the firm as a viable system: managing inter-organisational relationships

sinergie n. 58/02

THE FIRM AS A VIABLE SYSTEM: MANAGING INTER-ORGANISATIONAL

RELATIONSHIPS

Gaetano M. Golinelli* Alberto Pastore** Mauro Gatti*** Enrico Massaroni**** Gianluca Vagnani*****

Abstract The paper discusses the role played by business relationships within a view of the firm as a viable system. Attention is focused on relationships between firms and their supplying system, emphasising the way how such relationships affect firms’ innovation processes. The paper also considers the role of trust in enhancing the effectiveness of customer-supplier relationships and in promoting innovation. These aspects are discussed theoretically and further developed using the empirical example of the Ericsson subsidiary in Italy. Key words: interorganisational relationships, viable system, trust, innovation

1. Introduction

The aim of this paper is to propose guidelines for a new coherent approach to the

study of the firm and to focus on the contribution which such an approach is able to offer in understanding the ways and means of setting up and regulating relations between enterprises and interlocutors operating in the same economic milieu.

The advantages of the systemic approach include a more effective ability show the evolutionary dynamics of a firm. Indeed, development processes are increasingly conditioned both by a need to ensure cohesion and integration of organisational units operating in contexts characterised by widespread internal entrepreneurship and by a need to set up and make the best possible use of relations with other entities * University of Roma “La Sapienza” e-mail: [email protected] ** University of Roma “La Sapienza” e-mail: [email protected] *** University of Milano – Bicocca e-mail: [email protected] **** University of Roma “La Sapienza” e-mail: [email protected] ***** University of Roma “La Sapienza” e-mail: [email protected]

THE FIRM AS A VIABLE SYSTEM 66

operating in the environment of reference. The typical aim of viable entities is survival. In order to survive, firms must not

only ensure the coherence of their organisational structure with the aims to be fulfilled, but must also focus on “controlling the opening up” of the system in a way which would allow the enterprise to develop alongside its environment of reference. The latter is to be reached by enhancing the enterprise’s business model and improving its competitive positions in order to increase its capacity to generate value in time.

The methodological approach used in this paper is based on the concept of “viable systems” originally proposed in the work of Stafford Beer. However, the original concept has been adapted to suit the more observational approach to the examination of the organo di governo, which is the purpose of this paper1. Thus modified, the viable systems approach seems to be one of the best ways of understanding the processes involved in the government of a firm.

Following a brief outline of the characteristics of a viable system, the paper focuses on the interaction between the enterprise system and the environment. It proposes a more fitting and up-to-date definition of the concept of the market as a context within which control of relations with other entities - systemic or otherwise - operating in the same environment is necessary.

Another aim of the paper is to emphasise the relations and interactions between the firm-viable system and its suppliers. Indeed, more than any other relations, these interactions influence the technological and innovative dimension of the enterprise and lead to the need to develop increasingly sophisticated models - from which no less complex forms of industrial organisation derive - for their regulation.

Finally, having examined the role of customer-supplier relations in the systemic approach to the government of a firm, and having highlighted their presumed lines of development - the appearance of supply systems - the paper focuses on the role of trust as a fundamental element of all relations and a variable able to increase the knowledge-based assets of firms involved in partnerships in high-tech sectors. To conclude, ample space is dedicated to an in-depth examination of the nature of such relations. 2. Concepts underlying the systemic approach to the study of enterprise

In order to understand the importance of the systemic approach in the study of

enterprise, it is necessary to focus on the main concepts, which contribute to its underlying logic. 1 The organo di governo can be defined as the viable firm’s sub-system of the strategic

decision instance. For an in-depth analysis of the concepts of systemic enterprise adopted in this paper, see GOLINELLI G. M., L’approccio sistemico al governo dell’impresa. I – L’impresa sistema vitale, Cedam, 2000.

G. M. GOLINELLI – A. PASTORE – M. GATTI – E. MASSARONI – G. VAGNANI 67

a) From structure to system A structure is a set of elements (in the case of an enterprise these elements are

human, technical and financial), each of which has specific roles, activities and tasks to be completed while observing certain constraints and rules2. By placing these elements in relation to one another - and allowing them to interact in completing corporate processes - it is possible to fulfil common aims. Three structures can be identified in an enterprise system: a) A “logical structure”, i.e. a set of “logical components” which carry out

determined roles in observance of established rules and on the basis of specific links/relations with other components;

b) A “physical structure”, i.e. a set of “physical components” whose function and potential applications are known and which are able to connect with other components;

c) An “extended structure”, i.e. a complex set including internal components and components belonging to other entities - systemic and non- - with which the enterprise interacts.

The above distinction and the shift from a logical structure to a physical and then

to an extended structure hints at the idea of a “project”, i.e. a localised sequence (“organisational scheme”), which, prior to physical materialisation of the structure, predicts which (logical) elements/components must be present in a determined structure and the (logical) relations according to which they must connect to one another and to components of structures of other systems in order to be able to interact and allow the system to emerge or operate once the physical structure (components and physical relations) has been constructed.

Thus a “system ” is a physical structure whose physical components interact with one another and with other entities in order to fulfil a determined aim. The structure expresses the potential ability of the firm to achieve results through behaviour aimed at a certain goal. A “structure in action”, i.e. a structure oriented towards fulfilment of a common objective is a system.

The shift from structure to system can be considered as the “emergence” of the system from the structure.

2 A constraint is a commitment which links two parties and/or components and limits their

individual behaviour; a rule is a restraint which disciplines their behaviour and establishes a commonly shared order. The two concepts are complementary to one another. Indeed, while the constraint, being a link, regards the physical side of the relationship (structure), the rule regards the dynamics, the actions and the effects which are developed as a result of the relation (system). These conceptual gradations will become clear in the following pages.


b) Relations and interactions It is by no mere chance that in defining the structure and the system, use has

been made of the terms relation and interaction respectively. Indeed, a structure can be considered as a series of logical and physical links, which allow components to stand in reciprocal relation to one another and (potentially) create synergies, acting towards to a common goal and the sharing the same objectives. Thus a relation can be considered a logical or physical connection between the components of a structure. On the other hand a system focuses on moment of interaction, i.e. the moment in which the components, having set up structural relations, effectively exchange resources and share knowledge in order to reach a common goal.

The concept of (structural) relation is static and objective i.e. does not depend on the results of the relation. On the contrary, the concept of (systemic) interaction is dynamic - a flow of exchange - and subjective, as it depends not only on the system, but also, and above all, on what the observer is able or wishes to evince according to the point of view of the analysis in question.

c) The organisational scheme

As can be seen from the above considerations, the guidelines for a dynamic implementation of the extended structure are supplied by the “organisational scheme”. The organisational scheme is made up of the processes and activities to be completed by means of a specific succession of relations involving internal components, which interact with one another, and with external components.

Thus it is within the concept of the organisational scheme that the shift from the “tangibility of the structure ” to the “intangibility of the (emerging) system” can be recognised. By preparing and then adapting the organisational scheme, the organo di governo allows the enterprise system to emerge.

In order to understand the concept of the organisational scheme fully, it is necessary to note that two precise and specific moments of the organisational scheme can be identified in the shift from entrepreneurial idea to enterprise system:

a) “general organisational scheme”; b) “definite organisational scheme”,

The first moment is the shift from the entrepreneurial idea to the logical

structure, which passes through an intermediate stage of theorisation of the general organisational scheme. During this stage, by answering the questions “Who does what? How? And When?” the decision-maker is able to form an embryonic idea of the components and relations (including relations with the external environment) required. This moment is indispensable in identifying the logical structure according to which - in line with the established general organisational scheme - the variety of relations and roles required by the scheme can be set up. This variety of relations must also provide for connections that may be requested at a later date, when the extended structure is adopted and it will be necessary for the system to interact with the external environment.


