THE IMPACT OF PERSONAL NETWORK CHARACTERISTICS ON PERCEIVED ENVIRONMENTAL UNCERTAINTY: AN EXAMINATION OF OWNERS / MANAGERS OF NEW HIGH TECHNOLOGY FIRMS
Olukemi O.
Sawyerr, Radford University
Jeffrey E. McGee, University of
Texas at Arlington
ABSTRACT
INTRODUCTION
RELEVANT LITERATURE AND
HYPOTHESES
METHODOLOGY
RESULTS
DISCUSSION AND CONCLUSION
TABLE 1
TABLE 2
CONTACT
REFERENCES
New high technology ventures have long been characterized as “risky business” because they typically compete in dynamic, rapidly changing environments. Personal networks involving relationships between the entrepreneur and external stakeholders are seen as useful mechanisms for thriving in the volatile, uncertain high technology arena. This paper reports the results of a study designed to examine the relationships between perceived environmental uncertainty and the characteristics of the personal networks of owners/managers of small high technology ventures. The results of the multiple regression analysis suggest that certain network characteristics may be associated with the level of perceived environmental uncertainty. These results also indicate the relationships differ among managers of new ventures and managers of more mature firms.
The survival of the entrepreneurial venture depends on its ability to interact with the external environment in order to obtain the resources necessary to achieve its principal goals of profitability and growth. The external environment of organizations, composed of all the forces external to the firm that directly or indirectly influence their operations and which they in turn can influence, is characterized by constant, and often unpredictable, change (Milliken, 1990; Thompson, 1967). To be successful, entrepreneurs must be able to monitor and interpret changes in the environment, and assess the impact of those changes on their ventures (Daft and Weick, 1984). The inability to accurately predict the changes in the environment and to determine the effect of these changes on the entrepreneurial venture creates uncertainty about the environment (Duncan, 1972; Milliken, 1987).
An important component in the definition of environmental uncertainty is the absence of information regarding the factors in the external environment associated with a specific decision-making situation faced by a decision maker (Duncan, 1972; Lawrence and Lorsch, 1967; Milliken, 1987). Entrepreneurs are bounded in their capability to collect and process information, and to determine the result of their decision alternative (Peters and Brush, 1996; Lang, Calantone, and Gudmundson, 1997). As a result, they have to develop the mechanisms to scan the external environment in order to obtain the information needed for making decisions (Daft and Weick, 1984; Pineda, Lerner, Miller, and Phillips, 1998; Mohan-Neill, 1995). An important element of the scanning mechanism for entrepreneurs is the development and maintenance of a web of personal networks. The critical importance of personal networks to the success of entrepreneurs has been well documented in both theoretical and empirical literature (Aldrich, Rosen and Woodward, 1987; Johannisson, 1996; MacMillan, 1983; Ostgaard and Birley, 1994). Personal networks enhance entrepreneurial activity by serving as a link between the entrepreneur and the external environment (Sexton and Bowman-Upton, 1991). An elaborate personal network can provide the entrepreneur with business intelligence and the ability to trade upon ambiguity (Dollinger, 1985; Johannisson, 1996).
While there has been empirical examination of the role of networking in entrepreneurial activities, personal networks have not been examined specifically as mechanisms for coping with uncertainty. Our objective was to examine the relationships between the characteristics of an entrepreneur’s personal network and the level of uncertainty perceived in the external environment. Specifically, we assessed the associations between several key networking activity characteristics (network activity, network intensity, network propensity, and network informality) and the level of environmental uncertainty perceived by the owners/managers of 171 small high technology firms.
RELEVANT LITERATURE AND HYPOTHESES
Perceived environmental uncertainty is the absence of sufficient information about environmental events and activities, and the inability to predict external changes (Daft, Sormunem, and Parks, 1988). While the environment of the organization can be broadly defined, the environment that is of relevance to strategy making is the perceived environment (Bourgeois, 1985). Organizational environments are not ready-made, rather they are created through a process of attention and interpretation (Daft and Weick, 1984). The organization’s environment is known through human actors (Weick, 1969). Human actors do not react to a ready-made environment, but rather they enact their environment. The enacted environment depicts what the human agents of the organization believe and perceive about the objective environment. Thus, the objective environment is perceived differently by different organizations (Bourgeois, 1985). Since managers do not have the capacity to respond to the environment in a comprehensive manner, organizational responses to external events are based on the perceptions of decision makers of the environmental conditions, as opposed to the true environment (Daft et al., 1989). In the case of the entrepreneurial firm, the environment to which the organization responds is the environment perceived by the entrepreneur.
