Johanson and Mattsson 1987

Interorganizational Relations in Industrial Systems: A Network Approach Compared with the
Transaction-Cost Approach
Author(s): Jan Johanson and Lars-Gunnar Mattsson
Source: International Studies of Management & Organization, Vol. 17, No. 1, ORGANIZING: THE
NETWORK METAPHOR (SPRING 1987), pp. 34-48
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Int.
Studies & Org.,
ofMgt. Vol.XVII,
No.1,pp.34-48
M.E.Sharpe,
Inc.,1987
Jan Johanson and

LARS-GuNNAR MATTSSON (SWEDEN)
Interorganizational Relations in
Industrial Systems: A Network
Approach Compared with the

Transaction-Cost Approach
We shall here consider some aspects of relationsamong firmsengaged

in industrialproductionas thoserelationsare postulatedor describedin
two theoreticalapproaches to analyzingindustrialsystems.A network
approach, as developed by some Swedish researchers in industrial
marketingand internationalbusiness (see, forexample [1,2]), is com-
pared with the transaction-costapproach associated withOliver Wil-
liamson [3-5]. The reason we make such a comparisonis thatwe often
get questions fromcolleagues in the scientificcommunitysuggesting
thatwhat we tryto do is somewhatsimilarto what thetransaction-cost
approach is doing.
Industrial networks'
In industrialsystems,firmsare engaged in production,distribution,

and use of goods and services. We describesuch systemsas networksof
relationshipsamong firms.There is a divisionof workin a networkthat
means thatfirmsare dependenton each other.Therefore,theiractivi-
ties need to be coordinated. Coordination is not achieved througha
central plan or an organizational hierarchy,nor does it take place
throughthe price mechanism,as in the traditionalmarketmodel. In-
JanJohansonis Professor, ofBusiness

Department UppsalaUni-
Administration,
S-75120 Uppsala,andLars-Gunnar
versity, Mattsson
is Professor,
Stockholm
SchoolofEconomics,Box6501,S-11383 Stockholm,
Sweden.
34
THE NETWORK
KS. THE TRANSACTION-COST
APPROACH 35
stead, coordinationtakes place throughinteractionamong firmsin the

network,in which price is just one of several influencingconditions.
The firmsare freeto choose counterparts,and thus "market forces"
are at play. To gain access to externalresources,however,and to make
it possible to sell products,exchange relationshipshave to be estab-
lished with other firms. Such relationshipstake time and effortsto
establish and develop, which constrains the firms' possibilities to
change counterparts.The need foradjustmentsamong the interdepen-
dent firmsconcerningquantityand qualityof goods and services ex-
changed,and thetimingof such exchange,call formoreor less explicit
coordinationthroughjoint planning, or throughpower exercised by
one partyover the other.Each firmin the networkhas relationships
with customers,distributors,suppliers, etc. (and sometimes also di-
rectlywithcompetitors),plus indirectrelations,via those firms,with
the suppliers' suppliers, the customers' customers,competitors,and
others.
Networksare bothstableand changing.Individualbusiness transac-
tions among firmsusually take place withinthe frameworkof estab-
lished relationships.Evidently,some new relationshipsare established
now and then, and some old relationshipsare disruptedfor various
reasons (e.g., competitiveactivities), but most exchange takes place
within earlier existing relationships. Those existing relationships,
however,are changingall thetimethroughinteractionamong thefirms
in connectionwith transactionsmade withinthe relationship.
As an aspect of those relationships,bonds of various kinds are
developed among firms. We distinguishtechnical, planning, knowl-
edge, socioeconomic, and legal bonds. These bonds can be exemplified
by,respectively,productand process adjustments,logistical coordina-
tion,knowledgeabout thecounterpart,personalconfidenceand liking,
special credit agreements,and long-termcontracts.
We stresscomplementarity in thenetwork.There are also, of course,
importantcompetitive relations. Other firms want to get access to
specificexchangepossibilities, eitheras sellers or as buyers,and coop-
eratingfirmsalso have partlyconflictingobjectives.
The relationshipsimplythatthereare specificinterfirm dependence
relations that are differentin nature from the general dependence
relationshipto themarketin the traditionalmarketmodel. A firmhas
directand specificdependence relationswithfirmswithwhich it has
exchange relations. It has indirectand specific dependence relations
36 J. JOHANSON
AND L.-G. MATTSSON
(SWEDEN
)
with firmswith which its counterpartshave exchange relationships,

