Abstract
A trade assocation’s effectiveness is more than a matter of attracting and retaining member firms. It must also manage member firm involvement in its activities. Herein, I outline three drivers of firm participation in TA activity – economic self-interest, sociological identity, and meta-organizational management – and call for further research on ways that trade associations can manage firm-level contributions to communal strategy.
Industry matters (Rumelt, 1991). Really (McGahan & Porter, 1997). No, seriously (Hawawini, Subramanian, & Verdin, 2003). So shouldn’t we act like it does? Industry has significant effects on firm performance, but the management literature seldom explores how firms manage these effects. Rather, industry is commonly treated as an exogenous factor, to be controlled for rather than to be controlled. In practice, though, firms rarely treat industry as outside of their control. Instead, firms seek ways to protect and enhance the “attractiveness” of their industries.
In seeking to manage their industries, firms are “impoten[t] . . . acting in isolation” (Astley & Fombrun, 1983). When they unite with other firms through trade associations (TAs), though, they may accrue the power and influence necessary to maintain or change industry structure in their favor. And so unite they do. In the United States, firms have joined together to form more than 4,000 TAs, through which they seek to advance their shared interests across nearly every industry, from aluminum to gaming to wine.
Some of these thousands of TAs prove more effective than others at managing their industries. As Lawton, Rajwani, and Minto (2017) note, TAs are complex and diverse organizations that pursue industry advancement through a variety of important functions. The management literature sheds little light on variation in the ability of TAs to fulfill these many important functions. Rather, this relatively limited literature has focused on firms’ decisions to join particular TAs, not on what they do thereafter.
TA membership alone tells us little about how effectively a given industry is being managed. Membership may entail little more than paying nominal dues and participating in occasional social events, or it may involve significant and ongoing “sweat equity” from a firm’s top executives and agreement to abide by a strict and costly-to-implement code of conduct. Therefore, to better understand how effectively firms work together to manage their industries, we must explain not just which TAs they choose to join but also what firms choose to do within these TA after they have joined them.
TAs are voluntary membership-driven organizations that rely on the resources and involvement of their member firms to function. If a TA is to take a more active role in managing its industry, it must motivate its member firms to increase their involvement. How might a TA coax greater commitments from its member firms? Herein, I briefly outline the drivers of firm participation in TA activity and call for further research on the role of TAs in managing firm-level contributions to efforts to advance industries.
Bearing the Burden of Industry Management
Firms have much to gain by working together. For example, Hirsch (1975) showed that industry-level cooperation helped pharmaceutical firms achieve greater profitability than firms in the structurally similar but more disjointed recording industry, and Miles and Cameron (1982) demonstrated that the unity of tobacco firms was essential to this embattled industry’s survival. However, cooperation is hard to initiate and sustain, even when all parties recognize that they would be better off if they did so (Olson, 1965).
Mobilizing firms within a TA can be especially challenging because it entails cooperation among rivalrous firms where the benefits, such as forestalling regulation and improving industry reputation, may be impossible to exclude from nonparticipants (Barnett, 2006). The incentives to free ride can be hard to overcome in these settings. As a result, some TAs, though they may have many members, undertake little or no effort to shape their environment and instead focus internally, sometimes functioning as little more than “dinner-club” associations (Galambos, 1966). Other TAs are extremely active and very adept at institutional influence. For example, Rees (1997) describes the large budget, staff, thousands of meetings, and multiple initiatives of the Chemical Manufacturers Association, a TA that has had significant influence over the chemical industry’s institutional environment as well as the practices and performance of its member firms.
The management literature offers little insight into variation in the activity of TAs because it offers little insight into TAs in general. That is not to say that there are few or no studies of firms working together to pursue their mutual interests. There is a robust literature on interorganizational cooperation, which includes cooperation among rivalrous firms. However, of the various cooperative strategies examined in this broader literature, such as joint ventures and alliances, TAs rarely receive scholarly attention. Some scholars have looked at the population dynamics of TAs, uncovering factors that affect their rates of founding and disbanding as well as evolving breadth of membership scope. But due in no small part to the hesitancy of TAs to allow access, the management literature still sheds little light on the internal workings of TAs. Thus, we know little about what drives firms to take resources away from their individual pursuits and reallocate them to greater participation in TA activity.
Why would a firm voluntarily allocate more of its limited resources to a TA? The limited literature suggests three motivations: (a) economic self-interest, (b) sociological identity, and (c) meta-organizational management.