The external environment contains a level of uncertainty, and organizations must learn to cope with this uncertainty (Mathews and Scott, 1995; Daft and Weick, 1984). An important component of environmental uncertainty is the absence of the information necessary for making an informed decision about the relevant components of the environment (Duncan, 1972; Lawrence and Lorsch, 1967; Milliken, 1987). Thus, scanning for external information can serve as an important coping mechanism. Environmental scanning is the process of monitoring the external environment and collecting information of strategic importance for use in making organizational decisions (Aguilar, 1967). Entrepreneurs utilize members of their personal networks as sources of external information to aid them in their ability to cope with environmental uncertainty (Birley, 1985; Dollinger, 1985; Johnson and Kuehn, 1987; Ostgaard and Birley, 1996).
A personal network is a set of ties linking several individuals and providing various types of exchanges (Davern, 1997; Granovetter, 1973; Hurlbert, 1991; Nelson, 1989). Networking is defined as the process of sharing contacts and obtaining resources, and personal networks are the persons with whom an entrepreneur has direct relationships or indirect relationships via direct relationships (Aldrich et al., 1987; Sexton and Bowman-Upton, 1991). The personal network perspective of business venturing rests on the assumption that successful entrepreneurial activity depends on the ability of the entrepreneur to identify external opportunities and to accumulate the resources necessary from the environment for the creation and development of the entrepreneurial firm. Opportunity identification and resource accumulation occur through an exchange relationship between entrepreneurs and members of their personal network (Aldrich et al., 1987; Johannisson, 1990; MacMillan, 1983; Ostgaard and Birley, 1996). Thus, a network serves as a linkage between the entrepreneur and resource opportunity in the external environment (Carsrud, Gaglio, and Olm, 1987; Sexton and Bowman-Upton, 1991). The value of the linkage is that of information exchange.
The personal network provides information concerning the opportunities and necessary resources available to the entrepreneur (Dollinger, 1985; Johnson and Kuehn, 1987; Sexton and Bowman-Upton, 1991). Information flows through the network and this conditions the flow of money and support (Galaskiewicz and Marsden, 1978). Also, the flow of information through the network enables the entrepreneur to deal with the uncertainty characteristic of the external environment by providing business intelligence for use in decision-making (Johannisson, 1990, 1996). As a result, entrepreneurs spend a substantial amount of their time scanning for external information primarily through verbal exchanges with members of their personal networks (Birley, 1985; Dollinger, 1985; Johnson and Khuen, 1987).
Network members become resources in identifying and locating the appropriate knowledge from all known sources. The information provided is not widely available and as such has utility (Sexton and Bowman-Upton, 1991). Since the network composition will vary from entrepreneur to entrepreneur, the information available in the network can become a source of competitive advantage (Ostgaard and Birley, 1996). The network becomes a source of business intelligence that enables the entrepreneur to trade upon ambiguity (Human and Provan, 1997; Johannisson, 1990). Thus, the personal network becomes an important component of the environmental scanning activity of the entrepreneur.
Empirical research shows a great reliance of entrepreneurs on their personal networks in venture development and maintenance (Dodd, 1997; Hansen, 1995; Dubini and Aldrich, 1991; Birley, 1985; Sexton and Bowman-Upton, 1991). Aldrich, Rosen, and Woodward (1986) found that entrepreneurs spent a significant amount of time developing and maintaining contacts and talking to other people about business. The entrepreneurs in their sample reported spending over 40 percent of their time making external contacts. According to Johannisson (1996), entrepreneurs, in order to overcome the liabilities of newness, must focus on building personal networks. He found that entrepreneurs invest a significant amount of time in network building and maintenance activities. Moreover, Van de Ven, Hudson, and Schroeder (1984) argued that high performing entrepreneurs tended to be more externally oriented and maintained “richer, broader, and more complex networks of ongoing relationships with people outside the firm” (p. 101). Similarly, the entrepreneurship literature, in general, also suggests that successful entrepreneurs are more externally oriented (Jarillo, 1989) and willing to accept the advice of outsiders (Robinson, 1982; Paulsson, 1987). This may be especially true of entrepreneurs engaging in high technology businesses. As Powell, Koput, and Smith-Doerr (1996) noted, “The complex reality of rapidly developing fields, in which knowledge is both sophisticated and widely dispersed, . . . demand(s) a range of intellectual and scientific skills that far exceeds the capabilities of any single organization” (p. 119).
