EFFECTS OF LOCALLY-BASED NETWORK ON COLLABORATIONS AMONG MANUFACTURING SMES: AN OBSERVATION BASED CASE STUDY
Ritsuko OZAWA, Architects Regional Planners Associates, Kyoto Nobutaka ODAKE, Nagoya Institute of Technology
Summary: With economic globalization, and progress of liberalization in business transaction, there is a big impact on small scale manufacturing companies with regard to business deals and opening up new markets. In this scenario, where management resources are limited for such small scale companies, efforts for mutually complementing these resources through alliances are effective. In this paper, we focus on the alliances made by small scale manufacturing companies for establishing business deals and opening up new markets, by t aking the example of small scale manufacturing companies involved in such efforts, analyze the merits achieved by alliances and the structural requirements for establishing such alliances. We analyzed and organized these as 4 points namely, the formation o f a [Space] for information exchange, Presence of core companies for facilitating business promotion, Establishment of trust relationship and Reduction in adjustment costs derived by sharing space in the region.
Keywords: alliances between companies，Partnership, Small scale manufacturing companies，Trust，Information sharing, space
INTRODUCTION This paper aims to clarify how the feature of being locally-based network affect formation of collaboration among manufacturing small-to-medium enterprises (SMEs) through analysis of its composing factors. Among the number of Japanese manufacturing enterprises, 99.3% are SMEs (and 84.4% are small businesses with less than 20 employees), which indicates that SMEs form the basis of monozukuri Japanese term for manufacturing with the spirit to produce excellent products and the ability to constantly improve a production system and process. With progressing shift of large enterprise production bases overseas, and liberalization of business relationships as seen in parts/materials global procurement, the business environment surrounding the manufacturing SMEs is changing with weakening of keiretsu, a form of corporate structure unique to Japan enabling long-term and steady business relationship, and changing business transaction structures. 1 In such an environment, manufacturing SMEs are having difficulties securing steady order quantity from conventional specified business relationship, and required to develop new customers on their own, and improve productivity and technology in order to win over price competition with businesses in emerging nations. However, for a small business that does not have ample managem ent resources, it is difficult to speedily tackle these issues alone; and collaborations in which partners complement each other’s resources are one of important business strategies. In fact, many activities are recognized in different regions of Japan, in
1
In the white paper on Small and Medium Companies 2007, by analyzing the structure of the division of labor of the business dealings between companies. it is possible to see a shift from the traditional type with close dependence on small number of customer s to multi faceted business relationship with large number of customers(Mesh structure) 1
which SMEs aware of the issues of their business environment collaborate with each other in technology/product developments and sales promotion in order to solve these issues. Despite a possibility to collaborate with excellent SMEs in other regions offered by rapid advancement of information and communication technologies, there are many activities by locally-based business groups and collaborative bodies; and therefore, it is conceivable that being efforts of locally-based network has some effects on factors involved in business collaboration formation.
STRUCTURE Objective In this paper, we focus on alliances between companies for establishing business deals and opening up new markets by taking the example of small scale manufacturing companies in Osaka and kyoto who have established such alliances and analyze the merits achieved and study the structural requirements in order to set up such alliances.
Target group for survey The target group of this study are SMEs inclusive of small scale companies or alliance organization who have established their operations in a specific area in the Kinki region.
Small scale manufacturing companies as defined in the Basic law for
Small and Medium Companies establishments with 20 or less persons engaged .
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ACTUAL STATE OF ALLIANCE BETWEEN COMPANIES IN SMALL SCALE MANUFACTURING SECTOR Target group for survey Overview of the manufacturing sector in the Kinki region is taken as the subject of study.
Number of establishments as seen from statistics The number 2 of small scale manufacturing companies in the Kinki region were 96,721 units and total number 3 of persons engaged in all such establishments totaled 497,719.
The value 4 of the manufactured item that were shipped out was 3 trillion
900 billion.
In terms of the total country, there are 448,131 units (The Kinki region
comprises about 21.6%, and number of persons engaged is 2,358,560 with total shipping value of 23 trillion.
Of these the manufacturing companies account for
85.7% of the total in the Kinki region and is over 83.5% if we consider the country wide figure.
Efforts at establishing alliances by small scale manufacturing companies
Status of business deals In order to understand the real status of the efforts of the small scale manufacturing companies to establish alliances, we analyzed the status of efforts for establishing alliances from the results of the survey of [Small scale companies in the Kinki region].
