TRANSFORMATION OF FIRM STRATEGY TOWARDS THE
NEW ECONOMY—Networked governance perspective
Weian LI Jian ZHOU
（School of International Business, Nankai University, Tianjin 300071， P. R. China）
The paper, with background of the New Economy labeled as the network economy, is in search for form and
outcome from transformation of firm strategy. In terms of perspective on structure of governance for way of
organizing exchanging in transaction cost economics, it is analyzed that relatively to market and hierarchical
governance structure, networked governance structure is appropriate to be the base of transformation of firm
strategy towards the New Economy. What the transformation of firm strategy presents is how the firm determines
its corresponding governance structure of organizing exchanges in order to sustain its competitive advantages,
while so dramatic changes occurred in the business environments. The networked governance is an embodiment of
organizational capabilities to adapt to mechanism of value creation by which to increase returns of economies. The
networked governance is constituted part of continuum of way of organizing exchanges. Objective existence of the
networked governance proves that so many changes were taken place in exchanging forms and competition among
firms. The forms of exchanges change from transaction and control of property rights to co-operation of property
rights-based inter-firm arrangements, and competition from product to network levels. The networked governance
promotes transformation of firm strategy from competitive strategy and corporate at governance levels to the
networked strategy at strategic level so as to achieve networked governance-specific networked values. The
Chinese enterprises, particularly SOEs, may learn more from networked governance and strategy.
Key Words: New Economy, structure of governance, networked governance, network strategies
Since the 1980s in the 20th century, with extensive applications of Porter’s competitive
strategies and advantages, the significance of firm strategy has been proved by more and more
business practices. The firm strategy is by nature some dialogue between firms and changing
environments. Changing environments contain both internal and external environments of the
firm. Therefore, when dramatic changes occurred in those environments, transformation of firm
strategy is a normal response, disclosing some organizational capability (Chandler, 1999; Stalk
The Porter’s competitive strategy shows that in the model of the market transaction of
competitive institutional arrangement, the firm is capable of finding out the market positions
suited for its profitability in specific period through structure analysis of industrial market.
Furthermore, going on performing low cost and businesses differing from its competitors, as well
as focus and niche, the firm may accomplish competitive advantages of low cost and
differentiation (Porter, 1988; Fauklner and Baoman, 1997). This strategy had become a Bible of
business managers in the west of the 1890s. Of course, management as means to ascend
productivity of organization of the firm has being confirmed in the practices.
However, market/product matrix advantages from competitive strategies and organizational
advantages from general management do not exist in static. In the advent of one more new
millennium, rapid advances of technologies, particularly in information and communication
technologies (ICT), are changing one’s way of life little by little, and also way of value creation by
the firm. As a matter of fact, with gradual establishment of the modern institution of enterprise, the
position of management in value creation begins transferring to such institution arrangement in
which internal and various institutional authorities are built up, motivated and controlled. It is
corporate governance. In the changing backgrounds from globalization and accelerated advances
of technologies, corporate governance is also changing its traditional focusing from on structure of
corporate governance to on dynamic mechanism of governance, as well as to on practicing
principle of corporate governance (Weian Li, 2001), becoming a hotter global issue of
convergence. Also massive business practices in co-operation among firms globally since 1980s
differ from relationships of market exchange and pure internal organization, for example, vertical
integration and collusion-based horizontal cartel, and attract more and more attentions from
academic community (Fauklner, 2001; Beamish and Killing, 1998).
2 Research Question and Research Methodology
With deductive and inductive methods of normal analysis, it is discussed how firm strategy
conducts transformation, or ascend to higher level of strategic decisions, in the real backgrounds
of transmutation of the network economy representing the New Economy from industrial
economy. Strategic decision of the firm is referred to as generic decisions about “make, buy or
Transformation of firm strategy is essentially problem of changing way of producing
competitive advantage of the firm. As such, to understand such way, requirement is of course to
recognize general mechanism by which to change competitive advantage. Thus, transformation of
firm strategy is related to way of organizing exchanges of the firm fundamentally. How the
strategy transmutes is changed to answers such questions as how competitive advantage of the
firm is generated in principle, if different exchange model means different generation mechanism
of advantage, and which changes the mechanism to produce competitive advantage takes place
when business backgrounds are changed so much etc.
