Leaders lead by asking better questions

Many of my friends are leaders. All my clients are. They are leaders because they naturally develop people around them. Not only because of a title. You can recognise a good leader by how many of their followers are also leaders. Leaders and their follower leaders co-develop their skills. So leaders help each other, up-and-down the hierarchy and side-by-side in a network. Leaders are not threatened by people in their structure becoming better and better at leading, they usually take pride in how others are rising up. This makes the whole organisation like a network, like a collective brain. Managers don’t always like this, they don’t like it when people lower in “rank” challenge them, asking more of them. They prefer the hierarchy, which is more like a spine and less like a brain. But this is not the place to go into the difference between leaders and managers, or brains and spines.

So this is my main point for today: Leaders ask better questions, so that their teams can search for better questions. They are on a perpetual search process for better formulations and for “higher” questions that stretches everybody to think wider, deeper and more creatively. The goal is not better answers, that belongs to the linear world where questions have specific answers that are either right or wrong. Leaders know that by formulating better questions they enable everybody around them to explore better in this complex world where there are many formulations of a question, each with many answers. Good questions lead to better questions. Leaders somehow understand this complexity, where there are multiple hypotheses that explains what we see or can measure. This means many questions, and many possible answers, and many more reformulations.

These better questions are not random, and they do not emerge out of an isolated mind. They emerge from the very networks and contexts that the leaders are immersed in. Leaders can sense the better articulation of questions, or the unsatisfactory answers from their teams. They can feel that people are not satisfied, and instead of ignoring the issue, they enable a process of reflection with others to lift out the issues that matter. Leaders can also sense when people have fallen back on routines to get things done, so often the questions leaders ask require people to stop, reflect and question. This is not always appreciated as it takes energy to step out of the groove and to engage with new questions.

Right now in South Africa we need more leaders to ask better questions. Better questions about the role of business in the society. Different questions about how to allocate resources between many competing ends. Tough questions about balancing the rights of particular groups and individuals with the well being of the society as a whole. When I look at they way questions are framed by political leaders they often pose ideologies as questions. The very nature of an ideology is that it provides answers, often irrespective of the context. While some of these questions are important, they are closed. They do not allow for much debate, exploring these questions are not really permitted. These kinds of questions do not help as they don’t only exclude beneficiaries, they also exclude the connections of minds. While leaders in the non-government sectors often scoff at political leaders, many business leaders themselves have an ideology about how a workplace should be organised, how they game should be played. They often forget their own bias. Much of my work is about helping these leaders reflect on their own theories.

Focus. Back to my main point. If you are a leader (which I believe you are) then step forward in your environment, and offer to pose the questions that are on people’s minds. Are people feeling hopeless? Then ask questions about what it would take to have hope again. Ask questions about creating alternatives, or for taking stock of what exists and what can be done with what you have.

You have to set down a framework where people know that even if it is uncomfortable, certain questions that are sensitive or uncomfortable should still be explored. If you are afraid that people will burn you on a pile of office furniture then express your question as a theory, and ask your people to help you verify or invalidate you theory. Articulating the difficult questions, those ones where we just don’t seem to have all the right words, this is what we do as leaders. And then we join our people and help search for answers and listen for signals that there are better ways to formulate our questions.

Oh, and this process does not have an end. This is what we do. We ask better questions. All the time.

Between a rock and a hard place. Sectoral vs. local approaches to private sector development

I am preparing for a presentation at a conference in May about development programmes shifting from a sectoral to a regional or local perspective. This got me thinking about these shifts in focus and why they appear.

In economic development, it is often necessary to choose whether to intervene at a sectoral level, or whether it would be better to take a locational or geographic approach. In my experience I have learned that when you start with the one, i.e. with a specific sector or value chain, you often end up with the other, i.e. supporting specialization or addressing specific issues in a certain location. But this is of little consolation to managers of development programmes and Local Economic Development units who are then typically measured by the wrong indicators or that have different incentives due to the design of their programme or institutional mandate.

During my MBA, the Professor in Organisational Development introduced us to a really elegant tool to assess whether a tension or conflict between different approaches could really be addressed. He introduced us to Polarity Management, a simple instrument developed by Johnson (1992). According to Johnson, many problems that we face today are not really problems to be solved, but polarities to be managed. Johnson argues that we can continually try to solve these problems by shifting our strategies to another mode where we perceive lots of benefits. The trouble is that after a while of some negative aspects emerge, and suddenly the benefits of the other strategy seems to be more attractive.

