Inter-Builder Ties, Clientalized Relationships and Organizational Failure in Clyde River

Shipbuilding, 1711-1990

Ingram & Lifschitz

Networks and Organizational Performance

• Influence of a given social form depends on others

• Horizontal and vertical ties make up the social structure of industries– Position in these networks is likely correlated

– Overlap in the mechanisms of their influence, e.g. reputation and knowledge sharing

– No analysis of performance considers them simultaneously (few enough consider them separately)

Our Argument:

1) Horizontal ties to competitors reduce failure;

2) Vertical ties to customers reduce failure;

3) Horizontal ties contribute to the establishment of vertical ties.

Clyde Shipbuilding Setting

• “Shipbuilding capital of the world”

• Technology leader, first steam, first iron, first professorship in Marine Engineering

• Part of an industrial complex that made Glasgow the 2nd city of the empire

• Industry peaks in 1900, in crisis from the 1930s onward

Social Ties in Clyde Shipbuilding

• Three centuries of ties

• Horizontal and vertical ties

• Multiple measures of each form

Robert Napier’s ties

1861-1931

1858-1870

1870-1886

1834-1873

1852-1896 1833-1963

1886-1970

1879-1897

1850-1858

1899-1906

1821-1836

1843-1851

1848-1861

1844-1876

1844-1892

1836-1900

W Denny & Bros’ ties

1821-1931

1821-1906

1853-1866

1838-18651845-1853

1853-1866

1833-1838

1844-1849

1818-1833

1849-1963

1868-1950

1877-1947 1907-1957

1871-1954

1877-1951 1894-1951

1874-1949

Horizontal Ties

• Inter-builder learning and knowledge transfer

• Collusion

• Access to extra-industry resources

• Customer Sharing

Knowledge Transfer

• Ties between competitors promote knowledge transfer through:– Opportunity, motivation, and capacity

• E.g. – Steam/Iron technologies, from D. Napier, to R. Napier,

to a host of tied others

– William Denny’s administrative innovations

Customer Sharing• Capacity-

constrained industry (as hotels)

• More than a favor to a friend, a way of maintaining good relationships w/customers

Likelihood of Customer Sharing

Extent of

Customer

Sharing

Formal Tie 0.342 0.215

Informal Tie 0.570** 0.253*

Proximity to

Industry Leaders

0.711** 0.222**

Same Region 0.420** 0.011**

Sharing Knowledge and Sharing Customers

H1: Shipbuilders will have a lower failure rate to the extent they have more ties to other shipbuilders.

Access to extra-industry resources

• Transcending the provincial bounds of the industry for:– Capital

– Political Clout

– Prestige in the wider social system

Cunard’s Founding

• The extra ship and the increase in size raised Cunard’s costs and there was little evidence of support from English investors. Napier, with a group of Glasgow friends and business partners, was able to float the British and North American Royal Mail Steam Packet Coy. (which later became the Cunard Steam Ship Coy. Ltd.) with Samuel Cunard as the main shareholder, Napier himself investing £6100 of the initial capital of £270,000. Establishing this great shipping company was no easy task…. It was largely Napier’s reputation and his proven ability to provide reliable and powerful engines which persuaded his fellow Glaswegians to invest in Cunard’s high-risk venture (Osborne, 1991).

Industry Leaders

• Napier, Denny, Beardmore, Scott

• H2: Shipbuilders will have a lower failure rate to the extent they are more closely connected to industry leaders.

Collusion

• Some evidence this was attempted

• Tough here:– Customers few, deals are large– Competition from other locations

• But, collusion, or cohesion wrt workers is another matter…

Builders vs. Labour

• “Red Clydeside”

• Builders’ Association acts like a capitalists’ union

• Espionage and other efforts to hold down sedition

Collusion/Cohesion

• Cohesion in networks between competitors:– Shut customer’s structural holes– Provide trust necessary for the transfer of

sensitive information

H3: Shipbuilders will have lower failure rates when their horizontal networks are more dense.

Clientalized Relationships

• Repeat interactions between seller and buyer lead to trust and problem solving (Larson, 1992; Uzzi, 1996,1997, 2001; Zaheer, McEvily and Perrone, 1998)

• William Denny: “[w]e are bound, if we render ourselves worthy of it, to occupy the position of professional advisers, instead of that of mere manufacturers”

Clientalization

E.G., Cunard, John Brown & Co. and the Lusitania

H4: Shipbuilders with more clientalized relationships to customers will have lower failure rates.

