Back to the list
26 Jun 2014

Research: How can CEOs optimize the impact of their network on business referrals?

Business referrals are of low cost, even costless, and have a stronger influence on potential customers than usual marketing actions. They are therefore highly valuable to SMEs, especially in business-to-business relationships, when uncertainty and the amounts at stake make the purchase decision more difficult. Word of mouth from current satisfied customers is the main source of referrals, but the social capital of the firm's CEO also plays a substantial role in it. Why do some CEOs obtain more business referrals through their personal relationships than others ?

This article by Barthélémy Chollet is the subject of the 6th GEM LAB Executive Summaries.

From the article

Generating Business Referrals for SMEs :The Contingent Value of CEOs' Social Capital
Barthélemy Chollet, Mickael Géraudel, Caroline Mothe , 2014
Journal of Small Business Management 2014 52(1), pp. 79–101

For SMEs, referrals are related to the information about the CEO rather than the information circulating about the firm in general. The study takes an individual point of view, and explores the issue of business referrals and social capital in a sample of 408 CEOs developing B-to-B SMEs in a specific cluster.

Quite surprisingly, the research shows that enlarging one's network by getting in touch with many new people does not automatically generate many new orders, because people with weak ties to a CEO will not spontaneously talk about his or her company. The greatest impact of a CEO's social capital on business is made by consistently cultivating relationships with people over time, people who they not only know through work, and with whom they have emotional connection. This is far more efficient than making a host of new contacts.

More precisely, people with strong ties to a CEO will be more motivated to circulate positive information about this person and his or her company, with a tendency to overestimate his or her qualities. This means that networks, though effective channels for spreading information, also distort it.

To make the most of one's network, it is better to nurture existing strong ties than develop plenty of new ones

The study's second insight : a network made up of contacts from various social fields will generate more business referrals than a network with many people who know each other. Having a dense network with interconnected contacts opens the door to the "echo" effect, as opinions, whether positive or negative, are amplified by talks. It is rather in the CEO's interest to have a sparse network: « structural holes » between contacts lead to a wider and stronger impact of one's social capital.

A simple question will provide all CEOs with a basic self-assessment : "How many people, among my 20 closest business contacts, know each other ? " The lower the number of pairs of related people, the more efficient the network in terms of business referrals.

KEY POINTS

  • A greater number of contacts does not automatically lead to an efficient network for business: it is above all their quality that matters.
  • To improve one's network, it is more important to nurture strong existing ties than to make many new contacts.
  • Social capital will have a much stronger impact on business referrals if one's network is made of people who do not know each other.
Contacts
Magali Michel