BANKS IN INDUSTRIAL NETWORKS

LARS ENGWALL and JAN JOHANSON

University of Uppsata

(First received Murch 1989; accepted in revised form June 1990)

Abstract - Banks are important institutions by reason of their role as intermediaries between the hoiders of surplus capital and those in need of financial resources. They are therefore often mentioned as vital nodes in modern economies, with substantial power positions in relation to their clients. In recent years deregulation and the development of information technology have prompted several observers to conclude that the former long-term relationships in banking have disappeared. This development is analysed in the present paper with the help of a model of industrial networks, focusing on relationships. dependencies. connections and positions. In addition the dynamic and uncontrollable character of networks is stressed. It is argued that the changes mentioned will imply new relationships and banking links with a wider industrial network than before. Some relations are likely to disappear, and new ones established. In this process banks will actively employ different strategies in order to link and control activities in the industrial network.

Key words: Banking, networks. relationships, financial intermediation

1. INTRODUCTION

The traditional image of the banking industry sees it as involved in relationships which have been “stable, long-standing and buttressed, very often. by social relationships” (Mayer, 1976, p. 248). The histories of many major banks readily provide support for such a picture of banking. To take just three examples. the outstanding performance of the Rothschilds in the 1800s is described as resuiting from their “supranational intelligence network” (Sampson, 1982, p. 33). Secondly, the success of Siegmund G. Warburg is attributed to his ‘*extraordinary network of contacts accumulated over two centuries by his family and carefully maintained and developed by him” (Attali, 1987, p. 260). Thirdly, the authors of the history of Citibank (Cleveland and Huertas, 1985) reiterate the importance of permanent contacts and also conclude that on several occasions the bank’s performance “rested on longstanding relationships” (p. 142). However, over the last 10 years or so this genera1 image of banking has been questioned. As deregulation and the development of C & C (computer and communication technology) have radically altered the conditions under which the banks work, a usual comment on banking has been that relationships have disappeared. In the present’article we will argue that this is not - nor ever will be - completely true. In the course of our argument we will apply a model of industrial networks to banking.

2. INDUSTRIAL NETWORKS

2.1. Four basic concepts Research in international business and industrial marketing has stressed the

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232 L. ENGWALL md J. JOHANSON

significance of lasting business relationships (cf. contributions in Engwall, 1984 and Hakansson, 1982). Subsequent studies (cf. Hakansson. 19%; Hagg and Johanson, 1982; Johanson and Mattsson. 1987; Laage-Hellman. 1989) have developed this interaction approach by extending the focus to industrial networks. defined as “sets of connected exchange relationships between actors controlling industrial activities”.

The basic concept of the network model is exclzatzge relurionships (business, information. social, etc.) between actors. It is stipulated that exchange involves at least two parties with some kind of mutuality, i.e. the parties have some trust in and knowledge about each other. An important aspect of the relationships concerns the time dimension. Relationships are built up and maintained over time by way of a social exchange process, and they entail expectations of the future. The relationships can be viewed as more or less implicit rules which are related to exchange in the same way as language is related to communication. Relationships are formed, reinforced and modified by way of exchange. while at the same time constituting a framework governing subsequent exchanges (cf. Giddens, 1976). Obviously it follows from this view that the exchange can be to some extent regular, and that dormant relationships can be activated; also that the maintenance of relationships is important.

The relationships can be seen as a way of managing the dependence between actors. The activities of every actor - whether a firm, a division, a business unit, or an individual - are pursued in interaction. They are embedded, some more firmly than others, in a wider web of industrial activities performed in an industrial field, where the outcome of one actor’s activities is dependent on the activities of others. They also constitute links in activity chains involving a number of other firms, which thus become connected. Each actor is usually engaged in several different activity chains, which extend its interdependencies in various directions. Some of these activity interdependen- ties are specific, others general, the former implying that the outcome of one actor’s activities is sequentially or mutually dependent on those performed by another (Thompson, 1967). The general dependencies, on the other hand, are not related to specific counterparts. Thus, a firm may be dependent on the activities going on in a market, irrespective of which firms in the market are performing the activities. It may also be dependent on the activities utilizing a specific resource. irrespective of which firms are using the resource. In the terminology of Thompson (1967) these dependencies are pooled. Generally speaking industrial networks, i.e. sets of connected exchange relationships, may be expected to emerge in industrial fields where there are strong specific activity interdependencies. Inversely, it can be expected that actors engaged in exchange relationships will develop specific interdependencies in relation to each other as a result of their mutual adaptations. Thus. it can be expected that, ceteris paribus, exchange relationships and activity interdependencies will reinforce and structure each other.

