FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS: AN ANALYTICAL FRAMEWORK* AINO HALINEN. Turku School of Economics and Business Administration

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1 Journal of Management Studies 36:6 November FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS: AN ANALYTICAL FRAMEWORK* AINO HALINEN Turku School of Economics and Business Administration ASTA SALMI Helsinki School of Economics and Business Administration VIRPI HAVILA Uppsala University ABSTRACT This paper investigates the dynamics of business networks. We distinguish between con ned dyadic change and network change and show how change itself may be incremental or radical, using the punctuated equilibrium model of change. The concept of the critical event is introduced to highlight radical change. We propose an analytical framework where the ideas of mechanism, nature and forces of change are integrated. Two circles of network change (incremental and radical) are presented and transfers from one circle to the other are discussed. We believe this conceptual elaboration may have signi cant implications for future network dynamic research. INTRODUCTION Networking has recently become part of industrial reality in developed economies and, simultaneously, various network perspectives have become popular in business research (for reviews of network literature see Araujo and Easton, 1996; Iacobucci, 1996; Nohria and Eccles, 1992). In this paper we will investigate the dynamics of business networks by taking the so-called IMP Group's network approach to industrial markets as our starting point (see Turnbull et al., 1996). Within this predominantly Nordic and European research tradition, industrial markets are described as networks of inter- rm relationships. Companies build exchange relationships with other companies, and through these become connected to broader networks of business relationships. In accordance with the network model proposed by HaÊ kansson and Johanson (1985) and HaÊ kansson and Snehota (1995a), we view business networks as struc- Address for reprints: Aino Halinen, Turku School of Economics and Business Administration, Department of Marketing, Rehtorinpellonkatu 3, FIN±20500 Turku, Finland.. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

2 780 tures formed by three basic elements and connections between them: business actors, activities and resources. Actor bonds, activity links and resource ties bind the companies together, creating interdependence between them and stability in the market. From the viewpoint of an individual company, the network that it perceives the most relevant and to which it is connected forms the context for its business operations (see, for example, Anderson et al., 1994). The network contrains the company's activities but also provides new possibilities and opportunities to achieve desired goals. The business network thus incorporates the forces of both stability and change. The network approach views any company's business context in a holistic rather than fragmented way. It pays particular attention to the connectedness of business relationships and the borderless nature of the network in which each company is embedded. As di erent parts of a network are linked, change may emerge and shift from any one part to another ± an occurrence that the network view can reveal better than traditional organization theory or marketing approaches. The network approach o ers conceptual tools to the study of dynamics in business markets. It pinpoints the importance of both direct and indirect, close and distant relationships for understanding change and allows us to see that relationships may function in various important roles in the generation and transmission of change. The dynamics and change in business networks have recently aroused increasing interest among researchers of industrial marketing. Research has covered a broad range of issues, from the development and change of individual business relationships (e.g. Ford, 1980; Halinen, 1997; Wilson and Mummalaneni, 1986) to change processes in marketing channels (Wilkinson, 1990), small nets (triads) (Easton and Lundgren, 1992; Smith and Laage-Hellman, 1992) or in networks more generally (HaÊ kansson and Henders, 1995; HaÊ kansson and Snehota, 1995; Mattsson and HulteÂn, 1994). While there is increasing interest in the dynamics of business networks, we still know very little about how networks change and what the underlying forces behind their change are. Incremental evolution has been seen as the main mode of network change. Change is regarded as a result of a continuous networking process, the connecting of actor bonds, activity links and resource ties within a business network (HaÊ kansson and Snehota, 1995b, pp. 283±4). Radical changes or revolutions have been viewed as possible but unusual (Easton, 1992, p. 24). In most recent discussions, the possibility of revolutionary change has been brought up more openly, and authors have resorted to, for example, the punctuated equilibrium paradigm to form an understanding of network evolution (Easton and Araujo, 1994; Salmi, 1995). The aim of this paper is to elaborate on the process of change in business networks. An analytical framework is proposed for understanding and investigating network change. In the development of the framework, we wish to emphasize two points that we consider still to be neglected in present studies of network change. First, we argue that the mechanism of change in networks is circular rather than unidirectional. In contrast to traditional research approaches, where the focus is on environmental e ects on companies and business relationships, we place particular emphasis on the impact that a dyad may have on other connected relationships. By focusing on how change may spread via relationships, we make good use of the particular strengths of the network approach. Moreover, we argue that by AINO HALINEN, ASTA SALMI AND VIRPI HAVILA

