Stuck with excess inventory, Neptune Gourmet Seafood is toying.docx

Stuck with excess inventory, Neptune Gourmet Seafood is
toying with the idea of launching a second,
inexpensive product line. But if Neptune stoops to conquer,
rivals might retaliate with price cuts, and
the new line might end up cannibalizing the old.
HBR's cases, which are fictional, present common managerial
dilemmas and offer concrete solutions from experts.
JIM HARGROVE'S startled expression would have been
amusing had he not been in such a pitiable state. He was
standing in the yacht's magnificently appointed galley,
wondering if his stomach would be able to hold down the cola
he was pouring into a crystal flute, when his colleague, Rita
Sanchez, said something outrageous. Now the drink had
spilled down the length of his pleated khakis, and he was
sputtering. "You aren't seriously suggesting that we reduce
prices by 50%. Are you?”
It had been a long day for Hargrove, marketing director of $820
million Neptune Gourmet Seafood, North America's
third-largest seafood producer. When the firm's chairman and
CEO, Stanley Renser, had invited his senior managers

to sail with him to inspect one of Neptune's new freezer
trawlers, Hargrove had demurred. He hated sailing on small
boats-they made him sick, he told his boss. Renser had pointed
out that the 120-foot yacht he owned wasn't exactly
small. Besides, Poseidon II never rolled, even in a storm; the
renowned Tommaso Spadolini had designed it. In fact,
it was one of the last boats built by Italy's famous Tecnomarine
boatyard! Eventually, Renser had won him over, and
Hargrove had arrived that Friday morning as eager to see the
yacht as he was to visit one of the state-of-the-art
fishing vessels on which Neptune had bet its future.
Hargrove hadn't felt seasick all morning. There were no swells
that day. Flat and glassy, the ocean glittered in shades
of turquoise, silver, and gold. Aboard the freezer trawler, he
had been fascinated by the technologies that allowed
the vessel to catch fish in an environ- mentally sustainable way
and to freeze them in a manner that gave Neptune
an edge over rivals. But when the yacht had started to head back
to Fort Lauderdale, Hargrove had crumpled. While
his colleagues had made a beeline for the sundeck, he had spent
the afternoon in the oak-lined main saloon, where
he'd sunk into a leather sofa, clenching and unclenching his
muscles to fight the ocean's incessant motion.

Tired of trying to take his mind off the problem by focusing on
the distant horizon, Hargrove was exploring the galley
when Sanchez, his counterpart in sales, had walked in.
"Hey, Jim. You better?" she had asked solicitously.
"I'll survive" Hargrove had grimaced. "We can't be too far from
home now. But let's not talk about it. What's
happening topside?”
"Oh, nothing much. Stanley's showing people the garage where
he parks the water scooters and Windsurfers,"
Sanchez informed him. She gave Hargrove a challenging look
and added: "You want to hear something that'll really
take your mind off your seasickness? I'm convinced that we
have to drop our prices by 40% to 50%-and soon.”
Big Fish in a Small Pond
Hargrove snatched a stack of cocktail napkins to mop up the
cola, but his eyes never left Sanchez's face. He hoped
she'd break into a smile to indicate that she was teasing him
about the price cut. It had to be a joke, right? Seafood
was a high-end business in North America, and Neptune was an
upmarket--many believed the most upmarket--
player in the $20 billion industry. During the past 40 years, the

company had earned a reputation for producing the
best seafood, and Neptune did everything it could to preserve
that premium image among customers.
The company reached its consumers, who were extremely
demanding, through various channels. Neptune generated
about 30% of its revenues by selling frozen and processed fish
products to U.S. grocery chains, like Shaw's
Supermarkets, and organic food retailers, like Whole Foods
Market, all along the eastern seaboard and in parts of the
Midwest.
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The Neptune's Gold line of seafood products, manufactured in
two sophisticated plants near Cedar Key, Florida, and
Norfolk, Virginia, dominated most segments in terms of quality,
and therefore sold at premiums compared with other
brands. For example, Neptune's Gold canned salmon, tuna,
sardines, mackerel, herring, and pilchard enjoyed a 30%
higher price point, on average, than other brands; and Neptune's
(Sold lump crabmeat, anchovies, clams, lobster
meat, mussels, oysters, and shrimp commanded a 25% premium
over rival products.

That wasn't the company's biggest market, though. Neptune had
emerged as the supplier of choice to the best
restaurants within 250 miles of its Fort Lauderdale headquarters
as well as to the biggest cruise lines, which together
accounted for a third of the company's sales. Another 33% came
from wholesalers that distributed the company's
products to restaurants all over the United States. In fact, sushi
bars from New York to Los Angeles increasingly
bought Neptune's frozen fish instead of buying fresh fish and
freezing it themselves. And, befitting the humble
origins of founder John Renser, approximately 4% of Neptune's
sales came from a fish market outside Fort
Lauderdale that the company owned and operated.
It wasn't easy to live up to the tagline "The Best Seafood on the
Water Planet." Dogged by competition - especially
from China, Peru, Chile, and Japan-as well as tough fishing
laws, Neptune invested heavily to stay ahead of rivals.
Stanley Renser, the company's largest shareholder, had recently
expanded the firm's equity base, although doing so
had shrunk his share to 10%. The capital infusion allowed
Neptune to invest $9 million in six freezer trawlers of the
kind Hargrove had visited. Those ships' autopilot mechanisms
guided them to the best fishing grounds, manipulated

