Structural Holes

The Social Structure of Competition

Ronald S. Burt

• Publisher: Harvard University Press
• Year: 1995
• Print ISBN: 9780674843714, 9780674843721
• eBook ISBN: 9780674262461
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Ronald Burt describes the social structural theory of competition that has developed through the last two decades. The contrast between perfect competition and monopoly is replaced with a network model of competition. The basic element in this account is the structural hole: a gap between two individuals with complementary resources or information. When the two are connected through a third individual as entrepreneur, the gap is filled, creating important advantages for the entrepreneur. Competitive advantage is a matter of access to structural holes in relation to market transactions.

1

The Social Structure of Competition

A player brings capital to the competitive arena and walks away with profit determined by the rate of return where the capital was invested. The market production equation predicts profit: invested capital, multiplied by the going rate of return, equals the profit to be expected from the investment. You invest a million dollars. The going rate of return is 10 percent. The profit is one hundred thousand dollars. Investments create an ability to produce a competitive product. For example, capital is invested to build and operate a factory. Rate of return is an opportunity to profit from the investment.

The rate of return is keyed to the social structure of the competitive arena and is the focus here. Each player has a network of contacts in the arena. Something about the structure of the player’s network and the location of the player’s contacts in the social structure of the arena provides a competitive advantage in getting higher rates of return on investment. This chapter is about that advantage. It is a description of the way in which social structure renders competition imperfect by creating entrepreneurial opportunities for certain players and not for others.¹

Opportunity and Capital

A player brings at least three kinds of capital to the competitive arena. Other distinctions can be made, but three are sufficient here. First, the player has financial capital: cash in hand, reserves in the bank, investments coming due, lines of credit. Second, the player has human capital. Your natural qualities—charm, health, intelligence, and looks—combined with the skills you have acquired in formal education and job experience give you abilities to excel at certain tasks.

Third, the player has social capital: relationships with other players. You have friends, colleagues, and more general contacts through whom you receive opportunities to use your financial and human capital. I refer to opportunities in a broad sense, but I certainly mean to include the obvious examples of job promotions, participation in significant projects, influential access to important decisions, and so on. The social capital of people aggregates into the social capital of organizations. In a firm providing services—for example, advertising, brokerage, or consulting—there are people valued for their ability to deliver a quality product. Then there are “rainmakers,” valued for their ability to deliver clients. Those who deliver the product do the work, and the rainmakers make it possible for all to profit from the work. The former represent the financial and human capital of the firm. The latter represent its social capital. More generally, property and human assets define the firm’s production capabilities. Relations within and beyond the firm are social capital.

DISTINGUISHING SOCIAL CAPITAL

Financial and human capital are distinct in two ways from social capital. First, they are the property of individuals. They are owned in whole or in part by a single individual defined in law as capable of ownership, typically a person or corporation. Second, they concern the investment term in the market production equation. Whether held by a person or the fictive person of a firm, financial and human capital gets invested to create production capabilities. Investments in supplies, facilities, and people serve to build and operate a factory. Investments of money, time, and energy produce a skilled manager. Financial capital is needed for raw materials and production facilities. Human capital is needed to craft the raw materials into a competitive product.

Social capital is different on both counts. First, it is a thing owned jointly by the parties to a relationship. No one player has exclusive ownership rights to social capital. If you or your partner in a relationship withdraws, the connection, with whatever social capital it contained, dissolves. If a firm treats a cluster of customers poorly and they leave, the social capital represented by the firm-cluster relationship is lost. Second, social capital concerns rate of return in the market production equation. Through relations with colleagues, friends, and clients come the opportunities to transform financial and human capital into profit.

Social capital is the final arbiter of competitive success. The capital invested to bring your organization to the point of producing a superb product is as rewarding as the opportunities to sell the product at a profit. The investment to make you a skilled manager is as valuable as the opportunities—the leadership positions—you get to apply your managerial skills. The investment to make you a skilled scientist with state-of-the-art research facilities is as valuable as the opportunities—the projects—you get to apply those skills and facilities.

