Integrating supply chain and network analyses: The study of netchains

Sergio G. Lazzarini1,1 Fabio R. Chaddad2 & Michael L. Cook3

1John M. Olin School of Business, Washington University, 1 Brookings Drive, Campus Box 1133, St. Louis, MO 63130-4899,
USA; Tel: 314-935-4538; Fax: 314-935-6359; E-Mail: LazzariniS@olin.wustl.edu
2Agribusiness Research Institute, University of Missouri - Columbia, 138A Mumford Hall, Columbia, MO 65211, USA; E-mail:

frcbb6@mizzou.edu
https://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2001.x002 - Saturday, February 29, 2020 12:12:24 PM - IP Address:179.208.168.163

3Michael L. Cook, Agribusiness Research Institute, University of Missouri - Columbia, 125C Mumford Hall, Columbia,

MO 65211, USA; E-mail: CookML@missouri.edu

Abstract
This paper introduces the concept of netchain analysis. A netchain is a set of networks comprised of horizontal ties between
firms within a particular industry or group, which are sequentially arranged based on vertical ties between firms in different
layers. Netchain analysis interprets supply chain and network perspectives on inter-organisational collaboration with
particular emphasis on the value creating and coordination mechanism sources. We posit that sources of value and
coordination mechanisms correspond to particular and distinct types of interdependencies: pooled, sequential, and
reciprocal. It is further argued that the recognition and accounting of these simultaneous interdependencies is crucial for
a more advanced understanding of complex inter-organisational relations. The paper concludes with an analysis of a set
of netchain configuration examples, including buyer-supplier relationships, information technology induced inter-
organization collaborations, and the introduction of the “macrohierarchy” organization structure.

Key words: network, supply chain, value chain, interdependence, cooperative strategy

1. Introduction Even though both SCA and NA stress the importance of

interdependencies between multiple firms and how inter-
Supply chain and network analyses have been treated as organisational relationships can be a source of competitive
two distinct strands in the literature on inter-organisational advantage (Dyer and Singh, 1998), the integration of their
collaboration. Supply chains are defined as a set of core concepts and analytical tools is still to be done2. Yet,
sequential, vertically organized transactions representing it has been recognized that NA could benefit from a careful
successive stages of value creation. The literature on supply assessment of distinct types of ties (Nohria, 1992), whereas
chain analysis (SCA) suggests vertical interdependencies SCA could benefit from a network-based perspective of
require a systemic understanding of resource allocation and interfirm relations (Aitken, 1998; Stuart et al., 1998).
information flow between firms engaged in sequential stages This paper attempts to fill this void in the literature by
of production (Christopher, 1998; Simchi-Levi et al., 2000). introducing the concept of netchain - a set of networks
Value chain analysis (Porter, 1985), an approach describing comprised of horizontal ties between firms within a
a set of sequential activities creating value within firms, has particular industry or group, such that these networks (or
been more recently extended to activities between firms layers) are sequentially arranged based on the vertical ties
(Barney, 1997). between firms in different layers (Figure 1). Netchain analysis
Network analysis (NA), in turn, provides numerous tools explicitly differentiates between horizontal (transactions
to map the structure of inter-organisational relationships in the same layer) and vertical ties (transactions between
or “ties” based on the recognition that network structure layers), mapping how agents in each layer are related to
constrains and at the same time is shaped by firms’ actions each other and to agents in other layers.
(Granovetter, 1973; Burt, 1992; Nohria, 1992; Wasserman For example, it is becoming increasingly important to
and Faust, 1994). Unlike SCA, NA is not particularly evaluate not only how suppliers transact with a given buyer,
concerned with vertically organized ties, but rather with but also how they interact between themselves to promote
horizontal relationships between firms belonging to a knowledge exchange (Stuart et al., 1998; Dyer and Nobeoka,
particular industry or group (Powell, 1990). 2000). SCA is not well equipped to discuss relations among

1 We thank the helpful comments by two anonymous referees. All remaining errors and omissions are our own.
2 Some authors apply NA in contexts involving supply chains (Uzzi, 1997; Burt, 1992; Dyer and Nobeoka, 2000; Swaminathan et al.,
2000), but the comparative and simultaneous assessment of vertical and horizontal relationships is not their main goal.

Chain and network science (2001) 7

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
https://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2001.x002 - Saturday, February 29, 2020 12:12:24 PM - IP Address:179.208.168.163

Figure 1. An example of a generic netchain.

suppliers because it focuses on elements related to vertical In order to discuss these issues in detail, the paper is
transactions, such as logistics management or the design organized as follows. In the next section, the main sources
of contractual arrangements between buyers and suppliers. of value in inter-organisational relationships analysed by
On the other hand, even though NA provides elements to SCA and NA scholars are reviewed. In the third section,
evaluate social attachments and knowledge transfer between these sources of value are related to particular types of
firms, it is not particularly concerned with vertical ties. A interdependencies and coordination mechanisms. The
combination of both perspectives may generate an enhanced assessment of interdependencies is employed as an
general framework to assess inter-organisational integrative element in netchain analysis because it avoids
collaboration. confining the study of inter-organisational collaboration
More generally, we posit that such analytical integration is to particular sources of value or coordination mechanisms.
necessary because SCA and NA have focused on distinct Subsequently, examples of netchain configurations are
types of interdependencies involved in inter-organisational presented illustrating specific applications of netchain
collaboration. But if SCA and NA focus on particular types analysis. The netchain configurations section includes buyer-
of interdependencies, what happens when several types of supplier relationships, inter-organisational collaboration
interdependence occur in a given inter-organisational supported by information technology, and macrohierarchies,
setting? Stabell and Fjeldstad (1998) propose a framework which are defined as patterns of ownership between
considering organizational responses to distinct types of organizations arranged in layers. Concluding remarks and
interdependence, but the authors treat chains and networks suggestions for future research follow.
as alternative models. The same is true for Norman and
Ramirez’s (1993) distinction between value chain and value 2. Sources of value emanating from supply
constellation, which resembles a network. The netchain chain and network analyses
approach, in contrast, is intended to integrate SCA and NA
by recognizing that complex inter-organisational settings In this section we identify the main contributions of supply
embody several types of interdependencies, which are chain analysis (SCA) and network analysis (NA) as they
associated with distinct sources of value - that is, strategic suggest alternative sources of value in the study of inter-firm
variables yielding economic rents - and coordination collaboration. Sources of value are strategic variables yielding
mechanisms involved in inter-organisational collaboration. economic rents. They can be either associated with cost
reduction, rent creation, or rent capture. The identification