As the above definition of the network indicates, a third basic concept of the model concerns connections between exchange relationships. i.e. exchange in one relationship is conditioned by exchanges in others (Cook and Emerson, 1984). The connections may be positive, negative or mixed. A positive connection means that exchange in one relationship is facilitated or supported by exchange in another, whereas a negative connection implies that exchange in one relationship hinders exchange in another. Typically, relationships in activity chains are positively connected, whereas a customer’s relationships with competing suppliers, for example, are negatively connected.

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The connections can also be classified in another way. depending on whether they operate via activities or actors. The logic of activity interdependencies obviously has implications for the connections between exchange relationships, while the perceptions. attitudes, strategies and objectives of actors play an important part in the other type of connection. It may be a question of strategy whether two relationships should be viewed as complementary (positively connected) or as competitive (negatively connected). Thus two relationships can be regarded as positively awd negatively connected at one and the same time.

We could expect activity-based connections to be more important in the short run, while actor-based connections will grow in importance with time. This expectation is based on the assumption that in the short run activity interdependencies will exercise some sort of constraint on the actors, whereas in the long run the actors have more opportunity to re-arrange activities in various ways. It can also be assumed that the importance of actor-based and activity-based connections will vary in different technologies.

A fourth concept of the network model concerns the positions of the actors in the network, i.e. their direct and indirect relations to other specific actors, the strength of these relations, and the relative importance of the actors to each other (Mattsson. 1985). These positions are established and developed over time through processes of investment, and they represent assets on which action can be based (Johanson and Mattsson, 1985). His position gives an actor some control over the activities of other actors in the network and provides a power base from which the actor can mobilize network activities and resources in his own interest.

In every exchange relationship and in every sub-network or wider network there is a potential conflict between the actors about the distribution of any surplus and about influence on future development. At the same time the actors have a common interest in that specific relationship, in that sub-network or in that wider network. Thus throughout industrial networks there are strong incentives both to cooperate with and act counter to other actors (Hakansson and Johanson, 1988). In order to strengthen their position in the network the actors will endeavour to form various overlapping alliances of varying stability and visibility.

2.2. Two important features of networks In addition to the four basic concepts two features of the model should also be

mentioned: the uncontrollable and dynamic character of the system. The uncontrollabil- ity follows from the assumption that industrial networks emerge and develop as a consequence of exchanges between semi-autonomous, interdependent actors. These actors have to develop their own exchange relationships in the network. This cannot be done unilaterally. Other actors must be motivated to engage in exchange, which may require adaptations by one or both, or even by several actors. Thus, the networks are not designed by any single actor according to a plan or a strategic decision.

The uncontrollability of networks is reinforced by their unbounded and opaque character. They are unbounded, since the exchange relationships extend the networks without limit from actor to actor. An observer, or a specific actor, may draw appropriate boundaries, but all such boundaries are arbitrary. They are a result of perspectives, intentions and interpretations. Different actors may recognize the same network boundaries, but they may equally well recognize different ones.

1.;4 L. ENGWALL and J. JOti.ANSON

The networks are also opaque. All actors have a relatively clear view of their own relationships, albeit the views of interacting actors are not necessarily consistent. Likewise. different actors in the same firm may very well have perceptions of relationships with other firms which are naturally inconsistent. Generally, however. ideas about the more remote relations in the network are vague, and the ideas about distant actors may differ widely. An actor or an observer who is not engaged in the network cannot comprehend it other than superficially. Nevertheless the networks also exist: and since most industrial actors are aware of their existence, much industrial action can best be understood as attempts to comprehend the network structure.

Thus, as different actors perceive different boundaries, and as relationships and connections are both invisible, it is not possible for any one actor to exercise control over anything but very limited network sections. Especially as every actor has the possibility of extending the network by building links to previously unrelated networks.

