THE IMPORTANCE OF SOCIAL CAPITAL FOR SMALL BUSINESS

OWNERS: AN ENTREPRENEURIAL MARKETING APPROACH FOR

DECISION MAKING

Cristiano Tossulino MachadoMARKETING EMPREENDEDOR

cristiano@marketingempreendedor.com.br

Business Consultant and Professor

Ponta Grossa – Brazil

Paper presented at the 26th

Global Symposium on Marketingand Entrepreneurship.Boston – August 2013

ABSTRACT

The purpose of this paper is an investigation on how small business owners rely on their

“social capital” to seek information to decision making on marketing issues. The

methodology used was bibliographical research and in-depth interview with two small IT

(Information Technology) companies. The study showed that social capital is critical to

build “market intelligence” and to decision making about marketing, especially in the

small business environment.

Key words: social capital, decision-making, entrepreneurial marketing, Small

Businesses.

INTRODUCTION

Small businesses have scarce resources, whether financial, personnel or marketing.

Companies’ needs to find trusted information about the markets that they work, about

pricing, consumer preferences and habits, logistics, how to promote products and services

and so on. It is known that small businesses have scarce resources and with this, they

cannot use marketing tools or marketing systems like big corporations do.

Analysis of previous studies showed that social capital may be an important decision

making tool for small business owners. Social capital is now viewed as crucial to

offsetting the liabilities that small and medium enterprises face, and they are increasingly

using it to overcome the problems of limited resources, experiences and credibility (Lu

and Beamish, 2001). According to Rodrigues and Child 2012, social capital may be

defined as social relationships that confer actual or potential benefits. It can therefore be

understood as a particular type of resource.

LITERATURE RIVIEW

Researches frequently find that entrepreneurial marketing is practiced by entrepreneurial

firms such as small firms and young firms (Kilenthong et. al., 2011). Networks,

relationships and alliances are critical to small firms as a marketing tool to seek

information about their business and as a tool for decision-making.

Entrepreneurial Marketing and Decision-Making in small business

As it is already known, small businesses have scarce resources, and they usually cannot

use traditional marketing tools. Competition is increasing worldwide and the

globalization increases the competition in local markets. With fierce competition and

increasingly demanding customers, firms have a limited ability to forecast and define

their market boundaries (Day and Montgomery, 1999). Traditional marketing may not be

adequate for small firms to compete in this new business environment.

Small firms are considered more entrepreneurial than large firms because of several

characteristics. First, small firms have restricted resources and capabilities. Compared to

large firms, small firms have less financial and human resource. As a result, they cannot

perform the same kind of marketing activities that large firms can. Second, small firms do

not have normal organizational structures or formal systems of communication. Their

marketing planning is intuitive, loose and unconstructed. Third, small firms have a simple

and ad hoc marketing decision-making process. Small firms can develop an irregular

change in their decision-making pattern during their business engagement. Fourth, small

firms have fewer dominating decision makers than large firms. Marketing decisions in

small firms can be linked directly to specific personal goals of owners/managers. Lastly,

small firms can quickly response to their customers because they have flatter organization

structure than large firms. They are closer to customer and can access customer

information better than large firms. These characteristics suggest that entrepreneurial

marketing behaviors should be more prevalent in small firms than in large firms.

Entrepreneurial marketing behavior is categorized into six dimensions including value

creation through relationships and alliances, two-way contacts with customer, growth

orientation, opportunity orientation, informal marketing, and market immersion

(Kilenthong et. al., 2011).

In entrepreneurial marketing organization, entrepreneurship and marketing permeates all

areas and levels of the organization, with the organization being focused on recognizing

and exploiting opportunities. Successful entrepreneurs tend to have a long-term

orientation to opportunity creation and exploitation that is focused on meeting all the

customer’s needs by employing creativity and innovation (Collingson and Shaw 2001)

Entrepreneurial Marketing in Small IT Companies

As is known, the phenomenon of globalization affects various business sectors. But

especially in the IT sector, the competition is really global. A company in Brazil could be

competing with a competitor in India and the opposite is also true.

