Informal Networks—The Company behind the Chart

Many executives invest considerable resources in restructuring their companies, drawing and redrawing organizational charts only to be disappointed by the results. That's because much of the real work of companies happens despite the formal organization. Often what needs attention is the informal organization, the networks of relationships that employees form across functions and divisions to accomplish tasks fast. These informal networks can cut through formal reporting procedures to jump start stalled initiatives and meet extraordinary deadlines. But informal networks can just as easily sabotage companies' best laid plans by blocking communication and fomenting opposition to change unless managers know how to identify and direct them. Learning how to map these social links can help managers harness the real power in their companies and revamp their formal organizations to let the informal ones thrive.

If the formal organization is the skeleton of a company, the informal is the central nervous system driving the collective thought processes, actions, and reactions of its business units. Designed to facilitate standard modes of production, the formal organization is set up to handle easily anticipated problems. But when unexpected problems arise, the informal organization kicks in. Its complex webs of social ties form every time colleagues communicate and solidify over time into surprisingly stable networks. Highly adaptive, informal networks move diagonally and elliptically, skipping entire functions to get work done.

Managers often pride themselves on understanding how these networks operate. They will readily tell you who confers on technical matters and who discusses office politics over lunch. What's startling is how often they are wrong. Although they may be able to diagram accurately the social links of the five or six people closest to them, their assumptions about employees outside their immediate circle are usually off the mark. Even the most psychologically shrewd managers lack critical information about how employees spend their days and how they feel about their peers. Managers simply can't be everywhere at once, nor can they read people's minds. So they're left to draw conclusions based on superficial observations, without the tools to test their perceptions

Armed with faulty information, managers often rely on traditional techniques to control these networks. Some managers hope that the authority inherent in their titles will override the power of informal links. Fearful of any groups they can't command, they create rigid rules that will hamper the work of the informal networks. Other managers try to recruit "moles" to provide intelligence. More enlightened managers run focus groups and host retreats to "get in touch" with their employees. But such approaches won't rein in these freewheeling networks, nor will they give managers an accurate picture of what they look like.

Using network analysis, however, managers can translate a myriad of relationship ties into maps that show how the informal organization gets work done. Managers can get a good overall picture by diagramming three types of relationship networks:

• The advice network shows the prominent players in an organization on whom others depend to solve problems and provide technical information.

• The trust network tells which employees share delicate political information and back one another in a crisis.

• The communication network reveals the employees who talk about work-related matters on a regular basis.

Maps of these relationships can help managers understand the networks that once eluded them and leverage these networks to solve organizational problems. Case studies using fictional names, based on companies with which we have worked, show how managers can bring out the strengths in their networks, restructure their formal organizations to complement the informal, and "rewire" faulty networks to work with company goals.

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Designing the Brand Architecture

