Networks within Industrial Districts: Organising Knowledge Creation ...

Journal of Management and Governance 3: 339–360, 1999. © 2000 Kluwer Academic Publishers. Printed in the Netherlands.

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Networks within Industrial Districts: Organising Knowledge Creation and Transfer by Means of Moderate Hierarchies CRISTINA BOARI1 and ANDREA LIPPARINI2 1 Dipartimento Discipline Economico-Aziendali, Universitá degli Studi di Bologna, Piazza

Scaravilli, 1, 40126 Bologna, Italy (Phone: +39 051 258075; Fax: +39 051 258074; E-mail: [email protected]); 2 Dipartimento di Scienze dell’Economia e della Gestione Aziendale, Universitá Cattolica S. Cuore, Largo Gemelli, 1 – 20123 Milan (Phone: +39 02 7234 2436; Fax: +39 02 7234 2670; E-mail: [email protected])

Abstract. This paper furnishes evidence of innovative modes of organisation of inter-firm relationships and knowledge management within industrial districts. With the aid of a district firm, we first highlight the marked tendency among the largest companies to eschew an exclusively endogenous innovative process. Next, we analyse how the leading firm can play an active role within a network by assigning outside its boundaries tasks that were once undertaken in-house. This happens gradually with the moderate hierarchisation of originally destructured network relationships. In its attempt to organise innovative modes of design and manufacturing, without losing control and strategic legitimisation, the leading firm elects a coordinating agent with direct responsibility over a selected team of specialist suppliers.

1. Introduction In the debate surrounding industrial districts, clusters of firms located in northern and north-eastern Italy are considered models of economic efficiency, innovative output, and high employment levels (Benko and Dunford, 1991; Pyke et al., 1990; Sengenberger et al., 1990). It is widely accepted that in order to prosper, a district should act as a catalyst in the formation of predominantly informal and flexible networks of small and medium-sized enterprises (Goodman et al., 1989). In practice, districts are experiencing various destabilising pressures: i. – the “shopping” of long-established district firms by multinationals from other countries; ii. – growing international competition and the complexity and uncertainty connected with the size of the niche markets; iii. – increased labour costs in the district which, combined with improvements in systems of communication and the reduction in transportation costs, makes it cost-effective to relocate a number of production processes to other countries; iv. – the shortage of skilled manpower and the concomitant increase in unemployment levels; and v. – the decline in the business birth-rate/mortality ratio.

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Classic analyses of industrial districts limit themselves to the observation that the district is an environment conducive to the creation and development of relationships, in which knowledge for the growth of the system circulates spontaneously. Despite the recognition that some leading firms can play a key role in collective learning processes, no in-depth analyses have been conducted at firm level. According to a view which overlooks the active role of a single actor, studies focus primarily on production-related economies of scale or, more generally, on aspects related to efficiency. The slowdown in the growth of many local systems – even though in some cases they are heavily impacted by economic crises – has pointed up the limited potential of a body of literature which claims that responses to changing environments are possible only at the collective level. On this view, institutions emerge as key players and promoters of change. Our perspective contrasts with the classic viewpoints. Observation of many districts reveals that the advent of new players, or the active role of established organisations, may act as a driver for innovation and growth of entire sets of firms in the district. These players act as strategic centres (Lorenzoni and Baden Fuller, 1995), and lend momentum to processes of change towards higher levels of efficiency and competitiveness. The existence of firms with superior coordination skills and the ability to steer change in a given direction is a crucial factor for the survival – or at any rate the effectiveness – of a district formula based on extensive fragmentation of the production fabric. In this paper, we advance the idea that some industrial districts are witnessing the emergence of a moderate form of hierarchy. In order to provide support for this proposition, we look at several significant changes occurring within an industrial district. In doing so, we propose to shift the unit of observation from the district as a whole to the network of firms, and – within the network – to the leading firm, or strategic centre. Spatial proximity is still an important factor, but we believe that it is at the level of the individual firm that the generation of knowledge and its transfer occur. By observing the initiatives implemented by a leading firm, an understanding can be gained of the deliberateness and design content underpinning the structural and organisational changes experienced by the district as a whole. The paper is structured as follows. In the first section we report on the emerging structure of interfirm relationships within industrial districts, presenting a fourstage model partially developed by the existing literature. Next, we introduce the subject of knowledge creation and transfer within a district, advancing a basic theoretical framework which combines the two dimensions in order to highlight innovative developmental paths. In the following section, we introduce an exemplary case of the changing structure of interfirm relationships within a fast growing industrial district. Here we focus on the organisational roles within a network based on the exploitation of the competencies of a selected number of firms and structured processes of knowledge management. In the case presented in this paper, the relational structure for generating and transferring knowledge to partners takes the form of a development project for a specific product. Here, tacit knowledge is

NETWORKS WITHIN INDUSTRIAL DISTRICTS

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converted to explicit – and therefore codifiable – knowledge, triggering original reciprocal learning processes. In the final section we discuss a number of key implications both at firm and at network level. The involvement of the various actors in the district on the basis of their organizational and managerial knowledge represents, among other things, a new and mould-breaking kind of division of labour which warrants further investigation.