The second moment is the emergence of the system - once the physical structure has been created - which follows the interaction between the physical structure and the external environment. In this case, the decision-maker must identify the extended structure through the definition of a definite organisational scheme. There are many factors which, through the definite organisational scheme, lead to the identification of the extended structure. Indeed, in planning the extended structure, the organo di governo must take the physical structure into account, also bearing in mind that adjustments to the local structure (defined through the general organisational scheme) may be made as a result of the physical components actually acquired and available for use. Furthermore, the decision-maker must consider the external interlocutors (other entrepreneurial organisations, institutions, etc.) with which the physical structure of the enterprise system will set up relations, whose characteristics could mean some internal relations are inadequate with respect to external links 3.

3. Viable enterprise system

The need to consider the opening up of the system and its ability to adapt and search for means of improving the conditions of survival of the firm through its functions, as well as the need to identify an organo di governo which is able to orient the development of the firm through its choices, require the identification of a logic which is able to provide a point of reference for all entrepreneurial organisations. This need seems to be satisfied by the concept of the “viable system”. The concept of the viable system

The concept of the viable system is not new. It was first introduced by Stafford

Beer, one of the leading exponents of cybernetic theory applied to entrepreneurial organisations, however does not yet seem to have exploited all its heuristic potential4. The viable system model seems to be particularly suitable to defining the enterprise system which this paper aims to examine and is also coherent with the observational point of view - that of the organo di governo - which underlies this study. Furthermore, the concept of the viable system can refer to any organisation, and thus also to the firm. Viable organisations are able to survive as a result of changes (adaptations, transformations and restructuring) in their logical and physical aspects (logical and physical structures) and in their specific configuration over time (extended structure constant over time). The intrinsic privilege of the viability of the structure is shown in the systemic dynamic. Indeed, on the basis of relations among 3 Consider, for example, the level of technology available during the creation of the

physical structure and the level of technology of external organizations with which the enterprise must be linked.

4 See BEER S., The Brain of the firm. The managerial cybernetics of organization, The Penguin Press, 1972.


internal components and between some internal components and selected external components (belonging to the physical structures of other systems), the firm interacts with the context and thus learns, adapts, develops and improves its effectiveness over time5. Thus a viable system can be defined as a system which survives, remains united and is integral, is homeostatically balanced both internally and externally and possesses mechanisms and opportunities for growth and learning, development and adaptation, which allow it to become increasingly effective within its environment6. The properties of viable systems

Viable systems are open systems, which are only able to survive as long as they

are contextualized in their environment of reference and thus able to make exchanges. Viable systems are “isotropic” as far as their fundamental characteristics are concerned, i.e. they do not change according to the point of view from which they are observed. Furthermore, even though viable systems seem to vary in their physical structures, this does not deny their identity. Viable systems are generally represented as a single category when considered in relation to (see Figure 1):

1) an area of “decision”; 2) an area of “action”.

Fig. 1: The identity of viable systems. Source: BEER S., Diagnosing the system for organisation, op. cit.

For purely analytical purposes and in order to facilitate the study of the identity

of the viable system, the system can be divided into two areas - decision and action.

5 The viability of the enterprise system requires an activity of government which is able to

identify a variety of possible states of the structure, regardless of the uncertainly of the future, and knowledgeably make decisions regarding its ability to become systemic with the aim of surviving.

6 Summary of the definition given in BEER S., Diagnosing the system for organization, John Wiley, 1985.

Reduction in variety

Increase in variety

Area of

DECISION

Area of ACTION

(operations)


In reality, such areas can never form autonomous and independent areas of a system, nor are they able to live an autonomous life. Thus, a viable system is characterised by the existence of two distinct but interacting areas which, considered separately and independently of one another, cannot form a viable system7.

The two symbols which lie between the two areas (the amplifier diode and the resistor) represent the need to adapt the knowledge of each individual area in such a way as to allow a communication flow between them, e.g. between the tacit knowledge - “knowing how” - of technical-production aspects of the area of action and the “knowing to be” of the relational aspects of the area of decision. The dynamics of entrepreneurial organisation require a continuous relationship between the two areas. Obviously the difficulty in “regulating” the system lies in achieving the optimum combination of the knowledge of each area.

Furthermore, it must be considered that the activity of a viable system X at level L is conditioned by the need to satisfy the requisites of a super-system at level L+1. Likewise, the activities of subsystems of system X at level L–1 must achieve the results required by the needs, rules and orientations of system X. Thus:

a) the aims and objectives which allow system X to emerge from the underlying

extended structure derive from the super-system - or even from several super-systems - which influence(s) system X;

b) there is no point in studying the systemic characteristics of a certain organisation X without studying both the super-system in which X is included and the subsystems which X includes8.

From these conclusions it can be deduced that in studying social and corporate

organisations it is only possible to understand the characteristics and dynamics of a system by examining the super-systems which exist over it (systemic level L+1) and the subsystems which are included in it (systemic level L–1). The viable system enterprise as an abstract and concentrated model of the viable system

The concept of viable system proposed is not able to fully satisfy the need to

provide a systemic representation of the firm. First and foremost, it is difficult to condense the effective operating dynamics of the firm into the areas of action. Likewise, the area of decision includes all decisions and not just decision-making processes relative to the government of the firm. Obviously, this does not mean that the viable system model is inadequate, but rather that, over time, its ability to explain the progressive development of both the firm and the relative context of reference seems to lessen. As a consequence the model is no longer able to represent 7 Obviously, it is possible to hypothesize viable systems in which one of the areas is much

smaller than the other. 8 However, it is possible to study - and certainly worth studying - the characteristics of the

specific structure of system X, without taking the super and sub-systems into account.


the current reality. The significant changes in the context in which the firms operate which have

taken place since the Second World War have explicitly conditioned the decision-making and operating dynamics which distinguish viable enterprises. Above all, from an organisational point of view, complex external growth - the increased speed of change of the super-systems of reference and the type of needs expressed, as well as the rules imposed on the enterprise system - has required a drastic reduction in the degree of hierarchical specialisation. This has led to a reduction in rigidity in the operating area and thus a recovery of flexibility. As a result, the individual macro-components have been granted wider margins for movement and are thus autonomously able to accumulate skills and consequently plan their own routines internally. These lines of development also appear to be connected to a progressive recognition of the fact that human resources cannot be considered in terms of mere mechanical operativity. This substantial development in the firm’s way of being and operating means the model set forth in Figure 1 is no longer satisfactory.

The above considerations underline the need for a further effort in describing - according to the concept of “viable system” adopted in this paper - an organisation which could be considered a “viable system enterprise”, i.e. an organisation which is built on the founding principles of the viable system but which also lays with the tradition of managerial economics. The “viable system enterprise” can be defined in the same way as the viable system. Firstly, it is necessary to identify the type of adaptations - in line with the historical development of the firm - which make it possible to devise a coherent key to understanding based on Figure 1. In particular it is necessary to:

1) formalise the organo di governo’s approach to the enterprise whose aim is to

activate and orient the system in such a way as to fulfil its aims and objectives, by means of the operations of a structure whose routine decisions are made autonomously and on the basis of tacit knowledge;

2) emphasise the concept of “enterprise as an open system” able to survive in harmony with the development of the context of reference by adapting its organisational scheme and exchanging resources through interactions with other systems.

