THE CHALLENGE OF NETWORKING IN SMALL AND MEDIUM SIZED FIRMS: INTERNATIONALISATION ON TERMS OF SOCIAL CAPITAL

Aart Jan de Heer
Turku School of Economics and Business Administration, Department of Marketing / Innomarket, Turku, Finland. E-mail: aartjan.deheer@tukkk.fi

Abstract
Studies of developments in modern business pay much attention to the role of information and communication as a critical success factor. It has been noticed that managers, who gather information from multiple sources, are more successful than managers who rely on information from few established sources. Successful managers are active as agents in a variety of networks and function as gate keeping nodes in their organisation. Empirical studies indicate that critical managerial competence is created in hermeneutic networks, where existing knowledge is validated and modified by new interpretations. The increased strategic importance of communication networks must be seen in close relation to the emergence of the information society. In today's society, the action environment of individuals has become more open, more complex and more dynamic than before. Accordingly, individuals need adequate social skills in order to manage environmental change and inconsistency. Under these conditions, successful behaviour is cannot be based on action, which ignores human interaction outside the own organisation, but on commitment to understanding the principles of change in the external environment. In small companies, personal networks are often restricted to local agents. Participating in more open and complex networks requires social capital, which is not always available. The Finnish log house industry is an example of an industry, which has traditionally had a regional character, thus having a focus on local networks. During the economic recession in the beginning of the 1990's, however, many firms were forced to internationalise their activities. In a study on the information behaviour of these firms in the German market, it was found that only very few companies were able to establish functional networks outside their traditional action environment. Partly, this was due to a lack of economic resources, but in many cases, there was a lack of genuine commitment as a consequence of unavailable social capital.

Social networks and networking

What is networking?
Networking refers to a process of identifying and acting on complementary interests without formal means of coordination or command (Lowndes & Skelcher, 1998). In other words, networking is based on informal exchange and aims at creating channels for gathering information and building support. Networking has often been discussed as a technological concept (e.g. building computer networks), but networking is also particularly interesting as a knowledge management issue.
In order to understand the concept of networking, it is useful to analyse the increased need for knowledge in modern society. In the past centuries, the use of knowledge has changed in three phases:
1. The industrial revolution (1750-1880): knowledge applied to build tools and products;
2. The production revolution (1880-1945): knowledge applied to establish and improve labour processes;
3. The management revolution (1945-2010?): knowledge applied to knowledge, i.e. managers and leaders have become people responsible for the application of knowledge and the results of it.
Knowledge is accumulated through learning processes, which require both cultural and technological skills. Gathering explicit knowledge is relatively unproblematic, because this type of data is codified and can be retrieved from databases. A great deal of knowledge, however, is not codified and resides in the experiences and abilities of people. This knowledge may be of strategic importance, but is difficult to acquire since it is not formalised and often concerns diffuse and context-sensitive matters. The only way organisations can access uncodified knowledge is to invest in communication with individuals and communities of interest. One could say that an organisation's data is found in its computer systems, but a company's intelligence is found in its social systems. Consequently, the benefits of computer networks depend on how and whether they support human networks (Krebs, 1998).
Organisations in which knowledge plays a fundamental role are so-called knowledge-intensive organisations. Examples of this type of organisations are universities, research institutions, and governmental organisations. Within these organisations, networking is a process to facilitate operational activities that constitute the chain of knowledge-values. In this way, the term networking refers to the bringing together of people and having them exchange ideas and experiences, needs and expectancies. Hence, in many management studies networking is identified as a key-component of any successful knowledge-intensive organisation (cf. Smits, 2001).

What are networks?

Network definition
Networks have been defined as "reciprocal patterns of communication and exchange" (Powell 1990, p. 295). At a conceptual level, networks are descriptions of the connections that allow interactions and influences between parts of a complex system. When considering the effects of the connections, networks refer to the interlinked parts, i.e. the system as a whole.
 

