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Meeting the Challenges ofRestructuringMonica TamisariVersion of record first published: 28 Jul 2006.

To cite this article: Monica Tamisari (1997): Meeting the Challenges of Restructuring, Industryand Innovation, 4:2, 233-246

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Industry and lnnoz~atfon, Volohr?ne 4, Ncrmber 2, December 1997

EVOLUTION OF THE CHAIR MANUFACTURING INDUSTRY IN THE ITALLAN REGION OF FRIULI

I n recent decades, Italian industrial districts have been the focus of a great deal of attention. This is due to the districts' impressive econoniic achievements which

can be attributed largely to their original model of production organization based on a strong horizontal and vertical division of labour among local firms. This model of organization is typical of the economies of the Northeast and Centre of Italy, areas which form the so-called "Adriatic Development Belt". The chair n~anufacturilig district, which is the subject of analysis of this paper, is situated at the extreme Northeastern part of this region.

The interest in the chair manufacturing industry is justified due to the industry's significant contribution to both the local and the regional economy. In fact, the chair manufacturing industry is one of the largest contributors to the total industrial revenues of the region of Friuli-Venezia Giulia, and its contribution to the economy of the Province of Udine, where most of its productive units are located, is of even greater significance.

More than 1000 firms specializing in the production of wooden chairs (or in processing intermediates and component parts of the final product) are concentrated within this particular area. Together, these firms produce more than 30 million chairs per year, generating a sales revenue exceeding $US1.6 billion. Nearly 9000 people are directly employed by these firms, and a further 6000 people are employed indirectly, in chair manufacturing related activities. This area accounts for over 80 percent of the national production of chairs in Italy; for over 50 percent of production in Europe, and for more than 30 percent of total world production. An impressive 90 percent of the area's output is exported to foreign markets. The majority (64 percent) of the firms in the chair manufacturing system are artisan' firms which represent 30 percent of total employment. Thus w e are talking about a very significant concentration of industrial activity.

The triangle made up of the villages of Manzano, S. Giovanni a1 Natisone and Corno di Rosazzo (the so-called "Chair Triangle"), is the heart of the chair nianufacturing area, accounting for 63 percent of the employment and for 67 percent of the

I The Artisan firms are :I category in It:~ly defined as employing :I maximum of 1') workers in which thc owner also

works.

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Communes Total plants Craftsman '% Industrial Total employed

Buttrio Chiopris-Viscone Cividale del Frii~li Cormons Corno di Rosazzo Manzano Mariano del Friuli Medea-Romans-Dolegna Moimacco Pavia di Udine Premariacco Prepotto Remanzacco San Giovani al Nat. San Vito a1 Torre

Total

Source. Cbumber of Commerce of Ucli~ie (199.5)

productive capacity of the entire chair manufacturing system In thc surrounding areas throughout which manufacturing activity has spread over the years, arc located mainly firms concerned with intermediate work. This area also supplies the labour power required by the industry.

Tllis paper is concerned primarily with an analysis of the most recent structural changes occurring in this local production system as a result of radical transforma- tions of the competitive environment. The analysis is based upon empirical research carried out through interviews with chair-producers and other relevant actors, such as representatives of business associations, service centre managers and sector experts. These interviews provided valuable information, particularly in revealing the dynamics related to the most recent changes in the industry. Additional information was obtained from current literature relating to the above-mentioiled structural changes. In analysing these changes, this paper is dividecl into three sections. Section one briefly outlines the history of the chair manufacturing area. Section two presents some findings on the most recent evolutioll of the chair manufacturing system. Section three draws some conclusions based on the en1piric:ll evidence presented.

THE EVOLUTION OF THE STRUC'L'URE OF THE CHAIR ~ ' ~ N U F A C T U R I N G INDUSTRY

The history of the chair manufacturing district dates back to the 2880s and the arrival in Manzano of the first chair makers from the nearby village of Mariano which had

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been left under Austrian Rule after the re-definition of the national border^.^ Thus it was political upheaval which stimulated the origins of the industry.

Manzano was in a favourable location for chair manufacturing. The area provided good access to the Italian market, good infrastructural support (owing to the recent construction of bridges, roads and railways), a considerable abundance of raw materials and of hydro-electric power from the numerous mills along the river Natisone, and a supply of low-waged labour willing to make the transition from agriculture (which for centuries had provided the only means of subsistence) to industry.

