Block III: "Relations"

The third and the last group of theoretical concepts used to describe the specific nature of cooperation between entities includes theories focused on “relations”. However, it is necessary to include here a reservation - and thus begin discussing this block of concepts related to cooperation - that the theories discussed in this section are not the only ones that assume the necessity of relations between entities in order for these entities to operate properly. As already mentioned in this chapter, no entity operates in isolation - each organization operates using a specific network of relations because no organization is self-sufficient. Therefore, irrespective of whether a market participant or a researcher analyzing a certain sector takes the “Structure/Sector” approach or any of the theories from the “resources” category, they will have to consider the existence of relations between entities in default. The importance of relations for the success of business has been described by Madhok somewhat metaphorically (using an excerpt from Tolstoy’s novel adapted to the economic concept instead of the original war one), yet accurately: “In economic affairs, the strength of a collaboration is the product of the complementary and synergistic resources (the mass) and some unknown x... That unknown quantity is the spirit of the relationship... The spirit of the relationship is the factor which multiplied by the mass gives the resulting force (the outcome)” (Madhok, 2000, p. 75). Knowing the value of relations in terms of the functioning of economic organizations, it is beneficial to give these relations high priority even at the expense of going beyond the economically conditioned desire to save transaction costs because focusing on relations will be a better protection of cooperation against opportunism (Madhok, 2000).

The first “relational” concept to be discussed here is agency theory. Generally speaking, it focuses on one type of relation: between “principals” and “agents”. Nowadays, the meaning of both words has expanded slightly - at least as far as their use in agency theory is concerned - and covers “the entities that can do something” (Principals) and “the entities that must do something” (Agents). Despite leaving a lot to be desired from the point of view of scientific definitions, these expressions fairly well reflect the nature of entities under both names. Originally, the term “principals” referred to owners of corporations, while the term “agents” was understood as the management board of a corporation that was obliged to achieve the goals set by owners (Berle & Means, 1932). Later on, the scope of both expressions was expanded and can now be used to describe relations such as “employer-employee” or “buyer-supplier” (Child 8c Faulkner, 1998). Needless to say, the terms mentioned above are not the only ones to be found in the entire network of relations established in a given organization: one may find a superior entity that formulates goals to be achieved and a subordinate entity whose task is to achieve these goals using the means at their disposal (money, time, people, etc.) everywhere. Therefore, agency theory tackles the omnipresent and important dissonance between - as Marx would describe it - the owners of the means of production and the users of such means. Just as Marxist theory revolved around conflict, the pivot around which agency theory turns is the introduction of mechanisms preventing such conflict to the relation between

“principals” and “agents”. Apart from the topics limiting conflict, agency theory also raises the issue of ensuring the appropriate level of achievement of the objectives, thus the effectiveness of “agents”. Before sufficient trust is built between parties, their relations should be based on honesty, clear communication (including defined goals and expectations), precise rules of cooperation (including mechanisms to encourage “agents” to perform their tasks effectively), and monitoring by “principals”.

An extension of agency theory, which moves it beyond the boundaries of a given organization and adds entities not necessarily directly related to the organization to the perspective of thinking about the organization, is stakeholder theory. In his landmark work “Stakeholders Management: A Stakeholder Approach”, Freeman reshaped the way of thinking about the organization and the scope of its responsibility for activities - the main thing was to shift emphasis from the expectations of the “shareholders” group (the most important one in agency theory discussed above) and the effects that the results of a specific organization had on this group to bilateral relations of the organization with all its “stakeholders”. The “stakeholders” category includes two main groups of entities: (1) all individual and collective entities that may, in any way, affect the organization; (2) all individual and collective entities that may be affected by the activities taken by the organization (Freeman, 1984). As each entity classified as a “stakeholder” has the potential to affect the central organization through its activities (or the lack thereof) in a certain manner, it is vital to identify the needs of stakeholders and formulate an action strategy as well as choose how objectives are to be achieved so that they have a positive impact on stakeholders (or at least not have a negative impact on them). In this case, it may be assumed that satisfied stakeholders are more willing to engage in activities that are beneficial to the organization (e.g. they will purchase its products/services, formulate legal solutions that favor the development of the organization, offer preferential supply prices, etc.). However, as the number of all stakeholders is usually too high, it was necessary to establish a hierarchy - from the most important stakeholders (having the largest impact on the organization or affecting the area that is critical to the functioning of the organization) to the least important ones. Still, this does not undermine the fact that each of these relations will have to be considered important to some extent.