fishing gear, landed catches, and reported data to shore. Other
systems, along with new fishing equipment, ensured
that only mature fish were caught and that the nets were not
overfilled, thus reducing damage to the haul. As a
result, Neptune increasingly landed only top-quality catches.
What's more, the freezer trawlers used a new technology to
superfreeze fish to -70°F (instead of the usual -10°F or -
23°F) within four hours of capture. The fish would freeze so
quickly with this method that ice crystals couldn't form in
them or on them. That allowed the fish to retain their original
flavor, texture, and color; and when cooked, they
tasted like they were fresh out of the water. Moreover, by
packing the catch in snow made from dry ice and
surrounding it with liquid nitrogen, the process increased shelf
life by 50%. No wonder the gourmet magazine
Connoisseur's Choice had rated Neptune's products foremost in
quality for the tenth year in a row.
Against the Current
To Hargrove, the company's premium image, investments in
new technologies, and obsession with quality made any
price cut--let alone the notion of chopping prices in half-
unthinkable. But Sanchez refused to back down." I'm not
kidding, Jim. It's pretty clear that we have a big inventory
problem. We have to slash prices to get rid of those

excess stocks.”
Hargrove knew exactly what Sanchez was talking about. In the
past three months, Neptune's finished goods
inventory had shot up to 60 days' supply--twice the normal level
and three times what ill had been a year ago. Like
many of his colleagues, Hargrove considered the inventory
pileup a temporary phenomenon; stocks had risen
because the company had added ships to the fleet and could
process catches more efficiently than before. Surely, if
Neptune sold some old ships and stuck to its plan of launching
ready-to-eat, fish-based meals, its inventory would
soon fall to normal levels.
Sanchez and her sales team, however, were convinced that they
faced a more enduring situation. "I told you this a
month ago, Jim, and I'll say it again. The new laws have
reduced our access to fish near the coast and forced us to
go farther out to sea. Because the fishing grounds are richer
there, and because we're using new technologies, our
catches have grown bigger on average. That's why, even in the
past four weeks when we've seen demand reach an
all-time high, our inventory has continued to grow.”
"First of all, it makes no sense to me to cut prices when demand
is rising,” Hargrove said, exasperatedly. "Besides,

think about how customers would perceive a large price cut. If
you slash prices by 50%, people will think there's
something wrong with the fish-like it's rotten or full of
mercury! It would destroy our premium image and
permanently erode our brand equity.”
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Sanchez shook her head. "Customers recognize that we sell a
perishable product and that the supply of fish
fluctuates from day to day. They expect prices to vary. The
prices of fruits, vegetables, and flowers change all the
time, don't they? A few years ago, coffee bean prices
plummeted when growers realized they'd be better off selling
inventories than watching the beans rot. Since then, coffee
prices have gone up again. No one seems to object when
the prices of chicken, beef, or pork rise and fall because of
changes in the marketplace. I'm not willing to leave
money on the table by refusing to react to supply-and-demand
fluctuations.”
"But why do you want to cut prices so drastically? Why not just
offer customers a 10% discount? I can see us doing

that in the winter, when sales are slow, anyway" Hargrove
pointed out.
Sanchez shook her head again. "It won't work, Jim. Our
warehouses are so full that it's going to take a lot more than
that to make a difference. And with $9 million tied up in the
new ships, you know we won't be keeping them in
harbor. Our inventories are going to keep growing unless we do
something radical.”
"Selling product at a loss is radical, all right," Hargrove
muttered grimly. On many of its products, Neptune wasn't
making enough profit after manufacturing costs to sustain a
deep price cut.
In fact, the company's margins had already shrunk by 10% in
the past year because of rising costs and growing
competition.
"You're talking about sunk costs," Sanchez shot back. "Selling
product at a loss to generate some revenue is better
than throwing it away. What I'm proposing, though--”
"Have you considered how our competitors will react?"
Hargrove cut in. "If we do this, some of them are bound to
retaliate with even deeper price cuts, and then we'll be in a
price war none of us can afford--Neptune least of all,
given our cost structure.”

Sanchez held up a hand. "Of course, of course. But you're
assuming it says 'Neptune's Gold' on the discounted
product. I actually envision a new brand.”
Hargrove exploded. "You don't create a new brand to deal with
a temporary increase in supply! Besides, you won't
fool anybody. Everyone will know who's responsible for
flooding the market and eroding margins.”
It was clear to Sanchez that she wasn't making much headway
with Hargrove. "Look, Jim, this really isn't the place
for this discussion, and perhaps I'm not being as clear as I
should be. I want to put this issue on the MOC's agenda
for Friday." The Marketing and Operations Council, which
comprised Neptune's top executives, met twice per month.
"Fine, as long as Stanley is at the meeting, too. I'll go up on
deck and talk to him tight away," said Hargrove, his
seasickness all but forgotten. "The sooner you stop thinking
about a price cut, the better.”
Swimming with the Sharks
As the week progressed, word spread about the solution that
Sanchez had proposed to tackle Neptune's inventory
problem. Both Hargrove and Sanchez were drawn into lively
debates with their colleagues, and they soon realized
that whether people were in favor of price cuts or against them,
everyone had an opinion on the subject.
A day before the MOC meeting, Sanchez received an

unexpected visitor. It was Nelson Stowe, the company's legal
counsel and a longtime confidant of the Renser family, hovering
at her door. "Ah, Rita. Got a minute?" Stowe asked
in his mild-mannered fashion.
Realizing that this was no ordinary visit--Stowe had never
called on her before--Sanchez quickly invited him into her
office. After they had settled in, Stowe got slowly to the point.
"I've been hearing that you want to launch a mass-
market brand. Interesting! You know, before we opened the fish
market, John Renser wanted to do something
similar. He wanted to sell some of our fish at a low price so that
more people would eat seafood. But that was a long
time ago.
"I'm sure you're thinking through the implications of your
strategy," he continued, "but one issue concerns me. Have
you thought about how the Association will react?”
Stowe was referring to the powerful U.S. Association of
Seafood Processors and Distributors, whose members, such
as Neptune, accounted for 80% of America's seafood
production. The ASPD influenced American and global policies
related to the fishing industry and imposed quality standards on
members. It also conducted surveys of wholesale
and retail seafood prices and, twice a year, published