Different kinds of networks

We can distinguish between different kinds of networks:
1. transportation networks, e.g. the roads of a city,
2. communication networks, e.g. the telephone network,
3. utility networks, e.g. the electric power grid of a country,
4. supply networks, e.g. the food supply system of a city, supply chain management
5. networks of molecular reactions, e.g. metabolic networks,
6. networks of cells, e.g. neural networks,
7. networks of computers, e.g. the internet, and
8. social networks, e.g. the people in a company, or in a community.
An important generic feature of networks is their topology, which focuses on whether individual elements are connected to each other or not. When the connections have been located, more specific properties of the connections can be examined. Each connection of the network can be characterised by properties such as its strength of influence, capacity, etc.
All networks can be thought of as interdependent structures: the states of the parts that are connected by the network affect each other through the network. Basically, we can distinguish between networks that transfer materials (supply, transportation, utility, chemical), and networks that transfer information (neural, communication, computer, social). The way we conceive a network often depends on how complex is the behaviour of the network itself. Complex networks are difficult to analyse, but if in case of simple networks, we can understand the way in which the parts interact.
Although networks may have structural similarities, they may, however, be substantially different. Therefore, only analysing the topology of networks is not sufficient, but we should focus on the mechanisms that govern the behaviour and interactions of the network (cf. Bar-Yam, 1997, 782-825; Bar-Yam, 2003).

Social networks
Since the focus in this paper is on human communication in international business, only human networks are discussed. Social networks may be conceived in numerous ways. Two examples of definitions are given below:
"[Social networks] are groups of people who share a common role, occupation or passion and who connect with each other to deal with change. (M. Gusella, Former head of The Leadership Network)
"The emphasis [of social networks] is on interactive, shared learning and openness to a variety of disciplinary and organisational perspectives." (Policy Research Secretariat, Canada)

There are several concepts, which are closely related to social networks. Among the most important are:
1. Communities of Practice: a group of people informally bound together by shared expertise and passion for a joint enterprise (Wenger & Snyder, 2000)
2. Social Capital: the knowledge base created when a network of individuals collaborates and exchanges information to promote mutually productive gain (cf. Putnam, 1993).
3. Intellectual Capital: the compilation of applied experience, organisational technology, customer relationships and professional skills that provide an organisation with competitive advantage (Edvinsson & Malone, 1997).
Characteristics of social networks
Social networks function according to certain common characteristics. A well-functioning social network should promote at least (cf. Horibe, 2000; Leadership Network, 2003):
1. Interaction over hierarchy borders
· Well-functioning social networks connect people who share a common interest or purpose.
· They create a climate where innovation and new ideas are supported, and where multiple perspectives are applied to complex issues.
· They support a culture that questions the legitimacy and purposefulness of the decision-making environment and enables an open dialogue.
2. Relationship building
· Well-functioning social networks build relationships among people who share common interests, objectives and goals.
· They allow horizontal participation across organisational boundaries.
3. Knowledge sharing
· Well-functioning social networks turn knowledge into tangible results and let teams and other work groups create intellectual capital.
4. Sharing a common vision
· Well-functioning social networks help members setting common goals and objectives and finding solutions to shared problems.
5. Beneficial use of technology
· In well-functioning social networks the use of communication technology enables effective problem finding and problem solving.
6. Synergic effects
· Well-functioning social networks support the generation of new ideas and the creation of new knowledge through the fruitful interaction with others.
· They also empower network members and multiply the outcome of work.


Beyond these characteristics, well-functioning social networks have been associated with the following success factors and benefits (see The Leadership Network, 2003):
1. Key Success Factors
· Social networks need time to develop;
· They must be based on realistic expectations;
· They need good management;
· They need a common perspective;
· Network members should be consulted at all points;
· Network members need to see a benefit of participating;
· Social networks need stability of supporting resources.
2. Benefits of social networks
· Can be part of leading up to a solution; or part of the solution
· Support move from centralised to horizontal decision-making
· Establish partnerships and strategic alliances
· Promote learning and culture change throughout a functional community
· Improve integrated client service

(Source: F. Horibe, 2000)

Classification of social networks
Researchers in social sciences distinguish between different kinds of human networks. E.g. Ostgaard & Birley (1996) divide networks in two categories: professional networks and social networks. According to their definition the professional network includes all those individuals with whom the relationship primarily concerns business. The social network includes family, friends and acquaintances with whom the entrepreneur relates to primarily on a social level (Szarka, 1990).

