Why do network organizations fail?

1. Introduction

This paper examines network failures to determine why network organizations, intentionally developed by a group of actors to pursue specific goals, encounter problems and fail to reach these goals and to meet the actors’ expectations of creating collective value. The question of why networks fail is relevant in times of disruption and digitalization when new forms of organization are needed to link businesses and various stakeholders to develop innovative and sustainable ideas for an entrepreneurial future.

Research on business and strategic networks, as well as on business-to-business relationships has mostly addressed the structure and dynamics of business networks and the conditions under which networks can positively develop and generate value. A few scholars have studied the burdens of business relationships and interdependencies, focusing on the dark side of business relationships (Snehota and Hakansson, 1995; Anderson and Jap, 2005). Some researchers have examined the problems emerging in business-to-business interaction relationships to understand how and from where such problems arise, as well as their impact on the wider network (Ford and Havila, 2003). Other scholars have studied the critical issues in the development of business relationships using a relationship lifecycle framework (Johnston and Hausman, 2006; Terawatanavong et al., 2007). Some researchers have underscored the criticism of the start-up stage (Snehota and Hakansson, 1995; Håkansson and Ford, 2002), analyzed the factors that can compromise the continuity of business-to-business relationships (Doz, 1996; Arino and de la Torre, 1998) or highlighted the problems and frictions leading to the termination of business relationships (Dwyer et al., 1987; Ellram, 1991), as well as the dynamics underlying the end of the relationships (Havila and Salmi, 2009).

Yet, most of the mentioned studies focus on the negative dynamics of dyadic relationships, with very few studies being conducted at the network level or specifically on the topic of networks failure (Miles and Snow, 1992; Schrank and Whitford, 2011; Sroka and Cygler, 2014a, 2014b; Moretti and Zirpoli, 2016). Our study aims to contribute to the debate in two ways. First, according to network governance approach (Moretti, 2017) we assume the network as the unity of analysis. In particular, we refer to networks strategically designed and developed by small and mid-sized companies to reach collective and shared goals (Gulati et al., 2000; Möller et al., 2005). Our empirical study concerns specifically Italian strategic networks, named network contracts (NCs), created and signed by Italian SMEs according to legal frameworks defined by the Italian Ministry of Economic Development. Second, we adopt a notion of failure related to the problems encountered by a network designed to achieve the goals of the partners.

Thus, this paper seeks to enhance the understanding of why network organizations encounter problems in their dynamics that impede them from reaching the expected outcomes. To this end, our first research question is: what factors hinder a designed network from reaching its expected outcomes? The paper also delves into the various problems that can emerge during a networking start-up and its further development. Consequently, our second research question is: can we envisage different key issues negatively impacting the functioning of the network in its different stages of development?

The paper is organized as follows. First, we review the existing literature on network failure to frame the main variables affecting the failure of a network. Second, we summarize the methodology used to conduct an empirical analysis of Italian NCs and report the results. Such an empirical setting enabled us to develop a discussion on the reasons for the emerging problems hindering the designed network to reach the goals expected and shared by partners at different stages of its development, namely, the start-up phase and the development phase. Finally, we outline our conclusions, define the limits of our study and offer further research suggestions.

2. Literature review

Although some studies have examined the problems arising in business related processes and the reasons for the dissolution and termination of dyadic business relationships, very little literature adopting a network level of analysis exists. Moreover, no studies have specifically defined the different problems that business networks might encounter at different stages of their development.

To identify relevant studies, we searched three literature databases (Scopus, Google Scholar and EBSCO) to locate publications on the topic within social psychology, sociology and management literature. To narrow the search to papers of interest to our study, we used the keywords listed in Table I, searching for titles and abstracts. Keywords such as “network failure,” “network dissolution,” “network pitfalls” and “network pathologies” framed the main variables affecting the failure of a network.

The search results returned a huge number of articles and papers published from 1995 to 2016 in different backgrounds, including sociological, psychological, managerial, technical, mathematics, medical and IT background. We focused on papers within social psychology, sociology and management fields. To frame this research area, we used the Boolean operator “and” with the added keyword “business.” We found only 7 articles that included the keywords in both the title and abstract. Using the references cited by these 7 articles, we also identified another 11 papers relevant to our study. A careful reading of the 18 papers led us to define the detailed variables affecting network dynamics, and in particular, those variables explaining the emerging of problems within business networks. We classified these variables as individual, structural, legitimacy, interaction and governance issues.

