1 Innovation networks and alliance management The Basic Network Arguments U. Matzat

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 2 Administrative issues if you have not yet done... subscribe on studyweb: 0EE10 / 0ZM05 place: PAV B2

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 3 What you have learned already the last time.....what is a network? NetworkA set of ties among a set of actors (or “nodes”) Actorspersons, organizations, business-units, countries … TiesAny instance of ‘connection of interest’ between the actors

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 4 What you have learned already the last time..... Example: relations among organizations Firms as actors Buys from, sells to, outsources to Has done business with Owns shares of, is part of Has a joint venture or alliance with, has sales agreements with Has had quarrels with

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 5 What you have learned already the last time..... Why networks & innovation? Classic innovation studies focus mainly on characteristics of individuals or firms to explain innovation  e.g. firm size and innovativeness However, innovation, is inherently social in nature  e.g. firms have relations with other firms and consequently access to additional external resources Hence, networks of social relations between actors  (individuals and organizations) may be important factors in explaining innovation  and innovation may change networks of social relations as well

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 6 Today Arguments of classical social network theories that make clear why which network characteristics have what effect? First the general arguments, then applied to issues of innovation science and alliance management

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 7 Outlooking Example: Innovation Success Organisations often cooperate as well as compete with the same orgs. Which network forms optimize benefits, such as profits, market share? Network closure – Closely knit ties among organisational set facilitates trust, cooperative exchanges, & collective action; safeguards against information asymmetries & opportunism Network diversity – Sparse ties to organisations not linked to current partners span structural holes to gain brokerage benefits, access diverse resources, and learn innovative ideas Contingency H: Alternative forms of networks are better suited to achieving different organizational objectives: (1) Close-knit networks optimize benefits from collaboration (2) Diverse networks optimize appropriation of competitive benefits

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 8 Mark Granovetter: The strength of weak ties James Coleman: Network closure as social capital Ron Burt: Structural holes J. Coleman/R. Burt: Diffusion of innovation through social networks: cohesion versus structural equivalence All good theories are portable (from one problem to another). You have to take them to your problem. 4 Basic Social Network Arguments

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 9 Argument 1: Mark Granovetter The strength of weak ties

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 10 Mark Granovetter: The strength of weak ties Dept of Sociology, Harvard, “The strength of weak ties” (1973) Distinction between strong and weak ties Tie strength: - frequency of interaction - emotional closeness - duration of contact Granovetter was a sociology graduate student; interviewed about 100 people who had changed jobs in the Boston area. More than half of the people found their new job through personal contacts (already at odds with standard economics).

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 11 M. Granovetter: The strength of weak ties (2) Many of these contacts were rather indirect (a “weak tie”) This is surprising, because “strong ties” are usually more willing to help you out Granovetter’s conjecture: your strong ties are more likely to contain information you already know According to Granovetter: you need a network that is low on transitivity

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 12 M. Granovetter: The strength of weak ties (3) You need weak ties because they give you better access to information Coser (1975) You need bridging weak ties: weak ties that connect to groups outside your own clique (+ you need cognitive flexibility, because you need to cope with heterogeneity of ties) Empirical evidence: Granovetter (1974)28% found job through weak ties 17% found job through strong ties Langlois (1977) showed this result depends on the kind of job Blau: added arguments about high status people connecting to a more diverse set of people than low status people

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 13 Example: acquisition of diverse information through weak ties  Assume manager C has to to eliminate some contacts and he has the opportunity to get rid of T or D  Whom should he dump? X X  Get rid of T and the tie to T!

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 14 Social Networking in plain English

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 15 Argument 2: James Coleman Social Capital and network closure

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 16 Social capital vs human capital Coleman: Social capital in the creation of human capital Dep. of Sociology, University of Chicago, died 1995

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 17 Coleman: Social capital in the creation of human capital (2) – some vague definitions SEVERAL DEFINITIONS OF SOCIAL CAPITAL: OF AN ACTOR (person/organisation)  The resources you can mobilize through others  The value of social networks that actors can draw on to solve common problems. The benefits of social capital flow from the trust, reciprocity, information, and cooperation associated with social networks. OF A SOCIETY  The attitude, spirit and willingness of people to engage in collective, civic activities: the social infrastructure  The collective value of all social networks

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 18 Coleman: Social capital in the creation of human capital (3) Human capital: the competencies and resources you have available yourself (e.g., intelligence, education, experience, …) Social capital: the resources you can mobilize through others + the way in which your connections to others facilitate achieving one’s goals Note: Social capital need not be ‘social’. For instance: mafia famliy ties

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 19 Coleman: Social capital in the creation of human capital (4) One of Coleman’s social capital examples: The diamond merchants Compare … Diego Gambetta’s 1996 “The sicilian mafia” (  social capital need not be good for society) Putnam’s “Bowling alone”: Social capital is declining in the US (and according to him, this has something do do with privatization and television) At the same time: new social networking sites for professionals (LinkedIn..)

