&and. J. Mgmr, Vol. 4. No. 3/4, PP. 83-Y’J. 1988 Printed in Great B&in

0?81-7X7/88 $3.oO+O.OU Prrgamon Press plc

BUSINESS FORMATION-A NETWORK APPROACH*

BENGT JOHANNISSON

Viixj6 University

Abstract -This article suggests that the key to entrepreneurial success is to be found in the ability to develop and maintain a personal network. In elaborating this proposition I regard the environment of the business venture as “enacted”. The inexperienced new entrepreneur needs support to create a personal network and to manage the enacted environment. The concept of the “organizing context”, defined as a clustered sociocentric network, is introduced to provide a tool with which the entrepreneur can deal more efficiently with the different subprocesses that create his or her reality. The approach supplies a framework within which various forms of entrepreneurship - indigenous, corporate, etc. - can be compared and analysed beyond their institutional differences. The interaction between various forms of entrepreneurship and organizing contexts is empirically illustrated from case studies.

Key words: Venture, entrepreneur, personal network, organizing context.

INTRODUCTION

Many of the personal attributes typical of the entrepreneur, such as self-confidence, perseverance, resourcefulness, risk-acceptance and achievement motivation (cf. Hornaday, 1982), merge in a networking competency. This ability to establish and manage a personal network mobilizes all human resources. Being existentially motivated, the entrepreneur operates his venture(s) as a complete human being, i.e. his cognitive and emotional resources combine with his will-power to initiate action (cf. Macquarrie, 1985).

The personal network is the vehicle by which the established entrepreneur exchanges information with and acquires resources from the environment. I will argue that the personal network makes it possible to “enact” the environment. Naturally, however, the would-be or new entrepreneur will not come furnished with an appropriate network. This gives rise to the question: What leverage can the new entrepreneur find, to acquire the necessary network resources ? In this article I will try to answer this question conceptually and empirically.

ENTREPRENEURSHIP AND THE NETWORK APPROACH

Both metaphorically and concretely networks are well suited to describing and analysing the emerging new venture. The image of the entrepreneur as a person who

*An earlier version of this article was presented at the 1986 Entrepreneurship Research Conference at Babson College, Babson Park (Wellesley), Massachusetts, U.S.A., 17-18 April 1986.

83

8-l B. JOHANNISSON

assiduously exploits opportunities by organizing (those in control of) resources (Kirzner, 1973) promotes the idea of the entrepreneur as an intermediary in a network. Owing to his own minimal reach and an increasing turbulence in the environment, the new entrepreneur becomes dependent upon his personal network as a supplement to his own business resources. In economies such as in Scandinavia, the entrepreneur also needs his network to acquire influence in the sociopolitical environment. It has been argued elsewhere that the entrepreneur’s personal network is his most valuable asset (Johannisson and Peterson, 1984). In a network perspective it becomes natural for owner-managers (Deeks, 1976) as well as managers in general (Mintzberg, 1973; Kotter, 1982) to operate their businesses by getting personally involved in a multitude of activities of short duration. Thus the management of the personal network comes to represent both means and ends in business venturing.

There is thus a logical basis for pressure on the entrepreneur to substitute action for planning and decision. As Brunsson (1985) points out, quite different principles go into decision-making and action paradigms. Rationalistic decision-making increases un- certainty and diminishes responsibility in an organizational setting (1985, p. 55). Im- pressionistic choices, which characterize the action paradigm, increase responsibility and reduce perceived uncertainty. The impressionistic mode implies that a few concrete attributes of a project are evaluated and subsequent information is collected in a manner that makes it possible to rationalize the outcome, whether good or bad. In this way the conditions for action are improved and action rationality is achieved.

Visions and motivation are brought into the venture by the entrepreneur personally. The main social condition for action, namely commitment, is supplied by the entre- preneur’s personal network. The mutual commitment of the ties that form the network implies responsibilities. At the same time uncertainty is reduced; commitment facilitates the rationalization of actions that have already taken place. In addition the network supplies alternative foci of attention. Especially when the network is loosely structured with weak ties (Granovetter, 1973), the entrepreneur will thereby avoid being caught by his own or his affiliates’ preconceptions.

To demonstrate the potential of the network metaphor in clarifying entrepreneurship, we can elaborate three particular aspects: (1) characteristics of the linkages, (2) structure created by the nodes and linkages, (3) operation properties (cf. also Johannisson, 1987).

(1) In personal networks, the ties are relationships of trust. Unlike contractual relationships, these have no books recording the exchanges. Imbalances are not immediately regulated but are stored, supplying a motive for maintaining the relationship. There is an intuitively shared belief that both parties in the relationship will benefit in the long run. In trust relationships, instrumentality is embedded in affective and moral considerations (Kanter, 1972; Granovetter, 1985). The ties are also symmetrical, based on equality and respect for the other party’s distinctive character- istics. Thus, by relying on trust relationships the entrepreneur can preserve both his personality and the originality of his venture.

