Autopoiesis (self-production) in SME networks

Small and medium enterprise networks (SME Networks) are becoming an integral part of the Network Economy. From the `industrial districts' of the Terza Italia to the entrepreneurial clusters of the Silicon Valley, SME's are a significant driving force of economic growth, job creation, disinflation and productivity enhancement in most industrial countries. After decades of research, these local industrial systems are still poorly understood in terms of their sustained processes of innovation, network interaction and competitive adjustments. While there could be some external economies due to agglomeration, division of labor, specialization and lowered transaction costs, differential innovation, interaction and adjustment capabilities are not fully explained by these mechanisms. A theoretical construct of local industrial system is missing. However, no mechanical or graph theory model of network architecture can substitute for what actually makes people in the network interact in order to become technologically innovative and capable of ongoing adjustment to their competitors. Counting the nodes and edges of graphs would be a poor substitute for understanding SME networks as dynamic (`living') organic systems they are. In this paper we propose a theoretical construct of network production, renewal and adaptation based on autopoiesis (self-production) of living systems.

Keywords: Autopoiesis, self-production, industrial districts, regional enterprise networks, value chains, demand chains, added value, SME networks

1. Introduction

SME (Small and Medium Enterprise) networks are receiving fresh attention as dynamic parts of the New Economy (Network Economy), accounting for most of its job and productivity growth. Traditional `industrial districts' (IDs) of Italy have thus become the precursors of the global expansion of SME networks in technologically advanced countries and regions. Regional and local economic district, cluster or network provides a distinct advantage in the era of globalization and integration. With the accelerating weakening of the nation-state, the regional economic and political advantage is becoming more clearly perceived and widely supported. Local industrial systems can become models for regional and even transnational systems. A vast literature explaining the IDs of Italy has covered virtually all possible variables to explain their sustainability, adaptability and renewal. From Marshallian external economies, through division of labor, flexible specialization, geographical and political cohesiveness, to family-rooted self-reliance and trust -- no single variable has been shown capable of explaining persisting and sustained success of IDs.

For example, one can observe higher levels of cooperation and trust within SME networks and from that postulate cooperative and trust-based cultures as necessary prerequisites for IDs success. Yet, more significant levels of cooperation and trust are themselves a product of repeated and sustained interactions with already existing, functional networks. Is level of trust the cause or the effect? SME networks are not mathematical, linear graphs of connected elements, having clear inputs and outputs, translating neatly exogenous causes into indigenous effects. SME networks are circular organizations of no discernible inputs and outputs (or causes and effects). Trust, for example, is both the cause and the effect of SME networks interactions. We propose that SME networks are characterized by circular organization of productive, network forming processes, autopoietic (self-producing), organizationally closed and structurally open systems. In such systems, organization of the firm reflects the organization of the embedding network. We propose that the level and sustainability of autopoiesis is directly related to the levels of interaction, innovation and adaptation in SME networks. Further, we propose that the span of `coverage' or control over the underlying value chain is the key organizing principle of successful districts or clusters transforming into autopoietic networks.

2. Autopoiesis (self-production) of networks

The process of self-production is called autopoiesis (production of self), in contrast to heteropoiesis (production of the `other'). Self-produced systems or networks are referred to as autopoietic systems. Autopoiesis or self-production can take place when there are distinct and autonomous individuals or agents interacting and communicating in a specific environment and according to specific behavioral rules of conduct and interaction.

Business system is defined by its key processes of production, services, transportation, transformation, communication, etc. These processes carry out coordinated action, coordinated sequences of real (not merely represented) activities, operations, exchanges and transfers. Coordination itself takes place either by command or instruction (go there, do this) or by rules (if this, then do that), covenants and habits, all embedded in the language of coordination. Processes are not only coordinated but also concatenated into interrelated sequences and chains, forming complex and interdependent linkages of parallel and sequential subprocesses-forming networks of coordinated processes. The network of interrelated processes is driven and recursively coordinated by rules: rules of behavior, response, cooperation, competition and communication. Command leads to non-recursive, externally driven one-time action (go there, do that), while rules assure internal replication and recurrence (if this occurs, do that). The same processes (or networks of processes) can be coordinated by different rules (systems or networks of rules). It is therefore the system of rules of coordination, rather that the processes themselves, that defines the nature of recursivity of coordinated action.

