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Large companies are not interested in the sub-supplier’s
total dependence on them as the basic accessories supplied by a
small firm will soon make part of the goods produced by the
corporation and, therefore, will work for the degree of its competitiveness. An absolute subjection of a commutant firm (integration with the structure of a violent firm) promotes decrease
in management and production efficiency of a major company
(because of a large-scale diseconomy). Thus, cooperation is
beneficial to both of the parties: the commutant firm is happy
to get a receptive market for their products, and the violent
company intensifies its own competitiveness through lowering
the processing level with the help of a commutant firm.
Imitating commutants. All over the world, imitation is
one of the most popular spheres of legal small businesses. The
fact is that in a number of industries (for example, in furniture
and clothing industries) the patent law is not able to protect the
design from copying. In other industries (for example, in
pharmaceutics, electronics), the termination of the patent pro-
tection is significantly shorter than the product cycle. It pro-
vides an opportunity to imitate the best designs of known firms
quite legally.
Moreover, by doing it, an imitating commutant gets big
competitive advantages in comparison with the firm that has
introduced the product to the market:
• no expenses on Research and Development;
• no expenses on advertizing and marketing promotion
of new goods to the market;
• no need to deliver large consignments of goods, which
minimizes expenses on Research and Development, promotion, etc.
7.4. DANGERS OF A SMALL FIRM EXPANSION
Though commutant firms use various methods of compe-
tition, these methods does not help them to cope with the main
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shortcoming of the strategy — low degree of stability of these
firms:
• they have limited funds,
• they have no competitive advantages that other enter-
prises have: effective equipment, unique specialization, radically new goods.
However, business termination is usually not a big problem for a commutant firm — a small business is easy to start
up, but at the same time it is quite easy, as a rule, to dissolve
without any serious consequences. The fact that it is easy to
leave the market facilitates setting up new companies by trial
and error. Moreover, a failure of one small firm does not stop
its potential followers.
Business transformation is the highest degree of the
commutant firm’s flexibility of the strategy. The bigger the
commutant firm becomes, the more advantages it loses, which
causes instability, a lack of management, increase in costs.
A firm which has become quite considerable in size, but
hasn’t developed a new strategy that would be suitable for its
new dimensional parametres, turns into an overgrown commutant firm. These firms are extremely vulnerable (and are
doomed to suffer the most drastic financial implications).
The behavioral patterns of the overgrown small firm are
as follows:
• to increase the efficiency and, thus, to decrease aver-
age costs (the violent strategy);
• to launch an effective specialization protecting the
firm from its competitors (the patient strategy);
• not to change and to make part of a large company in
the future;
• not to expand its business.
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Literature
1. Efremov, V. S. Strategiya biznesa: kontseptsii i meto-
dyi plani-rovaniya. — M. : Finpress, 1998. — 192 p.
2. Zabelin, P. V., Moiseeva, N. K. Osnovyi strate-
gicheskogo upravleniya. — M. : Marketing, 1998. — 195 p.
3. Kono, T. Strategiya i struktura yaponskih predpriya-
tiy. — M. : Pro-gress, 2009. — 384 p.
4. Mihaylov, O. V. Osnovyi mirovoy konkurentosposob-
nosti. — M. : Poznavatelnaya kniga plyus, 1999. — 592 p.
5. Smirnov, E. A. Razrabotka upravlencheskih resh-
eniy. — M. : Finansyi i statistika, 2000. — 271 p.
Questions for self-check
1. What describes the principle of "an invisible hand" in
the economy?
2. What are the developmental stages of the strategy of a
commutant firm?
3. What do changes in local needs imply for a commu-
tant firm?
4. What is an inherent disadvantage of the strategy of a
firm commutant?
5. Explain why an absolute subjection of a commutant
firm promotes a decrease in management and production effi-
ciency of a major company.
6. What happens to the size of a commutant firm?
7. What does the tactics of limiting the turnover of the
commutant firm imply?
8. What does the notion of market segmentation suggest?
9. What special features of any market economy do you
know (name no fewer than four of them)?
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CHAPTER 8.
AN ECONOMY AS AN ASSOCIATION
OF COMPETING COMPANIES
8.1. THE ROLE OF INNOVATIVE ACTIVITIES
IN MAKING NATIONWIDE COMPETITIVENESS
An innovation is a resulting effect of the implementation
of some novelty into the production process, which helps to
gain income that would be higher than in the case of a usual
extensive growth connected with using additional labor, land or
capital resources. A novelty is understood here as any new idea
connected with any improvement in product quality, manufacturing techniques, marketing policy and service as well as with
their incorporation into new sales markets.
