Entrepreneurial networks

Who is this? Keep this face in mind, at least for a bit.

James Dewey Watson

 

 

Leading in the whitespace

A major breakthrough in our understanding of the social nature of competition came through a series of papers and then a foundational book by Professor Ronald Burt of the University of Chicago, “Structural Holes: The Social Structure of Competition.” While others had made similar arguments before (see Bavelas 1948, and for a fantastic review see Centrality in Social Networks: Conceptual Clarification by Linton Freeman) Burt grounded this idea in theory and provided a very clear framework for other scholars to rethink competition and strategy through this structural lens.

His, very powerful, argument to us was to think about “structural holes” as “opportunities.

That is, bridges across this holes in social structure are sources of value for everyone involved—the person who bridges, as well as those being bridged.

The research that followed resulted in a paradigmatic shift in our understanding of how competition within organizations and in markets functions. The early work made a clean and forceful point: the causal agent is not the “strength or weakness” of a tie, but the fact that bridges create value. Focus on the bridge.

This structural argument was supported by two mechanisms of action. These can be described as the control and information benefits of structural holes.  Consider the three archetypical networks depicted below (I’ve adapted this representation from Krackhardt 1999).

Picture1.png

On the left, the focal individual “YOU” is in a structure with very few structural holes. That is, all of his connections are connected to each other. On the far right, is the high structural holes condition. In this case, not of the focal individual’s connections are connected to each other. The intermediate network, which we will discuss later, is theorized to have its own special properties.

The Control Benefits of Structural Holes

Let us examine the control benefits first. In the first representation, who has control?

Consider the situation in the figure on the left. What happens if you cheat one person in the network? They talk to each other. Your reputation suffers. You lose some of your control. So, who is in control? Not you, but the group. The role that closed networks play in creating trust through control is not uncommon. For instance, small businessmen/women in America and other countries often tend to do business with their co-ethnics.

While preventing cheating is a good thing, a closed structure could also be highly constraining. Small and closed-knit groups have strong group norms that can force members to conform in unproductive or harmful ways. Innovation, for example, often requires people to take risks—both social and economic—and closed groups might stymie such risk taking.

At the other end of the spectrum, the focal person’s connections are not connected to each other. This lack of connection implies that they cannot communicate, and as a result, information or gossip cannot travel between these disconnected parties as quickly. The focal individual in this case has more control, because they have the freedom to act without others coordinating against them.

If you are in the third structure, there are two specific control benefits that you have:

  • The first strategy to exploit your control benefits here is one where you are the broker who can leverage your position to play-off two individuals (perhaps buyers or even sellers) who want the same thing from you.  For instance, you can in subtle ways, make them either lower their demands or increase their willingness to pay.
  • The second strategy based on control is to be a broker between two people (companies) who have conflicting demands. The broker, in order to get one person change their demands, can leverage the demands of the other. Furthermore, since these two parties do not interact with each other — the broker has the ability (because of this increased control) to shape the information that one party gets about the other. 

These are obviously dangerous strategies – and ones that require a significant amount of finesse and skill.

The Information Benefits of Structural Holes

All is not lost if you can’t pull off the control strategy. Spanning structural holes also provides information benefits. The literature broadly posits three types of information benefits:

  • Access benefits: Access benefits consist of two components. First, because the broker spans structural holes, she connects two groups that do not have a high degree of overlap in their knowledge. Thus, the broker has access to information that is not accessible to those in the separate and spanned social groups.  Second, since you are getting more diverse information because you have diverse connections — when you receive valuable information you know who can use it.
  • Timing benefits: Information can be transmitted over multiple channels. Consider job postings. Before a job is posted in an official manner, people in the department where the job will be know about it. Talking to someone in that department will give you knowledge about the job before everyone else. This subtle difference in timing can mean the difference between getting and not getting a job. Because the broker gets information through informal channels, she often has access to information before others.  Timing matters in many contexts, including venture deals, hiring, knowing a house is on the market, etc.
  • Referrals: Trust matters. Period. People avoid hiring people, buying products, or investing in companies that they have limited information about. Those who span structural holes have contacts in different social worlds with their different opportunities. Contacts with people in these social circles can refer you to their own network, thereby increasing your trustworthiness.   

The Structural Holes in DNA

Ok, now that we have the theory down. I want to share an example from real life that exemplifies the beauty of the theory of structural holes.