Source:2009 Economic Census for Business, Statistics Bureau of Ministry of Internal Affairs and Communications. Data of 0～19 persons engaged is adapted. . 3 Same as 1 above 4 Source: 2009 Census of Manufacturing,Ministry of Economic, Trade and Industry. Data of 4～19 persons engaged is adapted. 2
3
If we observe the status of business deals of the small scale manufacturing companies in the Kinki region in figure1, main business are those of the [SMEs] which is the largest, followed by [Major manufacturing companies], [specialized wholesale trading companies]. Fig.1: main business 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% １ Sm alland m edium -sized m anufacturing com panies
64.9%
２ m ajor m anufacturing com panies
45.0%
３ generaltrading com pany'
9.3%
４ specialized w holesale trading com panies ５ retailing
24.5% 3.8%
６ consum er
2.2%
７ others
2.8%
no answ er/unknow n
2.3%
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry)
Business dealings(Figure2) have changed from limited small number as subcontractors to new companies, to receiving orders from specialized companies (new companies) as subcontractors which is about half the total number and orders are received from large number of non specified companies [Independent order type] is 30.5％, [self manufactured product type] is 16.1％.
4
Fig.2: business dealings N =1834
no answ er/unk now n 4.1%
３self m anufactur ed product type 16.0% ２ independent order type 30.5%
１ subcontract ors type 49.4%
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry)
If we observe Figure3, the area where the business is generated is mostly [In the same prefecture], and if we include those in the [same town or cities] or [nearby town and cities], about half can be said to be from the same prefecture. Next is the Kinki prefecture at 24.2％. Fig.3: the area where the business is generated 0.0%
5.0%
10.0%
１ sam e tow n or cities
15.0%
20.0%
25.0%
9.9%
２ nearby tow n and cities
12.5%
３ in the sam e prefecture
27.6%
４ Kinkiarea
24.2%
５ C yubu area
6.7%
６ Kanto area
8.7%
７ other dom estic area
8.4%
８ overseas
30.0%
2.0%
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry) 5
Efforts for establishing alliances with companies Next, if we observe the efforts for establishing alliances in Figure 4, about 24.3% of companies are working on establishing some kind of alliances and about 11.9% are considering this. High growth companies with increasing sales are actively working on establishing alliance business and as a result, the number of alliances has increased. Fig.4: efforts for establishing alliances no answ er/unknow n 4%
１ w orking on alliances as core com pany 6% ２ w orking on alliances as collaborator com pany 18%
４ not w orking on alliances 60%
３ considering of alliances 12%
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry)
If we observe Figure 5, product development and technology development is overwhelmingly large, and following this, information exchange and cooperation are gradually linking to the alliances. This is followed by efforts for securing shared orders or unit deals and opening up new markets.
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Fig.5: Types of alliances being made by small scale companies. 0%
10%
20%
30%
40%
50%
38.3%
１ product developm ent ２ technology developm ent
40.4% 12.7%
３ joint venture
13.9%
４ new business
12.3%
５ unit deals/m odule product
15.7%
６ securing shared orders
14.5%
７ opening up new m arkets 4.8%
８ joint sale・ PR ９ opening new m arket overseas
6.8% 22.0%
10 inform ation exchange 11 buildig brand of localm anufacturing
3.3% 1.8%
12 others no answ er/unknow n
11.3%
N =664
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry)
The alliance company (Figure 6), indicates the features of the alliance company based on the type of alliance.
In the case of technology and product development,
with regard to opening new market overseas or new business deals, alliances are established with trading houses that have market information or networks. Especially in terms of business dealings, there are many initiatives for joint orders by small scale manufacturing companies in the same business, and in the case of initiatives for business deals or opening new markets, small scale manufacturing companies that have limited management resources are establishing alliances with SMEs or trading houses, and this suggests that use is made of networks or market information that provide this.
