Network Positions and Competitive Advantage

7 November 2006 at 3:46 am 3 comments

| Nicolai Foss |

One of the most important trends in strategic management research over the last decade or so has no doubt been the application of arguments developed in sociology by the likes of Mark Granovetter and Ron Burt. In the hands of able interpreters, such as Gautam Ahuaja, Olav Sorenson, Brian Uzzi, Toby Stuart, and many others, these arguments mark the real advent of sociology as a forceful voice in the conversation of strategic management scholars, a conversation that had until clearly been dominated by arguments drawn from various fields in economics.

Although I am usually impressed with the efforts of the above scholars, I have also sometimes felt a bit uneasy when reading papers that draw on the sociology literature on networks. Theoretical development seems conspicuous by its absence. Many things seem to be taken as exogenos, notably positions themselves. Moreover, the literature often seems to suggest that network positions may be associated with competitive advantage, but the precise mechanism that makes this happen is far from clear.Thus, sociological network arguments as they pertain to strategic management would seem to require a theoretical check. Enter Michael Ryall. I am a great admirer of Ryall’s work. Along with people like Peter Zemsky and Rich Makadok, he brings formal rigor to the strategic management field, without simply aping existing IO work. In an excellent recent paper, “Positional Advantage in Networks,” he joins forces with Olav Sorenson, pointing that the assumption of exogeneous network structure and positions is hard to align with the rent-seeking assumption underneath most of strategic management theory. Indeed, network structure and positions should be seen as endogeneous to the rewards that may accrue to such positions.

However, the aim of Ryall and Sorenson’s paper is not to launch methodological critique, but to forward substantive arguments and theory building, in particular examine the conditions under which network positions may yield competitive advantage. The vehicle for doing this is cooperative game theory, specifically the biform approach developed by Adam Brandenburger and Toby Stuart.

Here is the abstract:

Recent research in strategy has called attention to the fact that particular positions in inter-firm networks may serve as a source of competitive advantage for the firms occupying them. This empirical literature has nonetheless found it difficult to separate the effects of positions from those of firm capabilities and resources. We develop a general model for addressing this issue analytically. Our results suggest that agents can enjoy a competitive advantage due only to their positions, but only when several conditions hold, most notably: (i) the agent has relationships to at least three other firms; and (ii) the agent does not hold too strong a position. We also assess the stability of competitive advantages, finding that, while capabilities and resources can confer a stable competitive advantage, positional advantage is not robust to the activities that others might use to diffuse them.

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3 Comments Add your own

  • 1. brayden  |  7 November 2006 at 9:43 am

    I wonder how this argument squares with the argument made in this paper, which was published in the American Economic Review. Casella and Hanaki maintain that networks (or network positions) “work best when they are unintentional, and thus free by-products people’s social life.” Networks that are bought don’t seem to provide the same information signals that spontaneous networks do.

  • 2. Richard Makadok  |  7 November 2006 at 11:33 am

    Hi, Nicolai.

    Brandenburger’s co-author on the biform games paper is actually Harborne “Gus” Stuart, not Toby Stuart. A Freudian slip, perhaps?

    Anyway, Mike tells me that his paper with Olav has been accepted for Management Science (congratulations).


  • 3. Nicolai Foss  |  7 November 2006 at 11:42 am

    Rich,You are right, of course: Gus, not Toby. A slip indeed, but not Freudian.

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
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Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
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