8 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

of these sources of value is crucial in assessing the asymmetries between the parties to a contract (Jensen and
contributions of SCA and NA and how both approaches Meckling, 1976). The design of incentive contracts can align
can be integrated in a single analytical framework. the objectives of principals and agents and mitigate
opportunistic behaviour, thereby increasing transactional
Sources of value in supply chain analysis (SCA) efficiency (Sappington, 1991).
The second approach, transaction cost economics (TCE), is
https://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2001.x002 - Saturday, February 29, 2020 12:12:24 PM - IP Address:179.208.168.163

SCA is a broadly defined field focusing on successive stages associated with Williamson’s (1985) work. In contrast to
of value creation and capture in a vertically organized set agency theory, TCE emphasizes contract incompleteness,
of firms. Three core sources of value in SCA are identified: which hinders the possibility of crafting optimal incentive
optimisation of production and operations, reduction of contracts. However, similar to agency theory, TCE considers
transaction costs, and appropriation of property rights. the hazards of opportunistic behaviour, particularly when
relationship-specific investments are involved (Klein et al.,
Optimisation of production and operations 1978). The major proposition of TCE is the presence of
The concept of supply chain management has its roots in specific investments shifts organization away from markets
the 1960s concept of logistics management - a planning to “hybrids” or, in the limit, vertical integration to mitigate
tool that seeks to develop a system-wide, integrated view potential hold-up problems (Williamson, 1985). Therefore,
of the firm. Subsequently, supply chain management extends supply chain organization is a source of value when
the concept of logistics management to external integration transactions are governed by efficient structures, from
of the firm. The supply chain is conceived as “a series of markets to hierarchies, aligned with attributes of the
linked suppliers and customers” (Handfield and Nichols transactions along the chain (Zylbersztajn, 1996).
Jr., 1999, p. 2). It encompasses all activities associated with The third approach, measurement, focuses on the difficulty
the flow and transportation of goods from the raw materials of measuring performance or product attributes in a
stage through the end user plus the concomitant information transaction as a major explanatory variable determining
and financial flows. Supply chain management refers to governance choice (Barzel, 1982). When the performance
the coordination and alignment of materials, financial, and or attributes of goods being transacted are imperfectly
information flows for all activities and processes involved measured, pay-for-performance or pay-for-quality is
in a supply chain (Simchi-Levi et al., 2000). Assuming the problematic (Holmstrom and Milgrom, 1994). As a result,
supply chain is managed as a single entity, supply chain agents need to craft appropriate governance mechanisms
optimisation models specify how chain performance is to monitor and enforce contractual arrangements. Efforts
maximized by the optimal choice of a set of several to promote “traceability” of food products in supply chains
production-related explanatory variables, such as number in order to signal and guarantee certain product attributes
of stages in the supply chain, inventory levels, product to consumers, such as safety and origin, is an example.
differentiation, among others. Therefore, supply chain
management models focus on the optimisation of Value capture in weak appropriability regimes
production and operations as a key source of value. Supply According to Teece (1986), innovators are not always able
chain performance includes quantitative cost-based and to capture the rents from innovation. Competitors or agents
technical efficiency measures and qualitative indicators of located in downstream or upstream stages in the supply
customer responsiveness and satisfaction (Beamon, 1998). chain may benefit from innovation when appropriability
regimes are weak or they possess complementary assets. Weak
Reduction of transaction costs appropriability occurs when technology is either easy to
In addition to production optimisation, several scholars imitate or patent systems are not strongly enforced.
stress the importance of considering the optimisation of Complementary assets, in turn, occur when new technology
transactions based on Coase’s (1937) insight that there are adoption depends on assets owned by other firms. If
positive costs of using the market system, which later became competitive advantage is shaped by the firm’s ability to
known as transaction costs. These costs include ex ante capture value from its resources (Teece et al., 1997; Teece,
search costs, bargaining and contracting costs, plus 1998), then the implications for supply chain management
monitoring and enforcement costs, which occur in a post- are evident: allocate investments through the chain in order
contractual stage. Three distinct approaches in the literature to capture the gains from innovation, focusing on
analyse economic organization in a situation of positive complementary assets. For example, biotechnology firms
transaction costs: agency theory, transaction cost economics, acquired complementary assets downstream in the
and measurement. In the agency literature, transaction costs agricultural chain (i.e., seed companies) to capture the value
emerge due to divergent interests and informational generated by knowledge-based assets through genetically

