How horizontal inter-firm relationships regulated by the Network Contract influence SMEs’ performance in the shoe industry

Purpose - Inter-firm relationships are established by firms as a means to cope with continuous market turbulence and as a way to expedite the development of promising new technologies or products, to improve supply chain efficiency and market access. The literature on inter-firm relationships is very extensive and it finds its theoretical roots on Transaction Cost Economy, Resource Based View and Real Options Theory. Inter-firm relationships have been studied assuming different perspectives: strategic, including the drivers of inter-firm relationships, (Hamel et al., 1989; Lorenzoni and Lipparini, 1999), organizational (Das and Teng, 2000; Grandori and Soda, 1995), encompassing coordination mechanisms and the choice of the type of relationship, and finally managerial, including the formation process (Gulati, 1998; Kale and Singh, 2009; Varadarajan, 1986) and governance mechanisms (Li et al., 2009). The literature has focused more on vertical than on horizontal inter-firm relationships and more on inter-firm relationships aimed at developing new products/technologies than at promoting, commercializing and distributing products/services. Also the Operation Management literature proposes many theoretical and empirical studies on vertical collaboration and inter-firm relationships, under the Supply Chain Management umbrella (Frohlich and Westbrook, 2001; Power 2005; Flynn and Zhao, 2010). Considering these gaps in the literature, the paper focuses on horizontal inter-firm relationships aimed at fostering marketing and commercialization strategies. This assumes a relevant importance for SMEs which often do not have enough resources to sustain investments for these commercial/marketing activities. In Italy, where SMEs are at the backbone of the economy, institutions and government agencies are encouraging small firms to cooperate to overcome the limits that firm size poses and thus foster competitiveness and innovation. To this purpose, the Italian government, being the first European one, has drawn a law (Network Contract Law, No. 33/2009) that regulates a particular form of inter-firm relationships. The Network Contract allows two or more enterprises, on a purely contractual basis, to jointly perform one or more economic activities without causing them to lose their legal independence. Such contract provides some types of advantage, for example incentives in the form of tax allowances and the possibility to increase firms rating on the basis of the effectiveness of the Network Contract. It is an interesting field where doing research since it can both contribute to the body of literature and have managerial relevance. Considering both the theoretical background and practical implications, the main research questions are: 1) is the new Network Contract a driver in favouring effective horizontal forms of collaboration among SMEs?, 2) what are the organizational and managerial practices adopted by firms in horizontal network contracts?, 3) what are the effects of this form of network on SMEs performance? Design/methodology/approach - A multi case study research strategy has been adopted. Since the Network Contract Law was established by the Italian government, many Network Contracts have been signed. We have selected two cases in the shoe industry following two criteria: firms signing the contract have to be at the same stage in the value chain, and have a downstream strategy aimed at fostering marketing and commercialization strategies. We carried out semi-structured, face-to-face interviews with different actors, including entrepreneurs, managers and key informants, to gather information about the companies’ history and, in particular, about the Network Contract they have established, its stage of development, current characteristics and performance. Secondary data served as additional sources. Using multiple informants and cross-checking information and discussing the preliminary results with the interviewees made it possible to increase internal and external validity of the case study findings according to Yin's (2009) suggestions. Findings - In both case studies, some shoe makers, at the same level of the value chain, decided to establish a Network Contract with the strategic aim of overcoming their structural and financial constraints and improving their downstream strategic effectiveness. The Calegheri 1268 Network Contract, signed by companies in the Brenta Shoe District, has been established to collect unsold goods from the firms’ clients, most of which are retailers, in order to resell them in outlets they bought in leasing and try to increase customer loyalty, while the focus of The Rete Marche Shoe Group Network Contract, established by companies in the Marche Shoe District, is more focused on the organization of events in the foreign market of interests, private exhibitions and trade fairs. From an organizational perspective, both networks are characterized by a formalized structure, as imposed by the Network Contract Law, and are parity-based, that is there is not a leader company. The preliminary results of the cases analysis show three important findings: - one of the main characteristics of the network contract is flexibility since it leaves parties free to “customize” the contract and set several aspects of their relationship, such as the contract’s termination, management of potential conflicts of interests among the firms, and financial rules; - the network contract is an effective driver for horizontal inter-firm relationships formation as it pushes firms that already knew each other to boost their collaboration implementing new downstream strategies in order to overcome their structural constraints also by adopting interesting lean practices; - an horizontal network makes it possible to improve financial and market performance since in both cases it has a positive effect on sales, profitability and customer loyalty. Relevance/contribution - The paper studies in detail how firms competing with each other are able to implement collaboration strategies aimed at fostering marketing and commercialization activities using the Network Contract in order to improve strategic performance. Moreover, the Network Contract can represent an interesting alternative to the process of acquisition by big groups many SMEs are experiencing. This new form of structured inter-firm relationships can contribute to both the theory and practice of coopetition (Bengtsson and Kock, 1999; Chen, 2008; Gnyawali et al., 2006; Hamel et al., 1989) and results will be analyzed also considering this perspective. Furthermore the paper sheds new insight in the OM and SCM literature showing the drivers, practices and performance deriving from a new form of inter-firm collaboration. Finally the two case studies could be used, after appropriate modifications, for teaching.