italian style entrepreneurship

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  • 1. ENTREPRENEURSHIP IN ITALIAN FIRMS: SMALL BUSINESS, INDUSTRIAL DISTRICTS AND GLOBAL COMPETITION Andrea TracognaIntroductionThe Italian model of entrepreneurship has recently received particular attention fromscholars, researchers and politicians from around the world. Within the scope of thispaper, we should like to present this model as a useful point of reference andcomparison.More specifically, this presentation is an attempt to respond to the following questions:• Is there a model of entrepreneurship which can be considered as typically Italian? Is it possible to say that creating and running businesses in Italy differs substantially from such activities elsewhere in the world?• What makes successful Italian companies different from successful firms in Germany or America?• What are the qualities of the many Italian entrepreneurs, more or less well-known, who are conquering the world with “made in Italy” products? How do they differ from entrepreneurs in other countries?Actually, it is probably easier to identify the similarities rather than the differencesamong entrepreneurs in different parts of the world. However, beyond thesesimilarities, there exist notable differences in “doing business” in the USA, Germany,Asia or Eastern Europe. Let’s consider for instance, the differences among the greatAmerican managerial corporation, the Japanese financial and industrial groups and theGerman “participative” business system.Our basic assumption is that there is no “single best way” in doing business, and eachgeo-political and economic situation has – so to speak – “selected” its successfulentrepreneurial and business profiles. And Italy is not an exception. 1
  • 2. Problems and performance of the Italian System.Despite its advanced level of industrialisation and its solid ranking as one of the world’sleading economic powers, Italy cannot be considered as providing an easy “businessenvironment”. In fact, the Economist Intelligence Unit ranked Italy 22nd in its specialclassification of the best international “business environments”.Among the factors which hinder and impede our business system, are the following: • an unstable political system, which has produced nearly 60 governments since the end of WWII to the present; • an inefficient public administration, as compared to its budget; • a rigid labour market, which places considerable restrictions on the hiring and firing of employees, and on labour contracts; • a limited financial system, with a relatively low number of companies listed on the stock exchange (slightly over 200) and a very poor market capitalisation.However, in spite of these impeding factors, the Italian business system appears asextremely viable. Even though industrialisation and development began relatively latein this country, Italy has achieved excellent economic performances. In particular, itshould be noted that: • Italy has the world’s 6th largest GDP, with a pro capita GDP of over 21,000 dollars PPP (purchasing power parity), a figure that is much higher in Northern Italy, which is considered one of the richest regions of Europe, with extremely low unemployment rates. • Overall, Italian exports represent some 4% of all international commerce, with absolute leadership in several sectors. • In purely business terms, in the year 2000, there were 5,648,377 businesses registered in Italy, which corresponds to one business for every 10 inhabitants. In areas with a high level of enterprise, such as in certain zones of the Northeast, this can become 1 business for every 8 inhabitants, or even less. • Also in terms of the creation of new business the numbers are very positive, with 340,000 new business in 1999 and an annual growth rate of the business stock of over 2%. 2
  • 3. Therefore, the numbers tell us that Italians are not only a people of saints, navigatorsand poets, but above all of… entrepreneurs.Structural characteristics of the Italian System.But who are the Italian entrepreneurs? Obviously, there is no one single type ofentrepreneur, just as there is not a single type of business. On the contrary, the Italianbusiness system is quite diversified into the following constituencies: • a highly integrated historical nucleus made up of the major families of industrial capitalism (Agnelli, Pirelli, Falck,...) and of very long-standing financial institutions (Assicurazioni Generali, Mediobanca, the major public banks); • a system of businesses from the public sector which have already been privatised or are in the process of being privatised (Telecom Italia, Enel, Finmeccanica,…), and which in terms of dimension, strategies and management models are progressively assuming the characteristics of global corporations; • a very vital system of Small and Medium Businesses (SMBs) with a strong tendency towards export, specialised in the so-called “made in Italy” 1 products and highly concentrated in industrial districts.This last system has produced and consolidated: • a growing group of “national champions”, or businesses which in a relatively short period of time have been able to assume a leading role, in terms of name recognition and market share, in the international marketplace. Some examples of this group are Prada, Barilla, Ferrero, Scavolini, Benetton, Aprilia, Luxottica, Tod’s, Illycaffè, etc..Given the themes and aims of this paper, we will concentrate on small businesses andindustrial districts, and on the mechanisms and means by which the ‘Italian way’ ofentrepreneurship has obtained success around the world.1 This term does not refer generically to everything that is produced in Italy, but only to those forms ofproduction in which Italy has become a world leader, ie.: home furnishings, Mediterranean food products,“fashion” products and numerous forms of production in the mechanical sector (industrial machinery,machine tooling, etc.). 3