benchmark prices that influenced the pricing policies of seafood
producers and distributors.
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"I don't know, Nelson," Sanchez sighed. "But I doubt that the
Association can do anything.”
"I wouldn't be so sure," said Stowe. "At the prices you're
suggesting, you're likely to endanger our ASPD Gold Seal of
Approval. We're the only company that has the seal on every
product we sell. But the Association could easily change
that.”
"No!" Sanchez cried out. "It can't! Regardless of the prices we
charge, our products will still meet the ASPD's quality
standards. Besides, we're just selling the same fish under a
different brand.”
"Don't fool yourself, Rita. The Association has a great deal of
discretion about who gets the Gold Seal and who
doesn't. If it believes that our pricing strategy will cost the
fishing industry a lot of money, it might withhold the seal
on our low-end products- for starters. I'd like us to remember
that the Association isn't going to stand by idly while

we disrupt the industry," Stowe warned as he got up to leave.
"Keep me posted, will you?”
A Pretty Kettle of Fish
At 8 AM on Friday, Sanchez walked into the conference room
on Renser's heels. "How was Newfoundland?" she
asked.
"Lousy," croaked Renser, who had returned late the previous
night after delivering the keynote address at the
Canadian Fish Producers' annual conference. "I caught a cold,"
he complained. "Happens every time I fly
commercial.”
"At least riding in planes doesn't make you feel nauseated,"
Hargrove quipped as he joined them. "That's more than I
can say for tiding in boats.”
Once everyone had settled down, Hargrove got the meeting
under way. "We have several routine items on the
agenda," he began. "But Rita and I have added a topic we think
is important, so I suggest we move to that first."
When everyone nodded in agreement, Sanchez and Hargrove ran
through the issues they had discussed on the
yacht.
As they concluded their summaries, Bernard Germain,
Neptune's COO, spoke up. "Do we know which of our rivals
are considering price cuts? We aren't the only company facing

overcapacity. It would be naive of us to believe that
all our competitors will hold prices for the industry's good.”
"I can't believe it!" Hargrove burst out. "You're in favor of
price cuts?”
"I don't know yet, Jim. I'm trying to understand why Rita's
suggestion that we introduce a low-priced seafood brand
is so off-the-wall. Why can't we use a new brand to appeal to
value-minded customers? Seems to me that we have
the product; we can distribute it using our existing channels;
and we can achieve a new positioning through
packaging, advertising, and pricing. I don't see the difference
between this strategy and what companies like Kellogg
do with their private-label businesses. In fact, if we don't want
to launch a second brand, we could think about
supplying retailers with private-label products.”
"I'm not suggesting that we get into the private-label business,"
Sanchez was quick to reply. "That can pose
problems, as many consumer goods manufacturers have
discovered. I feel we should create a mass-market brand
called, say, Neptune's Silver.”
"That's terrible!" snapped Hargrove. "By calling it Neptune's
Silver, you're positioning the cheap product right next to
Neptune's Gold in the eyes of consumers. Then they'll be more

likely to try it and, once they do, they'll realize there's
no difference in quality. We'll end up cannibalizing our own
sales. Why would any company in a high-end segment do
something so crazy?”
"I guess you don't remember what transpired in the wine
industry a couple of years ago," responded Pat Gilman, the
head of Neptune's institutional business, whose taste for high-
end products was well known. "A California vintner,
Bronco Wines, did something exactly that 'crazy.' It was the
same kind of situation: a glut of grapes, huge
inventories. They slapped a new brand name on the stuff and
sold it through Trader Joe's for $1.99 a bottle. It's
called Charles Shaw, but people nicknamed it Two-Buck
Chuck.”
"Not only do I know about it, but I've also tried it," Sandy
McKain, head of the company's consumer business, piped
in. "I can tell you, it's worth every penny. But Pat, I don't think
the scenario is exactly the same. Even in Bordeaux, a
lot of winemakers offer a premium wine and several cheaper
wines, but they use grapes of different qualities to
make the different grades. Would we be doing that?”

Gl2ZQ%3d%3d#toc
"In Bronco's case, it was the same grapes they'd been using for
higher-priced wines," Gilman said. "As for Jim's
point, I'm sure they had some customers migrate to the cheaper
stuff. But think about the upside. In the United
States, 88% of wine sold is consumed by 12% of the population-
-”
"Hey, Pat" Hargrove called out. "How much of that do you
personally account for?”
Gilman joined in the laughter before continuing: "The point is,
more people will opt for a bottle of wine with dinner if
they can get a passable one on the cheap. Wine sales have
grown at the expense of other beverages in recent years.
The same thing could happen to us. Even with people eating
healthier things, seafood sales lag behind those of beef,
chicken, and pork. The way I see it, this isn't about reducing
inventory. It's about introducing our products to a
bigger market: the more budget-conscious consumer. And if it's
like wine, the educated consumer will then trade up
to Neptune's Gold.”
A furious discussion followed about how hard it would be for
Neptune to win shelf space in supermarkets for a new
brand, particularly for a low-priced product that might go head-

to-head with the grocers' own private-label offerings.
The group was also divided about whether it should sell a
second brand through the same channels or through
different ones. Germain wondered aloud whether Neptune
should target new geographic markets--like South America
and Central America--with a low-priced offering.
"Hang on!" exclaimed a clearly frustrated Hargrove. "When we
started, weren't we debating whether it made sense
to launch a new brand to deal with a temporary inventory
problem? That would mean we'd kill it once we solved that
problem. I--”
"If customers like our new brand, it might constitute a better
growth strategy," Sanchez interrupted. "The way I look
at it, the second brand could prove to be a win-win
proposition.”
"I don't know if it's as simple as that," Germain said slowly.
"Every luxury company I know of--Gucci, Mercedes-Benz,
BMW, Tiffany, even Hyatt--has struggled to go mass without
destroying its premium image. For that matter, when
fashion designers like Isaac Mizrahi create an affordable line
for a retailer like Target, I wonder if that adds to the
brand's luster or tarnishes it?”

