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Network Economy

Six degrees of separation or the Small-world-property, Metcalfe’s Law and Positive Feedback Effect, Enterprise 2.0 - Bull’s Eye

Seminararbeit 2017 17 Seiten

BWL - Personal und Organisation



1 Introduction

2 Networks
2.1 Six degrees of separation or the Small-world-property
2.2 Strong and weak ties
2.2.1 Strong ties
2.2.2 Weak ties
2.3 Structural holes
2.3.1 Information advantages
2.3.2 Control and innovation
2.4 Metcalfe's Law and Positive Feedback Effect
Facebook and Co
2.5 Enterprise 2.0 - Bull's Eye
Blogs, Wikis and Chat

3. Conclusion

4. Outlook


1 Introduction

It is quite natural for human beings to be part of a network. Our way of thinking today is permeated by network and we live in an era of networks. Facebook, Twitter and Xing have many millions of users. Within months services like Pinterest and Instagram became leading companies. Networks are not really new. For generations people invested time taking part in networking events meeting others. The importance of building connections is intuitively obvious to everybody (Sattel 2014). Scientists of different areas and disciplines deal with the subject of networks. Networks are everywhere in relationships between people but also in cancer cells, in the brain, in mathematic graphs as well as in technical devices and of course in global economies. Solely in business and economy the diversity of networks is just incredible (Barabasi 2015, p. 217). The technical progress in current time revolutionized the possibilities of networking. The transport is cheaper, the infrastructures supreme, mobile telephony and not least the Internet have a great impact on the flexibility and quantity of networks today (Mogensen; Erikesen). The next economic revolution shall be called networked economy. It is not about Big Data or devices, but much more about people. People are the ones who continue to use technology and take part in the global ocean of data (Sharma 2015). Therefore for better understanding of network economy, it is useful to start describing networks or some network theories with regard to interpersonal relationships or networks between people.

2 Networks

Networks were of great scientific interest for researchers in the last century as well as today. In the last century until the present day various network concepts have been developed. The knowledge scientists acquired in former times is still relevant for us today. Therefore in the following paper, a selection of the most significant or best known network theories of the 20th and 21st century will be presented.

2.1 Six degrees of separation or the Small-world-property

In a classic experiment of 1967 Stanley Milgram, a Social Psychologist, invited randomly selected test persons to send a letter to somebody they knew only by name. For this purpose, an "intermediary" should be selected from the circle of acquaintances, from whom the test persons assumed that they could be closer to the target person. This person forwarded the letter again under the same conditions. Milgram observed how long it was before the letter arrived at a chosen person. He evaluated and recorded the data on the various stations. In fact, an average random path length of six people resulted (Milgram 1967 cited in Cadarelli; Catanzaro 2012, p.47f.).

The main result of Milgram's experiment is the Small-world-property. It is shown in all networks. It is to observe that if one randomly takes an unknown person out of the network, the most direct path from one person to the chosen person is displayed. Few mouse 'clicks' are enough and information travels around the globe at an extreme speed (Caldarelli; Catanzaro 2012, p.49).

Researchers from Columbia University in New York in 2003 came to a similar conclusion. Peter Dodds, Duncan Watts and Roby Muhamad had asked 61,184 volunteers from 166 countries to write e-mails to 18 target groups from 13 countries. In this experiment as well, the participants were to contact those acquaintances who seemed to be close to the target person. In this way 24,163 communication chains were created, of which 384 led to one of the given recipients. The team from Watts came to the conclusion that five to seven steps are necessary to reach the desired person (Dodds et all. 2003).


In the economy this phenomena of the Small-world-property can be used for spreading information, for example in the so-called viral marketing strategy. Viral marketing can be described as mouth-to-mouth propaganda. With the help of the Internet viral marketing works very effectively. Hotmail was one of the first examples using the viral marketing strategy, which in principal is based on the Small-world- property concept. Founded in 1996, Doug Draper of Draper Fisher Jurvetson recommended adding a link back to Hotmail in any email sent via Hotmail. The success was striking: within the first 1% years of its existence, Hotmail won 12 million subscribers. A traditional print publication could hope for about 100,000 subscribers during this period. Today, Hotmail is the largest email service in India, although there has never been a marketing campaign for Hotmail (Recklies 2001).

This is just one of many examples how the Small-world-property approach can be helpful in developing business and marketing strategies in the economy.

2.2 Strong and weak ties

In 1973, Mark Granovetter - a well-known US American sociologist - published an article with the title "The strength of weak ties” in the American Journal of Sociology. In his article he described the connections between people as strong and weak ties. Every human being has strong ties to a limited number of people who are linked to each other by a dense relationship. In addition to these closed homogenous groups, there are some weak relationships, so called weak ties (Granovetter 1973, p. 218 f.).

