The perceived importance of external ties and the performance of small owner-managed firms

Abstract

The effects of perceived importance of external ties, a dimension of tie strength, on the performance of small owner-managed firms were investigated using data from a survey of the owners of small owner-managed firms in Scotland and New Zealand. Ties rated as highly important were found to promote growth in sales. In contrast, weak-in-importance ties were found to suppress growth in sales. The results support the core competence perspective on the configuration of external ties, suggesting that firms should focus on important external ties that contribute to their core competencies.

Keywords

external ties networks small business small owner-managed firms tie strength

Introduction

A growing body of literature suggests that networks of ties between owners/managers of small firms and external organizations and individuals may explain the differences in the firms’ performance (Acheampong et al., 2017; Amoako and Matlay, 2015; Jack et al., 2004; Pellinen, 2014; Söderqvist and Kamala Chetty, 2013; Stam et al., 2014). Such ties may be a source of emotional support (thus giving access to psychological capital) or offer access to role models (Brüderl and Preisendörfer, 1998; Nanda and Sørensen, 2010), which may encourage entrepreneurs to persist in their efforts to establish and to grow their firms. Further, networks may be a source of knowledge and ideas (Molina-Morales and Martínez-Fernández, 2010; Uzzi, 1997); in particular, context-bound tacit knowledge may be unavailable from other sources. By associating with well-regarded organizations, a small firm may gain legitimacy (Elfring and Hulsink, 2003; Higgins and Gulati, 2003), and by forming ties of trust with customers or suppliers, the focal firm can reduce transaction costs, resulting in benefits for all firms participating in the network (McAdam et al., 2014; Uzzi, 1997). Networks can be leveraged to access financial capital, forming both a conduit for information about financial capital availability and, via the trust they generate, facilitating its attainment (Jonsson and Lindbergh, 2013). Human capital can also be accessed via networks, with networks, once again both offering access to information about valuable human resources available and offering an extent of trust assurance about the veracity and the validity of such information (Seibert et al., 2001). Finally, networks by themselves may be seen as part of the firm’s social capital (Partanen et al., 2008) and may offer access to further social capital as current ties facilitate the establishment of further ties (Jack, 2005).

However, such networks may also have negative effects. For example, diverse network ties with varying role expectations may result in role conflicts, forcing the manager to make decisions that are not fully aligned with the interests of the firm (Wincent et al., 2016). External ties may prevent the firm from adapting to changes in the wider environment beyond the scope of the established network (Gargiulo and Benassi, 2000). Further, external ties consume resources such as the manager’s time. Just as investing in new equipment, in software systems, or in human capital, managers are not always successful; investment in forming and maintaining external ties entails risks. Forming and maintaining ties that do not bring benefits sufficient to justify their opportunity costs may negatively affect performance and survival, as suggested by empirical evidence (Acheampong et al., 2017; McFadyen and Cannella, 2004). The present study contributes to our understanding of the effects of external ties on firm performance by distinguishing the effects of ties perceived by managers as important.

In his seminal paper, Granovetter (1973) introduced the concept of tie strength as a combination of “the amount of time, the emotional intensity, the intimacy, and the reciprocal services which characterize the tie” (p. 1361) as well as “frequency of contact” (p. 1371). He anticipated that the issue of operationalizing the concept of tie strength was going to be settled in further research. For ties involving small firms, however, there is still no universal agreement on the meaning of tie strength, as exemplified by the findings of the recent meta-analysis by Stam et al. (2014). Stam et al. found it impossible to summarize the prior results of the effects of tie strength in a broad sense and limited the analysis to studies interpreting ties with family and friends as strong ties and the rest as weak ties (irrespective of other attributes of the tie, such as frequency of interaction). Indeed, for ties involving small firms, a unidimensional operationalization of tie strength has never been established. For example, the attempt by Money (2004) to operationalize the strength of ties involving small firms using a range of indicators suggested by prior research, such as duration and frequency of contact, was not successful because of a lack of consistency across the indicators. Money (2004) concluded that tie strength should be treated as a multidimensional concept and argued that rather than considering tie strength in general, greater insights into the role of ties involving small firms can be achieved by considering different dimensions of strength, which do not necessarily strongly correlate with each other and which may affect outcome variables of interest in different ways.

Jack (2005), in a longitudinal ethnographic study of ties maintained by small firms in Scotland, suggested that usefulness of a tie for the firm is a particularly salient dimension of tie strength (p. 1250). Ties remain latent and are reactivated when required, thus realizing their potential (Jack, 2005; Jack et al., 2004). Usefulness of a tie in Jack’s study is similar to a tie’s business importance, a dimension of tie strength introduced by Money (2004). The present study follows Money (2004) in viewing business importance of a tie as a dimension of tie strength and focuses on the effects of strong-in-importance and weak-in-importance ties on firm performance. It has to be emphasized that tie importance is a distinct dimension of tie strength, and just like other dimensions of tie strength, such as duration or frequency of contact do not necessarily correlate with each other, strength-as-importance does not necessarily correlate with other dimensions of tie strength. For example, just as a tie that has existed for a long time might not involve frequent interactions, a tie that has existed for a long time may be seen as important or as not important for the firm. Strong-in-importance ties should not be automatically assumed to possess any other characteristics of “strong” ties, just as, because of the absence of an established operationalization of tie strength, one should not automatically conclude that a “strong” tie is of long duration, or involves frequent contacts, or involves relatives or personal friends.

