Fewer Degrees Of Separation Make Companies More Innovative, Creative

Researchers at the University of Washington and New York University who examined networks of companies in relation to their creative strengths have discovered that it is, indeed, a small world.

Corey Phelps, an assistant professor of management and organization at the UW Business School and co-author of the study, says that when companies are indirectly linked in a network of strategic alliance relationships with only a few degrees of separation, they are more innovative.

Phelps and Melissa Schilling, an associate professor at NYU, analyzed the innovative performance of 1,106 companies in 11 different industries over a six-year period. They examined the pattern or structure of strategic alliance relationships among companies in each industry. They found that how firms are connected to one another influences the number of patented inventions they obtained. Those that secured more patents were classified by Phelps and Schilling as being more creative.

"Most social networks, whether we're talking about friendships among individuals or alliances between companies, are typically clustered," Phelps says. "Generally speaking, we only know a very small number of people and these individuals mostly know each other. As we know from high school, the world is cliquish. This is the essence of clustering.

"Because of this clustering, we might expect that it would take many connections to link two people or two firms from different parts of the world. However, if only a small number of individuals have ties that bridge clusters, then the average degree of separation between any two individuals in the network decreases dramatically. This is the essence of a small world. We know a small subset of people well, who also know each other, but thanks to a few boundary spanners, it only takes a few links to connect anyone in the world."

According to the researchers, companies reap greater benefits when they are part of a network that exhibits a high degree of clustering and only a few degrees of separation, both of which are characteristic of a small world network.

They found that clustering enables information to travel quickly and accurately because it creates redundant paths between companies and increases the level of cooperation among them. Clusters within networks are important structures for making information exchange meaningful and useful, they add. Clustering can make firms more willing and able to exchange information.

A network in which companies are directly or indirectly connected to many others by only a few degrees of separation has high reach. Reach increases the amount and diversity of information available by increasing the number of companies that provide information and by decreasing the length of the path the information has to travel. Based upon their analysis, the authors conclude that companies involved in large-scale alliance networks that exhibit high levels of clustering and reach are more innovative.

"When a small-world network structure emerges within an industry, all companies in the network benefit in terms of increased innovation, Phelps says. "Our results are particularly important because in today's knowledge economy, innovation is king. Without the ability to continually create and commercialize new products and services, companies often wither and die. This study helps us understand how large-scale alliance networks influence innovation. It improves our understanding of why some industries and regions are more innovative than others."

The study, which was partially supported by the National Science Foundation, appears in the July issue of Management Science.