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ISBN : 978-0-9742114-2-7
Title of the Paper:
The Problem of Motivation in Strategic Networks
Author Affiliations:
Muhammad Zafar YAQUB
Doctoral Scholar
Centre for Business Studies,
University of Vienna, Austria.
Muhammad Suhail NAZAR
Assistant Professor
Department of Management Sciences,
The Islamia University of Bahawalpur.
Rana Muhammad Shahid YAQUB
Lecturer
Department of Management Sciences,
The Islamia University of Bahawalpur
(Rahimyar Khan Campus)
Contact Information:
Address: Room No. 3/133, Brünner Strasse 72,
1210 Vienna, Austria.
Tel: (office) +43 1 4277 37945
Handy: +43 650 9685364
e-mail: [email protected]
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THE PROBLEM OF MOTIVATION IN STRATEGIC
NETWORKS
ABSTRACT
In this paper, the authors have analyzed the problem of motivation in strategic networks while
making an appeal to the expectancy, equity, agency and control theories of motivation. They
postulate that the partners in a network arrangement exhibit greater degrees of motivation in
a relational space that characterizes a higher alignment of interests, positive perceptions
about the instrumentality of network goals towards the attainment of their respective
corporate strategic goals, a higher expectancy of attainment of these goals, equitable
distribution of resources, ownership and control rights, and surplus. Asymmetries in power,
contributions, and control rights adversely affect the motivational force. The higher
motivational force coupled with high degree of cohesiveness among the partners eventually
results in higher performance of these structural arrangements.
KEYWORDS
Motivation, Expectancy, Equity, Strategic Networks
INTRODUCTION
In much of the previous research on the delineation of firm boundaries, scholars have revealed
two different modes of organizing vertical relationships: firms can either ‘make’ or ‘buy’ each
component necessary to complete their chosen product mandates (Williamson, 1975).
However, in the last couple of decades, scholars have expanded beyond this dichotomy to
include the so-called ‘hybrid’ forms of organization (Bradach and Eccles, 1989; Gulati, 1998;
Poppo and Zenger, 2002). In the words of Snow et al. (1992: p-5): ‘a new form of
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organization- delayerd, downsized, and operating through a network of market-sensitive
business units is changing the global business terrain’. Such networks encompass a firm’s set
of relationships (both horizontal and vertical) with other organizations including relationships
across industries and countries. Such strategic networks are composed of inter-organizational
ties that are enduring, are of strategic significance for the firms entering them, and can feature
the structural formats like strategic alliances, joint ventures, long-term buyer-supplier
partnerships, franchising, virtual organizations etc. (Gulati et al., 2000).
Much of the investigative work in this area in the last couple of decades has featured
economic-orientation at its centre-piece due to the rapid developments and an overwhelming
focus on transaction costs. However, Granovetter (1985) argued that economic institutions are
socially constructed i.e. they result from actions taken by socially situated individuals
embedded in networks of personal relations with economic as well as non-economic goals
like sociability, approval, status, power etc.. Similarly, from an in-depth case study, Larson
(1992) concluded that economic transactions cannot be separated from the social context in
which they take place. Therefore, to view organizations as atomistic entities competing for
profits against each other in an impersonal marketplace becomes increasingly inadequate
(Gulati et al., 2000). Social institutions, norms and interactions improve and shape individual
action (Camic, 1979).
Network organizations can evolve out of personal and small group ties as Powel (1990)
reveals that many of the arrangements commonly found in the publishing, fashion, computer
software, construction and entertainment businesses are among individuals, independent
production teams, or very small business units. The chances of such networks to perpetuate
sky rocket if they continuously manage to yield an integrated and adaptive response to the
pressures stemming from dynamism in the environment. Both the integration and adaptation
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require culmination of cooperation (alignment of interests) and coordination (alignment of
actions) (Gulati et al., 2005) among the participating nodes.
In the Strategic Management literature, the problem of cooperation has been described as the
problem of motivation. Under assumptions of self-interest, collectively beneficial outcomes
fail to emerge due to the actions motivated by the private-interests of individual members.
Park and Ungson (2001) reveal that failures in strategic alliances occur when excessive rivalry
eclipses cooperative tendencies. Consequently, the firms in a structural arrangement need to
identify and effectively address the de-motivators in the relational space in order to ensure a
highly integrated and adaptive response to the disturbances originating from both internal and
external environments. In the rest of this paper, we will discuss the dynamics of motivation
(or the cooperation) in the participating nodes of a strategic network while elaborating upon
expectancy theory, equity theory, agency theory and control theory of motivation.