i.e., the other firms operating in the network in which it is en-
gaged.
To get establishedin a new market,thatis, in a networknew to it,the
firmhas to build relationshipsthatare new to it and to its counterparts.
Sometimes this is done by breaking old, existing relationships,and
sometimes, by adding a relationshipto already existingones. Initia-
tives can be takenby boththeseller and thebuyer.A supplierfirmcan
become establishedin a networkthatis new to itbecause a buyingfirm
takes an initiative.
This model of industrialmarketsimplies thata firm's activitiesin
industrialmarketsare cumulativeprocesses in the sense thatrelation-
ships are constantlybeing established, maintained, developed, and
brokenin order to give satisfactory,short-termeconomic returnsand
to createpositionsin thenetworkthatwill assure thelong-termsurvival
and developmentof the firm.Throughits activitiesin the networkthe
firm develops the relationshipsthat secure its access to important
resources and the sale of its products and services.
Because of the cumulativenatureof the marketactivities,network
position is an importantconcept. At each point in time, the firmhas
certainpositionsin thenetwork.They characterizeitsrelationsto other
firms;are a resultof earlieractivitiesin thenetwork,bothby the firm
and by otherfirms;and constitutethe base thatprovides the develop-
mentpossibilities and constraintsof the firmin the network.
All the firmsin the networkhave objectives regardingtheirfuture
positions. Desired changes or defense of positions thus describes im-
portantaspects of the firms' strategies.The strategiesof firmscan be
complementaryto each other,competitive,or a combinationof both.
A basic assumptionin thenetworkmodel is thatthe individualfirm
is dependent on resources controlled by other firms. The firmgets
access to these externalresources throughits networkpositions. Since
the developmentof positions takes time and effort,and since the pre-
sentpositionsdefineopportunitiesand constraintsforthefuturestrate-
gic developmentof the firm,we look at the firm's positions in the
networkas partiallycontrolled,intangible,marketassets. Market as-
sets generaterevenuesforthefirmand serve to give thefirmaccess to
otherfirms' internalassets. Because of the interdependenciesamong
firms,the use of an asset in one firmis dependenton the use of other
firms' assets. Thus, investmentprocesses and theirconsequences are
also interdependentin the network.
VS. THE TRANSACTION-COST
THE NETWORK APPROACH 37
Relationships in industrial networks
In industrialnetworks,suppliersand customersestablish,develop, and

maintainlastingrelationshipswitheach other.Such relationshipsmay
be significantto the participants.They may reduce costs of exchange
and production;theymay promotedevelopmentof knowledge of the
respectiveparties; theymay give the parties some controlover each
other;theymaybe used as bridgesto otherfirms;and theymaybe used
when mobilizingpartnersagainst thirdparties.
Basically, an interfirmrelationshipis a mutual orientationof two
firmstoward each other.This implies that the firmsare prepared to
interactwitheach otherand expecteach otherto do so. We distinguish
two separate, but closely related, types of interaction-exchangepro-
cesses and adaptationprocesses [6]. They constitutethe dynamic as-
pects of relationships.The mutual orientationimplies also that the
firmshave mutualknowledgeabout each otherand thattheyare aware
of each other'sinterestsand are preparedto pay some attentionto them
(Figure 1).
The relationshipsarise throughexchangeprocesses among the par-
ties. The positive inducementstheyoffereach other is the primary
featureof those exchange processes. Mutuality,in which the parties
demonstratethat they respect each other's interests,is an important
aspect of the exchange process. A lasting relationshipmay emerge if
the parties perceive a certain complexityor heterogeneityin the ex-
change. This implies that a number of ratherweak and long-term
criteriaenterintoand become criticalin theevaluationof theexchange.
The situationbecomes similar to what Blau [7] has characterizedas
social exchange relations.He describes how a relationshipevolves in
such a case: "Social exchange relations evolve in a slow process,
startingwithminortransactionsin whichlittletrustis requiredbecause
littlerisk is involvedand in which both partnerscan prove theirtrust-
worthiness,enablingthemto expand theirrelationand engage in major
transactions" [7. P. 454].
Single exchangesare in thiscase integralpartsof a process in which
theparties graduallybuild up a mutualtrustin each other.In supplier-
customerrelationships,business exchange is an importantaspect of
thissocial exchangeprocess, and thegradualbuildupis veryfamiliarto
businessmen.
The social exchange process implies thatthe relationshipshave an
importantsocial element;but theyhave importanttechnical,logistical,
38 AND L.-G. MATTSSON
J. JOHANSON (SWEDEN)
RELATIONSHIPS ^ INTERACTION
<
MUTUAL ORIENTATION EXCHANGE PROCESSES

