Juhani Anttila
Venture Knowledgist Quality Integration
Helsinki, Finland
www.QualityIntegration.biz

 

INTEGRATED QUALITY APPROACH IN BUSINESS NETWORKS

Abstract

Organizations’ central business networks consist of different kinds of stakeholders. Also the broader networks of regional or global operators and business clusters should be taken into account in the business of an individual organization. Even competitors are members of these networks. People of organizations operate in networks internally and are involved with external networks, e.g. expert networks and science communities.

Genuine business networks are primarily unplanned, emergent entities. Their growth is sporadic and self-organizing. All network-members are independent actors and they have their own needs and expectations. Networks as a whole are managed by nobody but each actor has its own impact in the network.

Traditional quality management approaches are not appropriate within networked business environments. Network quality originates from network members, structure and phenomena, and their characteristics. Quality of a business network is based on the multiple win/win transactions among the network actors. According to ISO 9000 the definition of concept network quality is ”degree to which a set of inherent characteristics of the network fulfils needs and expectations of the involved network members”.

Business-integrated quality approach means that all organizational quality activities are seamlessly embedded within organizations’ business systems. It is crucial to understand the structure and behavior of the business management system and business environment as a whole for an organization’s quality development.

Universal networking phenomena and people networking

Networking is a universal phenomenon. There are networks everywhere, including biological nature, physics and chemistry, mathematics, human aggregations, business communities, economy, technics, societies, etc. In this paper, the focus is on organizational business cases and some related aspects, e.g. regarding human, societal and technical networks. A network may be defined in this context as a group of interconnected independent individuals or other actors who exchange information, contacts, and experience for professional or social purposes. In all networks there are knots and links. Relationship is the most essential and significant issue in all networks.

According to Einstein "A person starts to live when he can live outside himself". Individual people of organizations operate in networks internally within the organization and are involved with external networks, e.g. expert networks and science communities. In organizational cases different informal networks may form shadow organizations within an organization’s official organization structure. In addition to the the closely business-activity related networks people are involved with “free” networked communities.

Wenger [53] defined the concept of “Community of practice”. Communities of practice are groups of people who share a concern or a passion for something they do and learn how to do it better as they interact regularly. The community may include business practitioners, researchers, authorities, professionals, and amateurs.
Similar networked communities are:
- Community of interest
- Community of action
- Community of context
- Communities of circumstance
- Communities of position
- Communities of purpose

Amateur professionalism or professional amateurism (shortened to ProAm) [32] is a socioeconomic concept that describes a blurring of the distinction between professionals and amateurs. ProAms operate in networks at their leisure, regard consumption as a productive activity and set professional standards to judge their amateur efforts. ProAms fields include today increasingly astronomy, activism, sports equipment, software engineering, education, and music production and distribution. An example of professional amateurism on a large, and socially and economically notable, scale is the global open source and free software projecting.

People’s networking covers the whole scope of business and society in good and bad [51]. Particular examples include voluntary activist-groups in large disaster situations, e.g. hurricane Katrina and Indian Ocean tsunami cases, operating via open source technology based networking for helping people on site, and Al Gaida terrorist network infiltrated within our societal and business networks. These networks have had a remarkable effect also from the business point of view in many organizations.

Organizations' value networks

Organizations have many different kinds of stakeholders that operate as networks. Networks include customer networks, partner networks (e.g. out-sourcing, crowd sourcing, and the Japanese keiretsu, ??), supplier networks, and networks with other stakeholders. All organizations should take into account in their businesses also networks of regional operators and business clusters that include also competitors. [8, 33]

Still many business networks are only some kind of extended organizations or even like ”slave networks”. E.g. a big company may strongly control its suppliers like its own business units. This control may include shared business values, missions, targets, strategies, policies, and plans. These arrangements, however, don’t represent the situation in a real network.

Traditional value chains are under pressure in modern business networks [14]. The new forces are wreaking havoc on value chains of organizations. In various industries, the existing competitive advantage is being wiped out as new competitors quickly produce business networks that use digital technology. Company’s strategy can no longer be based on tinkering with today’s value chain - but to find ways to alter it radically. Achieving competitive advantage is now more demanding and requires understanding organization’s value network as a whole (figure 1). Surrounding the traditional five forces according to Porter, buyers - suppliers - substitutes – competitors - new entrants, there are three new forces, digitalization - globalization – deregulation [20]. These new forces are particularly creating pressures on organizations’ businesses by networking.
Figure 1. A value network of an organization. Customer’s success doesn’t depend only on our products but also on other supplies [14, 36].

