TRANSFORMATION OF FIRM STRATEGY TOWARDS THE

NEW ECONOMY—Networked governance perspective

Weian LI Jian ZHOU（School of International Business, Nankai University, Tianjin 300071， P. R. China）

Abstract

The paper, with background of the New Economy labeled as the network economy, is in search for form and

outcome from transformation of firm strategy. In terms of perspective on structure of governance for way of

organizing exchanging in transaction cost economics, it is analyzed that relatively to market and hierarchical

governance structure, networked governance structure is appropriate to be the base of transformation of firm

strategy towards the New Economy. What the transformation of firm strategy presents is how the firm determines

its corresponding governance structure of organizing exchanges in order to sustain its competitive advantages,

while so dramatic changes occurred in the business environments. The networked governance is an embodiment of

organizational capabilities to adapt to mechanism of value creation by which to increase returns of economies. The

networked governance is constituted part of continuum of way of organizing exchanges. Objective existence of the

networked governance proves that so many changes were taken place in exchanging forms and competition among

firms. The forms of exchanges change from transaction and control of property rights to co-operation of property

rights-based inter-firm arrangements, and competition from product to network levels. The networked governance

promotes transformation of firm strategy from competitive strategy and corporate at governance levels to the

networked strategy at strategic level so as to achieve networked governance-specific networked values. The

Chinese enterprises, particularly SOEs, may learn more from networked governance and strategy.

Key Words: New Economy, structure of governance, networked governance, network strategies

1 Introduction

Since the 1980s in the 20th century, with extensive applications of Porter’s competitive

strategies and advantages, the significance of firm strategy has been proved by more and more

business practices. The firm strategy is by nature some dialogue between firms and changing

environments. Changing environments contain both internal and external environments of the

firm. Therefore, when dramatic changes occurred in those environments, transformation of firm

strategy is a normal response, disclosing some organizational capability (Chandler, 1999; Stalk

etal., 1992).

The Porter’s competitive strategy shows that in the model of the market transaction of

competitive institutional arrangement, the firm is capable of finding out the market positions

suited for its profitability in specific period through structure analysis of industrial market.

Furthermore, going on performing low cost and businesses differing from its competitors, as well

as focus and niche, the firm may accomplish competitive advantages of low cost and

differentiation (Porter, 1988; Fauklner and Baoman, 1997). This strategy had become a Bible of

business managers in the west of the 1890s. Of course, management as means to ascend

productivity of organization of the firm has being confirmed in the practices.

However, market/product matrix advantages from competitive strategies and organizational

advantages from general management do not exist in static. In the advent of one more new

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millennium, rapid advances of technologies, particularly in information and communication

technologies (ICT), are changing one’s way of life little by little, and also way of value creation

by the firm. As a matter of fact, with gradual establishment of the modern institution of enterprise,

the position of management in value creation begins transferring to such institution arrangement in

which internal and various institutional authorities are built up, motivated and controlled. It is

corporate governance. In the changing backgrounds from globalization and accelerated advances

of technologies, corporate governance is also changing its traditional focusing from on structure of

corporate governance to on dynamic mechanism of governance, as well as to on practicing

principle of corporate governance (Weian Li, 2001), becoming a hotter global issue of

convergence. Also massive business practices in co-operation among firms globally since 1980s

differ from relationships of market exchange and pure internal organization, for example, vertical

integration and collusion-based horizontal cartel, and attract more and more attentions from

academic community (Fauklner, 2001; Beamish and Killing, 1998).

2 Research Question and Research Methodology

With deductive and inductive methods of normal analysis, it is discussed how firm strategy

conducts transformation, or ascend to higher level of strategic decisions, in the real backgrounds

of transmutation of the network economy representing the New Economy from industrial

economy. Strategic decision of the firm is referred to as generic decisions about “make, buy or

ally”.

Transformation of firm strategy is essentially problem of changing way of producing

competitive advantage of the firm. As such, to understand such way, requirement is of course to

recognize general mechanism by which to change competitive advantage. Thus, transformation of

firm strategy is related to way of organizing exchanges of the firm fundamentally. How the

strategy transmutes is changed to answers such questions as how competitive advantage of the

firm is generated in principle, if different exchange model means different generation mechanism

of advantage, and which changes the mechanism to produce competitive advantage takes place

when business backgrounds are changed so much etc.