With respect to the first point, it is useful to consider the need to survey the

behaviour of firms from a precise point of observation. Two distinct fundamental moments can be traditionally identified as far as entrepreneurial activities are concerned: government and management. In order for an enterprise to be represented as a viable system this dichotomy must be reflected as it qualifies the point of view of the organo di governo whose role is to observe, develop, plan and act by availing itself of a suitable and fast-reacting operating structure. The second point poses the need to identify - within the area of decisions - those decisions aimed at guaranteeing the flexibility of the organisational scheme in fulfilling the established aims and objectives.


It was previously stated that in order for a system to be considered viable it must be able to survive by setting up processes of learning which allow it to adapt to the context of reference or even - given certain conditions - to modify the context. However, it has not yet been established how the system can do this: how the decisions necessary to reach this result are made and then transformed into tasks to be completed. It should be noted that it is a specific decision-maker, the organo di governo, which decides whether to adapt, transform or restructure the set of ongoing relations of the extended structure in order to guarantee the continuing fulfilment of aims.

The following hypothesis provides a new explanation of how the organisational scheme, translated into an extended structure with a tacit knowledge integrated by routine solutions (established answers), can develop in line with the environmental context of reference by means of specific activities carried out by the organo di governo. As clearly shown in the model, the organo di governo “translates” the environmental context into organisations ranging from market configuration to the viable super system one. The organo di governo uses its knowledge to deduce opportunities and external relational rules from the environmental context. Thus if we imagine a set of all the decisions contained in the area of decision of the viable system, a subset of those decisions which characterise the action of the organo di governo can be extrapolated. Having extrapolated this subset, it is then possible to see the remaining set of management decisions (Figure 2). Essentially rooted in action and developed from ongoing and long-lasting processes, management decisions are inseparable from the internal context and based on the technical ability to implement included in the area of operations.

Fig. 2: Extrapolation of decisions of the organo di governo from the total area of decisions of

the viable system model It can also be hypothesised that the set of residual tactical/operating

(management) decisions can be added to the area of operations. In this way a new aggregate is formed. The new aggregate - which can be defined as the operating

Area of organo di governo’s decisions

Residual area of management decisions

Area of decision


structure - contains both tactical/operating decisions and the real and proper moment of operation and, thus, coincides with the area of management (Figure 3).

At this point the operating structure - fundamentally based on the previously mentioned concept of extended structure - can be extracted from the processes. The extended structure acknowledges the existence and possibility of activation - and therefore includes - of relations among internal components and between internal components and some types of external components. However, no reference is made to the intrinsic capabilities of the components involved in neither relations nor the “quality” of such relations. Indeed, the extended structure model conserves, but does not clarify, the historical development, which sees the initial extended structure modified by the organo di governo and internal processes of self-organisation to become a new version. The capabilities and skills of the individual components are implicitly present in the operating structure and, indeed, it is the operating structure, which dictates the law of change of state.


Area of operations

Fig. 3: The “viable system firm” as a model extracted from the “viable system” model Thus, having located the tacit knowledge and routines in the operating structure,

it is possible to confirm that the operating structure includes the set of potentials and limits which sanction the “law of change” upon which all possible redefinitions - induced and desired by the organo di governo - depend and to which the extended and operating structures will be subjected.

Therefore, the model summarises in a single diagram the set of conceptual processes, which form the axiomatic basis of the process of modelling. Indeed, even though this model retains the features of the “viable system”, it is more suitable to the description of the enterprise system, as will be explained below.

Relations between the organo di governo and the operating structure: towards post-Fordism

The first decades of the 20th century saw confirmation of the model of the large-

scale capitalist enterprise whose features have contributed to the determination of modern industry.

The Fordist organisational model is based on the idea of a firm, which functions in the same way as a machine: with the mechanical metaphor being applied to both

Management decisions

+ =

Operating structure

Area of management

Area

of management

Area of

government

Organo di governo’s decisions


the internal characteristics of the enterprise and the environmental context in which the firm operates. Indeed, it can be seen that the external environment of the Fordist enterprise is considered to be extremely simple both as far as the stability of consumer tastes and the intensity of technological and competitive pressures are concerned.

Given such a predictable external context, the progressive specialisation and parcelling of labour in correspondence to the standardisation of production processes and products and the growing size of the firm, generates a proliferation of organisational units within the enterprise. These organisational units are divided according to numerous hierarchical levels and rigidly regulated according to the principle of authority and a detailed set of rules and procedures. Thus, the integration and co-ordination of the activities carried out by the components of the operating structure are ensured by 1) planning which is centrally managed by the top level of the organisational pyramid; 2) standardisation (of inputs, processes and outputs) through rigidly codified and formalised rules and procedures; 3) hierarchical authority which is sectioned according to the various levels of the organisational structure.

The application of Taylorian principles shows a distinct separation between decision-making activities - whose processes are entirely determined by the top management of the firm - and executive and operational activities completed by components of the operating structure. The activity of intermediate level managers is characterised by an almost total lack of decision-making autonomy, as any decision made by such figures is strictly subordinate to the decisions of the organo di governo. Thus intermediate level managers are mere transducers within an information and communications system whose function is to ensure that orders given by the organo di governo reach the lowest levels of the company hierarchy and that data regarding the results of implementation of the management decision return to the top.

In such a scenario, the two moments - decision-making and operative - into which the overall structure of the enterprise system can be divided (into which viable systems can also be distinguished), exactly coincide with the physical separation of the organo di governo and the operating structure, as shown in Figure 4 which is based on the model already used to describe the logical structure of viable systems.

Fig. 4: The logical structure of the Fordist type firm.

Organo di governo

Operating structure


According to the Fordist firm model, the organo di governo dominates the evolutionary dynamics of the enterprise system by suffocating the potential variety of the operating structure. The organo di governo is relatively closed to influences and pressures from the various structural components (as shown by the dotted line in Figure 4). Consequently, the bi-directionality of relations between the organo di governo and the operating structure is weak. Indeed, the only data received by the organo di governo from the operating structure are return data highlighting any discrepancies with respect to the established objectives which enable the organo di governo to activate any corrective measures or regulations necessary to bring the system back in line. In this view of the relations between the organo di governo and the operating structure, there is no capacity of organisational units to implement self-organisational and self-.regulating behaviour and all relations are basically composed of unidirectional flows.

Various factors have contributed to the progressive modification of relations between the organo di governo and components of the operating structure, although such development has been extremely slow. Growing complexity - due to both external factors (such as the speed of technological innovation, the globalisation of the economy, the increase in competitive pressure, and the change in the consumer tastes) and internal factors (such as the increasing difficulty in integrating, co-ordinating and developing highly rigid organisations) - makes it easy to see the limitations of typically Fordian relations. Hence the need for flexibility.

Under an organisational profile, the increase in the pressure of competition deriving from the ability to give rapid answers has translated into a drive to increase the autonomy of organisational units and intense restructuring and re-organisational processes. In order to create competitive advantages, an organisation must be able to give rapid answers to various direct interlocutors. First amongst these interlocutors is the customer, whose satisfaction is the central aim of customer-oriented organisations and processes.

The progressive shift of capacity and decision-making autonomy from the organo di governo to the components (organisational units) of the operating structure has profoundly modified the structural aspect of the enterprise system. Indeed, nowadays there is a considerable need for widespread internal entrepreneurship. The operating structure and its components have not only been granted a decision-making capacity, but are also required to organise themselves and be responsible - according to the degree of autonomy awarded - for any risks deriving from their decisions. Thus entrepreneurial capacities are formed within the operating structure, which were previously the exclusive domain of company owners and the organo di governo. Limited areas of risk are created - in line with the degree of autonomy granted - within the operating structure. This risk is connected to the ability of the organisational units to organise themselves and to make decisions regarding well defined areas of activity in relative autonomy and in line with determined corporate objectives. Thus, with express reference to the logical structure of firm, seen as viable system, the operating structure can be represented as follows:


Fig. 5: Development of the internal structure of the viable system.