Chain and network science (2001) 9

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook

modified seeds sold to farmers as those assets can be easily because strong ties and dense networks may induce “lock
replicated by simply growing the seeds (Kalaitzandonakes in” to idiosyncratic resources, which may be less valuable
and Bjornson, 1997). in the future due to technological or institutional ruptures
(Grabher, 1993; Uzzi, 1997; Afuah, 2000). McEvily and
Sources of value in network analysis (NA) Zaheer (1999) find a positive effect of structural holes on
firm performance: firms that have non-redundant contacts
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NA is a broad field commonly associated with sociology, but outperform competing firms.
economists and strategy scholars have recently analysed
network-based industries and have applied network concepts Learning
to explain economic organization and performance. Three There are two fundamental types of learning processes with
core sources of value are emphasized in NA: social structure, distinct consequences in terms of value creation. When
learning, and network externalities. autonomous agents or groups develop knowledge “locally”
and specialize themselves in particular knowledge fields,
Social structure learning tends to favour knowledge diversity. In this case,
Social network approaches share a common emphasis on autonomous agents develop particular skills and
the role of social structure - i.e., interpersonal relationships “encapsulate” them in their interaction with other agents
and individual positions occupied by agents in a network (Demsetz, 1988; Zenger and Poppo, 1999). Within a
- influencing individual or collective behaviour and network perspective, knowledge diversity is beneficial
performance. Granovetter (1985) uses the term embeddedness because it generates positive externalities to multiple agents
to explain how social relations affect the economic behaviour through knowledge spillovers, which enhance opportunities
of agents and the institutional arrangements supporting for innovation (Feldman and Audretsch, 1998; Kogut, 2000).
transactions. The literature on social capital focuses on the Another type of learning involves systemic, joint efforts to
role of “resources accruing to an individual or group by create and refine a certain body of knowledge. This type of
virtue of their location in the network of their more or less learning tends to induce knowledge co-specialization, i.e.,
durable social relations” (Adler and Kwon, 1999, p. 4). skills that are dedicated to the agents participating in a given
Different strands in social NA have assumed, however, exchange (Zenger and Poppo, 1999). Co-specialization
divergent perspectives regarding the type of social relationship enables value creation through the combination of
(or tie) and social structure that is more conducive to individual capabilities and the development of specific
cooperative behaviour and superior performance. Some routines (Nelson and Winter, 1982; Kogut and Zander,
authors argue that dense networks with agents extensively 1992). However, co-specialization entails costs since it tends
connected with each other (Coleman, 1990) and strong ties to reduce the range of new, valuable opportunities that can
defined as repeated, affective, relational exchanges (Nelson, be exploited by agents and also their capacity to interpret
1989; Krackhardt, 1992) facilitate the emergence of trust, external knowledge (Leonard-Barton, 1995). Rowley et al.
create social norms, and promote cooperation as a (2000) offer a connection between learning and social
consequence. Dense networks can also create conditions structure and suggest that knowledge diversity is best served
for the emergence of intra-industry coalitions of firms that by weak ties, which tend to be conduits of new information,
negotiate better terms of trade with firms in other industries whereas co-specialization is facilitated by the existence of
or reduce competition within their own industry (Pfeffer strong ties, which promote cooperation.
and Nowak, 1976; Galaskiewicz, 1985; Lane and Bachmann,
1996). Cartels, trade associations, and cooperatives are Network externalities
examples of this phenomenon. This source of value is extensively discussed in the literature
Other authors emphasize that sparse networks with several on economic networks. Network externalities occur if the
non-redundant contacts connected by structural holes3 (Burt, benefits to adopt some type of technology or contract
1992) and weak ties defined by occasional, market-like increase with the expected number of adopters, thus
exchanges (Granovetter, 1973) generate new information inducing increasing returns to adoption (Arthur, 1989).
and diversity crucial to trigger innovation and create Katz and Shapiro (1985) distinguish between direct and
opportunities for network participants. This is important indirect network externalities. The direct type occurs when,

3 For instance, if an agent A is connected to a network of agents NA and B is connected to another network NB in such a way that agents
in NA and NB are not connected to each other, a tie between A and B would be non-redundant. This tie would span a structural hole
between networks NA and NB. If, however, many agents in NA and NB have direct ties with each other, a tie between A and B would be
redundant because they would be already connected with each other indirectly through their ties with agents in NA and NB.

10 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

for example, an agent adopting a trading technology, such the simplest type, occurs when each individual in a group
as electronic commerce, increases the benefit for other makes a discrete, well-defined contribution to a given task.
agents to adopt that technology due to increased arbitrage Sequential interdependence refers to serially structured tasks,
opportunities or decreased trading costs (Domowitz, 1995; when the activities of a firm or agent precede those of
Economides, 1996). The indirect type occurs when there another. Finally, reciprocal interdependence - the most
are complementarities among several technologies or complex - involves simultaneous, ongoing relationships
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exchange modes. Consider for example the benefits of between parties in which each agent’s input is dependent
purchasing a computer, which strongly depends on the on the others’ output and vice-versa (Figure 2).5
supply of complementary products such as software shared We posit that SCA has focused on sequential interdependencies,
by many users. In the presence of network externalities, whereas NA has primarily dealt with either pooled or reciprocal
there are benefits to promote interfirm coordination in interdependencies. In this section, this claim is supported in
order to capture the value generated as a result of network two ways. First, it is shown that the sources of value
growth and avoid “lock in” to inferior technologies (Farrell emphasized by SCA and NA correspond to distinct types of
and Saloner, 1985; Arthur, 1989) or contractual standards interdependencies. In addition, we discuss the coordination
(Kahan and Klausner, 1997) that compete simultaneously mechanisms commonly proposed by SCA and NA, which are
over time. associated with distinct interdependencies. This section
concludes showing how netchain analysis can successfully
3. Conceptualising netchains integrate SCA and NA with a simultaneous assessment of
all types of interdependencies.
In this section, it is argued that SCA and NA can be
successfully integrated by identifying an underlying variable How distinct sources of value correspond to particular
that explains why these approaches emphasize different types of interdependence
facets of inter-organisational relationships. This variable is
the nature of interdependence between two firms or agents, In the following discussion, the types of interdependence
since transactions arranged as chains (emphasizing vertical proposed by Thompson (1967) are outlined and related
ties) or networks (emphasizing horizontal ties) tend to to the main sources of value emphasized by SCA and NA
differ with regard to the type of interdependence they scholars.
generate (Stabell and Fjeldstad, 1998). Thompson’s (1967)
seminal categorization of organizational interdependencies Pooled interdependence
is employed to contrast SCA and NA.4 The objective is not In this case, interdependence involves discrete or
to refine Thompson’s framework, but rather use it as a tool autonomous contributions by loosely coupled agents (Astley
in analysing distinct types of inter-organisational and Zajac, 1991). Pooled interdependence is more akin to
interdependencies emanating from SCA and NA. independence because the relationship between agents is
Thompson (1967) identifies three types of interdependence: sparse and indirect (Van de Ven et al., 1976). Involving
pooled, sequential, and reciprocal. Pooled interdependence, more or less anonymous agents, pooled interdependence

4 Even though Thompson focuses on interdependencies within firms, other authors apply his framework in the context of inter-organisational

collaboration (Borys and Jemison, 1989; Gulati and Singh, 1998).

