Reading 19

,
I

( >L0 43
The key role of
social capital
in leveraging
hUm an capital

The Vital Role of Social Capital

Successful finns are well aware that the attraction, development, and retention of talent is
a necessOIy but not sufficient condition for creating competitive advantages. In the knowl-

edge economy, it is not the stock of human capital that is important, but the extent to which
it is combined and leveraged. In a sense, developing and retaining human capital becomes
less important as key players (talented professionals, in particular) take the role of "free
~ within and across "
\ thefirm.
j
agents" and bring with them the requisite skill in many cases. Rather, the development of
social capital (that is, the friendships and working relationships among talented individuals) gains importance, because it helps tie knowledge workers to a given firm. Knowledge
workers often exhibit greater loyalties to their colleagues and their profession than their
employing organization, which may be "an amorphous, distant, and sometimes threatening
entity."Thus, a firm must find ways to create "ties" among its knowledge workers.
Let's look at a hypothetical example. Two pharmaceutical finns are fo rtunate enough
to hire Nobel Prize-winning scientists. In one case, the scientist is offered a very attractive salary, outstanding facilities and equipment, and told to "go to itl" In the second case,
the scientist is offered approximately the same salary, facilities, and equipment plus one
additional ingredient: working in a laboratory with 10 highly skilled and enthusiastic scientists. Part of the job is to collaborate with these peers and jointly develop promising drug
compounds. There is little doubt as to which scenario will lead to a higher probability of
retaining the scientist. The interaction, sharing, and collaboration will create a situation in
which the scientist will develop firm-specific ties and be less likely to "bolt" for a higher
salary offer. Such ties are critical because knowledge-based resources tend to be more tacit
in nature, as we mentioned early in this chapter. Therefore, they are much more difficult to
protect against loss (i.e., the individual quitting the organization) than other types of capital, such as equipment, machinery, and land.
Another way to view this situation is in terms of the resource-based view of the firm
that we discussed in Chapter 3. That is, competitive advantages tend to be harder for competitors to copy if they are based on ''unique bundles" of resources. So, if employees are
working effectively in teams and sharing their knowledge and learning from each other, not
only will they be more likely to add value to the finn, but they also will be less likely to
leave the organization, because of the loyalties and social ties that they develop over time.

How Social Cap ital Helps Attract and Retain Talent

The importance of social ties among talented professionals creates a significant challenge
(and opportunity) for organizations. In The Wall Street Journal, Bernard Wysocki described
the increase in a type of "Pied Piper Effect," in which teams or networks of people are leaving one company for another. The trend is to recruit job candidates at the crux of social
relationships in organizations, particularly if they are seen as having the potential to bring
with them valuable colleagues. This is a process that is referred to as "hiring via personal
networks ." Let's look at one instance of this practice.
Gerald Eickhoff, founder of an electronic commerce company called Third Millennium Communications, tried for 15 years to hire Michael Reene. Why? Mr. Eickhoff says that he has
''these Pied Piper skills." Mr. Reene was a star at Andersen Consutting in the 1980s and at
IBM in the 1990s. He built his businesses and kept turning down overtures from Mr. Eickhoff.
However, in early 2000, he joined Third MiIlelUlium as chief executive officer, with a
salary of just $120,000 but with a 20 percent stake in the firm. Since then, he has brought

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in a raft of former IBM colleagues and Andersen subordinates. One protege from his time
at Andersen, Mary Goode, was brought on board as executive vice president. She promptly
tapped her own network and brought along fonner colleagues.
Wysocki considers the Pied Piper effect one of the Wlderappreciated factors in the
war for talent today. This is because one of the myths of the New Economy is rampant
individualism, wherein individuals find jobs on the Internet career sites and go to work for
complete strangers. Perhaps, instead of Me Inc., the truth is closer to We Inc.

Another example of social relationships causing human capi tal mobility is the emigration of talent from an organization to form start-up ventures. Microsoft is perhaps the bestknown example of this phenomenon. Professionals frequently leave Microsoft en masse
to form venture capital and technology start-ups, called "Baby Bills," built around teams
of software developers. For example, Ignition Corporation, of Bellevue, Washington, was
formed by Brad Silverberg, a former Microsoft senior vice president. Eight former Microsoft executives, among others. founded the company.
Social relationships can provide an important mechanism for obtaining both resources
and information from individuals and organizations outside the boundary of a finn.
Strategy Spotlight 4.3 describes how alumni programs for recently laid-off employees benefit both the individuals and the firm.