Value networks are the basis for technology innovation [14]. Established companies’ success or failure to respond to technology change depends on managerial, organizational, and cultural basis, and ability of firms to deal with new technology. This requires a very new set of skills and competences and collaboration in various networks. The concept of value network has actually much greater power to create benefits of new technologies and to avoid stumbling when confronting technology changes.

In characterizing and modeling new business environments the indicators affecting business models of organizations consist of social indicators, technological indicators, industry indicators, and market indicators
There are two extreme scenarios for the modern business environments and changes: (a) Growth within existing structure (vertical scenario) and (b) new industry structures and business models (horizontal scenario). Especially the horizontal model emphasizes the importance of networked cooperation of organizations (see table 1) [50].

Table1. Characteristics of two extreme business scenarios. Both may exist simultaneously in the market place and the situation may change continuously [50].

Business communities of all organizations include many different kinds of actors in networks:
- Companies and other organizations (private, public, and not-for-profit)
- Corporate-internal business units, competence centers
- Individuals, e.g. experts or business managers

Genuine business networks are primarily unplanned, emergent aggregations [2, 3]. Their growth is sporadic and self-organizing. A network member’s role can be characterized by centrality in the network as described by concepts activity, “betweenness”, and closeness. Genuine network members are independent actors. Nobody manages the network as a whole but each actor has its own characteristic impact in the network, including [31]:
- Access = actor’s easiness getting to the resources of the network
- Reach = actor’s potential wielding influence in the network
- Control = actor’s ability to control over the resources of the network

This kind of networks are neither understandable as systems because they may not have any commonly shared values, purpose, mission, strategies or targets. Each network actor has its own interest to be a member of the network.

Responsive processes of relating in business networks

Business partners are linked with each other in networks via their business processes. Processes that link organizations for collaboration are according to Stacey [47, 2, 3] “complex responsive processes of relating” that are extremely difficult or impossible to manage by using traditional management practices.

The theory of complex responsive processes is a foundation to understand processes of communication and relationship for collaboration between organizations. Complex responsive processes imply the fact that processes are not in practice designed to any great degree. They emerge as patterns of coherence from the iterative interactions of the partners. Leaders cannot – or are not necessarily willing to – design and control business processes in the most details, but they can influence the process performance by their own participation, and by their ability to raise the skill and awareness within their communities [43].

Complex responsive processes live with patterns of communication and relationship, and most of what we take to be “reality” is actually a social process that is created anew in each moment. It is possible to change what is latent within every moment, and small changes can propagate to become major changes.

Efforts to assert control - or at least to maintain that illusion - have led to untold waste and suffering. Embracing a complexity perspective involves focusing less on trying to assert control and attending instead to improving relational aspects of the processes. By reducing anxiety, enhancing awareness of context and relationships and fostering greater receptivity and openness to being changed, a complexity perspective helps to increase the resourcefulness, flexibility and adaptability of an organization in order to enhance survival and success.

Stacey [48] has described by his “matrix” presentation (figure 2) the phenomena that predominate in modern business organizations and communities.


Figure 2. Organizations’ process management challenges in accordance with the Stacey Matrix. Effects and effectiveness of the agreements depend on the nature of the process and its activities. Certainty is associated with predictability, strength of cause-effect relationships, and uniqueness and arbitrariness of the process activities [48].

Rational business control / management is typically based on the managerial structures, which are also the basis of the current quality management standards. In complex responsive processes they may be effective and efficient only in a small part of real process activities.

Political decision-making and control highlight various alliances, negotiations and compromises, which are very typical in organizations’ business management. Instead of rationality, management is often based on power position of leading people, intuitions and post-wisdom or explanations afterwards.
  
Judgmental control is based on rational risk assessments and decision-making, and is often related to different kinds of experiments or reactive actions. This area is the traditional area of structured and continuous development. In this case the future is built on traditional models and rational knowledge base. Issues are generally agreed, although there is no clear certainty about the achievement of results.
  