Renser, who had been quiet until then, cleared his scratchy
throat. His colleagues were starting to rehash territory
they had already covered, and instead of sharpening their
arguments, they seemed to be obfuscating them. On one
hand, they appeared to agree that it would be important to keep
the two brands separate. On the other hand, they
were talking about migrating customers from the low-end brand
to the high-end brand, which would mean linking
the two. Renser knew that the group was waiting to hear where
he stood, but he didn't yet know what to say. How
long could he leave them hanging--along with his company's
fortunes--between the devil and the deep blue sea?
Should Neptune launch a mass-market brand?
Informal Networks:
The Company
Behind the Chart
by David Krackhardt and Jeff Hanson
Reprint 93406
Harvard Business Review
This document is authorized for use only by Maithily Erande

([email protected]). Copying or posting is an infringement of
copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
JULY-AUGUST 1993
Reprint Number
RICHARD NORMANN FROM VALUE CHAIN TO VALUE
CONSTELLATION: 93408
AND RAFAEL RAMIREZ DESIGNING INTERACTIVE
STRATEGY
DAVID A. GARVIN BUILDING A LEARNING
ORGANIZATION 93402
GEORGE STALK, JR. JAPAN’S DARK SIDE OF TIME 93409
AND ALAN M. WEBBER
DAVID KRACKHARDT INFORMAL NETWORKS: 93406
AND JEFF HANSON THE COMPANY BEHIND THE CHART
BARBARA PRESLEY NOBLE REINVENTING LABOR: 93410
AN INTERVIEW WITH UNION PRESIDENT LYNN
WILLIAMS

ROBERT KELLEY HOW BELL LABS CREATES STAR
PERFORMERS 93405
AND JANET CAPLAN
HBR CASE STUDY
ALISTAIR D. WILLIAMSON IS THIS THE RIGHT TIME TO
COME OUT? 93411
WORLD VIEW
LAURENCE HECHT MANAGING RISKS IN MEXICO 93403
AND PETER MORICI
FIRST PERSON
JOSEPH M. JURAN MADE IN U.S.A.: A RENAISSANCE IN
QUALITY 93404
IN QUESTION
NANCY A. NICHOLS WHATEVER HAPPENED TO ROSIE
THE RIVETER? 93407
PERSPECTIVES
IS THE DEFICIT A FRIENDLY GIANT AFTER ALL? 93401
Mapping employees’ relationships can help managers harness
the real power in their organizations.
by David Krackhardt and Jeff Hanson
Informal Networks:

The Company
Copyright © 1993 by the President and Fellows of Harvard
College. All rights reserved. DRAWINGS BY GARISON
WEILAND
Many executives invest considerable resources in
restructuring their companies, drawing and redraw-
ing organizational charts only to be disappointed by
the results. That’s because much of the real work of
companies happens despite the formal organiza-
tion. Often what needs attention is the informal or-
ganization, the networks of relationships that em-
ployees form across functions and divisions to
accomplish tasks fast. These informal networks
can cut through formal reporting procedures to
jump start stalled initiatives and meet extraordi-
nary deadlines. But informal networks can just as
easily sabotage companies’ best laid plans by block-
ing communication and fomenting opposition to
change unless managers know how to identify and
direct them. Learning how to map these social
links can help managers harness the real power in
their companies and revamp their formal organiza-
tions to let the informal ones thrive.
If the formal organization is the skeleton of a com-
pany, the informal is the central nervous system
driving the collective thought processes, actions,
and reactions of its business units. Designed to fa-
cilitate standard modes of production, the formal
organization is set up to handle easily anticipated
problems. But when unexpected problems arise, the
informal organization kicks in. Its complex webs of
social ties form every time colleagues communi-
cate and solidify over time into surprisingly stable

networks. Highly adaptive, informal networks
move diagonally and elliptically, skipping entire
functions to get work done.
Managers often pride themselves on understand-
ing how these networks operate. They will readily
tell you who confers on technical matters and who
discusses office politics over lunch. What’s
startling is how often they are wrong. Although
they may be able to diagram accurately the social
links of the five or six people closest to them, their
assumptions about employees outside their imme-
diate circle are usually off the mark. Even the most
psychologically shrewd managers lack critical in-
formation about how employees spend their days
and how they feel about their peers. Managers sim-
ply can’t be everywhere at once, nor can they read
people’s minds. So they’re left to draw conclusions
based on superficial observations, without the tools
to test their perceptions.
Armed with faulty information, managers often
rely on traditional techniques to control these net-
David Krackhardt is a professor of organizations and pub-
lic policy at Carnegie Mellon University’s H. John Heinz
III College and a professor of organizational behavior
at its Tepper School of Business. Jeff Hanson ([email protected]
hansonadv.com) is the founder of Hanson Advisors, a New
York–based consulting firm that has advised financial
and professional service companies, institutional inves-
tors, and partnership organizations for over two decades.