2. Interfirm Relationships Within Industrial Districts The growing body of literature on industrial districts is attracted mainly by the dynamism of small and medium sized firms which share the same location. The general assumption is that localisation fosters both cooperation and competition among firms, thereby supporting the competitive advantage of both the district and the individual firm. Geographical clusters have been studied both at the aggregate level (Antonelli, 1999; Jaffe et al., 1993) and at firm level, focusing on their impact on a firm’s resources and activities (Enright 1991, 1993; Piore and Sabel, 1984; Porter, 1990, 1998; Reed and De Filippi, 1990; Saxenian, 1994) and on processknowledge transfer and creation among cluster firms (Sölvell and Zander, 1998). Two different perspectives on industrial districts, presenting contrasting views on the structure and the nature of interfirm relationships in geographical clusters, can be identified. The first is largely attributed to Alfred Marshall’s idea of “industrial district” (Marshall, 1919). He identifies the district as a spatially concentrated community comprising many small-sized, technologically advanced and heavily export-oriented firms. The division of labour poses problems of coordinating the activities into which the process is divided up. Coordination takes place mainly through the price system and cooperation. Cooperation is mainly enabled by adherence to local practices and by the rapid circulation of information, which leads to a better understanding of who does what. Many transactions are conducted between subjects who share relationships based on knowledge and mutual trust. The term “industrial atmosphere” effectively conveys the idea of the driving role of the context in which the firm operates. This atmosphere is basically the set of indivisible intangible assets belonging to the system as a whole. The more recent “flexible specialisation model” has been developed within Marshall’s framework (Piore and Sabel, 1984 Brusco, 1982). The model addresses the question of interfirm relationships within industrial districts from an economic standpoint, centred to a large degree on the role of technological innovation. The emergence of new production technologies (CNC, CAD, CAM systems) emphasises the division of labour characteristics which were already present in the district (Piore, 1986). By specialising in particular tasks and operations, small and medium sized firms gain a more powerful position in relation to larger assemblers. Small and medium sized firms are free to change clients and clients are free to change subcontractors. Under this approach, researchers contrast the new situation with traditional subcontracting relationships where small and medium sized firms are

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heavily dependent on very large firms. The flexible specialisation model undervalues, and in some cases denies, the importance of the choices made by individual large firms in the process of knowledge generation, relegating them to the ability to identify universal patterns in technological and market development trends (Williams et al., 1987) or, in terms of the origination of districts, to the dissemination of technical know-how in areas mainly devoted to agriculture (Brusco, 1982). We can summarise this approach as follow: i. – all the firms in the district are homogeneous; ii. – they interact uniformly with one another; and iii. – institutions (associations, unions, local government, etc) might matter more than individual firms in term of knowledge generation in industrial agglomerations. In this paper, we adopt another perspective on the industrial district which leads to a very different view of the structure and nature of interfirm relationships within geographical clusters. Without denying the role that institutions may play in the creation and development of industrial clusters, and the evidence amassed in a wide body of research on individual firms, researchers supporting this view claim that: i. – firms in the network are heterogeneous and not interchangeable in term of roles and tasks (Lipparini, 1995); ii. – some firms have the capability to design and manage a large and differentiated network of relationships with other firms (Lorenzoni and Baden Fuller, 1995; Dyer, 1996; Uzzi, 1997); iii. – industrial districts are as much a product of larger firms acting as disseminators of technology and knowledge (Schmitz, 1995; Lazerson and Lorenzoni, 1999). This is the perspective adopted by the in-depth study on the development of interfirm relationships between focal companies and their suppliers (Lorenzoni and Ornati, 1988; Lorenzoni and Baden-Fuller, 1995). Three stages are identified: in the first, relationships with suppliers are vertical, and largely unplanned, becoming planned in the second stage. The third stage is characterised by the emergence of horizontal relationships among suppliers, with the focal firm losing some of its centrality within the network. Initially, focal firms manufacture most of the critical components internally. Subcontracting to local firms and their spin-offs is seen as a short-term strategy to cope with brief market booms. At this stage, focal firms regard subcontractors predominantly as passive doers filling their capacity shortfall (realised network in Figure 1). A large number of small and medium-sized firms evolve from suppliers of simple parts, made to the specifications of the focal firms, into highly specialised manufacturers of components, groups of components and operations. At this stage in their development, some small and medium-sized firms are selfsufficient in engineering, have financial autonomy and investment capacity, and offer their production to different customers. Relationships between the focal firm and suppliers are more stable. Repeated and systematic relationships tend to foster cooperation and trust between them. Gradually, interdependency arises between the focal firm and a selected group of suppliers, as the decentralisation of parts and operations increases. A supplier’s willingness to invest is a sign of trust both in the focal company and in its own technological and managerial competencies. Trust


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Figure 1. The evolution of inter-firm relationships towards a moderate hierarchy.

