THE IMPORTANCE OF SOCIAL CAPITAL FOR SMALL BUSINESS
OWNERS: AN ENTREPRENEURIAL MARKETING APPROACH FOR
Cristiano Tossulino Machado
Business Consultant and Professor
Ponta Grossa – Brazil
Paper presented at the 26th
Global Symposium on Marketing
Boston – August 2013
The purpose of this paper is an investigation on how small business owners rely on their
“social capital” to seek information to decision making on marketing issues. The
methodology used was bibliographical research and in-depth interview with two small IT
(Information Technology) companies. The study showed that social capital is critical to
build “market intelligence” and to decision making about marketing, especially in the
small business environment.
Key words: social capital, decision-making, entrepreneurial marketing, Small Businesses.
Small businesses have scarce resources, whether financial, personnel or marketing.
Companies’ needs to find trusted information about the markets that they work, about
pricing, consumer preferences and habits, logistics, how to promote products and services
and so on. It is known that small businesses have scarce resources and with this, they
cannot use marketing tools or marketing systems like big corporations do.
Analysis of previous studies showed that social capital may be an important decision
making tool for small business owners. Social capital is now viewed as crucial to
offsetting the liabilities that small and medium enterprises face, and they are increasingly
using it to overcome the problems of limited resources, experiences and credibility (Lu
and Beamish, 2001). According to Rodrigues and Child 2012, social capital may be
defined as social relationships that confer actual or potential benefits. It can therefore be
understood as a particular type of resource.
Researches frequently find that entrepreneurial marketing is practiced by entrepreneurial
firms such as small firms and young firms (Kilenthong et. al., 2011). Networks,
relationships and alliances are critical to small firms as a marketing tool to seek
information about their business and as a tool for decision-making.
Entrepreneurial Marketing and Decision-Making in small business
As it is already known, small businesses have scarce resources, and they usually cannot
use traditional marketing tools. Competition is increasing worldwide and the
globalization increases the competition in local markets. With fierce competition and
increasingly demanding customers, firms have a limited ability to forecast and define
their market boundaries (Day and Montgomery, 1999). Traditional marketing may not be
adequate for small firms to compete in this new business environment.
Small firms are considered more entrepreneurial than large firms because of several
characteristics. First, small firms have restricted resources and capabilities. Compared to
large firms, small firms have less financial and human resource. As a result, they cannot
perform the same kind of marketing activities that large firms can. Second, small firms do
not have normal organizational structures or formal systems of communication. Their
marketing planning is intuitive, loose and unconstructed. Third, small firms have a simple
and ad hoc marketing decision-making process. Small firms can develop an irregular
change in their decision-making pattern during their business engagement. Fourth, small
firms have fewer dominating decision makers than large firms. Marketing decisions in
small firms can be linked directly to specific personal goals of owners/managers. Lastly,
small firms can quickly response to their customers because they have flatter organization
structure than large firms. They are closer to customer and can access customer
information better than large firms. These characteristics suggest that entrepreneurial
marketing behaviors should be more prevalent in small firms than in large firms.
Entrepreneurial marketing behavior is categorized into six dimensions including value
creation through relationships and alliances, two-way contacts with customer, growth
orientation, opportunity orientation, informal marketing, and market immersion
(Kilenthong et. al., 2011).
In entrepreneurial marketing organization, entrepreneurship and marketing permeates all
areas and levels of the organization, with the organization being focused on recognizing
and exploiting opportunities. Successful entrepreneurs tend to have a long-term
orientation to opportunity creation and exploitation that is focused on meeting all the
customer’s needs by employing creativity and innovation (Collingson and Shaw 2001)
Entrepreneurial Marketing in Small IT Companies
As is known, the phenomenon of globalization affects various business sectors. But
especially in the IT sector, the competition is really global. A company in Brazil could be
competing with a competitor in India and the opposite is also true.