According to this model the relations between the organo di governo and the

structural components of the operating subsystem are different. Such differences derive from the fact that:

a) it is no longer possible to suffocate - as in the case of the Fordist enterprise - the

variety, which the operating structure can potentially generate. On the contrary, such variety must be encouraged until the limits of tolerance - increase in costs associated with complexity and the perception by interlocutors (especially customers) of the perceived value generated by the greater variety - are reached;

b) the operating structure stimulates communications and contacts with the organo di governo thus generating bi-directional relations (represented by the dotted line in Figure 3). Sometimes such demands take the form of proposals and modifications to improve technical operating conditions, while other times various components of the operating structure inform the organo di governo that thresholds of tolerability regarding the socio-economic conditions in which labour activities are carried out are about to be reached and that organisational changes need to be made in order to guarantee more suitable intra-systemic conditions. Such information - often communicated in the form of weak signs - cannot be ignored by the organo di governo. Indeed, by ignoring such advice the very conditions of organisational equilibrium on which the building of inter-systemic effectiveness depends is undermined;

c) the government of variety has become more complex and difficult and requires greater leadership, co-ordination and integration. Such capabilities are especially important with regard to the management and government of internal risks, a source of potential risk for inter-systemic relations. In other words, it is necessary to contrast the growing degree of entropy regarding centrifugal pressures which derives from encouraging a certain amount of internal

Organo di governo

Operating structure


entrepreneurship throughout the operating structure, the more general process of granting increased decision-making autonomy and pushing towards self-organisation.

The development of the operating structure and the relations which connect the

components of this subsystem of the organo di governo offers a key to understanding the shift from the Fordist model of firm to the model proposed in the so-called post-Fordist era.

However, in order to fully understand this shift, some additional considerations must be made. Operating structures such as that presented in Figure 3 formed gradually and slowly and denoted a greater opening up of the subsystem of the organo di governo towards the operating subsystem and its structural components. This opening up was also imposed by the changes in the firm’s operating environment. By opening up, the organo di governo was able to inject widespread entrepreneurship into the operating structure. In some cases such entrepreneurship derived from processes of self-organisation demanded by the components in the general reorganisation of labour.

The past history of the firm, its values and its structural components can make the shift difficult or even impossible. In such cases, preparing the ground for the sowing of an entrepreneurial seed must carefully plan the shift.

3.5. Towards the virtual firm

On the basis of the model set forth in Figure 3 and an examination of the effects

of the structural changes mentioned, is possible to offer a “systemic” interpretation of the evolution towards the so-called post Fordist firm

This model is distinguished by a greater degree of vitality in the operating subsystem. In other words, the operating subsystem is itself composed of a set of subsystems - organisational units - which are each viable systems in their own right as they have a decision-making moment - partially autonomous of the organo di governo as a result of delegation of the decision-making power - and an operating-executive moment.

Organisational units become viable systems as they hone their capability for autonomous survival within the context of belonging. The development of forms of entrepreneurship throughout the various organisational units of an enterprise generates many micro-enterprises within the single enterprise system. Each of these micro-enterprises is able to create an autonomous systemic output which is the fruit of their activities and processes. Thus the establishment of a customer-supplier logic within the firm means each organisational unit (micro-enterprise) must generate value for its internal customer, preparing a systemic output with similar characteristics.

During the development of a firm, it is possible to note how the components of the operating structure increasingly develop the features of viable subsystems (according to the model proposed in Figure 3), through the granting of increasing


degrees of autonomy and self-organisation and the spreading of internal entrepreneurship. The ability of an increasing number of organisational units to supply systemic outputs and the possibility for internal customers to compare the effective value of such outputs with similar outputs acquired from the external environment makes it possible for the organo di governo to concentrate on precise tasks. Indeed the role of the organo di governo increasingly focuses on the management of a portfolio of organisational units according to a logic of generation of value, i.e. allocating fundamental resources to those organisational units (micro-enterprises) which are most capable of generating value using distinctive skills.

On the contrary, organisational units which do not have the skills necessary to generate value can be externalized and utilized according to contractual agreements which give rise to new inter-systemic relations. In this way, a logic similar to that of an internal market is formed, whose various organisational units compete for the assigning of key resources by demonstrating their ability to generate value through distinctive skills, thus contributing to the generation of value for the enterprise system as a whole.

The logic of externalisation can be seen as a key to the understanding of the shift towards post-Fordism. Indeed, the organo di governo takes advantage of the expansion of the internal variety of the operating structure - generated by the spreading of internal entrepreneurship - and delegates wider powers of decision-making, self-organisation and self-regulation to the structural components. Hence, the organo di governo has the task of guaranteeing the co-ordination and integration of the organisational units in such a way as to ensure the best development of the enterprise system as a whole.

Taken to an extreme, the activity and logic of externalisation could see all the organisational units, individually or in groups - grouped together to form larger components around inter-unit processes able to supply systemic outputs - develop systemic capabilities which lead the organo di governo to opt for the externalisation of all activities and operating processes in such a way as to increase value. In this case, the organo di governo - composed of a minimum structure of technical and financial elements - is the only subsystem of the enterprise system whose role is to deal with the flows from ex-subsystems, now elevated to the position of systems external to the firm. At this point virtual enterprise takes over. 4. Relationships between the enterprise system and its specific environment.

From a market view to a systemic view Definition of the enterprise as a viable system is important not only in order to

understand the internal dynamics but also, and above all, with regard to the relationships between the enterprise system and the systemic entities surrounding it. Indeed, the viability of a system is directly linked the degree to which it perceives changes of context and its ability to make government and management decisions


able to restore, maintain and improve the conditions of survival9. A fundamental result of this logic is the role played by the organo di governo in

recognizing, describing and interpreting the aims and expectations of the surrounding entities, with a view to outlining and implementing development routes for the enterprise which are consistent - and if possible in harmony - with the context. Fulfillment of this aim is, therefore, closely linked to organo di governo’s ability to impose a rational process of definition and interpretation of the context, firstly by drawing up a map of the entities which characterize the context and, secondly, by reconstructing the likely behavioural dynamics of each of the entities.

An examination of the nature of the opening up of the enterprise system towards other enterprises in the context of reference shows how the specific environment of the enterprise can be interpreted as the result of a set of markets and systems, which are, in turn, the consequence of the way in which the relationships between the various enterprises operating within the context of reference develop. Essential to this interpretation is an analysis of the exchange processes taking place within the market according to the relational logic, which connects the commercial interlocutors.

The market can be considered to be an embryonic system, which assumes - to a greater or lesser extent - the characteristics of the developing system in accordance with the manifestations of a common goal, of relations and inter-relations between the components and the emergence of an organo di governo.

In order for the system to exist - it being perceived and defined as such - it is necessary to assume the point of view of the organo di governo in analysing the relations with the market according to a systemic approach.

From one perspective, the market can be interpreted as a set of unconnected and independent exchanges, which take place in an unorganised manner between autonomous, and rigidly separated operators. This interpretation of the relations links the enterprise to its specific environment, and in particular to the operators with whom it has commercial relations (transactions) focused on the management of single acts of exchange and based on an acceptance of the fundamental principles of neo-classical economy10.