in the focal company depends on its commitment to leadership, on its superior knowledge of customers’ needs and market trends, and on its strategic relationships with other organisations, such as clients, competitors and distributors. A supplier’s trust in its own technological and managerial competencies depends on its linkages with numerous and heterogeneous clients, allowing it to invest in larger production volumes, limiting risk, and to improve its knowledge through a differentiated set of relationships. Focal firms tend to foster multi-client relationships with their suppliers; single-client relationships are rare and limited to very small firms (rationalised network in Figure 1). Some final firms gradually shift their procurement strategy towards a greater dependence on the external network of suppliers and subcontractors. They concentrate on design and final assembly, outsourcing most operations and the production of parts and components. They even start to co-develop new products with experienced suppliers, relying on outsourcing for sub-assemblies or complete products. The process involves a careful selection of suppliers. During this period, the final firm’s dependency on certain suppliers increases for critical components and co-

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designed parts and assemblies, and even for whole products. Some suppliers now play such a strategic role that final companies would find it difficult to develop a product without them. Suppliers, for their part, know they can only survive by cooperating with other suppliers and focal firms (Bonaccorsi and Lipparini 1994). Suppliers and focal firms have invested jointly in specific assets, and now their commitment is based on i. – mutual expectation of future profits, ii. – awareness of switching costs, and iii. – consciousness of the role of their relationships in the process of new product development. The anticipated integration of suppliers into the new-product development process brings growing interaction among suppliers. Relationships between focal firms and suppliers evolve from being mainly controlled by the focal firm in the first stage, to a reciprocal relationship in the second stage, through to a reciprocal focal firm/supplier relationship, and a horizontal relationship among suppliers, in the third stage. Suppliers are encouraged by the focal firm to interact directly among themselves, right from the earliest phase of the innovation process (planned network in Figure 1). More recently, in various districts operating in industries such as packaging machinery, scooters and motorcycles, robotics, ski boots and biomedical equipment, we observe a growing dependence of final firms on their suppliers for a larger set of tasks, such as assembly and the coordination of first tier suppliers. Firms such as IMA Spa (packaging), Piaggio and Ducati (scooters and motorcycles), COMAU (robotics), Nordica (ski boots), HOSPAL Dasco (biomedical), Marazzi (ceramic tiles), and Luxottica (sun glasses), are merely the most visible examples. Extended networking enables these firms to concentrate on their competencies and knowledge bases, accelerating learning (Powell and Brantley, 1992), and forming networks of learning (Powell et al., 1996; Hassen-Bauer and Snow, 1996). As complexity emerges and knowledge flows enrich their content, interfirm relationships appear to evolve towards a moderate hierarchisation. Within this emerging structure, focal firms are asked to modify the way they manage the process of knowledge creation and transfer (mixed-mode network in Figure 1).

3. A Theoretical Framework for Knowledge Creation and Transfer A key competitive factor is the efficient creation and transfer of knowledge within an organisational context (Kogut and Zander, 1992). Most of the relevant and widely-cited literature addressing the question of knowledge in organisations is concerned mainly with knowledge creation, the assumption being that the knowledge created should be transferred to amplify its positive effects. In developing their new theory on organisational knowledge creation, Nonaka and Takeuchi (1995), building on the seminal work of Polanyi (1966), highlight the critical role played by tacit knowledge and the interplay between the tacit and explicit dimensions of knowledge. The essence of knowledge creation is knowledge conversion. Despite focusing predominantly on the creation of knowledge, these authors recognise as critical the integration of exogenous


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aspects of knowledge into development (Nonaka, 1994). Inter-firm relationships provide a vehicle for the transfer of knowledge and, through the internalisation of externally-generated knowledge, they act as a catalyst for new learning trajectories. The formation of new knowledge depends on the interaction of people (Nonaka and Takeuchi, 1995), and the more a firm can rely on a wide set of high-involvement relationships, the more effective its generation of knowledge will be. A number of studies have highlighted the positive effects of deliberate knowledge transfer on innovative output (SMJ special issue Vol. 17, 1996). To a firm, the transfer of internally-generated knowledge often means gaining access to knowledge generated elsewhere, which itself reinforces learning trajectories. As a consequence, the success of companies often depends on their ability not only to generate knowledge, but to transfer the knowledge embodied in organisational routines from one firm to another in the network they are part of. On these lines, Grant (1996) sees the firm as an institution for integrating the specialist knowledge resident in individual firms. The primary task of management is then to establish the coordination required for knowledge integration. Knowledge transfer is the essence of the learning-by-interacting logic observable in Japanese buyer-supplier practices (Dyer, 1996; Dyer and Nobeoka, 2000), and in strategic alliances (Grant and Baden Fuller, 1995). A number of academics have described the recourse to alliances as a means of internalising knowledge and technical capabilities from alliance partners (Kogut, 1988; Hamel, 1991. Mowery et al., 1996). Rather than acquiring external knowledge, inter-firm relationships allow direct access to other firms’ knowledge, promoting the more intense exploitation of existing knowledge within each single firm (Grant and Baden Fuller, 1995). In this paper, we make a distinction between knowledge creation and knowledge transfer. In Figure 2, we consider two ontological levels for each process: organisational (the single firm), and inter-organisational (the network). Knowledge creation may occur within a single organisation as a consequence of the learning-by-doing logic in manufacturing, or from problem-solving activities among organisational members, or as a result of the R&D efforts of an internal laboratory. Knowledge can also be created from a firm’s participation in alliances. The joint development of groups, modules or prototypes, for instance, should increase the knowledge base of each participant. What is often observable in Japanese industry, and even in industrial districts, is that knowledge, once generated at the collective level (Spender, 1996), is then embedded and integrated into the knowledge base of each participating firm accumulated prior to its involvement in the process of mutual learning. The transfer of knowledge may also occur at the organisational and network (or community) level. In the former case, knowledge transfer approximates more closely to the integration of external knowledge through common practices within an organisation. At network level, the transfer of knowledge may be a deliberate attempt to improve the knowledge base of a partner. This can come about by

