Traditionally, a company’s links to its customers, suppliers and other external parties have been based upon either arm’s-length transactions or socially embedded ties. Electronic technologies have enabled a third and more flexible option, dubbed “virtually embedded ties.”
To conduct business with customers, suppliers, partners and other external parties, companies have three options: arm’s-length, socially embedded and virtually embedded ties. Arm’s-length ties are connections that exist solely for a particular business transaction. The problem with arm’s-length ties is that they have difficulty handling transactions that are uncertain, complex or opportunistic. Embedded ties are connections that overcome the weaknesses of arm’s-length ties by inserting the transaction in a supportive context, either social or virtual. With a socially embedded tie, trust, sharing of proprietary information and joint problem solving form the foundation for an economic relationship to minimize the risk of transactions. In a virtually embedded tie, an economic relationship is facilitated and maintained through the use of electronic technologies that help minimize the risk of transactions through increased transparency, widespread information sharing and community-based problem solving. Companies in different environments are likely to benefit from the use of different combinations of those types of connections.