-PREPAREDNESSTO INTERACT -SOCIAL EXCHANGE
-MUTUALKNOWLEDGE -BUSINESS EXCHANGE
-RESPECT FOREACHOTHER'SINTERESTS -INFORMATION EXCHANGE
INVESTMENTS ADAPTATION PROCESSES
BONDS -PRODUCTS
DEPENDENCE -PRODUCTION
-ROUTINES
Figure1. Relationships
andinteraction
in industrial
markets.
knowledge, administrative,and time elementsas well. The exchange

process implies thatthe parties testhow well theyfiteach other.The
process is, however,notonlya learningprocess but also an adaptation
process. In the course of the process, a numberof problems usually
emerge, thepartiesdo not fit,and a numberof activitiescan be carried
out to eliminatethemisfits.The parties adapt to each othrand influ-
ence each othertowardadaptation. This is a vital characteristicof the
relationships.
Adaptations are made in a numberof differentdimensions. Firms
can adapt to each othertechnicallyby modifyingproductsor produc-
tion processes. They mayadapt logisticallyby adjustingstocklevels or
developingcommondeliverysystems.Some adapt administratively by
modifyingplanningor schedulingsystems.They mayalso adapt finan-
cially by handlingpaymentsin special ways. Finally,some firmsadapt
to each otherin termsof knowledgeby actingtogetherin some techni-
cal developmentmatters.
Some of the adaptations among firms take place in the form of
specific investmentsor projects, such as the acquisition of particular
machineryor a change of systems. To a large extent,however,the
adaptationsoccur throughcontinuousprocesses as a resultof day-to-
day experiences. In general, thereis a close relationshipbetween the
general exchange process and the adaptationprocesses. The more in-
tensive the exchange process among firms,the strongerwill be the
reasons to make adaptations.The typeof adaptationsis also relatedto
the characteristicsof the exchange, including frequency,complexity,
and regularity.
THE NETWORK
APPROACH 39
Adaptationsare importantfor at least threereasons.

First,theystrengthen thebonds betweenfirms.Throughadaptations
the firmsbecome increasinglydependenton each other.The supplier
whose productsor processes are modifiedto fita specific customer's
needs becomes dependenton thatcustomer,and a customerwho has
adjustedproductionprocesses and schedulingsystemsto fita supplier's
capabilities is dependenton that supplier. The dependencies may be
mutual,but are not necessarilyso; in general, it may be assumed that
theyare more or less asymmetricalin the sense thatone partyis more
dependenton the relationshipthan the other.
Second, reinforcement of relationshipsthroughadaptationsmakes
themmore endurable, which in turnmeans that disagreements,as a
rule, have to be handled withinthe frameworkof the relationships.A
situationevolves in which "voice" is betteras a conflict-resolution
'
mechanismthan' 'exit,' since exitis noteasy or attractive(see Hirsch-
man [8. P. 83]). This impliesthattheexistenceof relationshipsneed not
make firmspassive, but theydo have to learn conflict-resolution meth-
ods otherthanjust switchingto new customersor suppliers, methods
thatare of a more problem-solvingnaturethan the exit method.
Third, adaptationsare importantbecause theyindicate thatthereis
some space forchange in therelationships:everything is notgiven once
and for all; rather,the two parties can adapt to fiteach otherbetter.
Nevertheless,thereare limitsto those adaptations,as all adaptations
are a kind of investment.The investmenthas to give some return,
which limits the total space for change. Furthermore,adaptationsto
specificcounterpartsmustbe limitedto preventlosing one's own inde-
pendence and identity.
Finally, interactionprocesses create adaptations in attitudes and
knowledge of the parties, thatis, a mutualorientationdevelops. This
mutual orientationis manifestedin a common language regarding
technicalmatters,contractingrules, and standardizationof processes,
products,and routines. Less overt aspects of the mutual orientation
may involve views on business ethics, technicalphilosophy,and han-
dling of organizational problems. A most importantaspect of the
mutualorientationis mutualknowledge,knowledge which theparties
assume each has about theotherand upon whichtheydraw in commu-
nicating with each other. This mutual knowledge may refer to re-
sources, strategies,needs, and capabilities of the parties and, in par-
ticular,to theirrelationshipswithotherfirms.It is a subtleknowledge
based on personal experience, and takes time to develop.
Above we have characterized interfirmrelationshipsas a mutual