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Figure 2. Knowledge creation, knowledge transfer, and learning paths.

sharing procedural knowledge with alliance partners, creating formal or informal occasions in order to transfer ideas, technical news and operational procedures tested at firm level. Inter-firm training practices with instructors from the leading firm in a network are an expression of an inter-organisational mode of knowledge transfer (Dyer and Nobeoka, 2000). If we look at the process of knowledge management within a relational context, two major trajectories can be identified. The first path (identified as Path 1) originates in a situation where internal knowledge generation occurs (box I). Knowledge transfer occurs at firm level, from the individual to groups, and thence to the firm as a whole. When relational activity and inter-firm connections are taking place, the knowledge created internally tends to be transferred to a broader community through combination and externalisation (Nonaka, 1995) (box II). At this stage, contextual learning should gradually be replaced by learning through socialisation-based interaction (with outside partners). At this same stage, combinative capabilities (Kogut and Zander, 1992) emerge as critical, and the role of the firm should be that of stimulating the creation of new knowledge at the inter-organisational level, capitalising on knowledge re-elaborated by partnering firms. The collective learning taking place in box III should be internalised by every single firm (from III to I) and integrated within the previous knowledge base. This process will be successful if organisations possess absorptive capability (Cohen and Levinthal, 1990).


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The second path (identified as #2) originates in box I. Each firm, with its initial know-how, enters into a relationship and socialises its knowledge (from I to IV) to develop new knowledge, i.e. through co-design practices. When generated (box IV), the knowledge jointly created is transferred at network level, though socialisation and externalisation (box III). As in the first path, new knowledge should be integrated into existing knowledge through internalisation (from III to I), stimulating further research activity at firm level (box I). Several basic observations should be made. To start with, the process of knowledge management which is responsible for innovation requires both the creation and transfer of knowledge. This is especially true when the product is complex and integrates different technology streams. Secondly, specialist knowledge at firm level is better exploited when self-generated knowledge processes are integrated. The new knowledge which derives from the interactions among firms accelerates the learning process. Thirdly, knowledge paths within the matrix suggest that selfgenerated knowledge needs to transit in contexts in which knowledge originates from relationships. Once knowledge is created at the inter-organisational level, firms tend to keep to relational ways of knowledge generation (see box IV). With respect to the evolution of interfirm relationships introduced in the previous section, Path 1 is typical of the rationalised network (Figure 1, stage 2), while Path 2 is much closer to the planned network (Figure 1, stage 3). In both the rationalised and planned network, the leading firm is involved in a three step-process of knowledge management. If we consider the more recent, moderate hierarchisation of interfirm relationships, as mentioned above, we do not expect different paths. It is our contention that the same paths are partly managed by a different actor (i.e. the supplier coordinating first-tier suppliers), with the focal firm redefining its strategy to warrant the organisational integration of the knowledge generated at the inter-organisational level. In the case of both Path 1 and Path 2, the first move (from I to II and from I to IV) is managed by the leading firm, while further steps (from II to III and from IV to III) are largely managed by the selected supplier. Consequently, the transition from box III to box I seems particularly challenging if the leading firm’s involvement in the previous step was moderate. 4. A Step-by-Step Approach to the Moderate Hierarchy: A Case Study 4.1. R ESEARCH

CONTEXT AND METHOD

The network under examination provides an interesting case-study for looking at organisational knowledge in terms both of its creation and transfer. Specifically, the question of knowledge can be studied either at firm or network level, as can the active role played by several actors in managing the transfer of knowledge once generated. The design of the most appropriate inter-organisational connections for the distribution of knowledge is frequently a prerogative of several firms in the district.