Economic Self-Interest
The most obvious reason that a firm would increase its investment in TA activity, or anything else, is because it expects to profit from doing so. But how does a firm profit from TA activity? The notion that industry matters follows from the acknowledgment that firm performance “can be decomposed into an industry effect and a positioning effect” (Porter, 1991, p. 100). The positioning effect accounts for a firm’s standing relative to its rivals and is the focus of competitive strategy. The industry effect is typically treated as exogenous, with firms assumed to manage it only by choosing to avoid industries that are structurally unattractive. Yet as the presence of thousands of TAs validates, firms often seek to manage industry conditions to improve their performance, rather than just exit as conditions falter.
At times, the industry effect may become a greater determinant of firm performance than will the firm’s position within its industry. When industry matters more, firms are more likely to increase their efforts to manage their industry. Consider, for example, tobacco. Although cigarette brands seek to increase profit by undertaking advertising campaigns to improve their positions relative to each other, when the industry comes under threat, these firms close ranks and work closely together to ensure the survival of their industry as a whole (Miles & Cameron, 1982).
Barnett (2006) explained this in terms of a firm shifting resources away from competitive strategy and toward “communal strategy” when industry effects become a significant threat to firm performance. Given limited resources, if a firm allocates more of its resources to communal strategy, then it necessarily has fewer resources available to use in other ways. Firms are hesitant to do so, but when a firm perceives that it has more to gain from greater efforts to improve its industry than it does from greater efforts to position itself therein, then it will take on this burden by switching more of its resources toward communal strategy.
Sociological Identity
Even when an industry clearly faces a threat, it can be difficult to obtain the cooperation of rivalrous firms to save it. Although all firms will be much worse off if their industry collapses, each firm may have the opportunity to obtain the benefit of the industry being saved without suffering the costs of participating in the rescue effort. That is, firms may free ride on the efforts of a TA to save an industry. In fact, economic logic may dictate that they do so (Olson, 1965).
Yet clearly cooperation across industries occurs and at a significant scale. Spillman (2012) looked beyond economic logic to explain why firms actively participate in TA activity. Rivalrous firms may work together within TAs not just because they are backed into a corner and have no other way to proceed without jeopardizing their survival, but because they identify and wish to show solidarity with their particular community. Recognizing this cultural embeddedness allows us to get past the free rider problem and to explain not just reactive TA activity when industries are threatened but also proactive TA activity.
Meta-Organizational Management
Although a TA is created by firms to serve their needs, member firms typically do not run the TA on a day-to-day basis. Rather, TAs are “meta-organizations” managed by a professional staff. A meta-organization is composed of autonomous organizations that are “not bound by authority based on employment relationships, but characterized by a system-level goal” (Gulati, Puranam, & Tushman, 2012, p. 573). For a TA, this goal is to further the interests of the industry. But the issues that a TA must address to further the interests of its industry are not always obvious or generally agreed by all member firms (Hoffman & Ocasio, 2001). They do not come prepackaged with a label that deems them either within each firm’s economic self-interest or consistent with its identity.
Those who manage a TA play a significant role in forming its agenda and in ensuring implementation. Differing organizational structures and managerial skills and capacities across TAs will lead to differing results, with some TAs better able to marshal member support than others. Yet there has been little research investigating how TAs are managed. How do these meta-organizations set the agenda, as well as balance the need to serve their member firms while coercing these same firms to take on burdensome and constraining activities? Which managerial practices are most effective in this particular meta-organizational setting?
Conclusion
Because industry matters, the management of industry matters. But how are industries managed? For firms, it is more than just a matter of picking which industries to enter or exit. Managing industry represents another level of strategy—communal strategy—and is normally carried out through a meta-organization, the TA. A TA can make a big difference in the performance of firms across an industry, but many TAs are inert, owing to the difficulty of managing cooperation among rival firms.
All else equal, firms would prefer to maintain independence. But at times, rivals recognize their interdependence and voluntarily work together more intensively. TAs can make a big difference in bringing about this increased cooperation. They can draw attention toward particular issues of shared economic concern and, as a result, help member firms to see the self-interest in advancing industry interests. Even where the economic case cannot be clearly made to member firms, TAs can build community and a shared identity among rivalrous firms that makes increased cooperation more likely.
The management literature should better recognize the endogeneity of industry and develop a more thorough understanding of the mechanisms through which firms come together to affect industry. The TA is the primary organizational structure through which firms seek to control industry. The managerial challenges of this important type of meta-organization go well beyond just wooing firms into TA membership and warrant much deeper investigation.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.