The complexity area is very important for the success of organizations. Creativity and innovation originate in this area and transition to the new forms of activity is made possible. Operation in complex situations cannot only be lead by rational control and fact-based decisions. According to Ashby [10], a successful operation in complex circumstances require acceptance of differences and diversity (“Requisite variety”). The organization can get benefit of such effects particularly through wide range of external networks.

Chaotic phenomena are burdensome for management in many organizations, because they cannot be managed by traditional means or not even completely avoided. In modern business process networks we are always accompanied by the agents and operators, which we are not even exactly aware about. Those actors may also be hostile. Individuals’ awareness as well as management flexibility and speed are useful in these difficult situations.

For many organizations the modern business environment seems to be desperate. However, as Toffler [52] stated that “whenever the situation seems to be the hardest and easy solutions are not seen, it is possible to enter a new, more sophisticated level of performance. In the phases of the mankind we can observe long periods of steady development. They are not associated with great development leaps.” Toffler said about exceptionally difficult circumstances: "This is the era of despair - this is a time of opportunity." Also Sorokin [46] confirmed in his time that “in spite of all inherent cruelty of the time and the turmoil, however, we are moving towards a better world. In his view, the current culture already contains in its beginning a toxic virus. The current crisis is due to this secret virus and its continuous evolution. A radical change and transformation should be achieved in our operational attitude and habits in the situation of overly matured systematicity and rationality. This would require replacing the existing modes of operation with better culture and expertise.”

In complex business situations, also relating to quality management questions, one could according to Naidoo [37] turn to interactive principles and methodology by identifying the affected stakeholders and understanding the nature of interactions and communication between them.

It is necessary that the development and expertise of the quality management move from past reactive systems-based culture and activities to new innovative formats that effectively and efficiently take into account needs and expectations of the modern business environment.

Scale-free networks, Win/Win and the quality of networks

A genuine business networks are so called scale-free networks that means that [11]:
- A network grows one by one node.
- A new node is easier linked with a node with many existing links (according to the Pareto principle 80/20)
- A network follows the power law formula where p is number of the nodes in the network and k links per a node, and the distribution parameters a and n vary according to the network. (Figure 3)

Figure 3. Power law as the foundation of the scale-free networks [11]

Strong network actors (hubs) keep a network alive, and quality of the network facilitates its growth. Networks compete with each other and one with highest quality wins. Individual actors or small entities may sporadically (according their own decisions) liberate from or join with the network. A network is however robust, and particularly strong hubs keep it together. It is network member’s own responsibility to keep actively him/her as a network member otherwise he/she drops out of the network. To be successful you should brand yourself and “sell” your value on the network. A slogan that describes the maxim of scale-free networks says: “The rich get richer”.

Win / Win -principle [49, 8] is the requirement for the sustained success to the networking partners (figure 4). Both parties are independent and they have their own interests expressed by their own ways. Value (V) and cost (C) scales of the parties are different, and it is essential that the both feel getting net value (V minus C).

Figure 4. Win / win principle is the prerequisite for a successful network collaboration.

Quality of a business (or any) network is based on multiple win / win. Quality of a network may be defined according to the general ISO 9000 [29] definition of the concept quality. According to this basis quality of a network means: “degree to which the set of inherent characteristics of the network fulfils needs and expectations of the involved network members”. All network members have their own needs and expectations and they produce something to and get something from the other network members. Network members may get benefits also from the whole network through the general recognition or privileges of the network. According to these assumptions the total quality of a network may be calculated according to figure 5 and the presented mathematical formula.

Figure 5. Calculating the quality of a network

This also proves the Metcalfe’s Law [20, 55]: A network increases in value as the square of the number of its users.

Changing mind-set for the quality management in networks

Business environments and concepts have changed radically in networked businesses [1, 6, 7]. That means crucial changes e.g. in all the key concepts of business management including:
- Organizing the business, the business system
- Business environments and its behavior
- Stakeholders
- Business models, performance and targets
- Management and leadership
- Technology
- Products (goods and services)
- Business processes
- Work, employeeship
- Custom, customers
- Business culture

Professional business-integrated quality management approaches consist of:
- Quality management concepts and principles
- Frameworks (ISO 9000 standards and performance excellence models)
- Quality management and quality assurance methodologies and practices
- Quality expertise

All these quality management aspects are very closely related to the above mentioned business management aspects. Therefore traditional professional quality management approaches are not any more appropriate within networked business environments without appropriate innovations. Network quality may not be achieved by traditional quality management means [6, 7]. E.g. significant topics of the ISO 9000 [29] standards, ”top management responsibility”, ”quality policy”, and ”quality management system”, are not any relevant issues in networks because there are not any single management, policies, or quality management system in a network. Network members are independent actors with their own management systems, business emphases, and interests.