For this reason, it is at first conducted simple comparisons of basic characteristics between
traditional industrial and the New Economies, from which to generalize main features of this new
economy. As long as there are some newer features from environment, transformation of firm
strategy is made sure to be objective and reasonable fundamental, which constitutes the starting
point of the paper.
Supported by mentioned above variables of backgrounds, it is disclosed issues about
institutional fundamentals, networked governance and networked organization, which are required
for transformation of firm strategy.
Following. Based on analyses of networked governance and networked organization, it is
emphasized to understand the networked strategies coming from network governance. Meanwhile,
combined with economic reform performed for nearly two decades in China, as well as realities of
Chinese entry into WTO, some valuable suggestions are postulated on market institutions and
value creation that Chinese enterprises may obtain from networked governance and networked
Finally, research conclusions are ended with outlines of strategic forms of three governance
structures and their value creations respectively, and pointed out that transformation of firm
strategy toward the New Economy is forming process of structure of networked governance,
which moves firm strategy to the networked strategy containing organizational network and
network organization. The networked strategy of firm is a group of strategic choices that are based
on inter-firm co-operative arrangements, formed by networked oligopoly competition, mechanized
by building and leveraging of resources and competencies and powered by the law of increasing
The mentioned above analysis routine may be abstracted as the following research logic
diagram as reads,
Characteristics of NE Network
Accelerated Tech. Advances
Strategies of the Firm
Figure 1. Research Methodology
3 Literature Review
How to sustain existed competitive advantages in the ever-changing environments of market
is a fundamental problem in strategic management. Presented is attempted to transcend across
domain of strategic management, combining changing environments, strategic management,
corporate governance and transaction cost economics, to argue that sustainability of competitive
advantage of the firm depends on appropriate transformation of firm strategy. The foundation of
this transformation is shaping of organizing inter-firm exchanges. Up to now, the bases are chiefly
hierarchical governance to organize internal management exchanges and market governance to
organize market exchange (Williamson, 1991). The former examines corporate governance for
market efficiency of the firm, and the latter applications of intangible resources and competencies
of the firm for producing competitive advantage.
So called corporate governance, traditional arguments observed how to set up effective
authority institutional arrangements under conditions of separation of the two rights of enterprise
system in order to match principal objective of ownership and acting objective of managers.
Consequently, corporate governance is essentially dealt with the whole efficiency of the firm.
Corporate governance is becoming a hotter issue most recently, turning from structure to
mechanism, and to principle of corporate governance. The scope of CG is also from locally
strategic management up to the wholly domain of market efficiency of the firm. Ever since 1992
when Cadbury Report was issued, international organizations, institutional investors, even a few
leading transnational corporations, across regions and countries in the world have begun
introductions of their principles of corporate governance consecutively
Therefore, research matter of corporate governance is by nature of market efficiency, instead
of simple choices of structure of corporate governance. The objective is how to build up principle
of corporate governance, containing such elements as structure and mechanism of corporate
governance, and to reinforce scientific degree of making decision of the firm rather than simple
counterbalance of rights and authorities (Li, 2001). Enhancing scientific degree of decision-
making is to establish related bridge between corporate governance and strategic management.
The principle of corporate governance, viewed from practicing corporate governance, becomes to
greater degree the best practicing that serves as sources of competitive advantages.
Locally dimension, efficient difference between firms in market is approached form either
tangible or intangible resources. The former is chiefly from deduction of logic framework of
economics. Economics, because of regarding the firm as Black Box, ascribe the difference among
firms to competitive behavior in the final product of market. However, using market entails cost.
Through transaction cost, internal organization began standing point to understand market
efficiency of the firm. For example, mobilization of production input is also entailed cost labeled
as imperfect mobility (Peteraf, 1993).
Relatively speaking, in strategic management, market efficiency among firms is dealt with
from intangible resources including the two viewpoints.
The first is extension of economics, particularly industrial organization (Carlton, 1998), in
fact application of SCP paradigm of Chicago University. However, due to enriched roots of
microeconomics, the paradigm is virtually unable to explain practicing situations of the firm. That
means that SCP paradigm has to be revised. Michael Porter at Harvard finished this revised work.
He updated the SCP paradigm reversibly from value creation in economic activities to be noted
generic competitive strategy and competitive advantage perspective. He argued that efficiency
among firms in market is outcomes of structural position in industrial market, i.e., the positioning
of the firm determines its market efficiency.