orientationof two firmstoward each other. This mutual orientation
implies thatthefirmsare preparedto interactwitheach other.We have
distinguishedtwo related interactionprocesses, exchange and adapta-
tion. We have noted that the mutual orientationis affectedby the
interactionprocesses among firms. The mutual orientationis estab-
lished, developed, and maintainedthroughinteractionprocesses; its
strengthand characterare developed and maintainedthroughinterac-
tion. Again, the mutual orientationconstitutesthe frameworkwithin
which furtherinteractioncan take place.
We have characterizedinterfirmrelationshipsprimarilyfroma so-
cial viewpoint. It is importantto bear in mind, however,that these
relationshipsare established and developed in order to performthe
industrialactivitiesof thefirms.Thus, theneeds of thoseactivitieswill
stronglyinfluencethe natureof the relationshipsdeveloped withother
firms. Technical, logistical, economic, and otheroperative consider-
ations will affecttheinteractionprocesses. The same is trueof consid-
erationsof a strategicnatureabout theindividualfirms'objectives and
activitiesin termsof theirdevelopmentand positionsin themarket.On
the otherhand, the firms' industrialactivitiesare modifiedand devel-
oped as a resultof theinteractionprocesses. Hence, interfirm relation-
ships, intrafirmindustrialactivities, and strategicmarketconsider-
ations are assumed to affect each other through the interaction
processes (Figure 2).
We have discussed interfirmrelationshipswithoutexplicitlyrefer-
ringto individualactors. However,themutualorientationamong firms
is principallya mutual orientationamong individual actors in those
firms.In some cases, themutualityis primarilya matterof interperson-
al relationshipsbetween salesmen and purchasers; in other cases, a
numberof personson different levels and withdifferent
specializations
may be mutuallyoriented toward each other. Correspondingly,the
interactionprocesses are carried out by individuals, thoughwe have
discussed themas takingplace among firms.
Our view of interfirmrelationshipsimplies thatthedevelopmentof
the relationshipsis affectedby developmentsin the technical,logisti-
cal, economic, and othersystemsin whichtheinteractionis embedded.
This view by no means assumes, however,thatthecharacteristicsof the
relationshipsare determinedby structuralcircumstances.There is al-
ways some discretion concerning which relationshipsto develop in
what respects,and to thatextenttheview is voluntaristic.On the other
STRATEGIC
MARKET
CONSIDERATIONS
T T
INTERACTION
PROCESSES
(EXCHANGE
AND
v
ADAPTATION)
^
i INTERFIRM INTRAFIRM 1
RELATIONSHIPS ACTIVITIES
INDUSTRIAL
ofthemodel.
Figure2. Basiccausalrelations
hand, the possibilities for changing relationshipsthroughunilateral

decisions are ratherlimited,as the relationshipsare createdand modi-
fied throughthe interactionof a numberof people.
The transaction-cost approach
In a perfectmarket,transactionsare carried out withouttransaction

costs. Informationis freelyavailable, decision makingis rational,there
are always alternativesuppliers and buyers, and thereare no carry-
over effectsfrom one period to the other of a specific transaction
between two parties in the market. When these conditions do not
prevail, transactioncosts emerge because there is a need to devote
effortsto organizing,carryingout, and controllingtransactionsamong
interdependent actors. The transaction-costapproach tries to explain
theinstitutionalform,i.e., the "governance structure"(market,hier-
archy,or intermediateforms)of these transactions.
Two behavioralcharacteristicsare postulated:decisions and actions
are characterizedby bounded rationalityand opportunisticbehavior.
Underconditionsof certainty, it is possible, ex ante, to gatherinforma-
tionand to specifycontractsbetweensupplierand buyer,to take care of
various futurecontingencies,and also, ex post, to controlthe fulfill-
mentof theagreementbetweentheparties. However,whenuncertainty
prevails, contractswill be very complex and costly both to construct
and to enforce, especially in the case of small-numbersbargaining.
"Small numbers" means thatthereare few, if any, alternativesopen
42 J. JOHANSON
AND L.-G. MATTSSON
(SWEDEN)
for a buyer or fora seller to replace each otherin a transaction.The

