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Integrating supply chain and network analysis: The study of netchains

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1. Introduction
Supply chain and network analyses have been treated as
two distinct strands in the literature on inter-organisational
collaboration. Supply chains are defined as a set of
sequential, vertically organized transactions representing
successive stages of value creation. The literature on supply
chain analysis (SCA) suggests vertical interdependencies
require a systemic understanding of resource allocation and
information flow between firms engaged in sequential stages
of production (Christopher, 1998; Simchi-Levi et al., 2000).
Value chain analysis (Porter, 1985), an approach describing
a set of sequential activities creating value within firms, has
been more recently extended to activities between firms
(Barney, 1997).
Network analysis (NA), in turn, provides numerous tools
to map the structure of inter-organisational relationships
or “ties” based on the recognition that network structure
constrains and at the same time is shaped by firms’ actions
(Granovetter, 1973; Burt, 1992; Nohria, 1992; Wasserman
and Faust, 1994). Unlike SCA, NA is not particularly
concerned with vertically organized ties, but rather with
horizontal relationships between firms belonging to a
particular industry or group (Powell, 1990).
Even though both SCA and NA stress the importance of
interdependencies between multiple firms and how inter-
organisational relationships can be a source of competitive
advantage (Dyer and Singh, 1998), the integration of their
core concepts and analytical tools is still to be done2. Yet,
it has been recognized that NA could benefit from a careful
assessment of distinct types of ties (Nohria, 1992), whereas
SCA could benefit from a network-based perspective of
interfirm relations (Aitken, 1998; Stuart et al., 1998).
This paper attempts to fill this void in the literature by
introducing the concept of netchain - a set of networks
comprised of horizontal ties between firms within a
particular industry or group, such that these networks (or
layers) are sequentially arranged based on the vertical ties
between firms in different layers (Figure 1). Netchain analysis
explicitly differentiates between horizontal (transactions
in the same layer) and vertical ties (transactions between
layers), mapping how agents in each layer are related to
each other and to agents in other layers.
For example, it is becoming increasingly important to
evaluate not only how suppliers transact with a given buyer,
but also how they interact between themselves to promote
knowledge exchange (Stuart et al., 1998; Dyer and Nobeoka,
2000). SCA is not well equipped to discuss relations among
Chain and network science (2001) 7
Integrating supply chain and network analyses: The study of netchains
Sergio G. Lazzarini1,1 Fabio R. Chaddad2& Michael L. Cook3
1John M. Olin School of Business, Washington University, 1 Brookings Drive, Campus Box 1133, St. Louis, MO 63130-4899,
USA; Tel: 314-935-4538; Fax: 314-935-6359; E-Mail: LazzariniS@olin.wustl.edu
2Agribusiness Research Institute, University of Missouri - Columbia, 138A Mumford Hall, Columbia, MO 65211, USA; E-mail:
frcbb6@mizzou.edu
3Michael L. Cook, Agribusiness Research Institute, University of Missouri - Columbia, 125C Mumford Hall, Columbia,
MO 65211, USA; E-mail: CookML@missouri.edu
Abstract
This paper introduces the concept of netchain analysis. A netchain is a set of networks comprised of horizontal ties between
firms within a particular industry or group, which are sequentially arranged based on vertical ties between firms in different
layers. Netchain analysis interprets supply chain and network perspectives on inter-organisational collaboration with
particular emphasis on the value creating and coordination mechanism sources. We posit that sources of value and
coordination mechanisms correspond to particular and distinct types of interdependencies: pooled, sequential, and
reciprocal. It is further argued that the recognition and accounting of these simultaneous interdependencies is crucial for
a more advanced understanding of complex inter-organisational relations. The paper concludes with an analysis of a set
of netchain configuration examples, including buyer-supplier relationships, information technology induced inter-
organization collaborations, and the introduction of the “macrohierarchy” organization structure.
Key words: network, supply chain, value chain, interdependence, cooperative strategy
1We thank the helpful comments by two anonymous referees. All remaining errors and omissions are our own.
2Some authors apply NA in contexts involving supply chains (Uzzi, 1997; Burt, 1992; Dyer and Nobeoka, 2000; Swaminathan et al.,
2000), but the comparative and simultaneous assessment of vertical and horizontal relationships is not their main goal.
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suppliers because it focuses on elements related to vertical
transactions, such as logistics management or the design
of contractual arrangements between buyers and suppliers.
On the other hand, even though NA provides elements to
evaluate social attachments and knowledge transfer between
firms, it is not particularly concerned with vertical ties. A
combination of both perspectives may generate an enhanced
general framework to assess inter-organisational
collaboration.
More generally, we posit that such analytical integration is
necessary because SCA and NA have focused on distinct
types of interdependencies involved in inter-organisational
collaboration. But if SCA and NA focus on particular types
of interdependencies, what happens when several types of
interdependence occur in a given inter-organisational
setting? Stabell and Fjeldstad (1998) propose a framework
considering organizational responses to distinct types of
interdependence, but the authors treat chains and networks
as alternative models. The same is true for Norman and
Ramirez’s (1993) distinction between value chain and value
constellation, which resembles a network. The netchain
approach, in contrast, is intended to integrate SCA and NA
by recognizing that complex inter-organisational settings
embody several types of interdependencies, which are
associated with distinct sources of value - that is, strategic
variables yielding economic rents - and coordination
mechanisms involved in inter-organisational collaboration.
In order to discuss these issues in detail, the paper is
organized as follows. In the next section, the main sources
of value in inter-organisational relationships analysed by
SCA and NA scholars are reviewed. In the third section,
these sources of value are related to particular types of
interdependencies and coordination mechanisms. The
assessment of interdependencies is employed as an
integrative element in netchain analysis because it avoids
confining the study of inter-organisational collaboration
to particular sources of value or coordination mechanisms.
Subsequently, examples of netchain configurations are
presented illustrating specific applications of netchain
analysis. The netchain configurations section includes buyer-
supplier relationships, inter-organisational collaboration
supported by information technology, and macrohierarchies,
which are defined as patterns of ownership between
organizations arranged in layers. Concluding remarks and
suggestions for future research follow.
