Here are two facts we have known for a long time. One is that a firm acquiring another firm combines their assets, and that can give synergies if they have something that works better together than apart. That something can be any kind of asset, by the way, including knowledge or intellectual property. The other is that firms establish and change interfirm networks through forming and dissolving alliances with other firms, and they use alliances to gain synergies too. So far everything sounds conventional and straightforward.
But these two facts don’t tell the whole story. A firm acquiring another firm also combines their networks, and that can create synergies when the combined network is better than the original ones. In fact, it can change a network much more radically than just forming and dissolving alliances one by one. This third fact is the start of an article in Administrative Science Quarterly by Exequiel Hernandez and J. Myles Shaver, but the article does not end there. It also checks whether firms are deliberately choosing acquisition targets based on these network synergies.
The question is important. It speaks to how smart firms are in maneuvering and modifying interfirm networks, which is useful to know, especially because people are not particularly smart in modifying interpersonal networks. But firms are not people, and acquisitions are not normal firm actions – they are analyzed carefully, and networks could be one of the factors taken into account. They could even be more important for acquisitions than some of the assets that researchers have long obsessed over. After all, alliances are observable in advance, like physical assets are, but they are unique and therefore more strategic. The other unique and strategic assets in play are often people with knowledge, but they are known to sometimes leave a firm after it has been acquired, so it is pretty risky to acquire to get people. Alliances usually stay.
Network synergies are especially potent if they make the combined firm a better broker of knowledge because they connect to firms that are not themselves connected and do not have other shared connections (that’s called gaining structural holes). Brokers of knowledge can help create novelty and can reap more of its benefits. Synergies are also potent if they make the combined firm more central in the overall network, giving it higher status. Pretty much any combination of firm networks will improve brokerage and status, however, so it is not enough to see that this happens after an acquisition. What we need to know in order to look for deliberate choice of network synergy is whether the increase from the firm network that got acquired was better than the increase would have been for other firms that could have been acquired. Strategy is about choices, so a choice has to be compared with what was not chosen.
This is where Hernandez and Shaver make a fully convincing case for network synergies as an important factor in acquisitions. They studied biotech, where networks are very important, and so are assets like people and intellectual capital. Their analysis is impressive and leaves no doubt that the opportunity to combine networks and gain network synergies was an important factor in the choice of acquisition targets. That means we now have a new way of looking at acquisitions, and we are better able to tell what firms may get acquired, and what they were acquired for.
Hernandez, E., & Shaver, J. M. Network Synergy. Administrative Science Quarterly, forthcoming.
Digital Divide Data (DDD) is a commercial enterprise doing data-entry work for profit. It is also a social enterprise that trains Cambodians to obtain better jobs than the ones they do for DDD. Is that a contradiction? Maybe it is not fully contradictory but instead just a tension—one that many social enterprises handle because they need to sustain themselves commercially, not just do good work. We have long known that the dual purpose of social enterprise is seen as a contradiction internally and can lead to various problems and coping strategies, but we have not known much about the long-term effects.
Now we know more, thanks to an article in Administrative Science Quarterly by Wendy Smith and Marya Besharov. They followed DDD for more than ten years, seeing it as a great example of the effects of how such contradictions are dealt with over a long time. It is a great example both because DDD has coped with them well, while many other organizations break apart or fail, and because it has faced a particularly difficult tension between its commercial and social work, as the commercial work has slim margins and some of the social activities can undermine it seriously.
What do we learn from DDD? As you might expect, the answer to such contradictions has more than one part, but here I want to describe just one: guardrails. Establishing guardrails is a way to set up the organization that follows some old organization theory almost to the book, although the DDD founders may not have been aware of it. In a hybrid organization like DDD, whose commercial and social activities are both important, one of the many possible solutions is to make sure that the organization holds strong advocates of each one and is not set up to let one type of activity dominate. That setup results in a battle for dominance between these advocates and between the coalitions they can muster for support whenever a critical problem arises.
That sounds like a noisy and costly way to organize, and it is. But its key feature is that the battles arise whenever one coalition sees the organization as going too far in one direction and neglecting the other, and the battles help to pull it back to the center. As long as the organization can balance its activities, it is peaceful. That’s why competing advocates and coalitions function as guardrails – they keep the organization from going off track and favoring one mission over the other.
The reason this is important is that hiring advocates for contradictory positions without giving priority to one looks like a way to generate problems for the organization. There is not one overriding mission, there is not a clear organizational identity, it is not possible to predict when conflicts will start, and it is hard to predict how they will end. But all these frightful sources of noise help stabilize the organization and resolve the tension between its contradictory goals and activities.
Smith, Wendy, K. and Marya L. Besharov . 2017. "Bowing before Dual Gods: How Structured Flexibility Sustains Organizational Hybridity." Administrative Science Quarterly: forthcoming.
This blog is devoted to discussions of how events in the news illustrate organizational research and can be explained by organizational theory. It is only updated when I have time to spare.