More accurately, social capital is as important as competition is imperfect and investment capital is abundant. Under perfect competition, social capital is a constant in the production equation. There is a single rate of return because capital moves freely from low-yield to high-yield investments until rates of return are homogeneous across alternative investments. When competition is imperfect, capital is less mobile and plays a more complex role in the production equation. There are financial, social, and legal impediments to moving cash between investments. There are impediments to reallocating human capital, both in terms of changing the people to whom you have a commitment and in terms of replacing them with new people. Rate of return depends on the relations in which capital is invested. Social capital is a critical variable. This is all the more true when financial and human capital are abundant—which in essence reduces the investment term in the production equation to an unproblematic constant.

These conditions are generic to the competitive arena, which makes social capital a factor as routinely critical as financial and human capital. Competition is never perfect. The rules of trade are ambiguous in the aggregate and everywhere negotiable in the particular. The allocation of opportunities is rarely made with respect to a single dimension of abilities needed for a task. Within an acceptable range of needed abilities, there are many people with financial and human capital comparable to your own. Whatever you bring to a production task, there are other people who could do the same job—perhaps not as well in every detail, but probably as well within the tolerances of the people for whom the job is done. Criteria other than financial and human capital are used to narrow the pool down to the individual who gets the opportunity. Those other criteria are social capital. New life is given to the proverb that says success is determined less by what you know than by whom you know. As a senior colleague once remarked (and Cole, 1992: chaps. 7–8, makes into an intriguing research program), “Publishing high-quality work is important for getting university resources, but friends are essential.” Of those who are equally qualified, only a select few get the most rewarding opportunities. Of the products that are of comparably high quality, only some come to dominate their markets. The question is how.

WHO AND HOW

The competitive arena has a social structure: players trusting certain others, obligated to support certain others, dependent on exchange with certain others, and so on. Against this backdrop, each player has a network of contacts—everyone the player now knows, everyone the player has ever known, and all the people who know the player even though he or she doesn’t know them. Something about the structure of the player’s network and the location of the player’s contacts in the social structure of the arena provides a competitive advantage in getting higher rates of return on investment.

Who

There are two routes into the social capital question. The first describes a network as your access to people with specific resources, which creates a correlation between theirs and yours. This idea has circulated as power, prestige, social resources, and more recently, social capital. Nan Lin and his colleagues provide an exemplar of this line of work, showing how the occupational prestige of a person’s job is contingent on the occupational prestige of a personal contact leading to the job (Lin, 1982; Lin, Ensel, and Vaughn, 1981; Lin and Dumin, 1986). Related empirical results appear in Campbell, Marsden, and Hurlbert (1986), De Graaf and Flap (1988), Flap and De Graaf (1989), and Marsden and Hurlbert (1988). Coleman (1988) discusses the transmission of human capital across generations. Flap and Tazelaar (1989) provide a thorough review with special attention to social network analysis.

Empirical questions in this line of work concern the magnitude of association between contact resources and the actor’s own resources, and variation in the association across kinds of relationships. Granovetter’s (1973) weak tie metaphor, discussed in detail shortly, is often invoked to distinguish kinds of relationships.²

Network analysts will recognize this as an example of social contagion analysis. Network structure is not used to predict attitudes or behaviors directly. It is used to predict similarity between attitudes and behaviors (compare Barber, 1978, for a causal analysis). The research tradition is tied to the Columbia Sociology survey studies of social influence conducted during the 1940s and 1950s. In one of the first well-known studies, for example, Lazarsfeld, Berelson, and Gaudet (1944) show how a person’s vote is associated with the party affiliations of friends. Persons claiming to have voted for the presidential candidate of a specific political party tend to have friends affiliated with that party. Social capital theory developed from this line of work describes the manner in which resources available to any one person in a population are contingent on the resources available to individuals socially proximate to the person.