When considering the two theories presented above in the context of the functioning of a CO, considerations ought to be divided into two levels: the level of organizations constituting cluster members and the level of the CO as a whole. For agency theory, the first level - the member level - will be of particular importance, since activities determined by the division into “principals” and “agents” will be performed in each constituent organization separately. For the level of the CO as a whole, the aforementioned division will be significant for project and task groups made up of some cluster members - apart from the natural division of tasks, one should also expect each such group to have its own leader, i.e. an entity with the greatest potential, usually responsible for the creation of the group and having a considerable impact on the goals, means, and their deadlines formulated within it. Stakeholder theory, on the other hand, will extensively apply to both levels of analysis. At the level of entities constituting the CO, the identification of stakeholders will be similar in nature to the nature of similar activities in non-member organizations. Quite significant changes will be brought about at the level concerning the entire CO: in this case, the list of stakeholders will be extended by all entities that will be in the sphere of influence of cluster activities and, additionally, will have an influence on the CO. Indirectly, it will also be necessary to take into account the specific nature of operation and stakeholders of other entities constituting the CO: being under a single aegis (the CO) may lead to the extension of the influence that a single member will fall under or exert on the remaining members of the CO.

Still, the essence of “relational” theories is a broadly understood network approach. It is not consistent and manifests itself in the literature in the form of many concepts. This section of the chapter will involve the selection of several main topics that coexist within “relational” theories and are combined to provide a relatively coherent view of how researchers perceive and accentuate the importance of relations between organizations in terms of their functioning.

As Hakansson and Snehota (2006) rightly observed, the turn of the 20th and 21st centuries saw a shift in organizational theory - from focusing on the internal structure and processes occurring in organizations to stressing the importance of the relation between the organization and the environment in which it operates. Interestingly, both researchers see a different distribution of features in these paths as a contradiction: “There is an interesting contraposition between the two fields of research. Organizational theory studies which focus on the interface between the organization and its environment have tended to conclude that the individual organization is often embedded in its environment and that its behavior is thus greatly constrained if not predetermined, which means that it is not a free and independent unit. In contrast to this, research on strategy management has been concerned with the opportunities for directing and managing the behavior of the individual organization, consequently assuming that the organization possesses a certain degree of freedom of choice. Cross-fertilization between the two fields of research has so far been limited, possibly because of this difference in perspective” (Hakansson & Snehota, 2006, p. 257). It seems, however, that this type of argument is rather flawed - the diversity of the quoted perspectives implies neither the lack of interest in relations among researchers following the “internal” path nor the lack of interest in factors other than relations among researchers following the “external” path. The degrees of freedom of choice mentioned by Hakansson and Snehota cannot be considered an either-or situation - reality is much too complex to treat both paths as simply contradictory.

It could even be argued that the relational view was constituted as a complement to or an extension of RDT - after all, Dyer and Singh (1998) distinguished relational resources from other types of resources. Organizations operate in a specific network of relations and use the resources that are available to them through this network. Operation in a network means establishing various relations with entities of different categories, whose main objective is - from the minimalist point of view - to ensure that their own organization has a sufficient amount of resources that are key to its functioning and - from the optimistic standpoint - to achieve a synergistic effect through contacts and relations with other entities. Cooperation within a network may involve the interaction between a specific number of entities under the conditions set by them (without establishing an additional structure for this purpose) or a new organizational structure that influences both its constituent entities and the environment through its own identity. Social network theory points out that cooperation undertaken by individual or collective entities is often sanctioned by “implicit and open-ended contracts. Such contracts are socially rather than legally binding” (Faulkner &C de Rond, 2000, p. 20). Such cooperation may form on the basis of both relations between entities with similar potential (size, market position, financial standing) and a clear dominance of a single entity. Both types are discussed in the literature; the theory of the flagship firm by Rugman and D’Cruz (1997) appears to be a particularly interesting concept. Its authors expand on the topic of a network with one central large point - a flagship firm. This cooperation model is suitable for companies that are primarily focused on long-term cooperation. For individual acts of exchange or short-term cooperation, a model where partners with similar potential cooperate or the use of standard market mechanisms (e.g. sale-purchase) is much more suitable. Cooperation in a network where the pivot is a flagship firm is characterized by the presence of five types of partners in the network: flagship firm - a multinational enterprise, key suppliers, key customers, competitors, and business infrastructure (administration of various levels - from central to self-government, trade associations, educational and training institutions, etc.). With the consent of the other partners, the flagship firm will use its dominant position to determine the action strategy and further cooperation with partners to ensure the implementation of the strategy. This will involve the conditions of the so-called strategic asymmetry, which is a one-sided vision of action established by the flagship firm and accepted by all parties. The network of cooperation established in this way has substantial grounds for survival and development (smaller companies are guaranteed to exist because there is a large company that places orders with them; a large company has, for example, a group of reliable suppliers immune to the temptations of termination of long-term cooperation) and, even more importantly, for competing with other similar networks. In addition, this concept corresponds to the concept of “ecosystems”, i.e. a cooperating environment of key partners that play various roles in such cooperation (customers, suppliers, competitors, etc.) (Moore, 1996). According to Moore, “ecosystems” begin to appear as new natural ways of conducting business - in a group of different entities united by the same goal: improving their and their partners’ competitive position. In the Moore’s concept, it is considerably more profitable for individual entities to cooperate than to compete with each other - in this concept, competition involves cooperation between ecosystems to a larger extent.