The second dimension is from intrinsic endowments of resources within the firm and
observes that heterogeneity of firm resources is why there is market efficiency among firms. It is
noted that resources here is different from and not input as resources in economics, but dynamic
resources that function value creation for the firm, or ones with imperfect mobility. Imperfect
mobility means that acquisition of such resources cannot be results by market price mechanism,
but by performing such intangible resources as reputation. Intangible resources as exerting matter
in firm strategy is sure to reflect dynamic characteristics in values generation of the firm, and
moves value of the firm toward operations of strategic options by the firm. Thus, how to leverage
intangible resources may be turned specific operation of organizational resources and capabilities.
In this aspect, there are the two vital documents to be worthwhile.
The first is used most frequently in “The Core Competencies of the Corporation”(Parahald
and Hamel, 1990). This study made deeper insights into why Japanese firms transcended majority
of European and USA counterparts during the almost entire 1980s. Their answer is distinguished
notion core competence that emphasizes capabilities in “doing” by firms. Unlike previous studies
on intangible resources in “having”, which attached importance to such factors as trademark,
channels and business secrets, the core competence highlighted competences in being best at
“doing” by the firm. They concluded that competitiveness of the firm is originated from different
“core competencies” rather than from properties of goods and services at the final market. Why
the firm exists in market or reliable method to keep on its competitive advantage is to constantly
update its “the best at doing” competence. As for those activities that do not belong to domain of
core competencies, it would better be conducted outside the existed border of the firm.
The second paper is a typically paper for relationship between intangible resources and firm
strategy (Hall, 1993). Starting from competence perspective of the firm, the paper attempted
combination of intangible resources and types of capabilities of the firm. However, capabilities in
the paper were further divided into “having” capabilities and “doing” capabilities. So called
“having” capability, it represents assets which are intangible resources including intellectual
property rights protected by law, such as trademark, copy rights, business secrets and selling
channels. For “doing” capability, it refers to specific knowledge or know-how, which may exist
processes performing some productive activities, for example management institutions for control,
also be in human capital embedded in employees. In other words, this “doing” capability is
actually “skill” competence of the firm. It is clear that the “skill” competence is function of time,
whose contribution to competitive advantage came from constantly improvements of external
Hence fore, the persuading explanations about competitive advantage from the competence
perspective of the firm are given in principle by core competencies. It may be seen that studies on
generation and sustainability of competitive advantage from local dimension are relatively
completely in the field of strategic management.
A very clear phenomena is, however, that competitive strategy in market governance is not in
fact to inter-firm cooperation relationships. Inter-firm cooperation in this aspect is usually
collusion by firms who provide similar goods and services, loaded with regulatory cost. Therefore,
value creations are of tacit for shorter-term profits, not of strategic for long-term profits. Similarly,
corporate governance inn hierarchical governance focus more on counterbalancing of institutional
authorities and does not consider more about how the corporate governance gives the firm
competitive advantage. But comparatively speaking, co-operative relationships in corporate
governance are more fruitful than those in competition area. The multiple principal-agent
relationship, or stakeholders, are a note to begin inter-firm cooperative arrangements widely.
So called the whole dimension to study competitive advantage is actually how to update
market efficiency of the firm entirely. It is particularly so in the establishment of modern
institution of enterprise.
Well, which changes will business face up in the New Economy labeled with economic
globalization and accelerated advances of technologies? What do they mean to the firm?
4 Backgrounds of Transformation of Corporate Strategy towards the New Economy
Basic characteristics of the Networked Economy based in rapid advances of technology and
globalization of competition constitute such backgrounds.
The New Economy has so many forms to embody. The New is relatively to the Old. The core
is that elements changing one’s life style or economic forms of society are rather different. In the
New Economy, the key element is to take digital as bite in basic unit of information. Instead, the
key is atom as basic unit in physical composition (Nigroponte, 1998). The more agreed consensus
is that the New Economy is characterized by the network economy. Therefore, to study how the
firm transforms its strategy under far changing business environments is to recognize which
characteristics and operation laws the network economy has, after all it is starting point to close to
the New Economy.
(1) Formal characteristics of the network economy.
The network economy may be viewed as such an economic form with main backgrounds of
developments applications of information and communication technologies (ICT). This economic
form is not only based on technological knowledge, but also formed by extensive cooperative
relationship and its network. Accordingly, traditional vertical integration of the firm is recessed to
complicated horizontal network of relationship. How the network creates value is associated with
basic characteristics of the network economy.