Social Networks: Implications for Knowledge Management

and Career Success
Managers face many challenges driven by such factors as rapid changes in globalization
and technology. Leading a successful company is more than a one-person job. As Tom
Malone recently put it in The Future of Work, "As managers, we need to shift our thinking from command and control to coordinate and cultivate-the best way to gain power is
sometimes to give it away." The move away from top-down bureaucratic comrol to more
open. decentralized network models makes it more difficult for managers to understand
how work is actually getting done, who is interacting with whom both within and outside
the organization, and the consequences of these interactions for the long-term health of the
organization. In short, coordination, cultivation, and collaboration are increasingly becoming the mode of work at every level.
But how can this be done? Social network an alysis depicts the pattern of interactions among individuals and helps to diagnose effective and ineffective patterns. It helps
identify groups or clusters of individual s that comprise the network, individuals who link
the clusters, and other network members. It helps diagnose communication patterns and,
consequently, communication effectiveness. Such analysis of communication patterns is
helpful because the configuration of group members' social ties within and outside the
group affects the extent to which members connect to individuals who:

convey needed resources,

have the opportunity to exchange information and support,
have the motivation to treat each other in positive ways, and,
have the time to develop trusting relationships that might improve the groups'
effectiveness.

However, such relationships don't "just happen." Developing social capital requires
interdependence among group members. Social capital erodes when people in the network
become independent. And increased interactions between members aid in the development and maintenance of mutual obligations in a social network. Social networks such as
Facebook may facilitate increased interactions between members in a social network via
Internet-based communications.

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>L04.4
The importance

f
I

of social

'\

I
~

networks in
knowledge
management
~
: and in promoting
career success.
"
.

social network
analysis analvsis of
the pattern of social
interactions among
individuals.

strategy spotlight

4 .3

Don't Go Away Mad .. . Now You

Are a Valued Alum!
Traditionally, when an employee is laid off, the relationship between the company and that person comes to a
bitter end. Increasingly, leading-edge companies such as
Dow Chemica l and JPMorgan Chase are trying to maintain ties with their "alumni," even if they are moving on to
other companies. What benefits do these efforts provide
to the company and its ex-employees?
SO\l=: Baker, S. 2009. You're Fired- But Stay in Touch.
4 : 53-55.

Bu.rjne:s.r~ek.

May

These alumni networks, which are often organized on

Facebook or Linkedln, offer their members valuable benefits such as free job ads and connections to others who
might help them in finding new jobs or facilitating entrepreneurial opportunities. For the firm, these networks constitute a laboratory for learning. Former employees who have
nice things to say about a company are essentially "b rand
ambassadors who can help in future recruiting efforts. The
companies can also track the discussions in the network to
identify hot topics, companies, products, and technologies.
Best of all, when the economy recovers, this is an enormous talent pool for recruiting workers who are already
familiar with the company and socialized into its culture.
N

Let's take a brief look at a simplified network analysis to get a grasp of the key ideas.
In Exhibit4.6, the links are used to depict infonnal relationships among individuals involving communication flows, personal support, and advice networks. There may be some individuals with literally no linkages, such as Fred. These individuals are typically labeled
"isolates." However, most people do have some linkages with others.
To simplify, there are two primary types of mechanisms through which social capital
will flow: closure relationships (depicted by Bill, Frank, George, and Susan) and bridging
relationships (depicted by Mary). As we can see, in the fanner relationships one member
is central to the communication flows in a group, In contrast, in the latter relationship, one
person "bridges" or brings together groups that would have been otherwise unconnected.
Both closure and bridging relationships have important implications for the effective
flow of information in organizations and for the management of knowledge. We win now
briefly discuss each of these types of relationships. We will also address some of the implications that understanding social networks has for one's career success.
Fred
George