3. Organization and structure

The network of rules of coordination is what distinguishes and defines the organization of a business corporation or system. Organization is the network of rules of coordination. Every object, every corporation, every system has its organization. Because organization, being a network of rules, drives and replicates action, it is the foundation of the system dynamics, the execution and replication of its action. Structure is a spatio-temporal distribution of outcomes or products of the rule-coordinated processes. Structure is therefore a specific manifestation of the underlying organization within the specific context and conditions under which the rules are applied. The same organization (rules of coordination) can be manifested in a number of different structures. The same structure could only rarely or by serendipity arise from different organizations. Organization gives rise to structure, as action gives rise to outcome. Structure is static, spatio-temporally limited arrangement of components and outcomes, a manifestation of the underlying recursive, dynamic organization of processes and their roles of coordination.

Organization, as a network of rules, can lead to the recursivity and self-replication of coordinated processes. In order to achieve this, organization cannot be linear and open-ended, from input to output, but it must be `closed upon itself', i.e., circular and therefore organizationally closed.

Organizational closure is a prerequisite of selfrenewal, self-replication and recursive regeneration of the system. The coordination of processes through organizational closure assures that the same network of processes and their coordination rules are produced again. Thus, not any set of rules, but a circularly `closed' set of rules assures the self-perpetuation of a system. Organizationally closed system produces itself: it recursively recreates its own network or processes and rules of coordination that produced it.

Organizationally open system is linear and unidirectional: it does not produce itself, it does not recreate the network of roles and processes that produced it. It `spends' itself unidirectionally and has to be repeatedly and externally triggered and re-triggered by command or feedback. Without renewing this external trigger-input it exhausts its potential and ceases its activity and production.

Organizationally closed systems are self-renewing; organizationally open systems are self-limiting.

Self-organizing and self-managing systems, like spontaneously emerging and self-renewing cooperative networks must be organizationally closed.

4. Environmental embedding

Organizationally closed systems thrive on intimate, highly evolved and intense environmental interactions. Rules-driven systems, lacking external command and feedback, can persist only through effective and incessant `reading' of external perturbations.

Environmental perturbations, signals and triggers can affect mostly the structure (see above) of the system, its organization being closed in the sense of selfconsistency and thus not easily perturbed. The system is not only open to its environment, it is being (intimately), through its structure, coupled with it. It is structurally embedded in its environment, while remaining organizationally autonomous.

This makes sense because only organizational autonomy and stability can assure system's survival and persistence within its changing, chaotic and inchoate environment. Yet, in order to survive effectively, the system must be structurally responsive and adaptive to changing environmental conditions.

Self-renewing corporations are organizationally closed and structurally open (coupled with their environment).

Corporation survives through maintaining its organization (closure) while adapting its structure by coupling it (intimately) with its environment.

One should see, after some reflection, that it is the organizationally open systems (hierarchies, command systems, input-output mechanisms) that are relatively `closed', unresponsive to their environment, structurally rigid and unadaptable. It is the organizationally closed systems (self-renewing networks, markets, spontaneous social orders) that are significantly `open' to their environment, crucially dependent on their structural coupling with it.

5. The role of feedback

A system which is separated from its environment by nonpermeable boundaries and information filters -not structurally coupled with it -- can read and calculate the environment only through symbolic or interpretational information feedback. Such feedback often provides the only link, the only channel of communication with the environment. Without such `channel' the system would become a `foreign body' within its own environment.

This is why hierarchical command systems -organizationally open and structurally closed -- are redolent of feedback. Data collection, data interpretation, information gathering, questionnaires and polls, special information channels, special information processors, consumer research, promotion, calculations and modeling, are the only connections penetrating the otherwise impermeable boundaries of command systems. Strong presence, large variety and technological effectiveness of informational feedback are the best evidence of system's relative `closure' and its essential separateness or `decoupling' from the environment.

This is why traditional hierarchies of command rely so crucially upon information feedback -- calculation and interpretation of environmental signals.

Responding to action is a sign of structural coupling, responding to the description of action is a sign of information feedback. In living systems, one is usually more effective than the other. Expressed more succinctly, through managerial conventional wisdom: `It does not matter what they say they'd do; what matters is what they do do'. The difference between action and its description cannot be clearer, as can't be the difference between feedback and structural coupling of a corporation. Organizationally closed systems respond to coordinated action and do that by structurally coupling themselves with their environment. Organizationally open systems can only respond to information (description of action) feedback because they are not structurally coupled with their environment, but are separate and even isolated from it. While mass customization is based on action and structural coupling, mass production is based on the description of action and information feedback separation from the environment.

Structural coupling of corporations with their environment is an important concept, going way beyond traditional feedback. Structurally coupled corporation responds to action, not to its description or prediction. It frees itself from the statistical conception of markets, from forecasting and prediction, from anonymity. At this stage at least, such liberation offers significant competitive advantage.

