Academic journal article Entrepreneurship: Theory and Practice

Informal Strategic Networks and the Board of Directors

Academic journal article Entrepreneurship: Theory and Practice

Informal Strategic Networks and the Board of Directors

Article excerpt

In a situation of increased environmental change and complexity, small business firms must consider how to get the information necessary for choosing strategy. Small business firms seldom have the economic or political power to control their environment. They have to be flexible and adjust to changes in the resource situation of their environment.

This paper presents the informal networks mediated by the board of directors as a very important part of small firms' strategic management, contributing to increased flexibility in strategic decision making. Network is here defined as long-term contacts between persons or organizations in order to obtain information and building resources (Aldrich & Zimmer, 1986; Thorelli, 1986). The term strategic network indicates that it is an important part of the system for defining the company's exchange relations to its environment. The board may be of importance in order to make proper use of this strategic tool (Zahra & Pearce, 1989). The board of directors has to match the organizations' need for contact through external networks.

STRATEGIC NETWORKS

Most organizations, and especially small firms, depend on resource exchange with their environment for survival and goal achievement. Organizations exist because of their ability to specialize and develop economies of scale, and the ability to reduce transaction costs (Thorelli, 1986). Permanent cooperation within strategic networks is a means of developing the advantages of specialization, and at the same time reducing the cost of coordinating exchange. Traditional market mechanisms of governing exchange have been regarded as inadequate to manage modern market complexity (Williamson, 1975, 1985; Macneil, 1980). In addition, the integration of markets and the advantages of scale economy harden the competition and make global economy less predictable (Drucker, 1980). Of crucial importance here are the costs of gathering and processing information necessary to predict the future effects of today's strategic actions, and toreduce conflicts between the organization and the environment. Williamson (1975, 1985) describes these costs as transaction costs. Small firms usually have a simple, centralized organizational structure. The strength of this kind of organization is the organic structure, an oral, direct management style, as well as top-management overview and direct control over the operating core of the organization (Dandridge, 1979; Mintzberg, 1983).

Informal strategic networks match this kind of organization (Perrow, 1986, 1991). Such networks give information and channels for resolving conflict, and are at the same time cheap to maintain. They can also more easily be cut off without sanctions and heavy exit costs. The networks increase the intercorporate influence and control, and thereby secure the resources needed for survival and planning towards goal achievement (Pfeffer & Salancik, 1979).

Informal strategic networks or weak inter-organizational relations are regarded as important tools in the coordination of exchange within turbulent environments. The networks, if they are connected with more personal relations of trust and affiliation between the partners, are particularly interesting (Perrow, 1991). A more personal management of exchange is regarded as very efficient in complex, turbulent exchange relations (Borch, 1992). The board of directors is considered to be a mechanism linking the organization with informal networks with its environments (Pfeffer, 1973; Palmer, 1983).

THE BOARD OF DIRECTORS AND NETWORKING

Even though the board of directors seems to be an important arena of governing exchange, creating a meeting place where several persons with external contacts join in the strategic decision making, and acting as a service function for the manager (Mace, 1948, 1971; Thompson, 1967; Pennings, 1981; Vance, 1978, 1983; Ford, 1988), there have been few studies focusing on this subject. …

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