For this reason, it is at first conducted simple comparisons of basic characteristics between

traditional industrial and the New Economies, from which to generalize main features of this new

economy. As long as there are some newer features from environment, transformation of firm

strategy is made sure to be objective and reasonable fundamental, which constitutes the starting

point of the paper.

Supported by mentioned above variables of backgrounds, it is disclosed issues about

institutional fundamentals, networked governance and networked organization, which are required

for transformation of firm strategy.

Following. Based on analyses of networked governance and networked organization, it is

emphasized to understand the networked strategies coming from network governance. Meanwhile,

combined with economic reform performed for nearly two decades in China, as well as realities of

Chinese entry into WTO, some valuable suggestions are postulated on market institutions and

value creation that Chinese enterprises may obtain from networked governance and networked

strategies.

Finally, research conclusions are ended with outlines of strategic forms of three governance

structures and their value creations respectively, and pointed out that transformation of firm

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strategy toward the New Economy is forming process of structure of networked governance,

which moves firm strategy to the networked strategy containing organizational network and

network organization. The networked strategy of firm is a group of strategic choices that are based

on inter-firm co-operative arrangements, formed by networked oligopoly competition, mechanized

by building and leveraging of resources and competencies and powered by the law of increasing

returns.

The mentioned above analysis routine may be abstracted as the following research logic

diagram as reads,

3 Literature Review

How to sustain existed competitive advantages in the ever-changing environments of market

is a fundamental problem in strategic management. Presented is attempted to transcend across

domain of strategic management, combining changing environments, strategic management,

corporate governance and transaction cost economics, to argue that sustainability of competitive

advantage of the firm depends on appropriate transformation of firm strategy. The foundation of

this transformation is shaping of organizing inter-firm exchanges. Up to now, the bases are chiefly

hierarchical governance to organize internal management exchanges and market governance to

organize market exchange (Williamson, 1991). The former examines corporate governance for

market efficiency of the firm, and the latter applications of intangible resources and competencies

of the firm for producing competitive advantage.

So called corporate governance, traditional arguments observed how to set up effective

authority institutional arrangements under conditions of separation of the two rights of enterprise

system in order to match principal objective of ownership and acting objective of managers.

Consequently, corporate governance is essentially dealt with the whole efficiency of the firm.

Corporate governance is becoming a hotter issue most recently, turning from structure to

mechanism, and to principle of corporate governance. The scope of CG is also from locally

strategic management up to the wholly domain of market efficiency of the firm. Ever since 1992

when Cadbury Report was issued, international organizations, institutional investors, even a few

leading transnational corporations, across regions and countries in the world have begun

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Characteristics of NE

Inter-firm Cooperative Arrangement Network

Networked Corporate Governance

Networked Oligopoly Strategies of the Firm

Economic Globalization

Accelerated Tech. Advances

Figure 1. Research Methodology

introductions of their principles of corporate governance consecutively

Therefore, research matter of corporate governance is by nature of market efficiency, instead

of simple choices of structure of corporate governance. The objective is how to build up principle

of corporate governance, containing such elements as structure and mechanism of corporate

governance, and to reinforce scientific degree of making decision of the firm rather than simple

counterbalance of rights and authorities (Li, 2001). Enhancing scientific degree of decision-

making is to establish related bridge between corporate governance and strategic management.

The principle of corporate governance, viewed from practicing corporate governance, becomes to

greater degree the best practicing that serves as sources of competitive advantages.

Locally dimension, efficient difference between firms in market is approached form either

tangible or intangible resources. The former is chiefly from deduction of logic framework of

economics. Economics, because of regarding the firm as Black Box, ascribe the difference among

firms to competitive behavior in the final product of market. However, using market entails cost.

Through transaction cost, internal organization began standing point to understand market

efficiency of the firm. For example, mobilization of production input is also entailed cost labeled

as imperfect mobility (Peteraf, 1993).

Relatively speaking, in strategic management, market efficiency among firms is dealt with

from intangible resources including the two viewpoints.

The first is extension of economics, particularly industrial organization (Carlton, 1998), in

fact application of SCP paradigm of Chicago University. However, due to enriched roots of

microeconomics, the paradigm is virtually unable to explain practicing situations of the firm. That

means that SCP paradigm has to be revised. Michael Porter at Harvard finished this revised work.

He updated the SCP paradigm reversibly from value creation in economic activities to be noted

generic competitive strategy and competitive advantage perspective. He argued that efficiency

among firms in market is outcomes of structural position in industrial market, i.e., the positioning

of the firm determines its market efficiency.

