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Virtual Organization Networking Strategies – Simulations Experiments

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DOI: 10.1007/978-3-642-22000-5_62 · Source: DBLP

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 Virtual Organization Networking Strategies
– Simulations Experiments

Konrad Fuks and Arkadiusz Kawa

Poznań University of Economics,

al. Niepodległości 10, 61-875 Poznań, Poland
{konrad.fuks,arkadiusz.kawa}@ue.poznan.pl

Abstract. In recent years, all kinds of networks, especially social and business
ones, have been developing very dynamically. The increase in their importance
is mainly caused by the popularization of information technology [2]. The
Internet, as a means of communication and a platform of business interactions,
has caused commercial cooperation and exchange to get a global dimension.
The participants of networks share their resources and carry out investments
(e.g. technology development, market research, launching new products), which
may improve the competitiveness of individual parties as well as the whole
network. The main contribution of this paper is the presentation of networking
strategies representing different approach to business cooperation. The authors
have built and verified a simulation model. The results of the simulation ex-
periments have allowed to analyze the structures of the networks which depend
on networking strategies.

Keywords: agent based simulation, network economy, networking, virtual

organizations, NetLogo.

1 Introduction
If we think about the surrounding reality, we can undoubtedly state that we live in a
highly networkized world. Everything around us and we ourselves are a set of various
networks. The human being is built of biological networks (e.g. bloodstream or brain)
and functions within specific food chains (our food consists of many different ele-
ments) which, from the human perspective, are nothing else but a network. We are
surrounded by networks of gravitational connections of stars, planets and galaxies
constituting an unexplored network – the universe. When we look at interpersonal
relations and the business interactions resulting from them, we can also see networks.
Our reality, from the point of view of the human civilization, is a set of social, politi-
cal, cultural, technological and, obviously, business networks [3]. The last ones have
recently gained special significance. They are based on economic transactions carried
out among enterprises.
Economic networks mainly consist in increasing flexibility and developing enter-
prises’ ability to adapt. The globalization of markets and competition imposes more
and more requirements on these two attributes of enterprises. Customers expect
highly individualized products, intense competition demands constant innovation and
keeping pace with the dynamically changing environment. An enterprise functioning
in isolation is not able to cope with all the above.

J. O'Shea et al. (Eds.): KES-AMSTA 2011, LNAI 6682, pp. 602–609, 2011.
© Springer-Verlag Berlin Heidelberg 2011
 Virtual Organization Networking Strategies – Simulations Experiments 603

The structure of the paper is as follows: the characteristic of virtual organizations

is discussed in Sec. 2. Then, Sec. 3 describes properties of networks and Sec. 4 pre-
sents networking strategies and simulation assumptions proposed by the authors.
Next, Sec. 5 contains the results of the simulation experiments. The conclusions and
directions for future research are outlined in Sec. 6.

1.1 Virtual organizations

The shift of the axis of the world economy function towards knowledge, unique re-
sources and outsourcing being in progress for several years has caused new organiza-
tional models to emerge. They are based not only on the aforementioned networks,
but also on virtuality.
Virtuality, with reference to enterprises, is understood as the use of the network
character of business relations in response to opportunities occurring on the markets.
A virtual organization was first defined in 1986 by Mowshowitz in his article “Social
dimensions of office automation” [8]. The following years brought an increase in the
number of both the researchers interested in the subject and the definitions of a virtual
organization. The elements most frequently taken into consideration when defining a
virtual organization are the following [10]:
• The significance of information technology and information resources in the
organization.
• The type of goals which the organization should strive to achieve.
• The dominant features of the relations of the organization with the environ-
ment.
An enterprise undergoing the process of virtualization oversteps its boundaries in
search of potential partners with whom it may establish cooperation in order to
achieve a specific benefit. The partners do not only play the traditional role of suppli-
ers, but also build a value chain together (a virtual organization) which creates a
product consistent with the final customer’s needs. The virtualization of an organiza-
tion based on relations and interdependence is becoming a social phenomenon with
very real consequences [4]. Virtuality as a paradigm of the study of management is a
response to the following trends [7,12]:
• More and more often, products and services are based on information and
processes of knowledge management, thanks to which they may be created,
popularized and sold in a digital form (virtual product).
• The era of the Internet has redefined the way of doing business, making it pos-
sible to work away from the office at relatively low costs.
• Networks and mutual dependence have become common ways of organizing
cooperation, ensuring an effective use of resources and a lot of flexibility as
well as speed in reacting to market changes.
• Market and resources globalization has enabled companies to enter world mar-
kets, or allowed to access world-class expert knowledge, irrespective of their
location.
• A new business environment requires an enterprise strategy based on the fol-
lowing three key elements: low costs, high quality and a fast reaction to the
customers’ needs.
604 K. Fuks and A. Kawa

It is worth noting that a virtual organization consists of a network of different legally

independent units which unite in order to carry out a given task. The connections
between the parties creating a virtual organization are of a quasi-stable character. It
results from the fact that each of the parties may resign from the participation in the
virtual organization, which increases the dynamism of the organization itself at the
same time [5].