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The case study refers to a network of firms operating within an Italian industrial district known as “Packaging Valley”. Firms operating in this sector produce almost one third of the automatic packaging machines operating worldwide. Italian producers in the packaging machinery industry (SIC Code 3565) are at the cutting edge of technology worldwide. In the northern province of Bologna we observe: i. – the presence of the largest manufacturers. ii. – the highest geographic concentration of production in the country; and iii. – a network of technically sophisticated suppliers. Almost all the firms in the district focus on the production of specialpurpose machines designed to perform a specific packaging task (e.g. blistering, wrapping or filling machines). We decided to investigate this context because of its relational dynamics. In fact, inter-firm relationships are the essence of competitiveness in the industry. Many of the firms in “Packaging Valley” were started either by engineers or designers. These individuals “spun-off” from a limited number of “incubator” companies in order to exploit their technical expertise by starting their own businesses. Longlasting relationships within the district allowed larger firms to focus on a narrow set of competencies (Lorenzoni and Lipparini, 1999), whilst relying on a wide set of specialist firms. As stated above, the structure of inter-firm relationships within industrial districts have shown progressive hierarchisation in order to respond to growing demands for efficiency at both the information and communication level. After choosing a specific district as the industrial context, the second step was the identification of a leading firm. One of the most important actors in the district is IMA Spa, a world leading packaging company. The growing difficulty in directly managing the entire development cycle of a high-technology product prompted the firm to start-up, in a systematic and structured way, a project aimed at restructuring parts of its supply chain largely comprising firms in the district. The third step we took was the identification of a specific product whose design and manufacturing testified to the move towards a new way of conceiving and producing an automatic machine for pharmaceutical multinationals. We selected a project that allowed us to build up the history of the new product creation from its origin and its impact over the network firms. Data was collected mainly by direct interviews with engineers and technicians at the IMA plant, as well as with individuals with direct responsibility within the transformation process, such as the Purchasing or Marketing Manager. The interviews, conducted over a period of 7 months in 1997, totalled almost 40 hours. We then conducted interviews at the supplier level. Suppliers involved in the project were asked to fill out a questionnaire which, together with direct interviews, helped us to collect useful information at the relational level. Other interviews were carried out in 1999, both within IMA and at its suppliers in order to monitor the progress of the project. The case study we present here is indicative of several trends: the emergence of actors with greater relational capability and the ability to give direction to strategic manoeuvres; the election of several actors as coordination centres to manage


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knowledge flows and the integration of competencies; deliberate actions to improve the conditions which govern access to knowledge and supervise its growth.

4.2. F ROM

NETWORK TO HIERARCHY: ANTECEDENTS AND STEPS

Established in 1961, IMA Spa is the biggest manufacturer of filter bag tea packaging machines, with a global market share of close to 70%; in addition, it enjoys a position of technological and market leadership in the packaging of pharmaceutical products, a sector in which it has helped revolutionise the standards by developing machines for the production and packaging of blisters. In 1998, IMA posted turnover of L410bn. It employs 1,800 workers in Italy and overseas and is structured in three divisions: pharmaceuticals and cosmetics; tea, coffee and drinks; and the food division, which sells machines produced by other divisions or subsidiaries. Over the last 40 years, IMA has relied heavily on external suppliers for its procurement needs. Right from the outset, the company has stood out for its marked propensity to outsource production, exploiting a district with a wealth of mechanical competencies and great entrepreneurial capability. Over time, outsourcing has grown steadily and now involves over 80% of total processing hours. The relational set has increased in number, in tandem with the growing responsibility assumed by those suppliers seen as critical in terms of technological competencies. In 1994, the firm decided to try out a new way of managing the design and manufacturing process, starting with situation midway between the rationalised and the planned network. The driving forces were mainly the need to improve production system efficiency and encourage independent capability in the marketplace. The first step in this process of change at the design, manufacturing and relational level, was the identification of the product. Automatic machine A94, a latest generation continuous movement packaging machine which stands out in the pharmaceutical industry for a series of innovative characteristics, was considered an ideal test for the new relational structure. The product’s innovative features include operating efficiency and productivity; ease of use; and low noise levels during the process. The machine is designed to reduce format adjustment times, one of the principal causes of dips in productivity in packaging machines, allowing change-over operations which are rapid and so simple that they can be performed directly by the employees in line. Prior to identifying “who” possesses the required knowledge in the district, and prior to embarking on the structuring of the relational set, the company divided the machine into homogeneous functional groups. It should be noted that, originally, the project was heavily based on the design competencies of IMA Spa. At this stage the automatic machine acquired the attributes of a system of operating groups with a specific identity in functional, technological and production-related terms. The following five groups were conceived and subsequently identified: 1) pusher; 2)

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tray chain; 3) electrical system; 4) “head”; 5) base and frame. These groups were to be supplied by selected vendors. The second step undertaken by the leading firm was a selection process to find the most appropriate partners for the development and manufacturing of such an innovative and critical machine. The spin-off process, which involved IMA Spa and the entire sector in the 1970s, led to the creation of independent companies able to carry out specific mechanical processing tasks on behalf of, and to the specifications of, the customer. It was primarily for this reason that the firm decided to start by exploring the existing relational network, while checking to see whether the required knowledge was available. The problem of selecting the supplier team was addressed with particular care, on the basis of the competencies required for the manufacture and complete supply of a functional assembly. The assessment parameters considered included both existing knowledge and capabilities, and the knowledge and capabilities which might be developed over the long term. After meticulous vendor screening, a limited group of suppliers was invited to be part of the project (hereafter the “Network Project) for the machine A94.1 The members of the team are small operations (from 15 to 95 employees), with turnover levels of between US$1 m and US$13 m; they are situated close to IMA Spa (maximum distance is 15 miles) and enjoy well-established collaborative relationships. They have production-related skills and use numerical control machines. Some of them have specific competencies in assembly tasks and experienced significant growth after IMA SpA recently qualified them as preferred partners. For some of them, prior to the Network Project, the relationship was based solely on individual components and not on finished groups. The third step was the most critical and innovative. It consisted in the identification of a supplier firm to act as coordinating agent between IMA and the selected supplier network. The Centre of Operational Coordination as it was called (hereafter coordinator) is not the largest firm in terms of employees, nor is it the “oldest”. Instead, it is characterised by the longest standing relationship with the leading firm.2 In choosing the coordinator, consideration was given not just to its location in the same district, but also to an organisational structure comprising external firms qualified in traditional and NC mechanical turning, milling, and also in assembly, overhaul and fitting activities, which have recently been supplemented by the co-design and design of parts and groups. Table I contains salient data on the actors in the Network Project. The next step in the process towards moderate hierarchisation entailed the definition of roles and tasks. IMA Spa defined itself as a Strategic Integration Centre (hereafter integrator) with responsibility for the management of the entire network of relationships. At the initial stages of the project, the tasks of the integrator included: i. – identification of the supplier firms and the coordinator; ii. – the organisation and integration of the contributions of the various participants; iii. – the complete design and prototyping of the machine; iv. – final testing/inspection,

