Interfirm Networks

Anna Grandori, Anna Grandori

• Publisher: Routledge
• Year: 1999
• ISBN:
  9781134629893
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume examines the nature of interfirm networks and their role in promoting industrial competitiveness. Where previous work in this area has tended to be descriptive, the distinguished contributors to this volume present a balanced theoretical and empirical approach to interfirm networking drawing on a variety of international case studies. I

Part 1

Differentiated interests, coordination mechanisms and fairness outcomes

1 The rules of the game in industrial districts

Sebastiano Brusco

Statistics from the industrial censuses show that from 1971 to 1991 industrial districts have been a resounding success. In twenty years their share of the total manufacturing employment in Italy has risen from 32 to 42 per cent. This success is attributable to the specific ability of the districts to harmoniously resolve conflict and cooperation both among firms, and within the firm (Brusco 1992; Brusco and Fiorani 1995). The aim of this essay is to study the way in which these dilemmas are dealt with in order to create an efficient system. The basic idea is that specific rules that allow parties to express themselves generate behavioural patterns that, instead of producing destructive effects, make the system more competitive.

Relationships among firms, competition and collaboration

Besides the ability to create innovations, discussed elsewhere (Brusco 1995), the second competitive factor to be considered in the ideal district is the relationships among firms; such relationships simultaneously create competition and cooperation.

The characteristics and rules of competition

It is not difficult to argue that there is competition among the firms within a district. The presence of nearby sellers allows buyers to choose a preferred product in terms of quality, price, delivery terms, customization, and customer service. Each of these elements represents an opportunity to build competitive advantage, and in each of these areas firms compete in a lively way. Each firm identifies its strong points and can draw on the experience of the others to strengthen its market standing. The spread of information makes it possible to know what the various firms’ strategies are and enables each one to measure the level of efficiency of all firms and, if need be, to take advantage of this by imitating one or more of them. In this respect, at least, an industrial district is very transparent. Strategies are indeed clear, understandable and replicable.

Information on product innovations circulates freely and it is very difficult to keep them secret. Fairs, fashion shows and even shop windows are an opportunity to watch what others are doing. When manufacturers in Carpi use felt for the first time, or some Prato manufacturers use synthetic fur, or canning machinery manufacturers in Bologna use relays, or Montebelluna ski-boot manufacturers use plastic, or machinery manufacturers introduce more complex planning, or construction firms utilize new motors in their cement-making machines, specifications of all these innovations become public and it is possible for anyone to retrace the processes that created them and apply them for a better and more efficient product, one which would be better received on the market. It is the incremental nature of innovations that favours imitations, and therefore competition.

As was said some time ago about Japanese entrepreneurs (and it would be easy to quote anecdotes showing how similar the conditions are), the district can count on a specific type of professionalism in taking either machinery or products apart in order to copy them and make small changes to improve the product without running into charges of patent infringement. This is true for imitations of innovations realized outside the district, by large Italian or foreign firms, as well as for incremental innovations carried out within the district. In either case, the small size of the firms is already a defence against intellectual property holders, since the number of lawsuits necessary to enforce the patent would be too expensive. There are several examples of farm machinery that have been copied in terms of quality, efficiency and price; similarly rapid is the spread of innovations introduced by firms within the district.

The frequent use of innovations, creative as it may be, has led to the claim that the district structurally entails a situation of dependence and parasitism that will cause it to fail. On the other hand, one could argue that the easy reproduction of innovations produced inside the district, together with the lack of institutional protection of the results, might discourage any research and development investments. In any case, both remain open problems. However, it could also be that the ability to innovate by imitation is based on a high professionalism, and that improving others’ products should be interpreted with the same attitude shown towards the copying of Xerox machines by Minolta or Canon. This discussion is, anyway, irrelevant. The point is that within districts competition is very high and expresses itself in product or process innovation. It should also be mentioned that—as Russo (1985) has demonstrated through significant empirical evidence—there is widespread awareness that it is easy to get a hold of ideas belonging to others, to the extent that firms in Modena and Bologna forgo patenting their innovations for fear that the registration of their new designs at the patent office will be a source of information too easily accessible to their competitors.

