Back to Obstacles for Rural FirmsBy Peter Schirmer and Melissa Taylor
From Farms, Factories and Free Trade
pp. 39-51, published 1995
Our manufacturing survey suggests that generating interest in foreign trade and raising expectations will be important steps toward broader participation in the global economy. However, rural producers are likely to have a healthy skepticism about whether they can actually become exporters. Dr. Burnett discusses several rather daunting needs—regulatory expertise, international sophistication and low-interest financing—which are sure to dampen the enthusiasm of rural producers. At the root of these obstacles is one problem—a lack of resources.
By themselves, most rural producers do not have the resources necessary for successful exporting. State government programs alone cannot remedy the problem. With cutbacks taking place all across government, public resources will be constrained well into the foreseeable future. Export-promotion and producer-education programs, particularly if they are new, are among the least likely to receive precious government revenues.
The challenge posed by limited and fragmented resources can be overcome by collaboration. State and local government can encourage collaborative efforts, but success or failure ultimately depends on individuals, enterprises and communities. Pooled resources at the local level, combined with insights into the unique needs of different communities, can generate tremendous energy and allow businesses to achieve goals that would otherwise be difficult, if not impossible, to reach. Cooperation is not a new concept to rural producers. Farm co-ops have been well established for years, as have trade associations for various industries. However, cooperation among manufacturers and farmers is becoming increasingly sophisticated in Kentucky and around the world. Relationships among producers are closer, more formalized, and are integral components of development planning. In fact, these sophisticated cooperative relationships now have a name—networks.
The term "network" is open to different interpretations. At a 1992 summit of networking experts from around the world, "network" was given a codified definition: "A network involves a form of associative behavior among firms that helps expand their markets, increase their value-added or productivity, [and] stimulate learning [to] improve their long-term market position" (Bosworth and Rosenfeld, 1993, p. 19). Firms might cooperate with one another in several ways:
In learning networks, firms share valuable knowledge and experience necessary to remain competitive.
In resource networks, firms develop solutions to common problems or spread expenses for insurance, certification, training, equipment or testing.
In co-marketing networks, firms employ joint marketing to gain access to new customers and new markets.
In co-production networks, firms jointly manufacture components or finished goods, complementing one another’s operations (Bosworth, 1995).
These types of networks are listed in ascending order that reflects the level of trust and cooperation necessary for success. Learning networks and resource networks are known as "soft networks," since these types of networks do not require the more formalized relationships of co-marketing or co-production networks, which are known as "hard networks." Firms typically begin working together in soft networks, which require less effort and less commitment, and as trust and cooperation develop, they may move towards hard networks. Hard networks generally yield greater results in terms of sales and competitiveness.
A good example of a learning network is the Cost Reduction Association of Northern Kentucky, or CRANK. This organization was created in 1994 by about 20 Northern Kentucky firms for the purpose of reducing costs. The group is examining inventory programs, scrap reduction, team approaches to management and trash disposal reduction costs. CRANK is also developing a plan for members to purchase office supplies as one large unit (Friedberg, 1995).
A resource network in Gosheim, Germany, has a number of small- and medium-size engineering and metalworking firms which were under competitive pressures from other European firms and from the rising quality standards of large manufacturers. They decided they needed to improve quality, but individually they could not afford to purchase the necessary equipment. Instead, they came together to buy a single set of the very best equipment on the market, to be housed at an independent technology center (Pyke, 1994). Similarly, the Oregon Book Publishers Expanded Network is an association of 167 small publishing companies which share equipment, technology, training, information and cost-cutting procedures ("NetNews", 1994). Washington state has established the ISO 9000 Implementation Networks Program to help small firms share the cost of ISO 9000 certification, reducing their training and consulting costs by nearly half ("NetNews", 1995).
A co-marketing network requires firms to become more interdependent and necessitates higher levels of trust. Nonetheless, these networks are quite common. For years farmers have sold their produce at farmers' markets and have cooperated to gain access to new markets, but today many different kinds of producers are engaging in this kind of activity. In Great Britain, a network of printers publishes a comprehensive brochure that describes the capabilities of the 10 member firms. When designing the brochure, the firms were careful not to overlap their products, so that no two companies provide the same services in the brochure. The network's members share customer databases with one another and sometimes engage in joint contract work, enabling them to secure larger contracts than they could individually (Broun, 1994b).
