Relational Capital, Trust and Networking Capabilities

Findings of Nahapiet & Ghoshal (1998) suggest social capital to be divided to three sub dimensions such as structural, cognitive and relational. Focusing on the relational dimension researchers highlight trust as one of the key elements in relations as according to them there lies a two-way interaction between trust and cooperation where trust generates cooperation and cooperation breeds trust (Nahapiet & Ghoshal 1998). Researchers did not mention relational dimension being parallel to relational capital but I see the connection between them when focusing on the common feature of trust. Term of trust have been identified and defined by many for example by Misztal as “the belief that the results of somebody’s intended action will be appropriate from our point of view” (Misztal 1996, 9-10).

There have been many researchers trying to proof trust as a key element of relational capital.

Castelfranchi et al., (2006) focus their research on trust as agents’ relational capital where an individual selects the right partners to fulfill his or her personal goals as well as where organizations select individuals for cooperation with accumulated trust. They also argue for separation of individual trust capital and collective trust capital from each other as the content of the concepts differ since the concept of trust as a form of capital is not widely researched (Castelfranchi et al., 2006).

Yee (2015) argues that trust goes along with transparency in economics and in certain situations can lead to corruption. He refers to different cultural values in Asia compared to Western societies since in Asia people tend to be more collectivist and in Western societies more independent. There is a term in Korean language to define relational capital. This term is called

“inmaek” which can be translated as “ties attached to same clique members in politics, business and academics.” Main criteria’s’ for “inmaek” are strength of the relationship with frequency and multiplicity of contact which breed the trust between two individuals creating longer mutual relation. In China this same term is called as “guanxi” (Yee 2015). These both terms are argued by researcher to be the true form of trust which would not lead to corruption when there is transparency and trust among individuals.

Anderson et al. (2010) examine relationship between trust, cooperation and wealth. Their main argument is that trust has influence on socio-economic interactions which can even be shopping.

Trust among the members of the community in a certain degree tends to encourage individuals to spent more financial resources on shopping which generates more resources in the development of the specific town, city or any community (Anderson et al. 2010).

Besides trust researchers have been very interesting in the relational capital and its effect on economics. Hormiga et al. (2011) argue the importance of intangible relational capital to success of a start-up new venture. They have researched 130 companies within the six set hypotheses regarding possible positive relation between relational capital and new venture success within a time period of first few years. On relational capital their research group give an explanation of how they define it: “the combination of the immaterial or intangible assets of an organization which although they do not appear in the traditional accounting records, are directly or indirectly controlled by the firm and which generate or will generate a future value for this firm and on which a sustained competitive advantage can be built” (Sánchez-Medina 2003, 39) The most important impact in a start-up new venture lies in the ability of an entrepreneur to establish and develop external relations (Hormiga, Batista-Canino & Sánchez-Medina 2011).

Carmeli & Azeroual (2009) argue the importance of relational capital within different units of a company since according to the authors relational capital is the building block of learning.

They divide relational capital into two concepts within a company called intraunit relational capital and interunit relational capital (Carmeli & Azeroual 2009). The definition of the first is when people within a particular team form high quality relationships where information is shared among the members of that team which allows all team members to learn from collective knowledge. The latter is defined very similarly having only difference of teams learning from each other within an organization instead of just their own team. Together combined these aspects of relational capital can create new knowledge and innovations in the high technology companies (Carmeli & Azeroual 2009). Similar findings come from Paul Frijters (2000) as he argues to importance of the relational capital within a company to be bypassed from senior level to junior level when the time is right. Researcher argues that in certain consultancy companies at senior level individuals have lot of relations between them, the company they work for and clients which would create higher income for the senior consultant. In order to keep clients in the company during the moment of senior consultant to retire he/she could transfer relational capital to junior level consultants. According to Frijters relational capital is the only form of capital which is transferable (Frijters 2000). This would come in place if cost of hiring a person outside the company would be higher compared to internal transfer of relational capital which in the end has the drawback not increasing the total relational capital of particular consultancy company.