The second dimension is from intrinsic endowments of resources within the firm and

observes that heterogeneity of firm resources is why there is market efficiency among firms. It is

noted that resources here is different from and not input as resources in economics, but dynamic

resources that function value creation for the firm, or ones with imperfect mobility. Imperfect

mobility means that acquisition of such resources cannot be results by market price mechanism,

but by performing such intangible resources as reputation. Intangible resources as exerting matter

in firm strategy is sure to reflect dynamic characteristics in values generation of the firm, and

moves value of the firm toward operations of strategic options by the firm. Thus, how to leverage

intangible resources may be turned specific operation of organizational resources and capabilities.

In this aspect, there are the two vital documents to be worthwhile.

The first is used most frequently in “The Core Competencies of the Corporation”(Parahald

and Hamel, 1990). This study made deeper insights into why Japanese firms transcended majority

of European and USA counterparts during the almost entire 1980s. Their answer is distinguished

notion core competence that emphasizes capabilities in “doing” by firms. Unlike previous studies

on intangible resources in “having”, which attached importance to such factors as trademark,

channels and business secrets, the core competence highlighted competences in being best at

“doing” by the firm. They concluded that competitiveness of the firm is originated from different

“core competencies” rather than from properties of goods and services at the final market. Why

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the firm exists in market or reliable method to keep on its competitive advantage is to constantly

update its “the best at doing” competence. As for those activities that do not belong to domain of

core competencies, it would better be conducted outside the existed border of the firm.

The second paper is a typically paper for relationship between intangible resources and firm

strategy (Hall, 1993). Starting from competence perspective of the firm, the paper attempted

combination of intangible resources and types of capabilities of the firm. However, capabilities in

the paper were further divided into “having” capabilities and “doing” capabilities. So called

“having” capability, it represents assets which are intangible resources including intellectual

property rights protected by law, such as trademark, copy rights, business secrets and selling

channels. For “doing” capability, it refers to specific knowledge or know-how, which may exist

processes performing some productive activities, for example management institutions for control,

also be in human capital embedded in employees. In other words, this “doing” capability is

actually “skill” competence of the firm. It is clear that the “skill” competence is function of time,

whose contribution to competitive advantage came from constantly improvements of external

environments dynamically.

Hence fore, the persuading explanations about competitive advantage from the competence

perspective of the firm are given in principle by core competencies. It may be seen that studies on

generation and sustainability of competitive advantage from local dimension are relatively

completely in the field of strategic management.

A very clear phenomena is, however, that competitive strategy in market governance is not in

fact to inter-firm cooperation relationships. Inter-firm cooperation in this aspect is usually

collusion by firms who provide similar goods and services, loaded with regulatory cost. Therefore,

value creations are of tacit for shorter-term profits, not of strategic for long-term profits. Similarly,

corporate governance inn hierarchical governance focus more on counterbalancing of institutional

authorities and does not consider more about how the corporate governance gives the firm

competitive advantage. But comparatively speaking, co-operative relationships in corporate

governance are more fruitful than those in competition area. The multiple principal-agent

relationship, or stakeholders, are a note to begin inter-firm cooperative arrangements widely.

So called the whole dimension to study competitive advantage is actually how to update

market efficiency of the firm entirely. It is particularly so in the establishment of modern

institution of enterprise.

Well, which changes will business face up in the New Economy labeled with economic

globalization and accelerated advances of technologies? What do they mean to the firm?

4 Backgrounds of Transformation of Corporate Strategy towards the New Economy

Basic characteristics of the Networked Economy based in rapid advances of technology and

globalization of competition constitute such backgrounds.

The New Economy has so many forms to embody. The New is relatively to the Old. The core

is that elements changing one’s life style or economic forms of society are rather different. In the

New Economy, the key element is to take digital as bite in basic unit of information. Instead, the

key is atom as basic unit in physical composition (Nigroponte, 1998). The more agreed consensus

is that the New Economy is characterized by the network economy. Therefore, to study how the

firm transforms its strategy under far changing business environments is to recognize which

characteristics and operation laws the network economy has, after all it is starting point to close to

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the New Economy.

(1) Formal characteristics of the network economy.

The network economy may be viewed as such an economic form with main backgrounds of

developments applications of information and communication technologies (ICT). This economic

form is not only based on technological knowledge, but also formed by extensive cooperative

relationship and its network. Accordingly, traditional vertical integration of the firm is recessed to

complicated horizontal network of relationship. How the network creates value is associated with

basic characteristics of the network economy.