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 20 Coleman: Social capital in the creation of human capital (5) Social capital (of a society or group) consists of: 1. Obligations and expectations Example: Kahn El Khalili market in Cairo 2. Channels of information Researcher uses everyday interactions (e.g., at lunch) for keeping up-to-date in related fields 3. Norms about what (not) to do  all kinds of collective action problems can then be solved(e.g., prevention of deviant behavior in small cities through gossiping curious neighbours) For 1. and 3. you need “closure” (dense networks between actors / connections between your ties) or ensure it through “social organization”. Note that Coleman is less clear about the need of closure for 2.

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 21 Coleman: Social capital in the creation of human capital (6) Social capital (of parents) can lead to human capital (of children) Empirical analysis  To explain: school dropouts  Network actors: pupils and their parents  Network ties: “having frequent contact with” To do well in school, you need  Financial capital (physical resources)  Human capital (cognitive environment)  AND: Social capital (access to human capital) Coleman: social capital helps pupils. Pupils whose parents spend more time on them, tend to be in Catholic schools [parents know each other from church related meetings], or have stayed in the same neighborhood [parents know each other better], indeed drop out less often.

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 22 Example: Social capital for successful innovation through collaboration Two collaborating firms anticipate opportunistic behavior of the partner e.g.: pooling of resources for collaborating  Standard solution: contracts  Disadvantage: costly, sometimes difficult to manage (e.g., are the best employees given for participation in collaborative projects?)  Alternative/additional solution: implementation of collaboration in an organisational environment with high network closure

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 23 Example: Social capital for successful innovation through collaboration (2) A B Market 1 Market 2 with high closure A* B  Assume that manager of company B has to choose between collaboration in the two markets – which one should he choose?  Who would loose more by opportunistic behavior: partner A or partner A*? C

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 24 Example: Social capital for successful innovation through collaboration (3) Opportunities for company B under high network closure: -damage of reputation of A* -collective action with other (third) parties if A* violates basic standards  A* anticipates these dangers; therefore special interest in avoidance of anything that could appear as opportunism  Network closure as safeguard against opportunism  Network closure facilitates trust

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 25 Argument 3: Ronald Burt Structural holes

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 26 Ron Burt: Structural holes versus network closure as social capital Burt’s conclusion: structural holes beat network closure when it comes to predicting which actor performs best Coleman says closure is good Because information goes around fast … … and it facilitates trust [fear of a damaged reputation precludes opportunistic behavior] Burt subsequently compares people (managers) with dense networks with those with networks rich in “structural holes” University of Chicago, Graduate School of Business

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 27 Ron Burt: Structural holes versus network closure as social capital (2) Robert AB C James  Robert’s network is rich in structural holes  James' network has fewer structural holes 8 9 D

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 28 Ron Burt: Structural holes versus network closure as social capital (3) Robert will do better than James, because of:  informational benefits  “tertius gaudens” (entrepreneur)  autonomy

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 29 Ron Burt: Structural holes versus network closure as social capital (4) It is not that clear (yet) what precisely constitutes a structural hole, but Burt does define two kinds of redundancy in a network:  Cohesion: two of your contacts have a close connection  Structurally equivalent contacts: contacts who link to the same third parties This more or less corresponds to the inverse of structural holes:  If two of your contacts are connected, you do not connect a structural hole  If two of your contacts lead to the same other, then to get to that other, you actually would have needed only one of those contacts

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 30 Structural holes vs network closure Empirical evidence on Dependent variable= early promotion = large bonus = outstanding evaluation Most or all of the evidence seems to favor Burt’s structural holes Burt on Coleman:  Coleman’s dependent variable = “dropping out of school”  parents in a close network  smaller probability of school dropout of children  but: parents may tend to earn less And about network closure: Best team performance when groups are cohesive but team members have diverse external contacts.