Collins & Hitt (2006) argue on knowledge transfer where relational capital plays a key element of success since we live and have lived in the knowledge based society for a long time as our economy is driven by knowledge. According to authors their main concern is to find a link between relational capital and tacit knowledge transfer. They see importance on company managerial level to manage their intangible assets actively instead of just passively recognizing its existence. Researchers argue that most often the relational capital is based on between the inter-personal dynamics of the representatives of the firms instead of collective dynamics of the staff of both companies. There may also be a huge difference between companies and their relational capabilities even within a network since those relations are not of course equal (Collins & Hitt 2006). Authors also highlight the importance of trust among the partners. When there are many interactions during the relationship it nourish the trust based relation since trust can be seen as a resource which is very difficult to imitate. Either there is trust or not. It also differs whether the company is operating on domestic or international market how the trust between partners is nourished. This is due to argument of the authors that culture of the company’s country has influence on how the trust is developed and perceived (Collins & Hitt 2006).

Still et al. (2015) argue relational capital often seen as an organizational attribute explained generally as alliances, relations, relationships and co-operation between company’s interest groups such as customer, suppliers and employees. Many times the focus of the researchers is based on the view of the external relations of the company towards high variety of economic agents, networking capabilities of the company, their reputation or the customer satisfaction (Molodchik et al., 2014). Relational capital can be many times mixed to be part of the concepts of human capital like focusing on individual know-how or structural capital within the organization. Difference is that latter can be seen as part of intangible assets of the company and therefore they have ownership to it (Still et al., 2015). It can be seen also as part of social capital (Nahapiet & Ghoshal 1998). According to Still et al. (2015) these concepts are linked to each other as well as interrelated since human capital is based on relations between individuals instead of generating knowledge alone. There have been many academic researchers trying to measure and define relational capital in the past but recently focus has been on two specific elements which are “1) networking capabilities and 2) customer loyalty and reputation.”

(Molodchik et al., 2014)

Relational capital is about the nature of the relations between individuals. These relations are always active and do not limit on just professional life. There are hobbies where people can meet in more relaxed environment and establish or develop personal relations. Good example comes from non-professional football taking place in Iisalmi, Finland where group of people from all social levels of the community play football twice a week together. There are local business owners, academic researchers, local community politicians, employees of the companies, police officers and professors present. Relational capital can be built in the university campus and lectures as well or in the student parties at local nightclubs. This relational capital of an individual can someday make a deal or brake a deal between companies so personal relations can be transferred to business relations in time (Happonen 2011).

Networking capability is highlighted by many research groups as an important factor for company success in several fields. Vesalainen & Hakala (2014) argue network capability to be part of strategic capability architecture of the company where the cognitive understanding of capabilities at specific SME companies’ top management on their own company is under the focus of their research. Main focus was to find out how managers perceive, process and interpret network capability using the set framework by the research group. “A firm’s network capability refers to its ability to build, handle and exploit relationships” (Vesalainen & Hakala 2014, Ritter

& Gemünden 2003, Tyler 2001). Recent studies (look Tyler 2001) have suggested that network capability could be the significant aspect on creating competitive advantage for the company.

In order to understand networking capability as a phenomenon I prefer the research findings of Molodchik et al. (2014) as they argue networking capability to be one concept of relational capital. Authors describe in-depth of six elements which according to them are elements belonging to the broad intangible concept of intellectual capital and modelled it as called as

“two-level structure of Intellectual Capital (IC)” shown in Figure 3. Intellectual capital has three main categories and each category is divided into two elements. First category is human capital including the elements of human resource capabilities and managerial capabilities. Second category of structural capital includes the elements of innovative and internal process capabilities while the final category of relational capital is based on the elements of customer loyalty and reputation with networking capabilities.