We argue that strength as perceived business importance is the dimension of tie strength that is particularly relevant to viewing ties as resources (providing access to financial, human, psychological, social, and other forms of capital) and thus to the resource-based view (RBV) of the firm (Barney, 1991; Lavie, 2006; Newbert, 2008; Rice et al., 2015; Wernerfelt, 1984) and the core competence perspective (Bhamra et al., 2011; Prahalad and Hamel, 1990). Thus, it appears that in order to be successful, firms should focus on establishing and maintaining bundles of resources that contribute to their core competencies, which are the roots of sustained competitive advantage (Prahalad and Hamel, 1990). For ties between the focal firm and external entities, the resource based view suggests focusing on the ties that give access to external resources that contribute to such bundles of resources (Dyer and Singh, 1998; Lavie, 2006). We argue that small firms are likely to regard such ties as important and to invoke them on occasions when their potential can be realized, which is a behavior reported by Jack (2005). Street and Cameron (2007) highlighted the relevance of the RBV of the firm to the study of external relations of small firms and called for future research from an RBV perspective. By studying the effects of the dimension of tie strength that is particularly relevant to the RBV, the present study contributes to answering their call.

The rest of the article is organized as follows. First, the article introduces perceived tie importance as a dimension of tie strength particularly relevant to the RBV of the firm. Then, the article discusses the implications of the core competencies perspective and the strength of weak ties perspective for the effects of the strong-in-importance and weak-in-importance ties on small firm performance and states the hypotheses suggested by the two perspectives. After that, the sample and the variables are introduced. Then, the descriptive characteristics of the respondents are presented, followed by the results of hypotheses testing. Finally, the implications of the findings are discussed, and conclusions are drawn.

Theory and hypotheses

Following the suggestion of Street and Cameron (2007), the present study builds on the extension of the RBV to incorporate network resources proposed by Lavie (2006). Following Lavie (2006), the broad definition of resources by Barney (1991) is adopted: resources “include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc.…that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness” (p. 101). According to Barney (1991), to achieve sustained competitive advantage, the firm needs to develop and maintain bundles of resources that are valuable, rare, and imperfectly imitable (Barney, 1991: 106). Lavie’s (2006) extension of the argument by Barney (1991) suggests that some of the resources in such bundles may be accessed via the firm’s external network, rather than being owned by the firm (Lavie, 2006: 641).

Although Lavie (2006) focuses explicitly on networks of interfirm alliances, we argue that for small owner-managed firms, this argument applies to all external ties. Thus, emotional support from relatives and friends, know-how possessed by the firm’s competitors (Bengtsson and Johansson, 2014), or the legitimacy of a well-regarded customer (that might enhance the legitimacy of the focal firm) can form part of the focal firm’s resource bundles, contributing to sustained competitive advantage for as long as these resources can be accessed via the firm’s external ties.

External ties give access to resources. Extending the argument of Street and Cameron (2007) regarding the applicability of the RBV to ties involving small firms, we argue that a focus on developing and maintaining idiosyncratic resource bundles contributing to sustained competitive advantage (and thus contributing to the firm’s core competencies; Petts, 1997) suggests investing in maintaining the external ties that grant access to the resources included in such bundles (and thus are important for the focal firm) and disinvesting in the rest of the ties.

The present study follows Money et al. (1998) and Money (2000, 2004) in regarding perceived importance of external ties as a dimension of tie strength. An interpretation of the strength of ties as their perceived importance was initially mentioned by Granovetter (1983: 218). Following Money (2004), we view the strength of ties involving small firms as a complex multidimensional concept that cannot be expressed with a single number. We focus on perceived business importance as a particularly important dimension because of its relevance to the RBV, based on an assumption that ties that contribute to a small firm’s core competencies are likely to be regarded by the firm as important.

For external ties formed by small owner-managed firms, other, more commonly considered dimensions of the strength of ties can be seen as related to perceived tie importance. Considering some of the dimensions of strong ties tentatively suggested by Granovetter (1973: 1361) (amount of time, emotional intensity, intimacy, and reciprocal services), one would expect that an owner/manager would maintain ties considered as important for longer, would have stronger feelings associated with such ties, and would invest in maintaining them – expecting returns. Over time, trust may build up, resulting in intimacy (which may facilitate the exchange of tacit knowledge; Uzzi, 1997). Tie strength has been associated with perceived tie importance in qualitative studies of networks centered on small- or medium-sized firms (Jack, 2005; Jørgensen and Ulhøi, 2010; Uzzi, 1997). Nonetheless, there is no expectation that the perceived importance dimension would replace other dimensions of tie strength, or even strongly correlate with other dimensions of tie strength in all contexts. For example, it is conceivable that a relatively new tie offers opportunities that are highly salient to building the firm’s core competencies and thus would be considered important by the firm.

Focus on core competencies and firm performance

Following Rice et al. (2015) and Bradley et al. (2012), firm performance is conceptualized as growth in sales and growth in profits. As argued earlier in this article, the core competence perspective suggests that to achieve sustainable competitive advantage and, ultimately, growth in sales and growth in profits, a firm should focus on ties that contribute to the firm’s core competencies. Such ties are likely to be perceived as important and thus are strong in importance. At the same time, maintaining ties that are not contributing to the firm’s core competencies may undermine the firm’s focus on its core competencies and thus undermine its competitive advantage and, ultimately, performance, by diverting the owner/manager’s attention, occupying employee time, or diverting resources from the core areas in other ways. Such ties are likely to be perceived as unimportant and thus are weak in importance. Based on this argument, the following hypotheses are formulated:

H1a: Strong-in-importance ties with external entities are positively related to growth in sales.

