Where Einstein Meets Edison

Exploring the Limits of Social Connections in Entrepreneurship: Friends as Chains

Exploring the Limits of Social Connections in Entrepreneurship:  Friends as Chains

Dec 31, 2010

What if having social connections was actually bad for business? The idea sounds incongruous after decades of business schools preaching in favor of “networking”. Now, after years of fruitful exploration of the positive aspects of social relationships, management scholars are also starting to understand their limits. It even appears that the power of connections in entrepreneurship and beyond may have been exaggerated, at least in part.

In the first installment of this two-part article, we focus on the social dynamics that turn making friends into a potentially dangerous exploit for entrepreneurs. If social connections can be thought of as pipes transferring rich information, they can also work as chains hampering evolution.

The cost of doing favors

Friends are great because they can do favors for you. Many people (and researchers), however, seem to forget that favors typically go both ways. In fact, surprisingly few researchers who have lauded networking have actually examined the cost of “doing favors”. Anecdotal evidence suggests that this cost can be substantial. The line between friendly favors and corruption is not always clear and is often crossed as part of the recruiting process into criminal organizations. Favor doing can not only turn a person into involuntary accomplice, but also into a victim as was illustrated throughout the Madoff case.

On a daily basis, doing or returning favors  often comes at a substantial cost to productivity. In his study of the Chinese VC industry, one of the authors of this article (Assistant Professor in Entrepreneurship at BU and MIT alumn), found that investors are often bound by social courtesy and are compelled to offer interview opportunities to entrepreneurs whose ventures they already know are not investment-worthy (Wang 2008). Such “doing favors”  behaviors can become so time-consuming, that some investors wind up having to make strategic calculations about the number of favors they need to do, to whom, and at what time.

Need to change?

Even if contacts do not explicitly ask for a favor, having many social connections can still be harmful since relationships can be an obstacle to necessary change.

Researchers have found that companies sometimes fail to adapt to technological change when their managers are socially committed to their employees and to the surrounding community. In times of trouble, managers and entrepreneurs may even choose to die from a slow death rather than let old-timers go, which would decrease costs and potentially jump-start a corporate rebound. Indeed, one reason that organizational change is difficult is that adaptive change often involves breaking social relationships with employees and often with suppliers, customers, and collaborators.

Former tire industry giant Firestone’s downfall is a compelling example. In a thought-provoking article, London Business School Professor Donald Sull explains how the former president of the company failed to take the necessary steps to avoid an economic disaster: “One former Firestone vice-president recalled that ‘Riley [president of Firestone in the 1970s] just lingered and lingered trying to hold on to the employees, he knew them, their kids, he had golfed with them for years and years.’ Although the motives for delaying exit [of the bias tire production] may have been admirable, the financial results were disastrous.” (Sull 1999, 448)

It is also important to note that the relationship to employees is not the only one that backfires. Researchers have found that relationships with existing customers can also lead astray. For instance, in his famous study of the disk-drive industry, HBS professor Clay Christensen found that established firms systematically fail to adapt to technological change when the new technology is not initially helpful to the company’s existing customer base (CM Christensen and Bower 1996; Clayton M. Christensen and Rosenbloom 1995). Similarly, strong relationships with suppliers can lead to sub-optimal decisions. Researchers have also found that when social ties are too strong and not diversified enough, they can lead to over-attentiveness to local resources and historical conventions, limiting a firm’s access to new information and ideas (Uzzi 1999).

The enslaving dimension of social connections

Entrepreneurs ought to be flexible, ready to experiment with their environment and able to give up a strategy quickly if it looks like a dead-end. In a fast-changing and highly uncertain environment, entrepreneurs cannot afford to remain stuck working with unproductive colleagues or unhelpful suppliers or even clients.

Despite all these downsides, however, it still cannot be contested that entrepreneurs need connections. Contacts can provide access to new clients, to new high-performance employees, and to investors. In addition, larger entrepreneurial teams tend to be more successful (Eisenhardt and Schoonhoven 1990) and they potentially may also have better access to new ideas and to more power to implement them (Hargadon 2003).

With this conflicting message, what are entrepreneurs to think? Though there is no doubt that being well-connected helps entrepreneurs, they should also keep in mind that connections also have their downsides…and that the danger of being trapped in one’s own web always exists.

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References

  1. Christensen, Clayton M., and Richard S. Rosenbloom. 1995. Explaining the attacker’s advantage: Technological paradigms, organizational dynamics, and the value network. Research Policy 24, no. 2 (March): 233-257. doi:10.1016/0048-7333(93)00764-K.
  2. Christensen, CM, and JL Bower. 1996. Customer power, strategic investment, and the failure of leading firms. Strategic management journal 17, no. 3: 197-218.
  3. Eisenhardt, Kathleen M., and Claudia Bird Schoonhoven. 1990. Organizational Growth: Linking Founding Team, Strategy, Environment, and Growth Among U.S. Semiconductor Ventures, 1978-1988. Administrative Science Quarterly 35, no. 3 (September): 504-529. doi:10.2307/2393315.
  4. Hargadon, Andrew. 2003. How breakthroughs happen: The surprising truth about how companies innovate. Harvard Business School Pr.
  5. Sull, Donald N. 1999. The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution. The Business History Review 73, no. 3 (Autumn): 430-464.
  6. Uzzi, Brian. 1999. Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing. American Sociological Review 64, no. 4 (August): 481-505. doi:10.2307/2657252.
  7. Wang, Yanbo. 2008. Evaluation or Attention: How Do Social Ties Matter in Venture Financing? In Unpublished paper presented at the MIT–Harvard Economic Sociology Seminar, December. Vol. 11.

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