6. Knowledge as coordination of action

Structurally closed corporations are producing knowledge, structurally open corporations are producing data and information. The difference is fundamental.

Organization is a circularly closed network of process-coordinating rules. Because knowledge (and its linguistic embedding) is purposeful coordination of action, organization (as defined here) is functioning in terms of storage, renewal, enhancement and production of knowledge.

While information, as description of action, is just an input into organizationally open, linear input-output system, knowledge is the action itself, as expressed through its coordination by organizational rules.

It is crucial for modem business to draw a clear distinction between action and its description, between knowledge and information. We have knowledge when we can coordinate our action purposefully; we have information when we have a (symbolic) description of action coordination. Information is input, knowledge is process itself. Knowledge producing systems are fundamentally different from data and information producing systems. The former are organizationally closed and structurally open, rules driven; the latter are the opposite: organizationally open and structurally closed, command driven.

In this sense, all corporations serve at least a dual purpose: 1. To produce and consume something else than itself, i.e., output, product, service or information -- through heteropoiesis; and 2. To produce and consume itself, i.e., its own ability to coordinate action, in order to produce goods, services or information -through autopoiesis.

In order to produce something, corporation has to be able to produce itself, i.e., recreate and renew its ability to produce, to coordinate its own action. Producing a product presents different focus and different challenges than producing the knowledge, the ability to coordinate action so that product gets produced.

7. Process of autopoiesis

Autopoietic organization can be defined as a network of interactions and processes, involving at least:

(1)   Production (poiesis): the rules and regulations governing the entry of new

      components, such as emergence, input, birth, membership, acceptance.

(2)   Bonding (linkage): the rules governing associations, arrangements, manufactures,

      functions and positions of components during their tenure within the organization.

(3)   Degradation (replenishment): the rules and processes associated with the

      termination of membership, like death, separation, consumption, output and

      expulsion.

In Fig. 1, the above three poietic processes are connected into a cycle of self-production. Observe that all such circularly concatenated processes represent productions of components necessary for the subsequent processes, not only the one labeled as `production'. Although in reality hundreds of processes could be so interconnected, the above three-process model represents the minimum conditions necessary for any autopoiesis to emerge. An autopoietic system can thus be defined as a system that is generated through a closed (circular) organization of production processes such that the same organization of processes is regenerated through the interactions of its own products (components), and its boundary or distinction emerges as a resuit of the same constitutive processes.

Autopoietic organization is an autonomous unity of a network of productions of components, that participate recursively in the same network of productions of components, which produced these components, and which realize such a network of productions as a unity in the space in which the components exist.

Such organization of components and component-producing processes remains temporarily invariant through the interaction and turnover of components. What changes is the system structure (its particular manifestation in a given environment) and its parts. The nature of the components and their spatiotemporal relations are only secondary to their organization and thus refer only to the structure of the system.

An organization becomes autopoietic if all three types of constitutive processes are balanced or in harmony. If one of the three types is either missing or if one or two types predominate (out-of-balance system), then the organization can only be heteropoietic or allopoietic, i.e., capable of producing only `the other' but not itself.

In autopoietic social systems, dynamic networks of productions are being continually renewed without changing their organization, while their components are being replaced; perishing or exiting individuals are substituted by the birth or entry of new members. Individual experiences are also renewed; ideas, concepts and their labels evolve, and these, in turn, serve as the most important organizing factor in human societies. Autopoietic social systems, in spite of all their rich metaphoric and anthropomorphic meanings and intuitions, are networks characterized by inner coordination (or harmony) of individual action achieved through communication among temporary memberagents. The key words are coordination, communication, and limited individual lifespan.

Coordinated behavior includes both cooperation and competition, in all their shadings and degrees. Actions of predation, altruism, and self-interest are simple examples of different and interdependent modes of coordination. Communication could be physically, chemically, visually, linguistically, or symbolically induced deformation (or in-formation) of the environment and consequently of individual action taking place in that same environment.

So I, as an individual, can coordinate my own action in the environment only if I coordinate it with the action of other participants in the network. In order to achieve this, I have to in-form (change) the environment so that the action of others is suitably modified; I have to communicate. As all other individuals are attempting to do the same, a social network of coordination emerges, and, if successful, it is being `selected' and persists. Such a network improves my ability to coordinate my own action effectively. Cooperation, competition, altruism, and self-interest are therefore inseparable.

Any self-sustainable system must secure, enhance and preserve communication among its components or agents as well as their coordination and self-coordination capabilities.