H1b: Strong-in-importance ties with external entities are positively related to growth in profits.

H2a: Weak-in-importance ties with external entities are negatively related to growth in sales.

H2b: Weak-in-importance ties are negatively related to growth in profits.

Weak ties theory and firm performance

The strength of weak ties argument (Granovetter, 1973; Granovetter, 1983) suggests that weak ties are more likely than strong ties to be a source of new information resulting in innovation and, therefore, are more valuable than strong ties. In terms of the dimension of tie strength adopted in the present study, one may expect that an owner/manager would spend attentional resources, time, and effort on maintaining a tie believed to be important to the firm (a tie that is strong in importance). The owner/manager would acquire better knowledge of such a tie and, therefore, is likely to learn to anticipate the kind of information that can be obtained via the tie. At the same time, casual ties that are not considered by the owner/manager as important have a greater potential to bring information and knowledge from entirely new areas, challenging the owner/manager’s understanding of and beliefs about the firm and its environment and thus opening entirely new opportunities. Exploiting such opportunities may result in growth in sales and profits.

As mentioned in the introduction, in their meta-analysis, Stam et al. (2014) found it impossible to summarize the results of prior studies of the effects of tie strength on firm performance within a single framework. Another review, by Jack (2010), explicitly highlighted that “the results for strong and weak ties are contradictory” (p. 130). Indeed, even though Batjargal (2003) found weak ties to enhance performance (and strong ties to have no effect), Bradley et al. (2012) found weak ties to suppress performance (and strong ties—to enhance it; both studies focused on the distinction between ties with friends and relatives, seen as strong, and the rest of the ties, seen as weak). Nonetheless, Stam et al. (2014) concluded that the overall evidence suggests that both strong and weak ties contribute to firm performance, even though the claim of the weak ties theory (Granovetter, 1973, 1983) that weak ties are more valuable than strong ties received little support. Based on the weak ties theory argument presented in the previous paragraph and, to an extent, based on the empirical results obtained for dimensions of tie strength that differ from the one emphasized in the present study, the following alternative hypotheses are formulated:

H2a*: Weak-in-importance ties with external entities are positively related to growth in sales.

H2b*: Weak-in-importance ties are positively related to growth in profits.

Thus, a plausible argument can be provided both in favor of hypotheses H2a and H2b (representing the core competency perspective), and against these hypotheses, resulting in hypotheses H2a* and H2b* (representing the weak ties theory perspective). The present study can be seen as an exploratory study comparing the two perspectives, with tie strength interpreted as their perceived importance.

Method

Sample

The hypotheses were tested using data obtained in a survey of small owner-managed firms in Scotland and New Zealand. Scotland and New Zealand are broadly similar in terms of population, economic infrastructure, and opportunity for small firms. New Zealand is a small open economy with a population of around 4.6 million (www.statistics.govt.nz). Scotland is similar in size, with a population of 5.3 million (http://www.gov.scot/Topics/Statistics). New Zealand had over 528,000 registered businesses in 2017 (https://www.stats.govt.nz/information-releases/new-zealand-business-demography-statistics-at-february-2017). Scotland had 365,600 private sector enterprises operating in 2017 (http://www.gov.scot/Topics/Statistics/Browse/Business/Corporate/KeyFacts). The comparison conducted by Smallbone et al. (2012) suggests that the two regions have similar institutional environments and sectorial composition for small firms. In view of the similarity of the two regions, in the analysis, firms are treated as a single population; region is introduced as a control variable with an expectation that it will have no statistically significant effects. We argue that including firms from two similar, but culturally and politically distinct, regions affords, to an extent, an international corroboration in results.

To be considered a small firm, the firm had to employ between 0 and 49 employees. The firms were selected at random from the UK Yellow Pages online directory of business services (http://www.yell.com; for Scottish firms) and from a database of small firms developed by the New Zealand Centre for Small and Medium Enterprises Research (for New Zealand firms). The sample included 635 Scottish and 300 New Zealand firms.

A pilot study was conducted to test the adequacy of the research instrument, and minor amendments were made as a result of this study. The survey proper was administered by telephone in early 2013. Firm owners/managers were the key informants. There were 302 respondents, 134 from New Zealand and 168 from Scotland, providing an overall response rate of 32%.

The present study is a secondary analysis of the data obtained in the survey, which was initially conducted to study market diversification. Therefore, data obtained for a relevant subset of the survey questions, not all of the data, are used in the present study. After removing cases with missing values for variables used in the present study, 285 cases were available for analysis (157 from Scotland and 128 from New Zealand), resulting in an effective response rate of 30.5%.

To test the hypotheses of the present study, sales and profit growth, describing the firm performance, were used as dependent variables, and the number of strong-in-importance ties and the number of weak-in-importance ties were used as independent variables.

Dependent variables

Following the review by Stam et al. (2014), three types of measures are relevant to describing the performance of small firms: growth, profitability, and nonfinancial performance measures. Performance data from independent sources, such as taxation authorities, were not available. Profitability and nonfinancial performance measures were not included in the survey because survey respondents tend to be reluctant when asked to provide profitability data (Bradley et al., 2012), and using self-reported nonfinancial performance measures (Wach et al., 2016) would have resulted in common method bias concerns (Podsakoff et al., 2003). Therefore, the present study used the two most commonly considered growth measures (Stam et al., 2014), growth in sales and growth in profits, as describing firm performance.