Simply generalizing, the network economy represents synthesis of the following several
economies: all-direction economy not constrained by limited of time and space, globalization
economy causing greater degree of interdependence of economic agents, co-opetition economy
extending scope and speed of competition and cooperation among firms, speed economy
promoting coded knowledge motion rapidly and shorter period of technology, and agiler and more
flexible of decision making, and innovation economy highlighting continuous innovation for
sustainability of competitive advantage. Long-term rents depend on continuous shorter-term
innovation rents or Schumpterian rents (Teece, 1998).
(2) Operating laws of the network economy
The four laws seemly govern the economy. They are labeled as Moore’s Law unveiling the
engine of rapid growth of IT industry and source of constant changing, Metcalfe Law showing the
value of network equaling to square of numbers of network nodal and disclosing the network
benefit’s growth as increasing of users of network exponentially, Gilder’s Law for doubling of
band width of mainline network per six months in future 25 years, and Matthews Effects
presenting that under certain condition, once advantage or disadvantage of information activity,
would it be accumulative effects of self-enhancement.
Objective existence of the four laws describing the network economy, the impact on
economic agents by ICT development-based network economy would be rapid amplified in
proportion of input and output, which is contributed to external effects of network. In related
studies, this effect is one of the important sources leading to increasing return. W. Brain Arthur
(1996) pointed out that besides network effect, there are the three other effects also producing
increasing return, they are scale effect, learning effect and interactive effect (Hartigh, 2001).
Clearly, the form of network economy is changing traditional way of producing values in
Therefore, the value creation in the network economy is actually performed by the increasing
return law. Correspondingly, competition among firms in the network economy is competing for
standard or for new rules of competition instead for price. Competing for new rules of competition
leads to competition between alliance and alliance-based network of relationship among firms and
firm’s cluster. Changes in competitive advantage and forms disclose a great deal of changes in
strategic paradigm of the firm including corporate governance, which reads in Table 1.
Table 1. Comparison of Strategic Paradigm under Traditional Industrial Economy and New Economy
Form of Economy
Industrial Economy New Economy
of the Firm
Form of strategy Linear Strategy Nonlinear Strategy
Strategic preference Integration Networking
Basic unit Atom Bit
Strategic start point Experience hierarchy Imaginary hierarchy
Domain for innovation Part(product, process) Whole（business pattern）
Way to develop Continuity Discontinuity
Competitive dynamics Market-based competition Inter-firm arrangement-based
CA and its source Scale of economies ； End Networking ； Core
product/market matrix competencies
Mechanism to realize CAs Chain of value-based relative Organizational learning-based
Game Zero-game with no co- Non-zero game with co-
Market metaphor Each spider sits down on his All spider sit down the same
own net network
Competition subject Individual firm Inter firms and among alliance
Governance principle Market and hierarchy Networked
Strategic objective “being larger” or “being SCAs
Strategic revenue Diminishing return Increasing return
Sources: Weian Li, Jian Zhou. Renewal of strategic options of the firm in the Network Economy. Modern
Management Science, No. 5, 2001, pp: 56-58 (in Chinese).
It is known from Table 1 that ICT-based gradual formation of the network economy not only
changes competitive strategy at the product market (Porter, 2001), but also influences corporate
governance embodying the best practicing of the firm (Li, 2001).
5 Exchange Mode of Inter-firm Arrangements
(1) Networked organization
It may be deduced from the previous descriptions that ICT-based network technologies brings
about rapid decreasing of market transaction cost in industrial organization and lowering barrier of
competition. Therefore, in the network economy, unless organization forms adapting to this
economy, competition intensification will be actually reinforced rather than lowered.
Consequently, the network economy makes sure to entail corresponding innovation.
Seeing from evolution of organizational structure, it is by nature an outcome of changing
environments. Organizational innovation embodies re-think mode of strategic alternatives.
Generally, firm’s organizing is hierarchical behavior reducing market transaction cost, which
results in organizational form of hierarchy. The theoretical foundation of this organizational form
is that the firm is substitute for market, and of course outcome of existence of real transaction cost.