With regard to individual issues, Schrank and Whitford (2011, p. 155) defined network failure as “the failure of a more or less idealized set of relational-network institutions to sustain “desirable” activities or to impede “undesirable’ activities.” According to these authors, the failure of networks, unlike the failure of other organizational forms, depends on the characteristics of the networks’ actors. The authors distinguish among different types of failures: network stillbirth or devolution, when networks do not manage to start up because of high opportunisms and ignorance among participants; network involution, which occurs due to high ignorance and competency shortfalls among participants (i.e. missing competences stop the network dynamics); and network contestation when only opportunistic behavior arises. In explaining the reasons underlying standing network failures, the authors focused on actors’ individualistic issues referred to as the level of ignorance and competence shortfalls on the one hand and opportunistic behavior on the other hand. Moretti and Zirpoli (2016) also considered two aggregate dimensions causing network failures, both of which refer to the role of individuals (i.e. single actors, personas or organizational group), in the creation and transformation of network ties. The first dimension, framing, refers to how each actor interprets and faces the difficulties to find the best solutions to solve problems. The second dimension, mobilizing, is the process by which the actors converge toward a shared vision and generate coalitions among the actors owning the same interpretative framework.

Sroka and Cygler (2014a, 2014b) examined structural issues. The authors discussed the emergence of network structural pathologies related to the positions of the companies, the density of the network and the choice of links in the network. Balanced or unbalanced power positions among the parties, high or low network densities and open or closed network links can, under different circumstances, act as pathologies generating network failures. Other studies at the sociological level highlight that networks rich in structural holes move information faster and to more people and managers who are not part of the cohesive and embedded networks because they benefit from greater information needed to find new opportunities (Burt, 1992). On the other side, a cohesive network can limit the autonomy of the actors, thereby limiting the social ties necessary for cooperation. In summary, network structural features such as density, cohesiveness and the presence or absence of structural holes can be linked to poor network performance (Gargiulo and Benassi, 2000).

Human and Provan (2000) considered the legitimacy-building process in the network to be a critical issue. According to their study, the reason for the failure of the networks is the failure of legitimacy building both inside and outside the network. For the purposes of this work, it is first necessary to provide a definition of legitimacy for a business network to grasp its importance in the evolutionary process that leads to the success or failure of the network. Human and Provan considered legitimacy to be a generalized perception that the actions and behaviors, as well as the entire structure of the network, are appropriate and desired, thereby guaranteeing credibility both inside and outside the network. This legitimacy turns out to be multidimensional and gives rise to the network as a form, an entity and an interaction. First, the network must be conceived as an organizational form and recognized and accepted as such – initially by internal members and founders and then by those who are outside it. The second dimension concerns an aspect no longer structural but ensures that the network develops as a recognizable identity that allows internal and external subjects to perceive it as a legitimized entity. Finally, legitimacy also concerns the network as interactions, namely, the result of ties and coordination among the members. Only the solid credibility and acceptance of such interactions can guarantee benefits to both the individual company and the whole network. With regard to this latter aspect of legitimacy, the initial conditions of the network formation are particularly relevant (Doz, 1996). The legitimacy-building process of a network as interactions that will guarantee the success of the network originates in this phase and will be directly influenced by the initial cooperation between companies. At this stage, there is still no trust among the potential members, but they recognize all the conditions that will allow the creation of stable links and cooperation.

Referring to these interaction issues, a few recent articles have focused their analysis on the dark side of business interactions (Fang et al., 2011; Grandinetti, 2017). Snehota and Hakansson (1995) highlighted that the existing dark side of business interactions can evolve negatively throughout the network. The perception of high risks in sharing goals and resources can limit the levels of investments in business interactions, thereby negatively impacting the process of value co-creation. Meanwhile, the perception of higher costs whose benefits stem from the business interactions and interdependencies within the network can limit the network performance as well. The indeterminateness of network boundaries can connect actors to unwanted interconnections, especially when it exists in the perception of reputation damages. Conditions of exclusivity in interaction can limit access to new opportunities. The misalignment between the individual and collective strategies can also generate problems in interactions (Zajac and Olsen, 1993) as actors observe and measure a zero-sum game in which the gain of one member will inevitably correspond to the loss of another. Network failures can also relate to the difficulty and resistance in changing or dissolving inter-organizational links to create new ones when the existing ones have become inefficient. This aspect is also known as network inertia (Kim et al., 2006).