2. Sources of value emanating from supply
chain and network analyses
In this section we identify the main contributions of supply
chain analysis (SCA) and network analysis (NA) as they
suggest alternative sources of value in the study of inter-firm
collaboration. Sources of value are strategic variables yielding
economic rents. They can be either associated with cost
reduction, rent creation, or rent capture. The identification
Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
8Chain and network science (2001)
Figure 1. An example of a generic netchain.
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of these sources of value is crucial in assessing the
contributions of SCA and NA and how both approaches
can be integrated in a single analytical framework.
Sources of value in supply chain analysis (SCA)
SCA is a broadly defined field focusing on successive stages
of value creation and capture in a vertically organized set
of firms. Three core sources of value in SCA are identified:
optimisation of production and operations, reduction of
transaction costs, and appropriation of property rights.
Optimisation of production and operations
The concept of supply chain management has its roots in
the 1960s concept of logistics management - a planning
tool that seeks to develop a system-wide, integrated view
of the firm. Subsequently, supply chain management extends
the concept of logistics management to external integration
of the firm. The supply chain is conceived as “a series of
linked suppliers and customers” (Handfield and Nichols
Jr., 1999, p. 2). It encompasses all activities associated with
the flow and transportation of goods from the raw materials
stage through the end user plus the concomitant information
and financial flows. Supply chain management refers to
the coordination and alignment of materials, financial, and
information flows for all activities and processes involved
in a supply chain (Simchi-Levi et al., 2000). Assuming the
supply chain is managed as a single entity, supply chain
optimisation models specify how chain performance is
maximized by the optimal choice of a set of several
production-related explanatory variables, such as number
of stages in the supply chain, inventory levels, product
differentiation, among others. Therefore, supply chain
management models focus on the optimisation of
production and operations as a key source of value. Supply
chain performance includes quantitative cost-based and
technical efficiency measures and qualitative indicators of
customer responsiveness and satisfaction (Beamon, 1998).
Reduction of transaction costs
In addition to production optimisation, several scholars
stress the importance of considering the optimisation of
transactions based on Coase’s (1937) insight that there are
positive costs of using the market system, which later became
known as transaction costs. These costs include ex ante
search costs, bargaining and contracting costs, plus
monitoring and enforcement costs, which occur in a post-
contractual stage. Three distinct approaches in the literature
analyse economic organization in a situation of positive
transaction costs: agency theory, transaction cost economics,
and measurement. In the agency literature, transaction costs
emerge due to divergent interests and informational
asymmetries between the parties to a contract (Jensen and
Meckling, 1976). The design of incentive contracts can align
the objectives of principals and agents and mitigate
opportunistic behaviour, thereby increasing transactional
efficiency (Sappington, 1991).
The second approach, transaction cost economics (TCE), is
associated with Williamson’s (1985) work. In contrast to
agency theory, TCE emphasizes contract incompleteness,
which hinders the possibility of crafting optimal incentive
contracts. However, similar to agency theory, TCE considers
the hazards of opportunistic behaviour, particularly when
relationship-specific investments are involved (Klein et al.,
1978). The major proposition of TCE is the presence of
specific investments shifts organization away from markets
to “hybrids” or, in the limit, vertical integration to mitigate
potential hold-up problems (Williamson, 1985). Therefore,
supply chain organization is a source of value when
transactions are governed by efficient structures, from
markets to hierarchies, aligned with attributes of the
transactions along the chain (Zylbersztajn, 1996).
The third approach, measurement, focuses on the difficulty
of measuring performance or product attributes in a
transaction as a major explanatory variable determining
governance choice (Barzel, 1982). When the performance
or attributes of goods being transacted are imperfectly
measured, pay-for-performance or pay-for-quality is
problematic (Holmstrom and Milgrom, 1994). As a result,
agents need to craft appropriate governance mechanisms
to monitor and enforce contractual arrangements. Efforts
to promote “traceability” of food products in supply chains
in order to signal and guarantee certain product attributes
to consumers, such as safety and origin, is an example.
Value capture in weak appropriability regimes
According to Teece (1986), innovators are not always able
to capture the rents from innovation. Competitors or agents
located in downstream or upstream stages in the supply
chain may benefit from innovation when appropriability
regimes are weak or they possess complementary assets. Weak
appropriability occurs when technology is either easy to
imitate or patent systems are not strongly enforced.
Complementary assets, in turn, occur when new technology
adoption depends on assets owned by other firms. If
competitive advantage is shaped by the firm’s ability to
capture value from its resources (Teece et al., 1997; Teece,
1998), then the implications for supply chain management
are evident: allocate investments through the chain in order
to capture the gains from innovation, focusing on
complementary assets. For example, biotechnology firms
acquired complementary assets downstream in the
agricultural chain (i.e., seed companies) to capture the value
generated by knowledge-based assets through genetically
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Chain and network science (2001) 9
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modified seeds sold to farmers as those assets can be easily
replicated by simply growing the seeds (Kalaitzandonakes
and Bjornson, 1997).
Sources of value in network analysis (NA)
NA is a broad field commonly associated with sociology, but
economists and strategy scholars have recently analysed
network-based industries and have applied network concepts
to explain economic organization and performance. Three
core sources of value are emphasized in NA: social structure,
learning, and network externalities.
Social structure
Social network approaches share a common emphasis on
the role of social structure - i.e., interpersonal relationships
and individual positions occupied by agents in a network
- influencing individual or collective behaviour and
performance. Granovetter (1985) uses the term embeddedness
to explain how social relations affect the economic behaviour
of agents and the institutional arrangements supporting
transactions. The literature on social capital focuses on the
role of “resources accruing to an individual or group by
virtue of their location in the network of their more or less
durable social relations” (Adler and Kwon, 1999, p. 4).
Different strands in social NA have assumed, however,
divergent perspectives regarding the type of social relationship
(or tie) and social structure that is more conducive to
cooperative behaviour and superior performance. Some
authors argue that dense networks with agents extensively
connected with each other (Coleman, 1990) and strong ties
defined as repeated, affective, relational exchanges (Nelson,
1989; Krackhardt, 1992) facilitate the emergence of trust,
create social norms, and promote cooperation as a
consequence. Dense networks can also create conditions
for the emergence of intra-industry coalitions of firms that
negotiate better terms of trade with firms in other industries
or reduce competition within their own industry (Pfeffer
and Nowak, 1976; Galaskiewicz, 1985; Lane and Bachmann,
1996). Cartels, trade associations, and cooperatives are
examples of this phenomenon.