Within 10 years, the area had expanded to include eleven firms, all engaged in chair manufacturing, which were spread throughout the entire territory of the Province of Udine. These were industrial firms run by artisans from Mariano, employing local labour and controlling the entire production process. On the eve of tlie World War I, annual production had reached around 1.2 million chairs.

World War I saw the devastation of the regional productive structure and the once flourishing chair manufacturing industry. However, the post-war reconstnlction period ushered in the beginning of a development phase characterized by important changes in the structure of the industry. Small artisan firms controlling the whole production process proliferated. These were run by ex-farmers attracted by the expectation of high profits. By 1927 there were already 96 firms established and demand (mainly for replacements) entered a period of steady growth in both public and private sectors. Whilst small firms flourished in this period, the larger firnis became increasingly overwhelmed by competition from both local artisan firms enjoying lower costs in capital, labour and fiscal duties, and foreign firms exploiting greater economies of scale.

World War I1 was less devastating for the manufacturing region than tlie first, and by 1951 there were 137 chair manufacturing firms, employing over 1,200 people. Between 1950 and 1960 there was a boom in demand both internationally due to the process of international specialization, and nationally due to the general increase of income and the diffusion of consumption models typical of developed countries. The dynamics of demand, together with the low technological entry barriers (a result of the minimal requirements of initial fixed capital and technical and managerial skills), activated a process of widespread industrialization. The number of firnis almost doubled over this 10 year period.

2 In the village of Mariano chair ni:mufacturing has been pctctised since the 18th century. I.lere there was :t niarked craftsman and commercial vocation, and a tcldition linked to wootl-working derived from some C:tmic families which emigmted to the area after a period of Turkish raids :tnd epidemics. In these rwo towns in the province of Gorizia the chair industry developed quickly, capitalizing on a series of hvour.tble conditions: the geographic position- along the road connecting tlie Udine-Trieste ant1 the Cividale-Cormons route (the last being a big centre for commerce and trade in raw materials), the availability of low-priced labour power (chair-mending work

performed at home by women and children), state facilities for the exploit:~tion of wood (in l'ernova), lack of competition, steady growth in demand mainly from the I.ornbardy and Vencthn regions (Exner 1879). When Friuli was annexed by tlie Savoy Kingtlo~n in 1866, Mariano w:ts left in Austrian temtory, irrep:~r:thly compromising the principle market outlet for the chair ~nanufacturing intlustry. The situation 1:trc.r worsencd wlieti, following Italy-Austria agreements, high customs duties were Ievietl (1878) on products crossing the frontier. As a result, some Mariano chair-making families decided to leave the arcit, emigr:~ting to thc ne:tresl Italian villages (Rosco nntl Deganutti 1980).

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236 INDUSTRY AND I N N ~ V A T I O N

In the following decade, a process of demand de-stn~cturing began, which was largely due to an increase in demand for more "fashionable" items. ?'his marked a shift from standardized mass production for wholesalers and foreign distributors to cus- tomized production destined for Italian fiimiture-makers. The result was a qualitative and quantitative fragmentation of orders. In particular, the demand for turned and folded chairs increased which consequently increased technological requirements of production and the level of technical skill required by the labour force.

The chair mnnufacturing system reacted to this structural change in demand in two major ways: firstly, by beginning a proccss of vertical disiistegrcttioi~ of industry structure; and secondly, by beginning a process of integration within the district area through a horizontal and vertical division of labour among local firms. This was made possible by the divisibility of the production process in a technic:illy efficient manner (i.e. allowing small firms to specialise in certain limited activities within the value chain, Seeding their outputs to cach other). In turn, the functional aggregation of several small firms involvecl in the protluction process created those econonlies external to the single firm but internal to the specific ;uea that typically characterize industrial districts (Bagnasco 1988; Becattini 1987, 1989; Garofoli 1991)

The thick web of informal relationships among firms which arc regulated by ;I

particular mixture of "competition and co-operation" (Becattini,l992), sometimes labelled "market and community" (Dei Ottati 1986), is the basis for cflicient manage- ment of the production process. This efficiency is ensured by two factors.

( 1 ) Disaygregated eco~zornies oj-scale Compared with the large, integrated firm model, the management of the production process according to the district model allows for greater reduction of transaction costs. The presence of a widespread information system contains information costs (as for large, integrated firms), whereas the low degree of opportunism and the frequency of relations recluces coordin;ition costs in conlparison with the vertically integrated model of a single large firm.'