In the evolutionary process of a business network, the bonds created can change, and consequently, transform the perception for the companies that originally created them. The impossibility and impediment of modifying these bonds can, over time, prove to be a reason for inefficiency and even failure of the network itself. The first type of constraint to change is internal and is defined in terms of the stability and complexity of the network. Stability concerns the structures, routines and common culture that are sustained over time. Complexity refers to the coexistence within the network of groups with different interests, ideologies and practices; this diversity is amplified as the size of the network increases. Regarding this first level, the inertia for change is strictly connected to the age of the network and its size. Younger networks will be more likely to modify ties that are less rooted, whereas routines and organizational structures created over time often serve to impede change. Similar reasoning can be made with reference to the size of the network; as the number of companies, and therefore, the links that are created increases, it will be more difficult to manage and/or modify them if they are no longer efficient. Network inertia is also influenced by the total volume of involvement of the participating companies in a specific and measurable link, such as in the capital invested for that particular bond and the “multiplexity,” that is, the number of roles or relationships that connect the members of the network to each other.

In relation to these issues, one of the few contributions that summarizes network pathologies is and Sroka and Cygler’s (2014a, 2014b) paper, which defined three levels of network pathologies as follows: company level (i.e. decline in innovativeness and competitiveness of the single actors, increase of their costs and risks), intra-network level (i.e. competition and/or opportunistic behavior among network actors) and network level (i.e. decline in network flexibility and competitiveness).

Considering governance issues as reasons for network failures, Provan and Kenis (2008) connected the failure to not having the coordinating skills and task-specific competencies necessary to reach network goals. Some scholars have underscored the lack of shared mechanisms to inhibit opportunism and sustain trust development among members (Hagen and Choe, 1998). Other authors have identified the absence of a network orchestrator as a critical factor without which the network risks failing or being inefficient in creating and delivering value (Dhanaraj and Parkhe, 2006). A network orchestrator is particularly important to enact resource combination and activities’ links, guarantee the appropriation of the innovation generated in the network, and reduce the risk of opportunistic behavior. Dhanaraj and Parkhe considered the management of “dynamic stability,” namely, the ability of a “hub” company to give legitimacy to the network and avoid friction among members, the formation of isolated groups and the migration to other networks – to be part of the process of orchestrating a network. Such phenomena would lead to the failure of the network itself. Moretti and Zirpoli (2016) concluded that the failure can be due to the lack of representativeness of a network orchestrator capable of inhibiting opportunism, diffusing information and moderating processes. The absence of a network orchestrator, leading to ineffective forms of network governance and an inability to guarantee network stability and affective dynamics, can also be a source of failure.

3. The research

4. Discussion

Our research has distinguished between networks encountering problems, as before the start-up phase (blocked networks) and networks that have passed the start-up phase but have faced problems in further developments (dormant networks). We have sought to explain the reasons underlying the failure of these two forms of networks, namely, failures occurring immediately at the beginning of the network’s birth, when the network started up, and in the developmental stage despite a successful start-up. We can explain such differences if we consider the differences in the expected goals declared by the two different types of networks. As already reported, the responses to Section 2 of the questionnaire indicated that blocked networks highlighted a restricted number of more focalized and ambitious goals than dormant networks. In particular, in the blocked networks, the goals concerned R&D and new product development projects, as well as subsequent sales and promotion of the innovation. The dormant networks showed a larger number and broader set of goals principally addressed to enable partner companies to share sales channels and develop joint promotional activities, especially in the international market. Through the network, each company is also able to make its products part of a larger bouquet of products.

The key aspects affecting the blocked networks and explaining the problems encountered in the start-up stage related to the prevalence of an individualistic approach among the partners and their difficulties to frame the network as a potential source of benefits resulting from their joint activities. Such a situation fueled opportunistic behaviors and limited the adoption of a collective strategy, particularly in the dark side of interactions, thereby generating distrust in the common project. No sharing of knowledge, through either the emerging forms of spontaneous coordination among the parties (for example, by mutual adaptation) or the shared formalized mechanisms of coordination, prevented network start-ups. Rather, the problems could be connected to the ambitious goals of these types of networks. The objectives concerning the development of innovation and R&D management require a great level of cohesiveness, knowledge sharing and belief in the cooperation process among companies. When these elements were missing, as demonstrated by our analysis, the network inevitably failed. The six active networks, on their part, do not complain about the limited knowledge sharing, cohesiveness, loss of autonomy and difficulties in interaction. A collective approach to network strategy has been developed in the active networks despite the fact that they showed a variety of different goals – sales, promotional and innovation goals. Active networks do not complain about any difficulties to reach expected goals, to abandon the individualistic mentality by the partners and problems occurring in interaction. However, it is recognized that cultural, technological and managerial dissimilarities among the partners can obstacle interaction.