3 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 781 employing existing change theories (see Van de Ven, 1992; Van de Ven and Poole, 1995), we are better able to understand the nature of network change and the forces that lie behind it. We found the punctuated-equilibrium model to be especially useful in the network context. The structure of the paper is as follows. First, we shall examine the mechanism of change, emphasizing the central role of business relationships, i.e. dyads and their role as both generators, recipients and transmitters of change in networks. Secondly, we shall focus on the nature of network change, both as an incremental and radical shift. Thirdly, we shall examine the forces of change in business networks. The mental process of `enactment' and the intentionality and interdependence of business actors are seen as important explanations of both network change and stability. It is further suggested that the concept of the critical event encompasses radical change in particular. Finally, the proposed ideas are summarized in an analytical framework of change in business networks. Along the way, our conceptual elaboration is illustrated by evidence from earlier empirical research. THE MECHANISM OF CHANGE IN BUSINESS NETWORKS The network approach to industrial markets emphasizes the role of a businessrelationship dyad in understanding change in business networks (e.g. Anderson et al., 1994; HaÊ kansson and Snehota, 1995). In an ongoing business relationship, the two parties are usually seen to adapt to each other ± that is, change their behaviour vis-aá-vis one another. Continuous changes in the relationship occur due to the interaction between the parties. Change may concern actor bonds, activity links and/or the resource ties which exist between rms. Single dyads play a central role in the change mechanism of business networks. Substantial changes are initiated and carried out in interaction between the companies. It is obvious that the development of a business network is also in uenced by various forces external to it, for example, general economic conditions. Such changes will, however, be transformed into or at least combined with endogenous change through the networking process, where relationships function as transmitters or transformers of these changes (HaÊ kansson and Snehota, 1995b, p. 272). The change occurring in a single dyad may have di erent consequences on other connected relationships. We suggest that part of the change always remains within a business-relationship dyad, whereas some part of change may also a ect other relationships and actors in a network. The former we call con ned change and the latter connected change. Con ned Change Network theorists have emphasized the coexistence of stability and change in business networks. The stability of existing business relationships provides a platform for continuous interaction and change (Easton, 1992, p. 23). The overall pattern of business relationships seems to be relatively stable, even though existing business relationships change in content and strength (HaÊ kansson and Snehota, 1995b, p. 269). Con ned changes characterize this seemingly `stable situation' in a network. They

4 782 AINO HALINEN, ASTA SALMI AND VIRPI HAVILA Figure 1. Illustration of con ned change in a business network remain within a dyad and are not received or acted upon by other actors in the network. Various types of change may be con ned to a business relationship. For example, the number of persons involved may increase or decrease, the perceived trust between the parties may deepen or weaken or the activities performed in cooperation may change in character with no e ects on other relationships. Figure 1 presents a case of con ned change. It depicts a small network of connected business relationships. The relationships between B and its customers C 1,C 2 and C 3 have changed character between Time 1 and Time 2, which is illustrated by the change in thickness of the three lines. These changes, however, have occurred within the dyads and have not spread from one dyad to another. Such changes occur throughout the network due to the parties' interaction. In the following, the case of a Swedish component manufacturer and its sales subsidiaries and customers in the German market is used as an empirical illustration of con ned change (see Havila, 1996). The Swedish component manufacturer (A) used a sales subsidiary (B) of another Swedish company in Germany to take care of its customer contacts in the German market. This stable situation (see gure 1) endured for about ten years, during which time various changes occurred within individual relationships in the network. In B's relationships with customers C 1,C 2 and C 3, for instance, contact patterns were changed. The eld salesman, who had previously taken orders from customers, lost his key role of keeping in touch with customers when the company decided on an organizational change. Another salesman located at the o ce was to be responsible for orders, which gave him much more in uence over customer relationships. This change can be characterized as a con ned change that was not transmitted to or received by other relationships. Connected Change As soon as a change in one business relationship also in uences some other business relationship(s), it can be characterized as connected change. We de ne connected change as a change in one relationship that is received and acted upon by other actors in the network. The notion of connected change includes the idea that a dyad may function both as a receiver and transmitter of change. HaÊkansson

