SUPPORTING SMEs IN A TIME OF CRISIS: HOW TO CHOOSE THE RIGHT ACTIONS:

A Capacity Building Seminar for Policy Makers and Local Development Practitioners

12-15 October 2009, Trento, Italy Inter-firm networks and cluster development,

by Luciano Consolati, Technical Committee, Federation of Italian Districts, Italy

• An organisational inter-firm network is defined by the relations between a defined set of distinct organisations (the network structure); and their interactions (the network process); The linkages are based on a different types of exchange (e.g.• economic goods, money, information or knowledge).• The network has a boundary to its environment• and pursues a common goal,• at the same time, the participants have different, specific• goals.• The network consists of relationships characterized by mutual• investments or interdependencies (no simple transactional linkages

A working definition:

Vast variety of network types

• Networks are an organisational form between markets and hierarchies.

• Compared to markets, a network has more structure, produces more interaction among the network organisations, provides 'thicker‘ information channels, demands more loyalty, exhi-bits more trust, prefers voice to exit, and puts less emphasis on prices.

• If compared to hierarchies, a network is somewhat underorganised, due to the loose coupling of the network organisations and due to the open boundaries of the network itself."

Business networks definition 1

From Markets to Hierarchy

Characteristics of business networks

• Which relations are between which actors in specific single networks (the structure)?

• How do the actors interact under the structure within the single networks (the process)?

Questions arise:

Relations in the Networks

The reasons of networking

• " ...four reasons for the dissolution of networks:

• (a) excessive legal structuring and monitoring of the relationship,

• (b) conflicts between role and interpersonal behaviors of organisational parties,

• (c) conditions for violations of trust, and• (d) escalating commitments to failing

transactions.

Development path and dissolution

Clusters usually involve networking;

Specialised networks of firms may evolve into clusters;

Clusters are the “natural habitat” of networks

The Controversy: NETWORKS vs. CLUSTERS-I.D.

Clusters/Industrial Districts Model

Dot

t. L

uci

ano

Con

sola

ti

Industrial districts in Italy

• 199 recognised industrial districts

• 239.305 production units (40% of the total)

• 2.172.491 employees (45%)

• geographical bias (5 regions have 77% districts and 88% employees):specialisation on traditional and mature industries:

Industry # dist. employees

Textile and apparel 67 698.705

Mechanical 32 584.112

Furniture 37 376.495

Leather, footwear 28 210.605

Food 17 109.416

Region # distr. employees

Lombardia 42 781.903

Veneto 34 469.275

Emilia Romagna 24 299.890

Toscana 19 203.537

Marche 34 165.900

A wider classification

• Areas of production specialisationconcentration of companies within the same industry in a local area

• Local production systems

concentration of companies within the

same industry in a local system, with

intensive intercompany cooperation

and exchanges

• System-areaslocal concentration of small production units from different industries relateb by intensive relationships and exchanges

The model of industrial districts

Four groups of key factors for local networks

• locational and spatial

• social and cultural

• economic and organisational

• institutional

Locational and spatial factors

• geographical proximity and sectoral specialisation

• small urban dimensions

reduction of transportation and transaction costs

circulation of information and knowledge

lower labour and land costs, social cohesion

Social and cultural factors

• central role of the family and job sharing among the family members heritated from the rural society;

• common social background and values;

• high social mobility and entrepreneurship attitude

trust as a the key issue in business relationships

Economic and organisational factors

• Possibility of extreme specialisation

• Balance between cooperation and competition

• Specialisation of the workforce as “public good” (repository of common knowledge)

joint scale and scope economies

collective learning (learning by localizing, learning by

specializing, learning by interacting

partnershipping (stability, long-termism, know-how exchange)

Institutional and policy factors

• Marginal role in establishing competitive local systems, but key role in supporting their growth and innovation

