when to create networks? originators: foundation for msme clusters (fmc), unido

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.


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


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


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


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


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


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


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


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


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.


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


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


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


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


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


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

when to create networks? originators: foundation for msme clusters (fmc), unido

Documents

common need

togetherassists network

common marketing brochures

unidoreducing poverty

common brand promotion

cluster firms

raw material purchasingaccess

joint business objectives