Hierarchy in Industry Architecture: Transaction Strategy under Technological Constraints

Motivation -Industrial firms survive, sustain and co-evolve by participating in the sector of innovation and production through industrial transactions with each other. However, it is difficult for specialized firms to be aware of and manage accordingly the kind of systemic constraints and opportunities induced by relevant but indirect transactions, as well as the technological and economic requirements of their value chains, which they cannot control or even sufficiently observe. The myopia may cause specialized firms to implement incorrect strategies, leave them vulnerable to system failures or ignorant of emerging opportunities. This implies a paradox: the simultaneous needs to specialize and to understand and manage the big picture of the eco-system. Goal -Previous industry studies have focused on the question if a transaction with an external firm is needed rather than in-house production, and on empirical work from single industries or bilateral relationships between firms. Meanwhile, the firms’ positions in the sectoral transactional network are also influential to the success and performance of firms. In this dissertation, I conduct transactional network analysis to explore how firms are organized in the sector of aggregated industries, in order to shed light on the set of previously ignored knowledge on industrial transactions, which is valuable to single firms in designing strategies and managing operations but is not available from firmand industry-level analysis. Hierarchy in Industry Architecture -At the sector level, existing theories often assumed hierarchical or non-hierarchical relationships among industrial firms, and quantitative evidence on variable degrees of hierarchy in industry sectors is lacking. This dissertation first identifies and defines the type of hierarchy relevant to industry studies flow hierarchy, develops a network-based metric on the degree of hierarchy (one-way flow of transactions), and applies it to the transaction data from two industrial sectors in Japan. The empirical results show that the electronics sector exhibits a significantly lower degree of hierarchy than the automotive sector due to the presence of many transaction cycles. It shows that the simplistic hierarchy hypothesis for production sectors does not always hold. Industrial Network Model and Transaction Specificity -I further create a network simulation model with random networks to relate sector-level hierarchy degrees to firm-level behavioral variables, and infer transaction specificity, i.e. the extent to which a firm is captive to a niche of customers positioned closely in the industrial network hierarchy. The model