Production Network

Production network refers to a network of internal relationships within a corporation or network of external relationships between independent or quasiindependent firms. Thus, it refers to the organization of production from the perspective of a firm's strategy. Production network allows us to investigate different strategies of production organization, ranging from transnational corporations and international strategic alliances, through subcontracting links to more independent network forms.

The concepts of production network and production chain are often used interchangeably. However, at least on the analytical level, it is possible to distinguish between production network as a network of internal relationships within a corporation or networks of external relationships between independent firms, and production chain as a characterization of a production process in general, involving various activities within the production system.

In the last couple of decades, technological innovation in the transport and communication media, together with trade liberalization, have enormously enhanced the potential of companies to organize their strategies over vast geographical distances. The technological change also enabled the development of complex organizational technology. In this context arose the transnational corporation (TNC), which can be broadly defined as an organization that coordinates production from one center of strategic decision making when this coordination takes it across national boundaries.

Large business enterprises have largely transformed from a functional form of organization, in which the firm is divided into major functional units, into a divisional form, where they are organized by product. This should enable companies to better cope with product diversity. It relates to the shift from Fordist economies of scale to the post-Fordist economies of scope.

There are four general types of competitive strategy that a TNC may pursue. First, there is an export-based strategy of high geographical concentration of [Page 752]production with loosely coordinated marketing activities. Second, the TNC may pursue a basic global strategy of high geographical concentration of production with tightly coordinated marketing activities. Another option is the complex global strategy of geographically dispersed production with tight coordination between overseas affiliates. Finally, there is a multidomestic strategy of geographically dispersed production with a high degree of local autonomy.

The external networks of relationships between firms include mainly international strategic alliances, international subcontracting, and dynamic networks. The strategic alliances comprise various forms of collaboration in order to share risks or rewards through joint decision making. These alliances often include corporations in fierce competition. Subcontracting is a customer-supplier relation between firms. The subcontractor is required to undertake the production according to the specifications provided by the firm offering the contract. Finally, dynamic networks are flexible forms of organization involving firms performing a specialized role within the coordinated network.