5 Van de Ven et al. (1976) propose a fourth type of interdependence: team work. The nature of interdependence is similar to the reciprocal

case, but the authors characterize team interdependence as involving simultaneous actions. Reciprocal interdependence may involve a temporal
lapse in the feedback process. But since we are not particularly concerned with temporal issues, teamwork is considered as a special case
of reciprocal interdependence.

Figure 2. Representation of types of interdependence.

Chain and network science (2001) 11

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook

has clearly a flavour of weak social ties and structural holes (e.g., an unusual destiny) and temporal specificities (e.g.,
as “arbitrage” opportunities - e.g., job opportunities in a customer requirement for fast delivery). In addition, the
large network - are magnified. Additionally, due to its common practice of tracking parcels and cargo to inform
emphasis on autonomous and loosely coupled agents, clients about the exact position of those units in their route
pooled interdependence supports a situation of knowledge at a given moment attempts to solve measurement problems
diversity, where specialized agents exchange knowledge making use of information technology.
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directly or indirectly through products or services that

embody such knowledge (Weick, 1976). Finally, since the Reciprocal interdependence
connection between agents is sparse, it tends to be mediated Reciprocity in this kind of interdependence means that one
by some underlying technology or organizational mode agent’s input is another agent’s output and vice-versa.
possibly with increasing returns to adoption. Thus, pooled Consequently, agents are mutually dependent on the choices
interdependencies are likely to be associated with network and actions made by each other. In this context, one should
externalities: the value of the network increases with its expect recurring, deep, intertwined relationships between
expected size (Stabell and Fjeldstad, 1998). agents, which suggests a situation of strong social ties and
As discussed in the following section, Internet-based dense networks. Agents in this case are likely to be tightly
procurement mechanisms known as business-to-business coupled: the knowledge of one agent strongly depends on
(B2B) exchanges enable the connection between the knowledge of another, i.e., there is knowledge co-
autonomous agents, thus creating pooled interdependencies specialization.
between them. Some organizations - such as the chemical A strategic alliance in which parties seek “to broaden or
company Buckman and the World Bank - are stimulating deepen their skills or to develop new skills jointly” is an
knowledge sharing between their “internal specialists” example of inter-organisational collaboration involving
located in different countries to solve practical problems. reciprocal interdependence (Gulati and Singh, 1998, p.
The underlying interdependence is pooled because those 797). In addition, groups characterized by shared culture,
specialists interact infrequently and contribute with identity, and norms, such as regional clusters of small firms
knowledge resulting from local, specialized experiences. and close-knit groups, create reciprocal interdependencies
through the development of dense networks. Japanese
Sequential interdependence supplier networks, which are discussed in the next section,
This kind of interdependence involves direct relationships are also an example of inter-organisational relations showing
between agents ordered in a serial fashion: one agent’s input reciprocal interdependencies.
is another agent’s output. It is straightforward to note that Pooled and reciprocal interdependencies involve sources
this describes precisely a supply chain. The sources of value of value that are commonly dealt with in NA. And since
associated with buyer-supplier relationships usually stem serially ordered ties describe a chain organization, it is not
from managing sequential interdependencies (Borys and surprising that SCA focuses on sources of value associated
Jemison, 1989). Inventory management, logistics, and the with sequential interdependencies. It is important to notice
like attempt to optimise sequential production processes and that the sources of value that are related to each type of
operations, while efficient governance mechanisms attempt interdependence are main sources of value. It is possible
to reduce transaction costs and appropriate property rights that, for example, strong social ties and dense networks
in downstream or upstream stages in the chain, i.e., optimise facilitate cooperation and decrease transaction costs as a
sequential transactions. result (Ouchi, 1980). But transaction cost minimization is
The organization of transportation services is an evident not the unique reason for those relationships since they can
example of sequential interdependence. Consider the involve value creation - for example, joint knowledge
international flow of cargo, correspondence and packages development - and other outcomes that transcend the simple
with sequential transactions from the origin to the desire to reduce transaction costs (Zajac and Olsen, 1993;
destination, involving domestic trucking, domestic freight Dyer, 1997).
forwarding, international air transport, foreign freight
forwarding, and forward trucking (Wada and Nickerson, How interdependencies correspond to distinct
1998). The output of one stage (e.g., a parcel coming from coordination mechanisms
another country through air transport) is clearly the input
of another stage (e.g., freight forwarding). The value created Another way to demonstrate that NA and SCA focus on
from managing these transactions originates not only from distinct types of interdependencies is to review the main
logistics optimisation, but also from reductions in coordination mechanisms proposed or implied by each
transaction costs, which are critical in the presence of local approach. Thompson (1967) suggests that each type of

12 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

interdependence should be handled with particular Mutual adjustment

coordination modes. These coordination modes include Thompson (1967) claims that reciprocal interdependencies
standardization, plan, and mutual adjustment. require the transmission of new information through mutual
feedback processes, which he calls “mutual adjustment.”
Standardization Instead of a central planner, mutual adjustment implies
According to Thompson (1967), pooled interdependencies joint problem solving and decision making. As a result,
https://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2001.x002 - Saturday, February 29, 2020 12:12:24 PM - IP Address:179.208.168.163