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Table I. Actors involved in the Network Project (1997)

Name

Duration of Net sales Dependence Location relationship Entrepreneurial Age Employees (million $) (%)a (miles)b (years)c origin

Integrator Coordinator Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5

39 12 22 23 46 16 15

1,800 95 18 15 73 24 37

220 13 1 1.7 6.6 2.6 5.7

– 35.0 93.5 68.0 8.5 11.5 61.2

– 3 1 9 14 15 13

– 20 20 10 15 15 10

– Spin-off from Integrator Spin-off from Integrator – Spin-off from others Spin-off from others –

Source: Archival data by IMA and direct interviews a Portion of net sales to IMA Spa as a percentage of total net sales b Distance computed with respect to the Integrator’s plant c With respect to the Integrator

after the pre-testing conducted by the suppliers on the individual pre-assembled functional assemblies. At the current stage, the tasks embrace: i. – identifying the procedures for the implementation of actors’ specific contributions; ii. – defining the project’s objectives in terms of product quality, cost efficiency and time-to-market; iii. – mailing delivery orders for functional assemblies and the finished product; iv. – solving emerging problems; v. – direct contacts with customers. The coordinator’s tasks include: i. – responsibility for the production order on the basis of the inputs (delivery date, machine characteristics, cost targets) agreed with the integrator; ii. – definition of the procedures and timeframe of supplier involvement; iii. – issue and management of orders to suppliers – not part of the supplier team – under its direct management. The role of integrator is performed effectively thanks to the mastery of given competencies which represent a source of competitive advantage within the automatic packaging sector. One is competency in design and prototyping, since it is on this phase that important attributes of the product, such as flexibility, depend, which will determine its success in the international marketplace.3 Another competency concerns dealings with suppliers. In its dealings with partner suppliers, the company does not merely place orders and look for the most economical terms of supply, but extends its radius of action to qualification activities, consulting and support to the supplier in several strategic investments. With regard to the management of the Network Project, the integrator has created an internal microstructure with managers from the main company departments (Design, Assembly, Purchasing, Planning, Times and Methods), coordinated by a project manager who acts as supervisor. This structure acts as interface with outside contacts in order to speed up the strategic manoeuvre with timely and appropriate responses.

352 4.3. C OMMUNICATION ,


KNOWLEDGE FLOWS , AND STRUCTURE REPLICATION

With the increased awareness of the actor’s role within a more complex organisational structure, the communication and information flows appear in many cases to be ordered and capable of processing raw data into information more quickly and selectively. The network is activated when a request from the market arrives at the integrator via the commercial structure. This phase is equates to the move from box I to box II in Figure 2. On receipt of the order, the integrator sends it to the coordinator and, after directly contacting the suppliers of the optional standard groups (a task about to be assigned to the coordinator), its involvement in the production side ceases.4 After establishing the feasibility of the request, the coordinator activates the mechanism for coordination and supervision of the supplier team: it selects and directly contacts the outside suppliers of commercial groups and parts (in addition to suppliers of relatively simple machining jobs), and coordinates the higher level contributions of the suppliers in the group which it heads up. The members of the supplier team manufacture the group assigned to them as a complete supply and deliver it to the coordinator for final assembly. The complete supply includes: the procurement of materials and parts (commercial and not) required to make up the group; machining jobs on the group (including ancillary tasks delegated to third parties); pre-assembly of the group, and its preparation for final assembly. Some suppliers in the coordinator’s group are tasked with final assembly and the production of prismatic and cylindrical components. This phase equates to the move from box II to box III in Figure 2. Once the functional assemblies have been received and the assembly and pre-testing operations completed, the coordinator sends the machine to the integrator, which carries out final testing/inspection and presentation to the customer. Figure 3 shows the overall organisation of the network, highlighting the content of the flows and the channels activated for the manufacture of the machine. The integrator has two main information and communication channels. The first is the one activated with the coordinator. The key moments in the two-way structure are the sending of the delivery order (leaving the integrator) and the delivery of the pre-tested product (arriving at the integrator). The coordinator is the principal recipient for the transfer of all information which may entail modifications to the standards or particular requests. The second channel relates to direct interaction with the members of the supplier team, managed directly by it and to which the delivery orders are sent for the functional assemblies. The coordinator has a higher level of articulation with regard to knowledge transfer and integration. It manages two-way flows in terms of orders, reminders, material deliveries and information useful for more efficient coordination. The firms directly managed by the coordinator are linked with each other via direct channels for the transfer of information. This two-way structure is also evident between the coordinator and the suppliers outside the group, showing how the