Over-clientalization

• At some point, clientalized relationships may imply:– Overdependence (Uzzi,1996)

– Insufficient diversity (Regans & Zuckerman, 2001)

H5: At high levels, the clientalized relationship’s of shipbuilders to customers will come to increase failure rates.

Links between Horizontal and Vertical Ties

• Ties between competitors may lead to ties directly to customers through:– Referrals– Builder Reputation

H6: Builders with more horizontal ties will have more clientalized relationships with customers.

Indirect Links between Horizontal Ties and Vertical Ties

• It’s a complicated world….

• Organizations look to competitors to choose how to meet the market (White, 1981)

• Organizations whose CEOs have ties to others in industry follow industry’s mean tendencies regarding strategy

Indirect Effect of Horizontal Ties on Vertical Ties

H7: Builders will tend to have patterns of clientalized relations that reflect those of their horizontal ties.

Data & Method

• 299 Builders, 1711 to 1990

• 205 Fail

• 76 moved or merged + 18 alive at end of period (right censored)

• No left censoring

• Piecewise Exponential models of failure

Measures of Horizontal Ties

• Informal Ties– Family ties

– Founders had worked together

• Formal Ties– Financial Association

– Sub-contracting arrangements

• H2: Proximity to Napier, Denny, Beardmore, Scott

• H3: Density among ties (ties between ties)

• H1 tested with total horizontal ties, and the totalBroken into its two components:

Measures of Vertical Ties

• Repeat Customers

• Non-repeat customers

• Herfindahl Index of Customer Concentration (first & second order)

• % of sales to best customer

• Current and past sales to Admiralty

Results

Acrobat Document

Results for Horizontal Ties (Table 2)

• H1 Supported:– Total Horizontal Ties Reduce Failure (20% per)– Formal ties reduce failure (11% per)– Informal ties reduce failure (31% per)

• H2 Supported– Reach to the dominant clique reduces failure (up to 74%)

• H3 Rejected:– Density among horizontal ties increases failure

Examining the Knowledge Sharing Angle (Table 3)

• Own Experience, and Experience of Network Contacts

• Four discount rates to allow for experiential decay

• Own Experience Reduces Failure

• Experience of Formal Ties Reduces Failure

Results for Vertical Ties (Table 5)

• H5 supported:– Repeat customers reduce failure– Customer concentration reduces failure

• H6 supported:– One-shot customers reduce failure– Reliance on best customer raises failure

• Selling to Admiralty doesn’t influence failure

Production Volatility (Table 6)

• Repeat Customers Customers have a large stabilizing effect, one-shot customers a smaller one– Customer portfolio effect, with additional

steady business from clientalized ties

• Proximity to leaders and network density also reduce volatility

Influence of Horizontal on Vertical Ties (Table 7)

• Direct effect is minor (weak support for H6)– Proximity to Leaders leads to Repeat Customers

– Formal Ties leads to Customer Concentration

• Indirect effect is major (strong support for H7)– Ties’ average affects focal builder’s level on each of

Building for Admiralty, Repeat Customers, One-Shot Customers, Customer Concentration

Summary

• Horizontal Ties Reduce Failure– Knowledge sharing through formal ties– Customer sharing and ?? Through informal ties– Extra-industry resources through industry leaders

• Vertical ties Reduce Failure– Clientalized relations are good– One-time customers are good– Overdependence is bad

• Builders mirror patterns of vertical relations of their horizontal ties

Informal/Formal Distinction

• Informal and family ties and the heart of an important industry

• Tie types depend on firm history

Hierarchy in the Industry

• Why doesn’t cohesion reduce failure?– Difficulty of collusion

• Industry is cliquey– Correlation of horiz. ties and network density– Clustering coefficient (Watts, 1999)– Visual Inspection of graphs

Figure 1Horizontal Network of Clyde Shipbuilders, 1900

Scotts

Napier

Denny

Denny

Napier

Scotts

Industry Leaders as “Good Fathers”

• Leaders at the centers of the cliques

• Direct effect to reduce failure

• Customer sharing and smooth productin within their shadow

• Horizontal analog to Keiretsu?

That was then, this is now…

1863 1990

Size of the largest cluster

20 2

Avg. Horizontal Ties

1.3 0.33

Avg. Repeat Customers

1.48 0.12

Next Steps

• Does a given tie mean the same thing at across history?– Networks and institutions as compliments and substitutes

• Effect of Provincial Status in a Declining Empire

• Network Externalities: Implications at the Industry Level

• Active comparison of ecological and network arguments– Analysis of Founding

Figure 1Influence of Horizontal Ties Over Time

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Year

Mu

ltip

lier

of

Fa

ilure

Ra

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Formal Ties

Informal Ties