(2) A network is a set of interrelated dyadic ties. In contrast to formal organization, sociocentric networks assume the form of non-hierarchical structures which are open- ended. Although membership of formal organizations, as well as proximity, kinship and ethnicity may lead to an agglomeration of linkages, the network remains loosely composed, i.e. the elements “preserve their own identity and some evidence of their physical or logical separateness” (Weick, 1976, p. 3). Such a sociocentric network is

BUSINESS FORMATION - A NETWORK APPROACH 85

difficult to change as a whole but it offers a favourable platform for individual action. The elusive nature of the network implies that various parts of the network can be mobilized, depending on what issue the focal person is currently handling. However, if the entrepreneur is conducting several parallel venture projects, his limited resources of time will force him to exploit the same network. In consecutive entrepreneurial events, network resources are correspondingly recycled.

(3) As well as providing a general vehicle for environmental attention, the network is also activated when problems arise or opportunities crop up. Thus neither the frequency nor the regularity of exchanges necessarily indicate the potency of reliability of the ties. Rather, the strength of a tie is related to the investment of time and emotion (Granovetter, 1973). Flexibility is the key attribute of networking. Action by way of the network is typically egocentric, initiated by one person who selects other appropriate further network members to build a temporary organization for his “project”, e.g. a business venture. However, once the project has been completed, the network persists. It is maintained by being operated. Thus the network is self-organizing, the result of experiential learning (Lessem, 1984), not an organization created and managed by design. This is why the entrepreneur needs charisma to manage his emerging organization (cf. Smircich and Stubbart, 1985).

The network approach helps to give structure to some more general observations on entrepreneurship. These include the importance of mentors and peers at different stages in the lifecycle of the firm. The cumulative nature of personal networks explains why entrepreneurs who have been in business before are more successful in launching new ventures (cf. e.g. Vesper, 1980). As trust often survives even the failure of an individual venture, entrepreneurs can use their personal network to recapture a position in the business world. New perspectives also enrich the differences and similarities between founder-managed and successor-managed firms, between innovative and handicraft firms. The inseparability of entrepreneurs from their networks explains why succession in family businesses is so difficult, and why owner-managers who sell their firms are soon drawn back into business.

One reason for the potency of the network paradigm is that it shows how, more than making business, entrepreneurship is the making of a way of life.

NETWORK CHARACTERISTICS AND THE BUSINESS-FORMATION PROCESS

The network approach has three main implications when applied to the start and success of new firms.

First, a shift is observed in the relative importance of the three basic factors of a business venture: the entrepreneur, the venture concept and the financial/material resources. The entrepreneur as a person is revalued; the quality of the network he creates is highly dependent upon his given personal attributes. The network can be used for refining or even defining the venture concept. By operating his network profession- ally and by communicating trust, the entrepreneur can acquire financial and material resources.

Second, although financial success is the ultimate success criterion in the market-place, the network paradigm suggests that separate actions should be evaluated by other criteria well beyond their instrumentality. Applying Kanter’s terminology, commitment

86 B. JOIIANNISSON

based on affection and morality creates supportive ties (Kanter, 1972). However, the various commitment-building processes are difficult to separate. Egocentricity means that the entrepreneur’s position as a member of the business community is intertwined with his membership of other societal institutions, e.g. the family and the community. Consequently, it may be worthwhile for entrepreneurs to activate contexts and connections which do not belong to the market-place but which do have implications for their ventures.

Third, the network approach greatly modifies the distinction between autonomous entrepreneurship and corporate entrepreneurship or intrapreneurship. The significance of the external network for entrepreneurs and managers is paralleled by a need for a network structure in corporations which promote innovation and entrepreneurship (Burns and Stalker, 1961; Peterson, 1981; Kanter, 1983; Pinchot, 1985). Just as the climate for entrepreneurship and change varies between local communities with different structural properties including the diversity and density of their networks (Johannisson, 1983, 1984), corporate structures also differ in their capacity for mobilizing an entrepreneurial spirit. But it is not only the formal structure per se that puts the entrepreneur in a straitjacket ! Miller and Rice (1967) show how the “sentient boundaries” of organizations form networks that both support and hinder the development of the owner-managed firm.

Launching a new venture is usually a time-consuming process. It is characterized by trial and error, as the entrepreneurial event by definition has no ready recipe to follow. A procedure which allows a lot of mistakes must allot time for corrections. However, the time needed to accumulate experience can be reduced by contact with mentors, role models and other business colleagues who have lived through the venture process themselves and are willing to share the experience they have accumulated as a result of their own mistakes (cf. e.g. Shaper0 and Sokol, 1982). As members of the entrepreneur’s primary network, they can also legitimize the new entrepreneur in his own network- building endeavour. Yet it will take time to build the trust relationships that constitute a personal network.

Thus an important difference between entrepreneurs is whether or not they possess a diverse personal network (acquired from previous business experience or in some other way). When the experienced businessman looks for new options, he can “manage” his personal network by using it in several ways: as a generator of new ventures. as an evaluator of proposed new projects, or as a safety-net for ventures being launched. A boundary position within a corporate hierarchy, or assignments in various professional bodies, provide alternative routes to strategically significant network resources. Inasmuch as networks of this kind are usually “pruned” and undersupplied with general business experience, ventures launched by such people will presumably rely on fewer linkages and their network resources will have to be supplemented by other competencies. However, in my view, it is just this elusiveness of the network resources that make them an efficient instrument for managing the equivocality of the enactment process.