HARVARD BUSINESS REVIEW July-August 1993 105
works. Some managers hope that the authority in-
herent in their titles will override the power of in-
formal links. Fearful of any groups they can’t com-
mand, they create rigid rules that will hamper the
work of the informal networks. Other managers try
to recruit “moles” to provide intelligence. More en-
lightened managers run focus groups and host re-
treats to “get in touch” with their employees. But
such approaches won’t rein in these freewheeling
networks, nor will they give managers an accurate
picture of what they look like.
Using network analysis, however, managers can
translate a myriad of relationship ties into maps
that show how the informal organization gets work
done. Managers can get a good overall picture by
diagramming three types of relationship networks:
M The advice network shows the prominent players
in an organization on whom others depend to solve
problems and provide technical information.
M The trust network tells which employees share
delicate political information and back one another
in a crisis.
M The communication network reveals the em-
ployees who talk about work-related matters on
a regular basis.
Maps of these relationships can help managers un-

derstand the networks that once eluded them and
leverage these networks to solve organizational
problems. Case studies using fictional names,
based on companies with which we have worked,
show how managers can bring out the strengths in
their networks, restructure their formal organiza-
tions to complement the informal, and “rewire”
faulty networks to work with company goals.
The Steps of Network Analysis
We learned the significance of the informal net-
work 12 years ago while conducting research at a
bank that had an 80% turnover rate among its
tellers. Interviews revealed that the tellers’ reasons
for leaving had less to do with the bank’s formal
organization than with the tellers’ relationships to
key players in their trust networks. When these
players left, others followed in droves.
Much research had already established the influ-
ence of central figures in informal networks. Our
subsequent studies of public and private companies
showed that understanding these networks could
increase the influence of managers outside the in-
ner circle. If they learned who wielded power in
networks and how various coalitions functioned,
they could work with the informal organization to
solve problems and improve performance.
Behind the Chart

M Whom would you recruit to
support a proposal of yours that
could be unpopular?
M Whom would you trust to keep
in confidence your concerns about
a work-related issue?
Some companies also find it
useful to conduct surveys to deter-
mine managers’ impressions of in-
formal networks so that these can
be compared with the actual net-
works revealed by the employee
questionnaires. In such surveys,
questions are posed like this:
M Whom do you think Steve goes
to for work-related advice?
M Whom would Susan trust to
keep her confidence about work-
related concerns?
The key to eliciting honest an-
swers from employees is to earn
their trust. They must be assured
that managers will not use their answers against
them or the employees mentioned in their re-
sponses and that their immediate colleagues will
not have access to the information. In general, re-
spondents are comfortable if upper-level managers
not mentioned in the surveys see the results.

After questionnaires are completed, the second
step is cross-checking the answers. Some employ-
ees, worried about offending their colleagues, say
they talk to everyone in the department on a daily
basis. If Judy Smith says she regularly talks to Bill
Johnson about work, make sure that Johnson says
he talks to Smith. Managers should discount any
answers not confirmed by both parties. The final
map should not be based on the impressions of one
employee but on the consensus of the group.
The third step is processing the information using
one of several commercially available computer
programs that generate detailed network maps.
(Drawing maps is a laborious process that tends to
result in curved lines that are difficult to read.)
Maps in hand, a skilled manager can devise a strate-
gy that plays on the strengths of the informal orga-
nization, as David Leers, the founder and CEO of
a California-based computer company, found out.
Whom Do You Trust?
David Leers thought he knew his employees
well. In 15 years, the company had trained a cadre
of loyal professionals who had built a strong region-
Leers (CEO)
INFORMAL NETWORKS
106 HARVARD BUSINESS REVIEW July-August 1993
Mapping advice networks, our research showed,
can uncover the source of political conflicts and
failure to achieve strategic objectives. Because

these networks show the most influential players
in the day-to-day operations of a company, they are
useful to examine when a company is considering
routine changes. Trust networks often reveal the
causes of nonroutine problems such as poor perfor-
mance by temporary teams. Companies should ex-
amine trust networks when implementing a major
change or experiencing a crisis. The communica-
tion network can help identify gaps in information
flow, the inefficient use of resources, and the failure
to generate new ideas. They should be examined
when productivity is low.
Managers can analyze informal networks in three
steps. Step one is conducting a network survey us-
ing employee questionnaires. The survey is de-
signed to solicit responses about who talks to
whom about work, who trusts whom, and who ad-
vises whom on technical matters. It is important to
pretest the survey on a small group of employees to
see if any questions are ambiguous or meet with re-
sistance. In some companies, for example, employ-
ees are comfortable answering questions about
friendship; in others, they deem such questions too
personal and intrusive. The following are among
the questions often asked:
M Whom do you talk to every day?
M Whom do you go to for help or advice at least
once a week?
M With one day of training, whose job could you
step into?
O’Hara (SVP)
Bair
Stewart
Ruiz

Calder (SVP)
Harris
Benson
Fleming
Church
Martin
Lee
Wilson
Swinney
Carlson
Hoberman
Fiola
Lang (SVP)
Muller
Jules
Baker
Daven
Thomas
Zanado
Stern (SVP)
Huttle
Atkins
Kibler
Software
Applications
Field
Design
Integrated
Communications
Technologies