Johannisson (1998) make a similar distinction, but use the words business networks, which include customers, managers, partners and business colleagues, and social networks, which includes family and friends.
Most general is the distinction between formal networks and informal networks (cf. e.g. Cook, 1982; Ibarra, 1993; Näsman, 2000; Scott, 1991; Wellman, 1983). Formal networks are distinct from informal networks in that they are officially recognised or mandated by organisations, and in that the content of their exchanges is rational and task-related, e.g. transactional or cooperative. In business, strategic alliances are typical examples of formal networks. The informal networks, on the other hand, are those where participation is more private.
The above network typologies cannot be considered as absolute. The distinction between business relations and social relations is often diffuse. E.g. Näsman (2000) argues that participation in informal networks is primarily private but that these also can have great impact on the development of a business (Näsman, 2000), i.e. these relations can have dual functions. Other authors such as Aldrich, Rosen & Woodward (1987) point out that it is possible for family members to be professional contacts and for professional contacts to be friends.

Changed focus in social networks
Social networks do not remain stable, but they change over time. Depending on which level is focused, they have developed in several respects during the past century. At personal level, the development has gone from closed system relationships to open system relationships, i.e. an individual's status in society is no longer predetermined by his or her social class origin, but by one's performance (role) as a node (gatekeeper or mentor) in social networks. At organisational level, the focus has shifted from closed hierarchical structures - typical of the Weberian bureaucratic organisation - to open self-organising teams. Behavioural norms and individual performance have thus been replaced by social interaction and functional flexibility. At business level, local networks are being integrated in global networks. This has been made possible through the rapid developments in information technology, but integration is also a consequence of the liberalisation of world trade, convergence of industries and scaling trends in modern business (fusions or clustering).

The role of social capital in networks
Social studies emphasise the role of social capital in the development of human networks (cf. e.g. Bourdieu, 1984; Putnam, 1993; Wiklund, 1998). Social capital comprises the networks and relationships that shape the quality and quantity of a society's social interactions. Social capital sets the rules that govern interaction between agents (members of the network). The amount of social capital varies according to the density of formal and informal institutions for development. According to Siisiäinen (2000), there are two ruling concepts of social capital: those of Bourdieu (1984) and of Putnam (1993). Bourdieu's concept of social capital puts the emphasis on conflicts and the power function (social relations that increase the ability of an actor to advance her/his interests). Social positions and the division of economic, cultural and social resources in general are legitimised with the help of symbolic capital. Putnam's concept of social capital has three components: moral obligations and norms, social values (especially trust) and social networks (especially voluntary associations). Putnam's central thesis is that if a region has a well-functioning economic system and a high level of political integration, these are the result of the region's successful accumulation of social capital.

In formal and informal networks, social capital can exist at different levels. According to Bowen, Martin, Mancini, & Nelson (2000), they comprise:
1. first-order effects within one network, which concern positive vertical and horizontal integration around knowledge, behaviour, and attitudes;
2. second-order effects, which are generated by relationship among actors in similar networks, and which focus on coordination and consistency in knowledge, behaviour, and attitudes, and
3. third-order effects, which generated by relationship across different network types, and which also have focus on coordination and consistency in knowledge, behaviour, and attitudes.

The role of social networks in business
Social networks are not a new phenomenon. For centuries people have been using informal networks to get things done within the bureaucracy and to support their learning and career development. People have also established formal networks to support the consultative process and networks of people have come together around shared interests and to solve common problems. Recently, however, social networks have become a topic of interest in business. The benefits of social networks in business have been related to:
· Competitive advantage and strength
· Greater skills base
· Sharing of best practice and industry standards
· Access to new technology
· Strategic alliances