This is James Watson, one of the co-discoverers of the structure of DNA. This discovery is described by many as one of the most (if not the most) important single scientific discoveries of the 20th century. In his gripping account of this discover, The Double Helix he recounts how he and Francis Crick discovered the structure of DNA.

James Dewey Watson

Here are some quotes about the quest for the structure of DNA from the Nobel Prize website:

In the late 1940’s, the members of the scientific community were aware that DNA was most likely the molecule of life, even though many were skeptical since it was so “simple.”

…Nobody had the slightest idea of what the molecule might look like.

In order to solve the elusive structure of DNA, a couple of distinct pieces of information needed to be put together…

As in the solving of other complex problems, the work of many people was needed to establish the full picture.

Picture1.png

Francis Crick, a brilliant scientist was already at Cambridge before James Watson had arrived, Watson describes Crick:

“Before my arrival in Cambridge, Francis only occasionally thought about deoxyribonucleic acid (DNA) and its role in heredity.  This was not because he thought it uninteresting. Quite the contrary.

Francis, nonetheless, was not then prepared to jump into the DNA world…[S]uch a decision would create an awkward personal situation.  At this time molecular on DNA in England was, for all practical purposes, the personal property of Maurice Wilkins, a bachelor who worked in London at Kings College…It would have looked very bad if Francis had jumped in on a problem that Maurice had worked over for several years. The matter was even worse because the two, almost equal in age, knew each other and, before Francis remarried, had frequently met for lunch of dinner to talk about science.

The combination of England’s coziness – all the important people, if not related by marriage, seemed to know one another – plus the English sense of fair play would not allow Francis to move in on Maurice’s problem.”

Watson, on the other hand was an outsider. He describes a few episodes that were critical to his discovery of DNA.

Screen Shot 2017-05-02 at 11.09.10 AM.png

Break #1:

At a conference in the spring of 1951 in Naples, Watson heard Maurice Wilkins’ talk on the molecular structure of DNA.

“I proceeded to forget Maurice, but not his DNA photograph.”

Break #2:

A manuscript on DNA (as a triple helix) had been written, a copy of which would soon be sent to Peter Pauling, the son of Linus Pauling, Nobel Prize Winner, and a scientist who was working on the structure of DNA himself.

Break #3:

Knowledge about Chargaff’s rules through is doctoral training in Indiana.

Watson had unique access, through his network, to the photos produced by Rosalind Franklin in the Wilkin’s Lab, the unpublished manuscript prepared by Linus Pauling, and exposure to Erwin Chargaff’s rules about the ratio of bases in DNA.  Because of his position, he was able to put these pieces together faster than anyone else.

All three processes helped Watson:

  • Access to novel information.
  • Timing, getting access to information before it was published.
  • Referrals, through his famous and Nobel prize winning advisor, he was able to hop from one great lab in Europe to an other, and get access to conferences that he would not be able to attend otherwise.

Luck? No. Social Networks.

Growing your network strategically

Structural holes theory also implies a series of tradeoffs between the size of one’s network and the benefits that the network produces. A large network is not necessarily a good thing. This is because maintaining a network connection implies some cost and results in some benefit.

  • Decreasing returns to network size:  If we measure benefits in units of novel information, one could imagine that adding a new tie might entail some cost (time, resources, emotional energy, etc.) but subsequently not result in access to much more new information-e.g., you hear about the same job opportunities from the new connection that you heard about from your existing friend or acquaintance.) So at least in terms of information, there is a decreasing return to the network size: you pay the additional cost of the new connection, but it is providing less information per unit cost than a prior connection.
  • Constant returns to network size: A more palatable case is constant returns. Here doubling your network size, doubles the amount of information you have access to. Every new network connection provides information in proportion to what the prior network connections provided.
  • Increasing returns to network size: The most ideal situation is one where doubling the size of your network more than doubles the information you get. Is this even possible, since adding a new network connection that provides more information than before might also be substantially more costly?

In any case, you clearly want to be at a point before your costs of maintaining a network significantly outweigh any benefits that you get.

Structural holes theory provides some useful guidance on not going too far down the route of decreasing returns to size. A good heuristic for understanding this tradeoff is a calculation developed by Professor Ronald Burt called efficiency. Efficiency can be calculated in the following way:

Efficiency = Effective Size / Actual Size

Expanding this function out, we can define:

Actual size = The number of connections that you have.

Effective size = Actual Size – Sum of percent of overlapping ties for each of your connections.