Susan

Exhibit 4,6 A Simplified Social Network

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Closure With closure, many members have relationships (or ties) with other members.
As indicated in Exhibit 4.6, Bill's group would have a higher level of closure than Frank,
Susan, or George's groups because more group members are connected to each other.
Through closure, group members develop strong relationships with each other, high levels
of trust, and greater solidarity. High levels of trust help to ensure that informal norms in
the group are eaSily enforced and there is less "free riding." Social pressure will prevent
people from withholding effort or shirking their responsibilities. In addition, people in the
network are more willing to extend favors and "go the extra mile" on a colleague's behalf
because they are confident that their efforts will be reciprocated by another member in
their group. Another benefit of a network with closure is the high level of emotional support. This becomes particularly valuable when setbacks occur that may destroy morale or
an unexpected tragedy happens that might cause the group to lose its focus. Social support
helps the group to rebound from misfortune and get back on track.
But high levels of closure often come with a price. Groups that become too closed
can become insular. They cut themselves off from the rest of the organization and fail
to share what they are learning from people outside their group. Research shows that
while managers need to encourage closure up to a point, if there is too much closure, they
need to encourage people to open up their groups and infuse new ideas through bridging
relationships.

Bridging Relation ships

The closure perspective rests on an assumption that there is a

high level of similarity among group members. However, members can be quite heterogeneous with regard to their positions in either the formal or infonnal structures of the group
or the organization. Such heterogeneity exists because of, for example, vertical boundaries
(different levels in the hierarchy) and horizontal boundaries (different functional areas).
Bridging relationships, in contrast to closure, stresses the importance of ties connecting people. Employees who bridge disconnected people tend to receive timely, diverse
information because of their access to a wide range of heterogeneous information flows.
Such bridging relationships span a number of different types of boundaries.
The University of Chicago's Ron Burt originally coined the term "structural holes" to
refer to the social gap between two groups. Structural holes are common in organizations.
\hen they occur in business, managers typically refer to them as "silos" or "stovepipes."
Sales and engineering are a classic example of two groups whose members traditionally
interact with their peers rather than across groups.
A study that Burt conducted at Raytheon, a $25 billion U.S. electronics company and
military contractor, provides further insight into the benefits of bridging.
Burt studied several hundred managers in Raytheon's supply chain group and asked
them to write down ideas to improve the company's supply chain management. Then he
asked two Raytheon executives to rate the ideas. The conclusion: The best suggestions
consistently came/rom managers who discussed ideas outside their regular workgroup.

Burt found that Raytheon managers were good at thinking of ideas but bad at developing them. Too often, Burt said, the managers discussed their ideas with colleagues already
in their informal discussion network. Instead, he said, they should have had discussions

outside their typical contacts, particularly with an infonnal boss, or someone with enough
power to be an ally but not an actual supervisor.
Before we address how to overcome barriers to collaboration and the implications of
social network theory for managers' career success, one might ask Which is the more valuable mechanism to develop and nurture social capital-dosure or bridging relationships?
As with many aspects of strategic management, the answer becomes: "It all depends." So
let's look at a few contingent issues.
First, consider firms in competitive environments characterized by rapidly changing
technologies and markets. Such firms should bridge relationships across networks because

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r closure the

degree to which
all members of a
social network have
A relationships (or ties)
~ with other group
\. members.

bridging
relationships
relationships in a
social network that
connect otherwise
disconnected people.

struct ura l
ho les social gaps
between groups in
a social network
where there are
few relationships
bridging the groups.

I1

un ification lever
method fo r making
people mo re willing
to collaborate by
crafting compelling

common goals
articulating a strong
value of cross-

company teamwork,
and encouraging

1 coll ,bo"lion in

'
J

orde r to send
:, strong signals to
~ lift people's sights

" beyond their narrow

.~ interests towards a
~, common goal.