Once you have decided upon the relationship that you want to convey between your master and subbrands, say Aaker and Joachimsthaler, you are then ready to design your brand architecture. You do so by completing five steps:
Step #1: Identify the Brands in Your Portfolio
Your brand portfolio, say our gurus, is all of the brands and subbrands you have in your product/service offerings, including those that you have cobranded with other firms. While the process of identifying your brands may seem simple, Aaker and Joachimsthaler caution that this may be a daunting task since you may have brands that are obscure or dormant. Nevertheless,
your task here is to compile a complete list and to decide if you need to add some new brands to strengthen your portfolio.
Step #2: Specify the Role of Each of Your Brands
Aaker and Joachimsthaler tell us that each brand in a portfolio should be assigned one or more of the following roles:
Strategic Role—the brand is an important source of future profits. Linchpin Role—the brand provides a key basis for customer loyalty. For example, Hilton Rewards is a linchpin brand for Hilton Hotels. Silver Bullet—the brand positively influences the image of another brand. For example, IBM’s Thinkpad brand boosted public perceptions of IBM. Cash Cow—the brand has a significant customer base and does not require the level of investment of other brands, therefore it can be used to generate funds that can be invested in strategic, linchpin, and silver-bullet brands.
Step #3: Specify the Product-Market Context of Each of Your Brands
Aaker and Joachimsthaler note that a set of brands taken together comprise a product/service offering in a particular product-market context. For example, the Cadillac Seville and Northstar system brands work together in the following way:
The Cadillac Seville with the Northstar system . . . is a particular offering for which Cadillac is the master brand with the primary driver role; Seville plays a subbrand role, and Northstar a branded component role.1 In this step, you identify endorser and subbrands (see our previous discussion), benefit brands (branded features, components, or services that augment the brand offering such as Ziploc’s ColorLoc Zipper), and any cobrands in your offering. (Cobrands are arrangement you have to combine your brand with one or more brands from a different organization to create a unique offering. For example, Pillsbury cobranded with Nestlé to create
Pillsbury’s Brownies with Nestlé’s chocolate.) Aaker and Joachimsthaler note that cobranding can be particularly powerful. For example, they cite a research study in which 20 percent of prospects said they would buy a fictional entertainment device if it carried the Kodak name, and 20 percent said they would buy it if it carried the Sony name. In contrast, fully 80 percent said they would buy the device if it carried both the Kodak and Sony name, that is, was a cobrand.
Step #4: Develop Your Brand Portfolio Structure
The brand portfolio structure provides a way of grouping brands to clarify their logical relationships. For example, if you are a hotel chain, such as Marriott, you might group your various brands by segment (business vs. leisure travelers), product (overnight vs. extended stay), quality (luxury vs. economy), and so on. Alternatively, say Aaker and Joachimsthaler, you
might find it helpful to clarify the relationships among your brands by drawing a “brand family tree” or hierarchical chart.
Step #5: Design Your Portfolio Graphics
Finally, say Aaker and Joachimsthaler, you need to take a look at the visual representations that you use across your portfolio of brands, the logos, packaging, symbols, product design, layout of print advertisements, taglines—everything that has to do with the look and feel of the presentation of each of your brands. The key question here is, What kinds of signals are these visual representations sending about the relationships between the brands in your brand portfolio and are they the right signals? An illuminating exercise, say our gurus, is to take all of the graphic representations of your brands (logos and such) and put them on a large wall. Look at them together and ask yourself if they convey a consistent message and support your brand portfolio’s structure.

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Fred Wiersema’s New Realities

In his book The New Market Leaders, Fred Wiersema offers six new realities that he says are causing a supply glut and customer shortage in most markets.

• Competitors proliferate—Like George Day,Wiersema notes that most companies are facing increased competition. He adds that this competition often comes from unexpected sources. For example, Boeing is now loaning money to customers to buy its planes, thus making Boeing a competitor of banks. In turn, banks are selling stock and
  stockbrokers are becoming financial advisors.
• All secrets are open secrets—Don’t expect your best practices to remain proprietary very long.Your competitors are becoming more adept at learning your secrets and adapting them for their own purposes. Everybody is imitating everybody else shamelessly.
• Innovation is universal—Product life cycles keep getting shorter and innovation is now
  commonplace.Wiersema says it has gotten so frantic that customers are inundated with
  products (twenty-three thousand new packaged goods last year alone) and suppliers are
  dizzy from pursuit of the next best thing.
• Information overwhelms and depreciates—We are all swamped with information, writes Wiersema.“Junk mail fills mailboxes; magazines stuffed with ads run as long as five hundred pages. . . . Advertisers stamp their logos on every conceivable surface, from
  cruising blimps and ski-lift towers to e-mail screens and bus roofs. Some television markets offer two hundred cable channels.An Internet surfer discovers a Milky Way or random data,much of it conflicting and some of it stupefying.” Our problem today isn’t how
  to generate information, it is how to digest it and make sense of it.
• Easy growth makes hard times—Carmakers produce 30 to 40 percent more cars than can be sold.Airlines keep adding seats and packing more passengers on planes.The telecommunications industry invests frantically in network infrastructure to such an extent that bandwidth vastly exceeds demand. In industry after industry, technology makes it possible to make more things faster. In business today, writes Wiersema, growth is sacred. It also leads to overcapacity, a shortage of customers, fewer sales, lower prices, and falling margins.
• Customers have less time than ever—“Of all the realities,” writes Wiersema,“this may
  be the most important.” After working, sleeping, eating, and doing chores people just have
  very little time left for such things as listening to your ad or even shopping for your product. Your biggest competitor, says Wiersema, might not be your rival but the demands on your customers’ time. Pressed for time and overstimulated by too many choices, people cope by tuning out.Your marketing message has to catch their attention in a nanosecond because that’s all the time they will give you.They are not paying attention.They are scanning.