Small technology firms approach marketing with a customer centric approach, focusing

on the development of long term customer relationships. Companies tend to rely on

WOM (Word of Mouth) recommendation for building trust and confidence in the

company and in the purchase decision. This requires very close participation between the

software company and the customer, which meant that co-creation of products, was often

a key feature of the development of new products and services. The software technology

industry sector is a particularly challenging sector for micro and small firms. Small firms

in this sector rely on providing superior levels of service together with innovative

practice to create quality bespoke software. Limitations for these companies include: lack

of financial resource and technical employee resource; a lack of a specialized and

experienced marketing and sales resource, particularly in micro-sized firms and;

difficulties in balancing R&D and high levels of service (Jones, 2011). These companies

rely on networks and relationships to generate knowledge from customers, suppliers,

employees and their partners.

Entrepreneurs should actively engage in information acquisition as an aid to effective

marketing strategy formulation. More importantly, proactive use of such information

allows entrepreneurs to predict oncoming trends and enact strategies, supporting the best

use of acquired information. Information utilization enables small firms to gain

competitive advantage and maintain a stronger position relative to the competition. The

information may unveil latent needs, which exist and are unmet but are not apparent to

competitors. Being the first to uncover such latent needs provides impetus to develop the

marketing capabilities accordingly. To enhance marketing capabilities, continued

investment in market research, pricing, product development, promotions, channels, and

market planning and market management capabilities is important. Findings further

suggest that market management (ability to segment and target market, to manage the

marketing programs, the ability to coordinate various departments and groups to respond

to market conditions), market research and promotion are the most important marketing

capabilities for small technology companies (Qureshi and Kratzer, 2011).

Social Capital

Social capital refers to the resources available in and through personal and business

networks. These resources include information, ideas, leads, business opportunities,

financial capital, power and influence, emotional support, even goodwill, trust and

cooperation. The “social” in social capital emphasizes that these resources are not

personal assets; the resources reside in networks of relationships (Baker, 2000).

According to Sander and Lowney 2006, social capital focuses on the social networks that

exist between us, literally who knows whom and the character of those networks, the

strength of the ties, and the extent to which those networks foster trust and reciprocity.

The core concept of social capital is that social networks matter, both for those in the

networks as well sometimes for bystanders as well. At the core of social capital is trust.

People engage in reciprocity, doing for others not with any immediate expectation of

repayment.

There is hard evidence that social capital boosts business performance. Individuals who

build and use social capital get better jobs, better pay, fast promotions, and are more

influential and effective, compared with peers who are unable or unwilling to tap the

power of social capital. Organizations with rich social capital enjoy accesses to venture

capital and financing, improved organizational learning, the power of word-of- mouth

marketing, the ability to create strategic alliances, and resources to defend against hostile

takeovers (Baker, 2000).

Social capital is essential for small business success. The accumulation of social capital

helps businesses grow through word-of-mouth. Social capital cultivates goodwill and

creates collaborative opportunities with competitors and within a supplier chain. Social

capital can facilitate cross-pollination of ideas between entrepreneurs and produces

positive personal influence on local market politics. In short, building social capital offers

opportunities to connect to others with varying degrees of intensity and allows for the

interchange of ideas and commerce that offer mutual benefits. Consciously developing

social capital also ensures that owners ask customers and suppliers for referral to

potential buyers. In the smallest of businesses, building social capital can have more

positive impact than advertising (Start-Up USA Cultivating Social Capital).

A striking development in recent research is the discussion of social capital in

companies’ relations, especially relations between firms and their suppliers. This stands

in sharp contrast to the traditional perspective of economics in which the enterprise is a

non-cooperative monolith that buys its input from suppliers and sells its output to

customers. According to this view, the production-related networks of an enterprise are

technical and economic, and exist only to fulfill the input and the output services. This

simplified view is today sometimes referred to as production relations of the “Fordist” of

manufacturing-industrial age, but is not a correct description. Social networks, even the

actors of production, are not san invention of the knowledge economy. There are

however arguments saying that they have become more important in the knowledge

economy (Westlund 2003).

In knowledge–based economy the perhaps most significant rent originates from the way

in which the easy exchange of knowledge, only partly understood, between and among

constantly changing configuration of firms within the community dramatically enhances

their innovative capabilities. Reducing your development to commercialization time is

often worth virtually whatever you have to pay and social capital contributes by cutting

the expenses and reducing time needed to benefit from knowledge residing elsewhere. As

innovative capabilities become increasingly important so does social capital (Maskell,

2000).