major reason for this is that the asset specificityis high. Personal
knowledge or skills, typeof machineryor products,geographicloca-
tion, etc., are not homogeneous across the population of buyers or
sellers. The highertheasset specificity, themore dependenttheparties
will be on each other,and thehigherthe costs of switchingto another
party will become.
Frequency of transactions also enters as a major concept in the
analysis. If thereare onlyoccasional transactionsand theasset specific-
ityis veryhigh,thereis no opportunity forverticalintegration,and the
markettransactionmustbe developed withthe aid of some arbitrating
agency. If the frequencyis high and the asset specificityis high, the
transaction-costapproach expects vertical integrationto take place.
Bilateral marketrelationsare expectedto be the most transaction-cost
efficientifasset specificityis in theintermediaterange(see Williamson
[5. Figure 1]). Some empiricalstudies, withsomewhatmixed results,
have been carriedout to testthesehypotheses(forexample, by Walter
and Weber [9]).
The transaction-costapproach offersan explanationof why indus-
tries are characterizedby large-scale organizations. Under the label
"theory of internalization," it has become one of the recentlymost
discussed theoreticalexplanations for the existence of multinational
corporations [10].
The transaction-costapproach has also recentlybeen ratherexten-
sively debated and criticized by economists and sociologists. "Neo-
institutionalists"(to be distinguishedfrom the "new institutiona-
lists") criticizeWilliamson foraccepting the neoclassical assumption
that the most efficientinstitutionalformwill "survive" [11].
This approach can be used as an argumentforverticalor horizontal
integration,since theuse of hierarchiesratherthanmarketsforcoordi-
nation of interdependentactivities may economize on transaction
costs. The criticssay thatthetransaction-cost conceptis vague, even ill
defined, and that there is little, any,empiricalevidence thatecono-
if
mizing on transaction costs is a good explanationof, or even a dominat-
ing motive for,verticalintegration(see, forexample, Perrow [12] and
Kogut2).
Another major objection is that Williamson makes unrealisticas-
sumptionsabout thedifferencesbetweenmarketsand hierarchies.Op-
portunismalso exists withinfirms; organizationsare not necessarily
able to economize on bounded rationality;marketscan also be charac-
THE NETWORK
APPROACH 43
terized by asymmetricalpower relations(controlledby "fiat"); etc.

Anotherimportantissue in the applicationof transaction-costanalysis
is delimitationof the systems to be compared. The transactionis a
dyadic relationship,but theindustrialsystemis made up of many such
relationsthatare more or less interdependent.If we pick just one of
those dyads and change the institutionalform,e.g., throughvertical
integration,theotherdyads mayalso be affected.The efficiencyof the
wider systemmay very well move in the opposite directionfromthe
efficiencyachieved in the original dyad thatwas changed. It has also
been arguedthatthebasically neoclassical approachassumes thatthere
is a unique and stableequilibrium,indicatinga singleinstitutionalform
underspecificcircumstances;but even casual observationreveals that
integratedand nonintegratedarrangementscoexist.
Among theassumptionsand major variables in thetransaction-cost
model, the postulate that mankind is basically "opportunistic, with
guile and deceit," has been questioned, fromboth an empirical and a
"moral" pointof view. Sociologists, in particular,pointout thateco-
nomicrelationshipsalso containelementsof mutualtrustand exchange
of a social and cultural kind [12].
A comparison of the transaction-

cost approach and the network approach
There are some fundamentaldifferencesbetweenthe transaction-cost

approachand thenetworkapproach relativeto theirtheoreticalfounda-
tions, problem orientation,basic concepts, systemdelimitation,and
natureof the relationshipsamong firms.
Theoreticalfoundations
Williamson's approach lies firmlywithinthe neoclassical framework

focusingon conditions for stable equilibrium. Ours does not. In the
networkapproach,thebenchmarkmodels of marketsand organizations
are not used: the "markets" are characterizedby interactionin sys-
temsof connectedrelationships,among suppliers,customers,and oth-
er actors, in which the parties have some controlover each otherand
the organizationsare not "pure" hierarchies.For us, the legal frame-
worksof thetransactionsare less important,and the boundariesof the
individual organizations are unclear. Instead, the networkapproach
views firmsas social unitsand is closer to social exchange theory^In
44 J. JOHANSON
AND L-G. MATTSSON
(SWEDEN)
termsof controlassumptions,it is based on resource-dependencethe-