are well managed by standardized rules and shared personal or group-based coordination mechanisms become
mechanisms to orchestrate transactions. The economic necessary (Van de Ven et al., 1976). Perhaps not surprisingly,
approach to networks argues that compatibility between social network scholars commonly discuss this type of
products and components, usually achieved through a coordination. As Powell (1990, p. 303) remarks, “in network
standardized technological platform, is a key element to modes of resource allocation, transactions occur neither
capture network externalities. Thus, firms may coordinate through discrete exchanges nor by administrative fiat, but
product design to generate increasing returns to adoption through networks of individuals engaged in reciprocal,
(Farrell and Saloner, 1985; Katz and Shapiro, 1985). Another preferential, mutually supportive actions.” According to
example of coordination through standardization is a social network scholars, the formation of inter-organisational
financial exchange, where contracts and negotiation rules relations tends to be emergent rather than premeditated,
are standardized in such a way to allow trade at low cost where feedback from past transactions in the network is a
and therefore attract many anonymous agents (Telser and crucial element. Past transactions are likely to reveal
Higginbotham, 1977; Domowitz, 1995; Economides, 1996). information about performance and partners’ conduct
In section 4, it is shown how the Internet enables the (Gulati and Gargiulo, 1999), foster learning (Powell et al.,
emergence of standardized codes that support information 1996), and reinforce social norms and informal sanctioning
transfer between firms and pooled interdependencies. Also, mechanisms (Granovetter, 1985).
firms encouraging knowledge sharing between internal In sum, SCA focuses on coordination mechanisms involving
specialists depend on standardized mechanisms through some sort of plan or discretionary managerial action, which
the Internet to form discussion groups and retrieve according to Thompson (1967) corresponds to sequential
information from sparsely connected individuals. interdependence. NA, in turn, emphasizes either
standardization or mutual adjustments, which are
Plan appropriate coordination mechanisms to deal with pooled
Sequential interdependencies require coordination by a and reciprocal interdependencies respectively.
plan, involving “the establishment of schedules for the
interdependent units by which their actions may then be Netchain analysis: Assessing all types of
governed” (Thompson, 1967, p. 56). This type of interdependencies
coordination denotes discretionary actions by a coordinating
agent, who plans the flow of products and information, Figure 3 summarizes the preceding discussion and presents
and promotes adaptation to changing internal or external the sources of value and coordination mechanisms
conditions. 6 Indeed, the literature on supply chain corresponding to each type of interdependence, showing
management has called for managerial discretion in order to that NA focuses on pooled and reciprocal interdependencies,
optimise production processes and operations (Beamon, whereas SCA emphasizes sequential interdependencies. We
1998), or align efficient governance mechanisms to propose that one way to integrate SCA and NA is to consider
sequential transactions (Zylbersztajn and Farina, 1999). simultaneously all types of interdependencies that occur in
For instance, the management of courier services requires a given inter-organisational setting.
a central planner, such as Federal Express and DHL, who This simultaneous assessment is the core of netchain
not only defines schedules, routes and transport modes, analysis. Instead of focusing on certain sources of value
but also contractual arrangements to coordinate sequential and/or coordination mechanisms given a certain type of
transportation stages from the sender to the recipient (Wada interdependence, the netchain approach begins by
and Nickerson, 1998). recognizing the relevant interdependencies involved in
inter-organisational collaboration. The concept of netchain

6 Victor and Blackburn (1987) refine Thompson’s model by considering conflicts of interest created by interdependencies. When these
conflicts are high, they argue a “chain of command” will emerge. Note, however, that these conflicts tend to be critical in the case of
sequential interdependencies because one party’s input is an output of the other: conflicts over prices, for example, tend to be acute. Thus,
the prediction is the same: coordination by plan (command) will emerge in the case of sequential interdependencies.

Chain and network science (2001) 13

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
https://www.wageningenacademic.com/doi/pdf/10.3920/JCNS2001.x002 - Saturday, February 29, 2020 12:12:24 PM - IP Address:179.208.168.163

Figure 3. An overview of netchain analysis.

integrates SCA and NA precisely because it allows for a embody reciprocal elements such as strong social
simultaneous account of all types of interdependencies, in attachments and knowledge co-specialization. At first glance,
addition to the sources of value and coordination this may appear to be inconsistent with the fact that vertical
mechanisms associated with them. If, for example, we ties exhibit sequential interdependence. Yet Thompson
confine ourselves to the analysis of sequential (vertical) (1967, p.55) proposes a hierarchical relationship between
transactions, several sources of value and coordination interdependencies by arguing, “all organizations have pooled
mechanisms associated with pooled or reciprocal interdependencies; more complicated organizations have
interdependencies are likely to be neglected. In other words, sequential as well as pooled; and the most complex have
netchain analysis does not take interfirm interdependence reciprocal, sequential, and pooled.”
as given, but rather includes it as a key variable in the model. Second, netchain analysis abstracts from issues regarding
In the next section, netchain analysis is applied to specific firm boundaries. Gulati and Singh (1998) offer a theory to
empirical cases. Before proceeding, two important remarks explain the choice between equity and non-equity strategic
are in order. First, it was previously mentioned that SCA alliances based on Thompson’s notion of interdependence.
and NA focus on vertical and horizontal transactions We believe, however, that interdependencies do not fully
respectively. Even though the graphical representation of a determine firm boundaries. For example, reciprocal
netchain proposes a combined assessment of horizontal interdependencies can be carried out internally by the firm
and vertical ties, the crucial aspect to qualify a given tie in or externally through alliances or social mechanisms.
a netchain is the nature of interdependence between agents. Paraphrasing Jensen and Meckling’s (1976)
For example, vertical transactions typically exhibit sequential conceptualisation of the firm as a nexus of contracts,7 which
interdependencies (Pennings, 1981), but they can also avoids the analytical demarcation of firm boundaries, a

7 Zylbersztajn and Farina (1999) use the same term to characterize chain organization.

14 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

netchain is conceptualised as a nexus of interdependencies. to pursue quality- and productivity-enhancing solutions to

In other words, the netchain approach analyses the nature several production problems. A key element is the existence
of interdependencies involved in a given setting, taking of voluntary learning teams (jishuken), involving groups of
firm boundaries as exogenous. The study of endogenous suppliers exchanging knowledge between them in a more
firm boundaries within a netchain would be an important practical manner. These teams are heavily valued by suppliers
extension of this work. as a way to promote improvements in production processes,
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cut costs, or create new solutions based on sharing individual