Innovations provide much higher returns than just a typi-
cal use of additional resources. Therefore, nowadays innovative
activities of the country are the most important factor of its
competitiveness in the system of the world economy.
Providing innovative activities on a worldwide basis.
The internationalization cycle of the innovative activities of
major Japanese companies is quite complicated and includes
five stages.
The first stage has to do with choosing a proper technology. At this stage, the company centers its efforts around the
development of systems of collecting scientific and technical
information as well as data about a product for this info to be
later used in the manufacturing process.
The second stage includes the creation of the organizational system for providing the manufacturing process abroad.
Most companies create a special technological department in
which each main factory is supported by a technological section or laboratory promoting the development of the technolo-
gy and the product.
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The third stage suggests official opening of Research and
Development laboratories. In many companies, a foreign laboratory, though called a center of Research and Development,
de facto carries out only little research. Their main function is
to ensure multidimensional technical cooperation with suppli-
ers, to introduce the technology into the manufacturing process,
and to ensure cross-licensing. Instead of doing research by
themselves, they make research contracts with independent laboratories and specialized companies that conduct necessary
tests to meet specific regulatory requirements. Besides, they
keep track of technological trends and examine new technolo-
gies and products.
At the fourth stage, foreign research laboratories center
their efforts around the development of new products, which is
their central mission here.
The strategic mission at the fifth stage is to get engaged
into fundamental research where the laboratory has to assume
responsibility for the development of some part of the technology within the company.
There are five different models of intra-corporate interaction between the remote R&D centers:
1. The approach "focus on the country" that centers R&D
activities around one country. Research trends are assigned by
the head organization. Exploitation of this approach makes
special scientific communities called technological parks ap-
pear. This model is one of the most popular ones in Japan
where many large technological parks have been created thanks
to the state’s intensive support.
2. The "pull" approach takes place when R&D activities
are performed at several foreign centres. In addition to being
involved into the main research campaign, the head company
can be involved in its own research project. A special govern-
ing body (a kind of «regulatory council») controls the coordi-
nation between these centers. This body assigns the main re-
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search trends. This model suggests introduction of the developed R&D activities into the other (foreign) research centres,
and after that, the regulatory council chooses the most promising project.
3. "The decentralized development". The firm assigns
some part of the research work to the home country, while its
foreign laboratories are engaged in the applied research.
4. The "consecutive" strategy is the one within which the
remote R&D centers pass round the results of their investigation to each other. It greatly differs from the model called
"pull" when different laboratories work at the same problem
but in isolation of each other, which allows to develop several
different approaches to solving one problem.
5. The "mutual" approach implies a two-way communi-
cation in the R&D activities, but unlike the consecutive model,
it suggests a segmentation of the research, i.e. different remote
research centers have to work at different parts of the same
problem.
The management of innovative activities is based on the
principle introduced by the famous manager of the 1940s V.
McKnight. V. McKnight's principle says: "Find good people
and leave them alone. They will do everything themselves". On
the basis of this idea, there has been introduced the so-called
"McKnight's philosophy" that suggests two rules:
1. The company applies different methods for estimating
the progress of the inventors and managers. After all, negative
results of the performance of the former cannot be considered
as an absolute failure, otherwise people will simply stop looking for something new.
2. "The rule of 15 %": with the managers’ official approval,
companies spend no less than 15 % of the working hours on the
development of their own innovative ideas. They do not only have
enough time for the development of the idea, but in certain cases
they are given money to buy the necessary equipment. For their
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idea to be included into the company’s production program for
the year to come, it has to be supported by at least one of the
board members. In this case, a special team of well-trained scien-
tists, engineers, marketing specialists and managers will be en-
gaged in the development of this project.
8.2. FORMS OF INTERNATIONALIZING
INNOVATIVE ACTIVITIES
It is possible to differentiate four forms of acquisition of
the results of intellectual work (within t ransnational innovative
activities):
1. Licensing is the least attractive form of acquiring new
technologies in the world markets today.
The shortcomings of this form are as follows:
• limited use of the licensed results of intellectual work;
• constant control over the commercial and productive
activity of the licensee exercised by the owner of the license;
• fraud during negotiations for licensing so as to con-
vince a potential buyer of the license value;
• problems with applying active user-specific innova-
tions; these problems arise as any modifications in the product
require official approval of the owner of the license.
2. Direct investments in a specific innovation project.
The investor shares either an exclusive right for the IP objects
created during the project or the profit gained from the sale of
the product made as a result of using the developed technology.
This form allows the investor to control the process of creation
of new technologies and its output, which (to some extent) en-
hances chances of technical or commercial information leakage. However, this form cannot provide fast penetration into
foreign markets owing to high costs for launching manufacturing abroad and systems of the promotion and sales of the product in the market.
