Towards Organisational Control of Network Enterprise

Copyright @ IFAC Automated Systems Based on Human Skill, Aachen, Germany, 2000 TOWARDS ORGANIZATIONAL CONTROL OF NETWORK ENTERPRISE Diane Poulin(1), Lucien Vincent(2), Patrick Burlat(2) (1) Universite Laval/ CENTOR, Quebec, Canada. (2) Ecole des Mines de Saint EtiennelSIMMO, France. Abstract: We are interested here in the « network of firms », i.e. in industrial structures linked with horizontal agreements (unlike the « fmn network» managed by a mainspring firm). According to our studies, co-ordination is an accurate problem for SME'S networks, where each partner preserves its independence and runs its own decision-making processes among the network. For that reason, SME'S networks needs co-ordination tools to unable organizational control of relations. We understand here "organizational control" as any form of influence (direct or indirect) that direct actors' behaviour inside the network. Copyright © 2000 IFAC. Keywords: Networks, Control, Value added chain, Evaluation, Benchmarking, Activity based costing, Modelling. 1. INTRODUCTION 2. OPPORTUNISM For several years, while reorganizing their internal activities, firms have launched vertical disintegration strategies in order to go beyond the single objective of reactivity, and to base their competitiveness on their processes of innovation. In this context of deep transformation of the relations between firms, a new organizational form emerged : the network. Opportunism is described by Williamson as a "realistic" picture of individual behaviour in economic relations. Inside a network, it means that a partner could act so as to satisfy its own interest, even if this action is harmful for the other partners. In that way, opportunism also includes guile or trickery. Different kinds of opportunism may appear among business networks of SMEs : We are interested here in the «network of firms », i.e. in industrial structures linked with horizontal agreements (unlike the « fIrm network» managed by a'mainspring fInn). • Inside networks, co-ordinations of actIVItIes are required. But this co-ordination is not carried out through a hierarchical organization (as in the fmn) or through price mechanism (as on the market), but through co-operation and interaction between firms within the network. • • According to our studies, co-ordination is an accurate problem for business networks of SMEs where each partner preserves its independence and runs its own decision-making processes among the network. Only apparent co-operation (limited effort, lower quality goods, service below standard, ... ), Catch of an excessive share of joint profits (overvalued switching costs, overvaluation of the added value brought), Excessive exploitation of a joint resource, or personal appropriation of the resources created in common or by others. The two first kinds are referred to in economic literature as "moral hazard". The third one is referred to as a "hold up". In addition, aggravating factors such as uncertainty, asymmetry of information, limited rationality and dependence (in the way of assets specifIcity) often exist within networks. 155 inside the network. Indeed, the collective learning processes present specific hazards : 3. COHERENCE AND RELEVANCE OF COLLECTIVE ACTIONS INSIDE NETWORKS The competency-based theories of the firm consider that the firm's essential attribute is its "competencies" or "organizational capacities". From this point of view, the creation of new knowledge and the learning processes are in the heart of the firm's composition. These competency-based theories of the firm cover many theoretical approaches, among which the evolutionary theory of the firm. • A" rigidiflcation " hazard (to be locked up in a routine) ; • A conservatism hazard (it is essential that individuals intend to evolve in a learning context) ; • A discordance hazard (need for individual and collective learning). joining According to C. Argyris and D. Sch6n [1], one of the difficulties for the common knowledge to evolve comes from the gap that can exist between what the individuals say and what they really do. According to them, the diversity of representations and action theories in an organization must be combined with shared cognitive maps, in order to ensure the coherence and the co-ordination of activities that are performed by each organization member or unit. These cognitive maps make it possible for individuals to share the same vision of the organization reality, Le. of its internal working procedure and its links with the environment. This competency-based design of the firm can be extended to the analysis of business networks of SMEs. This emphasizes the essential role of cognitive mechanisms : they imply the development of a collective base of knowledge, and the definition of a set of rules, codes and joint languages among the actors of the network, in particular due to the learning processes. In the face of environmental constraints, the network organization allows the generation of learning effects and an accumulation of joint information, led by lasting relations between the partners. The network thus permits the construction of a "collective asset" made up ofjoint knowledge and competencies. 