When it comes to network d~~~u~ic~ we can make a distinction between the linking and the control of activities (Hakansson, 1989). Firstly, as a result of the mutuaf adjustment of activities and the mutual orientation of the actors that stem from current interactions in the relationships. a basic and principally continuous structuring process takes place in the network. Over time and as a result of experience some actors modify and adapt their activities to each other, thus increasing their joint productivity and cohesion. The interdependence between activities grows stronger. However, the continuous dynamics also have an effect on the structure of the network. As two activities become more closely interlinked, they usually disengage from some other activities. Change in the performance of one activity may lead to adjustments along the activity chains and even to changes in related chains. Some of these adjustments will have a tightening and some a loosening effect on the network. Thus the continuous repetitive character of industrial networks has both a structuring and a restructuring effect; and the predominance of the two types of effect varies over time and in different parts of the network.

The second and more discontinuous type of industrial network dynamic pertains to the struggle between actors for control over the network; it entails efforts to establish unified control over activities, and efforts to disengage units from such control. Control refers here both to formal control based on ownership and to informal control based on power positions. This dimension of network dynamics obviously contains the seeds of change as well as defence against change. As resource-dependence theory suggests, it can be assumed that dependence is a factor that influences the patterns of the control struggle (Pfeffer and Salancik, 1978).

3. BANKING IN A NETWORK PERSPECTIVE

3.1. Conditions for banking Turning now to banking, we first have to define the object of study. It soon becomes

evident that the concept of the bank, like that of the firms or organization, is ambiguous. Most people would probably agree with former Federal Reserve Board chairman Paul Volcker, however, that “there’s something unique about a bank” (Mayer, 1984, p. 4). An important reason for this uniqueness is the central role of banks in modern economies. To governments they represent institutions that are important to the

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implementation of economic policies and the efficient allocation of financial resources. In order to serve these ends a banking system has to enjoy a high degree of trust: depositors have to be certain that they will get their money back on demand and borrowers need to know that loan agreements will be upheld. In most countries banks therefore work under very special conditions in terms of regulation. Four important questions in this context are: who? where? what? and in what way?

The first of these - the question of who - refers to restrictions on entry as manifest in the charter system, which means that prospective entrants are screened by some government authority. In a sense this screening implies an assurance of quality to clients. who can rely on the bank to fulfill its obligations. However, the granting of the charter is not unconditional. A bank entering a market also has to consider the governmental response to the other three questions.

With respect to location - the griestiorz of where - the governments of the home country and those of other countries can both impose restrictions. The McFadden Act in the United States that restricts inter-state banking is probably the best-known example of the first of these. Similarly many countries have long restricted the international operations of their national banks, which have also been hampered by other restrictions. such as barriers preventing their entry into certain other countries. The basic idea behind all these restraints on geographical dispersion is that cut-throat competition should be avoided in order to reduce the risk of bank crises (cf. Engwall, forthcoming~.

The third type of limitation on bank operations concerns their scope - the q~resriow of what. The idea behind this type of rule is to reduce risk and conflicts of interest. hfany restrictions of this type date from the economic crisis of the 1930s. Again the United States provide a famous example in the Glass-Steagafl Act, which established a dividing- fine between commercial and investment banking. By this act the taking of deposits and the granting of commercial loans are basically kept separate from issuance and the placement of securities. Similar rules have governed the scope of operations in some other countries, while others such as West Germany and Japan permit their banks to undertake a multitude of activities (cf. Wilson, 1986).

The fourth type of restriction - the question of in what way - concerns the degree of freedom ahowed in the permitted operations. Here too banks in different countries have faced a number of restraints on their behaviour. One usual limitation concerns pricing, which in many countries has been centrally controlled by the imposition of interest rate ceilings, for instance in the United States by Regulation Q. Other such restrictions consist of special requirements regarding reserves, liquidity and capital (cf. Sinkey, 1986. p. 148). Together these are intended to control the supply of credit and reduce the risk of bank failure.

The four types of regulation described here certainly represent a major obstacle to the integration of banks into industrial networks. But even under these circumstances banking is already exhibiting many signs of network involvement, as we have seen in Section 1. We will discuss these networking aspects first in commercial and then in investment banking.

3.2. Commercial banking Commercial banks can be described as important nodes between actors with a surplus

of capital and actors in need of additional financial resources, as they accept deposits

23h L. ENGH’ALL and J. JOHANSON

and engage in commercial loans (Mayer, 1981. p. 60). In terms of the network model we can say that commercial banks have relationships with depositors and borrowers. thus connecting these two types of actor via a position between the two (Fig. 1).

