Managing Self-organized Units

Table of Contents:

The issue appearing immediately after self-organized units are created is how to manage them. This issue had long been neglected by economists till Ostrom won the Nobel Prize in economics. And studies about self-organization have since received increasing attention. Next, we will compare Chinese and western cases by taking particular self-organized units– industry associations for example. On the one hand, a Chinese organization always needs to manage self-organized units within it, such as internal contractors, independent subunits, self-directed teams, etc., and at the same time, it needs to deal with networks of firms outside the organization, such as business groups, subcontracting systems, local industrial clusters, etc… Firms in a local cluster often self-organize themselves into industrial associations. On the other hand, industrial associations are communal forces in the governance of public sectors. An industrial association is a good case for our study, since it is a bridge between organization-level and public-level governance.

A Chinese Case

There are more than 1,600 furniture makers in City L, Hebei Province, China, who sell products in all the municipalities and provinces as well as thirty-five oversea countries and regions such as the EU, the Middle East, Africa, Southeast Asia and Americas. In 2009, the city's furniture industry saw a total output of 10.5 billion yuan (RMB; about 1.7 billion U.S. dollar), 13.28% of which came from exports. When it comes to metallic and glass-made furniture, City L ranks the first across China in terms of production and sales volume, as it represents 65% of the total volume of such products in China.

(1) The Beginning of the Furniture Association

Before the furniture association was founded, there were already over 1,000 furniture makers that formed a full industry chain in City L. Nonetheless, there were still copying, price competition and poaching among these businesses.

At that time, furniture maker associations had already grown relatively mature in Guangdong Province, including the city of Shenzhen. The furniture exhibition held by Guangzhou Furniture Association (GZFA) had become very popular; Shenzhen Furniture Association (SZFA) also had opened an R&D center to promote technological innovations in local furniture industry. There was little communication among City L-based furniture makers that were then competing fiercely with each other; despite that they knew the above-mentioned developments and also hoped that there could be a similar organization to help them develop. It was said that ―We all talk with each other in such a way as not to reveal any secret‖ and ―It's even difficult to have dinner together. And we won't talk with each other since we are competitors‖, a furniture maker said. As a result, nobody was willing to start organizing.

In March 2004, City L's first ever furniture association was officially founded with support from the municipal government. But when they faced this newborn industry association for the very first time, most business owners felt strange and ill at ease despite the government's strong support. In an election organized by local economic committee, W, who was believed to be excellent and innovative, was appointed as the president. W was also running a furniture factory in City L, where he was known as a man who ―dares to tempt fate‖ when it comes to investment and innovation. In addition, he was generally recognized in terms of morality and capacity. Unfortunately, the association did nothing but hold two meetings within the first year after it was founded. The attendees did negotiate about stopping forcing each other to cut prices, but to no avail. At last, the association looked as if it did not exist, and its members gradually quitted.

(2) The Appearance of a Capable Man

The local economic committee organized a second election for the furniture association on May 10, 2005. Among the four candidates, WHL (called President Wang hereinafter) was unanimously elected as the president. In addition, fifteen vice presidents were elected and they were all well-known furniture business owners in City L.

Unlike the other members of the association, President Wang of the new association specialized not in furniture manufacturing but in real estate operations. He was thirty years old in 2005 and was believed by other local entrepreneurs to be a ―down-to-earth‖ young man with great achievements and good word of mouth. At that time, President Wang and his company were planning a commercial real estate project named the Furniture Exhibition Mall; he was responsible for building a new furniture market larger than the old one before renting or selling booths to City L-based furniture makers. ―Everybody will receive many opportunities from this platform, including our own business opportunities,‖ said President Wang when explaining why he joined the furniture association. He believed that City L's furniture industry was very promising, but distribution channels remained a weakness at that time. The old furniture mall, which was opened in 1993, could no longer satisfy the furniture makers' needs in terms of size and infrastructures, but a quick-witted President Wang perceived business opportunities from this problem. ―The market comes first. We are thinking that to make a good market, we need to consolidate the furniture industry,‖ he said. With the opportunity of planning the Furniture Exhibition Mall, President Wang as a layman joined the furniture association.

The second election, though so named, indeed was nearly equal to founding a new association. Apart from the original name, there were changes in everything ranging from members of the association and members of its board of directors to articles of association. After he was inducted into the association, President Wang first organized a team responsible for its work. He appointed Mr. Zhang, an excellent employee of his company (called Secretary Zhang hereinafter; he was later on appointed as the general manager of the Furniture Exhibition Mall project), as the secretary general of the association, for which he hired six full-time staff members.

