Memo
To: Rajiv Krishnan Kozhikode
From: Team 9 Rajesh Soni, Raina,Yang,Samuel Wang,Laura Wei,Janice Su
Date: July 12, 2013
Re. Altercentric and egocentric uncertainty
Introduction
The fundamental purpose of this paper is to answer the question: “How do organizations
interact with each other?” We examine the article “Networks as the pipes and prisms of the
market” by John Podolny, to compare and contrast structural holes with high status and when
should a company create more structural holes at the cost of sacrificing status. We will evaluate
Podolny’s arguments and propose real world examples, some of which support his key
arguments, while others challenge them. Ultimately, using real world examples, we will extend
Podolny’s arguments to account for industries that were previously overlooked in Podolny’s
analysis.
Key Assumption and Arguments
In “Networks as the pipes and prisms of the market,” Podolny discusses which network
position is the most advantageous in different types of market uncertainty. Podolny distinguishes
between two different network perspectives: the pipes prospective and the prisms prospective.
The pipe prospective indicates that one should occupy as many structural holes as possible. The
prisms perspective on the other hand, says that in addition to occupying structural holes, one
should contemplate the negative repercussions of occupying those structural holes. Podolny then
introduces two more important concepts: egocentric uncertainty and altercentric uncertainty.
Egocentric uncertainty is the unsureness that a firm faces in transforming its inputs into the best
possible outputs. Altercentric uncertainty is wariness the audience experiences in terms of
product quality (Podolny 2001). Podolny contends that the pipes perspective (high structural
holes) is most beneficial when there is high egocentric uncertainty, and a prism strategy (high
status) is most advantageous when there is high altercentric uncertainty. From this, Podolny
develops two hypotheses—firms that occupy more structural holes will sort into high egocentric
uncertainty markets, while high status firms will sort into low egocentric markets (due to the idea
that status is not beneficial in high egocentric environments). By examining the venture capitalist
industry, Podolny vindicates his two hypotheses, proving that high status capitalist firms invested
in companies in the later rounds of financing where there is less egocentric uncertainty. . We
believe that while Podolny’s first hypothesis is valid, his second hypothesis would benefit from
being refined to account for observations that were not taken into consideration. We will start our
evaluation by providing a real world examples which supports Podolny’s two key assumptions,
and then present an example that challenges his second hypothesis.
Assumption One: The value of structure holes increases with egocentric uncertainty, but
not with altercentric uncertainty.
. Podolny make this point more clear in another article where he states” the value of
structural holes in reducing egocentric uncertainty is made even clearer when one assumes a
context in which there is no egocentric uncertainty.” (Podolny 2010)
One example would be if a car manufacturer already has perfect information of their
potential consumers’ tastes and the production methods of its competitors. In this case, it is
guaranteed that they will be able to produce high-quality products as they have perfect
information. Here since there is already no egocentric uncertain for them, structure holes are of
no value to them. Therefore, structural holes is only of value in where there is egocentric
uncertainty.
Assumption Two: In contrast, the value of status increases with altercentric uncertainty,
but declines with egocentric uncertainty.
An example of assumption can be seen in Law. In the article “Social Capital, Embedded
Status, and the Endorsement Effect” by Harris H. Kim, he finds law to be an area characterized
by high altercentric uncertainty and hence, any lawyer having friendly relations with lawyers
from high status universities often earning a higher income then lawyers who lacked those ties.
There are many ways to be characterized high status and having ties with high status members is
one of them therefore, the area of law does conform with Poldonly’s second assumption.
On the other hand, the pharmaceutical industry is low in altercentric uncertainty, but high
in egocentric uncertainty. As consumers have little doubt about the quality of medicines, one is
able to assume they would not necessarily choose the medicine produced by a high status
company over a low status company. So in a high egocentric uncertainty environment, status is
of little value.
Challenge to Podolny’s Arguement
It can be observed from our real world examples, that Podolny’s basic assumptions
reflect real world phenomena and therefore, are valid arguments. Podolny uses those two
assumptions to come up with his second hypothesis which states that high status companies
select segments that are low in egocentric uncertainty. This hypothesis we found, could not be
applied in some industries and therefore needs to be extended to account for those differences.