The results of a limited body of empirical research also indicate that certain networking activities may be positively associated with new venture performance. Falemo (1989), for example, discovered that managers of faster growing firms identified more external persons who channel resources for product development and marketing than managers of slower growing firms. Hansen’s (1991) examination of the characteristics of the “pre-organization” external networks of 44 new business owners/managers produced similar findings. He found that networking activities during the pre-organization stage of an entrepreneurial venture explained a statistically significant amount of variance in initial new venture growth rates. Similarly, the results of Ostgaard and Birley’s (1996) study of 159 owner managed companies in England suggest that new venture growth is associated with certain networking activities, including the frequent use of professional advisors such as bankers, consultants, and accountants.
Although much of the extant empirical research suggests that networking activities with external stakeholders are beneficial for entrepreneurs, a handful of studies have failed to provide an indication of the effectiveness of such activities. In a study of start-up businesses in Indiana, for example, Birley (1985) discovered that an entrepreneur’s “pre-organization” social network served as the primary source of help in obtaining the resources needed to launch a new venture. However, she was unable to detect any differences in the networking activities of “growth” and “no growth” ventures. Similarly, the results of Carsrud, Gaglio, and Olm’s (1987) survey of 197 woman entrepreneurs suggested that personal networks played a minimal role in new business development. In fact, they discovered that one type of networking, mentoring, actually had a negative impact on the performance of the small, service oriented businesses surveyed.
In summary, the empirical research indicates that entrepreneurs engage in a variety of networking relationships with external stakeholders. Moreover, three specific personal networking characteristics have been identified as being especially important: network activity, network intensity, and network propensity. Network activity refers to the frequency of external contacts made by the entrepreneur. Network intensity refers to the time devoted to developing and maintaining personal network relationships. Lastly, networking propensity refers to the inclination to develop and maintain networks. The literature also suggests that the perceived level of environmental uncertainty may influence the importance of these networking characteristics (Daft et al., 1988; Kefalas and Schoderbek, 1973; Rhyne, 1985; Sawyerr, 1993). For example, perceived environmental uncertainty has shown a positive correlation with environmental scanning activities in non-entrepreneurial firms (Daft et al. 1988; Kefalas and Schoderbek, 1973; Rhyne, 1985; Sawyerr, 1993). That is, the higher the level of uncertainty perceived in the environment, the greater the frequency of scanning. Daft et al. (1988) found higher levels of perceived uncertainty associated with greater frequency of scanning. Kefalas and Schoderbek (1973) found that executives of firms in dynamic environments spent more time scanning than executives in more stable environments.
In the current study, we expect that high levels of perceived environmental uncertainty will be positively associated to personal networking, since such activities may serve as an effective means of obtaining information and other resources that are relevant to venture success. Further, since new high technology ventures typically have fewer internal resources to obtain and synthesize information (compared to more mature firms), we expect this relationship to be most pronounced in new ventures. Hence:
Hypothesis 1: Compared to owners/managers of mature firms, the higher the level of perceived uncertainty, the greater an entrepreneurial manager’s propensity to network will be.
Hypothesis 2: Compared to owners/managers of mature firms, the higher level of perceived uncertainty, the greater an entrepreneurial manager’s network activity will be.
Hypothesis 3: Compared to owners/managers of mature firms, the higher the level of perceived uncertainty, the greater an entrepreneurial manager’s network intensity will be.
Personal networking exchanges have also been characterized by the extent of a relationship’s formality (Szarka, 1990; Borch and Huse, 1993). Informal networks are relationships or exchanges in which all the entrepreneur’s contacts are direct and face-to-face. Members of this type of network include friends, family, and close business associates, among others. On the other hand, formal networks typically involve firm-to-firm or professional relationships. The entrepreneur develops these relationships by means of boundary spanning activities with other owners and managers of enterprises, customers, vendors, and other constituents in the operating environment. These are the normal cross-organizational activities that are required for operation as an “open system” (Szarka, 1990).
