Multifirm Network Structure

Fundamentals

Prior to the 1970s, most American firms were self-reliant—they tended to use only their own resources and capabilities to conduct their businesses. During much of the 1970s, large firms were widely criticized by the business press for being uncompetitive compared with major Japanese companies, such as Sony, Toyota, and Honda. In their attempts to become more flexible and adaptive, American firms began to change how they were organized. Many firms downsized to reduce costs. Some firms removed layers of middle managers from their hierarchies in order to speed up decision making and resource allocation. Others began to subcontract activities—first production and later other business functions—to firms that were specialists in that particular activity. Gradually, the multifirm network structure took shape. Networks composed of multiple specialist companies as their main actors have been called modular organizations. Multifirm networks that change their shape frequently are called virtual organizations.

A multifirm network organization is different from a traditional (self-contained) organization in several respects. First, instead of holding in-house all the resources required to offer a product or service, multifirm networks use the collective resources of many firms. Each firm in the network specializes in a set of activities that constitute a portion of the total business. Second, multifirm networks rely heavily on market mechanisms in addition to administrative mechanisms to manage resource flows. In order to maintain its position in the network, a firm must behave efficiently and reliably—just as it would have to behave if it wanted to be successful in open markets. Third, lead firms in many multifirm networks expect their suppliers to contribute proactively, to engage in behaviors that improve the network rather than simply fulfilling a contractual obligation. Doing so can help the whole network to learn, improve, and adapt. Last, a multifirm network can be more flexible and scalable than a traditional organization. It can increase or decrease in size relatively quickly, and it can more easily expand its scope than a traditional organization.

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