Figure 3 Two-Level Structure of Intellectual Capital (Molodchik et al., 2014)

Molodchik et al. (2014) focus their paper more on knowledge management instead of relations and networks but argue networking capability becoming one of the most important factors for the company’s success in the globalizing market. Reason for not focusing more on networks the research group gives lack of private data as an explanation since their data is based on published records. In order to measure data they focus to measure networking capability within the number of staff members in the professional organizations which were not pinpointed, the number of company’s subsidiaries, financial leverage and attracted foreign capital (Molodchik et al., 2014).

Vesalainen & Hakala (2014) identified that networking capability (NC) related factors may have influence on different levels of the strategic capability architecture since alone networking capability as a one internal factor in the list of company strategic capabilities does not do much but in a co-operation along with other capabilities might provide competitive advantage.

Networking capability can be categorized into six different roles which are.”... as an asset, a coordinating activity, a developing activity, as intertwined with technological capability, as an independent core capability and finally as a strategic logic.” (Vesalainen & Hakala, 2014) They argue according to their findings within selected technology firms NC could be useful asset in both tangible and intangible forms on firm-specific and firm-addressable resources. They were able to extract the forms from each other and give a concrete example of their usage instead of an abstract one. NC as a firm-specific tangible asset can be seen in for example key account managers in person and how they network personally in order to develop company. As a firm-specific intangible asset NC can be seen as internal processes or how trustworthy company is seen by its customers.

On firm-addressable tangible asset NC can play a role in the relations with the local suppliers whereas firm-addressable intangible asset NC can be seen at inter-organizational trust (Vesalainen & Hakala 2014). The second identified role for NC sees it as coordinating activities within a company. Findings of Vesalainen & Hakala (2014) state NC can manifest itself as a coordinating activity which can be categorized into two groups called “vertical network context and horizontal networking context”. Former is defined practically for example as mutual openness with customer externally whereas latter with mutual internal targets of the organization. These answers were given by the surveyed management group concerning their own companies. Third role for NC is as developing activity. In this role NC is divided into three dynamic activity; adaption, absorption and innovation capability according to findings of Wang

& Ahmed (2007). Based on the research of Vesalainen & Hakala (2014) companies recognized only adaption and absorption whereas innovation capability was not mentioned. On absorption in these technological companies they preferred to keep up with the latest technology while on adaption was based on learning from the customer feedback (Vesalainen & Hakala, 2014). On fourth role focus is on NC connection with technological capability as authors argue NC is aligned with technology-oriented capabilities. Fifth role is more interesting since it argues NC to be considered as an independent core activity instead of supporting activity compared to other roles. This finding comes from the earlier research (see Ritter & Gemünden, 2003 for more). Vesalainen & Hakala identified that 80 % of the respondents of their research valued the importance of customers and customer relations (Vesalainen & Hakala 2014). Respondents highlighted the work of account managers and their investments on social and relational capital in a form of trust among customers towards the company in order to gain knowledge and understanding of their customers operations and industry (Vesalainen & Hakala, 2014). By doing so account managers were able to strengthen their relations to customers and collect important information on logistics, used technology and sourcing services for the company to deepen the relations and sometimes influence on research & development activities of their customer so that they could provide needed technological solution for customer. Also the investments on customer training hours of using the provided technology was seen as important factor (Vesalainen & Hakala, 2014). Customer capability oriented approach has been researched to provide positive results for the company according to findings of Rollins et al.

(Rollins, Bellenger & Johnston, 2012) which has reflected as networking capability per se.

Finally, the sixth role for NC is seen as a strategic logic where researchers have identified it to be consisted of three separate company level logical opportunities termed as; partnering, value streaming and horizontal allying (Vesalainen & Hakala, 2014). The logical content of partnering includes NC as close relations between company and their customers since it is according to Vesalainen & Hakala (2014) the only way to influence internal processes of the customer in order to create added value on a joint project. They argue it to be the most discussed networking capability in the industrial supplier environment where supplier and customers can co-create by learning and adapting together. The second logical opportunity the value streaming works as a strategy of being a middle-man or a hub with both supplier and customer by creating vertical relationships. Thirdly in horizontal allying in defined as logic of establishing learning networks with the partners in a joint operation. Argument of the researchers is that smaller suppliers face a tough battle in order to become a supplier for a larger company which usually prefers to reduce purchase cost focusing on few selected suppliers and cutting off the rest. This requires abilities from the small supplier to interact with the customer, use relational capabilities and try to be part of learning network defined as a horizontal allying. The focus of Vesalainen

& Hakala (2014) is on the company level instead of individual level since their main argument is that NC is seen as company’s capability among other capabilities.