(3) A Critical Mass – the Formation of the Core Team

Given the failure of the old association, a lot of former members were no longer willing to join the newly founded one. After President Wang was inducted, Secretary Zhang had the staff members visit more than 300 local furniture makers – they explained what was new about the association and invited the makers to join it. Fifty-four makers joined the new association shortly after it was founded; only a dozen of them were the former members of the old one. These 54 makers formed the initial ―critical mass‖ of the new association. Four months after it was founded, the new association successfully built a good image by organizing its members to participate in a Shanghai-based exhibition. It then began receiving the members' trust and support. For this exhibition, the member companies needed only to ship products and arranged them at the exhibition site, while the association was responsible for everything else, including decoration, booth arrangement, booth distribution (i.e., the exhibitors' relative positions), coordination with the host, etc. The association discussed with the twelve exhibiting companies about how to allocate the sizes and locations of the booths, before agreeing to follow the principle of equal sharing. After the end of the exhibition, the exhibiting companies from City L each received orders worth twenty to thirty million yuan. This success made the association much more reputable in the industry and allowed it to work more smoothly afterward.

According to the critical mass theory co-developed by Oliver and Marwell (1985), a critical mass refers to actors who advocate cooperation and who take lead in participating in it. They are critical for the realization of cooperation. For the part of City L-based furniture makers, they can receive returns in two aspects – operating in a competitive environment with good order and benefiting from the influence of local brands – for what they do for the furniture association (e.g., membership fees, time to attend meetings, self-restriction as required by the association, etc.). But neither return would be impossible if only a few companies were willing to join the association and obey the common norms in early period of cooperation. Expected benefits from the association can be realized only when a considerable number of companies are willing to cooperate, stop price competition and spend money on branding campaigns. Operation of the furniture association is therefore characterized by increasing marginal utility; inputs and initiative of the critical mass are crucial. The team led by President Wang and Secretary Zhang, plus the earliest members, became early and primary promoters of the association.

(4) Self-governance Mechanism

As members of the furniture association increases, how does the association regulate the industry in order to effectively monitor unfair competition among fellow member companies? As a self-organized unit, the furniture association has no power to forcibly regulate its members and have no formal regulations to monitor them. Its articles of association, which are fewer than 1,500 Chinese characters in length, specify nothing but broad definitions of its functions as well as the members' basic rights and obligations. Article 13 provides that the association's functions include ―Coordinate to settle disputes in the industry and avoid unfair competition in it.‖ Nonetheless, no article has further regulations on the members' behavior. As for the members' obligations, there are only three provisions: ―Support resolutions passed at the members' meetings; keep the association's internal secrets; actively participate in its meetings and activities and improve your company's production and operations so as to contribute to the growth of this industry.‖ There is no word about forbidding unfair competition, much less corresponding provisions with regard to penalties. The only job of the association that is directly related to unfair competition is assisting the local administration of technology supervision in amending local regulations. Moreover, the local administration of technology supervision is the one that publishes and implements these regulations, as the government has not granted the association the power of regulation. In fact, the secretary general of the association has confirmed that the association is only a coordinator and service provider, which advocates a good competitive order but will not regulate it through formal institutions. As the secretary of the association X_ZM put it:

“The association will not intervene in how the companies do business. We recommend that everybody stay away from poaching, price competition, reliance on low prices and inferior products, and unfair competition. We help people broaden their horizons so that they see what is happening elsewhere … The association itself has no institutional requirements on any individual or organization.”

“(The association) only provides a platform. You can leave if you don‟t want to be in the group. The guys were even unwilling to have dinner together, but now they have much better relationships with each other.”

The furniture association prioritizes promotion of communication among the businesses. First of all, the association holds business salons twice a month so that the entrepreneurs get together, talk with each other and share experience in the tea party. Topics for the business salons differ from session to session and cover important issues that affect corporate growth, such as steel market developments, sales issues and booths at the exhibition mall, etc… Secondly, the association makes full use of formal meetings as the opportunities for communication, as it holds a vice-president meeting every two months, an executive-director meeting every six months, and a plenary session annually. These meetings are more than ceremonial, as they hold in-depth discussion among the members on major issues that affect industry growth. Lunches and dinners will also be available for the member companies to have more opportunities for separate communication. In addition, the furniture association conducts many other events such as exhibitions, purchaser meetings and training. While helping the member companies broaden their horizons and understand the markets elsewhere, the furniture association works to enhance informal communication among Town S-based businesses by means of dinners, etc. As the secretary general X_ZM said:

“Today, if certain persons of some other association come here, we will call particular business owners or executives and say that „Would you like to join us this evening?‟ or „Would you like to talk with us?‟”

The association encourages the local businesses to actively share experience. On the one hand, it encourages larger businesses to release new product designs on their own initiative. On the other, it persuades smaller ones to abandon malicious poaching and turn to learn from their larger counterparts.

“We tell the businesses that „If you have any new ideas, just speak out. In this way, the other

people will be ashamed to copy them. Otherwise, they will copy them instead.