( 2 ) Prodziction Jexibility. Compared with the Fordist model of standardized mass production, the district moclel is better equipped to adjust rapidly to new conditions of supply and demand. This ability derives firstly from the low technically efficient size and therefore from the limited costs of re-structuring; secondly from an organiza- tional structure based upon tlcxible distribution of roles; and finally from the adaptability and flexibility of the labour force.

The chair manufacturing firms can count on a series of external econonlies that work as competitive factors offsetting thcir internal structur;~l deficiencies. These externalities arise from the following factors.

Economies of specializcltion. Specialization in one or nlorc areas of the chair manufacturing process gives rise to economics of scale allowing for reduction in fixecl costs and a greater exploitation of production f'acilities, and economies of learning allowing for an acquisition of specific knowletlge by each firm in the value chain.

Tech~zologic~~l in?zouatio?z. The thick wcb of both cooperative rclationsl~ips

3 The It:rli;m csprcssion is economics of sc:tlc "by phasc". nie:tning that tlicy :ire not c;rpturctl hy :I single firm, hur by tirnis coopccrti~lg within n tot:ll ~ r l u e ch:rin.

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(between specialized firms making lip the production cycle, between niachinery producing and machinery using firms, between entrepreneurs and employees), and competitive relationships (generating envy, emulation, imitation, push to innovate so as to increase barriers to entry) fosters continual incremental innovation typically embodied in new machinery. The high predisposition to capital upgrading, supported by the relatively limited costs of new machinery and by the existence of an efficient market for second-hand equipment, facilitates the introduction of technological innovations.

Creation of a skilled labour nzarket. The high degree of labour mobility and the existence of a widespread "industrial atmosphere" encourages skill accun~ulation w i t h the area.

Institutional support. In the chair manufacturing district, several coordinating institutions have been established as a result of the initiative of local policy makers and firms. These include CATAS (Centre for Technical Assistance to Chair manufac- turing Firms) a centre for technological research established in 1969; IPSIA (State Professional Institute for Industry and Handicraft) a professional training school established in 1966; a credit system tuned to the needs of chair manufacturing firn~s," export ass~cia t ions ,~ and PROMOSEDIA an institution formed in 1983 by the Ch21n1- ber of Commerce and some chair manufacturing firms for promoting sales and identifying new markets in Italy and abroad. In addition to coordinating other promotional initiatives, PROMOSEDIA annually organizes the International Chair Exhibition, an important occasion for the industry, bringing together firms, designers, and other operators in the chair manufacturing sector.

Fuelled by increasing demand, production grew steadily in the 1970s. Even when international and domestic demand eventually began to decrease, the chair rnanufac- t~iring industry continued to expand. This was due to the rebuilding process which

followed the earthquake of 1976. The quake, which struck ;i wicie zone in the Province of Udine, acted as a powerful stimulus for the area's industrial growth. ?'he availability of easy-term loans and contributions to encourage economic recovery stimulated investment in fixed capital thus accelerating the renewal of the productive structure.

The number of artisan firms established by ex-workers increased in tNs period. Many firms expanded their productive capacity (investing in fixed capital, not "soft" activities such as technological-organizational research, marketing, data processing, or professional training), thus transforming from semi-artisan to industrial firms. This resulted in an increase in the number of medium-sized firms."

4 Nearly 90 percent of investment in Clssa Kurale di Manzano is in the chair-sector. 5 'I'he first cxpofl association was the Consoflium for cllair-ma1mttfactttri11g development (1957), followcd by GESSEI;

(Group of Friulian chair exporters) and CONSIlG (Consortium of chair makers). 6 'Ihc high level of dynamism in the chair intlustry's tlimensional stnlcturr is linked to the high Icvrl of kthour

mobility, which acts 21s a physiological element of flexibility in the system hy retlistributitlg I;tl,our :Inlong the different sul~segmmts of the i~ldustry in rel;~tion to trends in tlmmand. l'hc ;~nisan suhsegment is thcrclbrc partict~larly important when denlantl falls (dtrc to thc tlrcre:~sr in rhc drpendrnt labour ant1 thc rise of new rntreprcnruri:~l undmakings).

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The early 1980s saw the chair manufacturing industry plunged into deep crisis.' The slump was the result not simply of unfavourable external circunistances, but of a series of structural weaknesses typical of the district firnis (such as delays in introducing new technologies, an inability to manage the market, organizational deficiencies), all which became evident whcn new competitive conditions emerged.