Other perspective on NC comes from Mitrega et al. (2012) who focus on the management of relations life cycles totally. They put the most of their efforts in a research into strengthening of existing relations instead of managing the origins of relations or endings of relations which are not as interested point of views. The components of Mitrega et al., (2012) NC frame are relationship initiation capability (RIC), relationship development capability (RDC) and relationship termination capability (RTC). On RIC researchers argue that successful companies are always looking for new partners to have a relation with or in order to get rid of older not so profitable partner relations. They define RIC as “the set of activities and organizational routines which are implemented at the organizational level of the focal company to initiate business relationships for the benefit of the company” (Mitrega et al., 2012). The phase of RIC is seen as those relevant capabilities which are put in use to establish a new partner relation which would come to an end as soon as the first business agreement is done according to researchers (Mitrega et al., 2012) and previous literature (for example Edvardsson et al., 2008) who besides of the introduction on initiation of business relation argue trust between partners operating as an insurance against unexpected events, difficulties and changes in the relation.

Gulati (1998) argues that in order to create new partner relations the role of personal connections of managers and how they spread information is seen as a key element for attracting interest of new potential partners. RIC on the research of Mitrega et al. (2012) argues successful companies try to attract new partners who they either have some sort of social connection in advance or potential partners with no previous connection at all. RDC is argued to be set of activities like RIC but focusing on developing, managing and strengthening business relations for the benefit of the company (Mitrega et al., 2012). Prior literature highlight the importance of developing mutually beneficial relationships as very important task for the managers of any company (for example Blomqvist & Levy, 2006). The context of RDC is divided to two

“interconnected but conceptually distinct” sub components according to authors which are inter-organizational and inter-personal relationship development (Mitrega et al., 2012). On inter-organizational level RDC refers to every company activity in order to increase mutual understanding, coordination and adaption concerning competence adjustments and allocated resources. These activities can be for example knowledge share, communication between partners, joint operations sharing benefits/risks or even co-operation in decision making (Mitrega et al., 2012). Inter-personal relations according to the authors are related to extreme importance, like a water for all living species on earth. Earlier research prefers the inter-personal relations of the CEO being important (see Ma et al., 2009; Hutt et al., 2000) but authors argue to importance of inter-personal relations in all levels of the company when being in business relation with the representatives of the partners in the company network. Authors also highlight the negative or the dark side of strong and deep partner relations which in a long run can occur into a minor or major conflict between partners if something unexpected happens like breach of agreement or customers give complaints or there are changes in the staff of the networked

“interconnected but conceptually distinct” sub components according to authors which are inter-organizational and inter-personal relationship development (Mitrega et al., 2012). On inter-organizational level RDC refers to every company activity in order to increase mutual understanding, coordination and adaption concerning competence adjustments and allocated resources. These activities can be for example knowledge share, communication between partners, joint operations sharing benefits/risks or even co-operation in decision making (Mitrega et al., 2012). Inter-personal relations according to the authors are related to extreme importance, like a water for all living species on earth. Earlier research prefers the inter-personal relations of the CEO being important (see Ma et al., 2009; Hutt et al., 2000) but authors argue to importance of inter-personal relations in all levels of the company when being in business relation with the representatives of the partners in the company network. Authors also highlight the negative or the dark side of strong and deep partner relations which in a long run can occur into a minor or major conflict between partners if something unexpected happens like breach of agreement or customers give complaints or there are changes in the staff of the networked