5 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 783 Figure 2. Illustration of connected change in a business network and Snehota (1995a, pp. 39±41) call this the `network function' of a business relationship. Easton and Lundgren (1992), on the other hand, provide an enlightening analysis of the various ways in which an individual company may receive or transmit change. Figure 2 illustrates connected change. A change in the relationship between A and D a ects the relationships that C 1 maintains with B, D, E and F. Parties to these relationships act upon the change they perceive in the relationship between A and D by making changes in their own relationships. The case of the Swedish component manufacturer can again be used as an example. After a seemingly stable period, the Swedish manufacturer (A) decided to use an additional marketing channel ± a sales subsidiary of its own (D) ± that had not previously sold such components in Germany (see gure 2). As a consequence, customer C 1 received an o er from both the sales subsidiary B and from A's own subsidiary D. The o er from D had no inbuilt margin and was thus 10 per cent lower. C 1 found it very peculiar that the same product was sold at two di erent prices and began to purchase more product from an Italian (E) and a Swiss (F) component manufacturer. As a result, C 1 's relationships with E and F grew stronger, while those with B and D (and thus with A) weakened. This incident also started a price war in the German component market, which in the end led to the Swedish manufacturer losing its market share. This network change originated from the channel decision of one actor: the Swedish manufacturer. The company's reaction to various di erent change forces that it encountered in its business context had signi cant consequences on several relationships in the European component market. The network approach helps to put the initial event in its broader context, and analyse its in uence on other connected relationships. A change which is spread to another business relationship may cause a `domino e ect' among several connected business relationships (see Hertz, 1993, p. 271). Because of various network interdependencies, indirect relationships relatively distant from the focal dyad may be a ected. Smith and Laage-Hellman (1992) note that there are several transformation possibilities open to actors within

6 784 AINO HALINEN, ASTA SALMI AND VIRPI HAVILA connected relationships. The connected parties can react to the change in di erent ways, so that changes in the connected relationships need not be of the same kind as the change in the focal dyad (HaÊkansson and Snehota, 1995a, p. 39). The character of a relationship may change or in an extreme case the relationship is dissolved and new relationship(s) may be established instead. As we see it, change always emerges at the level of dyads, where it is potentially generated, received and transmitted to other business relationships. The role of a dyad in network change is thus threefold: it generates change by itself, but also functions as a recipient and a transmitter of change with respect to other relationships in the network. From the perspective of business dynamics, this type of connected change is of particular interest. INCREMENTAL AND RADICAL CHANGE IN NETWORKS Network change has usually been regarded as an evolutionary process. The focus has rested on change through gradual and incremental steps as network actors interact and adapt to each other. However, the recent waves of acquisitions, mergers and bankruptcies in various elds of business have shown that discontinuities and revolutionary change can also happen in business networks and should therefore be examined in models of network evolution. In order to include both gradual and revolutionary change in the analysis of business networks, we shall utilize the punctuated-equilibrium model. According to this model, systems evolve through the alternation of periods of equilibrium, in which persistent underlying structures permit only incremental change, and periods of revolution, in which these underlying structures are fundamentally altered (Gersick, 1991). The punctuated-equilibrium paradigm of change has aroused particular interest in the social sciences and organization research (Gersick, 1991; Tushman et al., 1986; Van de Ven, 1992), and it also seems fruitful for the study of business-network dynamics (see Easton and Araujo, 1994; Salmi, 1995). The punctuated-equilibrium model o ers three concepts that are particularly useful for network analysis: a deep structure, periods of stability [1] and revolutionary periods. Deep structure refers to the underlying structures of the system. [2] According to Gersick (1991, p. 15), deep structure is `a network of fundamental, interdependent ``choices'' of the basic con guration into which a system's units are organized, and the activities that maintain both this con guration and the system's resource exchange with the environment'. In the business-network context, we de ne deep structure as the fundamental choices which sets of business actors have made concerning who they are connected to. The deep structure includes the actor bonds, activity links and resource ties the network actors have built between each other over time. During periods of stability, the basic organization and activity patterns of the system remain essentially the same and only incremental changes occur. This does not imply a static situation, however. The system is in the process of continuous movement and adjustment (Gersick, 1991). Periods of stability are relatively long term and thus represent the `usual' standing of a network. Empirical evidence of