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Figure 3. Project A94: The Network structure for the organization of knowledge creation and transfer.

learning by interacting logic is shared and accepted by all the participants in the architecture. Figure 4 shows the trend in coordination costs borne by the key actors in the various phases of the network project. Up until the time of project launch, the costs connected with the selection of partners and their coordination in networking procedures were borne by the integrator. With the assignment to the coordinator of operational coordination tasks, the costs incurred by the integrator gradually diminish. When the network consolidation phase is reached, the two main actors’ coordination costs remain virtually constant, with a reduction, for the integrator, of around 70% in the costs incurred at the time of project start-up. It is worth stressing the inevitability of the integrator’s role (albeit minimal) as “knowledge buffer”, which enables it to exert control over the design aspects of the network. One important point needs to be addressed here. The integrator tends to maintain some sort of control over the knowledge required, avoiding the loss of competencies and know-how. The first way of retaining control over the process of knowledge creation is the knowledge buffer role we have described. The second

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Figure 4. Coordinative efforts in network evolution.

is directly related to its knowledge and competencies in design activities; the third refers to the open communication channels activated with suppliers. The two paths connecting box 3 with box 1 in Figure 2 are an expression of this control. More recently, the coordinator has been involved by the integrator in co-design parts in order to adapt the product to the final client’s needs (path 2 in Figure 2). The ability to combine the operational coordination of the platform with design activity, however limited, as dictated in the first instance by the need to adapt the product in order to cut order processing times and reduce costs, brings about a series of significant modifications in the coordinator. The coordinator needs to develop new competencies at the design and at the relational level. On the design side, this is achieved by the opportunities offered by the knowledge generated in design and co-design practices; relational competencies are dictated by the need to select and manage critical suppliers in terms of the ability to transfer and share knowledge. Since relational capability is critical in this process of moderate hierarchisation, the coordinator is stimulated to promote training activities with its suppliers and the transfer of targeted competencies (certification and information systems).5 Furthermore, the need for more careful management of relational issues demands closer interaction between designers and other member of the integrator and coordinator work teams. What appears to be relevant is that the Network Project taking place within the district has some downstream effects. The relational and organisational structure adopted by the integrator to interface with the coordinator tends to be replicated by the coordinator with respect to its relational set. After a number of early difficulties in the assignment of roles and distribution of tasks (especially for the supply of commercial parts), the processing of


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production orders has improved significantly. Suppliers confirm that they have not received reminders of any sort, they produce according to requirements and manage very limited stocks (mainly small commercial parts), while machine orders are systematically met. Since 1994, the coordinator has recorded significant growth in terms of size and range of competencies. Turnover has risen from $3 m initially to $13 m in 1997. The group headed by the coordinator has been enlarged with the inclusion of new firms, for assembly, assistance, and design. It has secured quality certification for its design activity and has installed an Intranet system for more efficient supply chain management. The number of customers has grown to include important firms like Tetrapak Spa. However, the number of customers is still small (less than 10), located within a radius of less than 100 km, with whom the group markets itself as an advanced supplier with design and manufacturing competencies. Recently, additional investments have been made in training in various areas (planning and control of management and production, quality management, information systems). The participating firms have seen their respective competencies fully exploited: four suppliers out of six have recorded an increase in the scope of their collaboration with the leading firm and some have acquired specific expertise and even become privileged partners in the production of the functional component for other automatic machines.

5. Discussion and Conclusion In this paper we have provided evidence of the innovative restructuring of inter-firm relationships and knowledge management within industrial districts. In previous chapters we suggested and used our theoretical framework to interpret the case study selected. The introduction by the leading firm of a moderate hierarchy in its network of suppliers has a significant impact at both firm and network level and suggests important implications both for knowledge management and inter-firm relations within districts. As borne out by an investigation of moderate hierarchisation in the Japanese contexts, with the layering of supplier relationships coordinated by a single contact in the assembly firm (i.e. vertical keiretsu) (Fruin, 1992), the articulation and coding of organisational knowledge increases efficiency and learning, frequently preventing the atrophy of knowledge exchange and development processes. The conversion of knowledge from tacit to explicit (Nonaka, 1994; Polanyi, 1966), e.g. codifiable knowledge, is one of the central planks in the process of reciprocal learning taking place within the district. Learning in networks, by mean of hierarchisation, is “systematised” in order to produce what Levinthal (1996) describes as high-order capabilities, echoing the distinction between individual and organisational competencies advanced by Nelson and Winter (1982). In this paper, we suggests that codifiability is heavily influenced by the ability of the integrator and/or coordinator firms to structure the knowledge within a set of rules and relationships which can be readily communicated (Kogut and Zander, 1992), and the