Data Control
Systems
The Formal Chart Shows Who’s on Top
al reputation for delivering customized office infor-
mation systems (see “The Formal Chart Shows
Who’s on Top”). The field design group, responsible
for designing and installing the systems, generated
the largest block of revenues. For years it had been
the linchpin of the operation, led by the company’s
technical superstars, with whom Leers kept in
close contact.
But Leers feared that the company was losing its
competitive edge by shortchanging its other divi-
sions, such as software applications and integrated
communications technologies. When members of
field design saw Leers start pump-
ing more money into these divi-
sions, they worried about losing
their privileged position. Key em-
ployees started voicing dissatis-
faction about their compensation,
and Leers knew he had the mak-
ings of a morale problem that

could result in defections.
To persuade employees to sup-
port a new direction for the com-
pany, Leers decided to involve
them in the planning process. He
formed a strategic task force com-
posed of members of all divisions
and led by a member of field de-
sign to signal his continuing com-
mitment to the group. He wanted
a leader who had credibility with
his peers and was a proven per-
former. Eight-year company vet-
eran Tom Harris seemed obvious
for the job.
Leers was optimistic after the
first meeting. Members generated
good discussion about key com-
petitive dilemmas. A month later,
however, he found that the group
had made little progress. Within
two months, the group was com-
pletely deadlocked by members
championing their own agendas.
Although a highly effective man-
ager, Leers lacked the necessary
distance to identify the source of
his problem.
An analysis of the company’s
trust and advice networks helped
him get a clearer picture of the dy-
namics at work in the task force.
The trust map turned out to be

most revealing. Task force leader
Tom Harris held a central position
in the advice network – meaning that many em-
ployees relied on him for technical advice (see
“The Advice Network Reveals the Experts”). But
he had only one trust link with a colleague (see
“But When It Comes to Trust…”). Leers concluded
that Harris’s weak position in the trust network
was a main reason for the task force’s inability to
produce results.
In his job, Harris was able to leverage his position
in the advice network to get work done quickly. As
a task force leader, however, his technical expertise
was less important than his ability to moderate
But When It Comes to Trust...
Atkins
Thomas
Church
Huttle
Lee
O’Hara (SVP)
Stewart
Carlson
Daven

Bair
Fiola
Martin
Baker
Harris
Swinney
Muller
Kibler
Fleming
Hoberman
Calder (SVP)
Leers (CEO)
Lang (SVP)
Ruiz
Benson
Bair
Church
Baker
Swinney
Thomas

Jules
Zanado Muller
Harris
Leers (CEO)
Daven Lang (SVP)
O’Hara (SVP)
Lee
Fiola
Wilson
Calder (SVP)
Martin
Ruiz
Stern (SVP)
Huttle
Atkins
Kibler
Carlson
Fleming
Benson
Hoberman

The Advice Network Reveals the Experts
INFORMAL NETWORKS
conflicting views, focus the group’s thinking, and
win the commitment of task force members to mu-
tually agreed-upon strategies. Because he was a lon-
er who took more interest in computer games than
in colleagues’ opinions, task force members didn’t
trust him to take their ideas seriously or look out
for their interests. So they focused instead on de-
fending their turf.
With this critical piece of information, the CEO
crafted a solution. He did not want to undermine
the original rationale of the task force by declaring
it a failure. Nor did he want to embarrass a valued
employee by summarily removing him as task
force head. Any response, he concluded, had to run
with the natural grain of the informal organization.
He decided to redesign the team to reflect the inher-
ent strengths of the trust network.
Referring to the map, Leers looked for someone
in the trust network who could share responsibili-
ties with Harris. He chose Bill Benson, a warm,
amiable person who occupied a central position in

the network and with whom Harris had already es-
tablished a solid working relationship. He publicly
justified his decision to name two task force heads
as necessary, given the time pressures and scope of
the problem.
Within three weeks, Leers could see changes in
the group’s dynamics. Because task force members
trusted Benson to act in the best interest of the en-
tire group, people talked more openly and let go of
their fixed positions. During the next two months,
the task force made significant progress in propos-
ing a strategic direction for the company. And in
the process of working together, the task force
helped integrate the company’s divisions.
A further look at the company’s advice and trust
networks uncovered another serious problem, this
time with the head of field design, Jim Calder.
The CEO had appointed Calder manager because
his colleagues respected him as the most techni-
cally accomplished person in the division. Leers
thought Calder would have the professional credi-
bility to lead a diverse group of very specialized de-
sign consultants. This is a common practice in pro-
fessional service organizations: make your best
producer the manager. Calder, however, turned out
to be a very marginal figure in the trust network.
His managerial ability and skills were sorely
lacking , which proved to be a
deficit that outweighed the posi-
tive effects derived from his tech-
nical expertise. He regularly told

people they were stupid and paid
little attention to their profession-
al concerns.
Leers knew that Calder was no
diplomat, but he had no idea to
what extent the performance and
morale of the group were suffering
as a result of Calder’s tyrannical
management style. In fact, a map
based on Leers’s initial percep-
tions of the trust network put
Calder in a central position (see
“How the CEO Views the Trust
Network”). Leers took for granted
that Calder had good personal re-
lationships with the people on his
team. His assumption was not un-
usual. Frequently, senior man-
agers presume that formal work
ties will yield good relationship
ties over time, and they assume
that if they trust someone, others
will too.
The map of Calder’s perceptions
was also surprising (see “The
Tr ust Network Accor ding to
Calder”). He saw almost no trust
How the CEO Views the Trust Network
Church
Martin

Harris
Wilson
Lee
Calder (SVP)
Hoberman
Benson
Swinney
Carlson
Fleming
Fiola
The Trust Network According to Calder
Fleming Hoberman
links in his group at all. Calder was oblivious to any
of the tr ust dependencies emer ging around
him – a worrisome characteristic for a manager.