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3. Joint ventures also allow corporate partners to “open”
their patent portfolios as a result of sharing some part of the
dormant patents with the partner. Thus, a type of cooperation
like this one can provide firms with faster and less expensive
opportunities (in comparison with the chances their internal
resources provide) to gain access to hardly-licensed technolo-
gies. The shortcomings are as follows:
• conflicts arising as a result of the cooperation between
firms with different technological capabilities when a more mature firm aims to minimize the part of their technology to pass
on to another firm, while a less experienced company wants to
get as much as possible of this technology;
• problems with those technologies that are impossible
to provide to the partner because of their key role in the firm’s
competitiveness.
4. A company’s merger is considered to be the most pro-
gressive form of internationalizing innovation activities today.
Merging allows the firms to consolidate their patent portfolios
and, thus, to get an exclusive right to work within a certain sector of the world market, to ensure high income through regulat-
ing both the parameters of this sector and the demand and sup-
ply, as well as through establishing a new price policy.
8.3. THE DEGREE OF COMPETITIVENESS
OF INTEGRATED FIRMS UNDER THE CONDITIONS
OF INFORMATION DEVELOPMENT
In today’s economy, breakthrough technologies (macroinventions) have decreased in number. Since the end of the 20th
century, any modern economy is forced to follow the way of
optimization (at the expense of micro-inventions). Under these
conditions, the most important role is played by permanent dynamic updating and improvements in business activities, which
is possible only thanks to the integration of new generation
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corporate structures engaging authorities, financial, business
structures, research centers and other subjects so as to achieve
success on the basis of their cooperation.
M. Porter, Professor of Harvard University, believes that
in any modern economy, a traditional business division, espe-
cially in the context of globalization, doesn’t make sense any
longer. Clusters as systems of social and economic interrelations are taking the leading positions. M. Porter defines a cluster as "a group of geographically interconnected companies and
organizations involved in the same activity that are competing
and at the same time cooperating with each other".
This way to treat the process of clustering has later been
updated. For instance, J. Simmiye and D. Shennet (1999) were the
first to define an innovation cluster as a large number of interre-
lated industrial and/or service companies characterized by a high
level of cooperation possible on the basis of a supply network as
well as by functioning under identical market conditions.
In 2001, L. Van den Bergh and E. Brown classified a
cluster as "a localized network of specialized organizations the
production processes of which are closely connected through
goods and services exchanging and/or knowledge sharing".
Thus, the following conclusion can be drawn: modern
definitions of a cluster take into account the innovation development, on the one hand, and information and knowledge sharing — on the other.
An effective economic reorganization requires close in-
teraction and cooperation of large and small businesses, re-
search centers where clustering provides necessary tools and
analytical methodology. Besides, clustering is justified in terms
of psychological and socio-metric research methods according
to which (on the basis of some survey results) clusters are an
attractive form of business for the heads of enterprises as it is
in accordance with the mentality of Slavic people ("one man is
no man").
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Clustering, which is an innovative approach, has a num-
ber of benefits:
• clusters are based on a progressive system of new tech-
nologies and knowledge sharing (a technical and information
network) that implies free distribution of ideas, knowledge and
experience, which results in reduction of R &D costs and helps to
take the leading technological position within the cluster’s compe-
tence. So, a close interaction of the firms of the Finnish timber
industry cluster with research centers having strong scientific base
of biotechnologies provides them with competitive advantages (in
knowledge sharing) over their trade rivals, thanks to which Fin-
land, having 0,5 % of the world reserves of wood, provides 10 %
of the world export of products of wood processing, including
25 % of qualitative paper;
• clustering promotes the development of small busi-
nesses, increases their flexibility and stability by means of co-
operating with large industrial enterprises (for example, on the
basis of an agreement for subcontracting or outsourcing). So,
the automotive industry cluster of the Toyota Corp. company
has a multi-level network of 122 direct suppliers and nearly
36 thousand small subcontract enterprises;
• the model "a small business+big enterprises" allows to
combine competitive strategies of an effective specialization
and those of a scale economy (raw materials purchasing, carrying out joint marketing researches), to facilitate work performance and to decrease product costs. Thus, as a result of an
effective cooperation with small businesses, the operating profit of the Toyota Corp. grew by 32 % in the first quarter of the
2008 financial year (5,67 billion US dollars);
• clusters create centers of the country’s innovation de-
velopment; they facilitate establishing new businesses, fore-
casting of technology tendencies as well as ensure new qualifi-
cation statuses, which leads to the expansion of innovations
and further evolution of a cluster;
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