As a result, organizational form of the firm depends on choice of governance modes in the basis of
contract. Intrinsic incomplete nature of contract, however, it is not hard to guess that as micro
market agent for profit maximizing, the firm has the two optimal forms of organization: one for
vertical integration that is in fact extension of hierarchy organization for appropriate quasi rent (A-
Q rent), the other for M&A for competitive Pareto rents (P rent).
But are there only the two governance modes associated with border of organization of the
firm above? The answer is No. In fact, since 1980s, inter-firm arrangement has become more and
more an important research area, which shows some independently differing from hierarchical and
market governance. For instance, competitive institutional arrangement becomes changing
gradually, in particular in going global for business. Different backgrounds of institutions require
for transnational corporation to take up more flexible decision-making. One of the main means,
for example, is joint venture (JV). JV involves in establishment of independent business entity by
dyadic or multilateral players to create and distribute the group benefits jointly. JV may be seen as
the start to transmute to organizing the newer exchange way in the basis of inter-firm arrangement.
Chiefly due to waves of globalization and rapid advances of technology, there are broader
and broader application areas. Hereby, inter-firm arrangement has begun to be an opportunity and
chance to copy with this wave. Because of globalization, transnational business becomes the start
point for decision-making. Both level and span in internal management of the firm have been
dramatically increased. Simple functional structure cannot meet rapid development by businesses
and impacts by information flows. Therefore, even regarding organizational structure within the
firm, there exists some tendency to structure flattenization characterized by rapid flows of
information, showing greater and greater functionality of internal factors. Outside the firm, there
are more and more strategic factors that serve as key resources relative to the firm, for example,
regulatory resources and capabilities. These resources and capabilities, independently existed
outside the firm border and management control, make the governance mode began some new
cooperation mode with coordination mechanism. On the basis of this new mechanism, inter-firm
alliance came into existence.
Unlike pure allied strategy cooperatively, strategic alliance is such specific relationship
among firms, not only dyadic relationship like JV, coming across industries to enhance rather than
prevent competition. Proliferations of strategic alliance have broken up the governance mode that
integrated value maximizing vertically when technological conditions remain unchanged.
From singular atom competition to public or tacit collusions among firms vertically and
horizontally, and to JVs under different backgrounds of institutions, it can be viewed clearly that
inter-firm arrangements are moving from pure market relationship of exchanges to cooperative
relationship, although competition is still the main melody in this transformation of relationship.
As a matter of fact, when strategic alliance across firms is conducted, organizational behavior of
the firm moves toward the period of networked organization (Zhou, 2001). In other words,
networked organization of the firm is behavior of cooperative strategies on the basis of inter-firm
strategic alliances. This is evolutionary result of inter-firm relationship.
Resulting traditional arm’s length exchange led by pure competition evolutes to networked
organization of the firm characterized by strategic alliance. This changing may be seen as from
“market capitalism” to “hierarchical capitalism”, to “alliance capitalism” and to “network
capitalism”. The significances of evolutions of arrangements are ascending of competitive form
from product to network level (Hartigh, 2001: 374). The features of competition are network
effect and interactive effect.
So, in the New Economy characterized by the network economy, the modes of exchange by
firms in organizational form contain both organizational network based on cooperative
arrangements, such as virtual organization, strategic alliance and outsourcing and so on, and
network organization with some property rights exchange inside and outside the firm through
formal contracts, such as large sized enterprise group.
(2) Networked governance
Inter-firm relationship organizational network and network organization in the New Economy
have shown a problem from which one may not escape, if there is some exchange mode
specifically designed for inter-firm arrangement or inter-organizational arrangement? Transaction
cost economics provided answer Yes.
In fact, just as mechanism of market exchange for goods by the firm is “price”, and exchange
mechanism for internal organization of the firm “hierarchy”, the mechanism for inter firm
arrangements is accomplished by “coordinating”. The very nature of inter-firm relationship
network illustrates that the way for organizing inter-firm exchanges may be generalized by this
nature of relationship. Therefore, the networked governance mode is relative to market and
hierarchical governance mode, and is defined as mode of organizing inter-firm arrangement
exchanges, which constitutes part of continuum of mode of organizing inter-firm exchanges.
As a result, the fundamental connotations networked governance are induced as below.