In this way, alliances between s mall scale
manufacturing companies in the same business is large and also alliances with SMEs has been increasing, and it appears that there is a tendency for simple horizontal type alliances. 7
Fig 6: Type of alliances made by small scale companies and the alliance partner 0.0%
5.0%
technology・product developm ent
10.0%
3.3% 6.0% 8.0% 7.3%
securing shared orders
15.0%
11.7% 10.8% 10.1%
3.0%
7.1%
7.3%
big com panies
R &D com panies
11.9% 12.8% 13.8%
8.3% 11.0% 8.3%
10.4%
0.7%
sm allscale m anufacturing com panies in the sam e business sm allscale m anufacturing com panies in the other business SM Es in the sam e business SM Es in the other business
trading houses
14.7%
13.6%
inform ation exchange
26.7%
10.4% 9.7% 10.4% 9.2%
2.8%
30.0%
16.0% 11.2% 14.5% 11.2%
6.7%
opening new m arket overseas or new business deals
25.0%
15.8% 11.6% 15.4%
15.8% 17.6%
8.8% 9.4% 2.6% 8.2% 3.5% 2.1% 5.3%
opening up new m arkets
20.0%
design com panies 24.7% 17.6%
5.7% 7.5% 5.4% 5.4% 9.0%
universities
others
Source ： [Strategy and Inhibition factor analysis for strengthening the competitiveness of small-scale manufacturing industry in the Kinki region] (Kansai Bureau of Economy, Trade and Industry)
CASE STUDY ANALYSIS In this section, we have done a comparative case study of 3 types of alliances. One is the initiatives for alliance for joint order by small scale manufacturing companies, the second is the alliances with SMEs for making business deals and opening up new markets, and the third is the alliances for new product development in order to develop new markets.
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Naniwa Industrial park We take up the case study of alliances established between companies located within the Naniwa industrial park for joint orders.
Cooperative that manages the
Naniwa industrial park was established in Naniwa city of Osaka in 1980 and has integrated about 210 (as On Nov. 2007) SMEs involved in manufacturing processing and construction involved with metal processing. There is accumulat ion of firms that specialize in small lot, development products or prototype products and order can be placed for unit orders or multiple processes, and the advantage is that manufacturing site, product and technology are all available in one place. Also j oint orders between companies in the same park or mutual orders are being actively pursued.
Results of the survey of tenant companies that have entered the park in the year 2007 show that there is no significant decrease in order or sales and the DI value is maintained at a good state even as compared to the national level 5 .
Level of
technology and possibility of unit orders has been evaluated and a fall in unit cost of orders is not evident. In the case of A (precision grinding company No. of employees 5 ), located in the industrial park facilitating unit orders or multiple processing which is the strength of the park, its strength is metal polishing technology in cylindrical grinding of metal, and it has 150 companies as its trading partners, and about 80% of its total sales is through joint orders. A has established alliances with 7-8 companies in and out of the park. This company is also a member of subcontractor's cooperative of leading manufacturing companies, but it believes that this has little effec t except on securing
5
According to the results of the Management questionnaire implemented by Naniwa Enterprise cooperative, increase or decrease in sales and orders as compared to the previous year was Increase of 26%，No change 52%，Decrease of 22%, and the DI value was 3.3 and compared with the country with small scale manufacturing companies in 2006 －18 (Organization for small and medium companies [Small business sentiment survey]) is relatively high. 9
orders. The benefits of location are believed to be the availability of all required processes within the park, and ease of collecting information relating to business dealings or the market. Taking advantage of the cooperative office, importance is given to the opportunity for information exchange etc. regardless of whether in or outside of the park. Information is being disseminated, and efforts are being made to obtain news of business dealings or pricing etc.
Order alliance is the core business for each of these companies, and based on the order content, the combination of the alliance companies is determined, unit is flexibly formed and business is shared. The companies receiving the order from the customer function as the core company and are responsible for the management of the business (including warranty and payment etc.). For this reason, as each company has its own customer, the core company for each business dealing is different and it can be said that this is a sharing of the business transaction network. The requirements for establishing alliances are (a) Mutual Understanding of the technology/equipment to be supplied to the customer, (2) Mutually setting stringent conditions for receiving the order and maintenance.
(3) Actively holding exchange
events within the park, exchange between families based on childhood relationship, establishment of trust relationship beyond business.
(4) Existence of shared
network of business dealings and market information.
Kyoto prototype net
History of Organization Next as a case study that not only focuses on securing orders, but also works actively in making business deals and opening up new markets, we take the example
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of the Kyoto prototype net, that works on making alliances between small scale manufacturing companies and SMEs, business deals and opening up new markets by using the web.
The Kyoto prototype net was established in 1981 as the founder unit
of the Young Entrepreneurs Group SMEs of metal and machinery manufacturers in Kyoto (hereafter YEG).
Young Entrepreneurs Group of Kyoto was established in
1981, and as the name indicates, about 80 companies involved in metal processing participated as naturally formed committee. The Kyoto prototype net was formed by the voluntary participation of 10 member companies of the Young Entrepreneurs Group of Kyoto with the objective of expanding business deals in prototypes. The aim is at providing solutions specializing in prototypes, consultation and order received through the web.
