Social Networks Some theoretical insights

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How useful is it for entrepreneurs and businessmen to network continuously and have a great number of contacts? What do researchers say about ways in which one needs to network? What can entrepreneurs learn from these findings?

 

 
 
suresh-bhagavatula-pd-95This article attempts to understand and delineate what constitutes a good network. It introduces some of the relevant literature that has explored the advantages of social capital for entrepreneurs and managers.  
 
We now network more than we perhaps ever did before. Internet has made networking easier than before. Spearheading this social networking revolution are websites like Orkut, Friendster, and Craiglist, etc. Many of us actively network through these providers and seek friends and business contacts. There are a number of business success stories put on record by networking sites. However, how useful is it for entrepreneurs and businessmen to network continuously and have a great number of contacts? What do researchers say about ways in which one needs to network? What can entrepreneurs learn from these findings?
 
Let us begin with a small experiment to understand the power of networking. Pause for a while and think of the all the contacts you have - old school and college friends, past and current colleagues, your earlier and previous neighbors and so on.  Let us assume that you have no less than 75 contacts. These 75 contacts are likely to have their own contacts. Let us assume that each of these know 75 more people. So, by the time you move into your second level of contacts, you already can approach about 5,625 people. At the third level, you can potentially get in touch with 421,875 people. A higher level may get you to 31,640,625 indirect ties. However, in reality, the number is lesser than this because relationships greatly overlap. My friends may know each other and hence are friends as well so even though I may have 75 contacts it is highly unlikely that each of these contacts, in turn, have 75 unique contacts. Nonetheless, networking enables you to reach out to a large set of people. It is important for an entrepreneur to have a large network as he can scan it to identify opportunities and resources. In reality, imagining that such a large cloud of social relations surrounds us is difficult. This is where the social networking websites have come in useful. Not only can we see this cloud, we can understand our friends' networks as well, and to know if any of his friends can provide us with vital information or resources for our ventures.
 
The reason why networks are important to us is because there is an intrinsic value in a relationship, be it friendship or work related. Researchers have referred to this intrinsic value as ‘social capital' . This term captures the advantage individuals or organisations have by the virtue of contacts or networks they develop. So, if we understand how social capital captures the resources that are contained in one's social network, then like financial capital and human capital, we can derive benefits from it. The research, however, has had competing theories. One set of scholars argue that weak ties and sparse networks are beneficial for entrepreneurs while some others argue that strong ties and dense networks are the sources of social capital. Recent studies, however,  have merged both these perspectives to arrive at a comprehensive model that takes into account the industrial environment that surrounds the entrepreneur.
 
Weak and Sparse Ties: Much of the current research on networks finds its origin in the work of Mark Granovetter. For his PhD research, he explored the process by which individuals found jobs. He hypothesized that strong ties like family, relatives and close friends would be instrumental. However, he found out that many individuals found their jobs through their acquaintances; with whom they had had little contact. They may have met these people at conferences, parties or other social events. The contact may have been sporadic. Granovetter explains that each individual interacts with a close set of people in their lives. He terms such persons as strong ties and acquaintances as weak ties. Since individuals frequently interact with their strong ties, the information that they possess is more or less similar to that of the individual and other strong ties. Hence, he argues that individuals hardly receive novel information from their strong ties. Similarly, acquaintances also have a set of people with whom they are in regular contact. Unlike the individual, the acquaintance moves around in another set of social circle and has access to a different set of information. It is highly likely that the information that they will come across will be novel to the individual. Hence he says that acquaintances act as antennae into distant parts of the society and bring in information that has high novel value and due to which they, not strong ties, are the sources of information for job openings. He published these results along with his explanation in a paper called "The Strength of Weak Ties", which sparked new research areas in sociology related fields.
 
This concept of weak ties was further developed by another researcher, Ronald Burt. While agreeing that novel information is crucial for innovation and weak ties are important for novel information, he takes the concept of weak ties a little further. He introduces the concept of 'structural holes' to indicate holes in the social fabric (akin to weak ties). fig-1Let us say that A interacts with B, C, D and E; and if B, C, D and E do not know each other, then each actor is maintaining a network that does not overlap with the others' network. Then, it is said that ‘structural holes' separate these Some theoretical insights contacts. Unlike weak ties, non-redundancy of information forms a central core of structural holes. When entrepreneurs have networks with many structural holes (or acquaintances) they tend to have access to information that has greater redundancy, correspondingly, when an entrepreneur's social network contains many strong ties, then the network is said to have access to information with higher redundancy.
 