Simply generalizing, the network economy represents synthesis of the following several

economies: all-direction economy not constrained by limited of time and space, globalization

economy causing greater degree of interdependence of economic agents, co-opetition economy

extending scope and speed of competition and cooperation among firms, speed economy

promoting coded knowledge motion rapidly and shorter period of technology, and agiler and more

flexible of decision making, and innovation economy highlighting continuous innovation for

sustainability of competitive advantage. Long-term rents depend on continuous shorter-term

innovation rents or Schumpterian rents (Teece, 1998).

(2) Operating laws of the network economy

The four laws seemly govern the economy. They are labeled as Moore’s Law unveiling the

engine of rapid growth of IT industry and source of constant changing, Metcalfe Law showing the

value of network equaling to square of numbers of network nodal and disclosing the network

benefit’s growth as increasing of users of network exponentially, Gilder’s Law for doubling of

band width of mainline network per six months in future 25 years, and Matthews Effects

presenting that under certain condition, once advantage or disadvantage of information activity,

would it be accumulative effects of self-enhancement.

Objective existence of the four laws describing the network economy, the impact on

economic agents by ICT development-based network economy would be rapid amplified in

proportion of input and output, which is contributed to external effects of network. In related

studies, this effect is one of the important sources leading to increasing return. W. Brain Arthur

(1996) pointed out that besides network effect, there are the three other effects also producing

increasing return, they are scale effect, learning effect and interactive effect (Hartigh, 2001).

Clearly, the form of network economy is changing traditional way of producing values in

economic activities.

Therefore, the value creation in the network economy is actually performed by the increasing

return law. Correspondingly, competition among firms in the network economy is competing for

standard or for new rules of competition instead for price. Competing for new rules of competition

leads to competition between alliance and alliance-based network of relationship among firms and

firm’s cluster. Changes in competitive advantage and forms disclose a great deal of changes in

strategic paradigm of the firm including corporate governance, which reads in Table 1.

Table 1. Comparison of Strategic Paradigm under Traditional Industrial Economy and New

Economy

Form of EconomyIndustrial Economy New Economy

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Strategic paradigm

of the Firm

Form of strategy Linear Strategy Nonlinear Strategy

Strategic preference Integration Networking

Basic unit Atom Bit

Strategic start point Experience hierarchy Imaginary hierarchy

Domain for innovation Part(product, process) Whole（business pattern）Way to develop Continuity Discontinuity

Competitive dynamics Market-based competition Inter-firm arrangement-based

co-opetition

CA and its source Scale of economies ； End

product/market matrix

Networking ； Core

competencies

Mechanism to realize CAs Chain of value-based relative

stillness

Organizational learning-based

interaction

Game Zero-game with no co-

operation

Non-zero game with co-

operation

Market metaphor Each spider sits down on his

own net

All spider sit down the same

network

Competition subject Individual firm Inter firms and among alliance

group

Governance principle Market and hierarchy Networked

Strategic objective “being larger” or “being

smaller ”（lean）

SCAs

Strategic revenue Diminishing return Increasing return

Sources: Weian Li, Jian Zhou. Renewal of strategic options of the firm in the Network Economy. Modern

Management Science, No. 5, 2001, pp: 56-58 (in Chinese).

It is known from Table 1 that ICT-based gradual formation of the network economy not only

changes competitive strategy at the product market (Porter, 2001), but also influences corporate

governance embodying the best practicing of the firm (Li, 2001).

5 Exchange Mode of Inter-firm Arrangements

(1) Networked organization

It may be deduced from the previous descriptions that ICT-based network technologies brings

about rapid decreasing of market transaction cost in industrial organization and lowering barrier of

competition. Therefore, in the network economy, unless organization forms adapting to this

economy, competition intensification will be actually reinforced rather than lowered.

Consequently, the network economy makes sure to entail corresponding innovation.

Seeing from evolution of organizational structure, it is by nature an outcome of changing

environments. Organizational innovation embodies re-think mode of strategic alternatives.

Generally, firm’s organizing is hierarchical behavior reducing market transaction cost, which

results in organizational form of hierarchy. The theoretical foundation of this organizational form

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is that the firm is substitute for market, and of course outcome of existence of real transaction cost.