The information in these maps helped Leers for-
mulate a solution. Again, he concluded that he
needed to change the formal organization to reflect
the structure of the informal network. Rather than
promoting or demoting Calder, Leers cross-promot-
ed him to an elite “special situations team,” report-
ing directly to the CEO. His job involved working
with highly sophisticated clients on specialized
problems. The position took better advantage of
Calder’s technical skills and turned out to be good
for him socially as well. Calder, Leers learned, hat-
ed dealing with formal management responsibili-
ties and the pressure of running a large group.
Leers was now free to promote John Fleming,
a tactful, even-tempered employee, to the head of
field design. A central player in the trust network,
Fleming was also influential in the advice network.
The field group’s performance improved signifi-
cantly over the next quarter, and the company was
able to create a highly profitable revenue stream
through the activities of Calder’s new team.
Whom Do You Talk To?
When it comes to communication, more is not al-
ways better, as the top management of a large East
Coast bank discovered. A survey showed that cus-
tomers were dissatisfied with the information they
were receiving about banking services. Branch
managers, top managers realized, were not commu-
nicating critical information about available ser-
vices to tellers. As a result, customers’ questions
were not answered in a timely fashion.
Management was convinced that more talking

among parties would improve customer service and
increase profits. A memo was circulated ordering
branch managers to “increase communication flow
and coordination within and across branches and to
make a personal effort to increase the amount and
effectiveness of their own interpersonal communi-
cations with their staffs.”
A study of the communication networks of 24
branches, however, showed the error of this think-
ing. More communication ties did not distinguish
the most profitable branches; the quality of com-
munication determined their success. Nonhierar-
chical branches, those with two-way communica-
tion between people of all levels, were 70% more
profitable than branches with one-way communi-
cation patterns between “superiors” and staff.
The communication networks of two branches lo-
cated in the same city illustrated this point. Branch
1 had a central figure, a supervisor, with whom
many tellers reported communicating about their
work on a daily basis. The supervisor confirmed
that employees talked to her, but she reported com-
municating with only half of these tellers about
work-related matters by the end of the day. The
tellers, we later learned, resented this one-way
communication flow. Information they viewed as
critical to their success flowed up the organization
but not down. They complained that the supervisor
was cold and remote and failed to keep them in-
formed. As a result, productivity suffered.
In contrast, Branch 2 had very few one-way com-
munication lines but many mutual, two-way lines.
Tellers in this branch said they were well-informed

about the normal course of work flow and reported
greater satisfaction with their jobs.
After viewing the communication map, top man-
agement abandoned the more-is-better strategy and
began exploring ways of fostering mutual commu-
nication in all the branches. In this case, manage-
ment did not recast the formal structure of the
branches. Instead, it opted to improve relation-
ships within the established framework. The bank
sponsored mini-seminars in the branches, in which
the problems revealed by the maps were openly
discussed. These consciousness-raising sessions
spurred many supervisors to communicate more
substantive information to tellers. District man-
agers were charged with coming up with their own
strategies for improving communication. The bank
The manager didn’t know
that there were two distinct
cultures in his branch until he
saw the communication
network map.
surveyed employees at regular intervals to see if
their supervisors were communicating effectively,
and supervisors were informed of the results.
The communication network of a third branch
surfaced another management challenge: the
branch had divided itself into two distinct groups,
each with its own culture and mode of operation.
The network map showed that one group had
evolved into the “main branch,” consisting of
tellers, loan officers, and administrative staff. The
other group was a kind of “sub-branch,” made up

primarily of tellers and administrators. It turned
INFORMAL NETWORKS
out that the sub-branch staff worked during non-
peak and Saturday hours, while main-branch em-
ployees worked during peak and weekday hours.
The two cultures never clashed because they rarely
interacted.
The groups might have coexisted peacefully if
customers had not begun complaining about the
sub-branch. The main-branch staff, they reported,
was responsive to their needs, while the sub-branch
staff was often indifferent and even rude. Sub-
branch employees, it turned out, felt little loyalty
to the bank because they didn’t feel part of the orga-
nization. They were excluded from staff meetings,
which were scheduled in the morning, and they
had little contact with the branch manager, who
worked a normal weekday shift.
The manager, who was embedded in the main
branch, was not even aware that this distinct cul-
ture existed until he saw the communication net-
work map. His challenge was to unify the two
groups. He decided not to revamp the formal struc-

ture, nor did he mount a major public-relations
campaign to integrate the two cultures, fearing that
each group would reject the other because the exist-
ing ties among its members were so strong. Instead,
he opted for a stealth approach. He exposed peo-
ple from one group to people from the other in
the hopes of expanding the informal network. Al-
though such forced interaction does not guarantee
the emergence of stable networks, more contact in-
creases the likelihood that some new ties will stick.
Previously planned technical training programs
for tellers presented the opportunity to initiate
change. The manager altered his original plans for
What matters is the fit,
whether networks are in sync
with company goals.
on-site training and opted instead for an off-site fa-
cility, even though it was more expensive. He sent
mixed groups of sub-branch and main-branch em-
ployees to programs to promote gradual, neutral in-
teraction and communication. Then he followed up
with a series of selective “staff swaps” whereby he
shifted work schedules temporarily. When some-
one from the main branch called in sick or was
about to go on vacation, he elected a substitute
from the sub-branch. And he rescheduled staff
meetings so that all employees could attend.
This approach helped unify the two cultures,
which improved levels of customer satisfaction
with the branch as a whole over a six-month pe-
riod. By increasing his own interaction with the

sub-branch, the manager discovered critical infor-
mation about customers, procedures, and data
systems. Without even realizing it, he had been
making key decisions based on incomplete data.
Network Holes and Other Problems
As managers become more sophisticated in ana-
lyzing their communication networks, they can
use them to spot five common configurations.
None of these are inherently good or bad, function-
al or dysfunctional. What matters is the fit, wheth-
er networks are in sync with company goals. When
the two are at odds, managers can attempt to broad-
en or reshape the informal networks using a variety
of tactics.
Imploded relationships. Communication maps
often show departments that have few links to
other groups. In these situations, employees in a de-
partment spend all their time talking among them-
selves and neglect to cultivate relationships with
the rest of their colleagues. Frequently, in such
cases, only the most senior employees have ties
with people outside their areas. And they may
hoard these contacts by failing to introduce these
people to junior colleagues.
To counter this behavior, one manager imple-
mented a mentor system in which senior employ-
ees were responsible for introducing their appren-
tices to people in other groups who could help them
do their jobs. Another manager instituted a policy
of picking up the tab for “power breakfasts,” as long
as the employees were from different departments.