• Interventions mainly at local or regional level

(both public and private actors)

regional agencies, business service centres,

entrepreneurs’ and artisan associations, consortia of

firms

The Networks of The Networks of industrial districtsindustrial districts

Raw materials

Machinery

Semi-finished

SUPPLIERS

Trust

Job market

SOCIAL CAPITAL

Attitude

Value

Accessibility

Transports

Water purifying

Building land

INFRASTRUCTURECAPITAL

Banks

Designers

Transports

Agents

PRIVATE SERVICEPRIVATE SERVICE

TYPICAL ACTIVITIES

Sub contractors

CUSTOMERS

Markets

Schools

Trade associations

SOCIAL SERVICESSOCIAL SERVICES

Services centres

Consortiums

Research

Marketing

ProductionSub contractors

Sub contractors

Pro

du

ctio

n R

atio

nal

izat

ion

In

terv

enti

ons

Low Medium High

Low

Med

ium

Hig

h

aa

bb

cc

Market Strategies

aa

bb

ccMedium large enterprises central to the local producing system

Semi-finished products and high precision toolingsuppliers

Satellite phases sub-contractors andphases sub-contractors

Strategic map of District

Relationship models

TRADITIONAL TRADITIONAL SUPPLIERSUPPLIERNETWORKNETWORK

Leader

Leader C.

SS SS SS

SS SS SS

SS

SS

SS

SS

SS

SS

Supplier

CustomerSupplier

CustomerCustomer

SSSS SSSS SSSS

SSSS SSSS SSSS

SSSS

SSSS

SSSS

SSSS

SSSS

SSSS

PSPS

PSPSPSPS

PSPS

INNOVATIVE LOCAL SUPPLIER

NETWORK

Primary Supplier(Comaker)

Secondary Supplier Customer

Relationship models

Challenges and responses

• Re-configurations of supply chains on a global basis• Increasing cost competition from NICs• Need for strategic flexibility and proactiveness beyond

more short-term responsiveness

• Development of Innovation capabilities to differentiate• Managerial capabilities to stay competitive within global

supply chains

Customer

CustomerCustomer

SS SS SS

SS SS SS

SS

SS

SS

SS

SS

SS

Supplier

Leader CoLeader Co..

SSSS SSSS SSSS

SSSS SSSS SSSS

SSSS

SSSS

SSSS

SSSS

SSSS

SSSS

PSPS

PSPSPSPS

PSPS

Primary Supplier(Comaker)

Secondary Supplier Leader

INNOVATIVE INNOVATIVE GLOBAL SUPPLIERGLOBAL SUPPLIER

NETWORKNETWORK

Relationship models

From Local Districts to From Local Districts to Global Virtual EnterprisesGlobal Virtual Enterprises

Ind

ep

en

den

t R

eg

ion

al N

etw

ork

sIn

dep

en

den

t R

eg

ion

al N

etw

ork

sUse of Virtual Enterprise concept for business development:

Intensive use of modern communication technologies

Global Business Integration

Virtual Enterprises

Glo

bal V

irtu

al En

terp

rises

Glo

bal V

irtu

al En

terp

rises

Critical success factors in cluster development

0 10 20 30 40 50 60 70 80

Networking partnershipInnovative Technology

Human capitalAccess to finance

Presence of large firmsEnterprise entrepreneurialism

Physical infrastructureSpecialist servicesAccess to markets

Access to business support services

CompetitionAccess to information

CommunicationsLeadership

Virtual aspects/ICTExternal economic impacts

Su

cces

s C

rite

ria

The Demand of the clusters:internationalisation strategies of

networks

Main barriers between networks

Policy suggestions to createPolicy suggestions to createenvironments conducive to Networksenvironments conducive to Networks

actions for promoting networks of SMEs and for setting up collective service activities for the networks;

actions for connecting local enterprises to university and research centres and for transferring the results of scientific and experimental research;

actions for promoting international cooperation between institutions and for creating institutional networks at the international level, in order to exchange experiences and to create regional networks

3 LEVELS OF ACTION3 LEVELS OF ACTION

- promote the networking of all relevant actors at the local level to avoid dispersion of resources and increase the effectiveness of interventions and the integration of different components of the local economy within the system

- generating local leading institutions, which act as "catalysers", able to develop strategic development guidelines for the cluster by involving and coordinating different local actors in policy initiatives to fulfil common objectives;

- Public Policies as support to development and cooperation among local energies and competencies and not as substitute

Final SuggestionsFinal Suggestions