Development of the quality of a business network is based on the network members’ impacts in the network. As the whole network is emergent, so is also the quality of the network. The achieved quality may arise and exist only as a phenomenon of independent parties working together, and is not predictable on the basis of their properties.

Transaction costs and virtuality in networking

Understanding the fundamental features of the business related networking is not any new issue. Already in 1925 Dobb [19] found out that ”there is something more important than the relations inside each factory or unit captained by an undertaker. There are the relations of the undertaker with the rest of the economic world outside his immediate sphere. The undertaker busies himself with the division of labor inside each firm and he plans and organizes consciously, but he is related to the much larger economic specialization, of which he himself is merely one specialized unit. Here, he plays his part as a single cell in a larger organism, mainly unconscious of the wider role he fills.”

Coase [15] introduced in 1937 his concept of transaction cost that is extremely important factor in the development of modern business networks. According to him ”economic theory has suffered from a failure to state clearly its assumption. Economists in building up a theory have often omitted to examine the foundations on which it was erected. Firms are entities endogenous to the economic system and whose existence is justified only in the presence of transactions costs to production. Firms and other economic organizations and institutions, exist because people use them as a way to minimize transaction costs”. Basic aspects related to the transaction costs between organizations may include search costs, information costs, bargaining costs - negotiating costs, decision costs, policing costs, enforcement costs, and failure / maintaining costs. The nature of the firm will change. The concept of a firm as a physical entity, defined by its permanent employees and fixed assets, is giving way to a “virtual organization”. Individuals will be participants in many enterprises, and those enterprises will be formed around events much closer to transactions than to a sense of corporate immorality.

In the new economy, the balance of activity between firms and market, between middlemen and the buyers and suppliers they sit between, changes dramatically.

Completely new virtualization opportunities may provide Second Life [56] and other similar virtual living and operating applications, which are based on the latest social media technology. These applications have already got an increasing position also for professional business purposes, e.g. in the field of training and education.

Collaborating and learning in networks

Collaborating and learning are the core issues in networks from the quality point of view. Benefits relate particularly to new information and knowledge through learning. [3, 4, 8, 21, 22, 44, 45]

An organization is a living organism, and the roles of leadership and language have a crucial importance. In fact, an organization and its quality management are a set of conversations among people. Language is the defining environment in which an organization lives. It is how those in the organization reach agreements and decisions. Language is a medium for organizational activities, growth, and change.

Narrowing the organizational language, e.g. by standardization, increases efficiency [23]. A common shared language helps the organization arrive at decisions more efficiently. Narrowing language, however, increases ignorance. Constrained by a limited vocabulary, the organization becomes unable to adapt to fundamental changes in its environment. Unable to change, the organization eventually declines. When being ignorant of our own ignorance, we cannot ask questions outside our own language experience.

As a system moves toward equilibrium, it tends to become increasingly efficient and insular, rejecting external input. To increase efficiencies, it seeks to reduce variety. Therefore, attempts to increase variety are likely to be misconstrued as inefficient or even as a failure to execute.

It is possible for an organization to learn and grow only if it creates conditions that help generate new language. Using new language, an organization may create new paths to productivity, and regenerate itself. The conversations necessary for generating new opportunities come from outside the organization, from the language that has a different history. That takes place through networking. This is often technically and intellectually demanding and, consequently, often dismissed.

For any organization to be successful, a necessary and sufficient set of disciplines (knowing people) must be in play. A successful organizational development requires a requisite variety [10] within the organization. It includes establishing relationships among the disciplines to appropriately frame the conversations, decisions, and actions of the organization. For an effective leadership, the variety of the leader must be greater than the variety in the system being led. In other words, an organization can display something only to the extent that it has sufficient internal variety to represent it.