Respondents were asked to indicate whether sales have declined, remained the same, or have grown over the past 3 years. A similar question was used to elicit information about the growth in profits. Ordered categorical variables were used to increase the likelihood of a high response rate because, as outlined above, managers of small firms are known to be reluctant to provide detailed financial information in survey responses (Bradley et al., 2012).

Independent variables

Strong-in-importance ties and weak-in-importance ties were operationalized based on asking the respondents to rate from 1 = very unimportant to 5 = very important the relative importance of their firms’ ties to nine different categories of external actors (the wording was “how would you describe your relationship with each category in terms of helping to make business decisions?”). The categories that were based on similar lists used by Gronum et al. (2012) and Gutierrez and Fernandez Perez (2010) were adapted to fit the Scotland and New Zealand contexts and included general managers or directors of other businesses within the same industry; general managers or directors of other businesses within other industries; suppliers; customers; financial institutions; industry forums, trade associations, and trade fairs; government officials; and relatives and friends. Further, for each category, the respondents were asked to indicate the number of ties. For each respondent, ties in categories rated as very important were considered as essential for maintaining or developing the firm’s core competence and thus were interpreted as strong in importance (the number of ties in this category was greater than in any other category, as shown in Table 1). The rest of the ties were considered as playing supplementary roles and thus were interpreted as weak in importance. The numbers of strong-in-importance and weak-in-importance ties, respectively, provided the values of the strong-in-importance ties and weak-in-importance ties as independent variables.

Table 1.

Average numbers of ties rated at different levels.

	Weak-in-importance				Strong-in-importance
	Very unimportant	Unimportant	Neither important nor unimportant	Important	Very important
Scotland	1.02	2.75	6.13	12.2	19.3
New Zealand	1.92	6.92	7.2	15.4	16.9
All	1.42	4.62	6.61	13.6	18.2

Control variables

Even though firms from two distinct economies, New Zealand and Scotland, were represented in the sample, the region variable was not expected to affect the growth in sales or profitability. Therefore, region was used as a control variable. Further, control variables were the firm’s size (the number of employees, as reported by the respondents) and the firm’s industry.

Minimizing the effects of command method variance

The following aspects of the present study minimize the likelihood of spurious results because of common method variance (Podsakoff et al., 2003). First, the survey questions were simple and precise, and elicited factual information, rather than assessing the respondents’ perceptions. Second, the questions eliciting data used in the present study were embedded in a larger questionnaire and the key independent variables—the numbers of strong-in-importance and weak-in-importance ties resulted from a complex calculation and thus were not visible to the respondents. Therefore, the results are unlikely to be influenced by the respondents’ perceptions regarding the correlations hypothesized in the present study. Finally, post hoc analysis was conducted using a marker variable technique (Lindell and Whitney, 2001; Richardson et al., 2009; Williams et al., 2010). A variable for which no relationships to other variables used in the present study were expected (describing whether the business is run by spouses) was used as a marker variable. Regression analysis revealed no statistically significant relationships between strong-in-importance ties, weak-in-importance ties, firm size, sales, or profitability and the marker variable, providing further evidence suggesting that common method variance did not affect the results of the present study.

Results

Descriptive statistics characterizing the respondents are provided in Table 2. The responding firms were from a range of industries, including tourism, forestry, construction and utilities, professional services, fisheries, transportation, trades, personal services, and hospitality.

Table 2.

Characteristics of the sample.

	Strong-in-importance ties	Weak-in-importance ties	Size	Profits steady or growing	Profits falling	Sales steady or growing	Sales falling
Scotland	19.3	22.1	6.33	123	34	117	40
New Zealand	16.9	31.4	5.72	97	31	91	37
All	18.2	26.3	6.06	220	65	208	77

Note: Averages per firm are given for strong ties, weak ties, and size (the number of employees). The rest of the numbers are counts of firms.

The number of strong-in-importance ties correlated with the number of weak-in-importance ties, with Pearson’s correlation coefficient of r = 0.133 (p = 0.02) and with the firm size (r = 0.151, p = 0.01). However, the correlation between the number of weak-in-importance ties and firm size was not statistically significant (r = 0.100, p = 0.09). According to t-test results, there was no statistically significant difference between firm sizes and the numbers of strong ties between the two regions; however, New Zealand companies had more weak-in-importance ties (p = 0.003). Nonetheless, in both countries, firms tended to have more ties rated at higher levels (see Table 3). Because maintaining ties consumes resources (Portes and Sensenbrenner, 1993; Wincent et al., 2016), it makes little sense for small owner/managed firms to maintain unimportant ties.

Table 3.

Average importance ratings for different categories of ties.