4. Some netchain configurations experiences.
As a common attribute of Toyota’s supplier networks, Dyer
In this section, the concepts developed in the previous and Nobeoka (2000, p. 350) remark that they are “highly
section are applied to the analysis of particular cases interconnected, strong-ties network [with] multiple pathways
involving distinct netchain configurations. These cases serve among members effectively eliminating most structural
to demonstrate the applicability of the concept, not to holes.” Thus, one crucial source of value in this model refers
support specific theoretical claims, and indicate necessary to dense relationships with strong ties. Additionally, the
steps toward the future use and refinement of netchain authors point out suppliers in these networks “have
analysis. developed reciprocal obligations for sharing knowledge
with other members in the network” (p. 363), thus
Buyer-supplier relationships suggesting knowledge co-specialization. One natural
question in this context is how to avoid the shortcomings
Traditional approaches to the management of buyer-supplier of dense networks, strong ties and knowledge co-
relationships have focused on the design and maintenance specialization, such as a lower potential to innovate and
of vertical, serially ordered relations between a buyer and interpret external knowledge. Dyer and Nobeoka (2000, p.
its suppliers individually. The analysis of “tiered” supplier 365) note that in this model “there is the risk that the
structures is an example, where attention is paid to the diversity of knowledge that resides in the network will
choice of certain top-tier suppliers who supply critical diminish over time.” Toyota has responded to this risk by
resources to the buyer and are responsible for product and employing several tactics such as changing the composition
service flow from lower-tier suppliers (Asanuma, 1989). of learning groups from time to time and searching for “best
This view, however, focuses solely on sequential practices” in other contexts through committees organized
interdependencies between buyers and suppliers. Some by supplier associations.
authors challenge this view and suggest network-based Thus, supply chains with supplier networks involve typically
interactions between suppliers are equally important (Stuart two types of interdependencies: one sequential, between
et al., 1998). assemblers and their suppliers, associated with vertical ties;
Japanese manufacturing is a classic example of horizontal and another reciprocal, among suppliers, associated with
relations, where suppliers are organized through associations horizontal ties. This basic netchain configuration is depicted
(kyoryokukai) aimed at promoting knowledge exchange and in Figure 4: single arrows represent sequential
socialization (Nishiguchi, 1994; Dyer and Nobeoka, 2000). interdependencies, while double arrows represent reciprocal
Contrary to common sense, Japanese supplier associations interdependencies. Sequential interdependencies are
emerged due to a governmental initiative to promote managed by discretionary, planned actions by a central
cooperation, even though in some cases - such as in Toyota’s firm, such as Toyota. Reciprocal interdependencies, in turn,
association - they were reinforced by private initiatives are coordinated through mutual adjustments - in Toyota’s
(Nishiguchi, 1994). Supplier associations have also been case, through feedback from each other’s experience in the
replicated in other countries, such as in Toyota’s plants in
the U.S. (Holmstrom and Roberts, 1998; Dyer and Nobeoka,
2000) and Australia (Langfield-Smith and Greenwood,
1998).
However, network-based relations between suppliers are
not only restricted to supplier associations. Dyer and
Nobeoka’s (2000) empirical analysis of Toyota’s supplier
networks in both Japan and the U.S. show that practices
other than associations are used to foster exchange of
knowledge and socialization between suppliers. Consulting
and problem-solving teams are organized by Toyota in order Figure 4. Buyer-supplier relationships.

Chain and network science (2001) 15

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook

supplier network. Even though Toyota coordinates to some information sharing (Holland et al., 1992), shortened lead
degree the formation and maintenance of these supplier times (Dearing, 1995; Niederman, 1998), inventory
practices, voluntary learning teams are considered to be reduction and increased product quality (Kekre and
more effective in knowledge sharing. Instead of relying on Mukhopadhyay, 1992). These sources of value are strongly
knowledge imposed by a given buyer, this new model of associated with sequential interdependencies. Additionally,
buyer-supplier relationships emphasizes systemic learning private communication systems are commonly implemented
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and collective decisions within supplier networks (Stuart by a systems initiator (e.g., a buyer), “who deploys a
et al., 1998). proprietary [system] to expand the scope of hierarchical
Notice that traditional SCA, focusing on vertical ties control” to a particular firm (e.g., a supplier), “which
embodying sequential interdependencies, is unable to assess exercises the choice between accepting or rejecting” the new
the sources of value that emanate from reciprocal system (Zaheer and Venkatraman, 1994, p. 551). This has
interdependencies between suppliers, such as strong social clearly a flavour of plan-based coordination.8
ties and knowledge co-specialization. On the other hand, In contrast, the Internet allows for standardized transacting
NA tends to neglect the importance and distinctive nature procedures shared by many agents and an open architecture
of vertical ties given the sequential interdependencies they of connection, the World Wide Web (Kambil et al., 1999;
generate. The netchain approach allows for a more complete Croom, 2000). Internet procurement has emerged with the
picture of this inter-organisational setting, considering help of “orchestrated” markets called business-to-business
simultaneously the existence of sequential and reciprocal (B2B) exchanges. B2B exchanges create an electronic
interdependencies, which are associated with distinct sources marketplace with low-cost entry and standardized
of value and coordination mechanisms. transactional procedures - e.g., the display of buyer’s
specifications, bidding procedures, market clearing,
IT-enabled inter-organisational collaboration safeguarding, and so on. Interdependencies are pooled
because the bidding process is impersonal and carried out
To understand how information technology (IT) supports by autonomous suppliers. As such, network externalities
inter-organisational collaboration in the context of a constitute the main source of value associated with Internet-
netchain, two IT innovations that induced distinct types of based procurement. Namely, the benefits of this governance
interdependence are contrasted in this section: closed mechanism increase with the number of suppliers adhering
electronic data interchange (EDI) systems, and Internet- to the same standard because an alternative supplier that can
based procurement. closely match buyer’s specifications will likely participate
EDI involves computer-to-computer exchange of information in the bidding process (Lazzarini and Nickerson, 2000).
between buyers and suppliers (Holland et al., 1992; This is the case in B2B exchanges involving price negotiation
Marcussen, 1996). Early (or closed) EDI systems, which gained instead of “catalogs” with posted prices, since in the first
momentum especially in the 1990s, are associated with case Internet procurement reduces transaction costs and
specifically negotiated codes and a proprietary, or closed, increases competition in the procurement process (Kaplan
electronic architecture to transfer information. According and Sawhney, 2000).
to Holland et al. (1992, p. 544), early EDI systems are “used A remarkable example of a B2B exchange is FreeMarkets
to encourage close trading relationships with a smaller Online, which has generated approximate savings of 15
number of suppliers.” Within this perspective, early EDI percent in the procurement costs of its clients mainly due
systems involve investments by both parties in private to lower acquisition prices (Rangan, 1998). Glen Meakem,
computer connections and training, implying a closed one of the firm’s co-founders, points out that his company
architecture of connection and agreements specifying “introduces buyers to aggressive, world-class suppliers that
information transfer codes (Brousseau, 1994; Dearing, 1995). they may not have known about before” (Rangan, 1998, p.
Many authors document two main advantages of early EDI 10). As another example, the British retailer Safeway reduced
systems: a potential reduction of transaction costs, including the cost of connecting its web of suppliers through the
procurement and monitoring expenses (Brousseau, 1994; Internet to “only a few thousand dollars against several
Dearing, 1995) and the optimisation of production through million for EDI. [Thus,] the supermarket can easily increase