The main sales points are the speed of reply to a
consultation related inquiry within 2 hours and saving of time and effort of sorting client order by consortium
Since its inception, effort was not only for obtaining joint orders, but arrangement of reading meeting of P.F. Drucker’s book with the objective of sharing the vision and theory of business management. Further by mutually disclosing th e details of plant and management, along with sharing the vision, challenges of management are also shared.
The main objective is not only to increase the sales of the individual
companies, but the major goal is increasing the agglomeration of large proto type industry in Kyoto. Pursuit of profits of each individual company and the profits of the group, and regional interests of the Kyoto region, are all linked and while pursuing the regional agent, the focus is not only on individual profit, but also establishment of trust between companies.
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Structure of business management One of the member companies by name B (resin enclosure design 10 employees), is focusing on receiving of single unit orders of prototypes, and as it is difficult to secure a fixed number of orders continuously from each business deal, it aimed to expand sales from a few hundred companies to a few thousand. As of 2008, 8 companies (including Kyoto prototype workshop) were added to the 10 companies that were at the time when the network was established taking the total number of companies to 18, but B is also one of the companies that came into the network later.
Through the Kyoto prototype network and the member company
network, there are 500 companies with which business deals have been established and has been realized in about half of this number.
The management of the Kyoto prototype network is being handled by 2SME who are the members of this network.
Company B that was not an initial member, but
when it started participating, group management structure was formed, and foundation of the alliance business was already established. In this respect, Company B that participated later on had less burden of management of the Kyoto prototype network. Especially, for small scale companies like B, the big advantage is the access to business deals and market information held by SMEs or Kyoto prototype net. In this way, the structure of the organization is not horizontal network side by side, but is a 2 tier structure of participating members and management guiding members. However, as discussed above, from the fact that the vision is shared, and there are no mutual business dealings, thee will be no domination by the management guiding members. The requirements for establishment of alliances are (a) Sharing of concept
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between participating members, (b) Establishment of trust between participating members, (c) Presence of SME that are the core for handling the alliance business. (d) Existence of network for introducing for reciprocal sharing of business deals and market information or for introducing order items.
New alliance entity (Alliance for the commercialization of glass material coding"[Alliance for commercialization of glass coding material] as New alliance business Company N, which has an alliance with a leading automobile dealer as well as management of the real estate, fine art sales and lease, got the following information; If ceramic water purification is used for cleaning the car, the cleaning power would be enhanced and would result in luster and shine, while glass type coating has increased in addition to the conventionally used polymer coating. As compared to the polymer coating, that provides a temporary luster and shine, demand for glass coating with luster and shine of a new car and higher durability, have been increasing, and it was judged that the market for this would significantly change.
By passing the device with built in ceramic under the regular tap water, ion washing of the car would be possible and coating would have a sea level activating effect and it would be possible to produce functional glass with glass film forming effect and research was focused in this area. AS company N did not have the technology involved in this research, it was in charge of planning, basic technology development and sales, Company S that specialized in ceramic manufacturing technology, focused on manufacture of special purpose ceramic, improvement and development of special purpose water glass, and company T that is a device
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manufacturing enterprise, focused on manufacture of set up devices, after service and a local university was responsible for validating the rust prevention effect This way product commercialization proceeded.
In order to open new markets, alliance was established with the sales company of a leading automobile parts manufacturer to act as the alliance company. As a result, it was possible to achieve sales and delivery to leading dealers, and also opened up opportunities for business deals with other leading automobile manufacturers business alliances. Company N alone directly drives the manufacturing technology, through the power of planning and business promotion, and while playing the role as a core functionary of the alliance business, promoted commercialization.
Alliance is
established with leading manufacturers for opening the market, and links with market are established by product development in SME that are technology oriented.
OBSERVATIONS Benefits of alliance for small scale manufacturing industry From the analysis of the above case studies, we will summarize the merits of establishing alliances for the small scale manufacturing industry and the main factors required for the success of the alliance work. The following are the four merits achieved through alliance:
Connectivity up with the market Small scale business with limited management resources, who, cannot by themselves develop the market, can now develop the market through alliances. In all
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case studies, the characteristic feature is the integration as a system that facilitates entry to the market.
Building of an efficient organization structure In all cases, existence of a core company for planning the business were observed, and for companies with good planning capability, in addition to their efforts for business promotion, by establishing alliances with SMEs, a flexible organization structure can be created, and hence, without any in house changes, new business development can be achieved which is one of the key merits. Also a win -win relationship has been established between the alliance companies.
Technical capability for new business development For small scale business, that have difficulty running their own business, by acquiring technical information, technical exchange, and obtaining technical guidance, technical capabilities are improved.
Risk hedging capability In all the cases, a core company exists, and the participating alliance companies have trust in the core company and can utilize the branding power of the core company.