From a second point of view, contrary to the first, the market can be seen as a set of relations through which a co-ordinated system of exchange is created. In this context, the enterprises act consciously and in an organised manner in order to manage the interdependency, which characterises their relations with other operators appropriately and synergically. Consequently, stable and lasting relationships, which

9 On this subject, representation of the enterprise as a system immediately highlights the

existence of interactions with the environment and requires management to increase its knowledge of established matrices of environmental advantages and the rules of the game which govern entrepreneurial activities. See PANATI G., GOLINELLI G., Tecnica economica industriale e commerciale, NIS, p. 181.

10 Vendors and purchasers are considered to be independent enterprises in competition with each other (horizontally and vertically); the competitive system guarantees the best allocation of resources, etc.


exist as a result of continuous interaction between the parties involved, are created. In this second case, the market takes on systemic features as a result of repeated interactions, which link the various components both vertically and horizontally11.

Thus, it can be stressed that the tasks of the organo di governo include identification of its “relationship strategy”, i. e. definition of the characteristics of markets of reference and their selective categorisation according to an interpretation based on an approach inspired by an atomistic or systemic point of view.

According to the systemic approach, the enterprise system must understand the expectations that external systems impose upon its activities and, on the basis of important, influential and critical characteristics decide which priorities and procedures to adopt. According to this approach, it is clear that an atomistic or systemic point of view depends on the degree of perception of the quality, intensity and inter-relation of the above expectations. Thus, the extended structure of the enterprise system - which includes relationships with external entities - is developed.

In today’s economic system, several irreversible environmental trends seem to favour a kind of “evolution from market to system”, i. e. the development of various systems with various aims which emerge from the market structure and profoundly alter the characteristics of the context of reference. In other words, there is a trend towards the transformation of embryonic systems into systems approaching completion and of the latter into viable systems.

In this regard, first of all it should be remembered that there are various possible forms of organising transactions, ranging from the hierarchy (internalisation of activities) to the market (complete trust in the external regulation mechanisms). Among the intermediate or hybrid options - based on an organised co-ordination - lies the management of various forms of stable relations, which seem to be the best way of responding to the present needs for flexibility and specialisation induced by the growing complexity of the competitive scenario and favoured by the spread of new information and communications technologies.

Indeed, a new entrepreneurial model based on the management of relations has emerged. According to this model, firms tend to focus on their core activity, committing their resources to building up the characteristics, which define the values of their organisation, and accessing and selecting the variety of means available on the external market. By committing themselves to increasing their ability to establish relations, firms no longer need to invest in producing heterogeneous and homogeneous skills and capabilities, but rather are able to focus on activating a relational function which allows them to synergically exploit existing external resources and skills12.

Thus the firm can be seen as the nucleus of a network of relations. These

11 The idea of the market as “a collection of incidents of exchange” is certainly close to the

American managerial culture, while that of the market as “a set of relations” can more easily be attributed to the European or Japanese context. See GUATRI L., VICARI S., Sistemi d’impresa e capitalismi a confronto. Creazione di valore in diversi contesti, EGEA, 1994.

12 See GOLINELLI G., DEZI L., Reti, Finanza, Progetti, Cedam, 1997.


relations imply the continuous combining of resources in order to fulfil objectives previously established by the parties. In this context, the establishments of trust between partners, the exchange of information, interactive planning and reciprocal change take on a special relevance

In this new competitive scenario the preparation and management of a dense network of relations, ranging from simple and stable relations to agreements and networks, become a fundamental element of the enterprise strategy. Indeed such a network of relations may lead to formalisation of the concept of the extended structure13.

This strategy can be applied both vertically in relations with suppliers and distributors, prior to or following the production process, and horizontally in relations with other firms operating at the same stage of the same productive process.

In the first case, it is possible to set up real and proper vertical systems, i.e. inter-organisational contexts within which the central firm - the “focal firm” - acts as the organo di governo and systemically manages relations with suppliers, distributors, and sometimes even end-customers. As a result of interdependence, the players in the vertical system establish stable relations with the aim of achieving common objectives through a co-ordinated, shared and synergetic implementation of their respective resources.

In the case of firms operating in the same stage of the production process, it is also possible to identify stable relations, mainly aimed at enhancing the complementarity of the qualities and the tangible and intangible assets of the other players. Characterised by virtues such as holism, interdependence and shared aims, such relations give rise to the creation of a horizontal enterprise system.

To summarise the contents of this paragraph, it can be said that the enterprise system can either approach supply, distribution and consumer markets from a transactional point of view, or can set up stable relations with other players in order to identify vertical systems (of a higher level than the enterprise system) with the aim of improving the overall efficiency and effectiveness of the value system in which they are involved, thereby conquering a more competitive position.

As has been seen, systemic relations can also be established on a horizontal plane, between firms operating in the same stage of the economic process.

Indeed, horizontal relations can be established both with other firms operating in the same moment of production as the firm of reference and within supply, distribution and consumer markets. Thus enterprise systems may establish relations with systems of suppliers, distributors or end customers which also operate within their respective markets. Such horizontal systems may find their origin in an impetus generated by the firm, one of its elements or an external entity.

In the first case, the firm adopts government actions, which set up a horizontal system in an area other than that in which it operates. The aim of this action is to create value in a specific area and thus improve the efficiency and effectiveness of

13 See GOLINELLI G., L’approccio sistemico al governo dell’impresa, Cedam, 2000.


the whole vertical system. In the other cases, the impetus for the creation of horizontal systems (in the

supply, distribution and consumer markets) comes from outside the firm. Indeed, the aims of the system may contradict those of the firm. The presence of a horizontal system may impose constraints on the activities of the firm and must be taken into account in its government actions. The horizontal system is a contextual element within the market. Indeed, in defining the behaviour of the firm the organo di governo must ensure that the presence of this entity - which is different from the elements of which it is composed - is taken into account.

Markets and systems (suppliers, distributors and consumers) coincide, in the sense that each system can only be made up of a certain number of market components, not all of them. Therefore, while there may often be one or more systems within a market, at other times there may be no system at all. Obviously a correct perception of the inter-relational relations between entities - which give life to the markets/systems with which the firm has relations - is extremely important in the government of the firm. The organo di governo must therefore be aware of the characteristics of both its specific and general environments and able to identify any systemic connections in order to be able to develop the most appropriate “relational strategy”.

5. Morphology, distinctive characteristics and evolutionary lines of inter-enterprise relations on the supply market

Any economic activity in any country of the world produces goods and/or

services.14 Generally speaking, production refers to the transformation of certain inputs into

specific outputs of greater value than the raw materials. The aim of the producer is to obtain the maximum technical or economic profit.

Obviously, this transformation cycle is not the only activity of the firm. Indeed, prior to this activity the enterprise must source the materials needed for the production process.

In order to acquire resources, a firm must make contact with possessors of input operating in the supply market and set up exchange relations with them.

This situation leads to the setting-up of inter-relations between the enterprise system and the production/decision-making units, which supply materials, parts and components.

Suppliers are chosen as a result of a selection process implemented by the purchaser in order to identify certain enterprises from the set of potential producers 14 When referred to services (which are intangible, non-transferable and non-stockable) this

distinction becomes rather vague. In view of this trend, and with the principal aim of emphasizing its importance, some scholars refer to the present economic milieu as “post-industrial” or “neo-industrial”. See, among others, RULLANI E., “Il ruolo dei servizi nella realtà dell’impresa moderna”, Sinergie, n.42, 1997.


of a certain item operating on various markets. A firm chooses its suppliers on the basis of their ability to satisfy its needs.

