The state of network organization: a survey in three frameworks

Briefly, the computer metaphor models the firm as a decision process dependent on manager capabilities, communication paths, utilization rates, and decision errors while minimizing the costs of decision resources. Persons interested in decision efficiency can engage the computer metaphor, for example, to examine why shifting the locus of decisions alters throughput, errors, and communication costs.

The rational agent metaphor augments this interpretation by adding self-interest and guile as factors in the firm’s strategic behavior. Persons interested in rational decisions might consider economic tenets when exploring why changing the locus of decisions alters incentives and the ability to act on local information. 

Finally, the society metaphor marks the network firm as an organization composed of individual people whose actions are constrained by corporate culture and non-economic aspects of human nature. Persons interested in human behavior might invoke this perspective when considering how the same change in decision locus affects trust, power, and roles within the firm. 

Network: In computer science it represents the linked processor: “Networking computers” brings to mind issues of communications, errors, protocols, and control architecture. In economics, networks relate to coalitions and externalities: neither market nor hierarchy, they may still concern vertical integration, scale efficiency, firm boundaries, decentralized incentives, and non-cooperative gaming behavior among agents. And in sociology, the word network calls up connections -- lines of interpersonal affiliation and political influence: “networking” at a social function, for example, recognizes the importance of individual persuasion and noneconomic aspects of social pressure as the context for group activity. 

What defines a network organization? A behavioral view is that a network is a pattern of social relations over a set of persons, positions, groups, or organizations. This definition is useful because it emphasizes structure and different levels of analysis. A strategic view of networks considers them “long term purposeful arrangements among distinct but related for-profit organizations that allow those firms in them to gain or sustain competitive advantage,” a perspective which duly recognizes goal-directed processes and economic competition. A third definition incorporates organic adaptation and flexibility, suggesting they are: “... adapted to unstable conditions, when problems and requirements for action arise which cannot be broken down and distributed among specialists’ roles within a hierarchy. ... Jobs lose much of their formal definition ... Interaction runs laterally as much as vertically. Communication between people of different ranks tends to resemble lateral consultation rather than vertical command [and] omniscience can no longer be imputed to the head of the concern.”

Network organizations are defined by elements of structure, process, and purpose.

Structurally, a network organization combines co-specialized, possibly intangible, assets under shared control. Joint ownership is essential but it must also produce an integration of assets, communication, and command in an efficient and flexible manner.

Procedurally, a network organization constrains participating agents’ actions via their roles and positions within the organization while allowing agents’ influence to emerge or fade with the development or dissolution of ties to others. As decision-making members, agents intervene and extend their influence through association; they alter the resource landscape for themselves, their networks, and their competitors and in the process can change the structure of the network itself. 

Then, a network as an organization presupposes a unifying purpose and thus the need for a sense of identity useful in bounding and marshaling the resources, agents, and actions necessary for concluding the strategy and goals of purpose. Without common purpose, agents cannot discern either the efficacy or desirability of association or know whether actions are directed towards cooperative gains.

These three design elements -- co-specialized assets, joint control, and collective purpose -- distinguish network organizations from centralized organizations, inflexible hierarchies, casual associations, haphazard societies, and mass markets. 


Viewing firms and organizations as information processors has a fairly well-established history. In a distributed or decentralized system, the principal challenge is to exhibit coherence of purpose, that is to achieve global efficacy from local activity. The purpose, in this case, is coordinated problem solving in complex environments. A computational view draws attention to design variables parameters for tasks, processors (or managers), their arrangement and communications between them. Computational processes address questions of how to disassemble tasks, with whom to communicate, how to recover from error, and how to improve execution speed. By analogy to hierarchy and to markets, serial and parallel designs both influence the “architecture” of the firm.

Six dimensions of information processing:
  • Process Flow, Resource Dependencies & Parallelism
  • Processor Specialization & Generalization
  • Vulnerability & Tolerance to Processor Failure
  • Communication Channels & Coordination Costs
  • Distributed Knowledge, Sensing & Coherence
  • Modularity


Use of an economic or rational agent metaphor for network firms leads to the question of motivating self-interested parties to achieve mutually satisfactory Pareto efficient outcomes. Efficiency, in this sense, is maximized when redistributing a trade surplus leaves everyone at least as well off as before. One or another party may exercise guile and deception yet they are at all times assumed to behave rationally and purposefully with respect to their own welfare. The purpose of collaboration is to produce a surplus at least as great as the sum of agents’ gains working independently. Structural variables concern, for example, risk, information asymmetry, transaction costs, and complementary assets. Processes typically seek to align incentives in decentralized systems, to create and capture consumer surplus, and to establish mechanisms through which agents truthfully reveal their hidden information.

The principal topics addressed in the economics of network organization span:

  • Risk & Information Asymmetry
  • Teams, Games & Self Interest versus Public Good
  • Mechanisms Design
  • Vertical Integration & Transaction Cost Economics
  • Resources & Property Rights
  • Value Creation & Exploitation


The society metaphor augments the computer and economy metaphors by focusing on human context. It concerns human response to contextual cues such as horizontal, vertical, and geographic boundaries, cultural or structural behavior constraints, and communications manner as well as content. A sociological approach recognizes what an efficiency approach might not insofar as opinions and perceptions are influenced by desires for power and recognition, fear of shame, and avoidance of demeaning work among others. Concepts employed by sociologists may include sameness of participants, alienation, in-group bias, peer pressure, desire, loyalty, status, and symbolism.

These issues affect network design variables respecting:
  • Granularity
  • Identities, Groups & Boundaries
  • Consensus, Rank, Politics & Power
  • Trust & Loyalty
  • Roles & Ties
  • Organizational Learning
  • Environment