	Scotland	New Zealand	All
Clients/customers	4.18 (1.30)	3.93 (1.35)	4.07 (1.32)
Suppliers	3.82 (1.18)	3.39 (1.36)	3.62 (1.28)
General managers or directors of other businesses within the same industry	3.39 (1.27)	3.20 (1.45)	3.31 (1.36)
Financial institutions	3.36 (1.34)	2.59 (1.47)	3.01 (1.45)
Relatives and friends	3.29 (1.23)	2.41 (1.20)	2.89 (1.29)
General managers or directors of other businesses within other industries	3.01 (1.31)	2.57 (1.27)	2.81 (1.31)
Competitors	3.25 (1.44)	2.28 (1.37)	2.81 (1.49)
People from industry forums, trade associations, trade fairs, or other industry events	2.88 (1.31)	2.17 (1.18)	2.56 (1.30)
Government officials	2.60 (1.28)	1.85 (1.28)	2.26 (1.33)

Note: Means are followed by standard deviations in parentheses. The scale ranged from 1 = very unimportant to 5 = very important.

As shown in Table 4, close to half of the strong-in-importance ties were with customers. Strong-in-importance ties with suppliers and managers of other businesses (within the same or within other industries) were also common in both countries.

Table 4.

Distribution of numbers of strong ties (ties rated as very important) by categories of ties.

	Scotland (%)	New Zealand (%)	All (%)
Clients/customers	41	54	46
Suppliers	16	16	16
General managers or directors of other businesses within the same industry	9	13	10
General managers or directors of other businesses within other industries	10	7	9
Relatives and friends	8	2	6
Financial institutions	6	4	5
Competitors	5	1	3
Government officials	2	3	3
People from industry forums, trade associations, trade fairs, or other industry events	4	1	2

To test the hypotheses of the present study, a probit regression model with sales growth and profit growth regressed on the number of strong-in-importance ties, the number of weak-in-importance ties, region, size, and industry was estimated using Mplus software (The version was 7. Developer is Muthén & Muthén 3463 Stoner Avenue Los Angeles, CA 90066) (Muthén and Muthén, 2015). The numbers of strong-in-importance and weak-in-importance ties affected the sales growth with standardized beta coefficients of 0.176 (p = 0.007) and −0.146 (p = 0.016), respectively, but did not affect profit growth (the details of the probit analysis results are given in Table 5). As anticipated, the control variables (region, size, and industry) had no statistically significant effects. Thus, hypotheses H1a and H2a have been confirmed, and, correspondingly, hypothesis H2a* has been disconfirmed. However, no conclusive results were obtained for hypotheses H1b, H2b, and H2b*.

Table 5.

Probit regression results.

Independent variable	Sales growth		Profit growth
Independent variable	Coefficient	p Value	Coefficient	p Value
Strong-in-importance ties	0.176	0.007	0.126	0.06
Weak-in-importance ties	−0.146	0.016	−0.105	0.124
Region	0.069	0.299	0.013	0.851
Size	0.104	0.157	0.102	0.197
Industry	−0.009 to 0.137	0.135 to 0.898	−0.045 to 0.123	0.082 to 0.831

Note: For industry, ranges of values are given for the indicator variables, representing this categorical variable in the probit model.

Discussion

The purpose of the present study was to explore the effects of perceived importance of ties between a firm and external entities, such as customers and suppliers. Perceived tie importance is a rarely considered dimension of tie strength that is particularly relevant to the RBV of the firm. The results suggest that for small owner-managed firms, external ties that are considered by the owners/managers to be important (are strong-in-importance) contribute to sales growth. At the same time, ties that are not considered to be important (are weak-in-importance) not only do not promote sales growth but suppress it.

The negative effect of weak-in-importance ties can be attributed to the resources that they consume, such as the owner/managers’ time and attention (Batjargal, 2003; Wincent et al., 2016). A further reason could be that benefits obtained via weak-in-importance ties are benefits for the local business environment but not necessarily for the firm. A major benefit commonly attributed to weak ties is the fundamentally new information that they may provide, leading the firm to innovate, and thus to carry risks associated with innovation. However, recent research indicates that innovativeness may reduce the survival rates of new firms (Hyytinen et al., 2015). From the core competence perspective, the ability to innovate supported by network relationships can be a core competence of a large firm (Kandampully, 2002; Osiyevskyy et al., 2017) because a large firm may have the capacity to initiate large numbers of projects and let some fail in their search for innovative products, services, or business models. However, small firms are not equipped to bear the risks of ongoing radical innovation and should establish their core competencies elsewhere. As suggested by Hyytinen et al. (2015), even though innovation by a small firm (which may be prompted by information and influence arriving via weak-in-importance ties) may be of benefit in a broader context (e.g. it may contribute to knowledge spillovers promoting regional development), for the firm itself, it may be detrimental, rather than beneficial.

Moreover, the results of the qualitative study by Jack (2005) suggest that successful small owner-managed firms may access resources (such as new knowledge) available via weak ties indirectly, via their strong (and, in particular, strong-in-importance) ties. Indirect access not only reduces tie maintenance costs (by reducing the need to maintain weak ties) but also might mitigate risks associated with acting on the knowledge thus obtained. Strong ties enable holistic, fine-grained information transfer and are likely to filter information to fit the local context (Uzzi, 1997). Therefore, acting on knowledge obtained via strong ties may be less risky, as the joint problem-solving capability (Uzzi, 1997) of the local strong tie network supports the decision-making of the small firm owner/manager. Quoting the words of one of the participants in Uzzi’s study (p. 51) by establishing a strong relationship with an external entity “you become important to them. And if you’re not important, you won’t get quality.” We argue that “quality” applies not only to tangible materials but also to information and advice.