According to Thompson (1967, p. 16), a commercial bank is thus a major example of a mediating technology, i.e. organizations which “have, as a primary function, the linking of clients or customers who are or wish to be interdependent”. An important instrument in this process consists of networks of offices, which are essential parts of a large collection and distribution system, and which can also be seen as sections in the industrial network discussed above. Commercial banks thus have a network character even internally (Fig. 2). The importance of establishing such networks. which is supported by both the European and the American experience (cf. Hildebrand, 1971, pp. 103, 120; Cleveland and Huertas, 1985, pp. 152, 224). stems from an ability to connect a large number of independent depositors to a bank’s headquarter, which in turn creates interdependencies with borrowers, primarily industrial firms. in relationships of varying length. In their turn these last become to some extent connected with one another through their relations with the bank. A much discussed issue in this context concerns the strong positive connections between industrial companies belonging to the same sphere of ownership. It has also been shown that such connections are often manifest by way of

Fig. 1. The bank, depositors and borrowers.

Local off ices Borrowers

Fig. 2. The bank as a network node.

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interlocking directorates (cf. Mintz and Schwartz, 1985; Mizruchi, 1982; Stockman et 01.. 1985).

As was mentioned in Section 1, a relatively high level of stability has been noted in the relations between banks and customers (households as well as corporate customers). The reason has been “the belief that one will do business again with this customer. or his supplier” (Mayer, 1976, p. 280), i.e. the typical characteristics of an exchange relationship. An interesting example here is Citibank, which has continuously “followed the strategy of establishing close relationships with major borrowers” (Cleveland and Huertas, 1985, pp. 143, 215). Such behaviour is also consistent with the point made by Thompson (1967) regarding the reduction of uncertainty in relations with customers. Similarly customers have an interest in securing financial resources in a credit squeeze, by winning priority over other less loyal clients. In this context it is worth noting that the same actor can play several roles in relation to the bank, primarily by functioning as both lender and borrower, thereby investing in preferential treatment with regard to future loans by keeping money on deposit (cf. Hildebrand, 1971, p. 154; Mayer. 1976, p. 109; Cleveland and Huertas, 1985, p. 245). In this way traditional commercial banking meant that a “bank enjoyed a privileged relationship with its customers” (Cleveland and Huertas, 19S5. p. 255), but also that it faced difficulty in withdrawing from loyal clients who had landed in serious trouble (cf. Hildebrand, 1971, p. 170; Sampson, 1982, pp. 173, 296).

For corporate customers, however, the long-term relationships have not always been limited to one partner. In order to avoid the dominance of a single bank, companies have entered into multiple bank relations (cf. Hildebrand, 1971, p. 178; Mayer, 1976, p. 269). In certain cases such arrangements have been a result of mergers between two industrial firms which originally patronized different banks (cf. Lindgren, 1988). This kind of multiple bank relationship means that the banks are connected by their respective relations with a customer (Fig. 3). Basically these connections are of a negative character, in the sense that the different banks compete for the same business. These negative connections are often manifest in tit-for-tat behaviour, i.e. that major competitors try to keep on a par with each other. Examples of such behaviour among commercial banks are provided by Hildebrand (1971, p. 120) as regards competition for an office network. by Engwall and Wallenstbl-Schoenberg (1988) as regards bank internationalization, by Mayer (1976, p. 19) as regards the development of new products and by Crane and Eccles (1987, p. 94) as regards investment banking strategies.

Simultaneously with these negative connections, however, banking firms are often involved in advanced relationships with one another as a result of cooperation between competitors. Behaviour of this kind certainly occurs in many industries, but in most countries it has generally led to anti-trust laws and the creation of regulating bodies for the prevention of collusion (cf. Singer, 1968). In the service industries and between nations, such surveillance has been less significant. In banking the common interest in

Fig. 3. Banks connected through a borrower.

23x L. ENGWALL and J. JOHANSON

creating trust in the system has even led to a strong tradition of mutual aid among competitors. Sampson (1982, p. 173) thus argues that the interdependence among commercial banks is so significant “that an imprudent bank could cause the collapse of the system”. Close and trusting relations between banks are therefore a guarantee of a system in which bankers strive to distribute risks and liquidity strains. thereby reducing risk exposure. This solidarity among banks is particularly evident when a bank is threatened with failure, as the other banks work together to uphold confidence in the system and to avoid the domino effect of one bank failure setting off another (cf. Attati, 1987, p. 242).