Systems with limited or curtailed communication can be sustained and coordinated through external commands, but they are not self-sustaining. Hierarchies of command are sustainable but not self-sustaining.

Today, electronic networks enable small businesses to tap into the global reservoirs of information, expertise, and financing that used to be available only to large companies. Even individual agents become empowered through this process, and gain significant autonomy that enables them to participate in the autopoiesis of temporary corporations.

Free markets connect business agents into networks quite spontaneously, based on trade and other exchanges of mutual interest. In these tacit networks firms remain independent agents interconnected on the basis of short-term collaboration in order to execute transactions, recurrently establishing, canceling and re-establishing their multidirectional relationships. Such networks are dynamic, reshaped and reformed according to changing contexts, interests and conditions.

The industrial districts (ID) of Italy are local hyper-networks based on autopoiesis and innovation. A good example is the Prato region. In 1970s, a failing textile mill was broken into eight separate companies and major portion of the equity sold to key employees. This was the seed with catalytic properties: by 1990, more than 15000 small textile firms (averaging less than 5 employees) became active in the region. Textile production has tripled while the textile industry has declined in the rest of Europe.

What is at the core of ID success? The answer appears to lie in the mastering and controlling the entire customer-supplier value chain, the entire production process. The ID small businesses are not just marketscattered competing units, nor are they simple appendices to large companies and conglomerates. Instead, they respond to customer markets directly, through activating linkages most suitable for specific customization. They emerge, persist and disintegrate according to alternative manifestations of customer-supplier value chain.

In Fig. 2, the string of small businesses covering the defining (initial) value chain is sketched. As the alternative chains develop (in response to new customers, technologies or products/services), say I and II in the picture, the original businesses do not `cover' all activities of new chain-processes.

A room for new business or business-expansion reengineering is thus open and flexibly filled. Some original companies, unable to adapt, may go out of business, their knowledge agents absorbed into newly emerging units. As long as the ID responds and so `covers' the ever-changing chains, the network remains self-organizing (autopoietic) and self-sustaining.

It is the chain or process induced productive synergy which distinguishes ID from a simple collection of independent businesses.

There are many network organizations, driven by different goals and purposes. Some of them are simple tax/financial alliances, others aim at sharing or controlling the market. There are networks that are `covering' the value chain and are flexible and adaptive enough to maintain and expand their `coverage' through dynamic reshaping of their own linkages -- such networks survive and prosper. Such dynamic networks are capable of directly competing with the superlarge companies of global competition.

Such networks of small businesses represent a newly emerging mode of production, eminently suited to global competition, innovation, flexibility and knowledge production -- they could become autopoietic (self-producing) and thus self-sustainable in an everchanging global environment.

Australian TCG (Technical Computer Graphics) provides a good example of a self-producing network in a business-firm environment. There are no coordinating divisions, `leading firms', or management superstructures guiding TCG's 24 companies; the coherence, growth and maintenance of the network is produced, according to, by a set of network-producing rules:

1.      Mutual independence, binding firms through bilateral commercial contracts. This

      excludes the formation of internal hierarchy.

    2. Mutual preference to member firms in the tendering and letting of contracts.

    3. Mutual non-competition among members, to establish self-denial and trust.

    4. Mutual non-exploitation among members, based on `cost-plus' contracting, not

        profit maximization.

    5. Flexibility and business autonomy; no need for group approval of any transactions, 

        if no rules are broken.

    6. Network democracy without a holding company, `central committee', owner, 

        controller or formal governance structure.

    7. Non-observance of rules leads to expulsion.

    8. All members have equal access to the open market.

    9. Entry: new members welcome, but financed by debt, not through drawing on group

        resources.

    10. Exit: no impediments to departing firms.

The above ten rules constitute the autopoietic organization of a network TCG. They insure that the network continually produces itself and maintains its coherence over time. There has never been a bankruptcy within the TCG network. In a changing environment, TCG network grows outwards and adapts to a global market place through a `triangulation process' of collaborative alliances and through spinning-off new companies. A triangle is a strategic alliance of [TCG + external company + customer] and their bonding and concatenation expands the network.

8. Conclusion

SME networks are self-producing and self-sustainable autopoietic networks. As such, they are organizationally closed and structurally open systems, relying not on symbolic feedback but on action-based structural coupling with their environment. They are not cybernetic hierarchical machines of centralized control, but rather social organisms alive through their action and interaction. While autopoiesis assures interaction, innovation and adaptability, it is the coverage of the customer-supplier value chain that provides strategic competitive advantage to the SME network, contributing to its renewal and self-sustainability.