Other authors emphasize that sparse networks with several
non-redundant contacts connected by structural holes3(Burt,
1992) and weak ties defined by occasional, market-like
exchanges (Granovetter, 1973) generate new information
and diversity crucial to trigger innovation and create
opportunities for network participants. This is important
because strong ties and dense networks may induce “lock
in” to idiosyncratic resources, which may be less valuable
in the future due to technological or institutional ruptures
(Grabher, 1993; Uzzi, 1997; Afuah, 2000). McEvily and
Zaheer (1999) find a positive effect of structural holes on
firm performance: firms that have non-redundant contacts
outperform competing firms.
Learning
There are two fundamental types of learning processes with
distinct consequences in terms of value creation. When
autonomous agents or groups develop knowledge “locally”
and specialize themselves in particular knowledge fields,
learning tends to favour knowledge diversity. In this case,
autonomous agents develop particular skills and
encapsulate” them in their interaction with other agents
(Demsetz, 1988; Zenger and Poppo, 1999). Within a
network perspective, knowledge diversity is beneficial
because it generates positive externalities to multiple agents
through knowledge spillovers, which enhance opportunities
for innovation (Feldman and Audretsch, 1998; Kogut, 2000).
Another type of learning involves systemic, joint efforts to
create and refine a certain body of knowledge. This type of
learning tends to induce knowledge co-specialization, i.e.,
skills that are dedicated to the agents participating in a given
exchange (Zenger and Poppo, 1999). Co-specialization
enables value creation through the combination of
individual capabilities and the development of specific
routines (Nelson and Winter, 1982; Kogut and Zander,
1992). However, co-specialization entails costs since it tends
to reduce the range of new, valuable opportunities that can
be exploited by agents and also their capacity to interpret
external knowledge (Leonard-Barton, 1995). Rowley et al.
(2000) offer a connection between learning and social
structure and suggest that knowledge diversity is best served
by weak ties, which tend to be conduits of new information,
whereas co-specialization is facilitated by the existence of
strong ties, which promote cooperation.
Network externalities
This source of value is extensively discussed in the literature
on economic networks. Network externalities occur if the
benefits to adopt some type of technology or contract
increase with the expected number of adopters, thus
inducing increasing returns to adoption (Arthur, 1989).
Katz and Shapiro (1985) distinguish between direct and
indirect network externalities. The direct type occurs when,
Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
10 Chain and network science (2001)
3For instance, if an agent A is connected to a network of agents NAand B is connected to another network NBin such a way that agents
in NAand NBare not connected to each other, a tie between A and B would be non-redundant. This tie would span a structural hole
between networks NA and NB. If, however, many agents in NAand NBhave direct ties with each other, a tie between A and B would be
redundant because they would be already connected with each other indirectly through their ties with agents in NAand NB.
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for example, an agent adopting a trading technology, such
as electronic commerce, increases the benefit for other
agents to adopt that technology due to increased arbitrage
opportunities or decreased trading costs (Domowitz, 1995;
Economides, 1996). The indirect type occurs when there
are complementarities among several technologies or
exchange modes. Consider for example the benefits of
purchasing a computer, which strongly depends on the
supply of complementary products such as software shared
by many users. In the presence of network externalities,
there are benefits to promote interfirm coordination in
order to capture the value generated as a result of network
growth and avoid “lock in” to inferior technologies (Farrell
and Saloner, 1985; Arthur, 1989) or contractual standards
(Kahan and Klausner, 1997) that compete simultaneously
over time.
3. Conceptualising netchains
In this section, it is argued that SCA and NA can be
successfully integrated by identifying an underlying variable
that explains why these approaches emphasize different
facets of inter-organisational relationships. This variable is
the nature of interdependence between two firms or agents,
since transactions arranged as chains (emphasizing vertical
ties) or networks (emphasizing horizontal ties) tend to
differ with regard to the type of interdependence they
generate (Stabell and Fjeldstad, 1998). Thompson’s (1967)
seminal categorization of organizational interdependencies
is employed to contrast SCA and NA.4The objective is not
to refine Thompson’s framework, but rather use it as a tool
in analysing distinct types of inter-organisational
interdependencies emanating from SCA and NA.
Thompson (1967) identifies three types of interdependence:
pooled, sequential, and reciprocal. Pooled interdependence,
the simplest type, occurs when each individual in a group
makes a discrete, well-defined contribution to a given task.
Sequential interdependence refers to serially structured tasks,
when the activities of a firm or agent precede those of
another. Finally, reciprocal interdependence - the most
complex - involves simultaneous, ongoing relationships
between parties in which each agent’s input is dependent
on the others’ output and vice-versa (Figure 2).5
We posit that SCA has focused on sequential interdependencies,
whereas NA has primarily dealt with either pooled or reciprocal
interdependencies. In this section, this claim is supported in
two ways. First, it is shown that the sources of value
emphasized by SCA and NA correspond to distinct types of
interdependencies. In addition, we discuss the coordination
mechanisms commonly proposed by SCA and NA, which are
associated with distinct interdependencies. This section
concludes showing how netchain analysis can successfully
integrate SCA and NA with a simultaneous assessment of
all types of interdependencies.
How distinct sources of value correspond to particular
types of interdependence
In the following discussion, the types of interdependence
proposed by Thompson (1967) are outlined and related
to the main sources of value emphasized by SCA and NA
scholars.
Pooled interdependence
In this case, interdependence involves discrete or
autonomous contributions by loosely coupled agents (Astley
and Zajac, 1991). Pooled interdependence is more akin to
independence because the relationship between agents is
sparse and indirect (Van de Ven et al., 1976). Involving
more or less anonymous agents, pooled interdependence
Integrating supply chain and network analyses: The study of netchains
Chain and network science (2001) 11
4Even though Thompson focuses on interdependencies within firms, other authors apply his framework in the context of inter-organisational
collaboration (Borys and Jemison, 1989; Gulati and Singh, 1998).
5Van de Ven et al. (1976) propose a fourth type of interdependence: team work. The nature of interdependence is similar to the reciprocal
case, but the authors characterize team interdependence as involving simultaneous actions. Reciprocal interdependence may involve a temporal
lapse in the feedback process. But since we are not particularly concerned with temporal issues, teamwork is considered as a special case
of reciprocal interdependence.