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 31 Structural holes vs network closure (2) Coleman: closure can overcome trust and cooperation problems (empirical evidence from data on school dropouts) Burt: Structural holes give entrepreneurial possibilities (empirical evidence from data on US managers) Perhaps this is not so much a controversy after all …? There is a problem though, when it comes to innovation. For successful innovation one needs both to overcome trust and cooperation problems and entrepreneurial possibilities.

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 32 Argument 4: James Coleman vs Ronald Burt The diffusion of innovation: Cohesion vs. structural equivalence

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 33 J. Coleman/R. Burt: Diffusion of Innovations What happens with innovations? a) How and when do they spread (adoption)? b) How and when are they used? 2 theories (network theories of social influence)  A: Coleman: Diffusion by cohesion  B: Burt: Diffusion by structural equivalence Both theories predict which individuals of a social system are similar with regard to behavior, evaluation of some phenomena, and attitudes. Both theories make predictions about who adopts an innovation.

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 34 Diffusion via social networks effects of individual differences in receptivity (k) dy/dt = k*(1-y)*t effects of social contagion (influences via social networks): The ‘Snowball Effect’ dy/dt = k*y*(1-y)*t

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 35 Which situations? social influences of cost-benefit evaluation do not always take place important for social influences: uncertainty, ambiguity of the results of actions (e.g., often given when actors are confronted with innovations) no scarcity of information, sometimes even information overload problem: finding trustworthy information in such situations individuals rely on others during the decision process both models (cohesion, structural equivalence) argue that the decisions of actors are influenced by "other actors" in the social network they make different predictions about who these "others" are

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 36 J. Coleman: Diffusion of Innovation by cohesion two actors share the same understanding of the costs and benefits (shared attitudes) of an innovation when they socialize with each other the shared understanding of costs and benefits (shared attitudes) lead to a similar behavior if alter adopts the innovation then ego will follow soon who are the relevant alters? the less indirect and the stronger the relationship between ego and alter the more likely that social influences take place the stronger the relationship with alter the more likely that the adoption of alter will trigger the adoption of ego

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 37 J. Coleman: Diffusion of Innovation by cohesion (2) Robert James AB C Peter Tom Frank assume Peter adopts the innovation who would be the next to adopt? who would follow thereafter who would never adopt?

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 38 R. Burt: Diffusion by structural equivalence 3 classes of equivalent actors:  class A: 1 & 2  class B: 3 & 4  class C: 5 What is structural equivalence? - An example

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 39 R. Burt: Diffusion by structural equivalence (2)  two actors in structurally equivalent positions act in the same way because their positions imply that they act under the same structural conditions individuals take others as a frame of reference for judging whether their decisions are correct theory offers a different answer to the question "Who are the relevant others that are taken as a frame of reference?" structural equivalence emphasizes the competitive character of many situations that lead to social comparisons

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 40 R. Burt: Diffusion by structural equivalence (3) the more similar the relationships of ego and alter are to other (third) individuals the more likely that ego takes alter as a frame of reference for social comparisons hypothesis: the higher the degree of structural equivalence between ego and alter the more likely that alter's adoption will trigger ego's adoption of an innovation

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 41 Structural Equivalence versus Cohesion: 3 typical Cases A: Identical predictions of both models: social influence between ego & alter ego Person 1person 2 alter B: cohesion: social influence between ego & alter structural equivalence: no influence ego Person 3Person 4 alter C: structural equivalence: social influence between ego & alter cohesion: no influence ego Person 3Person 4 alter

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 42 Diffusion of Innovations Through Social Networks in Practice via the Internet Social Networking Sites for Business ature=related

TU/e - Innovation in networks and alliance management, 0ZM05/0EE10 43 To Do: Read the following articles Granovetter, M. S., "The Strength of Weak Ties," American Journal of Sociology 78 (6): (1973).The Strength of Weak Ties Coleman, J.S. "Social Capital in the creation of human capital" American Journal of Sociology 94: (1988).Social Capital in the creation of human capital Burt, R. (2001) "Structural Holes versus Network Closure as Social Capital", in: Social Capital. Theory and Research, ed. by Lin, N., Cook, K. & Burt, R.Structural Holes versus Network Closure as Social Capital Read these papers with in the back of your head the idea that you will have to be able to apply similar network arguments to problems of alliance management and innovation science.