions, shared values, and commitment, to control behavior. Granovetter (1985), for example, suggests that mutual trust in a relationship reduces the danger of opportunistic behaviors and may eliminate the need for bureaucratic control mechanisms. However, clan control requires shared values and trust. For this reason, the organization will try to hire people who are compatible with organizational values and will socialize so·cial·ize  
v. so·cial·ized, so·cial·iz·ing, so·cial·iz·es
1. To place under government or group ownership or control.

2. To make fit for companionship with others; make sociable.
 them in those values. Along with clan control goes the notion of self control, which means that employees monitor their own performance. As organizations become more flexible they must rely more on clan and self control, based on strong cultures that emphasize autonomy, indi vidual responsibility, and ethical values.

Contracts among companies are also difficult to monitor when the companies operate in a continually evolving network. As in the case of contracts between employer and employee, companies must rely on finding partners that share their values. It is not enough to create a culture within individual organizations. The challenge is to create a cross-organizational culture in which the interests and values of the partners coincide. Achrol (1997) emphasizes that in all forms of networks the important managerial characteristics to be developed are trust and commitment, as well as social norms of mutuality, solidarity, role integrity, harmonization har·mo·nize  
v. har·mo·nized, har·mo·niz·ing, har·mo·niz·es
1. To bring or come into agreement or harmony. See Synonyms at agree.

2. Music To provide harmony for (a melody).
 of conflict, and restraint of power.

It can be argued that cooperation can be achieved through the pursuit of self-interest. Axelrod's (1984) studies using the prisoner's dilemma try to answer the question, When should a person cooperate and when should a person be selfish? To the surprise of most observers, the winning strategy in the prisoner's dilemma game is also the simplest: tit for tat tit for tat
Repayment in kind, as for an injury; retaliation.

[Probably alteration of tip for tap.]

Noun 1.
 -- the strategy of starting with cooperation and then doing whatever the other player did on the previous move. When the two players use "nice" rules (i.e., always cooperate), they achieved the best scores. As long as the other player does not defect, the nice rules work well. On the other hand, greedy players who defected on the first move did poorly.

This may lead the casual observer to conclude that the pursuit of self-interest does, indeed, lead to ethical conduct, but this is true only under specific conditions. Axelrod (1984) points out that cooperation is pragmatic: the players may meet again. If you will not meet the other person again, self-interest would dictate that you defect on the first move. The second limitation can be found in the matter of future payoffs. If future payoffs are uncertain, of low value, or in the distant future, the present value of those payoffs may be insufficient to deter defection on the first move. In the real world, the games we play may not meet these two conditions. Future payoffs are often uncertain, e.g., because of changing markets and technologies, and may not deter defection. Also in the real world we may not meet the other player again, at least not in the same way. Interactions between two firms may, in fact, be repetitive, as in the prisoner's dilemma games. However, the interactions may involve different pla yers, e.g., different persons or departments of two firms. Moreover, each interaction may deal with a different issue such as sharing different technologies or cooperating on different projects. Therefore, the different interactions may not be perceived as moves in the same game. Under these conditions, the lessons learned from game theory may have limited applicability. However, if we consider the factor of reputation, we can see that it may indeed be in a player's interest to cooperate, even if he or she does not expect to meet the other player again. Even if firm A does not plan to do business with firm B in the future, it may be in the interest of A to behave honestly and fairly with B to protect its reputation. The reputation of A, through its dealings with B, may determine whether C will be willing to work with A in the future. In the age of strategic alliances and network organizations, a firm's good name may be its most valuable and enduring asset. To the extent that good reputation makes it possible for a firm to enter into and maintain valuable strategic alliances, reputation may be the most important competitive advantage.

In the real world, we find few mechanisms to control the behavior of strategic partners, and we must rely on mutual trust based on the partners' good character and reputation. I learned this lesson during my training at a large commercial bank. I was working on a large loan to a shipping company that wanted to purchase several tankers. After the terms of the loan were agreed upon Adj. 1. agreed upon - constituted or contracted by stipulation or agreement; "stipulatory obligations"

noncontroversial, uncontroversial - not likely to arouse controversy
, the bank's legal department devoted several weeks to producing a contract as thick as a book. When copies of the contract arrived in our department, my boss asked me if I thought this supposedly ironclad contract was sufficient to protect the bank from possible fraud. His opinion was "No." He said that a dishonest client can always cheat you, no matter what you put into a contract, and advised me to try to do business only with clients of good character. In the modern network organization, the importance of good character is even more important than in the past, because firms deal with a variety of partners (or stakeholders) in very fluid relationships that cannot be nailed down in detailed contracts.