Figure 2. Representation of types of interdependence.
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has clearly a flavour of weak social ties and structural holes
as “arbitrage” opportunities - e.g., job opportunities in a
large network - are magnified. Additionally, due to its
emphasis on autonomous and loosely coupled agents,
pooled interdependence supports a situation of knowledge
diversity, where specialized agents exchange knowledge
directly or indirectly through products or services that
embody such knowledge (Weick, 1976). Finally, since the
connection between agents is sparse, it tends to be mediated
by some underlying technology or organizational mode
possibly with increasing returns to adoption. Thus, pooled
interdependencies are likely to be associated with network
externalities: the value of the network increases with its
expected size (Stabell and Fjeldstad, 1998).
As discussed in the following section, Internet-based
procurement mechanisms known as business-to-business
(B2B) exchanges enable the connection between
autonomous agents, thus creating pooled interdependencies
between them. Some organizations - such as the chemical
company Buckman and the World Bank - are stimulating
knowledge sharing between their “internal specialists”
located in different countries to solve practical problems.
The underlying interdependence is pooled because those
specialists interact infrequently and contribute with
knowledge resulting from local, specialized experiences.
Sequential interdependence
This kind of interdependence involves direct relationships
between agents ordered in a serial fashion: one agent’s input
is another agent’s output. It is straightforward to note that
this describes precisely a supply chain. The sources of value
associated with buyer-supplier relationships usually stem
from managing sequential interdependencies (Borys and
Jemison, 1989). Inventory management, logistics, and the
like attempt to optimise sequential production processes and
operations, while efficient governance mechanisms attempt
to reduce transaction costs and appropriate property rights
in downstream or upstream stages in the chain, i.e., optimise
sequential transactions.
The organization of transportation services is an evident
example of sequential interdependence. Consider the
international flow of cargo, correspondence and packages
with sequential transactions from the origin to the
destination, involving domestic trucking, domestic freight
forwarding, international air transport, foreign freight
forwarding, and forward trucking (Wada and Nickerson,
1998). The output of one stage (e.g., a parcel coming from
another country through air transport) is clearly the input
of another stage (e.g., freight forwarding). The value created
from managing these transactions originates not only from
logistics optimisation, but also from reductions in
transaction costs, which are critical in the presence of local
(e.g., an unusual destiny) and temporal specificities (e.g.,
customer requirement for fast delivery). In addition, the
common practice of tracking parcels and cargo to inform
clients about the exact position of those units in their route
at a given moment attempts to solve measurement problems
making use of information technology.
Reciprocal interdependence
Reciprocity in this kind of interdependence means that one
agent’s input is another agent’s output and vice-versa.
Consequently, agents are mutually dependent on the choices
and actions made by each other. In this context, one should
expect recurring, deep, intertwined relationships between
agents, which suggests a situation of strong social ties and
dense networks. Agents in this case are likely to be tightly
coupled: the knowledge of one agent strongly depends on
the knowledge of another, i.e., there is knowledge co-
specialization.
A strategic alliance in which parties seek “to broaden or
deepen their skills or to develop new skills jointly” is an
example of inter-organisational collaboration involving
reciprocal interdependence (Gulati and Singh, 1998, p.
797). In addition, groups characterized by shared culture,
identity, and norms, such as regional clusters of small firms
and close-knit groups, create reciprocal interdependencies
through the development of dense networks. Japanese
supplier networks, which are discussed in the next section,
are also an example of inter-organisational relations showing
reciprocal interdependencies.
Pooled and reciprocal interdependencies involve sources
of value that are commonly dealt with in NA. And since
serially ordered ties describe a chain organization, it is not
surprising that SCA focuses on sources of value associated
with sequential interdependencies. It is important to notice
that the sources of value that are related to each type of
interdependence are main sources of value. It is possible
that, for example, strong social ties and dense networks
facilitate cooperation and decrease transaction costs as a
result (Ouchi, 1980). But transaction cost minimization is
not the unique reason for those relationships since they can
involve value creation - for example, joint knowledge
development - and other outcomes that transcend the simple
desire to reduce transaction costs (Zajac and Olsen, 1993;
Dyer, 1997).
How interdependencies correspond to distinct
coordination mechanisms
Another way to demonstrate that NA and SCA focus on
distinct types of interdependencies is to review the main
coordination mechanisms proposed or implied by each
approach. Thompson (1967) suggests that each type of
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interdependence should be handled with particular
coordination modes. These coordination modes include
standardization, plan, and mutual adjustment.
Standardization
According to Thompson (1967), pooled interdependencies
are well managed by standardized rules and shared
mechanisms to orchestrate transactions. The economic
approach to networks argues that compatibility between
products and components, usually achieved through a
standardized technological platform, is a key element to
capture network externalities. Thus, firms may coordinate
product design to generate increasing returns to adoption
(Farrell and Saloner, 1985; Katz and Shapiro, 1985). Another
example of coordination through standardization is a
financial exchange, where contracts and negotiation rules
are standardized in such a way to allow trade at low cost
and therefore attract many anonymous agents (Telser and
Higginbotham, 1977; Domowitz, 1995; Economides, 1996).
In section 4, it is shown how the Internet enables the
emergence of standardized codes that support information
transfer between firms and pooled interdependencies. Also,
firms encouraging knowledge sharing between internal
specialists depend on standardized mechanisms through
the Internet to form discussion groups and retrieve
information from sparsely connected individuals.
Plan
Sequential interdependencies require coordination by a
plan, involving “the establishment of schedules for the
interdependent units by which their actions may then be
governed” (Thompson, 1967, p. 56). This type of
coordination denotes discretionary actions by a coordinating
agent, who plans the flow of products and information,
and promotes adaptation to changing internal or external
conditions.6Indeed, the literature on supply chain
management has called for managerial discretion in order to
optimise production processes and operations (Beamon,
1998), or align efficient governance mechanisms to
sequential transactions (Zylbersztajn and Farina, 1999).
For instance, the management of courier services requires
a central planner, such as Federal Express and DHL, who
not only defines schedules, routes and transport modes,
but also contractual arrangements to coordinate sequential
transportation stages from the sender to the recipient (Wada
and Nickerson, 1998).
