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Turning social capital into a competitive advantage

07 July 2015, 19:36

Social capital is the expected collective or economic benefits derived from the preferential treatment and cooperation between individuals and groups. Although different social sciences emphasize different aspects of social capital, they tend to share the core idea "that social networks have value". 

So just in the same way machinery (economic capital) or a university education (cultural capital or human capital) can increase productivity (both individual and collective), so do social contacts affect the productivity of individuals and groups.

Social capital has been used at various times to explain superior managerial performance, the growth of entrepreneurial firms, improved performance of functionally diverse groups, the value derived from strategic alliances, and enhanced supply chain relations.

Various researchers over the years have also looked at social capital and its relationship with political participation. With some arguing that in communities with high social capital there seems to be a commiserate participation in political affairs.

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In the same vein, politicians really tend to rely on the amount of social capital they posses in order to get elected. The volume of the social capital possessed by any politician or political party depends on the size of the network of connections he/they can effectively mobilize and on the volume of the capital (economic, cultural or symbolic) possessed in his own right by each of those to whom he is/they are connected.

This was outlined historically in the rise of the Nazi party in a recent paper “Bowling for Fascism: Social Capital and the Rise of the Nazi Party in Weimar Germany, 1919-33” where researchers stated that where social capital was higher, the Nazi party rose faster in terms of membership and it also recorded higher vote totals.

More recently and more positively, in his historic election as President of the United States of America, Obama was able to exploit his high social capital amongst young and African American voters, who came out in a large number than in previous elections and voted for him.

Closer to home, the 2015 Nigerian presidential elections also produced another historical election, where incumbent president Goodluck Jonathan was defeated by his major opponent Muhammadu Buhari at the polls. Buhari scored major victories in the north and the south west. 

These were the same areas, which according to Kingmakers.com.ng who tracked social media site Twitter, for tweets regarding the presidential elections, pointed to a Buhari victory. They found that Buhari had more positive sentiment expressed about him amongst users across the regions of the North (where he hailed from) and the South West (where significant senior members of his party came from).

This was in line with M. T. Kuenzi’s research which revealed that ethnicity has a much greater effect on social capital and political trust in Nigeria. Also more tellingly what that Kuenzi also found that interpersonal trust was tightly wound with organizational trust, and membership of an organization had a negative impact interpersonal trust.

Now from a commercial point of view interpersonal trust is really important. Interpersonal trust, which is described as the perception that you have that the other person will not do anything that harms your interest, is often the difference on whether a sales person succeeds or fails in a sales pitch. Experts now agree that a company’s success is dependent, to a degree, on its marketing manager’s ability to develop social capital within the company’s global network.  Couretsy of Jay Palter (jaypalter.ca)Now it not uncommon in Nigeria to find companies who put together a sales team, armed with fancy looks and brochures piled into company branded cars and send them forth to market their products and services. As a marketing strategy that it does have its place but if research is telling us that people are less likely to trust a sales person hired by the organization whose products he or she is selling, then it is clear that it has been overplayed but definitely in need of some new thinking.
In 2008, a study was conducted to demonstrate the role of social capital in marketing of mango fruits in order to improve the marketing services and efficiency of the marketers in Oyo State, Nigeria. The result showed that social capital improved the marketing efficiency of the marketers. The three main channels through which the social capital was harness were marketing cooperative, religious organization and social organization.

In other words, the marketers were tapping networks where they had an already existing social connection. For now a company’s sales team, most of them already tap their network but the company is faced with two issues. Firstly, there is limit to the number of people within each sales person’s network they can tap, after a few weeks to months, they basically gone through their network. Secondly, there is the trust factor, where because it is known that sales person works for the organization, it erodes the trust that the potential prospect has in any belief that any dealings are done entirely in his favour.
Furthermore, relying on sales people tends to focus mainly on the social capital of the individual rather than harness the social capital of the company. Achieving success through social capital is done by design and not by off chance that some of the company’s sales personnel will be highly connected individuals who can bring in the doors on a consistent basis.

A German based bank, which has chosen to remain anonymous, has however provided one of the best examples of how to turn social capital into economic gain through methodically acquiring about half its customers though a customer-based referral program.

A study conducted by researchers over a three year period found that customers brought through this word of mouth referral programme • generated higher margins than other customers, • stayed longer with the bank than other customers and • also had a higher customer lifetime value (CLV), which is the net present value of all the profits a customer generates over his or her entire association with the company.

The bank was able to achieve this through two mechanisms; better matching between referred customers and the firm, and social enrichment by the referrer. 

Better matching implies the presence of characteristics common to the referrer and his or her referrals but unobserved by the firm. In other words, no one knows the company better customer and the customer knows the prospect he is referring better than the bank does. Plus since the referrer is not employed by the bank, the issue of interpersonal trust is not as severely impaired.

Social enrichment implies that the benefits of referral diminish or even vanish after the referrer churns.
These two mechanisms provide a means by which firms can leverage their customers’ networks to gain new customers with higher customer lifetime value, and convert social capital into economic capital.

The referral programs can be made more profitable by recruiting referrers among loyal and profitable customers, and by using churn by the referrer as an early warning signal for churn by the referral. 

Often, word-of-mouth marketing campaigns target opinion leaders and other influential customers likely to generate a large number of referrals. Such social targeting assumes that all referrals are equally valuable. Some even companies look to social media to look for to harvest such influential customers in the hope that it increases their social capital.

Instead, a better method will be to selectively recruit loyal and profitable customers to act as referrers as they are more likely to generate new customers who are more loyal and more profitable than average and who, consequently, deliver a higher marketing ROI.

This brand of marketing is gaining more attention especially as there is a general belief that the ROI on traditional marketing has been decreasing.

- MyNews24

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

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