The.Extended. Enterprise. vs.. Other.Forms. of.Doing. Business:

For a long time, two basic forms of economic organization have been recognized: markets
on the one hand and hierarchies (firms) on the other. Powell (1990) refers to
Ronald Coase as the person who first discussed the firm as a governance structure
rather than just as a black box that transforms inputs into outputs. Coase (1937)
asserts that firms and markets are alternative means for organizing similar
kinds of transactions. Only in the 1970s did ct upon Coase�s findings. One of these proponents,
Williamson (1975, 1985), argues that some transactions are more likely to take
place within hierarchically organized firms (Williamson equated firms with hierarchies)
than through a market interface. More specifically, he states that transactions that are to
be executed within hierarchically organized firms are likely to involve uncertainty about
their outcome, recur frequently and require substantial �transaction-specific investments�
(of money, time, or energy) that cannot be easily transferred. On the other hand, exchanges
that are straightforward, non-repetitive, and require no transaction-specific investments can
be expected to take place across a market interface. This dichotomous view of markets and
hierarchies�as discussed by Williamson (1975)�sees firms as separate from
markets and assumes the presence of sharp firm boundaries. These
sharp boundaries, however, do not always seem to be present. This is true especially in the
case of partnering organizations (extended enterprises, see Figure 1). Transactions between
partnering companies can be seen as a hybrid form of economic organization. That is, if
transactions are distributed as points along a continuum with discrete market transactions
located at one end and the highly centralized firm at the other end, partnering companies
fall in between these poles. The definition of Podolny and Page is very much aimed at
identifying the differences between the network form of organization on the one hand,
and markets and hierarchies on the other hand:
In pure markets companies do not aim at enduring relations, and in hierarchies there is a
clearly recognized, legitimate authority that can resolve disputes that arise among actors.
Besides these two characteristics, some scholars (e.g., Dore, 1983; Powell, 1990) have argued
that network forms of organization also posses another characteristic, namely a distinct ethic
or value-orientation on the part of exchange partners. Hirschman (1970) argues that partners
are willing to make relationship-specific investments without contractual guarantees protecting
those investments, and for Powell the norm of reciprocity is key (1990, pp. 303-304):