THE ORGANIZING CONTEXT- A VEHICLE FOR ENACTMENT

Recent literature on the role of leaders suggests that the crucial role of the leader lies in the management of meaning (Smircich and Morgan, 1982; Bennis, 1984). This

BUSINESS FOR\IATION - A NETWORIi APPROACH 87

proposition is based on the image of the environment as “enacted”, i.e. socially constructed by attention, action and interpretation. The main restrictions on what can be accomplished by individuals and organizations are then their own preconceptions of what is possible to do, and what is possible to learn from actions once taken.

A comprehensive foundation to this approach is provided by Weick (1979). F&using on organizing as an ongoing process, Weick identifies four subprocesses: ecological change, enactment, selection and retention (1979, p. 130). The first two elements are interrelated in mutually causal loops, and they generate variety, i.e. raw material for the construction of a person’s reality. In the selection and retention subprocesses, meaningful and successful interpretations of equivocal information produce enacted environments. Feedback mechanisms in turn help individuals to influence the choice of sources of variation to be considered.

Weick (op. cd.) argues that although his model originates in a cognitive framework, it has wider applications. “Organizing is also built around feelings, actions, and desires and collective attempts to understand them” (1979, p. 134). I regard this extended view as crucial. However, the unrestricted use of organizing capabilities requires self-confident people with internal loci of control and evaluation, prone to act as complete human beings. On two more important counts the typical “organization man” is impotent in this respect. Firstly, most managers are caught up in their own mental structures, or the institutionalized patterns of behaviour in their own corporations, or the established recipes in their sector of industry. Such restrictions add to the bonds that even entrepreneurs must adhere to, e.g. legal restrictions. Secondly, managers represent their organizations and not themselves. They are partially included in and split between several formal structures. Few of them either accept the responsibility or mobilize the courage to question the roles they play, let alone merging the roles into personalized behaviour. Entrepreneurs, on the other hand, are obviously furnished with the personal attributes needed to enact the environment. Their egocentricity brings both vision and strategy to the creation of a reality of their own. The entrepreneur’s organization is basically an extension of his personality, whether formally represented by his employees or by a personal network, as in the case of the self-employed. Being resourceful and creative, entrepreneurs introduce ideas into the enactment process. One probable reason for the many start-ups in the service industries is that the potential for enacted environments and business ventures is greatest there. No institutionalized industrial recipes and no heavy investments in buildings and machines restrict the entrepreneurs discretion in the enactment process.

Motivated by achievement ambitions and prepared to accept risks, entrepreneurs pursue the enactment process in small steps. This is a favourable strategy if guided by a vision, and it facilitates the learning and unlearning processes that successful enactment calls for (cf. Weick, 1984). Whatever the entrepreneur accomplishes by his enactment will be multiplied as a result of, on the one hand, transfer to his employees and, on the other hand, diffusion throughout his personal external network. The two mechanisms that make this possible have exactly the opposite characteristics. The entrepreneurial firm is centralized to the same extent that the personal network of the entrepreneur, composed of ties between peers, is decentralized. The entrepreneurial organization is a tight organization adopting clan characteristics, i.e. the founder’s enactments are echoed by his employees (cf. Ouchi, 1980). This contrasts with the loose couplings that characterize the personal network.

88 B. JOHANNISSON

The interlocking behaviours that combine into “organizing” can be described in terms of building - and building upon - ties in social exchange networks. The ideal personal network contains both weak and strong ties. The weak ties will supply the “ecological change” element as they are “bridges” to realities hitherto unattended by the entrepreneur (cf. Granovetter, 1973). The strong ties will support the selection and retention subprocesses by justifying choices made by the entrepreneur.

Once established, the entrepreneur can use his experience, partly stored in his personal network, to enact new ventures. But, as we have noted, the new entrepreneur needs support in his endeavour. He has not experienced that dynamic confrontation of his own mental images and the visions provided by others through the network, which creates variety. He has not had a chance to develop the mature networks that will help him focus his attention, to select. He has not yet found the network members who could legitimize his selections once made.

However, there are no ready recipes for how to achieve this “forced growth”. What is needed is thus a tool as universal as possible, by means of which the would-be entrepreneur can manage the making of his venture himself. The concept of the “organizing context” as a clustered sociocentric network represents such a tool. By “clustered” I mean that the density of the contextual network is considerably higher than that of the network beyond the contextual boundary. Nevertheless the contextual structure remains a loosely linked network of actors.

The organizing context should be identified and recognized by its members, thus creating a sense of community. These boundaries may be defined legally (e.g. the corporation), physically (e.g. the local community), ethnically, professionally and/or by kinship. The ideal organizing context supports the entrepreneur in fulfilling both his existential and materialistic expectations when launching a business venture. Social and/ or geographical proximity facilitate the building of networks in an “organizing context”. These networks will help to mobilize the various resources needed for action: cognitive resources, emotive resources and self-confidence.

The organizing context provides ends and means for the enactment, selection and retention subprocesses. It may operate as a spring-board (supporting ecological change/ enactment), a gear-box (supporting selection), and as a shock-absorber or defence wall (supporting retention) between the entrepreneur and environments beyond the context. The role of the gear-box, balancing the need for adaptability and adaptation, is the most crucial (Weick, 1979; p. 136). Unlike Birley (1985) I do not suggest that the local community as an organizing context maintains the retention subprocess at the expense of the other subprocesses.