  • 4. The role of small and medium businessesIn its annual classification of the top 1000 companies world-wide, the magazineBusiness Week includes only 24 Italian companies; of these, only 6 operate in theindustrial sector, as compared to 227 American companies, 68 Japanese, 44 Englishand 27 German.The lack of major Italian companies is widely compensated by an impressive density ofSMBs.Table 1. Breakdown of businesses by company size (% of company population) Company size 1-9 82.41 10-49 15.39 50-249 1.90 250-499 0.18 >500 0.12 Totals 100.00Table 2. Breakdown of businesses by company size (% of total workforce) : Italy vs.USA Company size Italy USA 1-9 24.44 12.34 10-49 30.03 18.40 50-249 19.36 16.26 250-499 6.37 5.74 >500 19.80 47.26 Totals 100.00 100.00 4
  • 5. The figures tell us that 98% of Italian companies have less than 50 employees and,indeed, 82% have less than 10 employees, and can thus be considered “micro-enterprises”. The comparison with the USA is perhaps even more revealing. In fact,companies with less than 50 employees account for 55% of the total labour force, ascompared to 31% in the USA, whereas companies with more than 500 employeesaccount for around 20% of the total labour force in Italy, as opposed to more than 47%in the USA.If we limit our analysis to the manufacturing sector, thereby excluding from the totalsthe many companies in the service sector, we find that companies with less than 10employees account for 23.3% of the total labour force in Italy, 7.4% in Germany, 7,2%in the United Kingdom, 5,5% in Japan and 3% in the USA.The concept is straightforward: in Italy there are many small companies, whichrepresents the main employer on a national level. This high density of SMB’s, togetherwith the good performance of the Italian system from the 60’s onwards, has led manyspecialists to coin the slogan “small is beautiful” and sing the praises of a developmentmodel which has been considered as an alternative to the Anglo-Saxon and Germanmodels.The following characteristics have been especially prominent in Italian SMB’s:flexibility in the use of productive factors, especially in terms of labour and sourcingdecisions, a high adaptability to changes in the market, and the ability to occupy, in anintelligent way and also at the international level, specialised market niches.Entrepreneurial profiles.The obvious question therefore is: “What kind of entrepreneur “inhabits” our SMBssystem? What are the common characteristics of the Italian entrepreneur?We have grouped these characteristics into 5 categories:1. personal attributes;2. strategic orientation;3. governance;4. finance;5. organisation and management.1. Personal attributes 5
  • 6. • The self-made entrepreneur. The typical Italian entrepreneur has built his business up from nothing, using technical or artisan abilities which were acquired in a previous job experience. • Desire for social advancement. The attitude of the entrepreneur towards work is not only that of guaranteeing an income but, above all, of obtaining economic and social advancement. • Success as a means of self-fulfilment. In many cases, the entrepreneur has experienced the moral and material reconstruction of the post-war period and therefore views his economic success as a personal contribution to the general welfare. This success is seen also as the main form of self-fulfilment. Other dimensions, such as the family and free time are often sacrificed.2. Strategic orientation • Small steps and a tight rein. Like all self-made men, his vision of growth of the business is based on “small steps” and “a tight rein”, in the sense that exploiting the growth opportunities which the market offers is always subordinated to the entrepreneur’s ability to keep total control of the activity. • Refusal of radical changes. The paths of strategic development never distance themselves radically from the original context, which is better known and more controllable. • Creativity, design, product innovation. The almost fanatical “love” for the product being created provides the drive and incentive for expressing creativity, design, product innovation and the continuous search for excellence, which are perhaps the most distinctive traits of “made in Italy” products.3. Organisation and Management • Power concentration. The Italian entrepreneur is someone who tends to concentrate power to a high degree, rather to delegate it, and who leaves little room in his company for professional managers, even when the organisational dimension would allow for such actions. • Human Resources Management. The relationship with the workforce is one of close control and direct supervision. The management of human resources is paternalistic in nature, without an extensive use of modern management systems (MBO, incentive schemes, training). 6