Small technology firms approach marketing with a customer centric approach, focusing
on the development of long term customer relationships. Companies tend to rely on
WOM (Word of Mouth) recommendation for building trust and confidence in the
company and in the purchase decision. This requires very close participation between the
software company and the customer, which meant that co-creation of products, was often
a key feature of the development of new products and services. The software technology
industry sector is a particularly challenging sector for micro and small firms. Small firms
in this sector rely on providing superior levels of service together with innovative
practice to create quality bespoke software. Limitations for these companies include: lack
of financial resource and technical employee resource; a lack of a specialized and
experienced marketing and sales resource, particularly in micro-sized firms and;
difficulties in balancing R&D and high levels of service (Jones, 2011). These companies
rely on networks and relationships to generate knowledge from customers, suppliers,
employees and their partners.
Entrepreneurs should actively engage in information acquisition as an aid to effective
marketing strategy formulation. More importantly, proactive use of such information
allows entrepreneurs to predict oncoming trends and enact strategies, supporting the best
use of acquired information. Information utilization enables small firms to gain
competitive advantage and maintain a stronger position relative to the competition. The
information may unveil latent needs, which exist and are unmet but are not apparent to
competitors. Being the first to uncover such latent needs provides impetus to develop the
marketing capabilities accordingly. To enhance marketing capabilities, continued
investment in market research, pricing, product development, promotions, channels, and
market planning and market management capabilities is important. Findings further
suggest that market management (ability to segment and target market, to manage the
marketing programs, the ability to coordinate various departments and groups to respond
to market conditions), market research and promotion are the most important marketing
capabilities for small technology companies (Qureshi and Kratzer, 2011).
Social capital refers to the resources available in and through personal and business
networks. These resources include information, ideas, leads, business opportunities,
financial capital, power and influence, emotional support, even goodwill, trust and
cooperation. The “social” in social capital emphasizes that these resources are not
personal assets; the resources reside in networks of relationships (Baker, 2000).
According to Sander and Lowney 2006, social capital focuses on the social networks that
exist between us, literally who knows whom and the character of those networks, the
strength of the ties, and the extent to which those networks foster trust and reciprocity.
The core concept of social capital is that social networks matter, both for those in the
networks as well sometimes for bystanders as well. At the core of social capital is trust.
People engage in reciprocity, doing for others not with any immediate expectation of
There is hard evidence that social capital boosts business performance. Individuals who
build and use social capital get better jobs, better pay, fast promotions, and are more
influential and effective, compared with peers who are unable or unwilling to tap the
power of social capital. Organizations with rich social capital enjoy accesses to venture
capital and financing, improved organizational learning, the power of word-of- mouth
marketing, the ability to create strategic alliances, and resources to defend against hostile
takeovers (Baker, 2000).
Social capital is essential for small business success. The accumulation of social capital
helps businesses grow through word-of-mouth. Social capital cultivates goodwill and
creates collaborative opportunities with competitors and within a supplier chain. Social
capital can facilitate cross-pollination of ideas between entrepreneurs and produces
positive personal influence on local market politics. In short, building social capital offers
opportunities to connect to others with varying degrees of intensity and allows for the
interchange of ideas and commerce that offer mutual benefits. Consciously developing
social capital also ensures that owners ask customers and suppliers for referral to
potential buyers. In the smallest of businesses, building social capital can have more
positive impact than advertising (Start-Up USA Cultivating Social Capital).
A striking development in recent research is the discussion of social capital in companies’
relations, especially relations between firms and their suppliers. This stands in sharp
contrast to the traditional perspective of economics in which the enterprise is a non-
cooperative monolith that buys its input from suppliers and sells its output to customers.
According to this view, the production-related networks of an enterprise are technical and
economic, and exist only to fulfill the input and the output services. This simplified view
is today sometimes referred to as production relations of the “Fordist” of manufacturing-
industrial age, but is not a correct description. Social networks, even the actors of
production, are not san invention of the knowledge economy. There are however
arguments saying that they have become more important in the knowledge economy
In knowledge–based economy the perhaps most significant rent originates from the way
in which the easy exchange of knowledge, only partly understood, between and among
constantly changing configuration of firms within the community dramatically enhances
their innovative capabilities. Reducing your development to commercialization time is
often worth virtually whatever you have to pay and social capital contributes by cutting
the expenses and reducing time needed to benefit from knowledge residing elsewhere. As
innovative capabilities become increasingly important so does social capital (Maskell,
Social, non-formalized links, between a firm (and its co-workers) and firms with which it
has production relations, increase the flows of knowledge and information between the
firms. Feedback, from the firm to its suppliers and to the firm from its customers, is
increased and speeded up. These links of acquaintance and trust are of obvious
importance to R&D-projects, aimed at developing new products or production methods.