7 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 785 stability in business networks is predominant. In fact, the IMP Group's network approach largely emerged from an empirical notion of stability of industrial market structures. During the periods of stability, the relationships ± that is, actor bonds, activity links and resource ties ± between actors remain, but their character may change. The punctuated-equilibrium model proposes that the longer periods of stability are punctuated by sudden and revolutionary changes. These are `relatively brief periods when a system's deep structure comes apart, leaving it in disarray until the period ends, with the ``choices'' around which a new deep structure forms' (Gersick, 1991, p. 20). In network terms, the underlying structures of actor bonds, activity links and resource ties are fundamentally altered during revolutionary periods. Such periods imply radical change in individual dyads. Change can be considered radical when a relationship between two actors is broken or a new relationship is established. This may happen, for instance, when one actor disappears from the network together with connections to other actors, or a new actor enters the network, so initiating new relationships. The punctuated-equilibrium model also suggests that systems do not shift from one kind of structure to another through incremental steps but through frame-breaking change (Gersick, 1991, pp. 19±22). It is likely that this period of destruction involves great uncertainty and a feeling of discomfort for the individual actors involved (see, for example, Halinen, 1997, p. 281; Salmi, 1995, p. 197). We thus suggest that the evolution of business networks involves both incremental and radical change. The two types of change are viewed here as empirical categorizations. Con ned change at the level of dyads may manifest itself either as gradual and incremental, or instant and radical. Where the change also a ects other connected business relationships and thus becomes a network change, it may similarly appear as incremental or radical. Incremental change in a business network involves changes in the nature and content of single relationships, while radical change means that relationships are dissolved or new relationships built. THE FORCES OF CHANGE BEHIND NETWORK DYNAMICS At di erent time periods a business network may be in either a stable or revolutionary state. The punctuated-equilibrium model suggests that di erent explicatory factors are at work in these states. Time is thus used as an avenue for incorporating di erent explanations of change processes (see Van de Ven and Poole, 1995, p. 531). We call these di erent explanations forces of stability and change. We suggest that di erent intertwined forces underlie and create network dynamics. The network approach emphasizes the interdependence of actors, activities and resources as a major force. It also stresses the intentionality of individual actors over environmental in uence: business actors are goal-oriented and aim to control the network and their interaction with each other (see, for example, HaÊ kansson and Johanson, 1992). Stability is an inherent feature of network, for which several reasons can be found. To begin with, industrial systems follow an industrial logic ( Johanson and Mattsson, 1992, p. 207), and technical and resource interdependencies cause