2 Network Features
M.E.J. Newman described eight main features that appear to be common to networks
of many different types: small-world effect, transitivity (clustering coefficient), de-
gree distributions (scale-free networks, maximum degree), network resilience, mixing
patterns, degree correlations, community structure, and network navigation [9].
In the first part of the study we decided to focus on the two most popular character-
istics – small-world effect and clustering coefficient. For this reason, the rest of this
section will give their broader description.

2.2 The small-world Effect

In the 1960s S. Milgram carried out several experiments in which letters passed from
person to person able to reach a designated target individual in a small number of
steps only – around six in the published cases [9]. This phenomenon is called “the
small-world effect” and “six degrees of separation”, too [1,11].
Milgram's experiment developed out of a question about the probability that two
randomly selected people would know each other [13]. This effect has implications
for a lot of processes taking place in enterprises networks. In this case most pairs of
enterprises seem to be connected by a short path through the network.
The study of the small-world effect has quite a serious use: to predict the pace and
scale of the spread of the epidemic, political trends, or fashions, and create programs
analyzing human networks which allow you to sell more efficient products or find
potential partners to do business with. For example, if one considers the spread of
information about itself across a network, the small-world effect implies that that
spread will be fast on most real world networks. If it takes only six steps for news to
spread from any person to any other one, for instance, then the news will spread much
faster than if it took a hundred steps, or even a million [9].
The shortest distance l between nodes pairs in a network is calculated from the
formula (1) where dij is the geodesic distance from node i to node j, and n is the total
number of nodes.
ͳ
݈ൌ ෍ ݀௜௝ (1)
ͳ
݊ሺ݊ ൅ ͳሻ ௜ஹ௝
ʹ

Transitivity (Cluster coefficient)

Another feature of the network is transitivity, which is often called clustering. In

many networks, it turns out that if node A is connected to node B and node B to node
 Virtual Organization Networking Strategies – Simulations Experiments 605

C, there is a high probability that node A will also be connected to node C. In other
words, transitivity means the presence of an increased number of triangles in three
sets of network nodes, each of which is connected to each other. It can be quantified
by determining the coefficient C in this way of grouping (2) where a “connected tri-
ple” means a single node with edges running to an unordered pair of others [9].

͵݊‫݇ݎ݋ݓݐ݄݁݊݁ݐ݊݅ݏ݈݁݃݊ܽ݅ݎݐ݂݋ݎܾ݁݉ݑ‬
‫ܥ‬ൌ (2)
݊‫ݏ݁ܿ݅ݐݎ݁ݒ݂݋ݏ݈݁݌݅ݎݐ݀݁ݐܿ݁݊݊݋݂ܿ݋ݎܾ݁݉ݑ‬

4 Networking Strategies and Simulation Assumptions

In order to check the network features presented in the previous section the authors
are suggesting to use the simulation model. Before this model is presented, however,
let us explain what the networking strategies are.
For the experiment needs three networking strategies between nodes are distin-
guished. Each strategy represents different approach to business cooperation. One can
pick associate partners according to the number of partner’s clients or market share,
other can apply different selection criteria for example quality of product/service, city
of origin or product portfolio. The main goal of the experiment is to analyze the struc-
tures of the simulated networks which depend on networking strategies. The basic
networking criteria behind two of three presented strategies is number of partner’s
clients i.e. number of its links.
First strategy reflects situation described by world wide web or scientific collabo-
ration research. People tend to connect to well connected nodes. The same principle
stands for web pages linkage and for citation mechanism. It’s more probable that
researcher will cite papers with high citation indicator and website manager will add
link to webpage with high PageRank1. One part of business interactions tend to reflect
this kind of behavior. Companies cooperate with ones having big market share, broad
client base or expertise based on large number of business connections. They cooper-
ate to adapt partner’s knowledge to their business or to achieve higher competitive-
ness level. All of these aspects can be represented by network of interlinked nodes
and we’ve called this strategy max-networking.
Second strategy represents opposite of above one. It pertains to situation when
company chooses it’s cooperates from companies that are fresh on the market (start-
ups) or from companies that just have few clients. This approach can benefit network-
ing initiator with fresh business glance. Can supply organization with innovative
ideas, specialized knowledge and technology. Statistics show that majority of enter-
prises are micro (1-9 employees) and small (10-49 employees) [6]. When we take into
consideration that each business interaction (link) requires employee attention, we can
assume that average number of company’s links is rather small. So min-networking
strategy can represent significant part of business cooperation.
1
PageRank is indicator developed by the Google Internet search engine for purpose of web
pages listing. The higher PageRank of a webpage has the higher probability that it will appear
in the Google engine results.
606 K. Fuks and A. Kawa