Burt elaborates three advantages of having access to good networks: access, timing and referrals. To begin with, entrepreneurs with good networks have greater access to information. More important than access is to have the information before others have it, since such information would have a higher opportunity value. Finally, good networks enable the individual to use referrals effectively for a job opening or a particular service at important places.
 
Strong and Dense ties: A few researchers have challenged the weak and sparse ties theory. Brian Uzzi says although weak ties provide the entrepreneur with abundant information, the signal to noise ratio is high. Strong ties on the other hand result from years of interactions, and the information that entrepreneurs receive from their strong ties is fine grained and has little noise. In addition, strong ties with clients and suppliers provide the entrepreneur with possibilities of joint problem-solving with customers, if differences of opinions arise. Finally, strong ties like family and friends provide emotional support, which is extremely crucial for entrepreneurs during their start-up phase.
 
When individuals are embedded in networks where everyone knows everyone else (like in the Figure) fig2such networks are said to be dense networks. James Coleman says that when an entrepreneur is embedded in a dense set of ties, then each contact knows everyone else. In such a situation, it is impossible for someone to display opportunistic behavior. For instance, he says, that diamond merchants in New York give a bag of diamonds to their prospective buyers, to enable them to examine and come up with their bid. However, the potential buyers take the bag, examine the stones at leisure and give the stones and their quotation back to the seller. Such transactions cannot happen except in a environment that has strong and dense social networks. These buyers and sellers are predominantly from Jewish backgrounds and have been interacting with each other for years. If a person takes advantage of the trust-laden relationship and swindles the seller, then word gets around quickly and no other diamond merchant will conduct business with this person. Hence strong and dense social networks are the sources of trust that entrepreneurs can depend on. They lubricate economic interactions by preventing opportunistic behavior.
 
Networking contingent on Industry: What kind of social capital should an entrepreneur nurture? Should he increase the number of contacts? Should he scan for weak ties? Should he develop strong ties? Researchers like Tim Rowley, Tom Elfring, etc. say that since both strong and weak, dense and sparse networks are important but the importance is contingent on the industry within which the entrepreneur is operating.
 
fig3For instance if an entrepreneur A is operating in an industry where the environment is changing rapidly, like semiconductors or Information Technology, then it makes sense for such people to develop a large network that contains more weak ties (dotted lines) than strong ties (thick lines). Such a network will spread out into the society and acts like antennae to bring in novel information from distant parts of the society. It is this novel information that helps entrepreneurs spot opportunities.
 
Your browser may not support display of this image.However, if an entrepreneur B is in an industry where there is hardly any change in the environment like running a restaurant or having a steel business, then it makes sense for him to have a small network containing more strong ties than weak ties. fig4Such a network would provide him with secure resources and trust, which are crucial for survival growth in such businesses.
 
Calculate your network density : In order to find out how your network is, you could take a piece of paper and plot your network. Make a small circle at the centre that represents you. Then list all the friends and important contacts (with whom you have made a contact in the recent past) on one side of the paper. Now draw circles all around the centre with each circle representing one contact. Next, draw lines to indicate the relationship between you and the contacts (dotted lines for weak ties and thick lines for strong ties). After which you may think about the relationships between the contacts. If you think they know each other then draw a line between them otherwise do not join them. Now count the total number of relationships you have (both strong and weak) and then count the number of relations your contacts have with each other. Add them up and this figure will give you the total number of relations that exist in your network. Now divide this value by the maximum number of relationships that can exist in the network [using the formula n*(n-1), where n is the total number of nodes in the network - you plus all the contacts you have]. This final value is the density of your network. If the value of this variable is high, you have a dense network and if it is low you have a sparse network.
 
For those aspiring to be entrepreneurs, it is important to nurture the right kind of network. As Burt says "Networks are the final arbiter of competitive success". If you want to be in an IT related field then try to increase the diversity of your contacts (having contacts with wide professional backgrounds) and increase the number of weak ties. Otherwise nurture strong ties and dense networks. In any case, the message for an aspiring entrepreneur is to "network" and to network right.
 
Suresh Bhagavatula has just established a consultancy - Netanalysis to help organisations and individuals better their social networks.   

Issue BG72 Mar07