Article 1

GOVERNANCE OF INTERMEDIARY NETWORK ORGANISATIONS:
A STUDY OF UNIVERSITY COOPERATIVE BUSINESS ASSOCIATIONS IN JAPAN
Yashavantha Dongre

Creating Network Organizations, either for achieving economies of scale in business or for promotional and lobbying activities has been practiced by economic enterprises for a long time.  Cooperative enterprises are no exception to this.  Depending on the needs of changing times, there have been organizational innovations among the cooperative enterprises all over the world resulting in network organizations such as Federations, Consolidations and in many cases Mergers and Acquisitions at national and regional levels.  There have been examples of more loosely knit formal or informal networks such as consortiums, purchase networks, supply chain networks, marketing networks etc.

Network organizations have attracted lot of academic interest over the years.  But most of this interest seems to be centered on assessing the merits and demerits of such organizations in terms of business efficiency, economies of scale, benefits to member organizations, costs, capital mobilization, competitive ability etc.  In other words most studies focus on cost-benefit analysis of network organizations.  The dearth of studies on governance practices of network organizations is conspicuous in these days focused on corporate governance and sustainable businesses.

Kurimoto’s study (2008) on network governance prepares a perfect ground to examine the governance challenges of cooperative network organizations.  His analysis related to cooperative consortiums created by the Consumer Cooperatives in Japan throws light on how network organizations move increasingly towards hierarchical structures due to increased competition and how there exists problems in decision making process due to dual board structures.  Another study on governance of third sector organizations in Japan (Dongre & Deguchi, 2010) has used a more holistic conception of governance but its focus is more on nonprofit organizations (NPOs) and more specifically on legal and cultural dimensions of governance.  Therefore, there is a need to build on the findings of these studies by examining in detail, the governance process and the critical dimensions of governance challenges.  Towards this end the author proposes to use the conception of governance used by an earlier study on governance of third sector organizations of which he was a part (Hasan & Onyx, 2008).  The key elements of good governance according to this study includes Autonomy (of constituents) Transparency (participatory decision making and communication with stakeholders), Accountability (shared responsibility and conflict resolution) and Democracy (leadership and shared goals).  It is worth examining how cooperative consortiums deal with these governance challenges.  The University Cooperative Business Associations (Consortiums) of Japan are used as case example to examine the above issues.

 

 

1. THE CENTRALITY OF GOVERNANCE

The Importance of governance structure and process in the context of network organizations has been emphasized by many scholars.  It is said that network organizations “are different from markets because they employ a wider set of coordination mechanisms, and are different from firms because they keep (at least some) property rights separated” (Langlois and Robertson 1995). It has also been argued that “the management and organization of inter-firm relations needs a more fine-grained analysis of what the coordination mechanisms applicable and applied to inter-firm-relations governance are (Grandori and Soda 1995).  In the context of good governance of network organizations it is held that “rules, codes and standards need to be completed and made more fair by negotiation, and social control on performance need to be put in place (Grandori, 1999).  Basu and others have emphasized that network organizations are “embedded in networks of relations with their stakeholders and these stakeholders in turn have relations among each other, resulting in networks that can both enable and constrain the focal organization. The topology of each network is much more complex than a mere collection of dyadic ties, which results in more interactions and also more complex interactions between network members. As the complexity of interaction in a network increases … crucial issue of a smart business network becomes its governance.” (Basu et.al., 2005)

Governance of network organizations has to “address problems of conflicting interests between its stakeholders, problems of joint interests, as well as problems of bounded cognition. Situations with conflicting interests require alignment of incentives (by allocating ownership, control, and income rights) to a certain extent. A special feature of networks is that multiple independent entrepreneurs have a sizeable stake in the development and outcome of the network. The multiplicity of independent entrepreneurs in a network results in incentive, coordination, and cognition problems that deserve special attention (Hendriske et. al, 2008).  It is thus clear that governance structure and process becomes the core issue for network organizations.

 

2. GOVERNANCE PROCESS
Good governance is the process of ensuring Autonomy, Transparency, Accountability and Democracy.  This is especially true in the case of network organizations of cooperatives and nonprofits for they pursue a specific social agenda even when they work as economic enterprises. There are studies that have focused on some, though not all together, of the above elements.

