Turnaround of Danish Economy:
The Power of Networks

Madhukar Shukla

 

In 1989, Denmark’s economy was approaching crisis. It was one of the smallest nations in the European Community, with a declining economy. The unemployment was growing high, the corporate investments were low, and even funding of public services was becoming difficult. For last three decades, the country had recorded trade deficit in its exports. Moreover, with 1992 approaching, the country also faced the onslaught of EC trade bloc, which was to change the rules of the game completely.

According to a government-funded report by McKinsey & Company, Danish economy was doomed, because "size is the problem." Danish economy consisted of a large number of small firms (with 10 to 30 employees) which were too small, too dependent, and too diversified to compete in an increasingly global market. Moreover, these firms were operating in traditional industries such as textiles, metalworking, wood and furniture, food processing, tools, etc. Specifically, the challenges looming before Denmark’s economy were:

· The domestic market was facing threats from international competition;

· Firms were unable to compete with high-value added products;

· For smaller companies it was difficult to keep up with pace of innovation globally;

· Most companies were unable to utilize their full capacities; and,

· Due to their small size and volumes, the international markets were virtually closed for the Danish firms.

McKinsey recommended that Denmark should reorganize its industrial infrastructure through mergers of these isolated small enterprises. Only then could the country create a "critical mass" necessary for large-scale financing, access to new technologies, marketing and sourcing world-class management experience.

But the merger prescription had two critical drawbacks. Firstly, the small business entrepreneurs were likely to resist giving up their control over businesses they had built up over years and generations. More so, since the independence and individualism was a key part of the Danish Viking culture. Secondly, the Danish small enterprises were so small, that even by merging them one could only create companies which would be dwarfs compared to the foreign multinationals.

The insight came during a seminar for the Danish manufacturers, in which, an American, C. Richard Hatch shared his first-hand experience of the "flexible manufacturing networks" which had turned around the economy of Italy’s Emilia-Romagna region. Emilia-Romagna represented the Italian Renaissance for the industrialized world of the 20th century. It was formed in the 1970s, when Italy reorganized itself into 21 administrative regions. At that time it was an old, historic, rural and the fourth poorest region of the country. Its pattern of industrialization had many similarities with Danish economy - for a population of 4 million, the region had 325,000 firms (that is, about one firm for every 12 people). Most of them were small, lacking the resources for growth and meeting any kind of competitive challenge.

15 years later, by 1985, Emilia-Romagna had emerged as the second wealthiest region of Italy. Its income levels had risen from 10% below to 25% above the national average. The unemployment rate had gone down from 20% to nil, and it was cited as the 7th most prosperous region in the European economic community. All this had come around because in the mid-70s, the regional government had initiated development programs which were based on a strong foundation of small enterprises. These programs were aimed at stimulating collaboration among firms, and the benefits were available only to group of enterprises working in a collaborative network.

Richard Hatch, a car racing and motorcycle enthusiast, had seen this blooming of the "third Italy" first-hand. He had lived in the region where he owned and managed a specialized metalworking company in Modena, Emilia-Romagna, which was a part of the flexible manufacturing network. In 1988, he had conducted the seminal study of Emilia-Romagna networks for the Corporation for Enterprise Development (and later he was to lead the US study tour to Emilia-Romagna and to design the Oregon’s Network program). Drawing on his experience, Hatch told the participants: "It’s not the size that counts but the competence. If individual small firms are weak and vulnerable, networks give them strength. Networks are, quite simply, collaborative efforts to escape from the limitation of size."

One of the participants of that seminar, Niels Christian Nielsen, who was with the Jutland Technological Institute (JTI) - and who later became the Director of Corporate Strategy at the Danish Technological Institute - was quite taken up by Hatch’s ideas. He urged Hatch to write a joint letter to the Niels Wilhjelm, the Denmark’s minister of industry, proposing a program to encourage collaborative efforts among the Danish small business enterprises.

The initial efforts, naturally, met with jeering resistance. "...even talking about building next steps in the national economy on cooperation of small companies was made quite a laughing stock", Nielson told a group of Oregon legislators a few years later. But the minister Niels Wilhjelm saw merit in the idea (perhaps because he himself was a businessman and not just a politician). He set up an industry steering committee to oversee the network project. JTI was co-opted to develop the program, who, in turn, hired Hatch to develop the broker training program.

In March 1989, the Danish Ministry of Trade and Industry announced the "Strategy ‘92" network plan, which aimed to create business networks among the small enterprises. It was a controversial plan. The national trade associations opposed it and thought that the idea was ridiculous. On the other hand, it had the whole-hearted support of the smaller sector trade associations and the Federation of Crafts and Small Industries. The two month long controversy, however, also gave enough publicity to the plan by keeping it on the front page and TV news. The bill, approving a $25 million for the plan, was finally passed in the spring and the program became operational in August. The legislation was approved with a three-year limit put on the experiment.