8 786 rigidity in the network. Increasing market concentration, high costs of change (switching costs) and risk-reducing strategies have also been suggested as reasons for stability (Turnbull et al., 1996, p. 44). Salmi (1995) recently found that institutional interdependencies cause rigidity. Various institutional rules for `correct' network behaviour emerge as an outcome of interaction between network actors. Moreover, the inclination of both individuals and organizations to stick to former behaviour patterns and resist change has a stabilizing e ect. As we see it, all the stabilizing forces are manifested in inertia, that is a tendency to maintain the deep structure of the business network. Due to inertia, the business network experiences only incremental changes. From the perspective of network dynamics, the forces of change are even more interesting. The network is never in a state of equilibrium, but, due to interaction between business actors and their di erent intentions, tensions and forces of change are always present. Since radical changes also occur in business networks, it is logical to ask what triggers these changes. In terms of the punctuated-equilibrium model, we should consider what factors trigger revolutionary periods and are able to dismantle the deep structure of a business network. We will now turn to this issue by introducing the concept of the critical event. The nature of critical events as manifestations of change forces is discussed and illustrated by way of ndings from recent network research. Critical Events and `Enacted' Reality The concept of the critical event (or critical incident) has been used in studies of business relationships, when referring to those events that have a decisive e ect on relationship development (ElsaÈ sser, 1984, p. 163; Halinen, 1997, p. 272; see also Hertz, 1993, p. 246). For the purpose of understanding network dynamics, `critical event' is de ned here as an incident that triggers radical change in a business dyad and/or network. It is a manifestation of the change forces inherent in networks. A critical event has the potential to break the deep structure of a dyad, that is the connection between two parties. To develop a radical change in a business network, the e ects of the event have to be received in several relationships. A critical event should be seen as an impulse that sets the stage for radical change (see Gersick, 1991, p. 22). The need for such change may have developed over time as various con icting forces ± some cementing inertia, others inducing change ± create tensions and the potential for instability. Whether a revolutionary period is started or not depends ultimately on the actions and intentions of the companies in the network. It is not the mere event itself that is critical but the way the parties of a focal and other dyads react to it. A critical event is the impulse that allows tensions to be released and the network to recon gure. It may also be the `last straw' in a series of developments that nally leads to major company action. Just as for societal revolutionary change (for example, the destruction of the Berlin Wall), the seeds of the change may have been sown some time ago and the pressure for radical change evolved during a long but seemingly stable period of incremental change. The perceptions and intentional behaviour of business actors are thus decisive for change. Industrial reality is continuously `constructed' by the human actors involved in the business (see Berger and Luckmann, 1967). The mental process of enactment can be regarded as a key explanation for both stability and change AINO HALINEN, ASTA SALMI AND VIRPI HAVILA

9 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 787 (Melin, 1989, p. 168). What can be considered a critical event is ultimately an empirical question. It is business actors and their interpretations that determine what is critical and what is not. The actions taken by companies in their business relationships, and the degree to which these actions are received and acted upon in other connected relationships, ultimately determine whether any framebreaking changes occur in a business network. The degree of revolutionary change may also di er according to the number of actors and relationships that become part of it. Types of Critical Event Critical events may arise from dyads in di erent parts of the business network or ultimately from outside it, from the broader business environment and society as a whole (see Anderson et al., 1994, p. 4; HaÊkansson and Snehota, 1995b, p. 271; Melin, 1989, p. 167). In the following, we discuss the potential critical events that emerge from interaction between companies, and from the broader environment. Critical events arising from interaction in the dyad. Critical events arising from business relationships characterize the role of dyads as generators of change. To begin with, certain events occurring in interacting companies become potentially critical for a dyad. The impact of personnel changes in the upper echelons of the organization has been particularly emphasized (Easton and Araujo, 1994, p. 387; Gersick, 1991, p. 23). These changes are likely to be preceded by a crisis or at least a stated need for changing the company's strategy (Gersick, 1991, p. 23; Salmi, 1995, p. 191; Tushman et al., 1986, p. 38). Shifts in organizational structures have also been identi ed as critical events. In her study of advertising agency±client relationships, Halinen (1997) found that an organizational change in a client company, caused by rapid international expansion of the company and various con icting interests within it, functioned as a critical event in the development of the company's advertising agency relationship. Several events that occur within a dyad ± that is, through interaction between two business actors ± may prove to be critical. All the entrepreneurial and strategic actions of companies fall into this category. Entrepreneurial actions always require the change or development of business relationships (HaÊ kansson and Snehota, 1995b, p. 273), and strategies are related to a company's interaction with and positioning towards other actors in the network (Melin, 1989, p. 169). For instance, changes in a company's business, marketing and purchasing strategies are potential critical events. An empirical case of a Swedish manufacturer and its French customer shows how a shift in the marketing strategy of a customer triggered radical change (Havila, 1996). A ten-year-old, well-established relationship was suddenly dissolved when the French customer (a component manufacturer) decided to focus on a new and less demanding customer segment and lowered the quality standards of its products. The high-quality, semi- nished materials that the company had bought from the Swedish manufacturer were no longer needed and the relationship came to an end. Acquisitions, mergers, bankruptcies and partner-switching may also be identi ed as potential critical events for a relationship and the broader business network (for empirical support see, for example, Hertz, 1993). In all of the events mentioned, a