At first, research matter of networked governance is inter-firm arrangement, which is neither
market exchange arrangement nor relationship between institutional authorities from managerial
level and span. Its research scope is structure of relationship network with formal and informal
organization, and is set of organizational network and networked organization. Consequently, the
network in network governance is not technologically networked nodal, but cluster of inter-firm
cooperative relationships (Gomes-Casseres, 1994). This clustering is characterized by effective
organizational capabilities and generally represents organizational capital to acquire scarcer
resource and competencies from partners, and social capital to get resources and competencies
from social backgrounds (Foss, 1998).
Secondly, for basic problem of organizing inter-firm relationship exchange, the networked
governance answers such question that how the firm utilize cooperative relationship network to
achieve and sustain competitive advantages in realities of the New Economy that is shaping by the
network economy little by little.
Thirdly, firm strategy generated by the market governance structure is chiefly generic
competitive strategies at business level in product market. Such set of strategic options is typically
Porter’s competitive advantages. The hierarchical governance structure, to considerable degree, is
vivid embodiment of modern institution of enterprise, which generates strategies at corporate
level, such as vertical integration and quasi network organization strategy with internal market
exchange. These strategies show how the firm set up and perform structure, mechanism and
principle of corporate governance with the best practicing.
6 Networked Strategy in the Networked Governance and Its Suggestions to Chinese Firms
The networked governance as a mode of organizing inter-firm cooperative relationships is
theoretically condensed abstract of various strategies performed by the firm. As exerting focus by
Porter’s competitive strategy is market, the performing key of the best practicing by corporate
governance is regularized operations of modern enterprise system. Inter-firm networked strategy
in the networked governance possesses strategic values showed by networks. The followings are
analyses of such networked strategy by using general structure of strategic management and
combining basic features and operating laws by the network economy.
Seeing from strategic objective, the networked strategy pursues long-term interests of
multiple partners, rather than short-term competitive advantages in the product market. Hence, the
mechanism by which to create the values may be more involved in how all sides in cooperative
relationship perform credit Stressing credit is to advocate reputation of the firm as mechanism of
motivation and constrains to be dynamics of value creation (Zhang, 2001).
In terms of new institutionalism economics, an institutional background of networked
strategy is co-opetition relationships; related institutional arrangement is cooperation of property
rights, instead of transaction or control of property rights. Process of acquisitions of associated
resources and competencies is process of competing for learning.
Institutional revenue by the networked strategy, because of established uncertainty, shows
space of opportunity but not specific values of resources, which is bordering of various
organizational activities induced by globalization and technological progress, at the same time
providing opportunity, entails gigantic challenge.
It is less hard to image that competitive advantages created by the networked strategy tend to
network-specific advantage as Porter’s strategy performs. In order to acquire those networked
advantages, the networked strategies would be oriented to strategies that may produce
technological knowledge within the firm and network structure. That is to say that strategies with
physical inputs and diminishing return are turned to firm strategy with performing information and
knowledge input and based on increasing return, emphasizing generating rather than distributing
Compared with vertical integration of firm strategy produced by hierarchical governance,
networked governance-based networked strategy emphasizes relatively establishment of
horizontal relationship network (Francalanci etal., 2001). Horizontal relationship network, under
networked governance, is not collusion among firms in industrious organization, but specific
strategic alliance going across industries by the firm. The networked strategy will make full use of
fuzzy border of industry brought up by technological advances and globalization to go in for
broader opportunity space more actively.
The values by the networked strategy are strategic resources and competencies. And because
of feature of increasing return by the network economy, once such values are realized, will there
be proportion of outputs amplified by self-enhancing. Therefore, the more specific accurate
speaking to the networked strategy should be knowledge-based networked oligopoly strategy
(Delapierre, 1998), and be set of transformed strategic options in the New Economy.
The networked governance perspective of transformation of firm strategy has deeper
suggestive meaning to firms towards the advent of the New Economy. According to the key
elements in networked governance, strategic options by the firm will be networked strategies
based on inter-firm cooperative relationship network, whose general forms are to set up
partnership, stress long-term development and leverage credit capital as dynamics of organizing
such relationship network.
Many transnational corporations in the west in fact pioneered this networked strategy.
German transnational corporation SAP, a software provider, has as many as more than 100
partnerships or alliance firms. In the period between 1991 and 1996, its business volume in the
world had increased 50 doubles. Its top management team observes agreed that this achievement
should be contributed to more than 500 alliance firms scattering the world, in which there is no
M&A, no patient fee charged, no JVs and no equity transactions (Wind etal., 1999: 244). SAP is
typically firm who is taking advantage of alliance strategies successfully.