They are probably also essential in the small, invisible development processes that take
place in companies everyday, which constitute the base for new innovations. A firm’s
cost for, among other things, knowledge and information are influenced by social capital
through the degree of trust and the climate of cooperation prevailing both in individual
workplaces and between firms and actors in a region. By creating relationships with
customers in diverse ways (advertising, personal contact, servicing contracts, etc.), a firm
attempts to shut out competitor from the network it has established. It can build similar
networks with suppliers. An established firm with strong customer and supplier networks
can use these to shut out competitors, which perhaps have newer and more productive
physical and human capital, from the market (Westlund 2003).
The social capital of an organization is an intangible asset critical to innovation in
organizations of XXI century. The quality of relationships within and between the
organizations and the capacity to build social capital to promote the cooperation needed
to sustain innovation processes within the organization, becomes a distinctive
competence in the new competitive scenarios, and therefore should be sustained by an
organizational strategy clearly defined.
A case study approach was chosen as it was considered the most effective method with
which to obtain rich and meaningful insights (Carson et al., 2005), and in-depth interview
to collect the data to be analyzed.
Two small IT companies were interviewed. Firms were chosen on the basis of 4
criterions: Firm size, small companies with under R$ 3.600,00 of gross sales per year,
firm age (over 3 years old), operating in the same industry sector (IT – Information
Technology) and based in the same geographic area (Center of Paraná State Brazil). The
owner-manager was chosen as the unit of analysis on the basis that in small firms the
owner-manager is a significant influence on the way that firm is operated and managed
(Carson et al., 1995).
According to Thomas & Cross (2009), the analysis and management of internal and
external networks can create great value for many organizational processes, promoting
revenue growth, greater connectivity with customers and users, cost savings, increased
sales force effectiveness, greater integration in the process of re-structuring and fusions,
alignment and strategic execution, greater integration of the skills inter and intra-
departmental and organizational competencies for managing these projects, the transfer
of best practices, lessons learned and points of alerts, and identify barriers and
bottlenecks in the flow knowledge necessary to give greater flexibility to the decision
making and problem solving.
On both interviews, the owner-manager mentioned several times that “who they know”,
the networks that they have access is critical to do business in their sector, especially to
find new clients, make decisions on pricing, marketing issues and managerial decisions.
Below are listed some key findings on the interviews, with some transcribed answers:
- “The way I do business have changed a lot after I started to participate in the
ASSESPRO (Association of IT Companies) as a President for my region and the
National Conferences of my product suppliers.
- “Having access to the networks offered by the associations and by the national
network of representatives, has enable me exchange clients, acquire new clients,
make better managerial decisions inside my company. The experiences that my
“peers” live everyday in another regions are a really good way to learn how to do
business in our sector”.
- “I also got better results on my management and better profitability with
exchanging ideas about our business with my peers and other entrepreneurs in the
- “I do not use to buy “market research” because is too expensive for my as a small
IT company. I rely on my peers to get information about new markets and
specially on pricing decisions for my products and services”.
- Small IT companies do not have to work alone, associations, networks and who I
know is the best way to find new clients, make better management decisions and
get better results for my company”.
As Carson et al. 2005 recognizes, the value of marketing activities which are influenced
by the entrepreneurial owner-manager is largely intuitive, ad-hoc and instinctive in
nature”, this study showed that the decision-making processes in small companies are
largely based on networks, relationships; in other words, social capital is crucial to
successful decision-making about marketing and management issues.
Moreover, the fact that small companies have scarce resources, social capital becomes an
important marketing tool and can be used as a tool for market intelligence.
Future studies could include for example: observations of competitive activity and
analysis of appropriate company records and also use a larger sample of interviews with
small businesses in different sectors.
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