The collaboration between banks has developed particularly far in international banking. A basic feature in this context has been the emergence of corresponding networks (cf. Cleveland and Huertas, 1985, pp. 33, 46). This has meant that banks can provide services to their customers in places where they have no branches. Like the iong- term relationships with national customers, these arrangements are based on compensat- ing balances (Mayer, 1976. pp. 303-304.450-451). Moreover, as the bank’s own loyalty is tested in times of crisis, its correspondents are likewise tested under these circumstances (cf. Cleveland and Huertas, 1985, p. 176). Negative outcomes in some of these cases have no doubt affected decisions to make foreign entries.

In investment banking - i.e. issuing, placing and trading in securities - it is clear that positive bank connections are very important (cf. Auletta, 1986, p. 70). Here we encounter the situation whereby the inflow of capital through the collection system does not suffice to meet the demand from borrowers (Fig. 4). Banks need to attract financial resources from large, often institutional, investors who require higher returns and who

Institutional investors

Fig. 4. Fund-raising by way of placement programmes.

BANKS IS INDUSTRI.4L NETWORKS 39

are prepared to take greater risks than households. In this instance banks interact closely in order to connect investors and borrowers. As noted by Cleveland and Huertas (1985, p. 3-I) “the placing power” (relationships with prospective investors) and “banking power” (the resources for providing short-term credit to syndicate members and brokers) are vital in this context. This is not just a national feature: it has been equally true of the Eurodollar market, which according to Attali (1987, p. 250) “supplied a structure for this network of friendships where each banker invited the other into issues that one or another was arranging”. It has also long been the practice to extend the investment banker networks by marriages and the exchange of trainees (Attali, 1987, p. 96). Despite these close relationships, there are obvious differences in the power of the various actors. such that lead managers earn higher fees and are more able to broaden their relationships to the borrower (Cleveland and Huertas, 19S5, p. 143). It has also been observed that the network position of a financial institution constitutes an advertising argument in customer relations (Clevefand and Huertas, 1985, p. 138).

As in the commercial banking system, the promotion of trust is very important in investment banking. According to the great investment banker Siegmund G. Warburg it is thus important to realize that an investment bank is “no more than a fragile network of individuals - bankers and clients - and that a few rumours, destroying confidence, could finally bring about its downfall” (Attali, 1987, p. 333).

3.4. Bank networks The above discussion has stressed the network features of financial systems. It has

been shown that banks occupy an important position in their role as connecting link between depositors and borrowers. To fulfil this task they have created networks of offices and customer relations, from which long-term dependencies often ensue. It has also become obvious that bank relationships are not limited to customers but that they also, particularly in investment bankin g, extend to other banks in cooperative efforts. In certain instances banks are also connected through the agency of companies which have entered into multiple bank relationships.

4. FINANCIAL INTERMEDIARIES IN A CHANGING ENVIRONMENT

4.1. Deregulation and technological development As we noted in Section 1, the working conditions of the banks have changed

considerably over the last decade. due to deregulation and the development of computer and communication (C & C) technology. Of the four issues discussed in Section 3. the question of who is still important. The charter system persists, although attitudes towards newcomers have become more liberal. The related question of where is gradually losing its importance. As restrictions on capital movements are disappearing, the restraints on foreign establishments are also being abandoned. Sweden, for example, which has long had extensive limitations on such activities, now permits both branches of Swedish banks in foreign countries and foreign competitors to establish branches in Sweden. Likewise problems in the U.S. banking system have forced the authorities to make exceptions to the McFadden Act, and to permit out-of-state banks to enter in order to save banks in trouble. A similar loosening-up of the borders is also occurring with regard to the question of what: the borders between commercial and investment banking are becoming