Continuous learning is the key issue for the development of quality in networks and in their members. Arranging traditional quality related training and education events, e-learning facilities, or quality awareness programs within the organization and even also participated by business leaders do not necessarily create real awareness or commitment successfully or effectively [21, 22]. Most (80%) of all learning takes place in practice through informal learning. Learning process may be made effective through participation in collaborative networks. This is proved by recognized experts, including Cross: ”Informal learning – The other 80%” [17], Handy: "The best learning happens in real life with real problems and real people and not in classrooms”, and Oldenburg: ”3rd place hosts the regular, voluntary, informal, and happily anticipated gatherings of individuals beyond the realms of home and work” [34].

Illich talks about the necessity of deschooling [27]: ”The pupils are ’schooled’ to confuse teaching with learning, grade advancement with education, a diploma with competence, and fluency with the ability to say something new. Education through schooling is not feasible. It must be reversed into the search for educational webs which heighten the opportunity for each one to transform each moment of his living into one of learning, sharing, and caring. Similarly medical treatment is mistaken for health care, social work for the improvement of community life, police protection for safety, military poise for national security, the rat race for productive work.” He introduced the concept of conviviality [28] for an effective learning and collaboration. ”It is to designate the autonomous and creative intercourse among persons, the intercourse of persons with their environment; and this in contrast with the conditioned response of persons to the demands made upon them by others, and by a man-made environment. It is individual freedom realized in personal interdependence and, as such, an intrinsic ethical value. As conviviality is reduced below a certain level, no amount of industrial productivity can effectively satisfy the needs among society's members.”

Nonaka has developed his well-known and recognized approach for learning through social collaboration, so called knowledge-conversion process, SECI (figure 6) that helps us understand learning by transforming tacit knowledge to explicit knowledge and vice versa through social collaboration. [3, 38]

Figure 6. The SECI process (S = Socialization, E = Externalization, C = Combination, and I = Internalization) [38]

Effective networked learning collaboration requires according to Gloor [26]:  
- Degree of connectivity among network members
- Degree of interactivity between network members
- Degree of sharing knowledge within the network
These may be supported effectively by the use of modern information technology (IT).

IT support for networking

According to McLuhan [54]  “technology serves our knowing and learning as an extension of the body. The medium is the message. The form of a medium imbeds itself in the message, creating a symbiotic relationship by which the medium influences how the message is perceived, creating subtle change over time.  We shape our tools and afterwards our tools shape us. Humankind will move from individualism and fragmentation to a collective identity, with a ’tribal base’". McLuhan's coinage for this new social organism is the global village.

However, the traditional information technology (IT) is not of a great help for networked collaboration [1, 2, 4, 16]. When organizations have invested in IT solutions the development and use of those solutions has been problematic in practice. During the past years nearly every new application and idea created by software industry has made the jobs of people more complex and difficult, rather than simplifying their responsibilities. This includes problems for employees and business leaders making operational and strategic decisions, and today they all have to access many IT applications to do their jobs. In many cases the data sources, systems, and applications located throughout the organization need to be combined to present the summarized information or desired report format that executives expect to review. Corporate-wide systems are complex and designed for a specific purpose and function, so the IT department is required to deploy many different and often unrelated applications and modules to fill the information and processing needs of the entire organization. An incredible amount of training time is needed for an employee to learn how to effectively use such a complex suite of applications and all of the processes and steps involved to complete their assigned responsibilities.

The corporate intranets [16] were originally designed and implemented to meet the needs for shared information across the organization. Correspondingly Internet and extranet solutions were developed for external purposes. Using the corporate intranet, employees are able to access corporate information using web browser to find forms, open applications to perform their jobs, and review a customer's project status, and for many other activities. The corporate intranet solution provides navigation to different enterprise systems and documents. Corporate intranets are responsible for hosting a multitude of applications and an exponential growing number of documents to be readily available for employees to use. As intranet sites grew larger, a new set of problems created related chaotic situations with information access, knowledge sharing, and security.

In order to solve the existing problems we should understand the IT in a new way as ”Interactive Technology” that supports information/knowledge-intensive business operations and the SECI process (Figure 6). There are two different technical approaches for this:
- Portal solutions, integrated information technology solutions based on sustaining technology [14] that, however, are complicated, difficult to use and maintain, and expensive.
- Collaborative group work and social networking infrastructures based on disruptive technology [14] of Web 2.0 social media that are simple, easy to use, and cheap, or free of charge (open source).