The boundary of the context acts like a rubber band, sometimes drawing the entrepreneur who tries to cross it back into the community, sometimes supplying socioeconomic leverage for external excursions. We can see examples of the former case where the contextual cohesiveness helps the entrepreneur to recognize that his problem has a local solution. The latter case arises when the contextual boundary operates as an energizer in remote business operations by injecting pride and providing a haven. These various benefits explain why entrepreneurs are prepared to accept and trade upon the restriction on their individual freedom that membership of a community, for example, imposes.

The organizing context also provides a conceptual tool for scrutinizing the differences and similarities between entrepreneurial categories, e.g. autonomous indigenous

BUSINESS FORMATION - A NETWORK APPROACH 89

entrepreneurs, enfranchized entrepreneurs and corporate entrepreneurs. These con- texts, although defined according to different principles-geographical, contractual and legal, respectively - determine some of the functions of the enactment process. For example, in the local community variety is generated by social networks and in the corporate context by commercial means (e.g. by internal prices for access to joint corporate resources). The selection subprocess is formally managed in the franchizing system, while autonomous entrepreneurs rely on commercial as well as social networks to make adequate choices. In the corporate and franchizing contexts retention is regulated by instrumental inducements; in the local community social mechanisms often contribute to the patterning of individual and collective entrepreneurial behaviour.

Contexts vary with respect to their efficiency in supporting entrepreneurial enactment processes. The supply and demand for variety, for selection support and for retention advice may not match. Corrective measures will vary with respect to both context and subprocess. Entrepreneurs are generally more prepared to adhere to contextual directives to increase variety, while expecting self-management in selection and retention processes. An entrepreneur can be told what he might do and should not do, but never what to do concretely.

An organizing context is regarded as supportive if, as well as facilitating the enactment process, it encompasses values which favour entrepreneurship (Johannisson, 1984) and encourages “disjunctive imitation” (Peterson, 1981). Figure 1 seeks to capture these properties, as well as the general characteristics of organizing contexts as outlined above. The model is suggested as a framework not only for interpreting the initial venturing process, but also for generally analysing the interaction between the entrepreneur and his firm on the one hand, and the organizing context on the other.

The personal capabilities of the entrepreneur and the internal resources of his firm are supplemented by colleagues in his contextual and global network, i.e. his total egocentric

me organizmg context

r----- ------_--_-_--------------------

Contextual Contextual structure menas

I- - Contextual identity

t /

I Contextual products

/

system

Change caWbAity of the firm

The entrepreneur and his frm

The gbbat market and general - societal structure

I Global soc~o-economc network

I L -_-____ __-_______ _____ _-_____-f_--__: I

The global context

Fig. 1. Entrepreneurs and contexts - a basic model.

90 B. JOHANNISSON

network. The small firm’s networks are intimately related to supplier/customer relationships (Deeks, 1976). While networks therefore vary in terms of range of distances over which they are established (McDermott and Taylor, 1982), they are often geographically close in small firms, ‘especially in new firms (Birley, 1985). Surveying would-be and new entrepreneurs, Johannisson and Johnsson (1988) found that between 80 and 90% of the primary networks of these entrepreneurs, defined as the five people they prefer to talk with about their own business venture, were local (within an hour’s drive). The geographical concentration of the network, however, need not have to imply any restriction on either outlook or concrete venture operations. As the model implies, local or generally contextual linkages may act as bridges to global networks.

The maintenance of adaptability in a turbulent environment will depend on the firm’s capability for change. The model suggests that this capability is composed of resources controlled by ownership, and by other resources that can be reached by way of contextual and global networks. Entrepreneurship, be it emergent or already institution- alized as a firm, is about organizing, i.e. the episodic use and continuous re-arrangement of activities in the marketplace (cf. Stevenson and Gumpert, 1985).

People seeking to become self-employed sometimes lack both a wider personal net- work and the ambition and/or the competence needed to build one on their own. Their networks are then restricted to the context itself. Many businessmen want to stay “local” (Gouldner, 1957) and to operate as craftsmen, i.e. they do not intend to pursue an entre- preneurial career as defined by Stanworth and Curran (1973). The organizing context, e.g. the corporation or the community, then defines the task environment (Dill, 1958). In this case the role of the context is reduced to that of shock-absorber and bulwark. The emphasis is on adaptation by way of retention. These entrepreneurs begin and end their business careers as local subcontractors or as suppliers to a few large customers.

An entrepreneur who lacks a personal network and any access to an organizing context - which is often the case in sparsely populated areas - will find it difficult for both psychological and practical reasons to launch his venture. Scandinavian experience indicates that in such settings initiatives are often channelled into the informal sector, where the social structure is more elaborate. However, professional and social ties seem to combine in entrepreneurial networks regardless of the region studied. According to Johannisson and Johnsson (1988), about 50% of the ties in the (would-be) entre- preneur’s personal network are essentially professional, the rest being essentially social. The results suggest that whether the venture is launched in a metropolitan area or in a sparsely populated region, professional and social ties supplement each other locally in entrepreneurial networks. This supports the argument advanced here, namely that the (local) organizing context is fundamental to the entrepreneur.