4. A NEED FOR ORGANIZATIONAL CONTROL However, there is a conflict between centralization and decentralization in the processes of organizational learning. The organization (especially the ne~ok organization), requires simultaneously centralIZatlon and decentralization to operate in disturbed environments in a satisfactory way. Dec ~traliz on in the acquisition of knowledge constltutes a source of variety, experimentation and learning. However, it can also be necessary to make knowledge available to the whole organization. When the agents differ in their representation of their enviro~ent and in their cognitive capacities, there must eXIst, at the organizational level, a body of common knowledge that guarantees the coherence of different learning processes in order to achieve an efficient competencies management. In order to face disturbed environments, this common body of knowledge, even if it is sustained by decentralized learning processes, must thus respect a certain form of centralization. Balancing these two forces (centralization / decentralization) will depend on the characteristics of the learning processes and the characteristics of the environment in which the firms operate. According to L. Marengo [4], when it is necessary for firms to adapt to the environment in a sharp and flexible way, local learning processes can only be efficient if there is a higher decision level able to co-ordinate them. For those reasons, networks of SMEs need coordination tools to forbid organizational control of relations. We defme "organizational control" as any form of influence (direct or indirect) that will direct behaviour of actors within the network, so to ensure coherence and relevance of collective actions. Of course, loyalty, trust, ethics and communication may limit the effects of opportunism, but they are not sufficient for the proper functioning of the organization [7]. Control is crucial, not in the sense of sanction, but to maintain the organization towards its goal. The network enterprise, often formed by expert elements in their own fields, does not need to be controlled as extensively as a multifunctional entity, although a focus must be done on critical areas, such as interaction between partners. Centering on precise points limits rigidity and permits the network enterprise to keep its lead trump that is flexibility. In our OplDlOn, the implementation of an organizational control respecting the actors' independence can be expressed in respect to two complementary approaches: benchmarking and value analysis. The first approach corresponds to a structural vision of the network that favours the use of physical indicators, and the second to a process vision that features the economic valorization of activities. The essential question is thus to know how to stimulate diversity while maintaining coherence 156 S. 6. BENCHMARKING AND STRUCTURAL APPROACH OF THE NElWORK Beyond the functional description of a network, there are typologies that serve to identify the networks according to the nature of the relations that federate their members. We will use the following distinctions [6) : A business network of SMEs may be described as a juxtaposition of complementary and competing competencies (structural description). This description suits quite well to several networks observed in the scope of the GRECOPME project This is the case, for instance, of the Mecanergie group, which is federating a boilermaker, a sheetmetal worker and five mechanics enterprises/firms. These core competencies can be evaluated with a cooperative benchmarking process inside the network. • • • Benchmarking is a continuous evaluation process of products, services and procedures against those of the most important competitors or of firms acknowledged as leaders. The main steps of this process are : • • • • • • MODELLING AND PROCESS APPROACH OF THE NElWORK • • • Implementation of the best practices in the industry within the organization; Definition of credible, ambitious and achievable objectives ; Identification of strengths and weaknesses; Establishment of a network of contacts and professional exchanges ; Reduction of partners' resistance facing change; Improvement of efficiency through adaptation of methods that have succeeded in others organizations. • Purchasing network : economy of scale for purchases and supplies, Production network : joint production, Service network: sharing of business services or elements/units of infrastructure, Technology network common development of technologies, Strategic network : achievement of a strategic objective shared by each member, Co-operation network : solving of common problems or joint reply to bids, Training network : acquisition of new knowledge and skills. It is to be noted that these types of network are not mutually exclusive. For example, a group may correspond at the same time to a production network, a service network and a cooperation network. Yet, this distinction enables the identification of interenterprise processes favoured in the relation. It will make it possible to complete the benchmark-type approach, that was based on the cost and performance of local production factors, with a chain of value approach. In this context, it seems that an objective performance evaluation of individual network members can be achieved with the application of benchmarking practices. Precisely, a comparison between the performance of network members and the "standards" of industry enables to establish objectively their respective "level". In this case, the overall "standards of performance" can be considered as a shared model for the network, which guides individual behaviour (objective identification