10 788 AINO HALINEN, ASTA SALMI AND VIRPI HAVILA dyad is the generator of radical network change, on the condition that other actors in the network perceive the event as critical and act upon it. Critical events arising from the business environment. Critical events may arise from general economic, political, social and technological conditions. For instance, changes in technology, institutional conditions or industrial structures, and their in uence on actors in business networks, have recently been analysed (Mattsson and HulteÂn, 1994). Environmental events concern several network actors simultaneously. Economic recession is one environmental change force behind a variety of critical events. It has a sweeping e ect on business networks where actors are dependent on each other through various activity links and resource ties. The impact of economic problems in one industry is rapidly transferred to other industries. Economic downturns have, for instance, a ected companies' advertising expenditures and as a consequence the advertising and media companies' business conditions. The 1990±93 recession in the Finnish economy led to a series of bankruptcies and a fundamental restructuring of the advertising industry. For an individual business relationship, a recession with its side-e ects may turn out to be critical and lead to the dissolution of the relationship (see Halinen, 1997). We want to emphasize, however, that while environmental forces seem to have a general impact on networks, they are always transmitted within the network through individual relationships. In the network context, environmental forces are channelled through business relations with other speci c parties, rather than operating as a kind of general market force in uencing the rm (HaÊ kansson and Johanson, 1993, p. 44; Nohria, 1992, p. 5). Together with other change forces, they may materialize into events that the business relationship actors perceive as critical. Empirical support can be found, for instance, in the study carried out by Salmi (1995) that analysed a Finnish company's coping with a large-scale environmental change process, namely the economic reform of the former Soviet Union. According to the study, the fundamental and unique change forces relating to the transformation of an economic system were channelled through the interorganizational relations which the focal company maintained. The company perceived these change forces as a stream of events in its business relations, and some although not all of the events were considered critical and led to radical change in the company's relations. We have used the network concepts to describe how the environmental forces actually function and a ect business relationships. When business actors throughout the network react to environmental pressures, the change per se only takes place in individual dyads, from which it is then mediated to other connected dyads. The dyad functions as a recipient of change and, potentially, as a transmitter of change to other relationships in the network. To the extent that critical events occur, the outcome may be a radical network change. A FRAMEWORK OF CHANGE IN BUSINESS NETWORKS Our propositions concerning the mechanism, nature and forces of change are summarized in an analytical framework of network change, presented in gure 3.

11 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 789 Figure 3. An analytical framework of change in business networks In this framework we focus on connected change, the most interesting form from the perspective of network dynamics. We suggest using this framework as an analytical tool for understanding network dynamics and making empirical investigations. Key elements in our framework are: (1) dyadic change and network change; (2) radical change circle and incremental change circle; and (3) transfers from one circle to another. We see the two units, dyad and network, as being important to the understanding of network dynamics (the left and right halves of gure 3). Change always emerges at the level of dyads. It may be con ned to a single relationship or spread to others and thus become a network-level change. We have also argued that change may be incremental or radical. Incremental dyadic change refers to change in the character of a relationship, whereas radical change means that a relationship is terminated or established. Similarly, network change may be incremental, involving changes in the character of relationships, or radical and frame-breaking. We have distinguished between two important concepts that re ect the impact of various change forces behind network dynamics: inertia and critical events. Inertia, de ned as the tendency to maintain the deep structure of the network, manifests the various interdependencies between companies and thus keeps the network in a stable state, where only incremental change and adjustments occur. By contrast, critical events that result from the interplay of di erent change forces trigger radical change in dyads and break connections, that is actor bonds, activity