Social, non-formalized links, between a firm (and its co-workers) and firms with which it

has production relations, increase the flows of knowledge and information between the

firms. Feedback, from the firm to its suppliers and to the firm from its customers, is

increased and speeded up. These links of acquaintance and trust are of obvious

importance to R&D-projects, aimed at developing new products or production methods.

They are probably also essential in the small, invisible development processes that take

place in companies everyday, which constitute the base for new innovations. A firm’s

cost for, among other things, knowledge and information are influenced by social capital

through the degree of trust and the climate of cooperation prevailing both in individual

workplaces and between firms and actors in a region. By creating relationships with

customers in diverse ways (advertising, personal contact, servicing contracts, etc.), a firm

attempts to shut out competitor from the network it has established. It can build similar

networks with suppliers. An established firm with strong customer and supplier networks

can use these to shut out competitors, which perhaps have newer and more productive

physical and human capital, from the market (Westlund 2003).

The social capital of an organization is an intangible asset critical to innovation in

organizations of XXI century. The quality of relationships within and between the

organizations and the capacity to build social capital to promote the cooperation needed

to sustain innovation processes within the organization, becomes a distinctive

competence in the new competitive scenarios, and therefore should be sustained by an

organizational strategy clearly defined.

METHODOLOGY

A case study approach was chosen as it was considered the most effective method with

which to obtain rich and meaningful insights (Carson et al., 2005), and in-depth interview

to collect the data to be analyzed.

Two small IT companies were interviewed. Firms were chosen on the basis of 4

criterions: Firm size, small companies with under R$ 3.600,00 of gross sales per year,

firm age (over 3 years old), operating in the same industry sector (IT – Information

Technology) and based in the same geographic area (Center of Paraná State Brazil). The

owner-manager was chosen as the unit of analysis on the basis that in small firms the

owner-manager is a significant influence on the way that firm is operated and managed

(Carson et al., 1995).

FINDINGS

According to Thomas & Cross (2009), the analysis and management of internal and

external networks can create great value for many organizational processes, promoting

revenue growth, greater connectivity with customers and users, cost savings, increased

sales force effectiveness, greater integration in the process of re-structuring and fusions,

alignment and strategic execution, greater integration of the skills inter and intra-

departmental and organizational competencies for managing these projects, the transfer

of best practices, lessons learned and points of alerts, and identify barriers and

bottlenecks in the flow knowledge necessary to give greater flexibility to the decision

making and problem solving.

On both interviews, the owner-manager mentioned several times that “who they know”,

the networks that they have access is critical to do business in their sector, especially to

find new clients, make decisions on pricing, marketing issues and managerial decisions.

Below are listed some key findings on the interviews, with some transcribed answers:

- “The way I do business have changed a lot after I started to participate in the

ASSESPRO (Association of IT Companies) as a President for my region and the

National Conferences of my product suppliers.

- “Having access to the networks offered by the associations and by the national

network of representatives, has enable me exchange clients, acquire new clients,

make better managerial decisions inside my company. The experiences that my

“peers” live everyday in another regions are a really good way to learn how to do

business in our sector”.

- “I also got better results on my management and better profitability with

exchanging ideas about our business with my peers and other entrepreneurs in the

IT sector”.

- “I do not use to buy “market research” because is too expensive for my as a small

IT company. I rely on my peers to get information about new markets and

specially on pricing decisions for my products and services”.

- Small IT companies do not have to work alone, associations, networks and who I

know is the best way to find new clients, make better management decisions and

get better results for my company”.

CONCLUSION

As Carson et al. 2005 recognizes, the value of marketing activities which are influenced

by the entrepreneurial owner-manager is largely intuitive, ad-hoc and instinctive in

nature”, this study showed that the decision-making processes in small companies are

largely based on networks, relationships; in other words, social capital is crucial to

successful decision-making about marketing and management issues.

Moreover, the fact that small companies have scarce resources, social capital becomes an

important marketing tool and can be used as a tool for market intelligence.

Future studies could include for example: observations of competitive activity and

analysis of appropriate company records and also use a larger sample of interviews with

small businesses in different sectors.

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