Along the same lines, market innovation does not represent an obstacle to competition. A success story with a product in a specific market immediately involves the advent of new competitors. (A small example of this type of market is the gold-leaf faucet market which was a resounding success a few years ago in the Arab world.)

This wild competition in product and market innovations is simplified even further: the presence of a new market or the introduction of a new product are usually simple processes in terms of the necessary capital and the resources needed. A production system entirely based on subcontracting and the availability within the district of complex and expensive machinery that can be utilized only for a fraction of their saturation time, lowers entry barriers. The low level of vertical integration and, paradoxically, the small dimensions highlight the competitive advantage of the adversaries. The comparative advantage of someone who produces a new product or explores a new market is always only temporary and is based on pure know-how as well as on a network of relationships. The latter is always the only ‘protection’ for the innovator while the efficiency of the firms in the district is always dynamic.

All conditions regarding competition are therefore exceptional: an extraordinary market transparency, a significant diffusion of information, and the easy access of new firms or existing ones to the market. This lively competition and the very rapid circulation of information, given the large number of highly enterprising firms, on the one hand eliminate rents but, on the other, are crucial factors in ensuring that firms inside the district attain a competitive advantage as against those remaining outside.

The large number of firms and their common attempts to distinguish themselves and grow, render them particularly open to large and small innovations in order to equip themselves with new products and markets. Many of these innovation attempts fail; however, they create precedents and have lessons to teach. At times, there is a feeling of certainty that a specific plan of action is completely wrong; in other circumstances, feedback is gained for future efforts if changes are made to the original strategy. In yet other cases, new experiences are positive and successful to the extent that they are acquired by others and copied. The advantage that innovators enjoy is only temporary since the district’s flexibility, its mobility and its ability to react are very high.

In sum, the district is constantly engaged in a trial and error process. Work is usually not carried out on projects that require large investments, given that the actors involved are small in terms of gross sales and capital. However, as has already been mentioned, if the project is a worthwhile one, the strategy, modified here and there as discussed earlier, can bring the effort to fruition. In addition, the strategy focuses on various directions and the commitment is quite significant, given that the rewards are rich and no firm is willing to share them with any other, at least for a while. Simultaneously, groups of firms carefully monitor the situation of thousands of other single firms pursuing old and new strategies and are able rapidly to process the feedback received, whether positive or negative. It is this ability to observe and copy success stories with care and creativity that explains how, even without a strategy and a means of coordination, the district can read and interpret occurrences within technology and markets, so as to compete efficiently with more aggressive actors.

This imitation and replication practice, combined with the ability to value and learn from others’ experiences, obviously creates problems—at times serious ones—as far as commercial ethics are concerned. However, the districts’ behavioural codes precisely regulate the conditions by which private knowledge can become public knowledge, defining in detail what is just, as opposed to what is unfair, competition. The rule established by the community reads as follows (keep in mind that the reference is to an ideal district even though the empirical evidence obviously refers to the study of actual districts):

Final market firms should be competitors and can exploite all final market firms by exploiting all legitimate opportunities to gain success from others as in the case affairs, fashion shows, exhibits, shop windows. Supplier firms are also competitors, along the same lines. Supplier firms can, if they deem it appropriate, play the game by gambling their future on final markets. However, it is considered unfair and shameful competition to corrupt a supplier or employee in order to acquire information on a competing firm’s strategy.

Towards a typology of cooperation rules

Despite the lively competition we have just discussed, cooperation does exist; it assumes various shapes and plays quite a relevant role. The idea that among district firms there is only collusion is an off-the-cuff remark that at times is expressed by economists who tend to think that collusion is the only alternative to competition. What is the social and cultural structure that enables competition and cooperation to coexist? What is the institutional framework in which cooperation is made possible and developed?

It does not seem reasonable to trust explanations that assign a relevant role to goodwill, a willingness to cooperate or, in the end, to character features of the actors and people involved. It is most certainly naive to think that this cooperation is based upon the fact that people from the Emilia-Romagna or Veneto regions have a particular inclination to be fair and good-hearted. Rather, this collaboration is underpinned by a complex body of rules that can be studied as carefully as law. In particular, norms regulating cooperation among firms can be categorized in three groups: rules of caution, interaction rules, and sanctions. The distinctions among them are quite precise. The first are norms that are unilaterally applied to single agents, as necessary conditions to create a new cooperation agreement. Interaction rules, on the other hand, define the behaviour that the agents will have to follow once the relationship is established. Lastly, sanctions identify who is in charge of ascertaining violation of the norm, determining the fine applicable and issuing the sentence.