“Every business indeed has been on the wrong path. And instead of poaching its people, it is advisable for you to avoiding taking such a wrong path. It has certainly paid a price for having been on the wrong path and you will also pay a price for poaching. In other words, learning from its lesson is better than poaching its people. In reality, these large businesses will not be stingy with their experience after you have a pleasant talk with them.”

With all these efforts made by the association, there are increasing interactions among the entrepreneurs, who have become willing to trust one another and discuss business issues, and can even visit each other's businesses to learn the latter one's experience. The communication platform created by the association has led to increasing communication among City L-based furniture makers, as a growing number of them are willing to frankly share ideas. As a member of the association XG_Y said:

“There has been an obvious phenomenon of frank communication since around 2006, especially since 2007. After a sufficient number of communication activities were conducted by the furniture association, people have found out that fighting between each other is actually not a good thing.”

Since the local furniture makers have a stronger identity with one another, a lot of entrepreneurs have become familiar ties who often have dinner together or talk with each other by phone. As a result of increasing communication between the entrepreneurs, an originally fragmented furniture industry has begun becoming a social network with strong interactions.

(5) Reputation Mechanism in structured social capital: Social Network as a Watchdog


Significant changes in City L's furniture industry have taken place since 2006 despite the lack of formal regulations. There are now much fewer cases of poaching and copying. When asked about the reasons, the local entrepreneurs often mention a phrase – ―feel ashamed.‖ As a local entrepreneur YS_Z said:

“Today, we are very united and want to expand the business. This association gives us opportunities for communication with one another and, at least, there are fewer cases of poaching each other‟s employees. We all have a sense of shame and will feel ashamed (if we do a wrong thing).”

Now that the furniture association as a communication platform was established and a social network of furniture makers built, norms have gradually come into being within the network and begun regulating its members. As was observed by Masahiko Aoki (Aoki, 2001) in Japanese villages, members of a social network will obey its norms once they feel the threat of being expelled and rejected – this threat as an informal but believable penalty will put the members under stress. ―Feel ashamed‖ indeed acts as a negative-screening incentive, because an entrepreneur believes that he will be noticed and condemned by his peers if he has done any wrong such as poaching or copying. This potential stress caused by the peers' opinions will make the entrepreneur feel ashamed or even dare not face the other members of the network. If a company violates the rules of the network (e.g., by committing unfair competition), then it will be faced with not only the stress from the peers' opinions, but also real-world punishment. This is because ―If you hurt me once, I will hurt you twice.‖ Once it ignores the peers' opinions and condemnations and insists on committing unfair competition, the company will be jointly rejected by the others that have decided to ―hurt you twice.‖ Specific manifestations may include the company's being excluded from the circle of information sharing and discussion, no other company being willing to deal with it or share experience, and even other companies' possible retaliation in a similar way (e.g., by poaching the company's people). The watchdog role of a social network becomes more obvious in the following statement of the furniture association's general secretary X_ZM:

“The old association was nominal at best and was unable to often get people together. I might have heard about your factory, but I didn‟t know you and would not meet you. Then I would have someone poach your employees because I knew they were excellent and, anyway, we didn‟t know each other. But now, we get the business owners or executives together from time to time, so they have become familiar with each other. When they meet, they will greet each other by saying things like “So you are President Zhu” or “So you are President Wang. Your business is pretty good.” And then they will talk to share experience. Now that they‟ve known each other, they will of course scorn to poach each other‟s employees … This is like the Beijing people in the old time who lived in Siheyuan (Chinese quadrangles, which literally means a courtyard surrounded by four buildings). We are all very familiar with each other, so things like clothes hung by any of us in the courtyard will never be lost.”

Once a close social network is established, the pressure from negative screening in the network will urge its members to obey the informal rules and act to show good will toward each other. Under such supervision in the social network, companies will begin, when faced with competition, to show stronger willingness to cooperate. Moreover, communication and cooperation between the companies will also make their employees dare not leave a job at will. This is favorable for the stable operation of all the furniture makers, thereby benefiting them in the long run. Now that they have felt the benefits of cooperation with each other, the companies will become more willing to join the association and work actively with it. Another noteworthy phenomenon is that the constraints from ―feeling ashamed‖ are effective only within this social network. Although they now no longer poach each other's employees or copy each other's products or ideas, City L-based companies still do so frequently to their competitors based in Guangdong or even foreign countries, as a member of the association HF_C said:

“We used to copy each other‟s products or ideas. But we have changed our mind since the association led us to see the outside world. We are now copying from the outside instead of copying each other. We have been brought to another level as we are now copying from Guangdong. And we are also copying from foreign competitors.”

This also suggests that self-discipline of City L-based furniture makers, which are members of the association, results from the pressure that they feel in the social network within the association. Once they are outside the network, the negative-screening incentive created by the pressure from the peers' opinions will no longer exist and, naturally, the resulting supervision will also disappear.

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