ory [13].
Problem orientation
The transaction-costapproach aims to explain institutional

governance
structures.Whyand whenare activitiescoordinatedwithin,ratherthan
among, firms?Our basic interestlies in describingand analyzingdy-
namic aspects of industrialsystemsand strategiespursuedby firmsin
such systems.We are also interestedin the functionalactivitiesin the
individual firm,especially those related to exchange and adaptation
processes (marketing,purchasing,R&D).
Basic concepts
Williamson's basic concepts, withthe exception of opportunism,can

also be used to describe importantcharacteristicsof networks.
We do notregardopportunismas a basic characteristicof theactors.
As in social exchangetheory,itscorrelatetrustis an importantconcept
in the networkapproach.
Bounded rationalityis for us an implicitassumption,in the sense
thatactors need to handle information,learn by experience,etc. More
interestingthan boundaries is the formationof new knowledge con-
cerningthehandlingof resources. An importantsource of knowledge
in the firm is the interactionwith other firms within the network
relationships.
Uncertaintyis, in our model, also linked to the relationshipsin the
network.The natureof the bonds and the extentof structuring of the
networkinfluencethe degree and type of uncertainty.It is possible to
influencethe uncertaintyboth in Williamson's and in our approach;
but withinWilliamson's framework,this influenceseems to be more
related to the legal form of the transaction than is the case in
ours.
Assetspecificityis veryclosely relatedto our stresson heterogeneity
[1], mutualadaptation, and marketassets. However,we basically dis-
agree with Williamson when he argues that a high degree of asset
specificityleads to vertical integration,.Asset specificitycan be the
resultof internalactivitiesin a firm,butwe believe thatit is mostlythe
resultof interactionwithinterorganizationalrelations.Thus, firmsare
THE NETWORK
APPROACH 45
usingeach other'sassets in a mutualadaptationprocess. Asset specific-

ityis one reason why firmsare dependenton externalresources and
devoteimportantresourcesto investmentsin relationships.If all these
resourcesare "internalized," however,a companywill finditselfin an
' '
impossible 'growth' situation.To us, a highdegreeof asset specificity
is the rule ratherthan the exception, and that variable in itselfcan
hardly explain integration.Furthermore,unless the production and
demandcapacities of supplierand user,respectively,matcheach other,
surplus supplyor surplus demand must be sold/boughtin the "mar-
ket."
Small-numbersbargaining is also, for us, a characteristicof the
market,as is a relativelyhighfrequencyof transactionsbetweenpar-
ties. Since we are dealing withindustrialsystems,buyersseldom have
only occasional need for a specific type of productor service. Even
capital goods transactionsare oftenpart of long-termrelationships,
includingtransferof service for the maintenanceof the functionper-
formedby the capital good.
Systemdelimitation
The transaction-cost approach bases its conclusions about governance

structureson characteristicsof aggregatesof specifictypesof transac-
tion relations. We look at relationshipsin networkswithinthe context
of othernetworkrelationships.The networkapproach bases its analy-
ses on characteristicsof systemsof interdependentdyadic relations.
Thus, if A firstbuys fromB, but thenmerges withB, not only is the
relationshipbetweenA and changed (in our framework,perhapsnot
very much) but also A's relation to B's other customers, suppliers,
competitors,etc. What mightbe gained in theA-B relationshipsmight
verywell be lost throughthe changes in the otherrelationshipsthat
had before the merger.
Another consequence of our system delimitationis that it is not
possible to characterizethe system as a typical market or a typical
hierarchy.Differentgovernance structurescoexist (complementaryor
competitive)withinthis wider system.
It can be argued thatwhereas the functionof the dyadic relationin
thetransaction-cost approach is to analyze theboundaries of organiza-
tionsand markets,theirfunctionin thenetworkapproach is to open the
systemsunder study.
Nature of relationships
The most importantdifferencebetween the two approaches is in the