ORGANIZING CONTEXTS i;OR VENTURE CREATION - \ SOME EMPIRICAL EVIDENCE

Research design and methodology The data presented in this article focus upon the would-be and the new entrepreneurs

who compensate for limited business experience by access to an organizing context. The empirical illustration below comprises three cases. The first, A, concerns a setting in which the new ventures are created on the border between a corporate context and the

BUSINESS FORMATION - A NETWORK APPROACH 91

general environment. These “extrapreneurs”, as they have been labelled by Johnsson and Hagg (1987), create their venture from no more than a few contextual and/or global connections. In this case the organizing context basically supports the new entrepreneurs in their selection and retention subprocesses. The second case, B, illustrates how organizing contexts - corporations as well as communities - can be operated in order to develop and maintain their focal properties, such as loose internal coupling and a distinctive boundary. The focus is on the total egocentric network of the corporate or independent entrepreneur, including contextual as well as global ties. All three subprocesses active in organizing the new venture are thus considered. The third case, C, summarizes experiences from two action-research projects in which a contextual (community) approach has been adapted to new-business formation and job creation. Particular attention is paid to the community as a sociocentric network. From the point of view of the entrepreneur, the context deals mainly with the enactment and selection subprocesses.

Table 1. The case studies - scope and methodology

Characteristic Extrapreneurship (A) Local/corporate entrepreneurship (B)

Contextual entrepreneurship (C)

Basic methodology

Focal unit of analysis

Static, descriptive analysis

Individual ventures

Data origin

Data collection

Secondary

Mailed questionnaires

Contexts researched -

Ventures (firms) studied

116

Longitudinal, descriptive Action research analysis

Individual ventures/ The context the context

Primary Primary

Structured interviews/ Participant observation/ mailed questionnaires unstructured interviews

2 2

142 + 15 15 + 20 (appr.)

Table 1 summarizes the different research strategies used in the three cases. Due to the complexity of the problem varying approaches are necessary, involving two levels of analysis: the venture (firm) and the context. Both methodologies help towards an understanding of the issue. While case A focuses on the venture and case C on the context, case B is particularly concerned with the venture-context interaction. However, since case C involves action research and first-hand involvement, it also contains some reflections on the venture<ontext relationship. For obvious reasons the number of contexts reported upon is limited, while the number of ventures/firms encompassed by the three cases exceeds 300 in all.

Case A: Extrapreneurship - Boundary-spanning business formation* The entrepreneur enjoys discretion in building up his personal network, but once the

*I am very indebted to Thomas Johnsson at Uppsala University for giving me access to the unpublished empirical material presented in this case.

92 B. JOHANNISSON

network is established it implies obligations inasmuch as each link represents mutual dependence. Besides personal trust, the diversity of the transactions involved adds to the strength of the tie. A small set of such ties, or even a single tie, may represent such a valuable asset as to constitute the nucleus of a business venture. Only time can build such strong relationships. Long-term employees separating from their employer obviously comprise a potential group for this kind of entrepreneurship.

Johnsson and Hagg (1987) define the “extrapreneur” as a white-collar worker who leaves his employment for the purpose of establishing a separate firm which will complement his earlier employer. This often means that the extrapreneur acts as supplier to his “mother” company or its customers. The extrapreneur’s venture is based on advanced customer-specific knowledge, acquired over a long period as an employee. Internal networks and linkages to the mother company’s suppliers may of course also generate venture ideas. In contrast to corporate entrepreneurs (Kanter, 1983) or “intrapreneurs” (Pinchot, 1985), extrapreneurs establish an independent business of their own. As pointed out by Johnsson and Hagg, only the mother companies which establish a “clan organization” (Ouchi, 1980) will be able to promote, and keep, extrapreneurs in a complementary relationship (cf. also Johannisson and Johnsson, 1988).

Although some companies in Scandinavia have actively promoted extrapreneurship, it is much more often job-related displacement that triggers the start of independent businesses by white-collar employees who exploit their job-related network. The Swedish Security Council SAF-PTK, a joint committee set up by the parties on the labour market, run programmes to support dismissed private-sector employees who want to launch ventures. In 1984 a questionnaire was sent to a group of 136 white-collar employees who had attended the council’s courses on starting a business in 1981-1983. The response rate was 85%; 116 questionnaires were processed to measure the importance of personal networks in the business-formation process. At the time of the study 81 individuals, or 70% of the respondents, had spun off into businesses of their own.

In the whole sample, 81% had been in positions involving contact with suppliers and/ or customers during their last employment. Of these, 80% exchanged information on a daily or weekly basis. Thus the entrepreneurs-to-be had many opportunities for building networks; 68% exploited these personal networks in their own businesses. Eleven extrapreneurs supplemented the mother company’s suppliers, and nine sold supplemen- tary products to the mother company’s customers. Nine had the former employer as the most significant individual customer. Of the extrapreneurs three out of four launched their venture in niches which exploited the product experience they had gained while with their last employer.

Twenty new entrepreneurs in the sample operate firms that compete with their last employer. This indicates that a career as an extrapreneur is not the only one possible for people with customer-specific knowledge.