The "product-oriented" strategy traditionally followed by firnis located in the district was based on three elements: price, flexibility of production and technical quality of the product This strategic combination became inadequate as a means of coping with increasing complexity of' the competitive environnient. l 'he most significant factors contributing to the crisis of the traditional competitive model were:

the contraction of Europcan consumption levels and the consequent reduction of international demancl; high domestic inflation and thc incrcase in the price of raw mater~als ancl labour, leading to an increase in the price of the final product. The latter consequence was particularly serious because of Italy's admission into thc EMS, which made a policy of competitive devaluation unsustainable;

a tlie globalization of markets and increasing competitio~i with both Eastern Europe (enjoying lower labour and raw material costsX), and large integrated American and European groups (mainly German, Belgium and 1)utcIi) that were ablc to exercise widespread control over final markets

In this context the traditional district externalities, typically productive in nature (rather than oriented towards marketing), could no longer provide competitive advantages for the firms localized in tlie district area It therefore became essential to redefine the key conipetitive factors, establishing a new focus on both upstream functions such as design and R&I>, and downstrean1 functions such as distribution and marketing, if the area was to survive. 'The trad~tional district externalities were not only unable to guarantee efficient management of the new strategic functions, but also lost effectivcness in the managenlent of the production process:

c advantages of specialization were reduced when confronted with stagnating or falling demand; social conditions regulating relatioliships among local firnis tended to weaken because of the generational turnover; transaction costs increased in an environment characterizetl by greater complexity and uncertainty; the advantage gained from the physical proximity of firms involved in the pro- duction cycle decreased due to the introduction of new information technologies; the large firm, structured according to new de-verticalized configurations, recovered substantial advantages from new the flexible manufacturing systcms.

7 The period hetween 1982 and 1984 was the worst for the industry 8 Raw malerial and labour constitutes hcra~cen ( 5 percent and 75 pcrcent o f a ch:~irs' total cost (Ikdnatz and

M:~ttioni 1995) and competition from countries endowed with these resources becomes niorc and more threatening as these countries develop Inore rnodcrn tcchnologics.

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Furthermore, within the district increasing cliseconomies of agglomeration began to accumulate. The simultaneous presence of low entry barriers and high exit barriers, characteristics typical of the district system, generated an excess of supply clue to the proliferation of firms during periods of rising demand, and a stickiness of the supply side's retrenchement in the following phase of contracting demand. This produced strong internal competition, snapping the delicate equilibrium between cooperation and competition that represented the district's principle strength. The ensuing price war, based on an exacerbated cost compression, caused a reduction in product quality, a high degree of imitation discouraging investment, and an erosion of the market spaces making it difficult to achieve "phase" economies of scale.

Moreover, the district found it difficult to create new external economies able to produce those resources needed to compete in the new context. The new strategic functions required minimum investment thresholds greater than those characterizing the productive function. Moreover, as far as these functions were concerned, "de- verticalization barriers" existed (Varaldo 1993), that is, limits to the divisibility of work among competing firms, related to the indivisibility of the embodied resources; their high degree of non-materiality, personalization and secrecy makes exclusive control necessary to give them a relevant value. Therefore, by their nature, the new strategic resources were manageable only through an organizational structure inte- grated or efficiently coordinated by a strategic centre. Such an organizational struc- ture could not be offered spontaneously by the districts' traditional mechanisms (that is, informal cooperation and competition); on the contrary, it could be obtained only by the chair-manufacturing firms starting a process of internal growth or realizing stable inter-firm cooperation. Thus, some of the most dynamic firms begin to modern- ize their organizational structure and to re-define their own competitive factors.

These more dynamic firms have developed, in recent years, independent commer- cial and distributive functions, allowing them to avoid control by intermediaries, and in doing so, to sell at more profitable prices than other firms in the area. In addition, they have undertaken strategies of product diversification and product quality improvement in order to offset fluctuations in demand. By entering the market with a divershed, high-quality product, sold tl~rough an own brand, these firms have succeeded in re-positioning themselves competitively.'