Informal personal networks are regarded as particularly important tools for small and new businesses since they facilitate the coordination of information exchange in turbulent environments (Borch and Huse, 1993). Such networks provide information and channels for resolving conflict and are quite inexpensive to maintain. These “informal” networks are especially useful if they are connected with many personal relations of trust and affiliation between the network members (Perrow, 1991). Ostgaard and Birley (1996) argue that “if the entrepreneur can expand his or her social network or gain a more central position in a network, additional resources and opportunities might be uncovered and this could facilitate business expansion” (p. 38).
It not surprising, therefore, that the frequent informal personal networking activities of entrepreneurial managers is well documented in the literature. Smeltzer, Fann, and Nikolaisen (1988) found that owners/managers perceived information obtained from informal sources to be more valuable than information obtained from impersonal sources, and informal sources were found to have the greatest utility. Shafer (1991) argued that entrepreneurial businesses have a tendency to use informal and personal sources of information more frequently than larger organizations. Others have suggested that smaller companies use more informal methods to collect more immediate market information such as customer, supplier, and competitor information (Brush, 1992). In a study of Canadian firms versus Hong Kong firms, Chu (1996) found this effect to be more pronounced and prolonged among Asian entrepreneurs. In a separate study, Donckels and Lambrecht (1997) found younger firms to be more likely to use personal, informal sources of information; while older firms, on the other hand, were more likely to collect “remote” information through more formal channels (Mohan-Neil, 1995).
It appears that entrepreneurial managers perceive value in engaging in personal networking activities because they have a tendency to spend a considerable amount of time establishing and maintaining such networks (Birley, Cromie, and Myer, 1990). Dubini and Aldrich (1991), for example, argue that successful entrepreneurial managers are more likely than less successful managers to consciously spend time and energy developing and nurturing their personal and extended networks. Similarly, Starr and MacMillan (1990) propose that independent venture managers, during the resource acquisition phase, will spend more time than administrative managers on building, nurturing, and maintaining networks.
Although the anecdotal evidence suggests otherwise, the explicit performance benefits of frequent personal networking activities have not received widespread empirical support. Aldrich, Rosen, and Woodward (1987), for example, reported a positive relationship between new venture survival and the average number of times per week entrepreneurs had contacted members of their personal contact network. Mugler (1988) discovered that “surviving” entrepreneurs were more active in social relations than their unsuccessful counterparts.
On the other hand, Johannisson (1996) was unable to identify any direct relationships between performance and personal networking activities. The results of his panel study of 361 prospective and existing young Swedish entrepreneurs indicated that, while personal networking enhanced optimism, there was little direct impact on perceived performance. Similarly, Ostgaard and Birley’s (1996) multiple regression analysis failed to uncover statistically significant associations between venture growth and the use of personal networking relationships among their sample of new English businesses.
Entrepreneurs are inevitably embedded in a complex set of social networks that either facilitate or hinder their ability to obtain the resources and available economic opportunities for their respective ventures. As Butler and Hansen (1991) argue, however, the role of the personal network contacts changes with the development of the organization, whereas “social networks are very important in initializing the entrepreneurial process . . . different types of networks have to be developed in a more proactive manner as the functional and strategic needs of the organization develop.” In this case, the social network includes all those stakeholders with whom the entrepreneur relates to primarily on a social or personal level (Szarka, 1990), as distinct from the professional contacts that include all those stakeholders with whom the relationship is primarily business-oriented. Similarly, Birley and Cromie (1988) offered a model of network development that illustrated how networks evolve from primarily consisting of informal personal contacts during a venture’s start-up phase to one predominated by professional contacts during a firm’s growth phase. However, empirical research on such an evolution has been limited (Butler and Hansen, 1991; Johannisson, 1990).
To summarize, obtaining resources from informal personal contacts is generally considered an expedient means of obtaining the resources necessary for successful entrepreneurship. However, these prescriptions are not fully supported by empirical research. The literature also suggests that informal personal networking activities are more important for new ventures, as opposed to more mature businesses. Again, however, previous empirical research has not identified this distinction. Hence:
Hypothesis 4: Compared to owners/managers of mature firms, the greater the level of perceived uncertainty, the greater an entrepreneurial manager’s frequency of informal personal contacts will be.
