The Importance of Strategic Networks in the Digital Business

Executive Summary

Today’s modern enterprises are struggling to meet market demands which are driving highly caffeinated business models underpinned by digital technologies and demanded by consumer expectations. They’re faced with accelerating rates of innovation, shrinking time to market demands, all while challenged to better their operational efficiencies to compete with startup organizations that have benefited from capital light business models.

With an increasing sense of urgency, executive management teams are faced with; business processes that cannot keep pace with innovation velocity demands, organizational structures that create information silos, overweight administrative burdens and a workforce that doesn’t have the skills required to compete in today’s markets.

Macro market drivers such as these have led to a rethink of organizational models. The same macro forces that are driving market disruption are also creating market specialization and commoditization of goods and services that were once was the sole realm of core strategic business processes of vertically integrated enterprises. These drivers are forcing executive management teams to rethink those organizational structures, core processes and value propositions creating a hybrid form of market models, built upon loosely coupled value networks and alliances (Powell, 1990; Powell, Koput & Smith-Doerr, 1996) in their search for above average returns.

Where managers once needed to only worry about building their own operational networks internal to their organization, it’s become an imperative to ensure that they’re also supported by robust strategic and personal networks (Ibarra & Hunter, 2007).

Operational Networks

Operational networks are biased towards an intrinsic and provincial nature to the firm. Managers build these networks on the premise of getting work done efficiently, including identifying stakeholders to champion or who could block getting work done. These networks can be both wide and deep, to include not only direct reports, but organizational peers, executive managers and the board of directors (BOD). These same networks may span both internal and external resources, including that of vendors, partners, or even customers.

The intent of these networks is to ensure managers have 360-degree support and limit blind spots (Scopelliti, https://www.linkedin.com/redir/general-malware-page?url=et%2eal, 2015) that would prevent the execution of immediate term tasks and initiatives. As Herminia Ibarra and Mark Lee Hunter in a 2007 article in the Harvard Business Review detailed in a matter of fact way, the value of relationships within an operational network are “either they’re[sic] necessary to the job and helping to get it done, or they’re[sic] not.”

These operational networks are decreasing in complexity, but not necessarily importance as firms voraciously follow the first law of information theory. The fidelity of these networks is increasing as firms flatten their organizations, decrease noise and message dilution from organizational layers in order to decrease costs and increase the velocity of innovations (Lin, 2008). While at the same time they empower lower level employees through the use of higher quality technologies and information sharing to take responsibility and accountability for what was once reserved for a deep management chain (Drucker, 2001).

Strategic Networks

Strategic networks are the antithesis of operational networks. These networks are generally extrinsically focused beyond a manager’s direct realm of control or influence. These networks are focused on identifying future priorities, opportunities and managing risks through external cooperative agreements (formal and informal), but still for endogenous reasons. As a result of less foci; strategic networks are more ambiguous in nature, tougher to develop and navigate, require significant investments of time and energies with a higher risk of return on investment.

Strategic networks can become a source of competitive advantage created from the synergistic effect from lateral and vertical alignment to stakeholders and partners inside and outside of the firm (Hitt, Ireland & Hoskisson, 2017, p. 369). The diverse backgrounds of the stakeholders and partners creates a knowledge network (TallyFox, 2015) from the varying objectives and incentives. When successfully marshalled these networks create outcomes and value creation that can exceed those that could have been achieved from just one functional focus.

Modern leadership theory places strategic networks as a key building block to leadership development. These networks develop social capital as a critical foundation of leadership. Defining these networks as “the features of social organization such as networks, norms and social trust that facilitate coordination and cooperation for mutual benefit” (Putnam, 1995). These claims aren’t baseless, with mounting academic evidence that leader performance and effectiveness (Dyer, Kale & Singh, 2001) is related to social capital and the strength of strategic networks (Balkundi & Kilduff, 2006; Burt & Ronchi (at press); Chia-Chen Kuo, 2004; Fredricks, 2003; Giovagnoli & Stover, 2004; Kilpatrick & Falk, 2003; King, 2004; Terroin, 2006; Zacharakis & Flora, 2005)

Personal Networks

Lastly, there’s externally oriented personal networks that lend to personal and professional development, referrals, contacts and a mechanism by which to gain lessons learned from others. Both from within and outside a manager’s industry these personal networks are the tie that binds. They generally have a wide breadth, take a significant investment of time to nurture, return on investment may be ambiguous and are discretionary in nature (Ibarra & Hunter, 2007).

Not too unlike the network effects that underpin the modern digital economy (Hagiu & Yoffie, 2016), personal networks even with only casual acquaintance can act to amplify a manager’s knowledge and influence. Access to ideas, resources, problem solving strategies and insights through contacts that can act as both information warehouses and/or brokers can extend a leader’s capabilities beyond their own sphere of influence. The power of this network effect can be seen at the World Economic Forum (WEF) where “2500 of the world’s busiest people,” from the business world gather in the Swiss city of Davos, not just to discuss global economic issues, but rather largely for the professional networking (Schumpeter, 2015).

Networking Endgame

Alas, personal networks are for naught unless leaders can translate their reach, rich information and knowledge into inputs into operational and strategic organizational needs. Operational, strategic and personal networking all require time, social and sometimes capital investments whether directly from executive leaders or from the firm. These investments need to be continually tended to be able to produce benefits. But, also require a fundamental prerequisite of reciprocity to be beneficial and remain healthy.

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