Indeed, there is a difference between a manufacturer of a certain material operating in a production market and a supplier of the same type of goods.

Satisfaction may derive from mere economic advantage or may require the setting up of a harmonic relationship between the firm and its interlocutors. Such a relationship must be founded on respect and mutual trust.

It is clear that the relevance and specifics of such a relationship need more detailed treatment. Thus the matter will be examined in more depth at a later stage.

It is possible to determine a set of firms (usually known as the “supply group”) which are potentially in a position to answer the needs of the end firm. The supply group defines the specific environment of reference of the supply market.

Obviously the extent of this environment depends on the degree to which a firm can - or wishes to - turn to the market for the supply of the materials, parts or components used in the production process rather manufacturing its own.

Normally, a firm only has continuous exchanges with suppliers, however these exchanges lead to a proliferation of relations which may take several forms.

One version of such relations between a firm and its specific environment is characterised by a direct link between the enterprise system and one individual supplier.

Another type of relation sees the end-firm establish relations with each of the units in the supply group, thus creating a star-shaped model of industrial organisation of inter-firm relations with the assembler at its centre.

Although guaranteeing the customer enterprise system high levels of control, this model also imposes the management of a whole series of activities which may be very diverse. Therefore it is necessary to develop increasingly specialised technical skills which gradually decentralise production and which may be very far removed from the core competence of the firm.

Another form of relations is typified by a direct relation between the customer and the supplier, which is essentially identical to the situation outlined above, as well as a direct link with another supplier who supplies the same end-firm.

Often found in the real world, this form of relation sees an operator with a multi-form technical-operational capabilities supplying an end firm with certain types of goods (usually products to be used at a certain stage in the assembly process) yet whose customers also include another supplier of the same assembler, to whom it supplies the materials, parts and components needed for the manufacture of articles (which are other intermediate-stage products for the end firm).

According to this hypothesis, a sub-supply mechanism sees the operator fulfilling the dual roles of direct and indirect supplier of goods to the assembly firm.

It is worth emphasising that the end-customer firm may be completely unaware of the fact that its direct supplier is also an indirect supplier and, thus, this fact has no effect on the organisational model of inter-corporate relations, which nevertheless retains a centralised star-shape pattern.

In any case, the division of labour between firms opens the way - at least in


logical terms - for a type of relation which connects the production/decision-making unit to a supplier which supplies the customer firm directly, not with materials, parts and components or intermediate-stage products, but rather with a complex set of goods, including - through a series of sub-assembly processes - homogeneous and heterogeneous items, contributed by various suppliers as well as its own goods.

Thus, as a result of the integration set up by the supplier of a large number of component manufacturers, the end firm receives a set of components. This relieves the end firm not only of a whole series of operating activities, which are now decentralised, but also from the co-ordination and control of the whole supply group.

In fact, in such a context, the supplier not only fulfils the role of supplier-system integrator, but also the role of co-ordinator of the operators which are its sub-suppliers in the specific environment of assembly supply.

If the customer firm becomes aware of the set up of the specific environment, a major change in the industrial organisation of inter-firm relations is created. Indeed the centralised star-shaped model gives way to a model, which is differentiated according to the whether suppliers are direct or indirect and multi-layered as a result of the emergence of several inter-relational levels that depend “on the degree of strategic importance/distance from the core competence”15.

Although this model provides a considerable advantage for the customer firm by reducing the number of relations of exchange, leaving the specific environment - i.e. the degree of decentralisation of production - unchanged, it also requires an irrevocable, even apparently contradictory, integration of all interlocutors regardless of their level of hierarchy. Failure to set up such integration could lead to technological sclerosis as a result of loss of perception of the strong and weak signals that warn of changes in progress.

Such signals are sent from the general environment of the supply market where they are generated.

Within this environment, suppliers and producers may establish links, often maintained in a sporadic or discontinuous way, which allow them to make contact with new innovative and dynamic entities. The operations of these latter can produce very important effects on the specific environment in the medium term, and, in some cases, even lead to structural transformations through the introduction of new supply firms. Obviously at this point, other suppliers are forced to leave the specific environment.

This situation is only one of the consequences of inter-relations established between the general and specific environments of the enterprise system.

Seen from another perspective, the model of industrial organisation under consideration conforms to an “network enterprise” model. The term network enterprise refers to a “system of multiple and recognisable connections and structures within which “nodes” operate at a high level of self-regulation (viable open systems). These nodes co-operate with each other, i. e. perform various types

15 TRACOGNA A., Rapporti evoluti di fornitura e politiche di approvvigionamento: una

prospettiva relazionale, G. Giappichelli Editore, 1995, p. 125.


of effective transactions with a view to fulfilling common aims and achieving shared results”16.

In the real world, when entrepreneur-assemblers refer to the “supply system”, they are probably referring to this entity, correctly perceiving that they have created and are vertically included in a systemic context. This is worth emphasising as a result of the benefits deriving from it in terms of generation of value.

However, inter-firm relations of a horizontal type may exist within the supply system. Such relations involve direct and/or indirect suppliers of various types of homogeneous goods which all belong to the same level.

The first example of this type of relationship was the kyoryokukay, which developed within the Japanese automobile industry alongside the appearance of lean production at the beginning of the 1990s and successfully spread to the western industrial world.

Kyoryokukay refers to “associations of suppliers…of a specific producer (created in order to) to share common discoveries regarding the best way of manufacturing components; […] many of the larger suppliers have associations of second-level suppliers… (These associations) have been of great importance in the spread of new concepts, such as the statistical checking of processes, […] total quality control, […] value analysis […] and computer-aided planning (CAD)”17.

Nowadays, it is widely accepted that “horizontal relations have been established at the highest levels of supply groups which link suppliers through joint ventures, technological agreements, exchange agreements and collective associations, giving rise to network systems within which intense levels of corporate interaction and information exchange can be seen”18.

It will not escape the keen observer that, when the minimum number of requisites necessary requested by a systemic approach are satisfied, even the various forms of association mentioned briefly above form real and proper horizontal supply systems.

Essentially, if suppliers of a certain level are interconnected and interact in order to achieve the objective of creating value, as established by the customer firm, there is no doubt that they will be confronted with a further systemic entity which, in turn, contains other systems, represented by each of the supply firms. This system is, in turn, contained within the even larger vertical supply system.

The present development in provisioning policies resulting from the pressure of globalisation and the increasing complexity of the consumer market shall require a transformation of horizontal systems in the future.

16 ANTONELLI C., L’impresa rete, F. Angeli, 1987, p. 26, and TARDIVO G., “Nuove

soluzioni organizzative per la gestione aziendale. L’impresa rete”, Sinergie, n. 27, 1992, p. 136. For further information, an essential source is LORENZONI G., “Accordi, reti e vantaggio competitivo”, ETAS, 1992.

17 LAMMING R., “Il coordinamento della catena degli approvvigionamenti”, in WOMACK J.P., JONES D. T., ROOS D., La macchina che ha cambiato il mondo, Rizzoli, 1991, p. 176.

18 TRACOGNA A., op. cit., p. 125.


Partnerships - including kyoryokukay - will inevitably evolve in years to come, probably giving way to types of customer-supplier relations which largely coincide with those on which Richard Lamming19 based his model of lean sub-supply “clearly associated with the concept of “lean production” … which is mainly based on partnership, but which modifies and expands the characteristics so as to allow development at a global level”20.

The difference between the two supply models lies in the role assigned to the supplier: from the “faithful follower” of the partnership, the supplier of the lean sub-supply model rises above his customers in the technological area in which he has greater knowledge.