We draw on the article “A Networks of Influence: implementing Politically Sustainable
Multinational Stakeholder Strategies”, by Josephine Otoo Nartey, to provide us with an industry
where the opposite phenomenon is perceived. The mining industry is an extremely volatile
industry. It has high altercentric uncertainty, as communities in which the company
is developing the mine are often pensive about what type of company is running the mine.
Often, mining companies exploit the land they are mining for short term profits, bearing long
term consequences for the people. Firms on the other hand, face a great deal of egocentric
uncertainty as well. Firms that seek to engage their stakeholders so as to avoid conflict and
enhance cooperation, face the problems of not knowing which stakeholders to seek out in order
to best achieve this goal(Nartey 2012). Jindal Power and Steel, a mining firm in India, has found
a way to solve this problem. Jindal Power and Steel is one of the most well-connected mining
firms in India, with Om Prakash Jindal the founder, being a Member of Parliament (thus having
contacts with the government of India). Based on this, one can characterize Jindal Power and
Steel as a high status firm. As Jindal Power and Steel has never invested in Mozambique, it is
fair to say they likely have high egocentric uncertainty and altercentric uncertainty that Nartey
mentioned is characteristic of all foreign firms investing in new countries(Lackey,2013). Based
on Podolny’s theory, Jindal Power and Steel would never have built a mine in Mozambique, as
the firm is high status, and Mozambique is characterized by high egocentric uncertainty. So,
what is the discrepancy between the Venture Capitalist industry as characterized by Podolny and
the mining industry as characterized by Nartey? The discrepancy is that in some industries such
as the mining industry, a firm is going to be confronted by high egocentric uncertainty and high
altercentric uncertainty in every market they compete in. Firms have no choice in choosing an
industry that is low in egocentric uncertainty or altercentric uncertainty. So how do companies
mitigate the egocentric uncertainty in those markets? Nartey in her article finds that firms can
mitigate egocentric uncertainty by forming heterogenious ties with various stakeholders
regardless of their status thereby occupying more structural holes in the community, But how can
a firm occupy a multitude of structural holes without forfeiting status. Well status is important in
high altercentric environments, and Nartey explains that altercentric uncertainty can be mitigated
for mining firms by occupying structural holes between high status firms like the UN and high
status environmental agencies. In essence, what she is saying status can be maintained by
occupying structural holes that are homophilous(in status) and heterogeneous(in type of
organization) at the same time. This will allow companies to maintain their status and also
obtain the information needed to fulfill their intended goal. Jindal is a good example of this as
they gathered input from the communities affected by their mine as well worked with high status
environment firms in order to make all potential stakeholders were the least effected by their
operations as possible.
Conclusion
So how do organizations interact with each other? According to Podolny, to maintain
their status, high status organizations form homophilous ties with high status organizations in
environments of low egocentric uncertainty. However, we found that high status organizations in
some industries continually face high egocentric uncertainty and high altercentric uncertainty
regardless of the industry, and therefore, must occupy more structural holes and maintain their
status at the same time. However, occupying structural holes reduces status therefore, high
status companies must create homophilous ties (in terms of status) and heterogeneous ties(in
terms of different organizations) with other organizations thereby developing new structural
holes and as well as maintaining their status Therefore, unless an organization is one of the few
organizations who has the ability to choose segment low in egocentric uncertainty, organizations
interact with each other by forming ties that are heterogeneous and homophillous nature to
mitigate egocentric and altercentric uncertainty.
References
Kim. H. (2001). Social Capital, Embedded Status, and the Endorsement
Effect.1-28, unpublished paper presented to SSRC Workshop. University of Berkeley
Lackey, C.(2013). Indian Mining: The Human Rights Risks of International Success.
The Hindu Business Line. Retrieved from
http://www.thehindubusinessline.com/opinion/global-mining-and-itspitfalls/article4759924.ece
Nartey, J. (2012). A Networks of Influence: implementing Politically Sustainable Multinational
Stakeholder Strategies.59-115, Unpublished doctoral dissertation, University of
Pennsylvania,Pennsylvania
Podolny, J . (2001). Networks as the Pipes and Prisms of the Market.
American Journal of Sociology, 107: 33-60
Podolny. J. (2010). Uncertainty Reconsidered. Status Signals: A Sociological Study of Market
Competition: 244-265. NJ: Princeton University Prie