The starters and non-starters do not differ as regards their parents’ occupations (in business/not in business), the availability of other role models, or the existence of explicit plans for the start-up. However, the starters had enjoyed a higher and more technically oriented education than the non-starters. In combination with longer service with the last employer, this can be expected to facilitate the creation of customer-specific knowledge, for example. Sixteen, or 20%, already had part-time businesses when they were given

BUSINESS FORMATION - A NETWORK APPROACH 93

notice, and they then only had to scale up these activities. Thus, networking skills complement other competencies that promote entrepreneurship.

At the time of the study, 77 of 81 starters were still running their own businesses. Although 38% of the full-time entrepreneurs were worse off financially than before they had been given notice, only 16% would consider an offer to go back to their previous jobs. The economic success was dependent on whether or not they had exploited their personal network at the start-up; but it was also related to their previous experience in starting a business, and whether or not they had planned their ventures explicitly. If we assume survival of the venture to be the main ambition of the existentially motivated entrepreneur, we could say that the “extrapreneurial” way of exploiting an organizing context appears to be effective. However, in this venturing strategy the emphasis is on the retention subprocess. The enactment subprocess is neglected. This, in the long run, may cause problems for the extrapreneur. The umbilical cord to the mother company may become a chain; in order to survive, the extrapreneur will then have to assume the role of the traditional entrepreneur in finding ways of increasing the input of variety.

Case B: Local and corporate contexts for entrepreneurship The potential function of the organizing context extends beyond that of a greenhouse

for new ventures or a shelter for small businessmen intent on operating as subcontractors to fellow members of the context; its function is also to assist the individual entrepreneur in building his total egocentric personal network. Even if an entrepreneur’s “action set”, i.e. direct linkages with peers (Aldrich and Zimmer, 1986), remains contextual. the network structure will inevitably generate indirect global linkages (cf. Fig. 1). To illustrate how contextual and global connections can be jointly managed, data from two different types of organizing contexts are presented below: the local community and the corporation. The community studies refer to Swedish research into local entrepreneur- ship in various regional settings. The corporate context presented is Magna International Inc., a successful and growing Canadian company in the automotive industry.

The 142 Swedish manufacturing companies studied are located in four small municipalities with populations of between 5000 and 15,000. Two are in a prosperous region and two in a depressed region. In both regions industrial traditions go back several hundred years. Due to both natural and man-made conditions, one region has produced a multitude of small firms (l-100 employees) and the other has been the home of large plants which used to dominate their communities socially and economically. While the small-business region has retained its vitality, producing Sweden’s highest employment and lowest unemployment ratios, the region dominated by one-company towns is in great difficulties with increasing unemployment and a declining population.

In the small-business region, establishing and managing independent businesses has become institutionalized as a common way of life. Gnosjo, one of the communities surveyed there, is regarded in Sweden as a prototype for entrepreneurial spirit. The municipality has a population of about 9000 and there are around 300 manufacturing companies. Moreover the company population changes continuously; in the period 1977-1982, 144 new manufacturing units were established and 109 closed down, i.e. a net increase of 35 companies. Material resources in terms of premises and machinery as well as immaterial resources such as management competencies are recycled by way of elaborate socioeconomic networks. The vast majority of the companies are in fairly low- tech metal manufacturing. One of these has spun off five generations of new companies,

94 B. JOHANNISSON

a total of more than 100, during its 90-year existence. Many new companies market(ed) the same products as their incubators. Twenty per cent of the businesses which have been in operation for as little as 12 years have already given birth to new companies. For comparison, one of the one-company municipalities, which admittedly is slightly smaller, had generated only nine businesses during the same period (1977-1982) (whereof two have subsequently closed down) and the total manufacturing company population is 20.

The scope of the local entrepreneurial networks appears as a major determinant of the differences in general prosperity as well as in new-venture creation in the two regions. In the communities in the prosperous region, local networks apparently have reached a “critical mass”, beyond which they become efficient and self-reinforcing (Johannisson, 1983). In the prosperous region an owner-manager has personal relationships with seven times as many local colleagues as does his counterpart in the backward region (85 vs 15) and has visited four times as many local plants (41 vs 10). In the region with a favourable entrepreneurial spirit, an average owner-manager discusses business matters with a local colleague every day.

Those entrepreneurs who started their business in the 1970s and 1980s have local personal networks that are only slightly different. They have established fewer person% ties than their experienced colleagues but have visited more firms - something which also applied to the depressed region. Since it takes time to establish trust relationships as a basis for local production systems, the new entrepreneurs have proved - as expected - to have fewer local customers than the average local businessman. This is partly counterbalanced by their more elaborate networks with companies in which they worked before their start-up. These networks often include supplier/customer relationships (cf. above). In the prosperous region the local market is nonetheless important to these new firms; two-thirds of the market sell at least 20% of their production locally. A calculated index of local identity among owner-managers shows that the new entrepreneurs in both regions exhibit average scores. In the backward region, however, they are more aware of the need to perform in local arenas in order to expand their networks than their colleagues with longer business experience.

Because Sweden is a pluralistic corporate state, the global networks must include not only customer/supplier relationships but also connections with authorities, business- interest groups and organizations outside the market. This is especially important in the depressed areas as the national regional and industrial policies provide significant financial resources and professional advice in a complex support system. As expected, the elaborate networks of the small firms in the backward region involve a variety of institutions. These networks are both denser and more personalized than in the prosperous region. The differences are especially marked among the new firms.

