Do companies benefit from social networking?

According to two U.S. researchers, fewer degrees of separation make companies more innovative. They've studied the innovative performance of about a thousand companies in various industries over a six-year period. And they've concluded that "companies that network and form strategic alliances are more creative and develop more patented inventions than those that don't." Even if the conclusion sounds right, basing it on patent numbers might be questionable. Read more and tell me what you think.

According to two U.S. researchers, fewer degrees of separation make companies more innovative. They've studied the innovative performance of about a thousand companies in various industries over a six-year period. And they've concluded that "companies that network and form strategic alliances are more creative and develop more patented inventions than those that don't." Even if the conclusion sounds right, basing it on patent numbers might be questionable. Read more and tell me what you think.

Computer companies' social networks

The study showed that "there is substantial variation across industries in the number of firms that participate in alliances. This is largely due to differences in industry size. [...] But the study looked at many other variables, such as the average number of alliances per firm within each industry or the average number of firms in each network which includes firms from the industry and their partners, some of which are not in the target industry." But there is always a 'main' component in an industry, which is the most connected to other companies. And sometimes, the leader suddenly changes, as the figure on the left shows for the computer industry between 1996 and 1997. "If we had focused only on the single largest component, we would have both understated the amount of alliance activity in the industries, and overstated the amount of change in alliance activity over time." (Credit: Melissa Schilling and Corey Phelps)

Corey Phelps, an assistant professor of management and organization at the UW Business School, and Melissa Schilling, an associate professor at NYU, "analyzed the innovative performance of 1,106 companies in 11 different industries over a six-year period. They examined the pattern or structure of strategic alliance relationships among companies in each industry. They found that how firms are connected to one another influences the number of patented inventions they obtained. Those that secured more patents were classified by Phelps and Schilling as being more creative."

According to the researchers, "companies reap greater benefits when they are part of a network that exhibits a high degree of clustering and only a few degrees of separation, both of which are characteristic of a small world network."

Of course, this makes sense. But do universities need to use business PR lingo? For example, take a look at this quote from Phelps. "Our results are particularly important because in today's knowledge economy, innovation is king. Without the ability to continually create and commercialize new products and services, companies often wither and die. This study helps us understand how large-scale alliance networks influence innovation. It improves our understanding of why some industries and regions are more innovative than others." What do you think?

For more real information, this research work has been published in Management Science under the name "Interfirm Collaboration Networks: The Impact of Large-Scale Network Structure on Firm Innovation" (Volume 53, Number 7, Pages 1113-1126). Here is the abstract. "The structure of alliance networks influences their potential for knowledge creation. Dense local clustering provides information transmission capacity in the network by fostering communication and cooperation. Nonredundant connections contract the distance between firms and give the network greater reach by tapping a wider range of knowledge resources. We propose that firms embedded in alliance networks that exhibit both high clustering and high reach (short average path lengths to a wide range of firms) will have greater innovative output than firms in networks that do not exhibit these characteristics. We find support for this proposition in a longitudinal study of the patent performance of 1,106 firms in 11 industry-level alliance networks."

Finally, here is a link to the full study (PDF format, 14 pages, 216 KB) from which the above illustration and its caption have been extracted.

Sources: University of Washington News, August 16, 2007; and various websites

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