Sample
The questionnaires were distributed to the owners, presidents, or CEOs of 357 manufacturing firms headquartered in a major metropolitan area of a large southwestern state during the summer of 1998. These firms represent all firms competing in at least one of three industries classified as “high technology” by the National Science Foundation (Littler and Sweeting, 1990). The four industries included three-digit SIC codes: 357 computing, 366 telecommunications, and 367 semi-conductors and electronic components.
171 of the 357 surveys distributed were completed and returned, representing a response rate of roughly 48 percent. The average respondent was a college educated, 50 year old male. The average firm in the sample was 17 years old and reported sales of less than $5 million. Thirty-four percent were less than 10 years old, 39 percent had been in business for 10 to 20 years, and the remaining 27 percent of the sampled firms were over 20 years old. In terms of employment size, the average firm had 31 employees. However, nearly two-thirds of the sampled firms employed fewer than 20 employees.
Measures
The perceived strategic uncertainty (PSU) construct was measured using the following variables: the rate of change in the environment, the degree of environment complexity, and the degree of sector importance to the accomplishment of organizational goals (strategic importance) (Daft et al., 1988; Duncan, 1972). Each variable was measured using a seven-point horizontal numerical rating scale anchored by extremely low and extremely high. The scores on these variables were used to compute the score for the degree of perceived uncertainty for seven environmental sectors: competitive, customer, economic, political, resource availability, societal, and technological. The actual formula, an adaptation of Daft et al.’s (1988) work, is as follows:
PSUi = SIi(RiXi)
where
I = sector being scored
PSUi = perceived strategic uncertainty of
sector
SIi = strategic
importance ascribed to sector
Ri = rate of change
ascribed to sector
Xi = degree of
complexity ascribed to sector
Four personal network characteristics were used in this study: network propensity, network activity, network intensity, and network informality. Network propensity refers to the entrepreneur’s inclination to network. Network activity refers to the number of persons with whom the entrepreneur interacts and the frequency of interaction. Network intensity refers to the degree of interaction between the entrepreneur and close network members. Network informality refers to the frequency of informal interactions with network members. The measures for this construct were adapted primarily from the work of Aldrich et al. (1986, 1987) and Ostgaard and Birley (1994, 1996), and are operationalized for the current study as follows:
Network propensity—measured by the number of the manager’s memberships in trade, professional, and social organizations.
Network activity—measured by the frequency of contact with external network members (where “1” = infrequently and “7” = frequently) and by the number of persons with whom the manager discussed running their business in the six months prior to the survey.
Network intensity—measured by the number of hours per week the owner/manager spent discussing business with network members.
Network informality—measured by the frequency of informal contact with network members (where “1” = infrequently and “7” = frequently).
We defined new ventures as firms that were founded within the past eight years. Eight years was chosen as the maximum age of the start-ups since research generally indicates that new ventures often take that long to break even and that they take up to twelve years to reach the same performance levels as mature businesses (Biggadike, 1976; Weiss, 1981). Employment data was also collected to capture potential size effects.
Data Analyses
Initially, we entered all of the independent variables into a correlation matrix in order to assess the possibility of severe multicollinearity (see Table 1). Next, we used multiple regression analysis in a two step process. We regressed all of the independent variables on the scores of the seven sectors of perceived strategic uncertainty (PSU) and the average PSU. We then created cross-product terms and entered them into the main effects regression model. The cross-product terms reflected the interaction between the venture’s age (“1” = < 8 years and “0” = > 8 years) and the seven networking characteristics. This interaction term allowed us to examine explicitly the relationship between PSU and the various networking characteristics among new ventures, as opposed to the older firms in our sample. Two procedures for entering the interaction terms were followed. The first procedure was to include all seven interaction terms as a block, recognizing the presence of severe multicollinearity. The second procedure involved entering each interaction term separately in a stepwise fashion. Partial F-tests for increments in R2 for the cross-product terms were used to determine each model’s overall significance in both procedures. The two procedures produced nearly identical results so the findings from the later are presented.
The results of the multiple regression analysis are presented in Table 2. Hypothesis 1 predicted that higher levels of perceived strategic uncertainty would be positively associated with a greater propensity to network among new ventures. The coefficients reflecting the interaction between age and membership in both social organizations and professional organizations were positive and significantly related to economic PSU. The coefficient representing the interaction between venture age and social organization membership was also positive and significantly related to resource availability PSU. Therefore, Hypothesis 1 was partially supported.