9 For instance, the development of a new sales organization covering the entire national territory (through the 7000

furniture shops served) has allowed Calligaris (240 employees and an an~lual production of 1.5 million of chairs. 45 percent exported) to consolidatc its presence in the market and to strengthen its bargaining power tiis-ir-ois

customers. Today, the firm re:ilizes a range of 1 0 models, :irticulated in more than 600 different versions, and distinguishes itself by high qwality standards, both in design and technical reliability and resist:ince (as cenitied by CATAS), and very good quality-price ratio. Design accuracy ant1 a widespread pn)duct distribution network forni the basis of success of another firm in the area, 7b11on (135 employees), which opemtes in numerous m:~rkcts (the export quota is 85 percent of the total production) with its own chair collection, specifically thought ant1

d n w n for the different types of consumers. All production is destined for the medium-high segnlent of the

market and is supplied flexibily in order to meet consumers' requirements (about 160 models with 40 standardized trimmings and 100 different upholsterings). Another interesting finn is Lisa ( 1 10 employees), operating in three sectors of activity: sub-contracting 50 percent of its total output; contract (furniture for restaurants, hotels); and residential. Along with the firms previously mentioned. Lisa takes pan in all of the most important inteniational fairs of the sector (Milan, Cologne, I'aris, Munich, Genoa and obviously Udine) and relies on a widespread distributive structure (more then 90 percent of the total production is exported). Distinguishing itself from the other firms in the area, Moroso (85 eniployccs). operatcs solely in the upholstry sector with ;I good

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The aim of this paper, however, is not to analyse which strategic levers the chair-nlanufacturing firms have activated to meet these new competitive challenges, but rather to v e r e the impact of the new business organization forms on the district's structure. The strategic behaviour of these firnis has had important c f i c t s on the district's evolutionary dynamics, itlfluencing thc relationships among firms in the district and among district firms and external firms.

Evolutionary develol~nze?zt of the chair n z a t z ~ f c t i n itzdz~stry

'I'he fall in demand tluring the early 1980s had a particularly tlamaging effect on those firms which had previously made the transition from a semi-artisan to an inelustrial scale of activity. Although this shift guaranteed an increase in production volumes, it

did not offer the economies of scale typical of the largest plants, and contributed to 21 greater rigidity in the eniployment coi~ditions of the labour 1-hce. Howcvcr, this strongly negative trend was offset by ;I positive trcnd within the smallest firms which mere able to resist the crisis thrc~ilgh thcir flexible organization. Moreover, some of the firms which had expanded in the previous period reducecl their size, niovitlg back into the category of smallest lirnis, whilst others started a niarked clestructuring of production processes, deccntralising intermediate manufr~cturing phases to employees transformed into artisans willing to ~lndertake job production, in orcler to reduce operating costs and regain ~lexibility.~"

'The largest firms," which could exploit sufficient economies ol' scale, were also able to resist the crisis." So, for paradoxically opposite reasons the recession contributed to tlic strengthening of both the largcst firms and the artisan firms.

In this context, the high level of i~ltcrnal competition causetl by the huge illcrease in numbers of small firms filrther rccluced profit margins which had already been eroded by a general increase in costs (both of labour and raw material) and by the

(/i,,,l,l<,l<~ ' ~ , , , , I l l l , l ' ~ ~ / )

qir:tlity proo'tct. Pn)duction is m:tinly rn:~nu:tl and requires grv;lt skill :ind speci;~liz:ttion (for tllc most \:tluahle operations tlie firm m:tkrs use o f decentralized \vork). The distributive structure c~)nsists of direct agcncies in

differrnt countries (export quot:~ is :~rounil 50 percent). Top Sc11ifr (75 cmployccs) opcr;ttes instc:td in the medii~nl-low segment of the market :~nd produces a st:intl:lrdizcJ pn)(ltrct completely ;~imcil :tt Ii~reign rn:irkcts (the n:ttional market being rnorc particular rrgarrling pn)tluct pcrson:tIiz;ttio~i). T ~ J Srrlici is p:trt of :I group of

finns including Cnrbo (sprci:~lizetl in the production of henchcs). Xls (t:thlcs), I':tn itnil 1Ian)n (suhcontr:~ctors), employing :I comhincil 330 pcoplc :ind producinl: 1.7 million pieces :I yc:tr, with :I competitive str:~tegy 11:iscil on price f;tctors :~nd o n an efficient production orgnniz:~tion fro111 materi;tls buying r o product deli\.cn. The strategy

undertakm hy Potocco ( I I5 employees and 120 thous:~ntls picccs :I year, es l)on~ng 75 pcrccnt). which I1:ts recently I:tunchcd a collection of high design protlucts, focuses upon increasing the value :idtlrd content or production ant1 tlie contr;ict sector, whicll rcprescllls 50 percent of 1ot:ll s;tlcs revenue. dfo11ti17r1 I ~ r t c r ~ ~ a t i r ~ ~ r ~ r l