Many organizations are already using Web 2.0 technologies [39] in some way. Already in 2007 according to McKinsey [30], ”over 80% of enterprises plan to use Web 2.0 technologies for better interactions with customers, partners and employees.” There are increasingly possibilities with this technology to improve effectiveness and efficiency of the quality of management and operations in all organizations. [7, 35]

A new approach instead of particular management systems is to create organizational Knowledge Work Environments (KWE) [18] for different management purposes, e.g. for quality management. The core of a KWE consists of ability to lead knowledge workers into work areas, where they work in collaboration to learn by building new knowledge. They have also all relevant explicit information easily available through related document files. The toolset that is available for use at work areas is meant to improve internal and external communication of such knowledge working in teams and networks. The five basic tools of a KWE include wiki, blog, aggregator, forums and files based on social software and Web 2.0 technology. Many organizations are already using these tools separately but in the KWE they have been integrated as a comprehensive knowledge-working platform. These tools may manage both tacit and explicit organizational knowledge consistently. Also other tools that may be easily integrated with a KWE include email, Skype, calendar, virtual meeting, mashups, and organization’s existing legacy IT systems [5, 12, 41].

Regional and social networking, and social capital

All organizations operate in the regional or even global society. All organizations should take into account this in managing their businesses. Quality in the regional environments is affected by all related societal partners and the quality culture of the whole society (figure 7). [9, 25]
Figure 7. Quality from societal performance through business activities to people, organizations, and societies at large [42]

The entirety of a regional offering (“regional product”) to individual regional actors may consist of different elements of personal or automatic (Internet) services, or material goods. This regional product may be characterized like any product offering including effectiveness (offered content of the product), ergonomics (easiness to use the product), serveability (accessibility and sustainability), security, aesthetic aspects, ethical aspects, social performance, ecology, and economy.

Social capital [40] is the underpinning and core fabric of social communities. Social capital is a large common-mode factor impacting society’s behavior. Its benefits include safety and security, mutual trust and friendship and community, a sense of civic identity, etc. Social capital creates value and cooperation through social human relationships or networks. According to Ahtisaari ”the strength of a society depends on social capital, which consists of mutual trust between the people and the ability to cooperate.” Today the general trend is that traditional forms of social capital are declining including:
- Political participation
- Civic participation
- Religious participation
- Connections in the workplace
- Informal social connections
- Altruism, volunteering, and philanthropy
- Reciprocity, honesty, and trust

However, there is also some development against this general trend particularly relating to small groups activities, social movements, and the network activities. Especially Internet based social networking is significant for organizations and individuals. Internet covers the whole life.

Internet [24] is a technical medium that integrates telecommunications, information technology, and information contents. It includes both the formal Internet and other networks and computers linked in through proprietary systems. The very openness is the single most important factor in Internet’s success. Internet is not, however, only a technology issue but it has facilitated new principles to operate among individuals, groups, and organizations, and in this way it has changed behavior of people, organizations, communities and society.

The Net includes all the people, cultures, and communities. It has rules and norms - ways we should behave even if no one forces us to. The Net belongs to no particular country or group. The greatest structural impact of the Net is decentralization; things and people no longer depend on a center to be connected. The Net has no independent existence. It matters because people use it as a place to communicate, conduct business, and share ideas. The Net will bring profound changes to human nature and institutions. Everything that matters on the Net will happen to human beings and on the contrary. The Net gives awesome power to individuals. It is a terrain that can be a source of untold productivity - or a medium for terrorists, con artists, and untrammeled lies and viciousness. It is almost impossible for traditional authorities to regulate, yet it does need to be governed. 

Conclusion

Networking is a most natural phenomenon. The hierarchical structure and bureaucratic ways to operate in organizations based on scientific management thinking are man-made artifacts that often not any longer support flexibility and responsiveness, and effectiveness and efficiency that are required by organizations operating in today’s continuously changing business environments.

The most significant factors for influencing in and getting influences from a network are power and authority in relationships, and effectiveness of communication. Paradox of real networks include gaps between private / public and politics / ethics. In a real life politics always overcome ethics [13].

Quality of a business network depends on its different members’ ability to give to and to get from the others for mutual business advantage. Each organization should create its own networking strategies and practices on this basis

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[This text was presented in Izmir, Turkey in 2010 (EOQ 2010)]