they need a wide variety of timely sources of infonnation. Also, innovation is facilitated if
there are mUltiple, interdisciplinary perspectives. On the other hand, finns competing in a
stable environment would typically face less unpredictability. Thus, the cohesive ties associated with network closure would help to ensure the timely and effective implementation
of strategies.
A second contingent factor would be the type of business strategies that a firm may
choose to follow (a topic that we address next in Chapter 5). Managers with social networks characterized by closure would be in a preferred position if their firm is following
an overall low cost strategy. Here, there is a need for control and coordination to implement
strategies that are rather constrained by pressures to reduce costs. Alternatively, the uncertainties generally associated with differentiation strategies (i.e., creating products that are
perceived by customers as unique and highly valued) would require a broad range of in formation sources and inputs. Social networks characterized by bridging relationships across
groups would access the diverse informational sources needed to deal with more complex,
multifaceted strategies.
A caveat: In both contingencies that we have discussed-competitive environment and
business strategy--closure and bridging relationships across groups are necessary. Our
purpose is to address where one type should be more dominant.

Developing Social Capital: Overcoming Barriers to CoUaboration Social

capital within a group or organization develops through repeated interactions among its
members and the resulting collaboration. However, collaboration does not "just happen."
People don 't collaborate for various reasons. Effective collaboration requires overcoming
four barriers:

network
lever method for
making people more

willi ng to collaborate
by buildi ng nimble
Inte rpersonal
networks across the
\. company.

T-Shaped
management
people's dual focus on

t he performance of
" their unit (the vertical

part of theT) and

~ across boundaries
j (the horizontal part of
\, t heT).

( people lever
method fo r making

people more willing

. to collaborate by
getting the right
people to work on
\. the right projects.

The not-Invented-here barrier (people aren't willing to provide help)

The hoarding barrier (people aren't willing to provide help)
The search barrier (people are unable to find what they are looking for)
The transfer barrier (people are unable to work with the people they don't know well)

All four barriers need to be low before effective collaboration can take place. Each one
is enough to prevent people from collaborating well. The key is to identify which barriers
are present in an organization and then to devise appropriate ways to overcome them.
Different barriers require different solutions. Motivational barriers require leaders
to pull levers that make people more willing to collaborate. Ability barriers mean that
leaders need to pull levers that enable motivated people to collaborate throughout the
organization.
To be effective, leaders can choose a mix of three levers. First, when motivation is
the problem, they can use the unification lever, wherein they craft compelling common
goals, articulate a strong value of cross-company teamwork, and encourage collaboration
in order to send strong signals to lift people's sights beyond their narrow interests toward
a common goal.
Second, with the people lever, the emphasis isn't on getting people to collaborate more.
Rather, it's on getting the right people to collaborate on the right projects. This means cultivating what may be called T-shaped management: people who simultaneously focus on the
performance of their unit (the vertical part of the T) and across boundaries (the horizontal
part of the T). People become able to collaborate when needed but are disciplined enough
to say no when it's not required.
Third, by using the network lever, leaders can build nimble interpersonal networks
across the company so that employees are better able to collaborate. Interpersonal networks are more effective than fonnal hierarchies. However, there is a dark side to networks: When people spend more time networking than getting work done, collaboration
can adversely affect results.

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strategy spotlight

4.4
, Picasso versus van Gogh: Who Was
, More Successful and Why?
Vincent van Gogh and Pablo Picasso are two of the most
iconoclastic-and famous-artists of modem times. Pa intings by both of them have fetched over $100 million. And
both of them were responsible for some of the most iconic
images in the art world: Van Gogh's SelfPortrait (the one
i sans the earlobe) and Starry Night and Picasso's The Old
Guitarist and Guernica. However, there is an important dif
ference between van Gogh and Picasso. Van Gogh died

penniless. Picasso's estate was estimated at $750 million

when he died in 1973. What was the difference?
Van Gogh's primary connection to the art world was
through his brother. Unfortunately, this connection didn't

feed directly into the money that CQuid have turned him
into a living success. In contrast, Picasso's myriad connections provided him with access to commercial riches.
I As noted by Gregory Berns in his book Iconoclast: A Neuroscientist Reveals How to Think Differently, "Picasso's
. wide ranging social netwo rk, which included artists, writers, and politicians, meant that he was neve r more than
a few people away from anyone of importance in the
world."
In effect, van Gogh was a loner, and the charismatic
Picasso was an active member of multiple social circles. In
social networking terms, van Gogh was a solitary "node"
who had few connections. Picasso, on the other hand,
was a "hub" who embedded himself in a vast network
SOllIl,:CS: H~hi, A. M. 2008. Why Picasso Out Earned van Gogh. MIT $I04n
Managemem Review, SO(l): 11-12; and Berns, G. 2008. A Neuroscientist

Revea/.r How 10 TlH"nk Differently. Boston, MA: Harvard Business PM8$.