Goal Compatibility: As suggested by the proponents of the relational view of strategic management, the advantages of an individual firm are often linked to the advantages of the network of relationships in which the firm is embedded (Dyer and Singh 1998).  Brinkhoff and Thonemann (2007) show in an empirical study that the unclear definition of common goals can be regarded as one of the major sources for failure of networks.  There are studies that have conceptualised the achievement of shared goals as the measure of network effectiveness (Provan and Kenis 2007)

Managing Relationships and handling conflicts: It is observed that “the main challenge for the focal actor in managing the supply chain network is adaptation to uncertainty which depends on how the connected relationships are organized” (Jap and Ganesan 2000; Wathne and Heide 2004).  The governance structure of network organizations need to facilitate solving conflicts between partners, coordinating tasks and distributing results, and finally to avoid opportunistic behaviour (Williamson 2002).

Autonomy: The individual constituencies of a network organization normally hold on to their own  specific interests.  They generally gravitate to a strategy of horizontal integration while the focal organization may prefer vertical integration.  “Conflicts over the goals, commitment, and performance of the federated system as a whole are the result of perceptual differences at each level of cooperation”.  Often, the individual constituents “pay attention to and value different things. Continuous and severe industry competition reinforces this tunnel vision and distracts the federated system (as a whole) from developing a broad-based unifying vision” (Hogeland, 2002).

The context and coverage of the above studies are very different.  Also they have focused on one of two elements of governance process.  Nonetheless, it is clear that the governance process is the core issue for network organizations and they need to ensure that this rather challenging process is well handled.  The primary issue however, is to clearly understand where they stand at a particular juncture and how to reinforce the positive elements and overcome the negative elements in governance process?

The present article looks at the governance issues of networks organisations through the case example of University Cooperative Business Associations (Consortiums) in Japan.  They are generally called Business Associations (BA) and hence I would use the same terminology for the purpose of this article.

3. THE CASE STUDY
Japan has a fairly long history of Alliances and Consortiums.  Japanese society is often referred to as a network society – a “network that joins formal network organizations with informal societal networks” (Kumon 1992).  There have been references about even private sector entities especially those in electronics and automobile sector promoting horizontal networks (kyöeikai – network of suppliers providing products and spares to giant companies) and cooperative networks (kyöryokukai – those specialized in production and product development) to ensure supply of timely inputs (Lincoln, 2006).   Within the cooperative sector Italy and Japan are probably the only countries that provide examples of consortium type of organizations for business development.  Italy has very successful consortia of social cooperatives like InConcerto – a consortium of 21 social cooperatives (Bland, 2012).  There have been extensive studies on Italian social cooperatives (Thomas, 2004) and cooperative network organizations as well (Menzani and Zamagni, 2010).

In Japan cooperative consortiums at the regional level exist especially among consumer cooperatives.  Even though such consortiums are started by the general (citizen) consumer cooperatives, the credit of initiating the consortium method of networking for business development goes to the University Cooperatives.  The history of consortium for business development by university cooperatives is much longer than other types of cooperatives.  More importantly these are consortia of small cooperatives which operate within a limited market sphere.  Hence the example of these consortia will be highly relevant with greater possibility of replication in the Asian region.
3.1 The History: University Cooperatives are the cooperatives functioning within the university campuses and organized with students, teachers and staff as members.  These cooperatives are generally incorporated as consumer cooperatives but they offer a wide variety of services to the campus community, ranging from book store, canteen, stationery to services such as student housing, career support, credit cards and even student insurance services etc., functioning almost like multi-purpose cooperatives.  University Cooperatives in Japan are often hailed to be the foundation on which the cooperative movement in general and consumer cooperative movement in particular is built.

The first university cooperative business consortium (Jigyo Rengo - generally called as Business Associations (BA) – and the same phrase is used in this article) to be set up was the Tokyo Business Association established in 1969.  The period of 60s and 70s was the high growth period for Japanese economy and also a period of high competition, with private sector coming to the fore in all segments of the economy.  It was very important for small business entities to become professional and remain competitive. University cooperatives being very small retail organizations working within the small market territory of university campuses felt this need quickly and hence initiated a process of organizational innovation and restructuring.

By this time the National Federation of University Cooperative Associations (NFUCA) was already functioning (established in 1947) as an umbrella organization and was also handling some wholesale businesses such as dealing in notebooks.  The university cooperatives who were the members of NFUCA were getting the benefit of this business, but they needed achieve economies of scale on a wide range of products and services.  It was found very difficult to organize them at national level since many of them such as food were region specific.  In the meantime the Japanese Consumer Cooperative Union (JCCU) of which NFUCA was a member, was also undertaking joint buying operations to support its member organizations.  There was a discussion in mid 60s about university cooperatives using the JCCU as a network organization.  But again it was found that there was a wide variation in the member needs of university cooperatives and general consumer cooperatives.  Since food articles were the main need based goods for general cooperatives, JCCUs joint operations were focused more on these lines.  But for the members of university cooperatives the basic needs were more of books, stationery and other education related infrastructure for which JCCU was not well equipped. 

