Network-firms are decentralized organizations formed of independent units linked to each other by contract. They differ from networks of firms, which entail cooperation between units not linked by contract.
Network-firms can either form a totally closed network, in which case they are formed by a limited set of linkages developed by a lead firm in a few sites, or a totally open network, in which case they are characterized by continuous change in terms of the partners involved and their locations. They are not transnational by definition, but tend to be so because of the globalization of the economy. Transnational or global
network-firms expand beyond national boundaries and reconstruct value chains creating links between suppliers worldwide.
Since the 1990s, the number of
network-firms has risen. Many major companies — in the automobile, aeronautics, IT and distribution sectors, etc. — have reduced their activities to core tasks, while outsourcing as many production processes as possible. These
network-firms rely on outsourcing and subcontracting.
Advantages of Outsourcing
By outsourcing, companies can increase the level of labour flexibility (transferred to the subcontractors), cost control (by creating competition between suppliers), and even technological innovation (as each subcontractor specializes in a particular field).
Undoubtedly, many firms are moving towards closer functional relationships with their suppliers by nominating preferred suppliers with whom they develop very close relationships. Such suppliers are increasingly being given greater responsibility for the quality of their outputs and, indeed, are playing a more direct role in product design. The result, in many cases, is the development of a system of tiered suppliers. In tiered production, the buying company deals primarily with the top-tier suppliers, while lower-tier suppliers are managed by those above them in the pyramid… A tiered production system reduces the need for a single company to manage the entire supply chain.
"Hollow firms" represent a special type of
network-firms, which outsource all or practically all production tasks. An example is the firm Dell, which is only active at the final stage of production— the assembling of computers —, and in the customer service department.
Disadvantages of Outsourcing
Outsourcing also has limits and drawbacks. Firms can overestimate potential profits or underestimate some costs linked to coordination (transport, a weakening of the production chain). The costs of transactions with subcontractors (communication, negotiation, regulation) can be quite high if the contract giver values quality. Also, outsourcing does not always provide more flexibility — as every subcontractor has its own agenda — and can deprive the firm of its own flexibility in terms of innovation or production. Lastly, decision-making with regard to what tasks to outsource and to whom are not based on objective facts and rules, but rely strongly on irrational criteria, resulting from negotiation and compromise.
Network-firms use new types of coordination and control relationships: collaborative projects, ISO norms, and shared information systems. Governance is obtained through complex organizational mechanisms that necessarily involve strong cooperation and reciprocal control. In other words,
network-firms have created a new social organization. These new relationships between firms modify working relationships within the structure. And labour law is still not up-to-date; it does not take into account the redefinition of roles, especially the new triangular relationship between subcontractor, employer, and contract giver.
(adapted from Dicken, P.,
Global Shift: Reshaping the Global Economic Map in the 21st Century, 4th ed., New York: Guilford Press, 2003, p. 258 and from Kelly, K.,
New Rules for the New Economy, 2006, visited 2009-08-21)