As a result, organizational form of the firm depends on choice of governance modes in the basis of

contract. Intrinsic incomplete nature of contract, however, it is not hard to guess that as micro

market agent for profit maximizing, the firm has the two optimal forms of organization: one for

vertical integration that is in fact extension of hierarchy organization for appropriate quasi rent (A-

Q rent), the other for M&A for competitive Pareto rents (P rent).

But are there only the two governance modes associated with border of organization of the

firm above? The answer is No. In fact, since 1980s, inter-firm arrangement has become more and

more an important research area, which shows some independently differing from hierarchical and

market governance. For instance, competitive institutional arrangement becomes changing

gradually, in particular in going global for business. Different backgrounds of institutions require

for transnational corporation to take up more flexible decision-making. One of the main means,

for example, is joint venture (JV). JV involves in establishment of independent business entity by

dyadic or multilateral players to create and distribute the group benefits jointly. JV may be seen as

the start to transmute to organizing the newer exchange way in the basis of inter-firm arrangement.

Chiefly due to waves of globalization and rapid advances of technology, there are broader

and broader application areas. Hereby, inter-firm arrangement has begun to be an opportunity and

chance to copy with this wave. Because of globalization, transnational business becomes the start

point for decision-making. Both level and span in internal management of the firm have been

dramatically increased. Simple functional structure cannot meet rapid development by businesses

and impacts by information flows. Therefore, even regarding organizational structure within the

firm, there exists some tendency to structure flattenization characterized by rapid flows of

information, showing greater and greater functionality of internal factors. Outside the firm, there

are more and more strategic factors that serve as key resources relative to the firm, for example,

regulatory resources and capabilities. These resources and capabilities, independently existed

outside the firm border and management control, make the governance mode began some new

cooperation mode with coordination mechanism. On the basis of this new mechanism, inter-firm

alliance came into existence.

Unlike pure allied strategy cooperatively, strategic alliance is such specific relationship

among firms, not only dyadic relationship like JV, coming across industries to enhance rather than

prevent competition. Proliferations of strategic alliance have broken up the governance mode that

integrated value maximizing vertically when technological conditions remain unchanged.

From singular atom competition to public or tacit collusions among firms vertically and

horizontally, and to JVs under different backgrounds of institutions, it can be viewed clearly that

inter-firm arrangements are moving from pure market relationship of exchanges to cooperative

relationship, although competition is still the main melody in this transformation of relationship.

As a matter of fact, when strategic alliance across firms is conducted, organizational behavior of

the firm moves toward the period of networked organization (Zhou, 2001). In other words,

networked organization of the firm is behavior of cooperative strategies on the basis of inter-firm

strategic alliances. This is evolutionary result of inter-firm relationship.

Resulting traditional arm’s length exchange led by pure competition evolutes to networked

organization of the firm characterized by strategic alliance. This changing may be seen as from

“market capitalism” to “hierarchical capitalism”, to “alliance capitalism” and to “network

capitalism”. The significances of evolutions of arrangements are ascending of competitive form

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from product to network level (Hartigh, 2001: 374). The features of competition are network

effect and interactive effect.

So, in the New Economy characterized by the network economy, the modes of exchange by

firms in organizational form contain both organizational network based on cooperative

arrangements, such as virtual organization, strategic alliance and outsourcing and so on, and

network organization with some property rights exchange inside and outside the firm through

formal contracts, such as large sized enterprise group.

(2) Networked governance

Inter-firm relationship organizational network and network organization in the New Economy

have shown a problem from which one may not escape, if there is some exchange mode

specifically designed for inter-firm arrangement or inter-organizational arrangement? Transaction

cost economics provided answer Yes.

In fact, just as mechanism of market exchange for goods by the firm is “price”, and exchange

mechanism for internal organization of the firm “hierarchy”, the mechanism for inter firm

arrangements is accomplished by “coordinating”. The very nature of inter-firm relationship

network illustrates that the way for organizing inter-firm exchanges may be generalized by this

nature of relationship. Therefore, the networked governance mode is relative to market and

hierarchical governance mode, and is defined as mode of organizing inter-firm arrangement

exchanges, which constitutes part of continuum of mode of organizing inter-firm exchanges.

As a result, the fundamental connotations networked governance are induced as below.

