when to create networks? originators: foundation for msme clusters (fmc), unido
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WHEN TO CREATE NETWORKS?
Originators: Foundation for MSME Clusters (FMC), UNIDO
Reducing poverty through sustainable industrial growth
What is a Network?
An alliance between a limited number of firms within a cluster that share joint business objectives.
Firms maintain their autonomy but share a vision and identify themselves as part of a group
Cooperation produces little externalities - benefits are fully appropriable
Can be horizontal or vertical
A cluster can comprise several networks.
Reducing poverty through sustainable industrial growth
Common Problems Faced
Most common problems faced by cluster firms: High cost of Inputs: Raw material and Capital equipment
Access to timely & adequate credit without collaterals
Linkages with markets
Innovations bottlenecks: Technology and knowledge input
Sector specific infrastructure (Testing lab, Effluent discharge, Electricity, Inland container depot, Estate roads
Networks as doers of successful clusters
Reducing poverty through sustainable industrial growth
Benefits of Collaboration
Economies of scale in marketing
Economies of scale in raw material purchasing
Access to new machinery and equipment
Access to training
Network creation is:
One of the quickest routes for creation of social capital
Important for upscaling
Sustainable due to higher and defined business interest
Reducing poverty through sustainable industrial growth
How to Form Networks?
Identify a common need - the process starts with the need (beyond wanted, achievable, sharable, profitable)
Identify one or two main active persons who are motivated enough to try out a joint activity (stakeholders/ Network Development Agent - NDA)
Ask the entrepreneur/s to identify potential partners
Go and meet potential partners to explain what a network is and how it could benefit them
Call for first meeting of the group
List down steps required to execute the project
Start driving the process
Mid way sometimes some members may move in ; some move out
Hire services of expert if required
Reducing poverty through sustainable industrial growth
Network Development Agent (NDA)
Can be hired in addition to a CDA
Assists a network identify common activities that they can do together
Assists network determine expected benefits and costs for joint activities
Promotes formation of trust-based relationship among members
Monitors management of common activities
Establishes collaboration with BDS providers and other support institutions
Evaluates impact on actions taken
Reducing poverty through sustainable industrial growth
Types of Networks
Soft Network:
Not legalized (common sourcing of raw material, sourcing services from a BDS provider for quality improvements, etc.)
Hard Network:
Legalized (include participation in international fairs, high-end marketing, developing common maintenance/storage service systems, common brand promotion, common marketing brochures, etc.)
OR
Primary
Secondary
Tertiary
Reducing poverty through sustainable industrial growth
Suggested Formal/Hard Networks
Purpose of the network determines its type/ legal structure
Purpose Possible Legal Firms
Common facility center/physical infrastructure SPV (Private limited/Section 25)
Joint marketingMarketing cooperative, partnership firm, private limited company
Joint purchasingCooperative society, private limited company, partnership
Joint testing facilityTrust, non-government organization
Policy advocacy Association
Reducing poverty through sustainable industrial growth
Legal Constitution of Hard Networks
The terms and conditions agreed by partners as per the network/partnership deed:
The date of commencement of a partnership with choice of terminability at the will of the partners
The activity (e.g. partnership shall carry on the business of trading in specific products
The name under which the partnership will carried on
Details on the office of the partnership with initial capital that shall be brought in by all partners equally with scope to enhance capital as mutually agreed upon
Specification of the managing partner and working partner; also (partner) operators of the bank account of the partnership
Reducing poverty through sustainable industrial growth
Legal Constitution of Hard Networks
Memorandum of Association Articles of Association
Specifies constitution and objects of the company: Is it for trading purposes alone, or for manufacturing/pursuing infrastructure projects such as road laying in Industrial estates?
Scope may be widened at a later date but with the consent of Registrar of Companies
Specifies internal regulation of the company that help govern management of internal affairs and conduct of business.
These may be changed by members passing a special resolution
Reducing poverty through sustainable industrial growth
Network Examples
COFIT- Fruit and vegetable cluster, Pune/India:
A development forum in the form of a ‘Consortium of Food Industry and Trade’ (COFIT) was formed to initiate dialogue with local food units on development issues.
Kalady Rice Mill Consortium, India:
KRMC was formed in October 2003, as a private limited company to set up a bran oil extraction plant in the cluster followed by marketing and other developmental activities in the Kalady Rice Mill cluster.
Reducing poverty through sustainable industrial growth
High Cost of Inputs
Formation of networks to counter high input costs:
Inputs = raw material and capital equipment
Source capital equipment together:
Get bulk discount
Ensure superior quality equipment – common consultant to advice on options
Buying is at the core of individual competence
Choosing right quality
Buying at right price at the right time (trader oriented)
SMEs are often provided direct subsidies. It hence makes the process unsustainable
Risks attached to implementation: Low
Disband groups when they have met their objectives
Pre-requisites required: None
Reducing poverty through sustainable industrial growth
Market Linkages
SMEs can gain access to new markets through:
Bulk tendering
Hire common marketing consultant to explore new buyers among non-competing yet similar suppliers
Market research for new options through joint participation in international fairs
Mechanism to check on rejected enquiries
Buyer-seller meetings with high end buyer chains
Black-listing of unwanted (non-paying) buyers: Screening the real cause of the problem and black-listing the culprit buyers
Risks attached: Medium to high
Backstabbing leading to group failures and trust
Pre-requisites: clarity on profit/loss sharing, higher trust
Reducing poverty through sustainable industrial growth
Innovations: Technology & Knowledge
SMEs can overcome costly & risky innovations by
Hiring high-end designers
Setting up quality systems
Exploring new technologies by undertaking joint visits to other clusters and/or fairs
Specialized training courses
Mutual problem solving and sharing of best practices
Reducing poverty through sustainable industrial growth
Improved Technology
Value chain of sal leaf cup/plate
Primary leaf Collectors
Local agent-Cycle wala
Primary processor
Leaf cup/plate trader
Federation of PCFederation of Processors
Information flow
Product flow
Financial flow
Prosperity through Networks in a poverty intensive cluster
Consumer
Reducing poverty through sustainable industrial growth
Cluster-Specific Infrastructure
Most difficult and risky area of intervention
Common effluent treatment & disposal
Common R&D & testing laboratory
Common design facility
Water supply
Maintenance of roads & Other infrastructure
Risks attached: High
Pre-requisites: PPP models are allowed
Reducing poverty through sustainable industrial growth
Effective Networks
Indicator Tools
Growth
Membership Increase Frequency of Meeting Operational Infrastructure Legal Status Presence of NDA
Coherence in thought process
Action plan in place
Maturity
Openness/regularity in decision making Composition of decision making
members Long term agenda
Financial strength Contribution by members Self-sufficiency of operation Linkage with support institutions
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