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ability to forge network identity (Dyer and Nobeoka, 2000). Early externalisation and socialisation of tacit knowledge to selected network member/s is enabled by this ability and deliberately sought by the leading firm. Another important implication is that, within industrial districts, organisational and managerial knowledge may be important attributes in the selection of the individual actors to be involved by leading firms in new product creation projects. This is consistent with the early development of supplier-client relationships in the Japanese automotive industry (Boari, 1982; Odaka and Adachi, 1982). The competitive advantage of leading firms lies in their ability to identify suppliers with the appropriate technical competencies, and also in their ability to select suppliers with competencies in the coordination and management of other firms, as much as in the selection and management of new second-tier suppliers. This too is consistent with what has been observed by other researchers studying network restructuring as responses to environmental events (Madhavan et al., 1998). The core competencies of the leading firms in the district no longer lie solely in knowing how to do what, but more and more in knowing how to secure contributions from outside actors in pursuit of a common objective, adopting a networked form of organisation. From an organisational viewpoint, this underscores the importance of possessing abilities in the selection of appropriate partners, in the coordination and synchronisation of their contributions, as well as relational capabilities (Lorenzoni and Lipparini, 1999). With reference to the network impact of the knowledge management process described, we observed that the behaviour underpinning the allocation of manufacturing and innovation contributions is subject to progressive and reciprocal improvement processes, in order to sustain compatible inter-firm learning mechanisms. We showed that, within a district, an individual project-centred network can serve as a planning tool in order to initiate the development of specific relational routines and capabilities in the conversion of knowledge. The extensive use of interpersonal relations required by the process of knowledge creation and transfer is fostered by spatial proximity. Acceleration of the suppliers’ growth might be an important consequence of the project (Sölvell and Zander, 1998). Another major implication concerns the fact that innovative capability located at the periphery of the system needs to be organised for improved exploitation of their specialist role. With the development of inter-firm relationships, peripheries are assigned tasks with ever greater responsibilities, and organisations which were once “peripheral” tend to become central as knowledge generators and brokers. The networks in the district perfect their configuration to the point of becoming distributed intelligence systems (Tsoukas, 1996). We also observed a proliferation – by imitation – of the entrepreneurial and organisational development model (Di Maggio and Powell, 1983). If appropriately promoted and sustained by the firm which has initiated the networking process, the structuring initiative is extended to involve a growing number of actors and relational sets. The firms which were tasked with operational coordination tend


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to take on the role of strategic integrators towards their suppliers, turning to account the experience of the organisational model of which they were and are part. Suppliers incrementally design and re-design their boundaries by mimicking the path traced by leading firm (Boari, 1999). Spatial proximity and interfirm relationships ease both the technological and managerial knowledge flows embedded in local networks (Almeida and Kogut, 1999; Saxenian, 1994). The initiatives adopted by lead firms in terms of the division of tasks and knowledge management within the district have a deep impact on their role within the district. As a consequence, the lead firm in the district is no longer considered an outlet market for most of the firms, an incubator of new organisations or an actor able to support their initial growth, but also as a development model in the structural adaptation process. Successful small firms have been able to grow by following similar behavioural paths to the central firms: they focus on their core competencies; they increasingly outsource the production of parts and groups; they help their suppliers to develop their own competencies. This suggests a new role for the traditional firms in the district: that of archetypes in entrepreneurial development processes (Boari, 1999). The evidence amassed also reinforces our key player-based perspective on inter-firm relationships within districts, as contrasted with the traditional flexible specialisation and institutionalbased perspective. Moderately hierarchical network structures are leading firms’ initiatives aimed at restructuring their knowledge management processes, rather than institutional moves towards a better division of labour within the district. Some research questions demand further attention. Additional in-depth analyses should be conducted in order to better quantify and qualify the dissemination of the process in other industrial districts and to allow, despite their apparent similarity, a closer comparison with supplier-client relationships in the Japanese industrial system. Particular attention should be addressed to the mechanisms for managing knowledge creation processes when the network centrality of the lead firm declines as a consequence of deliberate network restructuring: in the long term, the managerial and organisational solutions adopted by the leading firm in this paper might not be able to guarantee ensure control over the knowledge generation process. Acknowledgements We would like to thank the engineers and managers whose cooperation made this study possible. We also wish to thank reviewers from the Journal of Management and Governance for useful comments on an early draft. We alone are responsible for errors and omissions. Notes 1 The five suppliers of the team are: PI.SO Snc; Bolognesi Srl; O.M.G.M. Srl; Meccanica

Attrezzature Snc; and S.I.C.E.L. Srl. We will refer to them as Supplier 1, 2, 3, 4, and 5 respectively.

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Of course, these firms bring to the network other suppliers of functional groups (e.g. commercial parts, standard and optional commercial groups). 2 The role of coordinator was assigned to DI.CO. Service Srl. 3 Investments in research and development have resulted in over 200 patents, registered in the main countries. 4 The despatch of the formal order by the integrator reflects the need, evinced by the suppliers at the time of project start-up, to have a well-known contractual focal firm of a certain size. In actual fact, while it is formally the task of the party issuing the order to coordinate the contributions, the role has been taken over by the coordinator as production order manager. 5 The path taken by the coordinator has features largely similar to the supplier selection and development process conducted by the integrator in the nineteen eighties, to which the founder of the company was subject when his ownership was limited to the assembly firm alone. 6 It should be recalled that the integrator started the project with the aim of managing relations with suppliers by exporting familiar forms of collaboration and internal coordination and governance procedures, such as groupwork, management by objectives, and economic incentives. With this Project, the integrator has set itself the goal of trying out new and more evolved forms of collaboration.

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