At first, research matter of networked governance is inter-firm arrangement, which is neither

market exchange arrangement nor relationship between institutional authorities from managerial

level and span. Its research scope is structure of relationship network with formal and informal

organization, and is set of organizational network and networked organization. Consequently, the

network in network governance is not technologically networked nodal, but cluster of inter-firm

cooperative relationships (Gomes-Casseres, 1994). This clustering is characterized by effective

organizational capabilities and generally represents organizational capital to acquire scarcer

resource and competencies from partners, and social capital to get resources and competencies

from social backgrounds (Foss, 1998).

Secondly, for basic problem of organizing inter-firm relationship exchange, the networked

governance answers such question that how the firm utilize cooperative relationship network to

achieve and sustain competitive advantages in realities of the New Economy that is shaping by the

network economy little by little.

Thirdly, firm strategy generated by the market governance structure is chiefly generic

competitive strategies at business level in product market. Such set of strategic options is typically

Porter’s competitive advantages. The hierarchical governance structure, to considerable degree, is

vivid embodiment of modern institution of enterprise, which generates strategies at corporate

level, such as vertical integration and quasi network organization strategy with internal market

exchange. These strategies show how the firm set up and perform structure, mechanism and

principle of corporate governance with the best practicing.

6 Networked Strategy in the Networked Governance and Its Suggestions to Chinese Firms

The networked governance as a mode of organizing inter-firm cooperative relationships is

theoretically condensed abstract of various strategies performed by the firm. As exerting focus by

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Porter’s competitive strategy is market, the performing key of the best practicing by corporate

governance is regularized operations of modern enterprise system. Inter-firm networked strategy

in the networked governance possesses strategic values showed by networks. The followings are

analyses of such networked strategy by using general structure of strategic management and

combining basic features and operating laws by the network economy.

Seeing from strategic objective, the networked strategy pursues long-term interests of

multiple partners, rather than short-term competitive advantages in the product market. Hence, the

mechanism by which to create the values may be more involved in how all sides in cooperative

relationship perform credit Stressing credit is to advocate reputation of the firm as mechanism of

motivation and constrains to be dynamics of value creation (Zhang, 2001).

In terms of new institutionalism economics, an institutional background of networked

strategy is co-opetition relationships; related institutional arrangement is cooperation of property

rights, instead of transaction or control of property rights. Process of acquisitions of associated

resources and competencies is process of competing for learning.

Institutional revenue by the networked strategy, because of established uncertainty, shows

space of opportunity but not specific values of resources, which is bordering of various

organizational activities induced by globalization and technological progress, at the same time

providing opportunity, entails gigantic challenge.

It is less hard to image that competitive advantages created by the networked strategy tend to

network-specific advantage as Porter’s strategy performs. In order to acquire those networked

advantages, the networked strategies would be oriented to strategies that may produce

technological knowledge within the firm and network structure. That is to say that strategies with

physical inputs and diminishing return are turned to firm strategy with performing information and

knowledge input and based on increasing return, emphasizing generating rather than distributing

process.

Compared with vertical integration of firm strategy produced by hierarchical governance,

networked governance-based networked strategy emphasizes relatively establishment of

horizontal relationship network (Francalanci etal., 2001). Horizontal relationship network, under

networked governance, is not collusion among firms in industrious organization, but specific

strategic alliance going across industries by the firm. The networked strategy will make full use of

fuzzy border of industry brought up by technological advances and globalization to go in for

broader opportunity space more actively.

The values by the networked strategy are strategic resources and competencies. And because

of feature of increasing return by the network economy, once such values are realized, will there

be proportion of outputs amplified by self-enhancing. Therefore, the more specific accurate

speaking to the networked strategy should be knowledge-based networked oligopoly strategy

(Delapierre, 1998), and be set of transformed strategic options in the New Economy.

The networked governance perspective of transformation of firm strategy has deeper

suggestive meaning to firms towards the advent of the New Economy. According to the key

elements in networked governance, strategic options by the firm will be networked strategies

based on inter-firm cooperative relationship network, whose general forms are to set up

partnership, stress long-term development and leverage credit capital as dynamics of organizing

such relationship network.

Many transnational corporations in the west in fact pioneered this networked strategy.

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German transnational corporation SAP, a software provider, has as many as more than 100

partnerships or alliance firms. In the period between 1991 and 1996, its business volume in the

world had increased 50 doubles. Its top management team observes agreed that this achievement

should be contributed to more than 500 alliance firms scattering the world, in which there is no

M&A, no patient fee charged, no JVs and no equity transactions (Wind etal., 1999: 244). SAP is

typically firm who is taking advantage of alliance strategies successfully.