As mentioned earlier in this article, failing to distinguish different dimensions of strength may lead to results that are not consistent across studies, in particular, for the effects of strong and weak ties on firm performance (Stam et al., 2014). In the present study, the results of data analysis indicate that perceived tie importance is a dimension of strength that captures an important distinction because strong-in-importance and weak-in-importance ties were found to have opposite effects. Further, one may expect that by consistently focusing on strength-as-importance, greater consistency can be achieved across contexts and stages of firm development.

For example, Batjargal (2003) found formal ties (ties that the participants did not describe as ties with family or close friends) to enhance performance (and family or friend ties to have no effect) for small firms in Russia, but Bradley et al. (2012) found formal ties to suppress performance (and family- and friend-based ties – to enhance it) for small firms in Kenya. It is possible that in the harsh context of a developing economy (Kenya), ties to family and friends gave access to resources that supported the firms’ core competencies (and thus were important from the perspective of the owner/manager), and in the more resource-rich context of an emerging economy (Russia), there was less reliance on family and friends in business matters, and formal ties were important. If this assumption is correct, in terms of the dimension of tie strength emphasized in the present study, the results by Batjargal (2003) and Bradley et al. (2012) can be interpreted as consistently showing the contribution of strong-as-important ties to firm performance (and the results of both studies are consistent with the results of the present study). If, however, strong ties are interpreted as ties with family and friends, irrespective of their relevance to the firm (which is a common practice; Stam et al., 2014), the results of the studies by Batjargal (2003) and Bradley et al. (2012) are inconsistent.

The qualitative data quoted in the studies by Uzzi (1997) and Jack (2005) suggest that importance is a characteristic of an external tie that is highly relevant to practitioners; for example, a participant in the study by Jack (2005) highlights an external tie that “has saved…money, time and trouble so it’s really important” (p. 1246). Because the conceptualization of tie strength as their perceived importance relies on language from practitioners’ vocabulary, it is potentially particularly useful in application to practice. Owners/managers of small firms should have no trouble in establishing which ties they consider important. The implications of the results of the present study are that the owners/managers should consider investing more in important ties and disinvest in the ties they consider to be less important.

The descriptive analysis of strong-as-important ties conducted in the present study suggests that the ties contributing to small firm performance are overwhelmingly ties with customers, even though ties with suppliers and other firms also have a sizeable presence. Therefore, it is likely that networking contributes to the small firms’ core competencies by enabling them to provide better customer service. Indeed, small firms are in a position to know their customers very well, which may give them an edge in competition with larger rivals. Thus, rather than establishing broad networks in the hope that serendipitous encounters prompt radical innovation (which is associated with risks that small firms cannot afford), small firms should network closely with their customers to engage in joint problem-solving (Uzzi, 1997), benefiting both the focal firm and its partners and ultimately improving the effectiveness and efficiency of the overall supply chain to which they all belong.

Contributions of the study

The present study contributes by providing evidence that for small owner-managed firms, strong-as-important ties contributing to the firm’s core competence are beneficial, while weak (in importance) ties not only do not promote performance but also undermine it.

Further, the study demonstrates the viability of interpreting the perceived importance of ties between small owner-managed firms and external entities as a dimension of tie strength. Strong-in-importance ties are conceptualized as ties that the owner/manager considers to be highly important.

Implications of the study

The results of the study have clear and actionable implications for practice. Owners/managers of small firms should invest in establishing and maintaining ties that they consider to be important for the firm and should not be lured by the possibility of obtaining new information into spending time and attention on establishing and maintaining ties with uncertain benefits. For most small owner-managed firms, this means focusing on maintaining ties with their customers.

Limitations of the study and recommendations for future research

The present study used self-reported growth in sales and profits as dimensions of firm performance, and no statistically significant effects on growth in profits were discovered. It is desirable that the study is replicated with a larger sample in a context where independent data on performance, such as profitability data from tax authorities, are available. Additionally, the use of growth in sales as a dimension of firm performance might inadequately describe the performance of firms that limit themselves to a particular market niche or avoid growth as a deliberate choice.

Further, external ties might contribute to firm performance only over a period of time (e.g. resources accessed via such ties are mobilized to address contingences, as described by Jack, 2005:57), and current performance may be achieved with the help of ties that are no longer maintained. Thus, an analysis of how the numbers of strong-in-importance and weak-in-importance ties relate to firm performance are valid only if such numbers remain stable over time, which is not assured. This limitation is because of the cross-sectional design of the survey. Nonetheless, designing a longitudinal quantitative study fully overcoming this limitation may present a considerable challenge because different ties may take differing amounts of time to affect performance. Thus, it is not surprising that, to the best of our knowledge, all of the prior quantitative studies of the effects of external ties maintained by firms relied on cross-sectional designs. Overcoming methodological challenges and designing and implementing longitudinal, computer simulation, or other designs that allow the exploration of the relationships between external ties and their contributions to firm performance directly is a topic for further research; such studies may or may not confirm the findings of the present study. Further, verifying the findings of the present study in different cultural contexts (e.g. in countries with different culture, such as China or Vietnam) is also desirable.

The study was limited to small owner-managed firms in two small developed regions, and one should exercise caution in generalizing the results to other contexts, such as firms in developing countries or in major metropolitan urban areas. In particular, the study did not detect negative effects of strong ties, consistent with the study by Jack (2005), conducted in a very similar context, and in contradiction to the study by Uzzi (1996), conducted with larger firms in the very different context of New York City. It is possible that scenarios similar to the scenario reported by Uzzi (1997), with smaller firms becoming dependent on a larger partner to which they are connected with strong ties experiencing difficulties when the larger partner goes out of business, are more likely in the context of New York City.