Firms in a co-production network not only market their goods together, they also produce them together. The Iowa Strategic Alliance Beef Project is a network of several dozen cow-calf producers, an area feedlot operator and a beef packer. The feedlot operator and the packer exchange information with the producers, enabling greater quality control in the production process and producing more consistent and flavorful beef (Borst, 1995). The Western Canada Marine Group, a small, six-member network of marine equipment and design technology firms, recently won a $20 million contract to design and build a new patrol boat for the Mauritius Coast Guard, and it is currently bidding on another $200 million worth of contracts in Asia, the Middle East and South America ("NetNews", 1995). The Appalachian Center for Economic Networks makes household products, such as adjustable cabinets, for people with disabilities (Broun, 1994a). The firms in Canada and Appalachia are winning contracts that would be too large for any individual company to fill.
A network might consist of firms which produce similar products, such as the Western Canada Marine Group. A network might also be a group of firms producing different stages of the same final product, as with the Iowa Strategic Alliance Beef Project. Or a network may be like CRANK, with firms in different industries cooperating to share information about new business practices and to solve common problems.
Like and linked firms tend to cluster geographically. The cluster may be based on common technologies, labor needs, transportation needs and so forth. While these firms frequently view one another as competitors, it is also true that they probably share many of the same interests and concerns. Networks build upon the similarities among firms in a given region, and help them pool human and physical resources to promote innovation, increase the value added to their products and improve market shares. Firms are motivated to collaborate by the rapid growth of global trade—the metalworking shop on the east side of town no longer competes solely with the metalworking shop on the west side of town; it is now competing with metalworking shops in Mexico, Brazil, Taiwan and Spain, all of which may have lower labor costs, better public and private marketing services, and world-class machinery. Firms are increasingly coming to see their neighbors, with similar needs and similar interests, as collaborators rather than competitors.
However, firms are rarely drawn together as if by destiny. Rather, it takes extensive effort, often initiated by an individual firm or person, known as a "broker," to initiate a network. Brokers may be required to devote a considerable amount of time to laying foundations before any collaborative efforts can be constructed. The British printing network was founded by a printer and a marketing consultant. The two contacted other printing firms in the Gloucester area, and 10 firms formed the network (Broun, 1994b). When the Jane Adams Resource Center (JARC) in Chicago surveyed metalworking industries in the neighborhoods in which it worked, it found that firms were interested in working collaboratively. JARC then helped establish the Metalworking Consortium, a co-marketing network (Broun, 1995a). In Gosheim, Germany, the resource network of 40 engineering and metalworking firms was largely initiated through the efforts of one local person, who organized meetings and agendas (Pyke, 1994).
Particularly when firms are first exploring the possibilities of collaboration, it may take considerable time to establish trust between people who ordinarily view one another as competitors. At this stage the broker is key. Experts repeatedly state that interpersonal relationships between representatives of the different companies are essential to make the networks work. As trust develops, networks may move towards co-marketing or co-production activities, which tend to have larger benefits than shared learning or resources (Bosworth, 1995). Brian Bosworth of Regional Technology Strategies writes, "Networking behavior seems to involve more fundamental issues of modernization as trust relationships deepen and interdependence grows" (p. 2). These interpersonal relationships may be nurtured by frequent face-to-face meetings among networking firms (many networks meet once or twice a month, particularly in the early stages), and through other activities, such as seminars or social functions. Cordes Seabrook, who co-founded Value Systems Inc., a private consulting firm in the Carolinas, brought representatives from textile firms together at dinners and cocktail parties (Broun, 1995b).
Public agencies can assume the critical role of broker, but state government's role must be much larger than simply inviting firms to meet with one another. If new processes of development are to take root and flourish, private companies are not the only ones who need to change their thinking and their way of doing business. It is incumbent upon government and other members of the community—educational institutions, individual citizens, civic groups—to enable these changes in the private sector.
One of the true strengths of networks is the considerable value they have beyond service as economic development tools. Although networks have emerged in Europe and the United States largely in response to the rising competitive pressures of the global economy, they can serve a much broader purpose. Here in Kentucky we have examples of how networks can unite diverse actors within a community, build social capital and benefit those not previously associated with a particular industry.