Moreover, both in the case of dormant networks and in the active networks, the analysis showed that the difficulties connected to the capability to foresee network results, especially economic returns from the networking process, were perceived as critical issues. The predictability of network results is a critical issue, underlined also by the literature because it is difficult to predict processes and returns stemming from interactions and interdependencies. Moreover, positive returns for some actors of the network do not correspond to the perception of similar positive returns from the perspective of other actors of the same network. In the case of the dormant networks the difficulties to foresee network results and to predict economic returns, are consistent with the sales and promotional goals of these networks aimed at generating greater volumes of sales and an increase in market shares. However, the acknowledgment of the market opportunities through a joint action at the international level enabled the companies to overcome the perplexities generated by the unpredictability of the results as they bet on the greater possibilities stemming from the collective action rather than from the individual one. Considering the governance variables, the lack of an external manager was determined to be a weakness because the companies involved in the network need to generate economies of scale and scope in enlarging their markets; an external actor, independent from any of the participating companies, is considered the best coordination mechanism and governance element to synchronize and guide the companies in their joint expansion. Once some joint activities are developed and some sales and promotional goals reached, the dormant networks could survive for some time while stopping their development. However, they also declared that they considered networking to be a positive process and that they were ready to try a new network start-up. A network’s shift to the developmental stage probably demands an external promoter and activator capable of proving effective economic returns from the network and to keep the companies aligned and focused on their new various shared goals. Meanwhile, the innovation goals that characterize the blocked networks require a mechanism of coordination internal to the networks themselves; in particular, it is important that companies spontaneously interconnect and adapt, having a strong belief in their joint innovative projects. This is stressed by the active networks whose coordination mechanisms are mostly based on the continuous meeting, spontaneous interaction and mutual adaptation pressed by the strong belief in the shared goals. The absence of an internal commitment to the network stops it during the start-up stage.

Our analysis indicated that external legitimacy variables, defined as missing support by external resources constituencies, do not appear particularly relevant, whereas internal legitimacy items assume a relevant role in conditioning the network’s evolution. Government financial support is not considered a relevant condition for continuing the network’s organization. Institutional stakeholders’ (e.g. Chamber of Commerce) acknowledgment, support and commitment, as well as those of suppliers and customers, were found to be less relevant than internal legitimacy (i.e. partner companies’ reciprocal acknowledgment of the power of networking), probably for two reasons. First, a network’s functioning is connected to the will and belief of the network actors. Business interactions create value if and when actors connect activities and combine resources, developing “cooperative interaction” (Provan et al., 2008). The evidence of the benefits from the collective strategic actions represents the most important contribution to building internal legitimacy. Thus, networks first need to be legitimized by their members, as this internal legitimacy pushes networks’ partners to strongly engage in cooperative interaction. Second, external legitimacy is considered most critical at a more advanced stage of the network lifecycle, when the network organization has acquired a stronger position in the market and needs to reinforce its own specific identity in the eyes of customers, as well as be legitimized by constituencies as an entity in its own right (“network as an entity”). Once the network has conquered its own market autonomy, external legitimation can provide great support in enabling the network to realize its full potential.

5. Conclusions, limitations and further research

The article examined networks’ failure to develop a better understanding of why network organizations encounter problems in their dynamics, and thus, fail to reach their expected outcomes. A number of variables discussed in the literature as the main determinants of network failure were analyzed and discussed, and our empirical research helped us identify a number of key aspects affecting the functioning of the network. Through our research, we also distinguished between two types of failure, thereby identifying dormant networks and blocked networks. Our analysis made it possible to highlight the different impacts that the key items have on these two types of networks. We then interpreted and discussed the results of our analysis by connecting them to the goals that motivated the establishment of the networks.

Our findings can be useful both to companies that decide to start up a strategic network, specifically a NC under the framework of the Italian law and to policymakers who promote, finance and monitor the development of inter-firm collaborations through business networks. In fact, the functionality of business networks will be an essential success criterion for companies in addressing the challenges of our time that need a more flexible and faster business strategy. However, our study is not without limitations. The main limitation is the limited number of responses to the questionnaire, meaning our analysis relied on data from only a few respondents. Although the responses provided much quantitative and qualitative information, a greater number of replies could further support and develop our line of reasoning. In addition, our assumptions in defining problematic networks should be validated by additional specific questions finalized to capture more sophisticated variables defining and explaining the stage of the network lifecycle. Finally, we interviewed only one person per network. On the one side, we have identified and selected these respondents because of their role that let them have a general and extensive overview of their network and its ongoing history, as well as mutual expected goals and their level of achievement. On the other side, we know that it could be more effective to get the perspectives of other network participants – at least one from each partner company. This further analysis could be developed by targeting a limited number of networks. The research can thus be considered a preliminary step to further in-depth investigations to provide a more detailed definition of the status of the network and a deeper analysis of the role played by specific variables that appear more neglected at the moment (e.g. structural and governance variables). A more extensive survey could also better explain the variety of interplay among different variables in determining the failure of a network.