China entered the World Trade Organization (WTO) on November 10, 2001. Since that

moment, Chinese firms are not called local firms in principle, but are integrated to

internationalization wave. What does mean to China? There are so many ideas about it. The

presented, however, observes that the main impacts of WTO on China may be on the firm,

although majority of ideas for entry of Chinese government to WTO. Actually, so-called

government’s entry to WTO is in fact reflected by firms’ adaptation to WTO. In spite of various

meaning of Chinese firms, the core of Chinese firms is still State-Owned Enterprises (SOEs),

particularly public listed SOEs. Financial market liberalization and the corporatization of firms are

changing the business environments of SOEs intensively ( Liang etal., 2000).

Beginning with the early 1980s, China has conducted a series of economic reform, whose

central mission is to upgrade vigor of SOEs through various reform means. Therefore, direct

impact of China’ entry to WTO on SOEs is on how to revitalize. Solution to the problem at micro

level is about how to increase scientific quality of decision making of the firm, which can confirm

why corporate governance is becoming a hotter and hotter issue of the firm either in reform

procedure or in capital market. As mentioned above, how to update the quality of scientific

decision-making has been also focal question in transaction cost economics. When the sum of

costs of market governance and hierarchical governance cannot be minimized, the networked

governance becomes an optimal governance mode (Dussage, 2000: 37). As a result of deduction

like these, strategic alliance as a kind of inter-firm cooperative arrangements becomes important

means to continuously create value in the new environments. How to perform the networked

strategy in turn may become main strategic option.

Chinese firms, particularly Chinese SOEs, are in fact unknown to the networked strategy,

because growth processes of Chinese firms and their western peers are reversibly. It is well known

that the growth of the firm under institution of market economy is finished by competition. But in

China, majority of middle and large Chinese SOEs sized come into existence by commanding of

government just from beginning (Wang, 1998). Therefore, in the course of business, the business

management under the two different institutional backgrounds is of course differently. In order t

revitalize SOEs, multiple dimensions on institutional innovation have been carried out, including

reform on property rights, delegate authority and distribute profits, reform on corporatization and

build-up and satisfying the legal structure of governance and so on, to attempt transformation from

large sized firm with vertical integration of market internalization to enterprise group with market

exchange within the firm.

Chinese enterprise group, which reduced transaction cost through quasi market contract, is

per se one of networked organization forms. The market strategies in the transitional period by

Chinese SOEs enterprise groups are indeed stressed in the area of strategic management of the

West (White, 2001). So, in the course of economic reform, Chinese SOEs have been trying

performing of the networked strategies. Put differently, the networked strategy in the network

economy emphasizes more knowledge resource and competence supported by cooperative

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relationship network.

Chinese firms, especially those middle and large sized SOEs, underwent process of

establishing complicated relationship network for distribution and coordination according the

central commanding plans. Seen from networked governance, the relationship network is itself a

process to explore how to perform the networked strategies in networked organization and

organizational network. Accordingly, under backgrounds of the New Economy represented by the

network economy, Chinese middle and large sized SOEs are necessary to be asked for

transformations strategically in the two aspects. One is to consider about making efforts to

upgrade those existed competencies in building relationship network before and during economic

reform so as to reach truly reduction of market transaction cost; the other is to actively explore

newer organizational capabilities to conduct inter-firm cooperation and competition, so that

increases learning benefits in this process.

The relationship network build in the course of market exchanges by Chinese firms would

rather be a sociological concept than a management concept. Generally speaking, relationship

network among Chinese firms is inter-individual human relations, rather than inter-firm

arrangements. Thus, it is not up to talking about strategic properties and long-term profitability, or

about joint value creation space. However, one of the meanings of networked governance mode is

relationship value among firms and mutual complimentary based on mutual profits of core

competencies.

According to the networked governance, therefore, Chinese firms particularly middle and

large sized public listed companies have fuller enough reason to accept the newer strategic minds

like networked governance and strategies, in the newer institutional backgrounds. By developing

and leveraging the core competencies of the corporation, it is active to integrate into value chain

cluster of network produced by globalization and technological advances, to manage SOEs to

form agile organizational capabilities that adapt to changing environments. If so, it is not

impossible for Chinese SOEs to constantly produce, keep on and even ascend vigor, as well as

propelled by competitive minds shaped over the past more than two decades.