Mutual adjustment
Thompson (1967) claims that reciprocal interdependencies
require the transmission of new information through mutual
feedback processes, which he calls “mutual adjustment.”
Instead of a central planner, mutual adjustment implies
joint problem solving and decision making. As a result,
personal or group-based coordination mechanisms become
necessary (Van de Ven et al., 1976). Perhaps not surprisingly,
social network scholars commonly discuss this type of
coordination. As Powell (1990, p. 303) remarks, “in network
modes of resource allocation, transactions occur neither
through discrete exchanges nor by administrative fiat, but
through networks of individuals engaged in reciprocal,
preferential, mutually supportive actions.” According to
social network scholars, the formation of inter-organisational
relations tends to be emergent rather than premeditated,
where feedback from past transactions in the network is a
crucial element. Past transactions are likely to reveal
information about performance and partners’ conduct
(Gulati and Gargiulo, 1999), foster learning (Powell et al.,
1996), and reinforce social norms and informal sanctioning
mechanisms (Granovetter, 1985).
In sum, SCA focuses on coordination mechanisms involving
some sort of plan or discretionary managerial action, which
according to Thompson (1967) corresponds to sequential
interdependence. NA, in turn, emphasizes either
standardization or mutual adjustments, which are
appropriate coordination mechanisms to deal with pooled
and reciprocal interdependencies respectively.
Netchain analysis: Assessing all types of
interdependencies
Figure 3 summarizes the preceding discussion and presents
the sources of value and coordination mechanisms
corresponding to each type of interdependence, showing
that NA focuses on pooled and reciprocal interdependencies,
whereas SCA emphasizes sequential interdependencies. We
propose that one way to integrate SCA and NA is to consider
simultaneously all types of interdependencies that occur in
a given inter-organisational setting.
This simultaneous assessment is the core of netchain
analysis. Instead of focusing on certain sources of value
and/or coordination mechanisms given a certain type of
interdependence, the netchain approach begins by
recognizing the relevant interdependencies involved in
inter-organisational collaboration. The concept of netchain
Integrating supply chain and network analyses: The study of netchains
Chain and network science (2001) 13
6Victor and Blackburn (1987) refine Thompson’s model by considering conflicts of interest created by interdependencies. When these
conflicts are high, they argue a “chain of command” will emerge. Note, however, that these conflicts tend to be critical in the case of
sequential interdependencies because one party’s input is an output of the other: conflicts over prices, for example, tend to be acute. Thus,
the prediction is the same: coordination by plan (command) will emerge in the case of sequential interdependencies.
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integrates SCA and NA precisely because it allows for a
simultaneous account of all types of interdependencies, in
addition to the sources of value and coordination
mechanisms associated with them. If, for example, we
confine ourselves to the analysis of sequential (vertical)
transactions, several sources of value and coordination
mechanisms associated with pooled or reciprocal
interdependencies are likely to be neglected. In other words,
netchain analysis does not take interfirm interdependence
as given, but rather includes it as a key variable in the model.
In the next section, netchain analysis is applied to specific
empirical cases. Before proceeding, two important remarks
are in order. First, it was previously mentioned that SCA
and NA focus on vertical and horizontal transactions
respectively. Even though the graphical representation of a
netchain proposes a combined assessment of horizontal
and vertical ties, the crucial aspect to qualify a given tie in
a netchain is the nature of interdependence between agents.
For example, vertical transactions typically exhibit sequential
interdependencies (Pennings, 1981), but they can also
embody reciprocal elements such as strong social
attachments and knowledge co-specialization. At first glance,
this may appear to be inconsistent with the fact that vertical
ties exhibit sequential interdependence. Yet Thompson
(1967, p.55) proposes a hierarchical relationship between
interdependencies by arguing, “all organizations have pooled
interdependencies; more complicated organizations have
sequential as well as pooled; and the most complex have
reciprocal, sequential, and pooled.”
Second, netchain analysis abstracts from issues regarding
firm boundaries. Gulati and Singh (1998) offer a theory to
explain the choice between equity and non-equity strategic
alliances based on Thompson’s notion of interdependence.
We believe, however, that interdependencies do not fully
determine firm boundaries. For example, reciprocal
interdependencies can be carried out internally by the firm
or externally through alliances or social mechanisms.
Paraphrasing Jensen and Meckling’s (1976)
conceptualisation of the firm as a nexus of contracts,7which
avoids the analytical demarcation of firm boundaries, a
Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
14 Chain and network science (2001)
Figure 3. An overview of netchain analysis.
7Zylbersztajn and Farina (1999) use the same term to characterize chain organization.
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netchain is conceptualised as a nexus of interdependencies.
In other words, the netchain approach analyses the nature
of interdependencies involved in a given setting, taking
firm boundaries as exogenous. The study of endogenous
firm boundaries within a netchain would be an important
extension of this work.
4. Some netchain configurations
In this section, the concepts developed in the previous
section are applied to the analysis of particular cases
involving distinct netchain configurations. These cases serve
to demonstrate the applicability of the concept, not to
support specific theoretical claims, and indicate necessary
steps toward the future use and refinement of netchain
analysis.
Buyer-supplier relationships
Traditional approaches to the management of buyer-supplier
relationships have focused on the design and maintenance
of vertical, serially ordered relations between a buyer and
its suppliers individually. The analysis of “tiered” supplier
structures is an example, where attention is paid to the
choice of certain top-tier suppliers who supply critical
resources to the buyer and are responsible for product and
service flow from lower-tier suppliers (Asanuma, 1989).
This view, however, focuses solely on sequential
interdependencies between buyers and suppliers. Some
authors challenge this view and suggest network-based
interactions between suppliers are equally important (Stuart
et al., 1998).
Japanese manufacturing is a classic example of horizontal
relations, where suppliers are organized through associations
(kyoryokukai) aimed at promoting knowledge exchange and
socialization (Nishiguchi, 1994; Dyer and Nobeoka, 2000).
Contrary to common sense, Japanese supplier associations
emerged due to a governmental initiative to promote
cooperation, even though in some cases - such as in Toyota’s
association - they were reinforced by private initiatives
(Nishiguchi, 1994). Supplier associations have also been
replicated in other countries, such as in Toyota’s plants in
the U.S. (Holmstrom and Roberts, 1998; Dyer and Nobeoka,
2000) and Australia (Langfield-Smith and Greenwood,
1998).