(35 miployccs) is a 1e;tdcr in the production of sopIiistic:~tecl cli;~irs, \\,it11 a long tradition o f collahon~tion with

famous tlcsigners (Gio I'onti. ~M:~gistrctti. (:oppol:~). It openttes in the top segment of tlic rn:~rket :tnd c:tters m:tinly for 1t:tli:m customers, despitr m:~int:tining :tn cxport quot:~ of around z 1 0 pcrccnt. 'l'hc entire production cycle is

pcrfornieil inside tlic firm itsrlf in ortlcr to cot~trol c:tcIi pli;tse wit11 grcst c:~rc. Xloreovcr. hlontin:t is 011e of the

few fimis in tlie are:c to ;ttt:~ch iniponancc to :tdvcrtising tlirougli spcci:ilizccl m:~g:tzincs. :IS well :IS (;king p:m in

intcmational fairs and cspositions.

10 For ex:tmplc, Moroso makes use o f former cmployrcs who h:cvc fi)rnicrl :trtis:~n tirms to pcrti)rm some p1i:tscs of

the nianuhcturing process that rrquirc a ccn:~in lcvrl of clt~\lity. l~eccntral i~~cd wt)rk is :rlso used t o prt,\aidc tlic fir111 with :I ccnaiti Ic\fel of llexihility required 10 meet se:tson:tl pe:~ks. C:tllig:lris makes use of cxtcrnal workcrs for

slxcialized m:tnuf;tct~~ri~g processing. 1 1 Strictly speaking "ktrgc lirms' :tre absent in the district 'l'lie largc.st firt~ls :ire mcdiurn tirms hy its~lal st:uid:trda.

12 Sahot, the only firm \\,it11 more tli:~n I00 crnployccs, was liowcver ti)n:cd to close do\xrn.

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increasing bargaining power of the large retailers. This led to a higher incidence of self-exploitation-selling under the counter and dumping-with the consequent higher risk of insolvency. The re-organizational processes undertaken by the main firms to meet the new competitive conditions contributed, through the exacerbation of the traditional manufacturing decentralization mechanism, to the ~lncontrolled de-structuring of the chair-manufacturing system.

The significant investment effort made by these firms attested to their will to cut internal fixed costs and to increase sales volumes by expanding production capacity. This occurred not only within that sub-segment of the sector where price is by far the most important variable, but also among those relatively few firms which pay close attention to the quality and image of their products, destined for a sophisticated market and for which design, modelling and advertising expenditures are of significant importance. Among these latter firms the strategy of cutting costs was also prevalent, achieved by sub-contracting parts of the manufacturing processes out to controlled firms.

Even the largest firms in the area continued to focus alniost entirely on quantitative increases in sales rather than on moving the focus of their strategies to the rational- ization of the production cycle and to forming collaborative ventures. Recently, some firms have developed more stnictured forms of inter-firm cooperation in order to support a more rigorous and inter-related business planning, through implementing a stricter coordination and division of tasks. In these new arangements, the leader firm, which retains only the most critical phases of the production cycle (assembly and quality control, design, research, finance and marketing, until it completely loses the manufacturing component), is enabled to meet ever more demanding require- ments of timeliness, speed of deliveries, quality and prices imposed by demantl. These firms have also begun to build information links with suppliers and sub- contractors in order to improve co-ordination and thereby minirnise time and costs in the execution of orders.

However, they are still slow in implementing necessary rationalization of pro- duction processes, as cost of product inventory indicates. The decentralization of manufacturing through outsourcing still plays an essential role in the pursuit of policies aimed at reducing fixed business costs and at adapting to market demand rather than at implementing strategies of "just in time". Some examples of cooper- ation in the management of the commercial function are also present in the district area: private consortia are formed for the joint commercialization of complementary products in foreign markets. Such marketing consortia are a novelty for the chair manufacturing district.

Examples of stable cooperation put into practise by the main firms in the chair man~lfacturing area are limited to policies of production rationalization. Mergers and acquisitions (or simply de facto controls) aim at reducing possible diseconomies within the production cycle and do not represent a real evolution towards structured groups of firms. As demand is oriented towards purchasing more limited quantities more frequently, flexibility in execution of orders and p~inctualiq in deliveries, together with cost reduction, still represent the fundamental competitive levers for

'ictor the chair manufacturing firm. The organization of production is still the critical f.

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242 IND~JSTHY AND INNOVATION

for success, essential in reaching a position of equilibrium between production flexibility and costs.