Expectancy Theory
Making an appeal to the Vroom’s expectancy theory, we may regard the motivational force
(M) in individual member(s) to join, contribute and stay in a certain strategic network to be a
consequence of valence (V) and their perceptions of instrumentality (I) and expectancy (E)
such that M = V* I * E.
Valence refers to the degree of perceived attractiveness of a reward. Strategic network are
built with the expectation of (long-term) benefits accruing to all the participants. These
benefits fuel the future of relationship and give the parties an incentive to stick together
(Anderson and Jap, 2005). Strategic networks potentially provide a firm with access to
information, proprietary know-how, complimentary assets, human resources, market access,
social and political capital, technologies; with advantages from learning, scale, and scope
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economies; and allow firms to achieve strategic objectives, such as sharing risks and
outsourcing value-chain stages and organizational functions (Gulati et al., 2000). Valence (the
attractiveness of the chosen outcomes) gets higher if the focal actors manage to secure a
higher alignment of interests among the participating nodes.
Instrumentality refers to the extent to which the network members perceive attainment of
collective goals to be instrumental in the fulfillment of their parent organizations’ objectives.
Owing to the asymmetry in their goals and interest, the partners are often contradictory in
their assessment of collaboration at the parent level. It is possible that one partner’s success is
perceived as complete failure to the other partner(s) (Park and Ungson, 2001). Moreover, the
local management at the alliance level differs from their parent firms in terms of direction of
the alliance. While parent firms try to fit alliance operations with their long-term strategic
goals, alliance managers are more concerned with local interests as they try to adapt to market
changes (Park and Ungson, 2001). If these alliance mangers get predisposed to Chauvinisman extreme and unreasoning partisanship on behalf of a group to which one belongs,
especially when the partisanship includes malice and hatred towards a rival group- they are
more interested in maximizing interest of their principles then the network as a whole. Such a
predisposition in agency relationship causes high agency costs which according to Jensen–
Mecklin (1976) include monitoring costs, bonding costs and residual losses. Therefore, the
partners need to secure a better convergence in the network and the parent organizations’
objectives otherwise the agency problems may make it harder for them to effectively
collaborate. Maintaining a collaboration that does not offer significant complimentary
benefits to partners generates unnecessary costs.
Finally, the extent to which the nodes expect the network to successfully attain its objectives
(especially in the long- run) given the resource-base, strategic plans and operational strategies
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is also vital for the motivational force. In this regard, even more crucial is the issue of
distributive justice and/or fairness in the end-games since the perceptions of an unfair or inequitable distribution of rewards may aggravate the (ex post) conflicts and distrust, spur
opportunistic behavior and result in lessening of contributions in the successive cooperation
cycles, if such networks manage to perpetuate at all. This issue is deliberated more in the next
section.
Equity Theory
Porter and Fuller (1985) argued that an alliance is stable for as long as contributions by each
partner are perceived to be balanced and equitable. Networks fail when one or more partners
perceive unfair treatment or an unsatisfactory ratio between compensation and contribution.
Sometimes, asymmetries in the resource contributions (and power) induce the resource
dominant (or powerful) players to expect and appropriate greater payoffs (Yaqub, 2009) as
they contribute relatively greater magnitude of strategic and complementary resources and/or
effort. The problem further intensifies when the existence of information asymmetry makes it
difficult to assess the relativity in contributions, thus making it easy for opportunistic
members to free-ride over the contributions of others. Reciprocal interdependence also creates
significant cooperation problems because of the dangers of free-riding (Petersen, 1992;
Wageman and Baker, 1997). When several individuals must contribute to a task, but it is hard
to verify their marginal contributions, then collective under-investment of effort may occur
(Alchian and Demsetz, 1972; Holmstrom, 1982). Strategic networks are particularly
susceptible to this problem as network members have an incentive to minimize their own
efforts while free-riding on the efforts of others (Roberts, 1980).
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If the incentive structure fails to ensure distributive justice, the disadvantaged players will be
negatively reinforced to contribute in the successive cooperative cycles. One of the possible
solutions to the public goods problem is the Groves-Clarke mechanism- a type of contract
which encourages ‘truth-telling’ with respect to agents’ private information. The incentive
system compensates members through side payments which are proportional to the value
members create for each other. It works by making each individual decision instrumental in
determining the final outcome so that no member feels an incentive to misrepresent it
(Alstyne, 1997).