However, network-based relations between suppliers are
not only restricted to supplier associations. Dyer and
Nobeoka’s (2000) empirical analysis of Toyota’s supplier
networks in both Japan and the U.S. show that practices
other than associations are used to foster exchange of
knowledge and socialization between suppliers. Consulting
and problem-solving teams are organized by Toyota in order
to pursue quality- and productivity-enhancing solutions to
several production problems. A key element is the existence
of voluntary learning teams (jishuken), involving groups of
suppliers exchanging knowledge between them in a more
practical manner. These teams are heavily valued by suppliers
as a way to promote improvements in production processes,
cut costs, or create new solutions based on sharing individual
experiences.
As a common attribute of Toyota’s supplier networks, Dyer
and Nobeoka (2000, p. 350) remark that they are “highly
interconnected, strong-ties network [with] multiple pathways
among members effectively eliminating most structural
holes.” Thus, one crucial source of value in this model refers
to dense relationships with strong ties. Additionally, the
authors point out suppliers in these networks “have
developed reciprocal obligations for sharing knowledge
with other members in the network” (p. 363), thus
suggesting knowledge co-specialization. One natural
question in this context is how to avoid the shortcomings
of dense networks, strong ties and knowledge co-
specialization, such as a lower potential to innovate and
interpret external knowledge. Dyer and Nobeoka (2000, p.
365) note that in this model “there is the risk that the
diversity of knowledge that resides in the network will
diminish over time.” Toyota has responded to this risk by
employing several tactics such as changing the composition
of learning groups from time to time and searching for “best
practices” in other contexts through committees organized
by supplier associations.
Thus, supply chains with supplier networks involve typically
two types of interdependencies: one sequential, between
assemblers and their suppliers, associated with vertical ties;
and another reciprocal, among suppliers, associated with
horizontal ties. This basic netchain configuration is depicted
in Figure 4: single arrows represent sequential
interdependencies, while double arrows represent reciprocal
interdependencies. Sequential interdependencies are
managed by discretionary, planned actions by a central
firm, such as Toyota. Reciprocal interdependencies, in turn,
are coordinated through mutual adjustments - in Toyota’s
case, through feedback from each other’s experience in the
Integrating supply chain and network analyses: The study of netchains
Chain and network science (2001) 15
Figure 4. Buyer-supplier relationships.
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supplier network. Even though Toyota coordinates to some
degree the formation and maintenance of these supplier
practices, voluntary learning teams are considered to be
more effective in knowledge sharing. Instead of relying on
knowledge imposed by a given buyer, this new model of
buyer-supplier relationships emphasizes systemic learning
and collective decisions within supplier networks (Stuart
et al., 1998).
Notice that traditional SCA, focusing on vertical ties
embodying sequential interdependencies, is unable to assess
the sources of value that emanate from reciprocal
interdependencies between suppliers, such as strong social
ties and knowledge co-specialization. On the other hand,
NA tends to neglect the importance and distinctive nature
of vertical ties given the sequential interdependencies they
generate. The netchain approach allows for a more complete
picture of this inter-organisational setting, considering
simultaneously the existence of sequential and reciprocal
interdependencies, which are associated with distinct sources
of value and coordination mechanisms.
IT-enabled inter-organisational collaboration
To understand how information technology (IT) supports
inter-organisational collaboration in the context of a
netchain, two IT innovations that induced distinct types of
interdependence are contrasted in this section: closed
electronic data interchange (EDI) systems, and Internet-
based procurement.
EDI involves computer-to-computer exchange of information
between buyers and suppliers (Holland et al., 1992;
Marcussen, 1996). Early (or closed) EDI systems, which gained
momentum especially in the 1990s, are associated with
specifically negotiated codes and a proprietary, or closed,
electronic architecture to transfer information. According
to Holland et al. (1992, p. 544), early EDI systems are “used
to encourage close trading relationships with a smaller
number of suppliers.” Within this perspective, early EDI
systems involve investments by both parties in private
computer connections and training, implying a closed
architecture of connection and agreements specifying
information transfer codes (Brousseau, 1994; Dearing, 1995).
Many authors document two main advantages of early EDI
systems: a potential reduction of transaction costs, including
procurement and monitoring expenses (Brousseau, 1994;
Dearing, 1995) and the optimisation of production through
information sharing (Holland et al., 1992), shortened lead
times (Dearing, 1995; Niederman, 1998), inventory
reduction and increased product quality (Kekre and
Mukhopadhyay, 1992). These sources of value are strongly
associated with sequential interdependencies. Additionally,
private communication systems are commonly implemented
by a systems initiator (e.g., a buyer), “who deploys a
proprietary [system] to expand the scope of hierarchical
control” to a particular firm (e.g., a supplier), “which
exercises the choice between accepting or rejecting” the new
system (Zaheer and Venkatraman, 1994, p. 551). This has
clearly a flavour of plan-based coordination.8
In contrast, the Internet allows for standardized transacting
procedures shared by many agents and an open architecture
of connection, the World Wide Web (Kambil et al., 1999;
Croom, 2000). Internet procurement has emerged with the
help of “orchestrated” markets called business-to-business
(B2B) exchanges. B2B exchanges create an electronic
marketplace with low-cost entry and standardized
transactional procedures - e.g., the display of buyer’s
specifications, bidding procedures, market clearing,
safeguarding, and so on. Interdependencies are pooled
because the bidding process is impersonal and carried out
by autonomous suppliers. As such, network externalities
constitute the main source of value associated with Internet-
based procurement. Namely, the benefits of this governance
mechanism increase with the number of suppliers adhering
to the same standard because an alternative supplier that can
closely match buyer’s specifications will likely participate
in the bidding process (Lazzarini and Nickerson, 2000).
This is the case in B2B exchanges involving price negotiation
instead of “catalogs” with posted prices, since in the first
case Internet procurement reduces transaction costs and
increases competition in the procurement process (Kaplan
and Sawhney, 2000).
A remarkable example of a B2B exchange is FreeMarkets
Online, which has generated approximate savings of 15
percent in the procurement costs of its clients mainly due
to lower acquisition prices (Rangan, 1998). Glen Meakem,
one of the firm’s co-founders, points out that his company
“introduces buyers to aggressive, world-class suppliers that
they may not have known about before” (Rangan, 1998, p.
