Network learning: the effects of partners' heterogeneity of experience on corporate acquisitions

Administrative Science Quarterly, March, 2002 by Christine M. Beckman, Pamela R. Haunschild

A substantial body of research shows that firms tend to be influenced by their network partners in decisions about and adoptions of various practices and structures. The experience of network partners is communicated in various forums and tends to be influential relative to other information sources (Haunschild and Beckman, 1998). Network partners have been found to influence many diverse practices, including campaign contributions (Mizruchi, 1992), multidivisional form adoption (Palmer, Jennings, and Zhou, 1993), and several acquisition-related activities (e.g., Davis, 1991; Haunschild, 1993; Palmer et al., 1995; Davis and Greve, 1997). Although this research has been valuable in showing that networks can affect major activities of firms, the theoretical explanations underlying these effects have been somewhat limited. There is a heavy emphasis on institutional theories, with its attendant focus on imitation and mimetic isomorphism as drivers of network influence. Institutional theories predict that firms wi ll adopt the same practices as their network partners because their partners are conveying cultural models, systems of rules, and/or taken-for-granted assumptions that dictate which activities are legitimate (Powell and DiMaggio, 1991). So, for example, firms adopt poison pills as a defense against hostile takeovers when their network partners adopt them because these adoptions substantiate the legitimacy of the practice in question, resulting in normative pressures to adopt (Davis, 1991). (1) Or firms imitate network partners in their acquisition activities because of normative or informational influence flowing through the network ties (Haunschild, 1993).

Careful consideration of the theory of action supporting this body of research reveals limitations in terms of the range of behaviors available to firms. Firms either imitate or not, they do not learn or make inferences that result in changing the practice or structure in question. In this paper, we address this limitation by proposing a different theory of action, through which firms use the experience of their network partners and learn by sampling that experience. Drawing on theories of statistic sampling and group decision making, we propose that firms in networks composed of partners with heterogeneous experiences will be in a better position to benefit from these experiences than firms in networks composed of partners with homogeneous experiences and will therefore make better decisions.

NETWORK INFLUENCE AND LEARNING

The experiences to which a firm is exposed through its associations with its network partners affect its decisions. The interlock network, for example, has been shown to affect firms' decisions because directors bring their experiences with similar decisions in other companies to bear on the current decision (Davis, 1996). Researchers have found support for this idea in interviews conducted with chief executive officers (CEOs), who noted that sitting on other firms' boards provides valuable first-hand information that executives then use in their own firms' decisions (Useem, 1984; Lorsch and Maclver (1989: 27). Evidence showing that networks other than board interlocks influence firms' decisions suggests this is a general network phenomenon (e.g., Galaskiewicz and Wasserman, 1989; Mizruchi, 1992; Davis and Greve, 1997) and is not limited to the interlock context. In general, networks enable forums for discussion, direct attention to new practices, and facilitate the transmission of information and normative p ressures for firms to engage in certain activities.

Networks are considered a potential source of learning (e.g., Levitt and March, 1988; Powell, 1990; Uzzi, 1996), facilitating learning by promoting efficient skill transfer among firms (Hamel, 1991) or by producing novel syntheses of existing information (Powell, Koput, and Smith-Doerr, 1996; Stuart and Podolny, 1997). Other positive effects of networks come from studies documenting the power of networks to affect outcomes like survival (Uzzi, 1996), growth (Podolny, Stuart, and Hannan, 1996), the likelihood of being taken over by another firm (Palmer et al., 1995), and the time it takes a division to get a product to market (Hansen, 1999). Thus, networks have been shown to affect firms' decisions, but it is unclear if they affect the quality of these decisions. Depending on the variety of information available, firms in some network structures may make better decisions than firms in other network structures.

One important attribute of network structure that can affect decision quality is partners' heterogeneity. Firms in networks composed of partners with heterogeneous experiences should be in a better position to benefit from the variety of partners' experiences, and this benefit should be reflected in higher-quality decisions. Network partners' heterogeneity provides firms with more diverse samples of experience from which to learn. For example, if a firm is trying to determine what strategies work well in a given situation, it might look to its own prior experience with various strategies and the outcomes it experienced, but such experience is likely to be biased in various ways (e.g., March, Sproull, and Tamuz, 1991). Although some firms may learn from their own experience, others may have difficulty doing so, especially when that experience is limited. Firms therefore often look to the experiences of others, especially networked others, for guidance. Because networks tend to be stable, changes in net-work st ructure are unlikely to occur easily or frequently (Mariolis and Jones, 1982), which means that decision quality is likely to be affected by the heterogeneity inherent in a firm's current network structure.