2111 L. EKGWALL and J. JOliANSON

increasingly blurred in countries where they were once distinct. A major cause of this development is the increasing “securitization” of markets. which virtually started with the introduction of certificates of deposits in 1961 (cf. Cleveland and Huertas, 1985, pp. 25-t-255). instead of depositing surplus money with banks, companies have tended increasingly to deal in securities on the money market. As a result large companies have become more inclined to “spread their banking business among dozens of banks across the country” (Cleveland and Huertas, 1985, p. 246), and some have even created banks of their own. This tendency has been re-inforced by the recruitment of business graduates from the 1960s onwards (Cleveland and Huertas, 1985, pp. 258-259; Sampson. 1982, p. 213) to large corporations as highly skilled financial vice presidents who “often coolly [select] investment banks on a deal-by-deal basis”. The focus on long-term relationships has been replaced by concentration on the performance of a specific function or transaction (Auletta, 1986, p. t 1). “One-off jobs”, i.e. transactions including a bank and a borrower who have never done business with one another before and may never meet again, have become increasingly common (Mayer, 1976, p. 489). In considering these changes, however, it should be borne in mind that the size distribution of the firms is greatly skewed (cf. Engwall, 1973). The hiring of highly qualified financial officers, and in some cases the development of internal banks, are likely to be limited to companies in the higher size classes.

The dissolution of borders between industries has also reduced the possibility of imposing restrictions on the behaviour of banks - the qrfesriorz of itr what wuy. Restrictions on financial transactions have been removed world-wide. To take the Svvedish example: the deposit interest regulation was removed in 1978, a money-market was created in 1980, liquidity quotas were abolished in 1983, the regulation of interest on loans in 1985, credit limits in 1985 and currency control in 1989 (Lybeck and Hagerud. 1988, p. 16). Such changes have tended to lead to a shift away “from a business based in large measure on personal relationships and’advice to a business based on a variety of transactions and an instinct for gambling on interest rates and stock market shifts and the invention of new financial instruments” (Auletta, 1986, p. 44).

Deregulation has gone hand in hand with yet another rapid development: the improvement in C & C technology. This has brought about a radical change, in that the physical transfer of money has been replaced by information exchange. This has tended to re-inforce the tendency for regulators to lose control over the four issues discussed earlier (who? where? what? and in what way?), since in theory any operator of C & C technology can carry out transactions almost anywhere, and can reach almost everybody everywhere. This is particularly true in the case of money market transactions and foreign exchange, for which many corporations - particularly large ones - have tended to create their own money market and foreign exchange desks.

The developments described here have meant that two important features of the network model, i.e. the dynumic and uncontrollable character of the system, have become more visible.

4.2. propositions generated by the network model The network model suggests several developments stemming from the changes in the

working conditions of the banks which have been described here. Firstly, while the banks in regulated banking systems have been fairly well-defined entities, we can expect that in their search for differential advantages the banks will develop close network relations in

various directions outside the traditional banking boundaries. This will be achieved through the two mechanisms of network dynamics, namely the linking and controlling of network activities. Thus. although deregulation can be expected to lead to the development of more competitive market relations. the network model also suggests a parallel and more long-term development toward network relations. Every bank has some client or some other external links which are closer than others, and than those of others. We can expect a process whereby these links are developed as a result of the mutual adjustment of activities and a more mutual orientation on the part of the actors. This process of external link-development will lead to a gradual differentiation between the banks, affecting their activity structures and their dependence on various counterpart segments and specific counterparts. In some cases this process will also entail the development of relationships or network-specific technology applications. The process also implied a gradual dissolution of the borders between the banking system and related industrial systems, i.e. more integration of banking into the industrial netvvork.

This development is also accompanied and reinforced by a loosening of various relations and dependencies which are less crucial to the actors. An important aspect of this development is presumably a decoupling within the banks. Thus. corresponding to the growing tendency for banking to be embedded in external networks. there will be a restructuring of banking activities, whereby an internal decoupling of banks into network structures rather than the traditional hierarchical structures will mean the dissolution of the banking institutions as we are used to seeing them.

These external coupling and internal decoupling processes can be expected to lead to the emergence of banking networks, interrelated to a greater or lesser extent. with widely differing activity structures. Internationalization will obviously be both a driving force and a consequence of these processes.

The second type of network dynamics concerns the struggle for network control. We would expect to see attempts to establish extended unified formal control, instead of the previous type of control exercised through the regulatory system. As the network model indicates, however, it is less than probable that these changes in the formal control structures will have much impact on the activity structures. But new centres are likely to emerge around interdependent activities, and these centres will presumably strive for partial autonomy and in some cases even externalization. In this process the emerging centres will endeavour to strengthen their network positions through cooperation, coalitions. and alliances with various other actors, in other countries and in other industries.