The study has provided no indication about why different firms had different numbers of external ties. Therefore, even though the results suggest that having more strong-as-important ties results in greater performance, the evidence is not sufficient to suggest having more strong external ties as a recommendation for practice. An optimal number and composition of important external ties may depend on the firm’s internal resources, such as the owner/manager’s ability to reconfigure the ties in response to changes in the environment. There is a potential that further insights into this issue may be gained by applying the notion of the dynamic capabilities of the firm (Rice et al., 2015; Woldesenbet et al., 2012).

Conclusion

The purpose of the present study was to explore the effects of perceived importance of ties between a firm and external entities, such as customers and suppliers, thus focusing on a dimension of tie strength that is particularly relevant to the RBV of the firm, thereby answering the call by Street and Cameron (2007) to apply the RBV of the firm to the study of external relations of small firms.

The effects of ties were investigated using data from a survey of the owners of small owner-managed firms in Scotland and New Zealand. Interpreting the strength of ties between the focal firm and external entities as the importance of the ties for the focal firm allowed formulating hypotheses based on the core competence perspective in terms of the strength (strength-as-importance) of external ties.

The results suggest that for small owner-managed firms, ties to other organizations and actors that are considered by the managers to be highly important (and thus are strong ties according to our conceptualization) contribute to sales growth. At the same time, ties that are less important (weak ties) not only do not promote sales growth but also suppress it. Thus, the results of our data analysis indicate that perceived tie importance is a dimension of strength that captures a salient distinction. The implication for practice is that owner/managers should focus on cultivating ties they consider highly important and disinvest into maintaining other external ties.

Footnotes

Acknowledgements

The authors would like to thank the two reviewers and the Editor-in-Chief for constructive comments and helpful suggestions during the review process. The suggestions enabled us to improve the article.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Jo Bensemann

References

Acheampong

Narteh

Rand

(2017) Network ties and survival: a study of small commercial poultry farms in Ghana. International Journal of Entrepreneurship and Innovation 18(1): 14–24.

Amoako

Matlay

(2015) Norms and trust-shaping relationships among food-exporting SMEs in Ghana. International Journal of Entrepreneurship and Innovation 16(2): 123–134.

Barney

(1991) Firm resources and sustained competitive advantage. Journal of Management 17(1): 99–120.

Batjargal

(2003) Social capital and entrepreneurial performance in Russia: a longitudinal study. Organization Studies 24(4): 535–556.

Bengtsson

Johansson

(2014) Managing cooptation to create opportunities for small firms. International Small Business Journal 32(4): 401–427.

Bhamra

Dani

Bhamra

(2011) Competence understanding and use in SMEs: a UK manufacturing perspective. International Journal of Production Research 49(10): 2729–2743.

Bradley

McMullen

Artz

. (2012) Capital is not enough: innovation in developing economies. Journal of Management Studies 49(4): 684–717.

Brüderl

Preisendörfer

(1998) Network support and the success of newly founded business. Small Business Economics 10(3): 213–225.

Dyer

Singh

(1998) The relational view: cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review 23(4): 660–679.

10.

Elfring

Hulsink

(2003) Networks in entrepreneurship: the case of high-technology firms. Small Business Economics 21(4): 409–422.

11.

Gargiulo

Benassi

(2000) Trapped in your own net? Network cohesion, structural holes, and the adaptation of social capital. Organization Science 11(2): 183–196.

12.

Granovetter

(1973) The strength of weak ties. American Journal of Sociology 78(6): 1360–1380.

13.

Granovetter

(1983) The strength of weak ties: a network theory revisited. Sociological Theory 1(1): 201–233.

14.

Gronum

Verreynne

Kastelle

(2012) The role of networks in small and medium-sized enterprise innovation and firm performance. Journal of Small Business Management 50(2): 257–282.

15.

Gutierrez

Fernandez Perez

(2010) Managerial networks and strategic flexibility: a QM perspective. Industrial Management and Data Systems 110(8): 1192–1214.

16.

Higgins

Gulati

(2003) Getting off to a good start: the effects of upper echelon affiliations on underwriter prestige. Organization Science 14(3): 244–263.

17.

Hyytinen

Pajarinen

Rouvinen

(2015) Does innovativeness reduce startup survival rates? Journal of Business Venturing 30(4): 564–581.

18.

Jack

(2005) The role, use and activation of strong and weak network ties: a qualitative analysis. Journal of Management Studies 42(6): 1233–1259.

19.

Jack

(2010) Approaches to studying networks: implications and outcomes. Journal of Business Venturing 25(1): 120–137.

20.

Jack

Dodd

Anderson

(2004) Social structures and entrepreneurial networks: the strength of strong ties. International Journal of Entrepreneurship and Innovation 5(2): 107–120.

21.

Jonsson

Lindbergh

(2013) The development of social capital and financing of entrepreneurial firms: from financial bootstrapping to bank funding. Entrepreneurship Theory and Practice 37(4): 661–686.

22.

Jørgensen

Ulhøi

(2010) Enhancing innovation capacity in SMEs through early network relationships. Creativity and Innovation Management 19(4): 397–404.

23.

Kandampully

(2002) Innovation as the core competency of a service organisation: the role of technology, knowledge and networks. European Journal of Innovation Management 5(1): 18–26.