Overall, compared with the past, a substantial continuity of business policies emerges. The transformation taking place in the relationships among firms located in the district does not appear, in generail, to indicate an attempt by the prime contractors to establish a leadership within the area in order to encourage, to a certain extent, a "guided" re-structuring of the area towards a qualified re- industrialization.

B e slow opening towards the outside The chair manufacturing district has always been very open to international ex- changes, both in terms of exports and in terms of its procurement of raw materials. The high propensity to export is explained by a variety of causes: the inabiliv of the local market to absorb all output; high international demand, the ease of handling and packaging associated with the product, together with the fact that the product is suitable for a variety of environments. The propensity to purchase required raw materials abroad arises from the relative absence of these materials in the local area.

In the last years this tendency has becn reinforced by a geographic diversification and by a more strategic management of the countries-portfolio-which implies awareness of a niultiplicity of current markets and continuetl monitoring of potential markets-in terms of both provisions (including not only ex-Yugoslavia, but also Romania, Czech Republic, Slovakia and Poland) and export destinations (not only France and Germany, but also USA ant1 Japan).

However, this phenomenon affects internationalization only on a purely commer- cial level. Wider forms of internationalization have yet to be inlplemented In effect, the need to gain information regarding export markets and to offer auxiliary services such as pre-sales service and post-sales assistance, has encouraged the development of some form of direct presence in the foreign mi~rkets through subsidiaries and commercial affiliates.

Some attempts to internationalize production in accordance with the principle of a more global division of labour have also been made (although most of them are still in the planning stages). Specifically, these attempts have included:

the outsourcing of the simple ant1 low value-added phases of manufacturing to the countries providing the raw materials: for example, chair stuffing, which, until a few years ago was performed by local female labour in the home, has completely disappeared from the area. This phase is now perfor~ned in Eastern European countries or in Asia. Sometimes the early manufacturing phases arc perfornled directly in Eastern European wood importing countries; the outsourcing of the assembly process to the outlet markets": for instance, to

I? An example is Top Sedia. This firm is developing ;in internationalization pl:ln, forecasting the first phase o f pn)duction at the source of rarv m;tteri:~l. then ;I quick p:tss:cgc in It:rly for the most conil~licated m:~nuf;tcturing ph:lses, and final assembly in the dcstinntion country l h c fir111 has already taken steps in this direction: a new plant opened in France close to n niarkct th:tt ahsorhs more t1i;ln 25 percent o f the lirnl's totill production ant1 a j~in-\~enture with a firm in Slove~ii:~ for upholetry cornponcnts.

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Mexico and Costa Rica from where products are destined for the American and Canadian markets, thus reducing transportation costs and exploiting facilities provided by NAFTA. Long-term sub-contracting agreements have been stipulated with local firms, saving on labour costs, although decreasingly, and on transporta- tion costs.I4

Examples also exist of wider co-operation with foreign partners, where purchasing through sub-contractors is coupled with complementary objectives and opportuni- ties: co-operative production (with the objective of reaching, through horizontal integration of productive capacities and technical competencies, the minimum sufficient size required to enter certain markets), transfer of technology and know- how,I5 and also cooperative supply.

In general, however, the chair manufacturing firms, even the largest ones, are tightly anchored to the local context, particularly with respect to the organization of production. They prefer to rely on local subcontractors for their high level of professional competence, not just for the most sophisticated but also for more standardized manufacturing phases. The difficulty of managing relationships from afar, lack of experienced technicians, lack of an entrepreneurial mentality and social and political instability create problems for cooperative relationships with foreign partners. These problems include lack of respect for quality standards'"for instance, in optimal level of wood drying process) and lack of reliability in delivery, which discourages attempts to internationalize production. Moreover, the transfer of know- how and technology is strongly resisted by local entrepreneurs, who are afraid of encouraging competition in a sector already characterized by very low barriers to entry." Thus, there are formidable barriers to further internationalization of the industrial district. The most successful cases of internationalization involve manufac- turing to contract for foreign firms (as in production of upholstery, seats, padding and finishing). I n

On the whole, a traditional entrepreneurial mentality prevails in the district area. For the local firms is difficult to recognize the role of cooperation at a global level to

14 lniporting semi-finished goods rather than urn-worked wootl permits savings of up to 60 percent in weight :cntl bulk. The same applies to the handling of components rather than :cssernbled chairs (a transport t n ~ c k can convey 600 assembled chairs or the equivalent of 3500 chairs as components).