10). As another example, the British retailer Safeway reduced
the cost of connecting its web of suppliers through the
Internet to “only a few thousand dollars against several
million for EDI. [Thus,] the supermarket can easily increase
Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
16 Chain and network science (2001)
8 It is also possible that the strong attachment between firms brought by early EDI systems also induced reciprocal interdependencies in
the long run. As Zaheer and Venkatraman (1994, p. 554) hypothesize, “trust is enhanced through greater use of communication between
[the parties] under conditions of dedicated electronic interfacing.” Also, the presence of trust increases the willingness of the parties to
invest in expensive, non-redeployable electronic connections. For simplicity, the focus is placed on the sequential nature of interdependencies
emphasized by early EDI systems.
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the number of its suppliers, giving it more choice and better
prices” (The Economist, 1999, p. 17). This suggests that the
advent of Internet-based procurement is creating pooled
interdependencies between a large number of loosely
coupled agents, where standardization of connection and
transacting procedures is the key coordination mechanism
enabling low cost supplier participation.
Netchain configurations representing these contrasting IT-
enabled inter-organisational structures are presented in
figure 5. The structure of early EDI-based procurement is
presented in figure 5a, depicting idiosyncratic, sequential
transactions between a buyer and a supplier. The structure
of Internet-based procurement is depicted in figure 5b, with
two basic differences from the former case. First, there is a
new layer occupied by an “infomediary,” such as a B2B
exchange, which aggregates many buyers and many suppliers
with an open architecture of connection and standardized
transacting procedures (Hagel III and Singer, 1999). Second,
this infomediary induces horizontal, pooled
interdependencies among buyers and among suppliers -
depicted in figure 5b as dashed lines - using standardization
as a coordination mechanism.9The netchain approach
provides a more complete framework to contrast these two
IT-based models because it recognizes the distinct types of
interdependencies involved in each case, which lead to
distinct sources of value and coordination mechanisms.
Macrohierarchies
Macrohierarchies are hierarchies involving organizations -
instead of agents within organizations - that jointly
coordinate some of their activities through multiple layers
of ownership. One particular example of macrohierarchy is
discussed: farmer cooperatives organized in a multi-layered
fashion, which is known as the federated structure.
In a federated agricultural cooperative, patrons are members
of a local cooperative, which in turn is a member of a
regional cooperative.10 Regional cooperatives themselves
may also decide to form an inter-regional cooperative.11 As
a result, a federated cooperative is structured by means of
sequential layers of ownership (Figure 6). In addition,
cooperatives are characterized by restricted residual claims,
i.e., they are owned and controlled by patrons (Fama and
Jensen, 1983). Consequently, the vertical ties between
subsequent layers of a federated cooperative structure entail
both a transaction and an ownership relationship.
Integrating supply chain and network analyses: The study of netchains
Chain and network science (2001) 17
9The single arrows denoting sequential interdependencies in Figure 5b refer to the flow of orders, not necessarily the physical flow of products.
Indeed, many B2B exchanges do not get involved in storage or physical handling of products; they go directly from a particular supplier
to a particular buyer.
10 A patron is defined as any person who transact with a firm. For example, a farmer in an agricultural cooperative, a depositor in a savings
and loan mutual association, a borrower in a credit cooperative, or a buyer in a consumer cooperative.
11 Contrasting to this federated or multi-layered structure, patrons are direct members of a regional cooperative in a centralized structure.
a) EDI-based procurement b) internet-based procurement
Figure 5. inter-organisational collaboration induced by information technology.
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The assignment of ownership in a cooperative to its patrons
is often explained as a transaction cost minimization strategy,
which is a source of value associated with sequential
interdependencies. When farmers own - and, therefore,
control - an agricultural cooperative they avoid potential
hold-up situations arising from location and temporal asset
specificity. For example, by forming a cooperative, dairy
farmers can invest in equipment for storage and processing,
thereby avoiding downstream pressures to reduce prices
given the perishable nature of their product. Additionally,
market contracting is costly when the firm has better
information than its patrons (or vice-versa). In case a firm
knows more about the quality of the product it sells, it has
an incentive to deliver a lower-quality product than originally
promised. In this case, customer ownership reduces the
firm’s incentive to exploit its information advantage.
Hansmann (1996) explains the formation of consumer
and agricultural supply cooperatives on the basis of
measurement problems of this sort.
Notice that there are multiple sequential interdependencies
in many farmer cooperatives, since in one occasion farmers
sell their output to the cooperative (e.g., milk), while in
other occasions they acquire production inputs from the
cooperative (e.g., seeds and fertilizers). These
interdependencies are not properly classified as reciprocal
because these transactions are not necessarily carried out
together, except in some cases where the cooperative
“bundles” services (e.g., product acquisition and technical
support) and products (e.g., farm inputs). As discussed
previously, the contractual hazards created by these
sequential transactions determine ownership by farmers,
which then acquire rights to control (or “plan”) the
allocation of resources through successive stages of the
supply chain.
In addition to these sequential interdependencies, federated
cooperative structures are also characterized by pooled
and/or reciprocal interdependencies among members (or
cooperatives) within the same horizontal layer. For example,
individual members within the same layer keep their
decision-making autonomy, but pool their financial and
productive resources to create a higher-level structure to
develop related businesses, therefore characterizing a pooled
interdependence. This higher-level structure defines
common, standardized rules to commercialise products,
purchase inputs, transfer information, and divide the
residual claims among members.
Additionally, Bonus (1986) refers to the local cooperative
as a “social group” with an “esprit de corps.” The formation
of reciprocal interdependencies among farmers in local
cooperatives is explained as a consequence of intimate
personal knowledge and strong social ties, a distinguishing
characteristic of rural communities. In those circumstances,
members are likely to employ joint decision making and
problem solving to coordinate their activities - i.e., mutual
adjustments. As a result, the transactional and ownership
components of the vertical ties are embedded in a network
of personal relationships among members. These social
attachments may foster the emergence of trust, which tends
to neutralize potential internal conflicts and opportunistic
behaviour. In other words, reciprocal interdependencies
may positively affect vertical transactions between layers.
