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  1. 1. 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) Abstract 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 1 Introduction 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 etal., 1992). 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 1
  2. 2. 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 ally”. 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 2
  3. 3. strategies. 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 returns. The mentioned above analysis routine may be abstracted as the following research logic diagram as reads, Economic Globalization Inter-firm Networked Cooperative Corporate Arrangement Governance Characteristics of NE Network Accelerated Tech. Advances Networked Oligopoly 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 3
  4. 4. 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, 4
  5. 5. 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 environments dynamically. 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 5
  6. 6. 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 economic activities. 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 6
  7. 7. Form of Economy Industrial Economy New Economy Strategic paradigm 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 co-opetition 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 stillness interaction Game Zero-game with no co- Non-zero game with co- operation operation 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 group Governance principle Market and hierarchy Networked Strategic objective “being larger” or “being SCAs smaller ”(lean) 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- 7
  8. 8. 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 8
  9. 9. 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. 9
  10. 10. 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 process. 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 10
  11. 11. 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 relationship network. 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 11
  12. 12. 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 competencies. 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. 12
  13. 13. 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 13
  14. 14. 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. 1 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. 14
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