In Louisville, the plastics industry is one of several networks which has formed as a result of the efforts of the Louisville/Jefferson County Office for Economic Development (OED). The plastics industry network has been quite active since its formation in February 1994. Among other things, it has established a 42-hour curriculum for entry-level employees, to be taught at one of Jefferson County's magnet career academies. Nine suppliers and vendors donated a mold-making machine and support equipment to the school, and the Bluegrass State Skills Corporation provided an in-kind matching grant. St. Anthony Outreach, Inc., an inner-city community resource center, provided several students from a pool of job applicants to the training program. These students were hired by the plastics companies upon completion of the training program. The network has begun planning a 520-hour curriculum to be taught at Jefferson Community College (Louisville/Jefferson Co. Office for Economic Development, n.d.).
Not only do the plastics companies benefit by reducing worker training costs, but local educational institutions have acquired equipment, skills and training capability that are highly responsive to the local job market. Inner-city residents receive training which results in employment. All the while, the OED has worked to facilitate communication among the plastics firms and enlist the resources of a diverse group of organizations. This is clearly a community effort.
Rural communities may have to be a bit larger, geographically speaking, since firms are less concentrated than they are in a city. Firms in the same industry might be spread over several counties, which could inhibit the development of networks for a couple of reasons. First, face-to-face meetings, which are critical for establishing trust and cooperation, would be more difficult. More importantly, assistance from a single agency, such as the OED, is probably more efficient than a program which would require coordination of resources from several different county governments. This suggests that the state, while encouraging network development everywhere, would have a particular obligation to assist rural firms.
Kentucky recently established a program known as the Networking Initiative, administered by the Cabinet for Economic Development. The Networking Initiative provides information, expertise, training and financial assistance to firms wishing to establish a network. As of the spring of 1995, the program was still establishing guidelines for financial assistance, although it was already providing other kinds of support to a handful of existing networks in the state. However, much more could be done. Some states, and even some countries, have made networks a cornerstone of their development policy. Denmark is widely acknowledged as having one of the most sophisticated networking programs in the world, and several other European countries have enacted programs to actively encourage networking. Networks have been slower to catch on in the United States, but they are undoubtedly an emerging consideration in state economic development plans. Oregon became a leader in promoting the network process with passage in 1991 of the Key Industries Bill. This bill stipulates that the state work with "private firms, industry associations and others, to encourage cooperative, sector-based strategies to promote industrial competitiveness" (as cited in Simon, 1995). The Commonwealth of Virginia has also established an economic development plan focusing on key sectors of the economy, with one of its goals being the construction of public/private partnerships.
Kentucky's Strategic Plan for Economic Development lists "encouraging the establishment of manufacturing networks" as one of its tactics for reducing unemployment and increasing per capita income. The team working on this tactic recommended that unlike Oregon and Virginia, Kentucky should not designate statewide industries to be targeted for networking efforts. Rather, local and regional community groups and business organizations should identify industry sectors on a regional basis, and the Cabinet for Economic Development would then offer support to those sectors. Several industries are likely candidates to be selected by local leaders to receive networking assistance. The key industries discussed earlier—agriculture, apparel and secondary wood products—are very important to certain regions of the state, and each offers an example of how regional firms can develop effective networks.
Agriculture. Farmers' cooperatives have been in existence for decades but have only had limited success. Critics note that marketing cooperatives have had difficulty getting geographically dispersed farmers to work together, management is sometimes poor and unprofessional, profits often go to private investors instead of cooperative members, and cooperatives can become so large that the members lose control of the organization. Yet a new kind of cooperative, one which adds value to bulk agricultural products, has demonstrated some remarkable successes. The Minnesota Corn Processors co-operative began in 1982 and today is one of the world's largest producers of ethanol; farmers who made the minimum investment of $10,000 in 1982 now own more than $100,000 in equity and received a dividend of nearly $3,000 in 1993 (Alster, 1994). Farmers who helped purchase the American Crystal Sugar cooperative in 1972 own shares worth twenty times their original investment (Alster). These successes have made farmers very interested in food processing cooperatives; when the Northern Corn Processors cooperative offered 14.5 million shares to farmers, it received offers for 17.5 million shares in 24 hours (Alster).
To be successful, farmers need not organize on so large a scale, nor must they formally incorporate their organization. The Iowa Strategic Alliance Beef Project includes only a few dozen cow-calf producers, one feedlot operator and one beef packer, who cooperate with one another without confining themselves to the regiments of a formal organization. Alan Borst, an agricultural economist for USDA, writes that "networks have generated considerable excitement among some agricultural producers who want an alternative to traditional cooperatives" 1995). Borst recommends that producers who are uncertain whether they want to immediately risk investing much time or money in a formal cooperative agreement should first establish a soft network, in which they would simply share information or training expenses. Smaller, informal networks can lay the foundation for hard networks, in which farmers market or process food jointly.