of improvement measures) and thereby favours a cooperative behaviour. This model limits the two first kinds of opportunism: moral hazard (superficial cooperation, limited effort; service below standard, ...) and the practice of transfer prices overestimated on the basis of overvalued production costs. This fragmentation of the enterprise into activities must be driven by an objective to represent the sources of the enterprise's competitive advantages. Accordingly, an activity will be analysed only insofar as it constitutes a strong potential for competitive distinctiveness, or else if it contributes in a large measure to the cost of products. Therefore, the point is not to descnbe every chain of value but only those which are representative of the inter-enterprise processes linking network members. Thus, we must first identify the chains to be analyzed according to the type of network to study. With respect to a production network, we will focus on the supply chain management (logistics and production activities). On the other hand, the risk of personal appropriation of the resources created in common or by others still remains. For this reason, we consider it necessary to go beyond this practice of local identification, which does not put sufficiently in perspective the importance of inter-enterprise relations within the network. Afterwards, it is advisable to model these activities by functions (purchasing, manufacturing, assembling, inspection, planning, ...), and then to locate the elementary activities within these functions, and to identify their costs. However, instead of attributing costs to arbitrary work units that are all the more devoid of links with actual processes because the share of indirect costs is substantial, we must, following the example in the Activity Based Costing Method, consider that products do not consume costs 157 but activities, and that those activities do consume costs. Accordingly, the aim of this method is to gather consumed activities according to an economic chain of the cause-and-effect type tied to the raison d'etre of the network. For example, among the joint inter-enterprise supplies activity in the case of a purchasing network, the cost of the search for new suppliers could be charge according to the number of non-standard new components added to new products by the Research Unit or Engineering Department of each enterprise. REFERENCES [1] ARGYRIS C., SCHON D. : Organizational learning : a theory of action perspective, Addison-Wesley Publishing Company, Massachussets, 1978. [2] BURLAT P., PEll..LON S., VINCENT L.: ''New trends in modelling: the needs of networks", IIA'99, Genes, Juin 1999. [3] GUll..HON B., GIANFALDONI P. : "Chaines de competences et reseaux", Revue d'&onomie Industrielle, n° 51,97-112, 1990. Ibis allocation system differs from the work unit concept because the grouping keys are essentially selected in order to locate the source of the cost (in this example, one of the Research Units, introducing many new components, will be the source of a significant part of purchasing costs). The main concern is to consider costs not as objective measures but rather as vectors of influence that are intended to direct improvement processes in the enterprise. In the case of a network, this type of model has the strong advantage of defining objectively the responsibilities of various partners in the chain of cost-setting, thereby facilitating realistic and efficient joint costreduction processes. Ibis management appears as a means to rebuild an economic valorization, which guides behaviours through the introduction of an industrial organization of some valorization rules (cost and value) not directly provided by the market. [4] MARENGO L.: "Structure, Competence and Learning in an Adaptative Model of the Firm", Papers on Economics and Evolution, nO 9203, Trento, ESGEE, 1992. [5] MIDLER C. : "Instrumentation economique et mutation industrielle: les enseignements d'une recherche chez Renault", in ECOSIP, Gestion Industrielle et Mesure Economique, Paris, Economica, 1990. [6] D. POULIN, B. MONTREUll.. B. GAUVIN: L 'entreprise reseau Btitir aujourd'hui ['organisation de demain, Montreal, PubliRelais, 1994. [7] POULIN D., Z. SU : "Partnership management within the virtual enterprise in a network", IEMC, Vancouver, 1996. 7. CONCLUSION In conclusion, these two approaches (benchmarking on one side and modelling on the other) are certainly complementary. The first refers more to an organizational control led by local indicators, which are easily measurable and controllable (average daily number of orders processed by a purchaser, turnover generated by a commercial agent, lead time to produce a blueprint, ...). The second refers more to an overall improvement that can clarify the first approach (on what services to concentrate the action with priority in function of the type of network). As mentioned by C. Midler [5] with regard to this debate between "control by physical indicators" and "control by economic indicators", the first approach will focus on a few simple variables, controllable in a centralized fashion and where significant progress is expected. The second is in keeping with a more continuous process, where taking into account the interdependence of the variables is essential to assure co-operation. These approaches then become a coordination mode within the business networks of SMEs, to maintain these organizations towards their goals. 158