Competitors as Allies: A Study of Entrepreneurial Networks in the U.S. Wine Industry

We are witnessing what at first glance would appear to be two conflicting trends. First, business is becoming increasingly competitive and very few companies or industries are immune to increasing global competition. Second, smaller entrepreneurial firms are proving to be the "engines of growth" both in the U.S. and abroad. Although large corporations would seem to have the resources necessary to compete internationally and to respond to rapidly changing environments, they have often proved unable to adapt. How are smaller firms able to identify opportunities and focus their limited resources without the extensive staffs of their larger rivals? This research looks at interorganizational networks as a source of competitive advantage for entrepreneurial firms. We focus particularly on the nature of networks with competitors and how those networks can be used to overcome the disadvantages of being small and lead to improved performance in entrepreneurial firms. Neoclassical economic theory argues that all firms are profit maximizers, competing with each other for scarce resources (for example, Marshall 1890). Suppliers and customers can also be viewed as "competitors" in the neoclassical context. Williamson (1975) developed the notion that there are two basic ways to compete within such a system - markets and hierarchies - although he has more recently acknowledged the stability of hybrid modes (Williamson 1991). Following the "market" model, the firm can focus on being efficient within a small part of the economic activity and rely on other specialized firms to supply other parts of the value of a product or service, thus trusting market forces to discipline all firms and ensure efficiency overall. But Williamson (1975) recognized that there were transaction costs associated with market arrangements resulting from information asymmetries, opportunism, and strategic considerations. Consequently, some firms follow the "hierarchies" approach to organization, internalizing their market functions, performing more of the stages of the production and marketing processes within their own organizational hierarchies, and thus avoiding some of the inefficiencies and costs inherent in the market system. The presence of interorganizational networks, which have some of the advantages of both "markets" and "hierarchies," has been noted for some time and described by a number of organizational researchers (Aldrich and Whetten 1981; Van de yen, Hudson, and Schroeder 1984; Ouchi 1980, Miles and Snow 1986; Powell 1987). These networks provide a number of otherwise unavailable advantages to entrepreneurial firms. Networks may be used as a form of strategic alliance between vendors and customers - an alternative to vertical integration (Larson 1991), to "tap resources that are `external' to them, i.e., that they don't control" (Jarillo 1989, 133), and to extract noncash benefits from a venture capital relationship (Landstrom 1990). In a survey of the CEOs of young, independent, technology-based firms, McCann found that "joint ventures and alliances were the number-one choice being pursued to gain access to distribution channels and new markets" (1991, 190). Interorganizational networks are also a way for entrepreneurs to secure information about market relationships that can be exploited to ensure ongoing competitive advantage (Kirzner 1973). This enhances their position and allows them to compete more effectively (Aldrich and Zimmer 1986; Aldrich, Reese, and Dubini 1989; Ohmae 1989). Birley (1985) noted the importance of informal networks of family and friends in the startup phase of an entrepreneurial company, while Mazzonis (1989) and Shaw (1991) felt these networks had a role in the diffusion of knowledge. Butler and Hansen (1989, 1991) and Rothwell (1989) found that almost all entrepreneurs have some type of external information linkages which serve both strategic and functional business needs. In addition, the research of Niederkofler (1991) suggests that it may be harder for entrepreneurs to achieve those benefits through alliances with larger firms. …