Unlike kyoryokukay, where technological advancement is customer-driven, in the context of lean sub-supply, technology is the product of an equal co-operation between the supplier and the assembly firm.

Thus, each supplier can work with several assembly firms, simultaneously, even if the outcome is different in each case.

This requires re-alignment within the partnership: in lean sub-supply, first level suppliers lead their customers in the areas which they have greater knowledge.

Thus they need to constantly increase their technical abilities. In order to increase their technical abilities, suppliers can create alliances with

other first level suppliers and thus jointly provide the required technical ability, according to the needs of the assembly firm. Obviously one of the companies assumes the role of co-ordinator/integrator.

In short, in the near future, the shift from partnerships to forms similar to lean sub-supply, will lead to a transformation in the supply system, whereby the same structure will perform a different function as interactions between suppliers are set up with a view to achieving the objective of creating a decision-making centre within, and not outside, the system.

In any case, it can be confirmed that the existence or otherwise of a supply system essentially depends on the nature of the competition (competitive/co-operative) within the supply market.

This last point is a practical manifestation of many other environmental factors. As such, it confirms that nature of the competition within the supply market determines the customer-supplier relations established.

However, it is also possible to see an influence in the opposite direction. Indeed, the way in which relations are set up and developed determines the nature of co-operation.

19 This is a reference to the work by LAMMING R., Oltre la partnership: strategie per

l’innovazione e la produzione snella, CUEN, 1994, which is a natural extension of the studies by the same author into the supply chain previously mentioned.

20 CAMUFFO A., Le relazioni di fornitura: modelli a confronto, in CAMUFFO A., VOLPATO G., Nuove forme di integrazione operativa: il caso della componentistica automobilistica, Franco Angeli, 1997, p. 116. Greater detail can also be obtained from MASSARONI E., “La competizione globale: un’opportunità per l’internazionalizzazione delle piccole e medie imprese”, Small Business – Piccola Impresa, in press.


According to this approach, the supply system may be the result of the way the customer firm governs relations with suppliers, i.e. the supply system arises from an external stimulus, in which case it represents an environment within the context in which government takes place.

So far, this paper has only provided a static interpretation of the inter-connections, which link the enterprise system to the production/decision-making unit - which supplies it with materials, parts, components and systems - to the varied availability of other systemic entities, including those of a higher level.

In this way it has been possible to outline the range of inter-systemic relations which, with increasing degrees of complexity, permeate the specific environment of the firm and inform the customer enterprise of the supplier’s expectations.

Unlike the conditions of supply in other markets, these expectations have a greater effect on the structure of the customer enterprise system than on the organo di governo.

However, the organo di governo is undoubtedly involved when innovative stimuli from the supply market require a decision regarding “modification of the existing management approach or the way in which such approach is implemented or the structural dimensions of the (corporate) system, imposing a development plan, whose aim is to effect development by endowing the system with greater power in the market and in new forms of economic efficiency”21.

Indeed, this is a strategic choice, which affects the matching of the dynamic relations of the firm with the environment and vice versa.

Nevertheless, the morphology of the relations outlined must also be interpreted within a dynamic profile. Indeed, the order in which the relations between an enterprise system and its suppliers have been presented is representative of the developments of the last thirty years.

Such a tangible implication of the ongoing transformation and renewal of supply policy finds its origins in the search for a solution to the problem of how to keep a firm abreast of changes in the environment-market at demand level.

Thus changes are expressed in an evolutionary sense i.e. the government of firm- supply market relations.

6. Trust as a means of co-ordinating relations between firms.

Many organisational and managerial research projects have demonstrated the role of trust in co-operation between firms.

Indeed, it has been shown that co-operation between firms allows a reduction of risks connected to environmental uncertainty and, at the same time, forms an important external source of knowledge which is indispensable for innovative processes.

21 PANATI G., GOLINELLI G., Tecnica economica industriale e commerciale, NIS, 1993,

Vol. I, p. 228.


Performance of the

relationships among firms

Negotiation costs Control costs Conflict Opportunism

_

+ +

+

+ Learning Alignment with objective Cooperation

In co-operations between firms, the trust variable allows a reduction in the cost of negotiation (and re-negotiation) of agreements, delimits the “anti-functional conflict”, avoids the need to use expensive monitoring tools and limits the opportunistic behaviour of the parties. Furthermore, trust encourages new forms of co-operation which allow the setting up of synergies, even in areas differing from those initially identified by the firms, in virtue of the growing credibility and reputation acquired as co-operation is increased. Indeed, through co-operation, firms are able to increase their alignment with the objectives of the relation of exchange and initiate learning processes, thus improving the performance of the relation (Figure 6).

Fig. 6: Implications of trust in relationships between firms The relationship between trust and co-operation is bi-directional. Indeed, the

fact that co-operation is based on medium-to-long term relations, means it is able to nurture trust (Matthews and Shimoff, 1979). Furthermore, the twofold interaction involved in fuelling trust can lead to the formation of “general rules of co-operation” which are able to increase the inclination of the firm towards stable, ongoing commitments through forms of corporate and economic exchange (Putnam, 1993).

In relations between firms, and especially in the customer-supplier partnership, trust is a determining factor as far as generation of knowledge and the innovation of products, processes, technologies and the means of organisation of the firms involved are concerned. This is particularly true when the relationship includes planning, research and development activities.

The concept of trust

According to a recent definition, trust consists of the “(…) expectations which

one individual has with regard to another, concerning the fact that the latter: a) shall behave in a predictable manner (“he always does what you expect him to do”); b) shall be reliable (“thanks to his skill, he does what he does well ”); c) shall behave fairly even if he could take advantage of someone who trusts him and who is unable

Trust


to control or intervene in time (“what does what he does, keeping in mind the interests of those who trust him”)” (Perrone, 1996).

This definition is useful as its highlights the dimensions of the concept of trust:

- “predictability”, i.e. expectations with regard to the behaviour desired by the counterpart;

- “reliability”, i.e. the counterpart has the skill and capacity to honour the commitments he has undertaken, the sole intention to behave in the desired manner being insufficient;

- “fairness” (and “reciprocity”), i.e. it is understood that neither party will take advantage of the weakness of the counterpart. Fairness is an advantage to both parties as it is impossible to control the behaviour of the counterpart throughout the specific phases of the relationship and such controls would require considerable expenditure.

Furthermore, with reference to the various levels of analysis, it is necessary to

confirm that trust is a character trait of individual persons. Therefore, trust between firms (or inter-organisational trust) must be considered as the product of the collective orientation of members of a group or organisation towards another group or organisation (Zaheer, McEvily and Perrone, 1998). In this case, trust is gradually built up around the characteristics of the counterpart firm, such as its reputation and reliability, its structures and communication processes, as well as the extent to which these characteristics make the exchange of data available and credible.

As well as positive effects, trust also generates certain negative consequences. Although the existence of a relationship of trust may increase co-operation with one partner, it may also result in the failure to take advantage of interesting opportunities - i.e. setting up more advantageous forms of co-operation with the competitors of the current partner - due to moral obligations resulting from the fiduciary bond. As far as firm networks are concerned, strong relationships of trust may give rise to excesses (for example, the duplicating of information) and to forms of opportunism whose number increases in line with the size of the network and the extent to which the firms operating around the focus firm are connected to one another. Moreover, trust is not unlimited. A firm which does not take advantage of the weakness of its partner in the short term, may jeopardise the relationship of trust should such a situation persist.