Control Theory
The governance structures can be seen more broadly as institutional modes (Williamson,
1979) that establish the context of exchange through a “system of rules plus the instruments
that serve to enforce the rules” (Furubotn and Richter, 1997). Lieblien et al. (2002) revealed
that firms’ performance is contingent upon the alignment between governance decisions and
degree of contractual hazards. The governance structure and/or the contractual stipulations
employed as control mechanisms significantly affect the motivational force. We postulate that
greater the control perceived by the individual members as a consequence of equitable
distribution of ownership, property and control rights, higher the motivation.
Explicit contracts
Explicit contract is the most pronounced protective device against possible opportunistic
exploitation in transaction cost economics. By providing formal rules and procedures to
govern the relationship, these contracts serve as deterrence against possible opportunistic
exploitation since a violation here may lead to certain adverse economic and legal
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consequences besides the loss of reputation. Especially when the likelihood of potential value
loss increases due to investments in specific assets, firms find it beneficial to negotiate more
complex contracts which serve not only as an insurance against breach and termination but
also as an instrument with which such consequences or threats will be handled (Dyer, 1997;
Poppo and Zenger, 2002).
Despite their usefulness, there are a host of inefficiencies associated with the use of contracts.
The complex contracts may increase the bureaucratization in economic life (Lange 1938),
signal mistrust (Jap and Ganesan, 2000; Gulati and Nickerson, 2008), reduce willingness to
cooperate (Macaulay, 1963; Sitkin and Roth, 1993) and increase the costs to negotiate,
monitor, and enforce such contracts. Moreover, the explicit controls attached to contracts may
crowd out or substitute for the intrinsic motivation embodied in a committed relationship
(Fehr and Gächter 2000; Frey 1997) as agents may become less motivated to behave
cooperatively if they perceive the existence of external controls that are actually designated to
suppress defection (Lubell and Scholz, 2001; Malhotra and Murnighan, 2002; Tenbrunsel and
Messick, 1999). Research in marketing channels by Young and Wilkinson (1989) concluded
that the disadvantages due to inflexibility and signaling mistrust outweigh the advantages
offered by specific guidelines and specification of sanctions against an opportunistic behavior.
As an alternative, members can rely on trust as informal control mechanism by developing
trust-based committed exchanges as a solution to resolve social uncertainty. Where there is
trust, appropriation concerns are likely to be mitigated and organizations may not choose to
rely on detailed contracts that are costly to write, monitor, and enforce (Gulati, 2007).
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Control rights
The bundling and/or unbundling of control rights in strategic networks is one of the various
possible means to ensure institutional adaptation to a contractual setting that is characterized
by high uncertainty in the form of adverse selection problems as well as ex post opportunism
problems. That is why specific control rights are one of the crucial considerations in the
bargaining process in most of the structural arrangements. Extending the control theory in
context of strategic networks, we may postulate that greater is the perceived control over the
structural arrangement greater is the motivation.
Foss and Foss (2005) argue that the process of creating economic value through defining and
protecting property rights over potentially value-creating resources and the gradual evolution
towards setting up efficient institutions can be viewed analogous to how Schumpeterian “new
combinations” (Schumpeter, 1942) are generated dynamically to increase size of the pie. The
equitably-appropriated property rights may lead to new resource combinations beyond the
efficient utilization of these resources. Consequently, the pluralistic networks de-emphasize
centralization and more property rights are allocated to the actors most-responsible for the
particular domain(s) of actions (Yaqub et al., 2009). This positively contributes to the ‘spirit
of cooperation’ and spurs greater motivation in the participating nodes.
CONCLUSION
Making an appeal to the expectancy, equity, agency and control theories of motivation, we
have revealed a host of factors that affect the motivations of firms to join, remain and exit
from certain strategic networks. Contrary to the personal relationships, one cannot expect
business relationships to endure indefinitely. The members join the network and remain
committed to it until the motivational force remains sufficiently high. If they are committed,
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they yield maximum contributions, refrain from opportunism, and are more tolerant/pluralistic
about conflicts. Trust culminates and substitutes the more formal and costly governance
mechanisms. The end result is high value generated as a result of more efficient and effective
creation of surplus while lowering down the transaction cost (contracting, operating,
governance, agency, coordination). But if vice versa occurs, the commitment fails to escalate
and the nodes start behaving opportunistically in order to maximize their private-interests
during the perceived shortened lives of the networks. If such opportunistic hazards mount
beyond the tolerance thresholds, they make the network arrangement an unviable option.
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