15 The m:un initiatives in this field are the joint-ventures set up with developing countries. 16 Manzano entrepreneurs believe that the districts' 'industrial :ctniosphere" is not exportahlc, and therefore

production elsewhere cannot achievc the level of refinement that origini~tes from the high degree of specialization characteristic of production organization in the chair-manufi~cti~ring clistrict. Also regarding the more standardized phases of manufacturing, 'buying intermediate-goods from ahroad"-says Angelo Speranza, director of CATAS-"is difficult because the transport often damages materials and consequently final protlucts

can demonstrate filnctional defects".

17 Cdligaris started some years ago to decentralizc some upholster). phases requiring a high level of professional competence and extended manufacturing times to Romania, because these l,liases were costly in Italy. Flowever, the lack of quality in plants revealed the need to transfer technical knowledge, and to exchange k n o ~ - h o \ \ ~ . Today, due to the rise in labour cost, this firm is withdrawing from these markets. 'The inclination is to

internationalize the distribution function, not the production one. Similarly, production internationalization attempts made hy Lisa in Eastern Europe were not as sucessfi~l as liopetl because the low cost of labour and the proximity of supply sources were counterbalanced by the inlperfkction in

manufacturing and by rigidity of delivery. 18 Adler, a paint producer, recently cre;ctcd a joint-venture in Costa Ric:~, after expanding in Syria, Korea and

Malaysia.

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produce material and non-material resources. The process of opening towards the outside carried out by the firms located in the district area can best be delined as a process of "incomplete inter~ationalisation" (Grandinetti 1990; Rullani 1990).

It is widely recognized that, to tievelop s~~ccessfi~lly, a local production system must be able to dynamically balance the strength of its internal structures and processes with a certain degree of opening towards the external world. Only an "appropriate mix" between continuity of internal relations and opening to the outside, between internal and external synergies, allows it to remain innovative, to appropriate techno- logical trends, and to preserve and renew its own competitiveness.

This condition is no longer guar:~nteed by the spontaneous working o f those n~echanisn~s that reproduce the traditional motlel of district development (small firm, de-verticalization, self-focused development). In fact, confronted with a radical change in the competitive environment, the districts' typical ability to react to change, to continuously regenerate, to adapt to both external pressures and internal tensions, has entered a crisis. I b e process o f structi~ral cvolution of the district now appears to be related to the driving force of individual firms which put themselves at the vanguard of change. These firms emerge out of the mass of district firms successfully responding to the competitive challenge imposed by the market through a new behavioural logic different from that of the district tradition. They are firms that no longer base their own competitiveness 011 the simple exploitation of positive externalities produced spontaneously by the district's environment (typically techni- cal and productive in nature), but rather on the activation of' individual strategies aimed at acquiring new skills and resources.

The implementation of these strategies generally does not occur through a process of illterndl growth, i.e. by expanding the size of the firm, but rather through external growth, by organizing a flexible form of inter-firm cooperation. These new relation- ships, which may even be with firms from outside the district area, or overseas, are quite different from those that traditionally link firms operating within it. The activation of business re-organization processes, illflucncitlg the relationship among firms at a district level and among district firms and external firms, impacts, in turn, on the district's evolutionary dynamics, driving the completion of internal restructur- ing and repositioning within thc global economy (Varaldo 1993; Rullani 1993; Lorenzoni 1990; Mistri 1993).

Within this interpretative framework, the chair nlanufllcturing district seems to be a system finding difficulties in stabilizing changes because of a lack of a clear leadership. The impact of business strategies on the structural evolution o f the chair manufacturing district is still limited, and is only linked to the reorganization of the production process, that is, system rationalization through quasi-vertical inte- gration forms on the one hand, ;ind specialization at the international level in the marketing functions on the other hand. The other functions, those with greater strategic content, are generally managed in a traditional way inside the finn. Those

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activities with the highest value-added are, in other words, not only exclusively managed from within the area, but often in a centralized manner within the firms themselves. These activities are managed through a traditional process of growth rather than through inter-firm cooperation with independent firms, even if some examples to the contrary exist.

Political intervention in the local economy must therefore be based on this new conception of the district-firm relationship. Up until now, the various relevant institutions have managed the evident gaps in the district system by strengthening the traditional external economies of the district, without affecting the functioning of inter-firm organization. This has served to obscure a problem which is actually internal to the firms, and has thus inhibited a radical revision of the organizational schemes by the firms themselves, encouraging a structural sclerosis of their behav- iour. It is the new external district economies which will now drive further evolution.

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246 I N D ~ J S ~ K Y AND INNO\'A'I'IC)N

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