24.

Lavie

(2006) The competitive advantage of interconnected firms: an extension of the resource-based view. Academy of Management Review 31(3): 638–658.

25.

Lindell

Whitney

(2001) Accounting for common method variance in cross-sectional research designs. Journal of Applied Psychology 86(1): 114–121.

26.

McAdam

Dunn

. (2014) Development of small and medium-sized enterprise horizontal innovation networks: UK agri-food sector study. International Small Business Journal 32(7): 830–853.

27.

McFadyen

Cannella

(2004) Social capital and knowledge creation: diminishing returns of the number and strength of exchange relationships. Academy of Management Journal 47(5): 735–746.

28.

Molina-Morales

Martínez-Fernández

(2010) Social networks: effects of social capital on firm innovation. Journal of Small Business Management 48(2): 258–279.

29.

Money

(2000) Social networks and referrals in international organizational buying of travel services: the role of culture and location. International Journal of Hospitality and Tourism Administration 1(1): 27–48.

30.

Money

(2004) Word-of-mouth promotion and switching behavior in Japanese and American business-to-business service clients. Journal of Business Research 57(3): 297–305.

31.

Money

Gilly

Graham

(1998) Explorations of national culture and word-of-mouth referral behavior in the purchase of industrial services in the United States and Japan. Journal of Marketing 62: 76–87.

32.

Muthén

(2015) Mplus User’s Guide: Statistical Analysis With Latent Variables. Los Angeles: Muthén & Muthén.

33.

Nanda

Sørensen

(2010) Workplace peers and entrepreneurship. Management Science 56(7): 1116–1126.

34.

Newbert

(2008) Value, rareness, competitive advantage and performance: a conceptual-level empirical investigation of the resource-based view of the firm. Strategic Management Journal 29(2): 745–768.

35.

Osiyevskyy

Tao

Jiang

. (2017) Opportunity is in the eye of beholder: behavioral drivers of alliance portfolio adaptation to performance and environmental jolts. International Journal of Entrepreneurship and Innovation 18(2): 115–127.

36.

Partanen

Möller

Westerlund

. (2008) Social capital in the growth of science-and-technology-based SMEs. Industrial Marketing Management 37(5): 513–522.

37.

Pellinen

(2014) The interplay of entrepreneurial and network activities in the entrepreneurial process: a relational analysis. International Journal of Entrepreneurship and Innovation 15(1): 17–28.

38.

Petts

(1997) Building growth on core competencies – a practical approach. Long Range Planning 30(4): 551–561.

39.

Podsakoff

MacKenzie

Lee

. (2003) Common method biases in behavioral research: a critical review of the literature and recommended remedies. Journal of Applied Psychology 88(5): 879–903.

40.

Portes

Sensenbrenner

(1993) Embeddedness and immigration: notes on the social determinants of economic action. American Journal of Sociology 98(6): 1320–1350.

41.

Prahalad

Hamel

(1990) The core competence of the corporation. Harvard Business Review 68(3): 79–91.

42.

Rice

Liao

Galvin

. (2015) A configuration-based approach to integrating dynamic capabilities and market transformation in small and medium-sized enterprises to achieve firm performance. International Small Business Journal 33(3): 231–253.

43.

Richardson

Simmering

Sturman

(2009) A tale of three perspectives: examining post hoc statistical techniques for detection and correction of common method variance. Organizational Research Methods 12: 762–800.

44.

Seibert

Kraimer

Liden

(2001) A social capital theory of career success. Academy of Management Journal 44: 219–237.

45.

Smallbone

Deakins

Battisti

. (2012) Small business responses to a major economic downturn: empirical perspectives from New Zealand and the United Kingdom. International Small Business Journal 30(7): 754–777.

46.

Söderqvist

Kamala Chetty

(2013) Strength of ties involved in international new ventures. European Business Review 25(6): 536–552.

47.

Stam

Arzlanian

Elfring

(2014) Social capital of entrepreneurs and small firm performance: a meta-analysis of contextual and methodological moderators. Journal of Business Venturing 29(1): 152–173.

48.

Street

Cameron

(2007) External relationships and the small business: a review of small business alliance and network research. Journal of Small Business Management 45(2): 239–266.

49.

Uzzi

(1996) The sources and consequences of embeddedness for the economic performance of organizations: the network effect. American Sociological Review: 64(4): 674–698.

50.

Uzzi

(1997) Social structure and competition in interfirm networks: the paradox of embeddedness. Administrative Science Quarterly 42: 35–67.

51.

Wach

Stephan

Gorgievski

(2016) More than money: developing an integrative multi-factorial measure of entrepreneurial success. International Small Business Journal 34(8): 1098–1121.

52.

Wernerfelt

(1984) A resource based view of the firm. Strategic Management Journal 5(2): 171–180.

53.

Williams

Hartman

Cavazotte

(2010) Method variance and marker variables: a review and comprehensive CFA marker technique. Organizational Research Methods 13(3): 477–514.

54.

Wincent

Thorgren

Anokhin

(2016) Costly ties: social capital as a retardant of network-level entrepreneurial orientation. Journal of Small Business Management 54(1): 229–243.

55.

Woldesenbet

Ram

Jones

(2012) Supplying large firms: the role of entrepreneurial and dynamic capabilities in small businesses. International Small Business Journal 30(5): 493–512.