Network forms of organization, with reciprocal patterns of communication and exchange, are alternatives to hierarchically or market based governance structures; they are more suited to describing companies involved in an intricate latticework of collaborative ventures with other firms over extended periods of time.

Hierarchies are suited to transactions that involve uncertainty, recur frequently, and require substantial “transaction-specific investments”. Markets are suited to exchanges that are straightforward, non-repetitive, and require no transaction specific investments.

These “alliances” aim at creating indebtedness and reliance over the long haul: your current collaborator will be your competitor in other domains (or in the same domain) over time. In markets, the strategy is to drive the hardest possible bargain in the immediate exchange. Commitment is low.

Network organizations are more social than markets and hierarchies, they are dependent on relationships, mutual interests, and reputation. They are less guided by a formal structure of authority. Successful networks involve complementarity and accommodation. Reputation, friendship, interdependence, and altruism are integral. The most useful information comes from people you have dealt with in the past rather than from the formal chain of command.

Conflicts are resolved by haggling in markets; administrative fiats in hierarchies; norms of reciprocity and reputational concerns in networks.

Markets offer choice, flexibility, and opportunity. Prices determine production and exchange. Hierarchies are well-suited for mass production and distribution. Networks are more flexible than hierarchies. Transactions occur through networks of individuals engages in reciprocal, preferential, mutually supportive actions.

Reduction of uncertainty, fast access to information, reliability, and responsiveness are paramount concerns that motivate participants in network organizations.

Know-how, the demand for speed, and trust are critical components of successful network organizations.

Examples of network forms:

• Craft industries (construction, publishing, film and recording industries)—facilitated by loyalty to the profession and to project teams. Informal trading of proprietary expertise is common among members of a profession in different organizations.
• Regional Economies and Industrial Districts (German textiles, Silicon Valley)—Rich array of support services. Pooling resources on basic research through consortia and trade associations. Encouragement by local government. Proximity to centers of higher education.
• Strategic alliances and Partnerships (Oil and gas, chemical and pharmaceuticals, commercial aircraft)—share risk and expense. Cooperative relationships with suppliers. Gain fast access to new technologies or markets. Needs to deal with anti-trust concerns.
• Vertical disaggregation. (Downsizing, outsourcing)—Increased flexibility in responding to technological change and commodifcation of products.

Know-how, the demand for speed, and trust are critical components of successful network organizations.

• Know-how and detailed knowledge of the abilities of others who possess similar or complementary skills thrive in networks. Exchange of competencies is more likely to occur in networks; exchange of tangible resources is more likely to occur in market transactions or among units in a hierarchy.
• Demand for speed is facilitated by a network’s strengths in offering fast access to information, flexibility, and responsiveness to changing tastes. Information flow through a network is freer and richer than in more tightly controlled markets or hierarchical organizations.
• Trust develops when there is a high probability of future association. There is a higher probability of cooperation and also a willingness to punish those who do not cooperate.