In the prosperous region the entrepreneurs are often organized into local trade associations, administered by themselves or by banks. The role of these associations, however, is not so much one of promoting of local cooperation as of erecting a defence against the non-market forces that impinge upon entrepreneurial undertakings, e.g. municipal exchange and state regulation.

The study of the corporate context - the case of Magna International Inc. - further emphasizes the protective role of an organizing context. In 1985 this conglomerate, after 20 years in business, included about 60 independently run plants. Earlier, when the conglomerate was fairly invisible in the general environment, corporate management could concentrate on generating new business in a “cloning” process. Today, the

BUSINESS FORMATION - A NETWORK APPROACH 95

corporate office, beside providing banking and international services, regulates the exchange between the conglomerate and the institutional environment. Furthermore, the plants are organized into groups according to products, production technology and/ or location. The group headquarters operate as intermediaries between the plant managements and the powerful customers in the automobile industry.

In the terminology suggested by Ouchi (1980), we can say that Magna is not merely being operated as a bureaucracy (a considerable number of rules and standards) and as an internal market. but because the charismatic founder, Frank Stronach, still (in 1985) controls the corporation, it possesses clan characteristics as well. These parallel organizing principles should be kept in mind in the analysis of the contextual networks, especially since they co&vary with the different group structures. The empirical research, which encompasses 15 plant managers representing three groups, shows that the plants in the group with the technologically most advanced products, and operating on the most dynamic markets, have the widest global networks as well as the densest intragroup plant networks. This supports my conclusion that networks generally promote change capability. The most heterogeneous group has the widest intergroup plant network according to any of three network indicators: plants visited, personal contacts and supplier/customer relationships. In the third group, which is very homogeneous as regards products and (simple) technology, networking activities are limited not only between corporate units in this group or other groups, but also generally. These entrepreneurs voluntarily restrict their freedom of action to their “own” plant. This is accomplished by operating the (corporate) context as a defence.

In the local-community study it was found that entrepreneurs who had recently established their present businesses had had a business of their own previously twice as frequently as the average owner-manager. Today the art of entrepreneurship requires more field experience. In Magna, the plant managers in the high-tech group had all once occupied the role of owner-manager, which may explain their wider networks. In ad- dition they utilize the corporate context mainly as a spring-board. The plant managers in the low-tech group generally have a career outside the group as skilled workers, using Magna as a haven where they can maintain and perfect their competence. Unlike their colleagues in the high-tech group, for example, they do not cooperate formally outside Magna. To sum up: Magna has not only managed to create an effective organizing context for new ventures, but has also successfully and sensitively created tailor-made subcontexts for various entrepreneurial types.

Case C: A contextual approach to the promotion of pew ventures These cases illustrate that organizing contexts - whether formed by tradition (the

favourable local community) or by design (the Magna conglomerate) - can create a setting for business ventures. In case C the concept of the “organizing context” is examined with respect to its ability to re-establish economic viability. In a turbulent environment corporate turnaround strategies must include the promotion of internal entrepreneurship (Kanter, 1983). Analogously, if a small town is to be revitalized, a variety of owner-managed firms must be created. The inference of my present argument is that a sense of “community” must be established as a point of departure. That is to say, the building of social networks and the manifestation of a contextual boundary must precede concrete business ventures. The chances of success for such a strategy will be enhanced, if the collective will and ability to create a sustainable community are

% B. JOHANNISSON

epitomized in an individual who can personally promote entrepreneurship, by way of communication in personal networks and in other ways. Unlike corporate founders such as Frank Stronach at Magna, this type of “community” or “social” entrepreneur does not have to prove himself as a businessman. His field of action is primarily the sociopolitical environment, not the market.

At the end of the 1970s the small community of Male& (population 300) could be described as follows. Over the previous 30 years the population had shrunk by two thirds. The dominating glassworks had declined to a fraction of its former size and at the same time had come under external control. However, a strong local identity had survived, due to geographical isolation and viable social networks. In addition the community had a dedicated social entrepreneur, Mats Jonasson, the designer at the glassworks. He is attached to the community by kinship ties which go back several generations. Mats Jonasson decided to vitalize the elaborate local social fabric and to transform it into socioeconomic networks, by linking the few existing local businessmen and other community members with entrepreneurial talents. As an actor on various local arenas such as the sports association, the local orchestra and the village committee, he recognized both the potential of the social resources and saw how they could be mobilized to create business and jobs.

The internal dynamics of the local mobilization project were enhanced as local networks were supplemented by links with ex-residents and the involvement of cosmopolitan immigrants. From the regular meetings that were held, socioeconomic networks emerged which were able to produce ideas for new products and to comment critically on suggested ventures. Banks, various kinds of organizations, and the local authorities were all approached on a collective basis with the help of members of the emerging network. The path was smoothed for the individual ventures to acquire capital, professional advice and inexpensive premises.

Parallel with the formation of new businesses, the potential for local production systems was also being activated. Mats Jonasson supplied ideas and designs for new products to the local leather industry, to a small iron foundry and to a trading.company. The iron foundry and a local metalmanufacturing industry became subcontractors to the glassworks. A married couple who had recently moved into the community set up a business to cater for book-keeping and marketing needs. The publicity the project received, together with intensified networking by the individual firms, has successively expanded the global network.