Picasso was far more financially successful during his lifetime

than van Gogh largely because of his extensive social network.
that stretched across various social lines. Where Picasso
smoothly navigated multiple social circles, van Gogh
had to struggle just to maintain connections with even
those closest to him. Van Gogh inhabited an alien world,
whereas Picasso was a social magnet. And because he
knew so man)' people, the world was at Picasso's fingertips. From his perspective, the world was smaller.

' te
Ji pnva

Implications for Career Success Let's go back in time in order to illustrate the value
of social networks in one's career success. Consider two of the most celebrated artists of all
time: Vincent van Gogh and Pablo Picasso. Strategy Spotlight 4.4 points out why these two
artists enjoyed sharply contrasting levels of success during their lifetimes.
. . .
.
EffectIve SOCial networks proVlde many advantages for the firm. They can playa key
role in an individual's career advancement and success. One's social network potentially
can provide three unique advantages: private information, access to diverse skill sets, and
power. Managers see these advantages at work every day but might not consider how their
networks regulate them.
Private lltformation We make judgments, using both public and private information. Today,
' miormation
. C

' Iud'mg t he Internet. However, Since

. .It
pu bI IC
IS aval'1 abI e from many sources, mc
is so accessible, public information offers less competitive advantage than it used to.

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Any unauthorized use or reproduction of this document is strictly prohibited.

Ii information
I" information that is
. not ~vailable from
. publ~c sources,

~ and IS uS~allYd ' h

commUnicate In t e
context of personal
, relationships.
'

iJj

f....

. .

public mformat lon

information that is
t" available from public
,~d internet.
sources such as the
..

In contrast, private information from personal contacts can offer something not found
in publicly available sources, such as the release date of a new product or knowledge about
what a particular interviewer looks for in candidates. Private information can give managers an edge, though it is more subjective than public information since it cannot be easily
verified by independent sources, such as Dunn & Bradstreet. Consequently the value of
your private infonnation to others-and the value of others' private information to youdepends on how much trust exists in the network of relationships.

Access to Diverse Skill Sets Linus Pauling, one of only two people to win a Nobel Prize in
two different areas and considered one of the towering geniuses of the 20th century, attributed his creative success not to his immense brainpower or luck but to his diverse contacts.
He said, "The best way to have a good idea is to have a lot of ideas."
While expertise has become more specialized during the past 15 years, organizational,
product, and marketing issues have become more interdisciplinary. This means that success
is tied to the ability to transcend natural skill limitations through others. Highly diverse
network relationships, therefore, can help you develop more complete, creative, and unbiased perspectives on issues. Trading information or skills with people whose experiences
differ from your own, provides you with unique, exceptionally valuable resources. It is
common for people in relationships to share their problems. If you know enough people,
you will begin to see how the problems that another person is struggling with can be solved
by the solutions being developed by others. If you can bring together problems and solutions, it will greatly benefit your career.
Power Traditionally, a manager's power was embedded in a firm's hierarchy. But, when

corporate organizations became flatter, more like pancakes than pyramids, that power was
repositioned in the network's brokers (people who bridged multiple networks), who could
adapt to changes in the organization, develop clients, and synthesize opposing points of
view. Such brokers weren't necessarily at the top of the hierarchy or experts in their fields,
but they linked specialists in the firm with trustworthy and informative relationships.
Most personal networks are highly clustered; that is, an individual's friends are likely
to be friends with one another as well. Most corporate networks are made up of several
clusters that have few links between them. Brokers are especially powerful because they
connect separate clusters, thus stimulating collaboration among otherwise independent
specialists.
Before moving on, Strategy Spotlight 4.5 discusses an interesting research study. It
points out how women may differ from men in how they develop their social networks.