8 It is also possible that the strong attachment between firms brought by early EDI systems also induced reciprocal interdependencies in
the long run. As Zaheer and Venkatraman (1994, p. 554) hypothesize, “trust is enhanced through greater use of communication between
[the parties] under conditions of dedicated electronic interfacing.” Also, the presence of trust increases the willingness of the parties to
invest in expensive, non-redeployable electronic connections. For simplicity, the focus is placed on the sequential nature of interdependencies
emphasized by early EDI systems.

16 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

the number of its suppliers, giving it more choice and better IT-based models because it recognizes the distinct types of
prices” (The Economist, 1999, p. 17). This suggests that the interdependencies involved in each case, which lead to
advent of Internet-based procurement is creating pooled distinct sources of value and coordination mechanisms.
interdependencies between a large number of loosely
coupled agents, where standardization of connection and Macrohierarchies
transacting procedures is the key coordination mechanism
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enabling low cost supplier participation. Macrohierarchies are hierarchies involving organizations -
Netchain configurations representing these contrasting IT- instead of agents within organizations - that jointly
enabled inter-organisational structures are presented in coordinate some of their activities through multiple layers
figure 5. The structure of early EDI-based procurement is of ownership. One particular example of macrohierarchy is
presented in figure 5a, depicting idiosyncratic, sequential discussed: farmer cooperatives organized in a multi-layered
transactions between a buyer and a supplier. The structure fashion, which is known as the federated structure.
of Internet-based procurement is depicted in figure 5b, with In a federated agricultural cooperative, patrons are members
two basic differences from the former case. First, there is a of a local cooperative, which in turn is a member of a
new layer occupied by an “infomediary,” such as a B2B regional cooperative.10 Regional cooperatives themselves
exchange, which aggregates many buyers and many suppliers may also decide to form an inter-regional cooperative.11 As
with an open architecture of connection and standardized a result, a federated cooperative is structured by means of
transacting procedures (Hagel III and Singer, 1999). Second, sequential layers of ownership (Figure 6). In addition,
this infomediary induces horizontal, pooled cooperatives are characterized by restricted residual claims,
interdependencies among buyers and among suppliers - i.e., they are owned and controlled by patrons (Fama and
depicted in figure 5b as dashed lines - using standardization Jensen, 1983). Consequently, the vertical ties between
as a coordination mechanism.9 The netchain approach subsequent layers of a federated cooperative structure entail
provides a more complete framework to contrast these two both a transaction and an ownership relationship.

9 The single arrows denoting sequential interdependencies in Figure 5b refer to the flow of orders, not necessarily the physical flow of products.

Indeed, many B2B exchanges do not get involved in storage or physical handling of products; they go directly from a particular supplier
to a particular buyer.
10 A patron is defined as any person who transact with a firm. For example, a farmer in an agricultural cooperative, a depositor in a savings

and loan mutual association, a borrower in a credit cooperative, or a buyer in a consumer cooperative.
11 Contrasting to this federated or multi-layered structure, patrons are direct members of a regional cooperative in a centralized structure.

a) EDI-based procurement b) internet-based procurement

Figure 5. inter-organisational collaboration induced by information technology.

Chain and network science (2001) 17

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook

The assignment of ownership in a cooperative to its patrons In addition to these sequential interdependencies, federated
is often explained as a transaction cost minimization strategy, cooperative structures are also characterized by pooled
which is a source of value associated with sequential and/or reciprocal interdependencies among members (or
interdependencies. When farmers own - and, therefore, cooperatives) within the same horizontal layer. For example,
control - an agricultural cooperative they avoid potential individual members within the same layer keep their
hold-up situations arising from location and temporal asset decision-making autonomy, but pool their financial and
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specificity. For example, by forming a cooperative, dairy productive resources to create a higher-level structure to
farmers can invest in equipment for storage and processing, develop related businesses, therefore characterizing a pooled
thereby avoiding downstream pressures to reduce prices interdependence. This higher-level structure defines
given the perishable nature of their product. Additionally, common, standardized rules to commercialise products,
market contracting is costly when the firm has better purchase inputs, transfer information, and divide the
information than its patrons (or vice-versa). In case a firm residual claims among members.
knows more about the quality of the product it sells, it has Additionally, Bonus (1986) refers to the local cooperative
an incentive to deliver a lower-quality product than originally as a “social group” with an “esprit de corps.” The formation
promised. In this case, customer ownership reduces the of reciprocal interdependencies among farmers in local
firm’s incentive to exploit its information advantage. cooperatives is explained as a consequence of intimate
Hansmann (1996) explains the formation of consumer personal knowledge and strong social ties, a distinguishing
and agricultural supply cooperatives on the basis of characteristic of rural communities. In those circumstances,
measurement problems of this sort. members are likely to employ joint decision making and
Notice that there are multiple sequential interdependencies problem solving to coordinate their activities - i.e., mutual
in many farmer cooperatives, since in one occasion farmers adjustments. As a result, the transactional and ownership
sell their output to the cooperative (e.g., milk), while in components of the vertical ties are embedded in a network
other occasions they acquire production inputs from the of personal relationships among members. These social
cooperative (e.g., seeds and fertilizers). These attachments may foster the emergence of trust, which tends
interdependencies are not properly classified as reciprocal to neutralize potential internal conflicts and opportunistic
because these transactions are not necessarily carried out behaviour. In other words, reciprocal interdependencies
together, except in some cases where the cooperative may positively affect vertical transactions between layers.
“bundles” services (e.g., product acquisition and technical According to Staatz (1987), some cooperatives have an
support) and products (e.g., farm inputs). As discussed identifiable base of member-patrons who are more inclined
previously, the contractual hazards created by these to reveal strategic, proprietary information to their
sequential transactions determine ownership by farmers, cooperative (and vice-versa). Farmers can also be members
which then acquire rights to control (or “plan”) the of more than one local cooperative - such as in the case of
allocation of resources through successive stages of the farmer F in figure 6 - which tends to facilitate the joint
supply chain.

