Insight of the Week: The Power of the Network

There’s a scene in HBO’s “Silicon Valley” that parodies our economy’s love affair with social networks. At pitch after pitch, hopeful young tech entrepreneurs proclaim their company to be “so, lo, mo” or “mo, lo, so,” eventually tripping over their words entirely in a jumble of acronyms.

What they are trying to say is the shorthand for “social, mobile, local,” that confluence of important factors which venture capitalists and market watchers have dubbed the perfect combination for business growth in our digital age.
But is the idea that every product need to have a social networking component, be available on a mobile platform and have local relevance just hype? Or is there reality underneath?

A 2014 study from the University of Pennsylvania’s Wharton School of Business sheds some light on one aspect of the phrase. This research indicates that companies with a social component— that is, a network that ties together customers— actually do outperform companies with more traditional business models, like manufacturing or consulting.

This week’s insight: Embrace the power of the network, even if you have no desire to create a social platform.
Research study: “What Airbnb, Uber, and Alibaba Have in Common” by Barry Libert, Yoram Wind and Megan Beck Fenley, Harvard Business Review, November 2014.
What they did: The research team looked at 40 years of S&P 500 records to track which companies performed best in four distinct categories which the researchers assigned companies into based on details like where they generated the most revenue and where they invested most heavily.
The four categories were, roughly, companies that make or sell tangible products; companies that provide a service, such as consulting; companies that create new discoveries like medicine or software; and companies that connect people together, like online e-commerce or social networking sites.
After categorizing the companies, the research team examined performance in each of the four categories to determine which business type did best over the 40 year window.
What they found: Companies that connected people together (what they called “Network Orchestrators”) scored higher than the other categories in several areas, including a faster growth rate. They also found that these companies reduced their own costs because users often provided much of their own value (for example, using their own car as an Uber driver.)
So what does this mean for companies with no existing network within their customer base?
Never fear, the researchers said, any company can start to tap into networking principles, even if they have no intention of ever becoming a social network.
Among the first steps is taking a hard look at the networks your company has already created and determining which might be a good place to invest resources. Perhaps you have strong connections among employees, or customers, or outside vendors? Thinking about ways to activate interest among these groups could go a long way towards energizing your inner network.

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