Networks play a particularly important role in the diffusion and adoption of innovations (Rogers, 1995). Diffusion models emphasize the importance of social networks through which ideas about new technologies and practices are communicated (Rogers, 1983).
Of particular importance for developing and sharing knowledge relevant to innovation is boundary spanning. This has been shown in several studies on technological innovation and business relationships (e.g. Hakansson & Snehota, 1995). The term boundary spanning refers to the processes by which members of firms participate in networks that extend beyond the boundaries of their own organization, i.e. processes of inter-organizational networking (Swan et al., 2000).
Knowledge sharing in inter-organizational networks may occur both in formal channels and in informal channels. Formal channels include, for example, contractually based business relationships such as joint ventures and supply-chain agreements, and access to formally presented and published information. Informal channels are based on interpersonal contacts with members of other firms (for example, "corridor meetings" during visits to other firms, telephone conversations, meetings, etc. (Steward & Conway, 1996). Since these informal, interpersonal networking processes often involve external sources, they may be crucial for innovation. Informal networking may have advantages in at least two respects. First, it may allow the trust to develop such that partners share information more openly - it is rare to hear about failures and mistakes, for example, through formal channels but these can be powerful learning points. Second, interpersonal networks may permit the exchange of important tacit knowledge, i.e. the knowledge embodied in people, and difficult to transfer except through personal contact (Senker & Faulkner, 1996; Sorensen & Levold, 1992).
As business is going to be more and more tied to international networks, communication is growing in complexity. In international business, the risk for communication problems due to cultural differences is considerably higher than in a national scope. Successful management of cultural diversity hinges on how well organisations understand the manifestations of this diversity and its effects in the organisational and international business contexts. (cf. Hofstede, 1991). In developing sustainable relationships with international stakeholders (customers, suppliers, agents, etc.), a long-term communication strategy is required. The result of this communication process is increased awareness of demands and expectations, which then can be expressed as added value in the products.

Networking skills of Finnish log house exporters
This part of the article reports some central findings from an empirical study conducted by Aart Jan de Heer at the Department of Information Studies, Åbo Akademi University, Åbo, Finland (De Heer, 1999). The study (Problem identification and problem solving among Finnish exporters of log houses) illustrates how networking skills in SME firms are related to success in international markets.

Background
The aim of the study was to find out whether the information behaviour (i.e. acquisition and use of information on threats and opportunities) in export companies was related to their export performance. With respect to the networking capabilities of the companies, the most important research questions in the study were:
· How did the companies gather their information?
· In what way did information behaviour and in successful companies differ from the information behaviour in unsuccessful export companies?
Data were gathered from twenty-one Finnish log house producers, which had been exporting to Germany for at least one year during 1994-1995. The involved companies were interviewed in the autumn of 1995 using semi-structured qualitative techniques. The purpose of the interviews was to collect information on the background and action environment of the companies as well as to obtain information on how these companies acquired and used knowledge on external threats and opportunities.

The role of information in successful and unsuccessful companies
The interview analyses highlighted two companies, the first one having a very successful export to Germany, while the second one did not succeed in making a successful entry on the German market. A comparison of the information behaviour and success characteristics of these companies showed, that the successful company acted in a contrastive Finnish?German perspective and gathered its information directly from local agents in Germany, while the unsuccessful company acted in a purely Finnish perspective and had no other sources of knowledge than a single market survey. The characteristics of the companies made strong implications for their networking capabilities in the German market.

The role of cultural knowledge
A more detailed analysis of the social skills and action repertoire in both companies showed that management in the companies differed especially with respect to their ability and preparedness to understand other cultures. Other differences concerned the managers' way of accumulating and using experience, their way of acquiring information, their commitment to problem identification as well as their problem solving strategies.
With respect to the managers' ability to understand other cultures, it was possible to observe a certain synergy between the bicultural (German-Finnish) background and the information behaviour in the successful company. The manager of this company emphasised the importance of intensive and direct communication with German customers. One may regard that the representative's conception of the role of communication was to a high extent determined by his good command of the German language as well as by his excellent understanding of the German culture. Favoured by these conditions, it was comparatively easy for him to acquire the needed information directly from the export country. On the other hand, one can state that the representative's intensive contacts with the customers promoted his ability to integrate the customers' conception of service and quality into the business idea of the company.

Management in the unsuccessful company lacked both straight contacts with German customers and primary knowledge of the German market conditions. Moreover, the company had no personnel mastering the German language. Since the company had not enough resources to gather its own information from the export market, it was forced to use information services and to rely on the supplied information. Under these circumstances, it was understandable that the company's export decisions primarily reflected the manager's own expectations and needs and did not take into account how the German customers conceived service and quality.

The role of experience and empirical knowledge
In addition to cultural factors, the companies differed also with respect to the extent they were committed to acquiring and using experience. In the successful company, management had acquired its experience independently of others in the course of a long and continuous information gathering process. In this context, experience had the character of practical wisdom based on empirical knowledge of risks and opportunities in the foreign market. The interviews confirmed that experience was for the company a critical resource for long-term action. In the successful company, experience was a beneficial resource, because it was integrated in the problem context of the organization and was continuously accumulated and updated in a straight dialogue with German customers.