natureof therelationships.For us, industrialmarketsare characterized
by lasting relationshipsamong firmsbecause such relationshipscan
reduce costs of exchange and productionand can promoteknowledge
developmentand change. Through lasting relationships,firmsdo get
some control over each other,plus indirectaccess to assets in firms
with which theydo not have direct relationships.The exchange and
adaptation processes are looked upon as investmentprocesses (of
course, not always successful ones!). "Mutual orientation" is devel-
oped.
For Williamson, such relationshipsbarely exist in markets,only
withinhierarchies. "Bilateral governance," which is his counterpart
form.We
of our "relationship," is notconsidereda stable institutional
thinkthe relationshipsamong firms in networksare stable and can
basically play the same coordinatingand developmentfunctionas in-
traorganizationalrelations.Throughrelationshipswithcustomers,dis-
tributors,suppliers, etc., a firm can reach out to a quite extensive
network.Such indirectrelationshipsmay be very important.They are
not handled withinthe transaction-costapproach.
Internationalization of business
Finally, let us consider an example thatcontraststhe transaction-cost

and the networkapproaches in theanalysis of a specificissue, i.e., the
internationalizationof business (adapted from Johansonand Matts-
son3).
The theoryof internalization[10] assumes thata multinationalen-
terprisehas somehow developed a firm-specificadvantagein its home
market.Usually thisis in the formof internallydeveloped, intangible
assets thatgive thefirmsome superiorproduction,product,marketing,
and/ormanagementknowledge. If this asset cannot be exploitedand
safeguardedeffectivelythroughmarketor contractualtransactions,an
"internal market" has to be created. Expansions outside the firm's
domesticmarket,giventhatlocal productionis advantageous,will then
take place throughhorizontal and/or vertical integration.The firm
establishes, or buys, manufacturingplants outside its home market.
Thus, the multinationalenterpriseexists because of "market failure"
or high "contractingcosts." The firmwants to protectits intangible
assets and to be able to controltheprice otherspay fortheuse of those

assets. Internalizingdoes, have costs, in the formof internaladminis-
trativesystemsand risk-taking.These costs of internalizationwill be
lower the less differentthe foreignmarketis fromthe home market.
Thus, the internalizationmodel predictsthat internationalexpansion
startsin "nearby" markets.
The internalizationmodel, however,is not intendedto explain pro-
cesses. It triesto explain a specific economic institution,the multina-
tional enterprise.But it says somethingabout what, according to the
transaction-costapproach, are the drivingforces forinternationalex-
pansion of productionby a firm.
It seems to be an implicitassumptionin theinternalizationapproach
thatthe firm'sdevelopmentactivities are "internal." In the network
approach, developmentactivities are, to an importantextent,depen-
dent on the relationshipswith other firms,and thus on the network
positions of the firm. Since internationalexpansion is a process by
which networkpositions are established and changed, international
expansion as such influencesthe furtherdevelopmentof the products,
productionprocesses, marketingbehavior,etc.
We said earlier thatfirmsin networksinvest in relationshipswith
other firms. The positions thus created give access to external re-
sources. Thus, the multinationalenterprisetends to enjoy direct rela-
tionshipswithcustomersand users in foreignmarketsratherthan the
indirectrelations,throughagents or licensees, that the less-interna-
tionalized firm,operatingonlyin its home market,has. This leads to a
furtherobservationlinked to the networkmodel. The multinational
firmmay use itsnetworkpositionsto effectively' ' externalize' ' some of
its activitieswithoutlosing controlof itscrucial intangibleassets. The
manufacturingvalue added by multinationalindustrialfirms might
thus decrease because of increased "subcontracting."
Conclusion
It should be evidentfromour discussion thatthe networkapproach is

quite differentfromthe transaction-costapproach. Since the theoreti-
cal bases and the problem orientationsare different,this is hardly
astonishing.These differencesindicate the relative usefulnessof the
two approaches fordifferentpurposes. The meritsof the transaction-
cost approach are relatedto its abilityto explaintheexistenceof differ-
entgovernancestructuresor institutionalformsin different situations.
It seems to have a quite wide area of applicability.With its focus on