Irregular communication patterns. The opposite
pattern can be just as troubling. Sometimes em-
ployees communicate only with members of other
groups and not among themselves. To foster cama-
raderie, one manager sponsored seasonal sporting
events with members of the “problem group” as-
signed to the same team. Staff meetings can also be
helpful if they’re really used to share resources and
exchange important information about work.
A lack of cohesion resulting in factionalism sug-
gests a more serious underlying problem that
requires bridge building. Initiating discussions
among peripheral players in each faction can help
uncover the root of the problem and suggest solu-
tions. These parties will be much less resistant to
compromise than the faction leaders, who will feel
more impassioned about their positions.
Fragile structures. Sometimes group members
communicate only among themselves and with
employees in one other division. This can be prob-
lematic when the contribution of several areas is
necessary to accomplish work quickly and spawn
creativity. One insurance company manager, a nat-
urally gregarious fellow, tried to broaden employ-

ees’ contacts by organizing meetings and cocktail
parties for members of several divisions. Whenever
possible, he introduced employees he thought
should be cultivating working relationships. Be-
cause of his warm, easygoing manner, they didn’t
find his methods intrusive. In fact, they appreciated
his personal interest in their careers.
Holes in the network. A map may reveal obvious
network holes, places you would expect to find re-
lationship ties but don’t. In a large corporate law
firm, for example, a group of litigators was not talk-
ing to the firm’s criminal lawyers, a state of affairs
that startled the senior partner. To begin tackling
the problem, the partner posed complex problems
to criminal lawyers that only regular consultations
with litigators could solve. Again, arranging such
interactions will not ensure the formation of en-
during relationships, but continuous exposure in-
creases the possibility.
“Bow ties.” Another common trouble spot is the
bow tie, a network in which many players are de-
pendent on a single employee but not on each other.
Individuals at the center knot of a bow tie have
tremendous power and control within the network,
much more than would be granted them on a for-
mal organizational chart. If the person at the knot
leaves, connections between isolated groups can
collapse. If the person remains, organizational pro-
cesses tend to become rigid and slow, and the indi-
vidual is often torn between the demands of several
groups. To undo such a knot, one manager self-con-
sciously cultivated a stronger relationship with the
person at the center. It took the pressure off the em-
ployee, who was no longer a lone operative, and it

helped to diffuse some of his power.
In general, managers should help employees de-
velop relationships within the informal structure
that will enable them to make valuable contribu-
tions to the company. Managers need to guide em-
ployees to cultivate the right mix of relationships.
Employees can leverage the power of informal rela-
tionships by building both strong ties, relationships
with a high frequency of interaction, and weak ties,
those with a lower frequency. They can call on the
latter at key junctures to solve organizational prob-
lems and generate new ideas.
Testing the solution. Managers can anticipate
how a strategic decision will affect the informal or-
ganization by simulating network maps. This is
particularly valuable when a company wants to an-
ticipate reactions to change. A company that wants
to form a strategic SWAT team that would remove
key employees from the day-to-day operations of
a division, for example, can design a map of the area
without those players. If removing the central ad-
vice person from the network leaves the division
with a group of isolates, the manager should recon-
sider the strategy.
Failure to test solutions can lead to unfortunate
results. When the trust network map of a bank
showed a loan officer to be an isolate, the manager
jumped to the conclusion that the officer was ex-
pendable. The manager was convinced that he
could replace the employee, a veteran of the compa-
ny, with a younger, less expensive person who was
more of a team player.

What the manager had neglected to consider was
how important this officer was to the company’s
day-to-day operations. He might not have been a
prime candidate for a high-level strategy team that
demanded excellent social skills, but his expertise,
honed by years of experience, would have been im-
possible to replace. In addition, he had cultivated
a close relationship with the bank’s largest client –
something an in-house network map would never
have revealed. Pictures don’t tell the whole story;
network maps are just one tool among many.
The most important change for a company to an-
ticipate is a complete overhaul of its formal struc-
ture. Too many companies fail to consider how
such a restructuring will affect their informal orga-
nizations. Managers assume that if a company
eliminates layers of bureaucracy, the informal orga-
nization will simply adjust. It will adjust all right,
but there’s no guarantee that it will benefit the
company. Managers would do well to consider
what type of redesign will play on the inherent
strengths of key players and give them the freedom
to thrive. Policies should allow all employees easy
access to colleagues who can help them carry out
tasks quickly and efficiently, regardless of their sta-
tus or area of jurisdiction.
Experienced network managers who can use maps
to identify, leverage, and revamp informal net-
works will become increasingly valuable as compa-
nies continue to flatten and rely on teams. As orga-
nizations abandon hierar chical str uctures,
managers will have to rely less on the authority in-
herent in their title and more on their relationships

with players in their informal networks. They will
need to focus less on overseeing employees “be-
low” them and more on managing people across
functions and disciplines. Understanding relation-
ships will be the key to managerial success.
Reprint 93406
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