Source: Fred Wiersema, The New Market Leaders:Who’s Winning and How in the Battle for Customers (New York: Free Press, 2001), pp. 48–58.

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The Social Structure of Competition : 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 keep up with only 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, "Who are the key players needed to strengthen the department's position?" Add to each of these the more common question, "Whom do I know who is most likely to know the kind of person I need?"

Timing is a significant feature of the information received by the network. Beyond making sure that you are informed, personal contacts can make you one of the people who is informed early. It is one thing to find out that the stock market is crashing today. It is another to discover that the price of your stocks will plummet tomorrow. It is one thing to learn the names of the two people referred to the board for the new vice-presidency. It is another to discover that the job will be created and that your credentials could make you a serious candidate for the position. Personal contacts get significant information to you before the average person receives it. That early warning is an opportunity to act on the information yourself or to invest it back into the network by passing it on to a friend who could benefit from it.

These benefits involve information flowing from contacts. There are also benefits in the opposite flow. The network that filters information coming to you also directs, concentrates, and legitimates information about you going to others.

In part, this network does no more than alleviate a logistics problem. You can be in only a limited number of places within a limited amount of time. Personal contacts get your name mentioned at the right time in the right place so that opportunities are presented to you. Their referrals are a positive force for future opportunities. They are the motor expanding the third category of people in your network, the players you don't know who are aware of you. Consider the remark so often heard in recruitment deliberations: "I don't know her personally, but several people whose opinion I trust have spoken well of her."

Beyond logistics, there is the issue of legitimacy. Even if you know about an opportunity and can present a solid case for why you should get it, you are a suspect source of information. The same information has more legitimacy when it comes from someone inside the decision-making process who can speak to your virtues. Candidates offered the university positions with the greatest opportunity, for example, are people who have a strong personal advocate in the decision-making process, a person in touch with the candidate to ensure that both favorable information and responses to any negative information get distributed during the decision.

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Human Capital and Social Capital

Probably the most important and most original development in the economics of education in the past 30 years has been the idea that the concept of physical capital as embodied in tools, machines, and other productive equipment can be extended to include human capital as well (see Schultz 1961; Becker 1964). Just as physical capital is created by changes in materials to form tools that facilitate production, human capital is created by changes in persons that bring about skills and capabilities that make them able to act in new ways.

Social capital, however, comes about through changes in the relations among persons that facilitate action. If physical capital is wholly tangible, being embodied in observable material form, and human capital is less tangible, being embodied in the skills and knowledge acquired by an individual, social capital is less tangible yet, for it exists in the relations among persons. Just as physical capital and human capital facilitate productive activity, social capital does as well. For example, a group within which there is extensive trustworthiness and extensive trust is able to accomplish much more than a comparable group without that trustworthiness and trust.

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Public Goods Aspects of Social Capital

Physical capital is ordinarily a private good, and property rights make it possible for the person who invests in physical capital to capture the benefits it produces. Thus, the incentive to invest in physical capital is not depressed; there is not a suboptimal investment in physical capital because those who invest in it are able to capture the benefits of their investments. For human capital also—at least human capital of the sort that is produced in schools—the person who invests the time and resources in building up this capital reaps its benefits in the form of a higher paying job, more satisfying or higher status work, or even the pleasure of greater understanding of the surrounding world—in short, all the benefits that schooling brings to a person.

