Network Organization

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What is a network organization?

A network organization is a decentralized company structure that operates as a network of autonomous businesses or business units as opposed to a traditional centralized, hierarchical structure.

Each unit is responsible for its own profit and losses, and all units share a common goal of maximizing the value of the network as a whole. Units can share resources and collaborate where it makes sense to do so commercially.  Units can be under the same consumer brand or operate under independent brands.

Network organizations can be described as a structure in which individuals are connected through a series of relationships. These relationships can be categorized into various types:

  1. Vertical: Refers to status relationships (boss/employee)
  2. Horizontal: Refers to task relationships (colleague/co-worker)
  3. Initiative/Assignment based: Refers to forming and adjourning teams that only exist for a specific purpose and then disbands
  4. 3rd party relationships: Relationships with vendors or sub-contractors that are not permanent members of the organization
  5. Partnerships: Collaborating with other organizations or sharing resources to the benefit of both parties.

Network organization theory suggests that organizations should be structured as a network of teams instead of a hierarchy of departments and individual managers to allow for more flexibility and adaptability to changing market conditions.

There are a number of benefits to this type of structure. These include improved communication, decreased bureaucracy, and increased creativity and innovation. Networks are also better able to respond to change, which is becoming an increasingly important factor in the modern business landscape.

Network Organization

There are two types of network organizations: Internal network organization and external network organization. 

  • Internal: Within organizational design, a network organization consists of various internal working relationships operating across multiple departments, functions and levels (as well as outside parties) to deliver the organizational goals.   
  • External: Network organizations form a group of companies that share resources via formal and informal relationships to deliver on individual goals. For example, sharing of workspaces in a building or bulk ordering from a supplier to reduce logistics costs. 

Examples of a network organization

For example, the Starbucks coffee chain is structured as a network of independently owned and operated stores, each of which licenses the Starbucks brand and sells its products. This allows Starbucks to scale rapidly while maintaining control over its stores' quality and customer experience. All stores benefit from shared services provided across the group, such as marketing campaigns and product development.

Another example can be found in most financial service organizations that operate in different markets, such as Momentum Metropolitan, a multi-national insurance business in South Africa, the United Kingdom, and India. The brand operates under different consumer brands, each responsible for its own products, profit, and loss while contributing to the overall group earnings.

What are the types of network organizations?

There are various types of network organizations:

1. Functional network organization

A functional network organization is one in which the members are organized by their function within the company. So, you might have marketing, sales, and customer service departments all working together to achieve the company's goals.

2. Product network organization

A product network organization is one in which the members are organized by their product lines. So, you might have a soft drink division, a snack food division, and a cereal division, all working together to create products for sale.

3. Market network organization

A market network organization is one in which the members are organized by their market segments. So, you might have a children's clothing division, a women's clothing division, and a men's clothing division all working together to create products for different markets.

4. Geographical network organizations

A geographical network organization is one in which members are organized according to geographical region.  For example, you might have all the business units in Europe, Middle East, and Africa organized into the EMEA region. The South American businesses would fall within the LATAM region. 

5. Agile network organizations

An agile network organization is one where members are organized around a specific task or goal before disbanding. Examples include project teams that are pulled together across various business units to collaborate on a specific project for a designated period of time before moving back to their business units.

Benefits of a network structure

This type of structure has a number of benefits, chief among them flexibility, and scalability.

Since teams can be created and disbanded as needed, a network organization is very flexible and can easily adapt to changes in the market or the business landscape. And because teams are interconnected, new employees can be quickly integrated into the organization without having to go through a lengthy onboarding process.

Another benefit of a network organization is that it is scalable. The network can easily be expanded when the company grows to accommodate the additional employees. And if the company needs to downsize, the network can be shrunk to fit the new, smaller workforce.

A network organization is an ideal structure for constantly changing and evolving companies. It is also a good choice for companies that are growing rapidly or that have a large workforce.

Limitations of a network structure

A network structure can be a great way to organize a company or project. However, there are also some limitations to using this type of structure.

One limitation is that it can be difficult to maintain a sense of control or hierarchy in a network organization.

In addition, because people are working in loosely connected groups, it can be difficult to ensure that everyone is aware of what's happening and that everyone is on the same page. This may cause disunity and delay in meeting deadlines and company targets.

In networked organizations, there is a risk of duplication occurring due to the nature of how the organization operates. For example, teams or functions in different areas could be working on similar activities. As such, network organizations require greater visibility of work and a mature leadership structure to operate effectively.

Finally, because the company is decentralized, it can be difficult to make decisions or take action when needed. This is because every decision needs wide consultation with the team before a consensus is reached and action taken.

Key takeaway

Network organization is a type of organizational design that delivers work through a network of working relationships that can exist within the context of a market, product, project, or function. This type of design is popular in global and multi-national organizations, the FMCG sector, and telecommunications, where scale, flexibility, and localization are critical to achieving success.

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