How strong is your strategic network?

THE value of networking to businesses has been much touted in recent years, but why should a small business owner develop a strategic network, and what is a strategic network, anyway?

Two dominant organisational designs have existed in business over the past 150 years. The first is the vertically integrated firm such as the Ford Motor Company of the 1920s, which controlled almost all parts of its supply chain – from rubber plantations to the final assembly plants. The second is the outsourced organisation that emerged in the 1970s in response to a need to reduce costs. Unfortunately this drive for outsourcing led to a hollowing out of the corporation, with much of the value lost to sub-contractors. By the 1990s the need to maintain competitiveness, speed up the pace of innovation, and retain control over valuable intellectual property led to the strategically networked organisation as a third way.

A strategic network is where a firm can contract out its activities to one or more key suppliers, while keeping control over those activities or resources that enable it to maintain its competitive advantage. Interest in strategic networks has grown significantly in recent years as firms seek ways to outsource much of their production as a means of lowering costs, while simultaneously retaining strategic control over this outsourced work. However, for small firms, the value of a strategic network is often less well understood.

The strategic network of a small firm typically encompasses three interrelated networks. The first is the production network that comprises the customers and suppliers. The second is the resource network that includes third-party complementary partners such as accountants, banks or business support agencies. The third is the social network that comprises personal and professional contacts with whom the owner-manager of the business interacts.

Strategic networks enable small firms to build a competitive advantage by creating new business opportunities, building up their existing resources, or defending their market position. They do this by leveraging their networks to gain entry into new markets, identify new ways to satisfy customers, access new technologies, financial resources, knowledge and skills.

Most small firms engage within these strategic networks in a largely informal way, and how active and successful they are is often determined by the characteristics of their owners. While some owner-managers are highly networked and actively seek to forge business relationships, others are less inclined to do so.

For many small business owners, the decision to actively engage in a strategic network is viewed as a risk. There can be a fear that their ideas or even their staff will be poached. They can also prefer to be independent and not want to operate in alliance with other firms, whether on a formal or informal level. These attitudes seem to be fairly common among many Australian small business owners, who feel that such networking is a risk. Despite these views there are many benefits from strategic networking, although it can be a complex process that requires a well-considered engagement strategy.

Our research highlights the importance of strategic networking to small firm performance, particularly in the field of innovation and commercialisation. Further, it is not the size of the network that is important, but its intensity and richness. In other words, it is better to forge close, trusting relationships with a few key partners than to have a wide range of more superficial contacts. Establishing and maintaining a network of strategic business partners is time consuming so it should be based on quality, not quantity.

As you look at your own business, ask the following questions.

• Who are your leading customers and how well do you partner with them to generate ideas for new products or services?

• Who are your key suppliers and are you partnering with them to find ways to enhance the cost effectiveness of your supply chain?

• How good is your network of complementary resource providers who you can call upon when you have specific problems that need expertise or assets your own business lacks?

• How active are you in systematically developing a strong social network of personal and professional contacts you can turn to for advice, ideas and support when required?