Bandwidth and Diversity

The model above has been tremendously useful and very predictive. In recent years, some scholars have also highlighted another interesting tradeoff between stronger non-bridging ties and weaker bridging ties: the bandwidth/diversity tradeoff.

On one hand, greater bandwidth ties result in greater greater informational volume. On the other hand, weaker bridging ties result in greater variance in information.

Recent work suggests this relationship depends fundamentally on the nature of the environment in which people are building their social networks. There are two factors that can reduce the value of bridging ties and privilege high-bandwidth ties:

  1. If the network has a homogenous set of knowledge – where most people talk about the same things. Then having more high-bandwidth ties may be more important.
  2. If the “refresh rate” – is high – where people’s contacts and interactions churn very fast, or where the environment turbulent and the information is extremely complex — meaning that an idea contains multiple topics or subjects — then high bandwidth ties are better at sustaining the high variance information you need.

However, what studies have found is that “strong” bridging ties that have both bandwidth and diversity are the best — but they are indeed rarer rare.

 Extending the Core Insights from Structural Hole Theory

As one can imagine, structural holes theory was extremely powerful and scholars have been working to extend and refine the predictions of the theory further to account for structures that don’t neatly fit into the standard dichotomy or have dynamic elements.

Consider dynamics: Given how difficult it is to maintain bridging positions, it is likely that bridges are fragile. Research suggests that bridging ties followed what is called a kinked decay function. Initially bridges have a low likelihood of breaking, followed shortly by a sharp rise in decay, if the bridge survives this spike in decay rates, it is likely to persist for a long time.

Two processes often lead to decay:

  • Disintermediation: Disconnected parties learn to exchange on their own.
  • Competition from rival brokers: Rivals enter the fray and by offering either greater benefits or lower cost, whittle away at the original bridge’s benefits from occupying the hole. Indeed, the hole no longer exists.

Why bridges decay:

  • -Low performance / High performers have lower rates of decay for bridges
  • If other relations are decaying, bridges are also likely to decay
  • Experience bridging improves the chances that new bridges survive
  • “Hole decay” may be limited when:
    • Deep barriers limit interaction across the hole.
    • The benefits to the bridged parties is high enough and switching costs are high.
    • The bridged individuals don’t question the role of the broker, or it is not salient to them.

Beyond Information and Control

There are also cases where brokering is disadvantageous. The underlying mechanism leading to the disadvantages of brokering have to do with identity and expectations.

  •  In addition to information, networks also convey expectations about who one is (identity) and how one should behave (expectations). Many of us have been caught between two groups that expect different things from us.  This happens at work, at home, and even in our social and personal lives with friends. The more disconnected are connections are, the more likely it is that they have different expectations about how we should behave. Podolny and Baron (1997) show that when a person is a broker in a network that conveys “identity” they are less likely to benefit from their brokerage position than when the network primarily provides “information.”
  • Similarly, Krackhardt in his Simmelian tie theory makes a related argument that brokering between two strongly connected groups creates pressure to conform to different norms which can create internal role conflict, stress, and thus reduce performance.

Outcomes as Mean versus Variance

The theories that we have focused on thus far attempt to predict mean or expected outcomes. That is, what is the average difference in wages/promotion rates/bonuses/ideas for those with or without structural holes. The graph below shows that there is a mean shift. The blue distribution (e.g., structural holes condition) has a higher mean outcome.

Picture1

However, this analysis can be pushed further by asking: is there a shift in the variance of potential outcomes. Does a specific structure reduce or increase the possible variation in outcomes. Note that the blue distribution below, is “tighter” than the black distribution. The black distribution has a greater likely hood of worse, but also better outcomes than the first.

Which would you prefer below?

Picture1

James Lincoln of UC Berkeley did pioneering studies on business networks in Japan and found that companies that were members of the Keiretsu, while having lower means in terms of outcomes, also had lower variation and as a consequence were less likely to both do extremely poorly but also less likely to do extremely well.

With respect to brokerage, we can also think about floors and ceilings. Networks that are high in closure reduce variation in performance, both high and low.

The high performance is minimized because of the subsidizing of the lower performers by the high performers, and the low performers don’t do as poorly because the high performers help them out.

The network structures that tend to most facilitate the low-variance strategy are closed networks, as one can imagine.

The classic examples of this are ethnic networks, where people – the more wealthy people help out the less fortunate ones. 

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