The Potential Downside of Social Capital

groupthink a
tendency in an
organization for
individuals not to
qu:stion shared
beltefs.

f
.
,

"\

We'd like to close our discussion of social capital by addressing some of its limitations.
First, some firms have been adversely affected by very high levels of social capital
because it may breed "groupthink"-a tendency not to question shared beliefs. Such
thinking may occur in networks with high levels of closure where there is little input from
people outside of the network. In effect, too many warm and fuzzy feelings among group
members prevent people from rigorously challenging each other. People are discouraged
from engaging in the "creative abrasion" that Dorothy Leonard of Harvard University
describes as a key source of innovation. Two firms that were well known for their collegiality, strong sense of employee membership, and humane treatment-Digital Equipment
(now part of Hewlett-Packard) and Polaroid-suffered greatly from market misjudgments
and strategic errors. The aforementioned aspects of their culture contributed to their
problems.

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strategy spotlight

4.5
Developing Social Capital: Do Women
and Men Differ?
Several years ago, Boris Groysberg conducted a study in
which he warned managers about the risks associated

with hiring star performers away from companies. His

research investigated more than 1,000 star stock analysts,
and he found that when one of them switches companies,
not only does the star's performance plunge, but also the
market value of the star's new company declines. In addition, the players don't tend to stay with their new firms

very long-despite the generous pay packages that lured

them in the first place. So everyone loses out.
However, when Groysberg further analyzed the data,
he gained some new insights. One group of analysts main-

tained their stardom after changing employers: women.

Unlike their male counterparts, female stars who switched
firms performed just as well, in aggregate, as those who
stayed put.
Why the gender discrepancy? There were two expla
nations. First the best female analysts appear to have
built their franchises on portable, external relationships
with clients and companies they covered-rather than on
relationships within their firms. In contrast, male analysts
Source: Groysbel'8, B . 2008. How Star Women Build Portable Skills. Harvard
Business RClliew. 86(2): 74-81.

built up greater firm and teamspecific human capi

tal. That is, they invested more in internal networks and
unique capabilities and resources of the firms where they
worked.
Second, women took greater care when assessing a
prospective employer. They evaluated their options more

carefully and analyzed a wider range of factors than men

did before deciding to uproot themselves from a firm where
they had been successful. Female star analysts, it seems,
take their work environment more seriously yet rely on it
less than male stars do. And they tend to look for a firm that
will allow them to keep building their successful franchise
their own way.
There is a clear explanation as to why the female
analysts spent more time developing their external net
works. Most salespeople, traders, and investment bank
ers are men. And men tend to spend more time with other
men. Not surprisingly, the star women in the study were
generally thwarted in their efforts to integrate themselves
into the existing power structure. Thus, they went to
greater lengths to cultivate relationships with clients and
contacts at the companies they covered. Their decision
to maintain such an external focus rested on four main
factors: uneasy in house relationships, poor mentorships,
neglect by colleagues, and a vulnerable position in the
labor market.

Second, if there are deep-rooted mindsets, there would be a tendency to develop dysfunctional human resource practices. That is, the organization (or group) would continue to
hire, reward, and promote like-minded people who tend to further intensify organizational
inertia and erode innovation. Such homogeneity would increase over time and decrease the
effectiveness of decision-making processes.
Third, the socialization processes (orientation, training, etc.) can be expensive in terms
of both financial resources and managerial commitment. Such investments can represent
a significant opportunity cost that should be evaluated in terms of the intended benefits. If
such expenses become excessive, profitability would be adversely affected.
Finally, individuals may use the contacts they develop to pursue their own interests
and agendas that may be inconsistent with the organization's goals and objectives. Thus,
they may distort or selectively use information to favor their preferred courses of action or
withhold information in their own self-interest to enhance their power to the detriment of
the common good. Drawing on our discussion of social networks, this is particularly true
in an organization that has too many bridging relationships but not enough closure relationships. In high closure groups, it is easier to watch each other to ensure that illegal or
unethical acts don't occur. By contrast, bridging relationships make it easier for a person to
play one group or individual off on another, with no one being the wiser.

This document is authorized for use by Emily Chen, from 1/3/2015 to 5/18/2015, in the course:
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