2.2.1 Strong ties

The more people interact with each other, the stronger the ties between them. Other influencing factors on the strength of relationships according to Granovetter are the degree of intensity and intimacy, as well as the frequency of the time spent with each other and the exchange of help. In situations where trust is required, strong ties are more beneficial because trust is the rule in strong tie relationships. The sense of togetherness in strong tie groups develops continuously. These strong ties exist, of course, first in the family and among close friends. Such groups are more homogeneous and therefore there is more agreement between the group members. Mark Granovetter noted that the members of a sub-network, a so-called "clique", have very close contacts, because of the high density and the multiplexity.1 At the same time, these strong internal relations separate them from the outside. According to Granovetter strong relationships are associated with a high time-related expenditure, so they show a high degree of emotional connection and mutual proximity, and are characterized by mutual trust and mutual help. The group members have similar interests and attitude, and in this way information is subject to a certain redundancy. Since the actors of strong tie groups or cliques are connected very closely in a very time intensive relationship, the possibility to have relationships with actors in other cliques is decreasing. In this way the group of strong ties separates itself from the overall network, which leads to a kind of isolation. However, the human being can only build a few strong tie groups (Granovetter 1973, p. 218- 219ff; p. 1361).

2.2.2 Weak ties

Weak ties, on the other hand, can be constructed more often, so groups of weak ties can be much larger than just a few dozen people. Additionally, in networks with weak ties, not all of them must be connected to one another: A knows, for example, B and B knows C, but A does not necessarily have to know C or feel connected to it. In this much larger network the participants are not very similar, so the group is more heterogeneous. Weak relationships do not show such characteristics of temporal and emotional intensity. Such weak ties correspond to occasional contacts between acquaintances, neighbors and working groups (Granovetter 1973, p. 1361). On the assumption of local, homogeneous, isolated groups, not the strong but only the weak ties represent the possibility of crossing group boundaries. The weak ties in this function provide the prerequisite for the flow of information between the groups. Weak ties, when they occur as bridges, offer the possibility of the information flow between otherwise isolated groups. Since weak connections can also be transmitted within very different circles, the actors can receive and pass on new, valuable information to each other. According to Granovetter, the weak bridges integrate the different groups within a society (Granovetter 1973, p.1366). In summary Granovetter claims that weak bonds between hubs can bring greater advantages than strong, since the flow of unknown information can potentially increase. Strong ties point to close personal contacts, in which only known information circulates, while contacts beyond these circles introduce new, unknown information into the network, which in turn introduces new action corridors (Sparsam 2015, pp.129-162).

Recruiting, job searching and B2B market

Granovetter found the results of his theory in empirical surveys on the topic: How to find the right job? Through relatives, friends, job agencies or newspapers? Granovetter made countless surveys on this subject and investigated the extent to which social relationships can help in the search for the position. He found out that half of the people he interviewed had received a job through personal contacts, meaning through weak ties: someone knows someone who knows someone. Furthermore, weak ties are not only more helpful but also more efficient than close interpersonal relationships or formal job searches. The quintessence of his study was that especially those who recommend one for a job were not in a strong relationship with the recommended person. It was more like: "Maybe I know someone who could fit quite well" (Kittl 2012). So the weak ties approach in networking is useful in searching for a new job, and for companies to find the right employees. Due to the demographic change it is getting more and more difficult to recruit qualified, suitable staff, and using the weak ties concept of a network could be of great benefit for companies. The concept of Granovetter is beneficial not only in the case of searching for a new job possibility or for human resources; it is also useful to consider the strength of weak ties in the B2B market. Scientists were able to observe positive effects of using the weak ties approach in the case of some B2B companies in several Italian regions. Often companies are focused on the same suppliers and customers, but sometimes communication or even a new contract with companies to which the relationship or the ties are quite weak, could be of great value. In the B2B market, companies are accustomed to working with strong tied customers. However diverse customers have a great positive effect on technological innovation and the economic growth of a firm (Kleinaltenkamp; Schubert 1994, p.43; Lilien; Grewal 2012, p. 73).

2.3 Structural holes

The sociologist Ronald Burt builds his concept of structural holes (1992) based on Granovetter’s concept of weak and strong ties. Burt does not focus on relationships in a network, but on their absence. The networks are again characterized by strong bonds. Structural holes characterize networks that do not overlap at all, or only slightly. As a result, the flow of information between the networks is very small, but the group feeling within a network is very strong. It is of great advantage to a person, if (s)he manages to overcome the holes with the help of weak ties. On the one hand, the person receives support and security in the strong tied group, while at the same time he or she can bring new visions and information into the clusters. This also increases the potential of the group. The weak connections give the person an information protrusion and lead simultaneously to enhance his or her visibility. In the business environment, this leads to the fact that a person, as a member of various networks, can increase his/her value to the company. In contrast to Granovetter, Burt emphasizes, above all, the position in the network, and less the relationship strength (Burt 1992, p 72f.).


1 A relation between A and B is then multiplexed if there is not only one relationship dimension, but several. E.g. A can not only be called as B's advisor in personal questions, but he can also work with B in the same company and play poker with him (Diaz-Bone 1997, p. 59).


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Titel: Network Economy