Figure 6. An example of macrohierarchy – The federated cooperative structure.

18 Chain and network science (2001)

 Integrating supply chain and network analyses: The study of netchains

coordination of local cooperatives belonging to a higher- organisational collaboration in the NA literature, however,
level (regional) cooperative. tends to be portrayed as more autonomous and emergent.
Therefore, the analysis of vertical patterns of ownership Following this perspective, managers should develop social
between organizations should also consider the nature of ties where activities are mutually adjusted instead of planned
the interdependencies involving firms within the same layer, and at the same time pursue flexibility to position their
which tend to be either pooled or reciprocal. Layers that firms in valuable networks to benefit from new information
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are more in the base of the hierarchical structure are more and knowledge diversity.
likely to present a higher proportion of reciprocal From the point of view of netchain analysis, all business
interdependencies due to social interactions among policy recommendations are valid depending on the type
individual members. Nevertheless, the concept of of inter-organisational interdependence they are addressing.
macrohierarchy based on the netchain framework helps to Therefore, it is clear that normative decisions should first
accomplish the simultaneous assessment of these involve considerations about interdependencies. As
interdependencies and how they influence the nature of Levinthal and Warglien (1999, p. 343) put it, the
ownership ties. performance of complex systems should be enhanced
through “a shift from designing on the basis of a given set
5. Conclusions of interdependencies to designing by manipulating the set
of interdependencies.” For instance, the first crucial decision
SCA and NA are important, yet analytically disconnected faced by an entrepreneur who wants to invest in a
approaches to study inter-organisational collaboration distribution system is not contract negotiation, logistics
because they focus on different types of interdependencies. design and other coordinating activities. The entrepreneur
Netchain analysis attempts to integrate SCA and NA by must first define the type of interdependence that the
considering simultaneously all types of inter-organisational distribution system will embody: he or she can either
interdependencies, which correspond to distinct sources connect several suppliers and customers through a B2B
of value and coordination mechanisms. This is important exchange or manage the flow of specialty products from a
for both positive and normative reasons. restricted set of suppliers to a restricted set of buyers. For
In a positive sense, the simultaneous account of distinct this reason, the netchain perspective also insists that the design
interdependencies is crucial to the analysis of complex inter- of interdependencies is the first step in the formulation of inter-
organisational relations, instead of assuming that the world organisational strategies.
is arranged either vertically or horizontally. If only one Several lines of future research can expand and improve
particular type of interdependence is focused, crucial the framework proposed herein. It would be useful to
elements involving other types of interdependence are likely develop quantitative measures for the assessment of a firm’s
to be missed, which may be responsible for a substantial part position in a netchain and distinguish between the different
of the rent creation in the system. Therefore, the netchain types of interdependencies involved in the system. The vast
perspective posits that the assessment of interdependencies in a literature on social NA can contribute to the development
given inter-organisational setting is the first analytical step. of those measures12. Another possible line of research could
In a normative sense, the netchain approach can reconcile involve an endogenous demarcation of firm boundaries in
the somewhat diverging ways of how SCA and NA inform a netchain. In other words, in how many layers should a
business policy. The literature on supply chain management firm be present (the vertical scope of the firm), and what
emphasizes the role of managerial discretion to coordinate should be the extent of its participation in each layer (the
the flow of products, information and decisions in supply horizontal scope)? A dynamic analysis of the evolution of
chains. Thus, according to SCA, managers are well advised netchains, in particular with regard to possible changes in
to actively coordinate the chain within which their firms the interdependencies between agents when they transact
are located to minimize transaction costs, optimise over time, is also needed. In addition, it is important to
production flows, or capture value along the chain. inter- include the role of “chain service providers,” such as financial

12 Blockmodeling is a tool in social NA that allows for the aggregation of agents into sectors; the network of sectors is analyzed instead
of the network of agents. Some authors have used this technique to model vertical relationships (Madhavan et al., 1998). However, much
intra- and inter-layer information is not captured by this analysis. As Wasserman and Faust (1994) remark, a blockmodel is “a model, or
a hypothesis about a multi-relational network. It presents general features of the network, such as the ties between positions, rather than
information about individual actors” (p. 395, emphasis in the original). In contrast, the netchain approach attempts to model specifically
how each agent in a layer is related to agents in other layers.

Chain and network science (2001) 19

 Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook

organizations and logistics firms, which are not direct Bonus, H., 1986. The cooperative association as a business
participants in a netchain but contribute in the process of enterprise: a study in the economics of transactions. Journal of
value creation by interacting with several layers.13 Institutional and Theoretical Economics 142, 310-39.
Finally, netchain analysis could simultaneously assess more Borys, B. and D.B. Jemison, 1989. Hybrid arrangements as strategy
than one netchain at a time in order to evaluate competition alliances: theoretical issues in organizational combinations.
between alternative netchains. In many industries, firms Academy of Management Review 14, 234-49.
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are developing competing networks (Gomes-Casseres, 1994) Brousseau, E., 1994. EDI and interfirm relationships: toward a
that are actually competing netchains. For instance, several standardization of coordination processes? Information,
airlines are forming alliances to expand bookings on Economics and Policy 6, 319-47.
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