Hypothesis 2 was not supported. Although the frequency of external networking activities was positively associated with average PSU and several individual sector PSUs (competitive PSU, customer PSU, economic PSU, and technical PSU), only one interaction term was significant, and it was negative (competitive PSU). This finding is interesting since it suggests that more mature firms use external contacts to address issues of uncertainty more frequently than new firms.
Hypothesis 3 predicted that a higher PSU would be associated with greater network intensity among owners/managers of new ventures. Several significant and positive interaction terms provide support for this prediction. The coefficients reflecting the interaction between age and the number of hours spent on networking were positive and significantly related to average PSU, customer PSU, and resource availability PSU. The coefficients representing the interaction between age and the number of hours spent on networking were positive and significantly related to average PSU, customer PSU, and resource availability PSU. These findings support Hypothesis 3.
Lastly, Hypothesis 4 was partially supported. The coefficient representing the interaction between venture age and the frequency of informal personal contacts was positive and significantly related to resource availability PSU. No other interaction terms were significant. Interestingly, the frequency of informal personal contacts was positive and significantly associated with average PSU and several sector PSUs in the main effects model, suggesting that owners/managers of more mature firms may have a more fully developed appreciation for these types of exchanges.
Overall, the results of this study paint an interesting picture of the interplay between personal networking and perceived strategic uncertainty. Perhaps the most intriguing finding is the strength of the moderating role which a venture’s age plays on this interplay. It appears that the personal networking characteristics of new firm owners/managers differ markedly from the personal networks of owners/managers of more mature firms. For example, the regression results suggest that frequent external contacts and frequent informal contacts are positively related to several measures of perceived strategic uncertainty (PSU), including average PSU among the entire sample of firms. However, this is not the case when only the responses of the “new venture” owners/managers are examined via the moderated regression technique.
The regression results also shed light on how personal networking is related to levels of uncertainty within specific environmental sectors. For example, network activity, network propensity, and network informality all seem to be used by owners/managers of new ventures to address uncertainty issues concerning resource availability (resource availability PSU). On the other hand, a new venture owner/manager’s network activity and network intensity seem to be most appropriate for addressing high levels of average PSU and uncertainty pertaining to competition (competitive PSU).
Personal networks can play a vital role in collecting and synthesizing information. Most economic decisions are quite complex and often need information from more than a single source; consequently, it is often necessary to pool information from a variety of sources. Thus, an entrepreneur seeking to expand their business needs to know about such things like the availability of human resources, financing, and the potential retaliation from competitors. While the entrepreneur could research these issues on his/her own, it is often cheaper and more expedient to get the information and advice from other people. “Who you know” is often more important than “what you know,” because the people you know can often compensate for what you do not know.
Effective networking consumes a considerable amount of time and energy, especially for entrepreneurs and managers of new ventures. If the networking fails to improve firm performance, such activities could prove detrimental to the venture and quite frustrating to the entrepreneur. The results of this study should encourage managers of small, new ventures to invest time in building and maintaining network relationships. This may be especially true when the level of uncertainty about customers and resource availability are high.
This research was a “coarse-grained,” cross-sectional study of one economic sector and thus will have limitations in its application to other, more stable industries. Although we believe the merits of single industry studies outweigh the drawbacks, future research should also continue examining personal networking activities across a variety of industry settings. Longitudinal research designs, using finer-grained measurements, should be incorporated into future studies. The results of the current study suggest that the relationship between networking and PSU changes as new ventures evolve into established enterprises. Lastly, prospective studies should include measures of firm performance to assess directly the relationships between personal networking and a new venture’s success.
Although it is becoming clear that all firms benefit from building and maintaining large external personal networks, new ventures have a tendency to reap greater rewards from their investments in networking activities than their larger, more established counterparts. The benefits of frequent contact with external personal network members is more pronounced for newer, smaller firms, especially those in the rapidly advancing high-tech sector. Managers of new ventures should consider networking activities an important, worthwhile investment.
CONTACT: Olukemi O. Sawyerr, Radford University, Box 6954, Radford, VA 24142; (T) 540-831-5816; (F) 540-831-6261; osawyerr@runet.edu
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