Cautions

As already pointed out by Lorenz (1988) in the case of the Lyon steel workers, the practice of apportioning contracts among various suppliers and soliciting orders from various clients is also widespread within Italian districts. This is done in order to prevent damage to the firm’s viability in the event of a betrayal or a defection, thus leaving the contractor without his habitual tried and tested subcontractors who could be quickly assigned the work that was previously assigned to the offending party, or alternatively leaving a subcontractor without a reliable client. ‘Never put all your eggs in one basket’ is the oft-quoted saying. It must be noted that this turns out to be an expensive rule to observe. In fact, building trust among various suppliers and contractors requires more time and effort than dealing with only one or two opposite parties. The additional costs inevitably involved with this method represent a kind of insurance against possible defections or betrayals. To confirm this attitude towards cautions, we can argue that only rarely do subcontractors in districts purchase specific machinery, as discussed by organizational economists. The models used for the printing of steel plates, for example (or for moulding in the steel industry), almost always belong to the contracting company and are lent to the chosen supplier as the occasion demands. When this does not happen, it means that the machinery is of low value, and its cost is charged entirely on the first supply batch.

Both attitudes are made possible by a general rule without which no form of collaboration would be possible.

It is a good thing to trust those who deserve it, even though prudent attitudes are legitimate and allowed. These attitudes are not necessarily evidence of a lack of trust in and esteem for the opposite party; rather, they merely represent cautions, typical of any careful entrepreneur.

The true significance of the rule can be appreciated only by contrast, i.e. by reflecting on how often this norm is not applied and when prudent behaviour is not deemed desirable and legitimate. For example, this procedure is felt to be normal and fair in Emilia-Romagna and Tuscany, but is interpreted as a sign of blinkeredness in Veneto, where it is normal for an entrepreneur to ask his subcontractor to work exclusively with him/her. At the same time, in Southern Italy only those who trust others unconditionally, through total commitment, have the right to ask for special treatment and support in times of need. These two different behaviours, unusual as they may seem, are actually quite similar. Indeed, in both cases the relationship is based on very strong dichotomies: ‘either we are friends or we are enemies’. If we are friends, we are expected to give and get back; any refusal will be interpreted as a betrayal. If we are enemies, any unfair behaviour is possible and all interactions will be characterized by fear and suspicion of cheating.

Interaction rules

The type of collaboration that best reflects the daily life of the district is the one between final-market firms and subcontractor firms. This collaboration relies, above all, on the readiness to invest significant resources in order to ‘learn how to work together’. The investment is made by both contractor and supplier. The point is to understand and harmonize two different work-styles as well as two ways of organizing the production process. In this setting, transfers of knowledge (even technological) often occur in both directions. The requirements are a common language and a set of mutually agreed-upon precedents that facilitate communications. Through a series of subsequent orders, costs can be agreed upon and a price can be established. Then, multiple visits to each others’ plants enable a better acquaintance with and understanding of the respective technologies. The ongoing relationship then leads to a sample contract that can be later defined on the phone before being put into writing, if a written form is necessary. In almost every case, when firms in the textile or steel industries with less than fifty employees are involved, the only written agreements defining delivery contracts are the order vouchers that are frequently not even signed by the supplier. These contracts, informal as they may seem, even detail the procedures for handling possible communication misunderstandings. A typical case requiring a standard procedure to share damages equally is a situation when, in good faith, the supplier delivers a product that is different from what the contractor requested (e.g. sewing buttonholes that are too big or producing metal pieces with too high or too low endurance).

The basic rule governing these cases of collaboration is quite simple:

Two agents who work together on a continuous basis will never fully take advantage of the market power that is available to them, owing to their reciprocal interdependence, or some other phenomenon. Each of them will take into consideration the survival needs and the success opportunities of the other; both are tied to profit margins, and to the ability to keep their respective technological standards high and to retain the best and ...