Polarity management is an instrument that can be used by change management practitioners to understand these polarities and to manage them. It implies that perhaps these different strategies even depend on each other, like breathing in versus breathing out. We need both, even if they have very different objectives, benefits and downsides. This means that the strengths and the weaknesses of alternatives must be understood, and then managed.

In development we have many polarities, for example wealth creation versus poverty reduction, or designed interventions versus enabling evolution, project versus process, top down versus bottom up, and many others. It is very expensive and even risky to shift between these, and an organisations current expertise, instruments and orientation may find it very hard to make these shifts effectively. But some try and some even manage to do this.

This post is for those organisations that are undecided about their strategy and their focus.. A key question then is how do we manage these alternatives, especially if we want the best of both worlds?

There are 3 steps to better understand a polarity:

  1. Fill in the headings of the two polarities in the matrix
  2. Capture the strengths and the weaknesses of both in the columns
  3. Determine if there is a movement of preference between the polaries, meaning that when the negative consequences of a particular strategy becomes too much, strategy is shifted to the other approach for its apparent strengths. Then over time, the negatives start to weight in on the positives, resulting in a shift to the other approach.

Below I have quickly written down some of the positives and negatives of both approaches. This is an incomplete list but I think it is sufficient to illustrate the point. The PDF of the graphic below can be found here. For those that cannot read so small, the bottom line is this: there are pluses and minuses to both paradigms. Under each strategy, the benefits of the one approach may outweigh the negatives of that approach, but be aware, these weights are changing and after a while the other strategy may become more desirable!

Polary table

 

 

 

 

 

 

 

 

 

 

 

 

The third step in understanding the polarity is to look at whether there is a shift between these polarities. From my experience working in a dozen or so developing countries, development programmes are either designed to be sectoral or geographic, with very few programmes designed to do both. From a local perspective, institutions and programmes are designed and resourced to either be targeted at specific industries and sectors, or they have a locational focus. It is very hard for programmes and institutions to build a case that a strategic shift to the other paradigm may be needed, even if for only a part of the resources to be dedicated to the other approach. This typically happens when the negatives of a current path starts to outweigh the positives, and the benefits of the other approach increasingly looks appealing. The danger is that a compromise is reached, instead of a synergy being developed.

From a Local Economic Development perspective, growing the technical capability to pursue both strategies simultaneously is important. This does not imply that both are equally important at any given time, as both these approaches have different timescales, resource requirements, and objectives. For example, it would be unwise to leave a dominant sector to its own devices in order to focus on emerging enterprises. At the same time, focusing on the issues of a dominant sector might distract attention from purposefully promoting emergence, diversification and economic resilience. Yet, many programmes and organisations are forced to choose, often too early when not enough is understood about the dynamics of the place or the industries. For me the worst reason to choose an particular approach is because some or other decision maker has attended a training course or conference, or because a particular approach is deemed “best practice”. In fact, most of my time is spent trying to help leaders and decision makers get out of a mess because their programme or institutions was designed based on some ideology or “solution” without enough attention being given to the requirements, trajectories and complexity of the specific context.

For national governments and international development programmes there seems to be a continuous shift between these two. Almost like a flip-flopping from one to the other. I think that the shifts are counter productive, as the learning from the previous shifts are often lost. If I just think back over my 16 year career how often the value chain or sub sector approaches or alternatively cluster and Local Economic Development have become fashionable again and then losing its appeal after a short time.

My conclusion is that while there is a tension between these approaches, the shifting between the strategies are not taking place at an institutional or programmatic level. Decisions about these strategies are made at higher levels of government and development cooperation with little regard for the challenges faced at sub national level in developing countries to build and grow “the right” institutions that can ensure long term economic evolution and development.

At the implementation level, regional development programmes should do both:

  • Sectoral programmes that ignores the impact of their sector on the geographic areas they are working in are most likely creating negative externalities, even with the best intentions in mind and even when they achieve their objectives of inclusiveness, job creation or export promotion. The negative externalities could be about the environment (mono economy, mono culture), or about increasing the coordination cost of every economic activity not related to the priority sectors (institutional or locational lock-in to particular paths and trajectories). Sectoral programmes that ignore opportunities for regional nuances to develop in their targeted sectors miss important opportunities to enable diversification and emergence of unique regional capabilities.
  • Location development programmes that do not collaborate with other locations to build sufficient scale in particular sectors to justify investing in particular regionally significant institutions will forever remain trapped in low value add, or perpetual dependence on the priorities and mood shifts of national governments. While trying to help every kind of economic activity in a region, you have to at some point also start promoting specific industries and sectors in order to try and reach some leverage or scale.

