Entrepreneurs can take advantage of the complementary nature of the various business in the economy in which they operate. Networking is one way through which this can be achieved.
Networking is the process of enlarging the entrepreneur’s circle of trust through negotiation.
Networks can be divided into two main categories, informal and formal networks;
These exist where the entrepreneur makes use of his range of friends, acquaintances, and business associates to obtain resources and opportunities for his firm. This information helps the entrepreneur understand his environment better. It also helps him build a reputation and credibility for himself and his firm. The networks can be a source of sustainable competitive advantage as well as a means of procuring other resources that can be a source of competitive
These are more organized forms of associations where the entrepreneur establishes mutually beneficial relationships with other business people and potential clients. The aim is to exchange business ideas, information and support.
Motivations of Networking
Here we shall look at what drives entrepreneurs to form networks for their businesses. The reasons are varied and each entrepreneur needs to find a partner who shares his vision, one who will compliment his business needs and objectives.
A cost cutting strategy may be reason enough to venture into networking whereby the production process avoids wasteful duplication of resources, utilizes by-products and processes, and may even allow the partners to share brands and distribution channels. Another internal motivation is the need to share new intelligence and production methods. These relationships can help a firm emulate innovative managerial practices, superior management systems and improved communication patterns.
This motivation drives the formal network to come up with improved current strategic positions with respect to the industry in which they belong. For instance a set of firms is more likely to be able to influence the structure of the industry’s evolution than a single firm. A joint venture could also act to preempt the possible entry of new competitors thereby giving the partnership a lead that is less likely to be challenged in the industry. This will ensure customer loyalty as the venture expands its capacity to serve. Another motivation here is the acquisition of resources at better terms from suppliers. Economies of scale play a major role in getting better deals.
Some forms of joint venture will exist not solely with the objective of deriving immediate benefits but for creative reasons, to exploit synergies, to develop new technologies or extend old ones.
It could also be a room for a venture to set a toehold in a market that is not completely ready for the product or service in the offing, a product or service that needs long term credibility.
Here, firms network not for purely profit oriented reasons. The firms come together to promote their own values and social agendas. A lead firm will set precedence by setting a forum where other entrepreneurs who are committed to social changes through business come together.
The network is a loose collection of entrepreneurs, social activists, corporate executives and philanthropists. The network brings individuals of common purpose together for the purpose of achieving a common social goal.
Types of Networks
This is an informal network that consists of all the direct face to face contacts that the entrepreneur has. They include friends, family, close business associates, former teachers at the university etc. In this kind of network, the entrepreneur can easily develop trust with the other parties since these are people who can vouch for him as a result of knowing him very well. Trust enables the entrepreneur to forgo all the legal formalities that guard against opportunism when getting into a business arrangement with any of these people. Trust can replace any contract that may need to be signed and save the need to incur unnecessary costs. People within a personal network have predictable behavior patterns since they know each other well. Their consistent behavior enables
the entrepreneur to have a mental map of the personal network – to know who will be where and when. This will help him navigate quickly through the personal network when resources and information are needed for business purposes. Personal networks have strong ties. Such ties are formed because the relationship may have a long history, there may be family relationships or people may share a common culture, common values or common associations. Strong ties are especially important in the early stages of business formation particularly in financing and securing the initial resources for new venture creations. An example of this kind of networks is the pyramid scheme that was rampant in the country a few years ago.
These are formal firm to firm relationships. The entrepreneur engages other entrepreneurs, customers, vendors and other constituents in the operating environment in boundary spinning activities. Each of these parties has a role to play in the open system under which the entrepreneur runs his operations. Extended networks become more important as the firm moves beyond the initial foundation stage. These networks contain more diversity that personal networks and consequently, more information. There is little trust between the concerned parties hence the need for formalized agreements in form of contracts. There is also more uncertainty and less predictability in these relationships. There are weak ties since the customer of a customer or the supplier of a supplier may be included in the network. This forms many indirect associations but in the end only acts to make the extended network even larger. As a result it will contain more diverse information, people, resources and channels for the entrepreneur to use. Examples of relationships that exist in this category are the cartels of firms that combine resources to benefit from economies of scales, such as bookshops importing books in bulk from abroad.
An agglomerate network is a formal network that is constituted by a set of indirect relationships between firms that are competitors. It serves as an information network that enables the firms to secure information about capabilities and competencies that are regarded as necessary but not sufficient for success. It requires registration for membership and members are required to pay some fee. It is regulated by by-laws that control the activities. Such a network can exist in highly fragmented and geographically dispersed environments that are populated by very small, homogeneous ventures, such as retailing and small scale farms. They are loosely coupled, voluntary and have a low task structure. No single member of the association can influence another member to do anything. Examples of this kind of network are firms that belong to an association that protects their interests, e.g. publishers belonging to the Kenya Publishers Association
This is an indirect relationship between non – competing organizations. The indirectness is not in terms of the individual entrepreneur who represents the firm but in terms of the business.
These relationships are not task-oriented and may consist of strong ties linkages such as friends and close associates or weak ties links. Examples here include firms that come together for a common social purpose e,g to sponsor athletes to represent the country at the Olympics