One of the distinguishing features of hard agricultural networks (what Forbes magazine calls the "new wave of farmers' co-ops") is that they are now in the business of adding value to a wide variety of farm products (Alster, 1994). In recent years, co-operatives have formed to process wheat, corn, broccoli, cauliflower, navy and pinto beans, hogs, cattle and buffalo (Alster). Small networks will have the flexibility to process food for niche markets, enabling them to respond to changing market demand and offer customized products to consumers who may have vastly different tastes (Borst, 1995).
In Kentucky, a grant from the W. R. Kellogg Foundation is enabling networks of farmers across the state to develop more sustainable agricultural systems. Using start-up money, the groups are working in a variety of sectors, including cattle marketing, organic apple production, dairy products, vegetables and pork genetics. The goal of the project is to increase the networks of farmers and farm groups in the state. Because many farmers in Kentucky are part-time and have limited resources to contribute to a network, public and private institutions such as the Kellogg Foundation have a critical role to play. Financial assistance, professional management and market research will be essential for improving our agricultural networks.
Apparel Manufacturing. The challenge for apparel manufacturers is to compete with foreign producers who have lower labor costs. Richard Rothstein of the Economic Policy Institute points out that the United States has the competitive advantage in every aspect of production except wages. Apparel manufacturers in the United States have more highly-trained and productive workers, superior technology, minimal political and economic instability, no administrative costs of importing or travel to foreign plants, and close proximity to the U.S. market, meaning lower shipping costs, better quality control and shorter lead times (Rothstein, 1989).
Networks can play an important role in helping U.S. firms invest in technologies and worker training programs to make them competitive in the face of rapid globalization. Quick Response programs, which establish closer working relationships with retailers and enable shorter delivery times and other production efficiencies, are being adopted by manufacturers to help reduce inventory requirements and eliminate stockouts for retailers. One example of flexible manufacturing associated with Quick Response programs is modular manufacturing. With modular manufacturing, small teams of employees use specialized, electronically-controlled equipment to produce an entire garment. Workers are trained to perform multiple tasks, and pay and incentives are based on team performance in order to minimize downtime and improve quality (ITC, 1995). Other examples of technological advancements used by firms in Quick Response programs include computer-aided design and ergonomics, a concept which involves designing instruments to improve worker safety, health and productivity. In addition, communications technology is vital to Quick Response programs because apparel manufacturers must keep in close contact with retailers in order to fill orders as quickly and efficiently as possible. In doing so, they improve the quality of service and reduce inventory and markdown costs for retailers.
Quick Response programs offer apparel manufacturers the hope of regaining their competitive position, but the costs of purchasing new equipment and upgrading communications capabilities can be daunting, particularly to smaller firms. Many firms have not invested in efficiency-increasing technologies because of the lack of skilled labor capable of using the technology and the failure of management to recognize its importance. In addition, many firms have failed to adopt high-performance management practices such as team production.
With the high costs of advanced technology and training, networks could offer apparel manufacturers considerable advantages. Firms might conduct worker training programs jointly, as the Louisville plastics manufacturers do. Communications and equipment costs might be shared as well. Learning networks, the easiest kind of networks to establish, would enable firms to share information about management practices and cost-saving ideas. Not only could apparel firms collaborate with one another, but they could also work with local educational institutions, as they do in South Carolina. There, the Apparel Research Center at Clemson University works with groups of apparel firms, particularly small ones, to aid in technology transfers, including flexible manufacturing processes, computer-aided design and worker training in team-based manufacturing.
Dispersion of firms across a wide geographic area would not be a problem for apparel manufacturers in Kentucky. Many plants are located in the south-central part of the state and would be able to work together with frequent face-to-face meetings. In the summer of 1995, the Cabinet for Economic Development's Networking Unit conducted a seminar in Bowling Green, and several apparel firms expressed an interest in pursuing the networking idea. This could be the beginning of a process which will strengthen the largest manufacturing industry in rural Kentucky.