Valenzuela and Villacorta (1999) suggest that companies should treat suppliers as collaborators and select them carefully. They recommend that a company identify suppliers that are likely to adapt to the needs of their partners, but also make sure that the suppliers' needs and goals are compatible with its own. Any company entering into strategic alliances or networks should devote the effort and time to make a careful selection of partners. However, the thoroughness of the process may vary somewhat, depending on the specific structure of the organization. A modular organization has longer-term relationships with its partners than the virtual organization and may be able to spend more time selecting them. However, all organizations must try to select partners with whom they are compatible in term of goals and values. They must also select partners that will uphold ethical standards and not become an embarrassment. In several areas, such as the apparel industry, standards have been developed to evaluate suppli ers with regard to the use of child labor child labor, use of the young as workers in factories, farms, and mines. Child labor was first recognized as a social problem with the introduction of the factory system in late 18th-century Great Britain. , working environment, wages, and collective bargaining collective bargaining, in labor relations, procedure whereby an employer or employers agree to discuss the conditions of work by bargaining with representatives of the employees, usually a labor union.  (Simon, 2000; Emmelhainz & Adams, 1999; Hancock, 1998). Standards should also be defined regarding other business relationships, not just those with suppliers. By measuring ethical conduct, the standards will contribute to that valuable and enduring asset, the firm's reputation.

We should also consider the human relationships and the culture that exist within and between organizations, because these can help prevent unethical or illegal behaviors. When relationships are long term, interpersonal relationships of friendship and trust can create a stable culture that sustains interorganizational relationships and guides their activities. To the extent that this culture coordinates the activities of partners in a harmonious way, it contributes to organizational efficiency and is, therefore, a strategic asset. As Granovetter (1985, p. 486), explains, "this culture is not a once-for-all influence but an ongoing process, continuously constructed and reconstructed during interaction. It not only shapes its members but also is shaped by them, in part for their own strategic reasons." More important, people's behavior is "embedded" in established systems of social relations (Granovetter, 1985, p. 487). This suggests that, through their interactions in network structures, people create relation ships and a culture that define expectations and shape behavior, for good or ill. It is, therefore, very important that participants in networks develop relationships and cultures that are not only functional in terms of business success, but also consistent with legal and ethical norms. It can be argued that the relationships that are integral to a network can sustain illegal and unethical behaviors as well as good ones. Granovetter (1985, p. 492) points out that force and fraud are more efficiently pursued by teams, and that the structure of these teams requires a level of internal trust or "honor among thieves This article is about the Deep Space Nine episode. For other uses, see Honor Among Thieves (disambiguation).

Honor Among Thieves is an episode of , in which Miles O'Brien is tasked by Starfleet Intelligence to infiltrate the Orion Syndicate, an organized
." Organized crime is often a very efficient network. Network organizations, however, should strive to develop embedded relationships and cultures that facilitate ethical conduct. Lacking these, the network becomes either a community without direction or a conspiracy in illegal or unethical activities.

Cases of Ethical Gaps in Networks

Many cases exemplify the ethical gaps that can occur because of the decentralized control In air defense, the normal mode whereby a higher echelon monitors unit actions, making direct target assignments to units only when necessary to ensure proper fire distribution or to prevent engagement of friendly aircraft. See also centralized control.  in network organizations. One well documented case involved a financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page.
 network (Buono & Hachey, 1993). It appears that the Fleet Bank was benefiting from industry redlining Identifying text that has been changed in a word processing document by displaying it in a special color, for example. It allows the original author of the text or other users to see ongoing revisions. The term comes from manual editing where a red pen is used to mark up the pages.  practices that denied credit to members of racial minorities in poor areas. Fleet extended lines of credit to second-mortgage companies, encouraged these companies to make the high-interest mortgages in the poor areas, and then purchased the loans from these companies. In this way, Fleet was able to benefit from these questionable loans while shifting the responsibility to the independent mortgage companies. This fragmentation in legal and ethical responsibility resulted from the creation of an interorganizational network. In the past, a single financial services institution (a portfolio lender) would usually perform each of the steps in the process of securitization Securitization

The process of creating a financial instrument by combining other financial assets and then marketing them to investors.