conditions forstable equilibrium,it tends,however,to be determinis-
tic, makingitless suitableforstrategyanalysis. In contrast,thenetwork
approach stressestheactionpossibilitiesof the firm.In particular,it is
a useful tool in analyzing approaches to, and strategiesin, different
markets.
Notes
1. Thissection
is adaptedfromJ.Johanson andL.-G.Mattsson
(1984)"Interna-
inIndustrial
tionalization Systems-A Network Approach."Paperpresentedat the
PrinceBertilSymposium, StockholmSchoolofEconomics, Stockholm, Sweden.
2. B. Kogut(1985)"A Critique ofTransaction CostEconomicsas a Theory of
Behavior.'*
Organizational Workingpaper(WP 85-05) of theReginaldH. Jones
Center, PA, USA.
Philadelphia,
3. JohansonandMattsson (1984)Op. cit.
References
1. Hgg,I., andJohanson, J.(Eds.) (1982)Fretagi ntverk [FirmsinNet-

works].Stockholm: SNS.
2. Hammarkvist, K.-O.,Hkansson, H., andMattsson, L.-G.(1982)Mark -
nadsfringfrkonkurrenskraft for
[Marketing Competitiveness]. Malm: Liber.
3. Williamson, O. E. (1975)Markets andHierarchies: Analysis andAntitrust
. NewYork:TheFreePress.
Implications
4. Williamson, O. E. (1979)"Transaction CostEconomics: TheGovernance
ofContracture!Relations." Journal ofLawandEconomics , 22, 233-61.
5. Williamson, O. E. (1981)"The Economics ofOrganizations: TheTransac-
tionCostApproach." American Journal 87, 548-77.
ofSociology,
6. Hkansson, H. (Ed.) (1982)International Marketing andPurchasing ofIn-
dustrialGoods-AnInteraction Approach. Chichester:
Wiley.
7. Blau,P. (1968)"The Hierarchy ofAuthorityinOrganizations." American
Journal ofSociology,73,453-67.
8. Hirschman, A. O. (1970)Exit, VoiceandLoyalty. Cambridge, MA: Har-
vardUniversityPress.
9. Walker,G., andWeber, D. (1984)"A Transaction CostApproach toMake
or BuyDecisions."Administrative ScienceQuarterly,29, 373-91.
10. Rugman, A. M. (Ed.) (1982)NewTheories oftheMultinational Enterprise.
London:CroomHelm.
11. Dugger,W. M. (1983)"TheTransaction CostAnalysis ofOliverE. Wil-
liamson:A NewSynthesis?" Journal ofEconomic Issues,(1),95-114.
12. Perrow,. (1986)Complex Organizations.A CriticalEssay(3rded.). Glen-
way,IL: Scott-Foresman.
13. Pfeffer,
J.,andSalancik, G. R. (1978)ExternalControl ofOrganizations.
NewYork:Harper& Row.

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Interorganizational Relations in Industrial Systems: A Network Approach Compared with the

Jan Johanson and

Approach Compared with the

We shall here consider some aspects of relationsamong firmsengaged

In industrialsystems,firmsare engaged in production,distribution,

JanJohansonis Professor, ofBusiness

stead, coordinationtakes place throughinteractionamong firmsin the

with firmswith which its counterpartshave exchange relationships,

Relationships in industrial networks

In industrialnetworks,suppliersand customersestablish,develop, and

MUTUAL ORIENTATION EXCHANGE PROCESSES

knowledge, administrative,and time elementsas well. The exchange

Adaptationsare importantfor at least threereasons.

Above we have characterized interfirmrelationshipsas a mutual

hand, the possibilities for changing relationshipsthroughunilateral

The transaction-cost approach

In a perfectmarket,transactionsare carried out withouttransaction

for a buyer or fora seller to replace each otherin a transaction.The

terized by asymmetricalpower relations(controlledby "fiat"); etc.

A comparison of the transaction-

There are some fundamentaldifferencesbetweenthe transaction-cost

Williamson's approach lies firmlywithinthe neoclassical framework

termsof controlassumptions,it is based on resource-dependencethe-

The transaction-costapproach aims to explain institutional

Williamson's basic concepts, withthe exception of opportunism,can

usingeach other'sassets in a mutualadaptationprocess. Asset specific-

The transaction-cost approach bases its conclusions about governance

The most importantdifferencebetween the two approaches is in the

Finally, let us consider an example thatcontraststhe transaction-cost

assets and to be able to controltheprice otherspay fortheuse of those

It should be evidentfromour discussion thatthe networkapproach is

It seems to have a quite wide area of applicability.With its focus on

1. Hgg,I., andJohanson, J.(Eds.) (1982)Fretagi ntverk [FirmsinNet-

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