The implementation of the Strategy ‘92 plan was divided into three phases. Phase I, which was crucial for the success of the plan, was aimed at encouraging companies to come up with an explicit idea for networking. The government outlay for the grants was $3 million. In addition, another $3 million was apportioned for creating overall environment for networking (promotion, technical support, evaluation, and broker training). The key elements of this phase were:

· The companies intending to create a network had to get a feasibility study done for cooperation among firms.

· Any group of three or more firms with an intent to network could apply for a "micro-grant" of $10,000 to investigate the feasibility.

· The application form was just two page long, and the response time to an application was just one month.

· The companies did not have to write or request for the form. Instead they were made freely available in places, such as banks, post offices and insurance offices, which are frequented by business people. In fact, banks who had been losing money on small businesses, became the strongest advocates of the plan.

· The Ministry financed lawyers, accountants and tax consultants to work out standard contracts, product liability issues and financial issues of the networking feasibility studies. This avoided duplication of efforts across different studies, thereby saving time and reducing costs.

· A parallel evaluation process was instituted to ensure that the program administrators learned from the mistakes and take advantage of the opportunities.

To encourage the process of networking - of starting to think in terms of inter-firm collaboration - the criteria for approving the micro-grant were purposely kept quite lax. Virtually all applications for the grant to commission a feasibility study were approved. Later on the evaluation of the program showed that this had a multiplier effect. A large number of initial ideas for networking with which the firms started turned out to be unsound. But the feasibility studies also showed new opportunities and options for networking. Ultimately almost all companies which started with the idea of networking did end up as networks, though not necessarily the same network.

Phase II of the plan focused on detailed planning of how the network would work. The plan outlay for this phase was a grant money of $5 million, but now the participating companies had to come up with matching investment. The approval of the grants was also not automatic. But the more detailed scrutiny of the application also often provided new direction for successful networking.

Phase III had an outlay of $14 million, and was an innovative way of providing venture fund to the networks during their initial years. In this phase the grants covered upto 50% of the cost of setting up the network in the first year and upto 30% in the second year. This support was critical for the success of the experiment.

The Strategy ‘92 plan was a resounding success. Within a year of its launch, more than 1,500 firms had started operating in networks. This number had grown to 3,500 - covering nearly half of the country’s manufacturing companies - within the next six months.

But the real success was not just in terms of the numbers of firms which entered into networking arrangements. Rather, it was in terms of enormous power the networks lent to the small enterprises to do business. Consider, for example, CD (Corporate Design) Line, a 14-company textile manufacturing network, which aimed at the job wear uniforms market. Each of the participating company produced one part of a complete collection, e.g., shirts, suits, skirts, ties, scarves, men or women knitwears, etc. Networking enabled these firms to offer the customer a complete collection, which was easier to market. Moreover, together it was possible for them to hire famous clothes designers, hire quality managers, and set up sales agents in foreign markets, such as Sweden and Germany. In just a couple of years, CD Line was able to export 45% of its produce.

Similarly, flexible manufacturing networks were able to revive the declining Danish furniture industry. Till 1960s, Danish furniture companies were known world-wide for their superior design and quality. But then, first the Taiwanese, and then the Italian started uprooting them by producing superior "Danish" furniture. By pooling their resources in the network, now these companies were able to buy advanced equipments, hire design firms, jointly develop work processes, and fund export marketing.

The advantages of networks were not only limited to pooling of resources and in producing volumes necessary to enter a market. An even greater advantage was the innovative potential which inter-firm collaborations unleashed. Working together also enabled the participating firms to develop more creative and value-added offerings. For instance, Alphabetica, a network of firms from different industries - furniture, carpet, lamp, tapestry, etc. - could make worldwide bids for complete interior furnishing of new facilities, e.g., hotels, conference centers, government agency buildings, etc. By internal coordination, and by hiring common designers and architects, they could give the network’s products a common identity.

Similarly, when five landscape designing firms started networking, they found a new export market - golf courses. With a weak economy, the Danish construction industry was in a downturn, and therefore, so was the landscaping industry. The network partners noticed how hordes of Swedes had started coming to Denmark to play golf. By pooling their resources, they could sponsor a trip to study the US golf course industry, import specialized equipments, and hire salespersons with reputation in the golf world. Within a year they had four golf course under construction in Sweden. They also managed to get a contract for building fifteen golf courses in Poland by convincing the Polish tourism ministry that golf courses were necessary to attract rich German tourists.

Such success stories were almost universal. A midterm evaluation of these flexible manufacturing networks showed that:

· all of them were able to reduce their costs in one or more important areas of operation;

· all of them were able to generate more employment;

· 40% of the networks had introduced new products; and,

· 60% had entered into new markets.

The impact of the networking initiative was apparent also at the macro level. In 1991, Denmark became the only European nation to register a positive trade balance with Germany, reversing a trend for the past three decades. It had also achieved the highest per capita balance of trade in the world, surpassing even Japan.

****