The key element for the effectiveness of maintaining and developing relations, which are important in any process or act of cooperation, is trust. In principle, there are no studies that prove the unsuitability of trust for cooperative relationships; on the other hand, evidence that trust itself is important for the success of any act of cooperation between individual and collective entities is plentiful. “The principal effect of goodwill and trust was that the partners did not act strictly on the basis of their own short-term self- interest, but instead were considerate of their partner’s interests and position, expecting the same behavior in return. Thereby, trust and goodwill stabilized relationships and helped avoid conflicts. A high degree of goodwill and trust had a positive effect on communication [...] and increased the partners’ tolerance and flexibility. It also produced some unexpected benefits” (Niederkofler, 1991, p. 249). In addition, “goodwill and trust were found to have a stabilizing effect on the relationship at all development stages. They increased the partners’ tolerance for each other’s behavior and helped avoid conflicts. Goodwill and trust also raised the general level of communication between the partners and thereby increased the chances for uncovering and dealing with operating misfit” (Niederkofler, 1991, pp. 248-249). Needless to say, one may discuss trust in its general sense, but one may also divide it into different types of trust - representing its levels or different aspects of the functioning of entities interconnected with relevant relations. One such possible division of trust is:

  • 1 “deterrence-based trust” - based on the conviction that someone will do (or not do) something for fear of punishment;
  • 2 “knowledge-based trust” - based on the knowledge of the entity in which trust is built (this knowledge suggests that this person’s behavior will most probably be in line with expectations);
  • 3 “identification-based trust” - based on deeply internalized common convictions expressed by entities linked by a given relation (each entity treats the interests of the partner as its own) (Shapiro et al., 1992).

Other divisions of trust, which is coincident with and in some parts even identical to the aforementioned division, are

  • 1 “calculus-based trust” - based on an economic account of profits and losses related to the maintenance or potential termination of a given relation;
  • 2 “knowledge-based trust” - based on the ability to anticipate the behavior of the entity with which another entity is connected by a specific relation (resulting from the knowledge that another entity has on its partner); and
  • 3 “identification-based trust” - based on accepting partner’s expectations and desires as one’s own (Lewicki Bunker, 1995).

Another three-way division was proposed by Sako, who divided trust into:

  • 1 “contractual trust” - based on the entity’s conviction that a given partner will fulfil the obligations that it has imposed on itself (this type of trust is supported by the expectation to maintain standards of fairness);
  • 2 “competence trust” - based on the conviction that the partner is able to cope with the expectations that it has to meet (this type of trust is supported by the professional knowledge of the area in which the partners operate); and
  • 3 “goodwill trust” - based on the conviction that the partner will operate in the interests of all parties involved in cooperation and will refrain from opportunistic behavior that is beneficial to this partner but detrimental to the other cooperating parties (Sako, 1998).

At the institutional level, the division made by W. W. Powell may be used. According to this division, trust can be built on:

  • 1 standards of reciprocity and civic engagement;
  • 2 membership in joint occupational groups;
  • 3 shared historic experiences (in relation to the group that a given entity is a member of); and
  • 4 interdependence (Powell, 1995).

COs operate on different principles and in different configurations; however, their essence is always associated with establishing relations with different entities. In principle, it may be stated that enterprises and other organizations constituting a CO are simply networks of relations but COs are “networks of networks” anchored in even wider overriding networks controlled by, for example, the national economy or - thanks to the mechanisms arising from developing globalization - the global economy and other related areas of life. A CO is a kind of a “gateway” to those parts of the world with which a specific entity entering it has had nothing to do previously; therefore, this CO broadens its perspective, expands its possibility of influencing its surroundings, simultaneously integrating it into this “bigger” world. Irrespective of whether a CO is a conglomerate of entities with similar potential or is dominated by a single strong player, its objective is always the same: the synergy of its members. The strength of this synergy and the possibilities of using it by individual constituent organizations will be mainly depend on the involvement of such organizations in joint CO activities. Given that a CO brings together entities that differ from each other, their degree of involvement will also vary - as will the quality of relations with cluster partners. This is another dimension having a considerable effect on CO fragmentation and supporting the conclusions drawn by the authors in Chapter 5 concerning multilevel cooperation within one CO.

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