China entered the World Trade Organization (WTO) on November 10, 2001. Since that
moment, Chinese firms are not called local firms in principle, but are integrated to
internationalization wave. What does mean to China? There are so many ideas about it. The
presented, however, observes that the main impacts of WTO on China may be on the firm,
although majority of ideas for entry of Chinese government to WTO. Actually, so-called
government’s entry to WTO is in fact reflected by firms’ adaptation to WTO. In spite of various
meaning of Chinese firms, the core of Chinese firms is still State-Owned Enterprises (SOEs),
particularly public listed SOEs. Financial market liberalization and the corporatization of firms are
changing the business environments of SOEs intensively ( Liang etal., 2000).
Beginning with the early 1980s, China has conducted a series of economic reform, whose
central mission is to upgrade vigor of SOEs through various reform means. Therefore, direct
impact of China’ entry to WTO on SOEs is on how to revitalize. Solution to the problem at micro
level is about how to increase scientific quality of decision making of the firm, which can confirm
why corporate governance is becoming a hotter and hotter issue of the firm either in reform
procedure or in capital market. As mentioned above, how to update the quality of scientific
decision-making has been also focal question in transaction cost economics. When the sum of
costs of market governance and hierarchical governance cannot be minimized, the networked
governance becomes an optimal governance mode (Dussage, 2000: 37). As a result of deduction
like these, strategic alliance as a kind of inter-firm cooperative arrangements becomes important
means to continuously create value in the new environments. How to perform the networked
strategy in turn may become main strategic option.
Chinese firms, particularly Chinese SOEs, are in fact unknown to the networked strategy,
because growth processes of Chinese firms and their western peers are reversibly. It is well known
that the growth of the firm under institution of market economy is finished by competition. But in
China, majority of middle and large Chinese SOEs sized come into existence by commanding of
government just from beginning (Wang, 1998). Therefore, in the course of business, the business
management under the two different institutional backgrounds is of course differently. In order t
revitalize SOEs, multiple dimensions on institutional innovation have been carried out, including
reform on property rights, delegate authority and distribute profits, reform on corporatization and
build-up and satisfying the legal structure of governance and so on, to attempt transformation from
large sized firm with vertical integration of market internalization to enterprise group with market
exchange within the firm.
Chinese enterprise group, which reduced transaction cost through quasi market contract, is
per se one of networked organization forms. The market strategies in the transitional period by
Chinese SOEs enterprise groups are indeed stressed in the area of strategic management of the
West (White, 2001). So, in the course of economic reform, Chinese SOEs have been trying
performing of the networked strategies. Put differently, the networked strategy in the network
economy emphasizes more knowledge resource and competence supported by cooperative
Chinese firms, especially those middle and large sized SOEs, underwent process of
establishing complicated relationship network for distribution and coordination according the
central commanding plans. Seen from networked governance, the relationship network is itself a
process to explore how to perform the networked strategies in networked organization and
organizational network. Accordingly, under backgrounds of the New Economy represented by the
network economy, Chinese middle and large sized SOEs are necessary to be asked for
transformations strategically in the two aspects. One is to consider about making efforts to
upgrade those existed competencies in building relationship network before and during economic
reform so as to reach truly reduction of market transaction cost; the other is to actively explore
newer organizational capabilities to conduct inter-firm cooperation and competition, so that
increases learning benefits in this process.
The relationship network build in the course of market exchanges by Chinese firms would
rather be a sociological concept than a management concept. Generally speaking, relationship
network among Chinese firms is inter-individual human relations, rather than inter-firm
arrangements. Thus, it is not up to talking about strategic properties and long-term profitability, or
about joint value creation space. However, one of the meanings of networked governance mode is
relationship value among firms and mutual complimentary based on mutual profits of core
According to the networked governance, therefore, Chinese firms particularly middle and
large sized public listed companies have fuller enough reason to accept the newer strategic minds
like networked governance and strategies, in the newer institutional backgrounds. By developing
and leveraging the core competencies of the corporation, it is active to integrate into value chain
cluster of network produced by globalization and technological advances, to manage SOEs to
form agile organizational capabilities that adapt to changing environments. If so, it is not
impossible for Chinese SOEs to constantly produce, keep on and even ascend vigor, as well as
propelled by competitive minds shaped over the past more than two decades.