12 790 links and resource ties. What is perceived as critical and in need of prompt action depends on the perceptions and intentions of business actors. The framework identi es di erent change patterns in business networks. We suggest that two circles of change dominate network evolution: the incremental change circle, owing to inertia, and the radical change circle, triggered by critical events (see the inner and outer circles in gure 3). The incremental change circle involves the idea that incremental changes in a dyad tend to cause only incremental changes in a business network and vice versa. Actions taken by business partners or events occurring in the business environment are perceived as minor issues that require only small incremental changes in relationships with other actors ± thus, a period of stability prevails. Technical and institutional interdependencies, among other stabilizing forces, create inertia that keeps the circle viable. The radical change circle, on the other hand, suggests that radical change in a dyad is likely to lead to radical changes in the surrounding network as well, and vice versa. The interplay of various change forces becomes manifest in critical events that are perceived and acted upon by other actors in the network. It is easy to nd examples: for instance, in times of economic recession, fundamental changes spread from one industry to another due to strong connections, as described earlier. Most interesting from the perspective of network dynamics is, however, a transfer from the incremental change circle to the radical or vice versa. There seem to be situations where radical changes take place within an individual dyad, while the business network remains basically the same. For instance, when a marginal customer decides to stop ordering from one big wholesaler and starts to buy from another, the breakdown of one relationship causes only minor changes in the character of other connected relationships. Another option in gure 3 is that of an incremental dyadic change leading to a radical network change. Depending on the connected relationships, a relatively small change in one dyad may eventually trigger dramatic changes in the business network. This happens if the small initial change is perceived as important by other actors, and consequently promotes major responses. The case of the Swedish manufacturer that changed its channel strategy in Germany provides a good example of this. Here we have stressed the role of dyads as generators of change, because of the important role of the enactment process in explaining network dynamics. However, change is not only unidirectional but circular, and therefore dyads may also be seen as recipients of change. This means that incoming impulses from the network may also lead to a transfer from the incremental change circle to the radical change circle (i.e. incremental network change becomes radical dyadic change) and vice versa. This is illustrated by the corresponding arrows in the lower half of gure 3. In fact, both the transfers from one change circle to another and the circular change e ect make network change a far more complicated issue than it may at rst seem. Di erent patterns of change may be realized in a business context and changes may have their origins in distant parts of the network, which makes the issue challenging to handle for both business managers and researchers alike. AINO HALINEN, ASTA SALMI AND VIRPI HAVILA

13 FROM DYADIC CHANGE TO CHANGING BUSINESS NETWORKS 791 CONCLUSIONS AND IMPLICATIONS The strengths of the IMP Group's network approach, as we have shown in this paper, lie mostly in the perspective it takes of business markets as borderless webs of connected business relationships. Clearly, the network approach is most fruitful for investigations of several business actors simultaneously, or the dynamics of business markets more generally. It o ers tools to analyse how change impulses originating in di erent parts of the network spread and a ect business relationships. By viewing the business context as a web of speci c business actors rather than a faceless environment, and by stressing perception processes, the network approach increases our understanding of how change is actually generated and transmitted in business markets. It thus provides better options for tackling the process of change than conventional marketing perspectives limited to an actor or dyad with some reference to the impact of the environment. Current understanding of the dynamics of business networks leaves room for improvement. In this conceptual paper we have attempted to deepen this understanding by making better use of the existing theories of change, particularly of the punctuated-equilibrium model. We have proposed several concepts to describe network change and developed a comprehensive analytical framework that compiles the mechanism, nature and forces of change in business networks. A number of ideas have been put forward to contribute to the development of network theory. We started by emphasizing the central role of business-relationship dyads for understanding the mechanism of network change. We promoted the idea of change as con ned, occurring only within a dyad; or connected, with spill-over e ects to other relationships in the network. We also advanced the idea of radical change in business networks. The concept of the critical event was introduced to pinpoint incidents that emerge from the interplay of various change forces and trigger fundamental recon guration of the network. The mental process of enactment is proposed to be a key explanation for both stability and change in networks. Depending on the perceptions of individuals ± how they view the business context and its interdependencies, and possibilities to achieve their business goals in this context ± some events are considered critical and requiring prompt action from the company, while others are perceived as minor, allowing inertia to come to the fore. The proposed framework also allows for further elaboration of the change patterns in business networks. Two major circles of network change were distinguished: the radical change circle ± involving radical change of a dyad and network ± and the incremental change circle, where incremental change in a dyad perpetuates incremental changes in the network, and vice versa. Moreover, transfers from one circle to another are of particular interest from the perspective of network dynamics, as they indicate alternation of stable and revolutionary periods in networks. These transfers, and the circular change e ect from dyad to network and network to dyad, add to the complexity of change and create considerable challenges for both researchers and managers in their attempt to deal with change. We believe that our analytical framework can be used as a source of inspiration for future research on network dynamics and a basis for empirical investigations. We have already addressed the need to incorporate radical change into the