Organisation and dynamics of trust in relationships of co-operation

The organisation of a relationship of co-operation between firms may differ

according to the activity in question and the number of departmentsents it involves. For example, in the high-tech sector, the main area of co-operation often concerns planning, innovation and product development. In this case, a “virtual vertical integration” is set up which includes various operations such as the planning, research and development of new products, production, financing, administration,


marketing, etc. Relations are managed by a set of teams composed of experts in the integrated operations (“technical teams”). Their activity is co-ordinated and integrated by the departmental managers of the two firms who work together in a special team (“core team”). This team has hierarchical authority over the technical team and is responsible for policy, control and assessment of the results attained by the technical team. The managers of the core team answer to the top management of their respective firms, who form a further group (“managerial team”) composed of either the upper echelons of the two firms or, in organisations structured into business areas, by the division managers and senior-managers of the most important departments involved in the business activity. The structure formed is represented in the following model:

Fig. 7: Possible organisation of a supplier-customer partnership

The above organisational model allows both interpersonal and inter-

organisational trust. On the interpersonal level, trust is created and must be present on each of the three levels in order to allow the partnership to achieve satisfactory results. Each of these levels presents its own dynamics for generating trust. The degree of trust generated may vary and even influence the trust created at other levels.

Although many problems lie in the creation of common relationships of trust at all levels, special focus should be placed on the mechanisms for generating trust within the technical team. Indeed, a large part of the success of the relationship of trust lies in the ways in which the individuals involved interact and the intensity of the relationship of trust established. Moreover, the dynamics of the forming of a relationship of trust at this level are highly complex and may give rise to extremely particular phenomena. For example, should the activity of a certain technical team - whose members have developed a relationship of trust such as to have achieved a high level of internal unity - not be adequately supported by the core team in terms

MANAGERIAL

TEAM (responsible for the divisions and

main operations of the partner-firms) CORE TEAM

(operations managers of the firms, integrated into the partnership)

TECHNICAL TEAM

(technicians and experts of all operations in the firms, integrated into the partnership)


of the provision of suitable structures and processes able to guarantee the required flow of data, the technical team may harbour feelings of conflict towards the core team. Other aspects, such as the presence of irresolvable conflicts within the team, could lead to a progressive reduction in the level of interpersonal trust, which, unless promptly resolved, could also reduce the degree of inter-organisational trust.

In order to create interpersonal trust, it is necessary to focus on the composition and dynamics of the group. From this point of view, the organisational context plays an extremely important role. Indeed, the organisational context is the area in which individuals acquire the capabilities and skills necessary to work in the team. Furthermore, individuals working in teams whose members come from the various firms involved in the partnership are representatives of their organisation, whose objectives may not necessarily be perfectly aligned to those of the partnership. Thus, the inter-organisational context is particularly important in guaranteeing the necessary structural support and information dissemination processes.

Relationships between trust, knowledge and innovation

The precedents of inter-organisational trust and its consequences on the success

of relations can be identified as:

- positive results attained by firms in previous experiences and a greater knowledge of the other partner based on past exchanges and corroborated by satisfactory results (Hakansson and Johanson, 1988; Ring and Van de Ven, 1992);

- the transparency, quality and promptness of the data exchanged by the partners, facilitated by communication structures and processes, with the specific intent of reducing asymmetries as far as possession of information is concerned and associated opportunistic behaviour;

- perceived fairness between the distribution of results, responsibilities and risks and the intensity of specific investments by the partner;

- the cultural similarities (or differences) of the organisations; - the reputation and technical competence of the organisations within the business

community (Mishra, 1992; Ring e Van de Ven, 1992; Mayer, Davis e Schoorman, 1995);

- the expected duration of the relation of partnership. In this way it is possible to avoid opportunistic behaviour connected to the so-called “end game” strategies (Axelrod, 1984);

- alignment of strategies and objectives of the firms and their relative stability. Indeed, sudden changes in strategies and objectives may modify the intensity of the co-operation or be perceived as symptoms of lesser involvement.

The consequences of trust at an inter-organisational level make technical teams

more effective by increasing personal satisfaction and favouring innovative processes through continuous learning. This is reflected in the following aspects:


- communications: high levels of trust increase the tendency to communicate openly and transfer sensitive data thus making the risk of such information being used for opportunistic purposes bearable. In this way the credibility of the data exchanged is also increased;

- co-operation: trust at group level encourages the tendency to co-operate, increasing the feeling of responsibility of each individual member and favouring an increase in motivation;

- internal unity: social mechanisms determined through repeated interaction make the group more united. This unity favours decision-making processes and critical analysis of the consequences and results of possible errors;

- alignment of objectives: high degrees of trust allow the identification of individual objectives with the objectives of the group. This increases the tendency of group members to help each other and tolerate ambiguities deriving from different organisational cultures;

- resistance to frustration: the high degree of motivation deriving from a relationship of trust allows the group to overcome difficulties and resist frustrations connected to failure to achieve short-term results;

- resistance to external pressures: interpersonal relations characterised by a high level of trust encourage group unity, making it possible to resist pressures from the organisations to which group members belong and allowing group members to focus on team objectives;

- efficiency of conflict: trust and reciprocal respect tend to have positive effects on internal conflicts, eliminating their effect on efficiency and allowing members to overcome internal differences in a friendly manner. One of the main consequences of trust regards innovation. According to

Schumpeter (1934) and other scholars concerned with knowledge creation mechanisms (Boisot, 1995; Cohen and Levinthal, 1990; Kogut and Zander, 1992; Moran and Ghoshal, 1996), the process of innovation is mainly based on two different activities: the combination of human resources and exchange. The combination of human resources exploits existing knowledge following which exchange is necessary in order to acquire knowledge from external sources (not immediately available). On the other hand, innovation through exchange is a prerequisite of the combination of human resources. Indeed, a partnership is an important means of acquiring new - and particularly tacit - knowledge. The formation of teams can permit interaction between trust and the creation of knowledge as tacit knowledge can be transferred through the sharing of experiences and teamwork (Nahapiet and Ghoshal, 1998). Nahapiet e Ghoshal (1998) identify the following conditions as necessary for the creation of knowledge:

- the existence of opportunities which make exchange and combination possible; - the existence of positive expectations and the possibility of anticipating the

expected results of interaction, exchange and combination; - the presence of adequate motivation and a suitable level of commitment towards


the exchange and combination of knowledge; - the availability of capabilities which can be combined.

Trust is particularly important in the first three situations as it favours exchange

and combination and plays a determining role in the creation of intellectual assets. Furthermore, having its origins in ongoing relations and being nurtured by greater reciprocal knowledge, trust increases co-operation. Thus occasions for the exchange of data and culture increase the combinatorial capabilities and favour innovation. Finally, the increase in individual and collective knowledge resulting from this process may give rise to important innovations and - if opportunely used within the firms - allow the development of new business opportunities for the individual firms participating in the partnership. A model of the above is provided in Figure 8, which also shows how innovation and the consequent generation of new knowledge produce positive effects as far as both inter-organisational and inter-team trust are concerned.


Fig. 8: Relationships between trust, knowledge and innovation

Resistence to frustration

Cooperation

Internal unity

Alignment of objectives

Communications

Resistence to external pressures

Efficiency of conflict

Firm A Firm B

Interorganizational context (A+B)

Previous experiences

Communications

Perceived fairness of the

partnership

Culture/systems of values

R t ti / kill

INTERORGANIZATIONAL TRUST

TRUST IN INTERORGANIZATIONAL TEAMS

INNOVATION

+ +

+ + +

+ +

+

+

+

+

+

KNOWLEDGE

+

+


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the firm as a viable system: managing inter-organisational relationships

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