Therefore, some university cooperatives in each region had started establishing informal network among them to take up joint buying and to make use of infrastructure such as warehousing, transportation etc jointly.  One such early initiative came up in Tokyo region with cooperatives of three big universities lead by University of Tokyo, joining together for joint business operations.  Looking at the functioning of networks of this kind the NFUCA realized the need for regional consortiums and initiated a national level discussing beginning from 1962.  In 1964 the General Assembly of NFUCA adopted a national policy for starting regional business consortiums.  This led to series of deliberations and negotiations among member university cooperatives and finally the Tokyo Business Association (Tokyo Jigyo Rengo) was established in October 1969.

3.2 Formation & Structure: Business Associations are formed by the voluntary initiative of primary cooperatives.  Some cooperatives operating in a particular region join together and take the lead to form a business association.  NFUCA and the already functioning business associations of other regions help in the process of establishment of new business associations.  Once the BA is formally established, each participating cooperative enters into two types of contracts/agreements with the BA.  The first is the basic contract that stipulates the member’s obligations and the nature of relationship of each member with BA.  The second is the business contract which specifies as to what type and share of business each member cooperative should get done through the BA.  Generally the contract clearly states the activities fully taken care by the BA, the activities that are to be fully taken care by the member cooperatives and the other activities that needs consensus from time to time.  Most part of the human resource functions such as appointment of permanent staff, training of staff, transfers etc are done by the BA.  However, the member coops can decide on the appointment of temporary and part time staff (it is important to note that in Japanese context the number of permanent staff is very small and most daily activities were handled through temporary/part time staffs that include students and house wives).  Similarly Accounting, Financial Management, Layout Design of Shops, Selection of Vendors etc are handled by the BA.   While there is a stipulation that the member coops should procure a minimum stipulated assortment of goods and services through BA, they are also free to procure from any other dealer the specific goods and services they want to offer at their stores.

The Business Associations will have a General Assembly consisting of the chief executives of all the member coops.  It will have a Board generally consisting of 5 to 7 members and all these will be the chief executives of member cooperatives.  Some big cooperatives will always have their representative on the Board while the others keep changing over time on rotation.  Even though each BA is an autonomous entity, periodically NFUCA would organize meetings of chief executives of all BAs so as to enable exchange of experiences and information.  Similar to Indian situation, in Japan one primary cooperative cannot lend money to another cooperative.  However, since the BA acts as the custodian of the finances of the primaries, the BA often uses the financial surplus to help some weaker cooperatives.  Even though this may not involve direct lending, the BA may pay the vendor for the merchandise procured by the primary in case of need.

3.3 Present Status: At present there are nine regional BAs of University Cooperatives in Japan.  The details of these BAs are given in Table 1.

 

Table 1
Over view of University Cooperative Business Associations in Japan (as of Nov. 2013)

Name of Business Association	Regions & No. of member Coops	Total No. of Member Coops	Turnover (Fiscal 2012-Billion Yen)	Surplus (Fiscal 2012-Million  Yen)
Hokkaido Business Association	Hokkaido-17	17	11.29	55.69
Tohoku Business Association	Aomori-2, Iwate-3, Miyagi-8 Akita- 1, Yamagatha-1, Fukushima-1	16	17.32	177.54
Tokyo Business Association	Niigatha-3, Nagano-6, Gumma-4, Tochigi-2 , Ibaraki-2, Saitama-1, Chiba-3, Tokyo-40, Kanagawa-7, Yamanishi-2	70	61.21	-58.36
Tokai Business Association	Gifu-2, Aichi-14, Shizuoka-1, Mie-3	20	17.56	-87.56
Keiji-Nara Business Association	Kyoto-10, Nara-5, Shiga-4	19	21.61	91.77
Hokuriku Business Association	Toyama-3, Ishikawa-5 , Fukui-1	09	04.22	43.45
Hanshin Business Association	Osaka-10, Hyogo-11, Wakayama-3	24	19.88	134.03
Chugoku-Shikoku Business Association	Tattori-1, Shimane-1, Yamaguchi-4 Okayama-1, Hiroshima-1, Kanagawa-2, Tokushima-1 Ehime-3, Kouchi-3	17	15.49	118.43
Kyushu Business Association	Fukuoka-10, Saga-1, Oita-2, Nagasaki-4, Kumamoto-2 Miyazaki-2, Kagoshima-2 Okinawa-2	25	15.74	223.21