But most forms of social capital are not like this. For example, the kinds of social structures that make possible social norms and the sanctions that enforce them do not benefit primarily the person or persons whose efforts would be necessary to bring them about but benefit all those who are part of such a structure. For example, in some schools where there exists a dense set of associations among some parents, these are the result of a small number of persons, ordinarily mothers who do not hold full-time jobs outside the home. Yet these mothers themselves experience only a subset of the benefits of this social capital surrounding the school. If one of them decides to abandon these activities—for example, to take a full-time job—this may be an entirely reasonable action from a personal point of view and even from the point of view of that household with its children. The benefits of the new activity may far outweigh the losses that arise from the decline in associations with other parents whose children are in the school. But the withdrawal of these activities constitutes a loss to all those other parents whose associations and contacts were dependent on them.

Similarly, the decision to move from a community so that the father, for example, can take a better job may be entirely correct from the point of view of that family. But, because social capital consists of relations among persons, other persons may experience extensive losses by the severance of those relations, a severance over which they had no control. A part of those losses is the weakening of norms and sanctions that aid the school in its task. For each family, the total cost it experiences as a consequence of the decisions it and other families make may outweigh the benefits of those few decisions it has control over. Yet the beneficial consequences to the family of those decisions made by the family may far outweigh the minor losses it experiences from them alone.

It is not merely voluntary associations, such as a PTA, in which underinvestment of this sort occurs. When an individual asks a favor from another, thus incurring an obligation, he does so because it brings him a needed benefit; he does not consider that it does the other a benefit as well by adding to a drawing fund of social capital available in a time of need. If the first individual can satisfy his need through self-sufficiency, or through aid from some official source without incurring an obligation, he will do so—and thus fail to add to the social capital outstanding in the community.

Similar statements can be made with respect to trustworthiness as social capital. An actor choosing to keep trust or not (or choosing whether to devote resources to an attempt to keep trust) is doing so on the basis of costs and benefits he himself will experience. That his trustworthiness will facilitate others' actions or that his lack of trustworthiness will inhibit others' actions does not enter into his decision. A similar but more qualified statement can be made for information as a form of social capital. An individual who serves as a source of information for another because he is well informed ordinarily acquires that information for his own benefit, not for the others who make use of him. (This is not always true. As Katz and Lazarsfeld [1955] show, "opinion leaders" in an area acquire information in part to maintain their positions as opinion leaders.)

For norms also, the statement must be qualified. Norms are intentionally established, indeed as means of reducing externalities, and their benefits are ordinarily captured by those who are responsible for establishing them. But the capability of establishing and maintaining effective norms depends on properties of the social structure (such as closure) over which one actor does not have control yet are affected by one actor's action. These are properties that affect the structure's capacity to sustain effective norms yet ordinarily do not enter into an individual's decision that affects them.

Some forms of social capital have the property that their benefits can be captured by those who invest in them; consequently, rational actors will not underinvest in this type of social capital. Organizations that produce a private good constitute the outstanding example. The result is that there will be in society an imbalance in the relative investment in organizations that produce private goods for a market and those associations and relationships in which the benefits are not captured—an imbalance in the sense that if the positive externalities created by the latter form of social capital could be internalized, it would come to exist in greater quantity.

The public goods quality of most social capital means that it is in a fundamentally different position with respect to purposive action than are most other forms of capital. It is an important resource for individuals and may affect greatly their ability to act and their perceived quality of life. They have the capability of bringing it into being. Yet, because the benefits of actions that bring social capital into being are largely experienced by persons other than the actor, it is often not in his interest to bring it into being. The result is that most forms of social capital are created or destroyed as by-products of other activities. This social capital arises or disappears without anyone's willing it into or out of being and is thus even less recognized and taken account of in social action than its already intangible character would warrant.

There are important implications of this public goods aspect of social capital that play a part in the development of children and youth. Because the social structural conditions that overcome the problems of supplying these public goods—that is, strong families and strong communities—are much less often present now than in the past, and promise to be even less present in the future, we can expect that, ceteris paribus, we confront a declining quantity of human capital embodied in each successive generation. The obvious solution appears to be to attempt to find ways of overcoming the problem of supply of these public goods, that is, social capital employed for the benefit of children and youth. This very likely means the substitution of some kind of formal organization for the voluntary and spontaneous social organization that has in the past been the major source of social capital available to the young.

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