In the unsuccessful company, management relied on secondary information from a market survey and was not committed to accumulate its own knowledge of the German market. Hence, there was no direct dialogue with German customers who could have supplied the company with the knowledge needed for interpreting and mapping unobserved threats and opportunities.

The role of information in decision making
The information profile as represented by the successful company showed that active export behaviour could lead to success if this behaviour was based on a well-planned and holistic information strategy. An active information strategy alone was, however, not necessarily related to success. In the unsuccessful company, the information gathered in the export planning phase was an important cause for failure, because it was based on superficial and fragmentary knowledge. It was interesting to note that the unsuccessful export company had relatively much confidence in this incomplete knowledge. In addition, the company's management pleaded that it lacked resources to gather more comprehensive and varied information. In the unsuccessful company, the export decision was primarily based on opportunistic and short-term expectations concerning the firm's production capacity. Accordingly, the decision of the unsuccessful company to choose the German market made in this way a rather intuitive and haphazard impression in comparison to the successful company's decision according to which the German market was chosen because of the producer's personal connections with the export country.

Different approaches to problem solving
In the unsuccessful company, problem solving was limited to operational and routine-like matters like accounting, invoicing and logistics. In the successful company, on the contrary, problem solving had a strategic dimension and was interconnected with finding new opportunities and challenges. Accordingly, the successful company scanned its business environment continuously and made a lot of efforts to find out how its customers' conceptions of production and service could be best integrated in the export products. In contrast with this, action in the unsuccessful company had a defensive character and aimed at safeguarding the current level of operational performance. In this company, problem solving only served the company's short-term goals and was entirely detached from the long-term needs of the German customers.

Discussion and conclusions
The behaviour and strategic approach of above companies gave strong indications that there exists a special relationship between market success and cultural literacy. The successful company had an export minded management, which realised the importance of knowing the implicit context of the German customer. In this company it was clear that the German lifestyle and way of thinking could not be understood without primary and update knowledge of the German conditions. In his statements, the representative of the successful company often referred to the circumstance that Finnish producers do not exactly know what German customers expect of a log house. Other successful log house exporters included in the study shared this view and suggested that misunderstandings originated from the ambiguous concept "product of nature". According to them, Germans conceive a product of nature as an artefact that idealises the properties of nature, whereas Finnish conceive a product of nature as an object that reflects nature just as it is or as something that makes the user feel part of nature.

To understand that log houses are differently associated with the concept of nature in different countries requires profound and contrastive cultural knowledge. An analysis of all successful companies included in the study showed that the managers of these companies had acquired contrastive cultural understanding through a life-long learning process. Typically, they had gained understanding of the German mentality by experience, in particularly by learning from mistakes.

The notion of cultural literacy being an explanatory success factor in exports implies that export success requires a critical mass of social capital. The study suggests that in business, social capital is relatively scarce and must be generated through intensive and long-term participation in social networks. In other words, strategic knowledge cannot be gained by compiling reports from explicit data, but requires that we understand the driving force behind the things we see.

The way, in which successful behaviour arises from accumulating social capital, remains, however, a complex issue. Efforts related to gathering social capital often refer to a rather unintentional process, which can hardly be described by a set of universally applicable rules. The study gives, though, some indications about how successful networking behaviour may develop. First, increased awareness concerning the existence of different norms and values seems to have an advantageous effect on a firm's communication skills. Improved communication, in turn, may result in improved trust relationships between the firm and its foreign customers and partners. Finally, through enhanced trust, the development of more effective and larger networks becomes possible, which, in turn helps the firm to improve the level of its products and services. In internationalising SME's, networking with foreign customers and business partners has substantial importance for overcoming cultural barriers between a firm and its foreign business environment. Moreover, the successful accumulation of social capital in small business is rather related to the improvement of communication skills than to coping with power relationships (cf. the different conceptions of social capital by Bourdieu 1984 and Putnam 1993). Successful firms do not see their environment as a battlefield of conflicting interests, but as a source for learning and generating new ideas.

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Last updated August 31th, 2003
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