Secondary Wood Products. Kentucky has done more to promote networking in this industry than in any other. House Bill 561, enacted in March 1994, created the Kentucky Wood Products Competitiveness Corporation in order to, among other things, develop workforce training plans for the secondary wood products industry and review proposals to establish networks for businesses and industries. The legislation states:
The Kentucky Wood Products Competitiveness Corporation...shall provide development and promotion advice and assistance...that will allow three (3) or more secondary wood industry businesses to: pool expertise, improve technology, develop new markets, improve employee skills, increase capitalization, improve product and production quality, and develop a system of collective intelligence among participating entities.
The Corporation is instructed to work with the Tourism, Labor, Economic Development, and Natural Resources and Environmental Protection Cabinets, as well as the Quicksand Wood Utilization Center in Breathitt County, the University of Kentucky, Eastern Kentucky University, Morehead State University, the community college system and the Kentucky Tech System. These state agencies and regional institutions are enlisted "for the purposes of increasing product quality and productivity of Kentucky's wood products manufacturers and processors and enhancing the global competitiveness [italics added] of Kentucky secondary wood products industries" (Kentucky General Assembly, 1994, p. 3).
One of the early successes of the Corporation is the Kentucky Woodworkers' Network, based in Johnson County. A local extension agent had been working with area woodworkers for several years to find a market for their products when the Wood Products Competitiveness Corporation helped the Woodworkers' Network find a buyer in Lexington. The Network has secured contracts for $400,000 worth of goods for 1996, and some of the craft items will be sold overseas. Network members assist each other when orders exceed one member's capability, thus enabling them to secure larger contracts than would be possible individually. Furthermore, network members purchased the same type of equipment, they purchase materials together, they help train each other and they set quality control standards. To lower materials costs, the network uses wood waste products from manufacturers across the state, thus enabling those enterprises to lower their waste disposal costs.
Many people are discovering the benefits of networks. Network support activities often originate outside of state government, and are often provided by local organizations in response to the needs of small producers within a particular region. The Northern Economic Initiatives Center of Northern Michigan University utilizes faculty, students and staff to provide coordinated assistance to micro-enterprises, businesses that employ fewer than 20 people, in the Upper Peninsula. A graduated program of services enables micro-business owners to improve product quality, productivity and marketing. The long-term goal of services is to move owner-operated businesses toward limited or full-scale manufacturing and active participation in export markets (Anderson and Lambert, 1994).
Winrock International, a Henderson State University program in Arkansas, offers an example of a successful, self-sustaining industrial extension service. Winrock provides small wood and metal industries with a range of technical and support services designed to expand sales and improve plant productivity through process and equipment redesign and worker training. This member-supported program forms alliances of small manufacturers that jointly secure bids from furniture manufacturers and building suppliers. More than 1,000 small manufacturers participate. This model holds particular promise for Kentucky as it seeks to advance the wood products industry. Through cooperation, wood products manufacturers and crafts workers can overcome deficiencies in training, equipment and production capacity.
Similarly, the Montana Women’s Economic Development Group (WEDG) provides consultation, training and much-needed capital to women entrepreneurs in five rural, mountainous counties of western Montana. Since 1992, the organization has achieved remarkable results, helping entrepreneurs to create, expand or sustain businesses employing more than 500 people. Only 5 percent of WEDG clients have either sold their businesses or opted not to go into business since the service organization was launched in 1992. Through service to what traditional lenders and support organizations would recognize as an unlikely client base, WEDG has enabled and empowered entrepreneurs to expand their individual capabilities and, consequently, improve the capacity of the region as a whole. Presently, the Berea-based organization, Mountain Area Community Economic Development (MACED), is working on a similar project. Were Kentucky actively engaged in capacity building as a primary development strategy, this project would be a likely candidate for funding and replication in rural regions throughout the state. WEDG offers an excellent model of organizational leverage and social capital that could help raise labor force participation rates among women in rural areas, a significant obstacle to increased prosperity.
In rural Arkansas, Southern Development Bancorporation, a community development bank, and the Arkansas Enterprise Group (AEG), which coordinates the work of five for-profit and nonprofit organizations, combine to provide a range of services and capital to businesses and low-income individuals who want to become self-employed. Southern and AEG have invested more than $25 million in small enterprises and provided $1.5 million in short-term financial assistance in addition to providing vital support services to help businesses improve the management of accounting, forecasting, acquisitions, equipment leasing, etc. Additionally, the program has provided low-cost, high-quality office space for rural enterprises. AEG is an example of achieving greater leverage and impact through organizational collaboration, a model that can be broadly encouraged and rewarded with financial incentives and technical support.
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