From the view point of knowhow and cost, and by establishment of the
difficult to establish quality control system through alliance it is possible to handle risks related with business deals.
Requirements for the establishment of alliance business The following are the 4 requirements for the establishment of alliance business.
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[Space] for information. The alliance companies mutually share company related information and establish relationship for sharing of business deals and market information of the participating companies. According to Itami（pp.45-49）if there is an intense interaction of horizontally generated information, psychological interaction is generated in the participants. In this case, the mutual understanding between people increases, and people as individuals will deepen this accumulation of information causing psychological resonance to occur and a sense of solidarity is born. Even in the case studies, it was observed that this kind of information exchange [Space] was created 6 . Further according to Itami, even if there is no shape in the form of a [Space], information interaction or psychological interaction would take place, but both focused and non focused interaction would occur that would result in diffusion of the information and hence a limited place in the form of a [Space] is important. In both the case studies, [Space] is the focus of functioning. Especially in the case of Naniwa industrial park, the structure is not the creation of one business unit for sharing objectives, but multiple business units sharing the place as a park are also functioning.
Structure of alliance Next, if we see the below figure that shows the relationship between the small scale manufacturing companies and the market, and the structural configuration of the alliances, the liaison network of company A in the Naniwa industrial park is the management company for the companies that received orders from the customers, 6
According to Itami, (p.42), [Place] has been defined as the point at which people participate, mutually observe consciously or unconsciously, communication takes place, mutual understanding is established, mutually encourage, mutually psychologically stimulate, and within the status of this framework. 16
and is the contact point to the customers placing the orders.
This configuration
changes for each order job. On the other hand, in the case of Kyoto prototype network, the web is the contact point for the market.
The structure of the alliance company ties the Kyoto
prototype network that is the business group of the participating companies, and horizontal structure is established between the participating companies, however, as transactions of the small and medium scale companies are being handled that form the core of the alliance business, it can be said that the organization structure that is neither vertical or neither horizontal is present. From the view point of the participating small scale manufacturing companies, in either case, when seen from the stand point of business promotion, the existence of SMEs that form the core is one of the key features.
Establishment of trust The trust between companies is important in order to continue the relationship between companies. In the case of alliance business, profit distribution, and disclosure of confidential information related to technology may be raised as issues for business promotion, but, it is necessary to build a relationship that overcomes these challenges. if we observe the case studies, in the case of Naniwa Industrial park, we find that there is a close knit communication, between companies based on childhood and family relationship.
Openness of the factory (production
environment), and mutually understanding the technology and equipment, it is possible to establish a smooth alliance. In the case of Kyoto prototype network, effort is made for participation in the management study meeting, and through this meeting, the mission is shared and trust relationship is established. In addition, without increasing members for several years after establishment, strong alliance
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continued with the 10 companies, and any increased in members is carefully selected by the participating members. The trust relationship formed in this way is the foundation of the alliance business. According to Sako, this character of trust between companies is of 3 types [Trust towards the contract], Trust towards capability], [Friendly trust]. Particularly, the subjective evaluation criteria like [Trust towards capability], [Goodwill trust], constitute trust, and communication that generate this kind of a relationship is required. This is the space described in 4.1. From the viewpoint of characteristics of relationship ties, if the mutual relationships are good, then the trust of the relationship also improves.(In the case of the case study by Wakabayashi [7] p.11), based on mutual relationship by mutual orders, or sales/PR through alliance business, mutual relationship is established, and high reliability network is established. Reduce adjustment costs by sharing of space in the locality. This time, when we were gathering information relating to the alliance bu siness of medium scale companies, there were many cases where business in the same region in certain industrial clusters had alliances, and locality has been used for building alliances. All the 3 cases in this research have established alliance companies within the area with a certain proximity. In particular, the prototype net has raised the mission of making Kyoto the prototype industrial city and emphasizes the sense of solidarity rooted in the region. When the alliance company rooted in the region, participates in the business activity of that region, it is possible to easily acquire the information related to the business activity in the region, and by remaining in the region and taking the role of governance, it is easy to build mutual trust. Itami, Matsushima, Kikkawa are equipped with power to create meaning in space,
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and by sharing space, physical activity that takes the form of a product becomes possible.
Further communication is enabled. In terms of communication, physical
product information on subtle differences in physical product, face to face communication, and communication where a large number of people would participate have become possible. Based on this, by sharing space, it has been possible to reduce [Adjustment costs) of production, and it can be considered that the alliance companies rooted in the region are functioning effectively .
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