Empirical evidence is readily available. People develop relations with people like themselves (for example, Fischer, 1982; Marsden, 1987; Burt, 1990b). Wealthy people develop ties with other wealthy people. Educated people develop ties with one another. Young people develop ties with one another. There are reasons for this. Socially similar people, even in the pursuit of independent interests, spend time in the same places. Relationships emerge. Socially similar people have more shared interests. Relationships are maintained. Further, we are sufficiently egocentric to find people with similar tastes attractive. Whatever the etiology for strong relations between socially similar people, it is to be expected that the resources and opinions of any one individual will be correlated with the resources and opinions of his or her close contacts.

How

A second line of work describes social structure as capital in its own right. The first line describes the network as a conduit; the second line describes how networks are themselves a form of social capital. This line of work is less developed than the first. Indeed, it is little developed beyond intuitions in empirical research on social capital. Network range, indicated by size, is the primary measure. For example, Boxman, De Graaf, and Flap (1991) show that people with larger contact networks obtain higher-paying positions than people with small networks. A similar finding in social support research shows that persons with larger networks tend to live longer (Berkman and Syme, 1979).

Both lines of work are essential to a general definition of social capital. Social capital is at once the resources contacts hold and the structure of contacts in a network. The first term describes whom you reach. The second describes how you reach.

For two reasons, however, I ignore the question of who to concentrate on how. The first is generality. The question of who elicits a more idiographic class of answers. Predicting rate of return depends on knowing the resources of a player’s contacts. There will be interesting empirical variation from one kind of activity to another, say, job searches versus mobilizing support for a charity, but the empirical generalization is obvious. Doing business with wealthy clients, however wealth is defined, has a higher margin than doing business with poor clients. I want to identify parameters of social capital that generalize beyond the specific individuals connected by a relationship.

The second reason is correlation. The two components in social capital should be so strongly correlated that I can reconstruct much of the phenomenon from whichever component more easily yields a general explanation. To the extent that people play an active role in shaping their relationships, then a player who knows how to structure a network to provide high opportunity knows whom to include in the network. Even if networks are passively inherited, the manner in which a player is connected within social structure says much about contact resources. I will show that players with well-structured networks obtain higher rates of return. Resources accumulate in their hands. People develop relations with people like themselves. Therefore, how a player is connected in social structure indicates the volume of resources held by the player and the volume to which the player is connected.³

The nub of the matter is to describe network benefits in the competitive arena in order to be able to describe how certain structures enhance those benefits. The benefits are of two kinds, information and control.

Information

Opportunities spring up everywhere: new institutions and projects that need leadership, new funding initiatives looking for proposals, new jobs for which you know of a good candidate, valuable items entering the market for which you know interested buyers. The information benefits of a network define who knows about these opportunities, when they know, and who gets to participate in them. Players with a network optimally structured to provide these benefits enjoy higher rates of return to their investments, because such players know about, and have a hand in, more rewarding opportunities.

ACCESS, TIMING, AND REFERRALS

Information benefits occur in three forms: access, timing, and referrals. Access refers to receiving a valuable piece of information and knowing who can use it. Information does not spread evenly across the competitive arena. It isn’t that players are secretive, although that too can be an issue. The issue is that players are unevenly connected with one another, are attentive to the information pertinent to themselves and their friends, and are all overwhelmed by the flow of information. There are limits to the volume of information you can use intelligently. You can only keep up with so many books, articles, memos, and news services. Given a limit to the volume of information that anyone can process, the network becomes an important screening device. It is an army of people processing information who can call your attention to key bits—keeping you up to date on developing opportunities, warning you of impending disasters. This second-hand information is often fuzzy or inaccurate, but it serves to signal something to be looked into more carefully.

Related to knowing about an opportunity is knowing whom to bring into it. Given a limit to the financing and skills that we possess individually, most complex projects will require coordination with other people as staff, colleagues, or clients. The manager asks, “Whom do I know with the skills to do a good job with that part of the project?” The capitalist asks, “Whom do I know who would be interested in acquiring this product or a piece of the project?” The department head asks, “Wh...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Acknowledgments
• Introduction
• 1 The Social Structure of Competition
• 2 Formalizing the Argument
• 3 Turning a Profit
• 4 Getting Ahead
• 5 Player-Structure Duality
• 6 Commit and Survive
• 7 Strategic Embedding and Institutional Residue
• Notes
• References
• Index