Networks in marketing

Overview

Networks are crucial parts of any action taken in a marketplace. Peter Drucker even described the future economy as one of a society of networks. Companies embedded in such networks stand to gain a lot. There are a number of different network models, which have distinct relevance to customers, and marketing initiatives. A network in marketing can be formed either strategically (e.g. Business networking) or completely randomly (e.g. Referral economy). Marketing channels and business networks have been referred to, by Achrol & Kotler as:

“Interdependent systems of organizations and relations that are involved in carrying out all of the production and marketing activities involved in creating and delivering value in the form of products and services to intermediate and final customers.” Achrol & Kotler stated that networks are not accepting of traditional mechanisms, such as authority and control. Suggesting that organizational hierarchy, power and contracts are now exchanged for instruments of relational control. Businesses such as Ford, Procter & Gamble and General Electric have evolved in much the same. It wasn't all to long ago that they were organized as classic hierarchies. Displaying central control, unified purpose, and complex management structure of many tiers. Business and marketing networks differ in the amount of connectivity between agents. Some markets, which are more fragmented, have less connectivity between agents than others. On top of this, the level of complexity differs between various networks, some may seem ordered and rather linear, whereas other random and chaotic. As a network develops, agents or entities form relationships with others, which increases the efficiency of operations. Although, this inevitably adds complexity to otherwise simple networks, and makes them more prone to chaos.

Networks in general

A network is a web of interrelated lines, passages, or edges, intersecting at a certain points, nodes, vertices, or places, which can be interlinked with other networks and contain sub networks . Networks have been linked to branches of mathematics, electronics, biology, and biosocial fields. Studies of inter-organization relations, and its networks, can be traced to early societies.

History

In 1736, Leonhard Euler created graph theory. Graph theory paved the way for network models such as Barabási-Albert's scale-free networks, chance networks such as Paul Erdös and Alfréd Rényi, Erdős–Rényi model, which applies to random graph theory, and Watts & Strogatz Small-world network, all of which can be adapted to be representative of strategies and or relationships in the marketplace. With respect to marketing, much of the creation of theories around systems, structure, and the management of business networks, can arguably be attributed to early economists such as John Common, Ronald Coase, and Joseph Schumpter. John Commons, in 1934, took ideas from the fields of law, economics, and psychology, and focused on transactions as a rudimentary unit of analysis. Commons showed how united economic entities arise and grow to deal with inherent conflicts of interest among agents and how united organizations are in control of individual actions in that it both restricts and facilitates it. Joseph Schumpter, in 1939, focused on the processes underlying industrial organizations and how they have transformed. He showed how the battle for survival among various types of businesses and networks, vying to serve the needs of society, fashioned the change of the industrial sector. Ronald Coase, in 1937, introduced the concept of transaction cost. His research signified the development of ideas about exchange and more specifically the cost of securing agreements as well as coordinating, controlling and implementing them. These three economists, Wilkinson stated, have been especially influential in the development of theories surrounding networks in marketing. There are a number of notable historic studies, pieces of literature marketing networks. Theodore Macklin, in 1921, published a book called ‘Efficient marketing for agriculture’. He emphasized the importance of maintaining relationships between farmers and local middlemen, and between various levels of middlemen in bringing about successful and efficient marketing. Wilkinson stated that his study can be seen as a precursor for research on marketing and economic evolution and the way the development of marketing organizations linked local markets to larger scale markets that enabling the steps of economic specialize. Another key study in the field could be that by Ralph Breyer, in 1924. Breyer introduced the thought of marketing flows, depicting marketing frameworks in terms of the flow of electric current through wires, when connections are made. Distinguishing organization unit channels, enterprise channels, business type channels, and channel groups with respect to the number of business actors involved. In 1940's, there were signs that change was in order. Marketers by the names of Wroe Alderson, and Reavis Cox wrote an article in 1948, proposing a number of ways that marketing theory could be built upon. Alderson's research depicted a divide in the development of marketing thought and more specifically the structure and operations of channel networks and marketing institutions. They sought to understand the nature of work and the functional requirements of a marketing system and the way that marketing organizations come about to carry out this work. These previously mentioned studies and pieces of literature demonstrate the creation of various ideas and thought surrounding networks in marketing. As the years have passed these concepts have develop and evolved, as will be shown.

