Structural Holes: The Social Structure of Competition.

Abstract

The study analyzes the social structure of competition. It addresses the consequences of voids in relational and resource networks. Competitive behavior can be understood in terms of player access to "holes" in the social structure of the competitive arena. Those "structural holes" are network gaps between players which create entrepreneurial opportunities for information access, timing, referrals, and for control. A player brings capital to the competitive arena and walks away with profit determined by the rate of return where the capital was invested. The rate of return is keyed to the social structure of the competitive arena. Each player brings three kinds of capital to the competitive arena: financial capital, such as money and investments; human capital, such as his or her natural qualities and skills; and social capital, i.e. networks of other players. Social capital is the final determinant of competitive success. Something about the structure of a player's network (his or her relations with other players, such as colleagues, friends, and clients), and the location of the player's network in the structure of the arena defines the player's chances of getting higher rates of return. These chances are enhanced by two kinds of network benefits for those who can exploit structural holes: information and control. Opportunities for success are many, but it is information that plays a central role in seizing them; structural holes determine who knows about opportunities, what they know, and who gets to participate. Structural holes also generate control benefits, giving certain players an advantage in negotiating their relationships. Following sociological theory, a player who derives benefit from structural holes by brokering relationships between other conflicted players is called tertius gaudens. The essential tension in tertius strategies is not hostility of participants, but rather uncertainty; no one has absolute authority in the relationship under negotiation. The findings of empirical research indicate that structural holes are advantageous to suppliers and customers, but not to producers in their negotiated transactions, because suppliers and customers benefit from competition among producers. The information and control benefits of structural holes are advantageous to managers, and the managers who develop those benefits are an asset to the firm employing them. Managers with networks rich in structural holes often reach promotion faster. Hole effects are most evident for managers operating on a social frontier, i.e. in places where two social worlds meet. Social frontiers involve continual negotiations of the expectations of the manager and those of the people across the frontier, and thus more entrepreneurial skill is required. The most serious frontier is the political boundary between top leadership and the rest of the firm. To move up the corporate ladder, a manager has to transform his or her frame of reference from that of an employee protected by the firm, to that of a leader responsible for the firm. The findings also indicate that women and entry-rank men tend to be promoted earlier because they build hierarchical networks around a strategic partner who helps them break into higher ranks. Although the reported differences between the manager networks have clear implications for promotions, there are no differences among managers in their tendencies to have one network rather than another, which is especially striking with respect to the sex and rank differences that are observed to be important in distinguishing network effects. Structural holes provide a theoretical connection between micro and macro levels of sociological analysis. The structural hole argument extends other theories, such as personality theory, interface theory of markets and population ecology, and resource dependence and transaction cost theory