But most importantly, the economic activity, available institutional capabilities and the regional context prescribes where to start. And when you have started down a chosen path, be sensitive to when it may be necessary to foster additional organisational or collaborate with other institutions with different more adequate capabilities to enable the benefits of the other strategy to be leveraged. A key challenge in developing countries is that we do not have a rich layer of supporting institutions pursuing different strategies. Everyone seem to be trying more or less the same approaches, or chasing the same politically set targets.

In our capacity building sessions in Mesopartner we always elaborate on the importance of value chains and sectors to Local Economic Development practitioners, and the importance of regional competence development for value chain and sector development specialists. Actually, the process of diagnosing industries and regions are very similiar, even if you would give slightly more attention to different issues and perspectives.

In the end, from a bottom up perspective, supporting specific industries allows for scale and focused public investment, but caution must be taken to not create path dependence or institutional lock in. At the same time, a regional approach is critical as it allows for emergence of new kinds of economic activity and for diversity to emerge. I think we need to development of synergies for both, but it depends on the context what your priority should be. Simply being aware that there are pluses and negatives to either strategy is already a good start! This makes it much easier to collaborate with other organisations and programmes that have different objectives and priorities.

Now I have some questions to my readers:

  1. What is your current approach in your programme or organisation? Sectoral or locational?
  2. Have you even been through a shift from the one to the other in your programme, or do you cater for both?
  3. How did making the shift work out? Did you have the networks, resources and expertise to make this shift?
  4. What would you do differently next time?
  5. Please share your thoughts by commenting below, or send me an email if I can paste your comments unanimously if you are afraid to upset somebody higher up the chain.

References:

JOHNSON, B. 1992.  Polarity management : identifying and managing unsolvable problems. Amherst, Mass: HRD Press.

 

Education to enable industry development

Our industry in South Africa is constantly complaining that their workers have the wrong (or low) skills. Yet based on my own experience, many manufacturers prefer to appoint people from the street and then train them in-house on the job. This saves the business money and bargains the wage down, but at the same time makes it very difficult for the enterprise to respond to technological change. And when all your workers are at a low skills level, the technological advancement of the firm is almost completely dependent on the genius (!!) of the entrepreneur and the middle management. This is a risk for our industry as we do not embrace learn-by-doing enough as our competitors are doing because we do not trust the ability of our workforce.

The South African government itself acknowledge the importance of jobs intensive growth, especially aimed at lower skilled workers. I sometimes wonder if our government has given up on its education system, but then the large and continued investments in the overall education system seems to suggest otherwise. The education policy has a strong focus on vocational training, but learners still prefer to queue at our Universities despite the best attempts of the minister to highlight the value of Further Education Colleges and the recent investments into the vocational system in the country.

While the importance of making sure that our large numbers of low skilled workers do get some form of employment and further education, I wonder if we do not need a stronger dual focus on other forms of education and more skills intensive job creation.

Also, I wonder if we do not need to strengthen our ongoing education aimed at people currently employed. I know the Skills Education and Training Authorities (SETAs) are supposed to do this, but from the businesses that I work with it seems that this is a frustrating option – the skills levy is basically treated as a tax. The SETAs are also focused very much on basic skills and not on deep technological skills.

As long ago as 1987, Lawrence and Schultze criticized the European education system with its focus on apprenticeships that provides rather specific skills to rather standard and mature technologies. These technologies become obsolete very fast in times of rapid technological change. Furthermore, these skills do not help our enterprises to get ahead, they simply help the lower productivity part of the economy to catch up. Many other scholars have come to the some conclusions about Europe’s education system, advising them to follow the US model of equipping graduates with a more generic education that helps people to adapt to a more dynamic work and technological environment.

For in case you wondered, South Africa is undergoing huge technological change. With the energy problems this technology intensification is accelerating as enterprises try to upgrade to lower energy manufacturing technology.

To get ahead we need to invest more in creating middle and higher skills capacity, more or less what the learners are sensing. From an economic policy perspective, we need to support the enterprises that are in the more knowledge intensive industries. They still absorb lower skills workers, but at least in these enterprises their development paths are more varied and more secure. While at the job-intensive low skill industries these lower-skilled workers are vulnerable due to South Africa’s poor cost competitiveness on many basic manufactured goods. At the same time, we have to continue and even expand upgrading our workforce with vocational training, if not for any other reason than to give people a deeper sense of pride and dignity.