Source: NFUCA Records

 

As may be seen from the data in Table 1, the size of each BA in terms of members varies widely.  The biggest, Tokyo BA has 69 primary cooperatives as members while the smallest, Hokuriku BA, has only 9 members.  As depicted through the data on turnover and surplus, it is not just the size that determines the financial status.  Some times when the BA becomes too large in terms of member coops, it might be difficult to cope with needs needs of all members. Similarly if a BA has too few members, there may be problems of size and scale of operations.  Based on the experience many people opine that creating a BA with a member base of 20 to 30 primary coops might be ideal in terms of business efficiency and ease of management.

3.4 Features: Even though a Business Association it is a federated structure (in technical and legal sense it is a Federation) in principle and purpose it is not an umbrella organization but a business solidarity organization established with the consensus of member coops of the region (Yamazaki, 2013).  The figure below gives the position of BA in the web of inter organizational hierarchy of university cooperatives in Japan.

 

 

Figure 1
INTER - ORGANISATIONAL RELATIONS

 

 

 

 

As may be seen from Figure 1, Business Associations are autonomous intermediary organizations.  They have a federated structure but they are not the apex or umbrella organizations.  While primary cooperatives are made up of individual members the business associations are organizations with institutional (primary coops) members.  Both the primary coops and the business associations are incorporated under the Consumer Cooperative Act.  Also both primary coops and business associations become members of the umbrella organization i.e., NFUCA.

In terms of business, NFUCA as a federal apex organization for university cooperatives nationwide, plays the role of the wholesaler for some products (e.g. nationally branded stationery) and services (e.g. Student Mutual Insurance).  However, BAs handle most of the other businesses as representatives of primary cooperatives.  In other words while the national federation gets manufactured and procures goods and sells them to primaries at a margin, the BA buys on behalf of the members by negotiating prices and product specifications with the manufacturers/vendors.  Technically the national federation through its wholesale function can generate surplus

whether the primaries make profit or not.  However the BAs can generate surplus only if he primaries generate a surplus.  Given a situation in many countries where the federal structures make profits many times at the cost of primaries, the BA system looks definitely more favourable to the economic health of primary cooperatives.

4. GOVERNANE ISSUES
It is important to note that the BA system has its own constraints and challenges.  Governance challenges are the critical issues for any network type of organizations be it Alliances, Franchises or Consortiums. This issue is well articulated in many studies (Hendriske, 2008) even though the governance issue of cooperative consortiums is not extensively studied.  A study by Kurimoto (2008) has illustrated through Swedish and Japanese examples some critical elements of governance of cooperative consortiums.  None the less this is an issue that calls for greater academic scrutiny.

The Business Associations of University Cooperatives too are facing some critical challenges.  As democratic network organizations the process of decision making is relatively slow and often they find it difficult to catch up with private competitors.  Many times the individual interests, such as the needs and interests of specific primary cooperatives, differ widely from the common interests of most primaries, posing challenges to BAs functioning.  Since the primaries have little choice in terms of products to buy and vendors to buy from they often get unhappy.  There are instances that some cooperatives do not become members of BA even though they are members of NFUCA.  There are also instances of some primaries leaving BA and preferring to function on their own, or creating a smaller, more informal parallel joint buying group with other primary cooperatives.

But then such challenges are inevitable.  The important thing is how the consortiums overcome these challenges.  Here again the BAs of University Cooperatives in Japan have done a commendable job.  They always keep up a very high degree of communication with member cooperatives.  They have developed systems to keep interacting with primaries on a daily basis.  The most important network is that of member feedback to primaries which in turn becomes feedback to BAs and the BAs try to accommodate the needs as quickly as possible.  They have also resorted to organizational restructuring.  Some smaller BAs have merged to form BAs of adequate size.  They have stopped forming of new BAs for the time being and are considering various options of restructuring of existing BAs.  As noted by the Mr. Fukushima, the Managing Director of NFUCA (Fukushima, 2013) “innovations and changes are a perpetual process and as Professionals we need to know that well.  The BA system has contributed substantially towards making the primary cooperatives do well to meet the needs of their members.  We therefore need to continue with it, but with organizational innovations”.

5. CONCLUSION
Network organisations with multiple stakeholders always pose a challenge in governance process. 

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