  • 7. 4. Governance • Plurality of roles in the business. The Italian entrepreneur concentrates different roles within himself contemporaneously: the representation of the interests of the family which has ownership (governance), the definition of strategic goals (vision), operational management and often some form of work activity. This is why Italian businesses are so strongly identified with the figure of the founding entrepreneur. • Role of the family. Assets and control are often divided among other family members. The development of the business is thus conditioned by events within the family, the number of its members, the size of the family holdings or wealth and the willingness to invest it in the business. • Resistance to the entry of new partners. The priority given to family ties and the resulting bond of trust creates a strong resistance to the entry of new partners into the company.5. Finance • Preference for bank loans. Quotation on the stock market or the entry of new financing-partners or venture-capitalists is considered a means of diluting control, imposing an unwanted transparency of company information and of decision-making processes. This explains the marked preference for bank loans. • Strong self-financing. Investments benefit also from the systematic reinvestment of profits within the company, which is made possible by a “frugal” lifestyle that refuses waste or ostentation.Many of these elements can also be found in other national contexts, while others arepeculiar to the Italian entrepreneur and permit us to understand the many recentcompany “success stories” in Italian capitalism.However, in order to fully define the very specific nature of the Italian situation it isnecessary to shift our attention from the “personal” level to the “context” in which theentrepreneurial activity takes place: the industrial districts. 7
  • 8. Industrial districts and entrepreneurial profilesRomano Prodi, the current president of the European Commission, recently defined theindustrial districts as the main social-economic innovation which Italy has offered to theworld in the post-war period.According to one of the many definitions which have been proposed, an industrialdistrict is a localised area characterised by a high concentration of SMB’s in terms bothof the relationship between the number of businesses and the population as well astheir productive specialisation.In other words, in Italian districts there are numerous companies which are specialisedin the same form of production.In Italy, there exist nearly 200 districts, in the most different productive sectors, and inboth the North and the South. The highest number, however, are located in theNorthern and Central parts of the country. It is by means of the districts system thatthose products which best represent the so-called “Made in Italy” have succeededinternationally.The shares of the world market obtained by Italian districts in these sectors are quitenotable.Table 3. Shares of world exports of the main Italian districts Products Districts Share (%) Wool textiles Prato 19-20 Wool textiles Biella-Vercelli 14-15 Silk textiles Como 24-26 Women’s stockings Castel Goffredo 40 Dressed skins Vicenza 10 Footwear Ascoli Piceno-Macerata 5-7 Eyeglasses Belluno 15-17 Goldsmith products Vicenza 13-15 Goldsmith products Arezzo 12-13 Furniture & kitchens Treviso-Pordenone 8-9 Furniture & kitchens Como-Milano 4-5 Chairs Udine 20-25 Ceramic tiles Modena 38-40 Packaging machinery Bologna 13-15 8
  • 9. With such performance levels, in a country like Italy where major companies arelacking, the industrial districts can be legitimately considered as our “spontaneousmultinationals”; spontaneous because the creation of a district occurs without thestrategic planning or guiding role of large or small companies.The creation of a district is rather based on social, economic and cultural factors, suchas the historical presence of institutions which are rooted in the territory (one thinks ofthe Italy of the “municipalities”) and artisan traditions which are often centuries old(knives, gold work, furniture, etc.). Based on this foundation, the subsequentdevelopment of a district takes place through a series of spin-offs, where theexperience of the company with the greatest success produces technicians andworkers who become entrepreneurs in turn. In this way, efficient systems ofrelationships are developed among companies, which exchange unfinished products,technology and services.Belonging to a district offers many advantages for SMB’s in Italy: • In general terms, the district represents a context which facilitates enterprise, through the diffusion of a culture based on the values of commitment, labour, loyalty, personal success. • Cultural homogeneity, together with geographical proximity, aid the diffusion of an approach which seeks collaboration rather than competition among companies, while relationships based on trust facilitate exchanges and make it possible to regulate agreements between companies on an informal basis. • Through the relationships of exchange and co-operation which link companies within a district, extended forms of the division of labour are created which are fully comparable to those within a major company, and in accordance with the logic of what the great economist Alfred Marshall called the “factory without walls”. In this way, the district permits the SMB’s to obtain all the benefits of large scale companies without paying any of the costs in terms of technological, organisational and decisional rigidity.In a few words, Italian industrial districts are a perfect mixture of market mechanismswithin a social communities framework.The context of districts has strongly influenced the psychological profiles and attitudestowards risk of Italian entrepreneurs.Above all, the feeling of belonging to a district satisfies the innate need of individuals toenter into relationships with others. As we know, no one is totally autonomous as a 9