However building business networks just on the basis of maximal or minimal links
number can be very naïve. Companies rather use much more sophisticated and com-
plex sets of criteria during cooperation process. However links can represent various
economic aspects of business relations and can be treated as set of multiple features.
As point of reference for min- and max-networking strategies we distinguished
third random-networking strategy. Although Barabasi’s research shows that business
networks are far from random [2] our simple networking model is meant to show
polar opposites (max, min) and transition point (random).
Evaluation of each networking strategy was simulated in the NetLogo environ-
ment. NetLogo is a programmable agent based modeling environment for simulating
natural and social phenomena. Full description of environment and its capabilities and
features can be found at [14].
One kind of breed was distinguished: nodes which represent companies. Links
created after networking strategy selection reflect business connections between com-
panies. Each node (total number of nodes is identified by nodesNum parameter) tries
to establish finite number of links described by linksNum parameter of the simulation.
During the simulation linksNum varied from 1 to 10 with step of 1 and nodesNum
varied from 5 to 100 with step of 5. Sample interface of simulation output is presented
on fig. 1.

Fig. 1. Random-networking strategy – Sample simulation output

The simulation was run 100 times for each case (changing nodesNum, linksNum
and networking strategy – linking), that gives total number of 60000 simulation ex-
periments. Analysis of this amount of data needed statistical methods of average val-
ues estimation based on distribution of simulation output. Below section refers to
average data of networking strategy simulation experiment.
 Virtual Organization Networking Strategies – Simulations Experiments 607

5 Results of Simulation Experiments

As mentioned above, in order to check the network features (the small-world effect
and cluster coefficient) three networking strategies have been used.
The calculation of the small-world effect (3) is consistent with slightly modified
formula (1) of shortest geodesic path in small world model presented in [9], where dij
is distance between any two nodes in the network. As there is no self linking possibil-
ity each analyzed network has possible n(n-1) connections between any two nodes
where n is total number of nodes.
ͳ
݈ൌ ෍ ݀௜௝ (3)
݊ሺ݊ െ ͳሻ
௜ஹ௝

Figure 2 presents distribution of small-world effect according to nodes (nodesNum

– horizontal axis) and links (linksNum – vertical axis) numbers when min-networking
strategy was selected. Distribution graph of small-world effect in random-networking
strategy looks almost equally although there is smaller dispersion of values. In the
case of max-networking strategy we’ve observed homogenous distribution of effect.
The maximal and minimal values of l are presented in table 1.

Fig. 2. Min-networking strategy, Small-world effect

Table 1. Small-world effect values dispersion

max-net. strategy min-net. strategy random-net. strategy

maximal value 1,98 18,57 11,16
minimal value 1,00 1,00 1,00

Other network property is cluster coefficient value which was described in sec. 3.
As there is no unified equation for its calculation we use for our experiment one
implemented by Uri Wilensky in his Small Worlds model [15]. He defines cluster
coefficient as: “The clustering coefficient is a measure of this "all-my-friends-know-
each-other" property. This is sometimes described as the friends of my friends are my
608 K. Fuks and A. Kawa

Fig. 3. Random-networking strategy, Clustering coefficient

friends. More precisely, the clustering coefficient of a node is the ratio of existing
links connecting a node's neighbors to each other to the maximum possible number of
such links. The clustering coefficient for the entire network is the average of the
clustering coefficients of all the nodes.” [15]
Simulation output shows that in max-networking strategy cluster coefficient value
is very high and in almost 90% of cases exceeds 0,9. This means if node A is con-
nected with node B and B is connected with node C that probability that node A is
connected with C is above 90%. Random- and min-networking strategy show much
more disperse view of clustering coefficient and one of them is presented on fig. 3.

6 Conclusions and Future Work

A virtual organization must react fast to the changes in the environment, related both
to demand and supply. Building a virtual organization on the basis of key compe-
tences enables to adjust the structure and possibilities of the organization to the
changing environment in a faster and more precise way. In addition, business partners
participate in the accomplishment of the aim; therefore, abilities, knowledge, costs,
access to markets and the risk of failure are shared.
The simulation experiments confirmed the observation [2,3,9] that virtual organi-
zations, like people, tend to link with well connected nodes. As mentioned, companies
want to collaborate with ones having big market share, a broad client base or expertise
based on a large number of business connections. But keep in mind that most enter-
prises protect their customers, experience, technology at all costs. If they see that their
competitors are doing something similar, they probably will not work with them.
They do not perceive well-networked nodes as an opportunity, but rather as a threat.
Of course this is changing, but very slowly. The results of our simulation show that
companies should choose a max-networking strategy which gives them best
conditions of cooperation. The basis, however, is trust. There is no question of
opportunism.
 Virtual Organization Networking Strategies – Simulations Experiments 609

The future work is to check the other popular network features (degree distribu-
tions, network resilience, mixing patterns, degree correlations, community structure,
and network navigation) in relation to the three networking strategies.
The authors also want to obtain data on the cooperation between enterprises on the
Polish market in order to verify the simulation model and find different dependences
in networks.

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