Navigating the Types of Network Organizational Structures

• Article's photo | Credit ScottMadden
• The rise of globalization has fundamentally changed the way businesses operate. Companies with footprints across multiple countries are increasingly turning to network structures to leverage local expertise and navigate diverse markets. These structures foster collaboration with local partners, who can act as cultural bridges and expedite adaptation to regional needs. In this article, we explore three distinct types of network organizational structures: internal, stable, and dynamic, each offering unique advantages in today's dynamic business environment.

Understanding Three Key Network Structures for the Global Landscape

Network structures represent a departure from traditional hierarchical models. They are characterized by:

• Decentralization: Power and decision-making are distributed across the organization, fostering agility and responsiveness.
• Collaboration: Teams from different departments and locations work together seamlessly to achieve shared goals.
• Knowledge Sharing: Expertise is readily shared across the network, leading to innovation and improved problem-solving.

Network structures offer a unique approach to organizational design, fostering three main categories commonly found in today's dynamic business landscape:

1. Internal Network Structure
2. Stable Network Structure
3. Dynamic Network Structure

1. Internal Network Structures: Fostering Internal Competition

   The internal network structure operates on the principle that internal competition can drive innovation and entrepreneurial spirit within an organization, without resorting to extensive outsourcing.

   This structure features independent internal units functioning as profit centers. Each unit specializes in a specific aspect of the organization's product delivery system. These units own most of the assets they utilize and are subjected to market-like pressures by central management.

   Each unit acts like an external vendor, negotiating with a central unit within the organization. An example of this approach is General Motors (GM). GM's component business has independent divisions specializing in automotive system parts production. These divisions compete in the open market but also cooperate with the central unit when beneficial. This fosters overall effectiveness for the corporation.

2. Stable Network Structures: Leveraging Outsourcing for Flexibility

   Stable network structures utilize outsourcing to enhance flexibility within their value chain. Organizations in this structure rely on external vendors to supplement their product delivery system and gain greater agility.

   The central organization remains focused on its core business but outsources specific products and services crucial to its operations. These vendors are independent but typically maintain strong, committed relationships with the central organization. Long-term partnerships and even financial investments in vendor firms may occur.

   For instance, BMW utilizes a stable network structure. Between 55-75% of their production involves outsourcing. While BMW doesn't own these vendors, they maintain stable relationships and may invest in them strategically. Dell's longstanding alliance with Intel for processors exemplifies this type of collaboration.

3. Dynamic Network Structures: Extensive Outsourcing for Core Focus

   Dynamic network structures differ from internal and stable networks in their extensive reliance on outsourcing. Here, the lead firm identifies and assembles resources primarily owned by other companies.

   Partnerships with vendors are less frequent, and the focus is on finding external providers for most functions, not just those serving the central organization specifically. The central organization typically concentrates on its core competencies and outsources most other operations.

   Ikea, for example, leverages its retail expertise while outsourcing many other operations. They coordinate the entire process but rely on external partners for various functions. Reebok follows a similar approach, focusing on design and outsourcing the rest.

Choosing the Right Network Structure