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Economics & Finance

A new perspective for the age of networks

Robert Goldsmith |
Paul Kleindorfer

The rise of international networks and globalisation have created a dilemma for business: companies need global networks to access resources and markets to be competitive, but the networks themselves present great risks.

“On the one hand, networks lead to contagion and other risks, as can be seen in the rise of global terrorism, current concerns about the potential for a flu epidemic, and the spread of the 2008 global financial crisis,” states 'The Network Challenge: Strategy, Profit, and Risk in an Interlinked World', co-edited by INSEAD Professor Paul Kleindorfer.

“On the other hand, networks present opportunities for building community, as witnessed by the rapid rise of companies such as eBay, Google, Facebook, and other network-based enterprises.”
'The Network Challenge' argues that the rise of global networks challenges the traditional firm-centric view of competencies and strategies that are the focus of most business education and management thinking. Instead, companies and managers need a much broader perspective that recognises that the company headquarters is no longer the centrepiece of strategy – the network is.

“This is, if anything, the age of networks,” says Kleindorfer, the Paul Dubrule-chaired Professor of Sustainable Development at INSEAD. “This age of networks does not obviate the fact that there are nodes and firms and firm-centric decision rights, as well as capital rights and ownership rights. But network thinking certainly puts a whole new cast on the core themes of business and business education, from strategy to marketing to supply management.”

Co-edited with Yoram (Jerry) Wind, Professor of Marketing at Wharton Business School, 'The Network Challenge' is a joint publication of the Wharton-INSEAD Alliance. It brings together 50 experts in business and non-business disciplines, from anthropology and biology to computer science, to study various kinds of networks in order to understand, manage and leverage them.

“From risk to political risk to terrorism and health, in one arena after another, we are seeing fundamental changes occasioned by the movement from firm-centric to net-centric thinking,” Kleindorfer says.

A network perspective

In traditional firm-centric marketing, for example, a company develops a new product or service, offers it to the public for consideration and then awaits the response in terms of revenues generated. In network-centric marketing, this strategy is no longer valid, Kleindorfer explains. Instead the public is telling one another what products and services they want and don’t want, through conversations on Twitter, MySpace, YouTube and other social networking sites.
“If you don't have that view as a marketing person these days we listen, we innovate, we respond to emerging groups of customers specifying potentially new products you're neither in the consumer game nor in the industrial marketing game,” Kleindorfer says. “There is a huge difference between announcing to the world that we’ve got it, so buy it and announcing to the world we're ready to listen to you, both in terms of our current offerings and in terms of the design of new products.”
The financial crisis and the failure of the American automobile industry are further examples of the perils of not recognising that this shift has taken place. The spread of the financial crisis is now recognised to have its roots in network contagion and the difficulties of tracking the network-based risks of financial instruments that were firm-based and not marked to market. The American automobile industry has become the latest victim of firm-centric thinking by insisting on marketing that worked in the past, rather than being responsive to the changing requirements of American consumers.

No exemptions

Networks have had an impact on all business disciplines. In operations, there have been huge changes in risk and in the way in which unbundled global networks are run. Traditional supply chain thinking suggests simple one-on-one connections, but does not take into account the ripple effects of risk and disruption that occur in unbundled global supply networks.  

“In every one of the business disciplines that defines the modern corporation, the network perspective has begun to take deep traction in redefining perspectives about the nature of the enterprise itself, the nature of what's controlled, the nature of profits and risk, and fundamentally therefore the nature of the strategies that ought to be pursued in such a redefined globally networked world,” Kleindorfer says.
The effects are not just for large enterprises – small- and medium-sized companies have been impacted as well. SMEs contribute a significant share of global GDP (and even more in terms of global employment) but often they don’t think of themselves as being part of a global network. But that may indeed be the case through their supply chains, customers and their customers’ customers. Knowing this could be important in terms of how they construe their economic and corporate lives.
“Understanding their interconnectivity and their interdependence to the broader economic and global forces they are part of, gives them a deeper sense of satisfaction for the value they create, a deeper sense of meaning as to what they are part of, and a deeper sense of confluence with the broader activities, including sustainability, that we are all a part of, whether we like it or not,” Kleindorfer explains.

part of something bigger

Taking a network perspective can be a humbling experience for companies when they realise that they are not entirely masters of their own fate. Rather, they are part of a global network of interconnected firms, each playing a fundamental part in each other’s destiny. Companies and their shareholders, customers, suppliers and employees will be better off for recognising and learning how to adjust to this fact, Kleindorfer says.
“They will have a view that is much more respectful of the huge forces of turbulence that surround them what they control and don't control, and a more humble view about their position in the universe than a solipsistic view gives them,” he concludes. “This net-centric view is ultimately a better starting point for strategy, profit and risk than the illusion of control that goes with firm-centric thinking.”  


‘The Network Challenge: Strategy, Profit, and Risk in an Interlinked World’ by Paul R. Kleindorfer, Yoram (Jerry) Wind with Robert E. Gunther, is published by Wharton School Publishing.

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