14 792 AINO HALINEN, ASTA SALMI AND VIRPI HAVILA analysis of network evolution. The framework also raises a number of more speci c questions to be considered in future studies; for example, to what extent and under which conditions do changes in business-relationship dyads remain con ned and never become connected with other relationships? How typical are the circles of radical and incremental change and transfers from one circle to another? More theoretical and empirical research is also needed to analyse the interplay of forces of change and forces of stability that ultimately create network dynamics. Although our paper does not o er direct managerial implications, it does raise interesting research questions concerning managerial behaviour. For instance, future studies could analyse how managers interpret and distinguish critical from minor events. Another interesting research theme would be the role of enactment and managerial intentions in creating a radical change in a network. NOTES *We would like to thank the anonymous JMS reviewers for their useful comments. We are also grateful to Professors Geo Easton, Jan Johanson and Ivan Snehota for very constructuve comments on earlier drafts of this paper. This research was partially supported by grants from the Joint Committee of the Nordic Social Science Research Councils (NOS-S), the Foundation of Marketing Technology Center (MTC), the Foundation for Economic Education (Liikesivistysrahasto), and the Academy of Finland. [1] A network of business relationships is never in a state of equilibrium or optimum (see, for example, HaÊ kansson and Snehota, 1995b, p. 271). Therefore, in the context of business networks we refer to periods of stability rather than periods of equilibrium (cf. Gersick, 1991). [2] Authors discussing the punctuated-equilibrium model refer to the term `system'. In our case, this relates to the discussion of network boundaries. In network studies, the term `system' should be seen to refer to a net or network that has been delimited according to the speci c needs of analysis. REFERENCES ANDERSON, J. C., HA Ê KANSSON, H. and JOHANSON, J. (1994). `Dyadic business relationships within a business network context'. Journal of Marketing, 58, 4, 1±15. ARAUJO, L. and EASTON, G. (1996). `Networks in socioeconomic systems. A critical review'. In IACOBUCCI, D. (Ed.), Networks in Marketing. Thousand Oaks: Sage, 63±107. BERGER, P. L. and LUCKMANN, T. (1967). The Social Construction of Reality (reprinted in 1971). London: Penguin Books. EASTON, G. (1992). `lndustrial networks: a review'. In Axelsson, B. and Easton, G. (Eds), Industrial Networks ± A New View of Reality. London: Routledge, 3±27. EASTON, G. and ARAUJO, L. (1994). `Discontinuity in networks; initiators, issues and initiatives'. In Biemans, W. G. and Ghauri, P. N. (Eds), Meeting the Challenges of New Frontiers. Proceedings of the 10th IMP Annual Conference. Groningen: University of Groningen, 381±97. EASTON, G. and LUNDGREN, A. (1992). `Changes in industrial networks as ow through nodes'. In Axelsson, B. and Easton, G. (Eds), Industrial Networks ± A New View of Reality. London: Routledge, 89±104.

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