Despite a certain amount of external stress as various interests have attempted to benefit from the successful mobilization, and some internal stress in the shape of close- downs and even a bankruptcy, Male& has retained both its identity and its vitality. Over a period of 5 years the number of companies and the number of locally employed have more than doubled. The glassworks has become a local company owned by the employees and the local people. The negative population trend has changed to a slight increase. The vitalization of a local community as a sociocentric network has thus proved to be a viable strategy for the creation of new ventures.

Just as Gnosjo (see case B) was used as a role-model in Male&s, so has Male& provided guidelines for a mobilization campaign in another local community, Svangsta. However, conditions in Svangsta were quite different: the vitalization effort was not locally initiated, the community was much larger and lacked an identity of its own (because of its proximity to the municipal centre), and there was no indigenous

BUSINESS FOR.MATlON - A NETWORK APPROACH 97

community entrepreneur. Resources for the management of the change process had to be imported, including networking competence. A lot of energy had to be devoted to coping with relevant existing structures such as the local management of the two large externally controlled plants, and the influential trade unions. Only with the assistance of local and regional authorities was it possible to legitimize the approach.

When the mobilization campaign was launched, the two large plants had just given notice to several hundred people. Thus there was no time to build up social networks, in order to create a local identity and to change the authoritarian value structure that is typical of the one-company town. Instead, rather superficial information systems were set up, and these gave little priority to local sources. Inasmuch as information from global sources eclipsed the internal sources, collective self-confidence in support of potential native entrepreneurs failed to develop. And in fact, none of the 20 entrepreneurs that the turnaround project identified and encouraged between 1981 and 1983, originated in the community itself. Lacking strong local connections, the entrepreneurs were not interested in becoming deeply involved in socioeconomic networks; nor were they interested in local production systems. This lack of supportive local networks recoiled on the entrepreneurs and their companies. Some had to close down, others never grew beyond the part-time business level. Their contribution to the job-creation process in Svangsta remained marginal, and in 1985 the community was still as vulnerable as it had ever been. The local meetings arranged for would-be entrepreneurs more or less ceased, and the community is still totally dependent upon non-local employers. The failure in Svangsta shows that there is no road to networking; networking is the road.

THE ENTREPRENEUR AS NETWORKING MAN

By elaborating the metaphor of the enacted environment with the help of network theory and by introducing the concept of the “organizing context”, I have tried to supply a framework for research into the creation of new firms. This framework should help us to understand how would-be entrepreneurs can mobilize the support they need, in order to acquire the competencies necessary to successful venturing. In light of these cases, four further arguments have emerged in support of the “contextual” approach.

First, the resource argument says on the one hand that new and small businesses have to specialize, on the other that they have to control a variety of resources in order to handle the problems and options inherent in a complex environment. Only a personal network, concentrated to an organizing context, is powerful and flexible enough to enable the new entrepreneur to meet such challenges.

Second, the legitimation argument says that any new venture needs recognition, not only in the marketplace but also for instance by authorities and various interest groups. A network of trust relationships is strong enough to transcend institutional boundaries. The organizing context, which encompasses more than purely commercial linkages, is an important means of gaining access for instance to the sociopolitical environment.

Third, the action argument says that in order to stay alert, the entrepreneur’s motivation and ability to enact the environment must be maintained. A network structure provides the mental and social support needed to launch experiments and rationalize their outcomes. In other words it promotes entrepreneurial action. The social

98 B. JOHANNISSON

and/or geographical proximity provided by an organizing context makes such processes both desirable and feasible (cf. Shaper0 and Sokol, 1982, p. 83).

Fourth, the organizing argument says that networks by themselves create new ventures. Some new companies are established as intermediaries between existing companies. This is the case when an employee who has unique competencies from the point of view of both the former employer and its customers decides to start his own business, cf. case A. Some new firms emerge as composites consisting of network resources that have become obsolete in their present use. Such recycling is facilitated in an organizing context, in which all the members have an overview of any resources and competencies that may be released and are henceforth available for new ventures.

The network perspective shows how important it is that the entrepreneur can handle both independence and dependence (Johannisson and Peterson, 1984). The entrepre- neur is autonomous and externally controlled. In a population context Aldrich and Zimmer (1986) use network terminology to describe entrepreneurs as basically re-active economic actors. My argument is that the entrepreneur, using his network, can operate re-actively and pro-actively at one and the same time. This means, however, that the network must be able to channel both information and influence, i.e. it must include both weak and strong ties. Such a network, though, takes a long time to build, obviously a difficult task for the new entreprenetu. Introducing the concept of “organizing context” I have show that the (initially) weak ties in the marketplace can be compensated for by strong ties in a social community.

Thus, all in all, whether the entrepreneur re-acts or pro-acts, whether he is new in business or experienced, he can be approximately described as “ner~orking man”. This epithet is just as applicable to the high-tech companies of Silicon Valley as to the socially influenced networks created by Briarpatch, for example. or the Triodos Bank N.B. in the Netherlands. In Silicon Valley businesses have hitherto exploited the social and natural environment to create business success. Briarpatch and the Dutch experiment have built a social context for an alternative business logic. The cases presented here illustrate that in favourable organizing contexts, social and commercial considerations run parallel with one another in the day-to-day operations of the business ventures - to the benefit of the entrepreneur and of the context.

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