7 Research Conclusions and Further Studies Possibly
With examining the changing business environments, the paper discusses issue about
transformation of firm strategy from the light of the network economy chiefly representing the
New Economy. This transformation is found out not to be shifts of preference, but demand of the
firm to the changing environment. Furthermore, the transformation of firm strategy depends on the
governance structure of the firm defined as way of organizing exchange in terms of TCE.
Governance structure as application of TCE to the firm is start point to make decision in market.
How to make choices of the governance structure is unquestionably about how to determine
“make, buy or ally”. Such objective of decisions is to make the decision process more
scientifically and question about producing competitive advantages of the firm in market.
As a result, transformation of firm strategy must be associated with the two aspects. One is
about how the market governance shapes competitive advantages of products, the other about how
the hierarchical governance belonging to and reflected by corporate governance forms the best
practicing of the firm. The sharp occurrence of the network economy shows that the dynamic
environments faced by firms is main driving force to change governance structure of the firm.
Under promotion of globalization and technological advances, the mode of governance structure
of the firm is undergoing turning from previously theoretically studied “intermediary” or “hybrid”
governance mode to really existed networked governance.
Continuum of Exchange Relationship of the Firm and Governance Structure Mode
Market Governance Networked Governance Hierarchical Governance
Competitive Strategy Networked Oligopoly Strategy Corporate Governance
Product/Market Performance Strategic Resources and Competencies Best Practicing
Competitive Advantage of the Firm
Figure2. Transformation and Integration of Firm Strategy towards the New Economy
The TCE perspective and the business practices in the global turn out that the networked
governance structure lies at the middle part in the continuum of mode of organizing exchanges.
Institutional arrangements for networked governance contain principally organizational network
and networked organization based on formal and formal relationship. Under such institutional
arrangements, practical choice of strategy tends to the networked strategy. Furthermore, because
of propensity to increasing return in the network economy, the networked strategy, accurately
speaking, is knowledge-based networked oligopoly strategy. This strategy provides strategic
resources and competencies required for development of the firm, which gives one more
fundamental for formation and sustaining of competitive advantages of the firm. The strategic
application of three governance modes, market, hierarchy and network, and resulting generation of
competitive advantage are seen in Figure 2.
Combining the productive mechanisms of competitive advantages by market and hierarchical
governances, the outcome of transformation of firm strategy towards the New Economy is shown
gradual take-up of networked strategy of the firm, producing competitive advantage depended on
increasing return to be value dynamics.
As networked governance highlights existence of continuum of mode of organizing
exchanges, of course prolonging market governance, particularly features of corporate governance
in hierarchical governance, some further research dimensions may be postulated.
How to flexibly select appropriate governance mode is the principal issue in firm strategy.
Since 1980s, the practices of using networked strategies have increased dramatically; a variety of
forms need related theories for deeper study.
Following is how to continue disclose unusual importance in hierarchical governance from
strategic management. It can be seen roughly that corporate governance unveils institutional
revenue of hierarchical governance. The mechanism of value creation in corporate governance is
chiefly related to the whole market to form the behavior pattern of “the best practicing” with
specific features, which increases substantially market efficiency of the firm. How the behavior of
corporate governance shapes competitive advantage of the firm is a deeper-level problem1.
Thirdly, networked governance provides some suggestions to firms from emerging market
economies. Networked governance illustrates that any firm, regardless of its institutional
backgrounds, does not exist isolated far away from economic community. Applications of
networked organization and organizational network will be facilitated with some nodal of network
with firms from developed countries and become basic unit to create value jointly, getting out of
wash-out scheme by competitive institutional arrangement.
Finally, compared with Porter’s competitive strategy in market governance and corporate
governance in hierarchical governance, the networked governance advocates network as basic unit
to produce competitive advantage of the firm. How this process is shown need further positive
study, so that competitive advantages from organizational network and networked organization in
the networked governance may become valuable research area.
April 2-3, 2002, financially supported by World Bank and Asian Bank of Development, sponsored by Malaysian
Institute of Corporate Governance, International Conference on Corporate Governance in Asia was held in Kuala
Lumpur, Capital of Malaysian. The subject of this conference is “Corporate Governance and Global
Competitiveness: Does corporate governance give a company (an industry or a country) competitive advantage?”
It is typical example of corporate governance moving toward more practical research area.
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