According to Staatz (1987), some cooperatives have an
identifiable base of member-patrons who are more inclined
to reveal strategic, proprietary information to their
cooperative (and vice-versa). Farmers can also be members
of more than one local cooperative - such as in the case of
farmer Fin figure 6 - which tends to facilitate the joint
Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
18 Chain and network science (2001)
Figure 6. An example of macrohierarchy – The federated cooperative structure.
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coordination of local cooperatives belonging to a higher-
level (regional) cooperative.
Therefore, the analysis of vertical patterns of ownership
between organizations should also consider the nature of
the interdependencies involving firms within the same layer,
which tend to be either pooled or reciprocal. Layers that
are more in the base of the hierarchical structure are more
likely to present a higher proportion of reciprocal
interdependencies due to social interactions among
individual members. Nevertheless, the concept of
macrohierarchy based on the netchain framework helps to
accomplish the simultaneous assessment of these
interdependencies and how they influence the nature of
ownership ties.
5. Conclusions
SCA and NA are important, yet analytically disconnected
approaches to study inter-organisational collaboration
because they focus on different types of interdependencies.
Netchain analysis attempts to integrate SCA and NA by
considering simultaneously all types of inter-organisational
interdependencies, which correspond to distinct sources
of value and coordination mechanisms. This is important
for both positive and normative reasons.
In a positive sense, the simultaneous account of distinct
interdependencies is crucial to the analysis of complex inter-
organisational relations, instead of assuming that the world
is arranged either vertically or horizontally. If only one
particular type of interdependence is focused, crucial
elements involving other types of interdependence are likely
to be missed, which may be responsible for a substantial part
of the rent creation in the system. Therefore, the netchain
perspective posits that the assessment of interdependencies in a
given inter-organisational setting is the first analytical step.
In a normative sense, the netchain approach can reconcile
the somewhat diverging ways of how SCA and NA inform
business policy. The literature on supply chain management
emphasizes the role of managerial discretion to coordinate
the flow of products, information and decisions in supply
chains. Thus, according to SCA, managers are well advised
to actively coordinate the chain within which their firms
are located to minimize transaction costs, optimise
production flows, or capture value along the chain. inter-
organisational collaboration in the NA literature, however,
tends to be portrayed as more autonomous and emergent.
Following this perspective, managers should develop social
ties where activities are mutually adjusted instead of planned
and at the same time pursue flexibility to position their
firms in valuable networks to benefit from new information
and knowledge diversity.
From the point of view of netchain analysis, all business
policy recommendations are valid depending on the type
of inter-organisational interdependence they are addressing.
Therefore, it is clear that normative decisions should first
involve considerations about interdependencies. As
Levinthal and Warglien (1999, p. 343) put it, the
performance of complex systems should be enhanced
through “a shift from designing on the basis of a given set
of interdependencies to designing by manipulating the set
of interdependencies.” For instance, the first crucial decision
faced by an entrepreneur who wants to invest in a
distribution system is not contract negotiation, logistics
design and other coordinating activities. The entrepreneur
must first define the type of interdependence that the
distribution system will embody: he or she can either
connect several suppliers and customers through a B2B
exchange or manage the flow of specialty products from a
restricted set of suppliers to a restricted set of buyers. For
this reason, the netchain perspective also insists that the design
of interdependencies is the first step in the formulation of inter-
organisational strategies.
Several lines of future research can expand and improve
the framework proposed herein. It would be useful to
develop quantitative measures for the assessment of a firm’s
position in a netchain and distinguish between the different
types of interdependencies involved in the system. The vast
literature on social NA can contribute to the development
of those measures12. Another possible line of research could
involve an endogenous demarcation of firm boundaries in
a netchain. In other words, in how many layers should a
firm be present (the vertical scope of the firm), and what
should be the extent of its participation in each layer (the
horizontal scope)? A dynamic analysis of the evolution of
netchains, in particular with regard to possible changes in
the interdependencies between agents when they transact
over time, is also needed. In addition, it is important to
include the role of “chain service providers,” such as financial
Integrating supply chain and network analyses: The study of netchains
Chain and network science (2001) 19
12 Blockmodeling is a tool in social NA that allows for the aggregation of agents into sectors; the network of sectors is analyzed instead
of the network of agents. Some authors have used this technique to model vertical relationships (Madhavan et al., 1998). However, much
intra- and inter-layer information is not captured by this analysis. As Wasserman and Faust (1994) remark, a blockmodel is “a model, or
a hypothesis about a multi-relational network. It presents general features of the network, such as the ties between positions, rather than
information about individual actors” (p. 395, emphasis in the original). In contrast, the netchain approach attempts to model specifically
how each agent in a layer is related to agents in other layers.
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organizations and logistics firms, which are not direct
participants in a netchain but contribute in the process of
value creation by interacting with several layers.13
Finally, netchain analysis could simultaneously assess more
than one netchain at a time in order to evaluate competition
between alternative netchains. In many industries, firms
are developing competing networks (Gomes-Casseres, 1994)
that are actually competing netchains. For instance, several
airlines are forming alliances to expand bookings on
international markets, share computer reservation systems,
explore marketing practices such as frequent flyer programs,
and in some cases develop joint procurement operations.
It is clear these alliances should not only be defined in terms
of the (horizontal) ties between airlines, but also in terms
of their ties with agents on upstream (aerospace
manufacturers, input suppliers) and downstream layers
(travel agencies, web sites and customers). The relative
performance of competing netchains depends crucially on
how their underlying interdependencies deliver superior
sources of value, and how firms employ appropriate
coordination mechanism to cope with those
interdependencies.
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Sergio G. Lazzarini, Fabio R. Chaddad & Michael L. Cook
22 Chain and network science (2001)
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... This study presents a conceptual framework called the Netchain according to Ref. [35] adapted from Ref. [36]. Based on this Netchain, a network structure is made up of dual components, which are the vertical and horizontal dimensions. ...
... On the other hand, the second dimension, which is the horizontal component posit the correlation existing among players in the same chain link (between farmers, between processors, among others). Lazarrini [35] formulated the concept of the netchain in order to depict interconnection between the two components in the supply chain, as shown in Fig. 1. Fig. 1 posits the vertical connection among the different actors along the supply chain and horizontal correlation among actors in the same chain. ...
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