7 Research Conclusions and Further Studies Possibly

With examining the changing business environments, the paper discusses issue about

transformation of firm strategy from the light of the network economy chiefly representing the

New Economy. This transformation is found out not to be shifts of preference, but demand of the

firm to the changing environment. Furthermore, the transformation of firm strategy depends on the

governance structure of the firm defined as way of organizing exchange in terms of TCE.

Governance structure as application of TCE to the firm is start point to make decision in market.

How to make choices of the governance structure is unquestionably about how to determine

“make, buy or ally”. Such objective of decisions is to make the decision process more

scientifically and question about producing competitive advantages of the firm in market.

As a result, transformation of firm strategy must be associated with the two aspects. One is

about how the market governance shapes competitive advantages of products, the other about how

the hierarchical governance belonging to and reflected by corporate governance forms the best

practicing of the firm. The sharp occurrence of the network economy shows that the dynamic

environments faced by firms is main driving force to change governance structure of the firm.

Under promotion of globalization and technological advances, the mode of governance structure

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of the firm is undergoing turning from previously theoretically studied “intermediary” or “hybrid”

governance mode to really existed networked governance.

The TCE perspective and the business practices in the global turn out that the networked

governance structure lies at the middle part in the continuum of mode of organizing exchanges.

Institutional arrangements for networked governance contain principally organizational network

and networked organization based on formal and formal relationship. Under such institutional

arrangements, practical choice of strategy tends to the networked strategy. Furthermore, because

of propensity to increasing return in the network economy, the networked strategy, accurately

speaking, is knowledge-based networked oligopoly strategy. This strategy provides strategic

resources and competencies required for development of the firm, which gives one more

fundamental for formation and sustaining of competitive advantages of the firm. The strategic

application of three governance modes, market, hierarchy and network, and resulting generation of

competitive advantage are seen in Figure 2.

Combining the productive mechanisms of competitive advantages by market and hierarchical

governances, the outcome of transformation of firm strategy towards the New Economy is shown

gradual take-up of networked strategy of the firm, producing competitive advantage depended on

increasing return to be value dynamics.

As networked governance highlights existence of continuum of mode of organizing

exchanges, of course prolonging market governance, particularly features of corporate governance

in hierarchical governance, some further research dimensions may be postulated.

How to flexibly select appropriate governance mode is the principal issue in firm strategy.

Since 1980s, the practices of using networked strategies have increased dramatically; a variety of

forms need related theories for deeper study.

Following is how to continue disclose unusual importance in hierarchical governance from

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Continuum of Exchange Relationship of the Firm and Governance Structure Mode

Market Governance Networked Governance Hierarchical Governance

Competitive Strategy Networked Oligopoly Strategy Corporate Governance

Competitive Advantage of the Firm

Product/Market Performance Strategic Resources and Competencies Best Practicing

Figure2. Transformation and Integration of Firm Strategy towards the New Economy

strategic management. It can be seen roughly that corporate governance unveils institutional

revenue of hierarchical governance. The mechanism of value creation in corporate governance is

chiefly related to the whole market to form the behavior pattern of “the best practicing” with

specific features, which increases substantially market efficiency of the firm. How the behavior of

corporate governance shapes competitive advantage of the firm is a deeper-level problem1.

Thirdly, networked governance provides some suggestions to firms from emerging market

economies. Networked governance illustrates that any firm, regardless of its institutional

backgrounds, does not exist isolated far away from economic community. Applications of

networked organization and organizational network will be facilitated with some nodal of network

with firms from developed countries and become basic unit to create value jointly, getting out of

wash-out scheme by competitive institutional arrangement.

Finally, compared with Porter’s competitive strategy in market governance and corporate

governance in hierarchical governance, the networked governance advocates network as basic unit

to produce competitive advantage of the firm. How this process is shown need further positive

study, so that competitive advantages from organizational network and networked organization in

the networked governance may become valuable research area.

1 April 2-3, 2002, financially supported by World Bank and Asian Bank of Development, sponsored by Malaysian Institute of Corporate Governance, International Conference on Corporate Governance in Asia was held in Kuala Lumpur, Capital of Malaysian. The subject of this conference is “Corporate Governance and Global Competitiveness: Does corporate governance give a company (an industry or a country) competitive advantage?” It is typical example of corporate governance moving toward more practical research area.

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原文刊于：Li, Weian; Zhou, Jian. (2002). “Transformation of Firm Strategy towards the New Economy:

Networked governance perspective”, The Proceedings of the Fourth International

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