  • 10. person and able to achieve ends limited only to themselves; instead, we are all beingswho develop through our own affinities, relationships and networks. This is why theItalian entrepreneur maintains a strong attachment to his own roots and to the social-economic contexts to which he belongs. In terms of the industrial districts, therelationships of trust, friendship and kinship extend themselves into businessrelationships with suppliers, customers and financiers which are based on a profoundpersonal knowledge.With respect to the attitude to risk, being able to count on an extended network ofrelationships at the district level, even before establishing one’s business, makes thestart-up less risky because there always remains the possibility of going back to workas an employee and of a more general social-economic integration.In our view, the extension of inter-personal relationships into business relations,together with the willingness to take risks, the desire for independence, the pursuit ofpersonal success and an unequalled creativity and vision of the market are the primarycharacteristics of Italian entrepreneurship.Open issuesWhat is surprising about the situation in Italy is the ability of companies to create highadded value even when operating in “traditional” sectors, and to be innovative and tokeep abreast of economic systems which are much more committed to technologicalinnovation, even without major investments in R&D.However, past successes must not give rise to a dangerous complacency. Thechanging scenarios and progressive globalisation of competition are placing intoquestion the successful business models of the past. And this is also true for thesystem of SMB’s and industrial districts.At present, the future of the Italian business system appears to depend on the solutionsto some important issues. • Business succession. Many successful entrepreneurs are currently nearing the retirement age. These companies are thus about to make the crucial “generational” leap. Unfortunately, this transition has not always been prepared for adequately. In addition, the younger generations do not always have either the desire or the ability to take over the control of the family business. Often, they lack the technical abilities and charisma of the founders. Or they simply 10
  • 11. wish to follow a different course, drawn by different models of personal affirmation. • Dimensional development. Until now, the Italian entrepreneur preferred to enhance and reinforce the system of relationships (the network) in which the company is situated rather than to pursue organizational growth, that carries with it the risk of losing control over the business. In the future, with the opening of markets on a global level, the size of firms will become increasingly important for a competitive edge. The SMB’s in Italy will thus be forced to expand. Large interventions in the areas of governance, strategy, management and finance will be needed. • Innovation and the new economy. One of the most important attributes of Italian entrepreneurs has undoubtedly been their ability to imitate in an intelligent way the latest technological advances available, and to combine knowledge from various sectors. An example of this capacity is seen in the success which has been obtained by the Italian machine and mechanical industries. However, new competitive challenges and international pressure are, in many cases, rendering the competitive strategies of our minor industries obsolete. A significant portion of SMB’s in Italy is currently not inclined or unable to exploit opportunities offered by the new economy and the new technologies. The fundamental question is whether– in the face of the increased competition of newly industrialised countries and the strong pressures towards de-localisation - it will still be possible in the future to maintain world leadership in the traditional sectors.In consideration of the above unresolved issues, we end this presentation expressing anumber of concerns: • Will Italian entrepreneurs be able to repeat their successes in the international marketplace? • Will they be able to handle the threats that are already visible on the horizon, and continue to function as the locomotive of the national economic system? • Or will they instead be re-dimensioned by technological change, international competition and large global companies?We are convinced that the future of Italian Style Entrepreneurship can still bepromising, but it will also depend mostly on the answer to these questions. 11