Mortgage backed securities are a perfect example of securitization.

May also be spelled as "securitisation.
, acting as a vertically integrated firm. This arrangement, however, involve d a growing number of specialized firms tied together in a network structure. This network structure resulted in greater cost effectiveness but also spread oversight and responsibility over several organizations.

Many cases can be cited in the manufacturing area in which fragmentation of the stages in the value chain resulted in the fragmentation of legal and ethical responsibility. A well-publicized example is that of Nike, whose partners produced shoes using child labor. A less publicized case is that of the "beer girls" of Southeast Asia (Marshall & Stecklow, 2000; Schiffrin, 1998). Beer and liquor distributors hire small armies of attractive women to greet male customers at bars and restaurants and promote the distributor's brands. There is a darker side to this marketing, because the girls are pressured by customers to go home with them. Some of the girls comply to supplement their salaries. When they refuse, they are sometimes raped. A number of the beer girls are now HIV HIV (Human Immunodeficiency Virus), either of two closely related retroviruses that invade T-helper lymphocytes and are responsible for AIDS. There are two types of HIV: HIV-1 and HIV-2. HIV-1 is responsible for the vast majority of AIDS in the United States.  positive. In Cambodia, the government estimates that 19% of "indirect commercial sex workers," which includes beer girls, are HIV positive (Marshall & Stecklow, 2000). The distributors either deny that there is a problem or claim they have no r esponsibility for "what the girls do on their own time." The brewers also shirk responsibility. A Philippine brewer responds that it has no presence in Cambodia and, therefore, cannot control what goes on there. An American exporter claims that "Marketing efforts that are done overseas are really not something the brewer participates in at all or really has any knowledge of" (Marshall & Stecklow, 2000).

The Role of Decision Makers in Networks

In these sad cases of corporate irresponsibility, one must wonder whether there is anything that a responsible stakeholder stakeholder n. a person having in his/her possession (holding) money or property in which he/she has no interest, right or title, awaiting the outcome of a dispute between two or more claimants to the money or property.  can do to maintain an ethical climate in the network. Are these unfortunate dynamics in networks deterministic 1. (probability) deterministic - Describes a system whose time evolution can be predicted exactly.

Contrast probabilistic.
2. (algorithm) deterministic - Describes an algorithm in which the correct next step depends only on the current state.
 and inevitable, or is there room for managerial discretion and strategic choice? In spite of the fragmentation of ethical responsibility in a network, can an ethical stakeholder influence the behavior of its partners?

These questions raise the issues of power, influence, and choice in networks. A deterministic model deterministic model

one in which each variable changes according to a mathematical formula, rather than with a random component.
 of organizations, such as that of population ecology Population ecology

The study of spatial and temporal patterns in the abundance and distribution of organisms and of the mechanisms that produce those patterns.
, assumes that objective factors determine all outcomes and leave little room for strategic choice (Van de Ven, 1979). According to this model, decision-makers have no opportunity to alter the outcomes of organizational activities. Perhaps the most useful theoretical framework for understanding power and influence in networks is the resource dependence model, which is wonderfully compatible with the emergence of strategic alliances and networks. The model begins with the proposition that organizations are not able to generate internally all of the resources they need, so they must enter into relationships with other organizations. Two aspects of this model are relevant to network relationships. The first is that this model, as opposed to the population ecology model, stresses the role of organizational actors in determining the fate of their organizations and the network. "The resource dependency model portrays the organization as active, and capable of changing, as well as responding to the environment" (Aldrich & Pfeffer, 1976, p83). This involves the second aspect, which is the notion of strategic choice (Child, 1972).