1960s

Studies around this time had a focus on the economic structure of distribution channels, looking at it from more of a macro view. A significant study was that by Cox, Goodman, and Fichandler, which built upon previous research conducted by Stewart, Dewhurst and Field (1939) and examined the distribution in a high level economy. Bert McCammon, in 1963, enriched the field further. He drew from previous literature by Schumpter and Coase, bringing together research and ideas from a number of behavioural sciences exploring the processes of change occurring in channel systems. Other developments made in the 1960s were a number of models of channel systems. These models were created to study the many interactions taking place and how they affected performance. Wilkinson cited Forrester's (1961) models of industrial dynamics and Balderston and Hoggat (1962) models of market processes as fundamental frameworks for following logistic models developed by Bowersox (1972) and his colleagues.

1970s

Research around this time looked more at the behavioral dimensions of channels, somewhat the result of Wroe Alderson's earlier writings. The first attempts were made to improve the typical conceptual models of inter-firm relations towards the tail end of the 1970s. Major developments were undertaken by researchers such as Robicheaux. Also the first marketing channels textbook was created Malled in 1976. Research in this decade was very limited in that studies were considered unsuccessful if conflict and power were not present. Leading researchers to focus on the car industry and franchisor-franchisee relations were conflict and power are more likely.

1980s

As the 1980s dawned so too did another era of research into networks and its behavioral dimensions. A significant study by Phillips, in 1981, challenged the problem of various informants in inter-firm relations research. Phillips suggested that the perceptions of a relationship differed across various informants in an organization. Putting into question the validity of many studies carried out in the years prior. It also showed that inter-organization relations involve personal as well as business relations and interactions between many people in a company. Researchers also started to explore additional facets of inter-organization relations, combining them with more extensive models of relationships (e.g. Anderson and Narus). As well as this work by Oliver Williamsons in 1975 on transaction cost and the nature and price of inter-firm governance, sparked interest again on economic theories.

1990s

Literature around the 1990s brought together a number of research traditions. This is when various theories such as relationship marketing in industrial and consumer market appeared. The connection between services marketing to the analysis of relations and networks emerged. There was also more of a focus on cooperation as opposed to competing relations, which caused in an eruption of interest in the region of relationships and networks. Furthermore, Researchers began directing more effort to network dimensions, as opposed to isolated dyadic relationship. Moreover, new technology has been used in the study of business networks, allowing for specific issues to be addressed. The developments made in the last several decades, demonstrate the evolution of pre-existing concepts and models in relation to networks in marketing, first proposed in the 1950s and 60's. Wilkinson stated that what is needed now is the application of modeling techniques to portray networks in marketing, in order to strengthen current theories with empirical evidence.

2000s to present

Various studies have used a number of methods to study business networks. One such study conducted by Aino Halinen, & Jan-Åke Törnroos, looked at how networks are constructed and how they function in the modern day world. Giving insight into use of case studies as a method of measurement. Another key study, conducted by Jun, Kim, Kim, & Choi, modeled consumer referrals through use of a small world network. Demonstrating that Watts & Strogatz's Small world network model can be adapted to interpret the initial linear relationship between firms, and consumers, and its subsequent development exhibiting small world properties. Alternatively a study by Lorenzo Bizzi & Ann Langley (2012) considered the key choices, with regard to methodology, met by researchers, when looking at network dynamics.

Examples

Work by Ravi Achrol & Philip Kotler identified several marketing network models.

Layered network

The first model proposed was that of a layered network. A layered network is a business which comprises “an operational layer of cross-functional teams on the one hand and a knowledge creating layer of functional silos on the other hand, connected internally and externally through extensive data bank knowledge and transparent information flows”. An example of this has been implemented by sharp electronics.

Internal marketing networks

The second model proposed is that of internal marketing networks. An internal marketing network is a “firm organized into internal enterprise units that operate as semiautonomous profit centers buying from, selling to, or investing in other internal or external units as best serves their needs on market determined terms of trade but subject to firm policy”. AC-Rochester is a definitive example of an internal marketing network. It is one of eight component manufacturing divisions of General Motors, structured as an internal market. It markets its products to Mitsubishi in Japan, Daewoo in Korea and Opel in Europe. Internal marketing networks have many similar properties to those of small worked networks.

Vertical networks

A vertical network comprises a groups of resource firms specializing in the various product, technologies, or services that constitute the inputs of particular industry, organized around a focal company that focusing on monitoring and managing the critical contingencies faced by the network participants in that market. Vertical network in marketing often represent monopolies. These would include companies such as Transpower, Kiwi rail, and the like. These networks display preferential attachment, similar that of Barabasi-Albert Model.