When small and medium-sized companies join strategic networks of other firms operating in the same industry and within the same area, they do it to increase their innovative output and to compete effectively with larger corporations. Firms do it under the theory that networks are looking after their member firms’ interests, and that all the network participants stand to benefit from joint participation in research and development projects. There is often a formalized commitment to pursuing collective interests over allowing individual firms to profit at a cost to others, and networks usually create specialized boards that work hard to ensure that everybody plays by the rules. But are these expectations justified? Are there instances when some firms may abuse their position in the network to profit at others’ expense?
It turns out, says Sergey Anokhin, an Entrepreneurship Professor at Kent State University, that some network partners are a lot more opportunistic than others. Two characteristics that may describe opportunistic member firms come to mind immediately. The first one is the firm’s entrepreneurial orientation. Entrepreneurially-oriented firms are known to engage in the proactive pursuit of risky innovative opportunities without regard for the resources currently controlled. The very focus on opportunities pursuit makes them necessarily opportunistic; the disregard for the resources currently in their disposal exacerbates the issue further. Such firms may misrepresent their capabilities to get into the projects that they are not qualified to pursue. They may overstate their contributions to the joint projects so as to get a bigger slice of the pie. They may renege on the promises made earlier – all in the name of pursuing high-potential opportunities.
The second feature that should make potential network entrants wary is market power, or, simply put, partner firm size. Powerful firms possess a sort of a clout in the network that allows them to extract commitments from fellow member firms that is lopsided in how the benefits of cooperation are shared among the partners. They often abuse the extra legitimacy, then lend to the network to claim more than their fair share of benefits created jointly. In other words, small firms pay dearly for working with the powerful players, and should carefully weigh the pros and cons of entering agreements with such companies.
But what happens when such powerful firms are also entrepreneurially-oriented? Do they become the nightmare that other firms should try to avoid at all costs? To the contrary, the combination of entrepreneurial orientation and market power actually mitigates the problems associated with each of these features individually, and makes such firms desirable partners. The primary reason that entrepreneurially-oriented firms act opportunistically is their lack of resources. If these same firms attain the scale necessary for successful innovation, they are less interested in mistreating other network partners because such strategies could backfire. Besides, they know that due to their possession of both suspect features, they will draw extra scrutiny on the part of their potential partners, and are thus less likely to engage in questionable practices.
To study how network opportunism operates in practice, an international research group has investigated the performance of 108 firms working across 25 networks in Sweden over the course of five years. All expectations were confirmed, says Professor Sergey Anokhin. Indeed, entrepreneurially oriented firms were much more likely to engage in opportunistic behaviors, as were firms with substantial market power. Yet, the firms that scored high on both dimensions did not pose the same opportunism problem for their partners. That is, suggests Sergey Anokhin, you can fight fire with fire.
The study highlights the problem of opportunism in strategic networks. Most network research focuses on the benefits of network participation, so these results are novel and meaningful. Paradoxically, although many firms join the networks to pursue innovative and entrepreneurial ends, it is other entrepreneurially-minded firms that pose a major problem. The other problem sign – market power – is intuitively understood by most network participants.
It is noteworthy that firms that combine entrepreneurial orientation with market power are actually much less of a problem. Taken together, the findings provide actionable advice to firm managers considering joining network projects on how to avoid becoming a victim to partners’ opportunism, concludes Dr. Sergey Anokhin.