Using the arguments of Child (1972), Aldrich and Pfeffer (1976) describe three ways in which decision-makers in organizations have autonomy and can make choices. The first is that they have a choice of viable alternatives within the niche or domain in which they operate, e.g., the choice to differentiate the product or segment the market. Decision-makers can also select the domain in which an organization operates, for instance, they can enter or leave markets. We can apply this argument to the network by arguing that decision-makers choose to create a network and select their partners; they are free to choose partners who share their ethical values.

The second argument is that organizations are not passive in the face of environmental influence. They can also shape the environment, perhaps by trying to regulate market competition. This would suggest that a firm can also manipulate its environment within the network and take measures to strengthen its position vis a vis its partners. According to the resource dependency model, organizations try to acquire resources, and the principal way in which they do this is through exchange (Benson, 1975). Moreover, the exchange occurs in a setting of power differentials (Cook, 1977). The members of a network have different levels of power and, therefore, different amounts of influence. An organization can influence the behavior of other network members, not only in a way that improves its own competitive position, but also in a way that enhances the network's ethical quality.

The third way in which strategic choices can be made is through the interpretation of the environment by decision-makers. Environments are to some extent "enacted" or created through a process of attention (Weick, 1979), so decision-makers respond to a perceived reality. This is relevant to the problem of ethical conduct because unethical conduct Behavior that falls below or violates the professional standards in a particular field. In law, this can include Attorney Misconduct or ethics violations. The standards for conduct to be observed by attorneys can be found in the Code of Professional Responsibility; members of  is often the result of a "value free" perception of reality. Moreover, because organizational monitoring and scanning systems are selected in light of the enacted reality, they tend to support that reality. Ethical dilemmas do not create a blip on the radar screen if the scanning systems were created to monitor an environment devoid of ethical issues. However, because the enacted environment is a shared reality, ethical actors in a network can introduce an ethical dimension into that environment by forcefully presenting ethical issues to other stakeholders.

As Child points out, decision-makers have strategic choice, and they retain freedom of choice when they enter into networks. It is, therefore, the responsibility of every organizational actor to make sure that ethical responsibility is not lost in a decentralized network. Organizational actors can maintain a climate of ethical responsibility (a) by choosing partners who share their ethical values, (b) by using their power and influence to block unethical conduct, and (c) by creating an environment that includes an ethical dimension and a monitoring system that scans the ethical dimension as closely as the economic dimension.


The shift in strategy from vertical integration to strategic alliances has developed hand in hand with the evolution of organizational structure from the vertically integrated firm to the network and the boundaryless organization. The forces driving this evolution have been the need for greater coordination and information processing, occasioned by the increasing speed of change and the complexity of the environment. The result has been the elimination of boundaries, more flexible organizations, and a greater interaction among individuals and organizations. The modem network organization is credited with requiring less capital, having less overhead expense, being able to utilize technology from various sources, being more entrepreneurial, and being able to act more quickly. On the negative side, the specialization of firms in single areas of competence has resulted in fragmentation of the value chain and of ethical and legal responsibility.

The conditions in the environment (turbulence and complexity) that brought us these flexible organizational structures will not go away. On the contrary, they are likely to accelerate. Network structure may evolve into the cellular structure, as predicted, and the problem of establishing ethical and legal responsibility in a network or cellular structure will continue to be important. The solution seems to lie in the development of relationships and cultures that are functional not only in terms of business success but also in terms of legal and ethical norms. Once these relationships become embedded in the network, they can sustain constructive and ethical conduct. Individual decision-makers in the network must accept responsibility for creating these constructive relationships. The outcomes in networks are not random occurrences or the product of deterministic forces, as the population ecology model might suggest. Decision-makers do not lose strategic choice when they enter into a network structure. Organiz ational actors can maintain a climate of ethical responsibility by choosing ethical partners, by using their power and influence to block unethical conduct, and by creating an environment with an ethical dimension. Strategy and structure have undergone radical change, but one thing has not changed: organizational outcomes, for better or worse, are still the responsibility of human actors.


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Dr. Daboub's research interests include business and society, organizational behavior and theory, and strategic management. He has presented papers at several conferences, including SAM's, and has published in the Academy of Management Review.
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Date:Sep 22, 2002
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