4.3. The management of relationships The picture described in the previous section thus suggests that the future too will see

competition for network positions and relationships. The question then is how will the financial intermediaries act in order to link and control activities? They will be compelled to employ strategic arguments in order to create dependencies, thereby maintaining old relationships and establishing new ones. These arguments are likely to imply differentia- tion towards competitors. Three such arguments, which are likely to be used in different mixes by different firms, are based on scope, technology and the network itself.

The first argument means that actors will seek to offer a wide range of services and to package them in a way that is advantageous to the customer, something which is evidently easier to do now that the borderlines between industries are dissolving, i.e. all

1-t’ I... ESGWALL and J. JOtlANSON

sorts of financial services may be offered by the same firm. In order to take advantage of this wider scope for services, however, a bank will have to encourage its customers to use it as the only source of all the financial services they need. This can be done by introducing “relationship pricing”‘, which means that any customer. be it household or company, is given preferential treatment if it uses a number of different services in one particular bank.

Relationship pricing is aften combined with the strategic use of C&C r&rzoZogy, which creates a number of more tangible exchange relationships between different actors. In the whoiesafe market. for instance, computerized systems of cash management and salary payment mean that the bank is continuously involved in commissions for its client firms. In such cases the cost of switching to another partner may discourage the actors From breaking off the relationship. Modern technology wilt thus tend to strengthen dependencies. particularly for smali and medium-sized firms. The argument is that the relatively heavy investments in physical C&C systems tend to tie industrial firms closer to the financial institutions. We shall be seeing more cooperation between cash management officers in banks and controllers in companies. sometimes in systems which the two parties have designed together. In certain countries, such as Sweden for instance, the development of technology has also led to a new type of relationship between banks and the genera1 public in their role as consumers through monthly transfers to those having paid employment. This in turn encourages the creation and growth of new withdrawal and payment systems such as automatic teller machines. point-of-saies systems and credit cards (cf. Ballarin, 1986; Mayer, 1976). And it is then in the interest of the financia1 institution to attain wide use of their C&C investment. and to involve as many households and companies as possible. Relationships and connections between a number of new actors will then be formed.

In many instances the ff~~~o~~~o~~rio~ of the bank may also be an important argument in discussions with prospective clients. For one thing, trust will be extremely important in modern networks. As Mayer (1984, pp. 200-203) has pointed out, failure in one part of the financial system will have important repercussions on the various actors connected with it. The problems of Continental Illinois first affected its own banks. then other financial institutions holding the certificates of deposit issued by these banks. and so on from there. Or we need only recah the events following Black Monday in October 1987. It is therefore of vital importance to any purveyor of financial services, that its reIationships with the industrial ne;work are such as to provide protection from incipient problems.

The network-position argument will of course continue to be crucial in investment banking activities. Of particular importance in this context is the placement power of lead managers, which in turn is highly dependent on the relationships of these managers with other financial intermediaries (Auletta, 1986, p. 43). This still holds. even though most modern corporations appoint highly qualified financial vice presidents. who are well able to design a placement programme. The large investment banks thus continue to work together in such programmes,

Not only do banks need to employ strategic arguments externally, in order to maintain and develop network positions and relationships; they also have to handle the interna network, as the internai decoupling mechanism comes into play. This differentiation is likely to go hand in hand with the growing scope for banking activities, the increasing use of C&C technology, and the extension of network relationships. It will create demands for organizational strategies aimed at the productive integration of activities. The

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message conveyed in Lawrence and Lorsch (1967), that differentiation and integration must go hand in hand. will thus be increasingly important in the world of bank management.

5. CONCLUSIONS

Recent changes in financial markets provide a good illustration of the dynamics of networks. They also show that networks are not controllable by any individual actor or group of actors. Nevertheless, relationships between banks and corporations in industrial networks are likely to persist. They will change character, and the dependencies between certain actors may increase in certain areas and decrease in others. New relationships are being created and some of the old ones undermined. During this process we can expect banks to employ a variety of strategic arguments regarding scope. technology and the network itself, in order to link and control activities in the industrial network. Since this process is leading to the differentiation and decoupling of organizational units within the banks, integration strategies can also be expected to become increasingly important.

Acknowledgement - This study was supported by the Research Foundation of Forsta Sparbanken.

REFERENCES

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