References

Lawrence, R., Schultze, C., 1987. Overview. In: Lawrence, R., Schultze, C.(Eds.), Barriers to European Growth: A Transatlantic View. The Brookings Institution, Washington, DC.

Moving from generic to specific and then onto systemic

When working with development organizations in the mesolevel we often find that their programmes are very generic. The same can be said of the findings of many diagnosis. The result is that firms do not really use the services of these organizations, because the value add and the impact of the services are not really clear.

For me there should always be a movement from the generic (e.g. the foundry sector is not competitive) towards the specific (e.g. the foundry industry is not competitive because it lacks capacity to do good front end engineering and design). After we have developed a sense of some specific issues that are affecting the performance of firms, there are two things we have to do.

Firstly, we want to try and figure out if there is something that we can do at a more systemic level to try and influence the specific issues. With systemic I mean that instead of addressing a particular issue repeatedly at various firms, see if there are other ways to achieve the same outcome. An example would be instead of only offering a design service to firms, make sure that the university curricula includes sufficient content dealing with design. Of course, we should always strive to have multiple interventions to address a particular issue.

Secondly, we should verify whether our specific findings are unique to the firms we have diagnosed or engaged with. For instance, and food initiative run by a university might find that the private sector is affected by a lack of a particular kind of testing lab. Then instead of designing a solution just for a limited number of producers, the university should check whether similar firms in other industries (related and not even related) are facing the same constraints. It may just be possible to design a solution that is useful to a much broader target group, making the solution more sustainable and more relevant to the private sector.

From my experience of working within many different value chains is that there are many issues that are treated as being unique (or specific) to a particular value chain that are in fact affecting many different kinds of enterprises. The South African Industrial Policy framework for instance is designed around many different sub-sectors, with many different interventions implemented by different organizations and programmes that are actually not unique to a particular sub-sector. This is expensive and also not really systemic, these interventions are not permanently changing the meso level in South Africa or the service offerings of meso organizations such as universities and other development programmes. The South African manufacturing sector is struggling with low volume, outdated designs and rapidly increasing costs across the board. I imagine that it should be possible to based on the insights from the different sub sectors to design much better programmes that are cross cutting over many different sub sectors, and that from the start are designed to improve the service offerings from meso organizations to firms.

Update from the field

I wondered if I should name this post “from the airport lounge” but then I realized that I still travel much less than my business partners and some friends.

Seeing that so many of you ask me where I am I thought I will give a quick update.

Since my previoSplit Team Smallus post I have traveled to Split in Croatia to conduct an LED training for a group of local government officials from Bosnia. This was a great event because I had the opportunity to conduct the training with my business partners Frank Waeltring and Christian Schoen. This event was arranged for and funded by GIZ Bosnia and took place during the first week of September.

During this event it again struck me how no matter where we work with Local Economic Development, the main principles and challenges remain the same. The people, the language and also the priorities might be different, but the issues that we are always confronted by is a breakdown in trust between business and local government, fragmentation and confusion between local and national stakeholders, and the tension between bottom up and top down priorities and intervention means.

 

 

Immediately after Croatia I traveled to India to assist GIZ India to assist with designing a Private Sector Development Programme. The mission included capacity building of local experts, consultants and policy makers on innovation systems and how this perspective can be used to strengthen cluster, value chain and regional development programmes. I traveled with the GIZ team to Bangalore and Aurangabad to assess the readiness of different clusters to benefit from an innovation systems perspective.

In Delhi, my hotel room overlooked the famous Jantra Mantar astronomy instrument. It is anJantra Mantra heritage site that dates from 1724 that was one of the great astronomy observation posts of the time. I spent a whole Saturday morning looking at the details of this site. I also spent half a day on the Hop on Hop Off Bus in India.

I am looking forward to traveling back to India shortly for an extension on this assignment.

Absorbed into the networks behind the systems we see

Its been a while since I have last posted here. The reason for my absence is two-fold.

Firstly, I am busy with a course offered by Coursera and the University of Michigan about Social Network Analysis (SNA). My business partners and one of our associates in Mesopartner are participating in this course. The course is 9 weeks long and I must admit that it is taking much more of my time than I originally anticipated.

The second reason I am hardly online is that the industrial policy in South Africa is starting to have positive effects on local industry. As I work mainly with the manufacturing sector on topics like innovation systems, industrialization, identifying and addressing market failures, and the competitiveness of regions, it means that there is suddenly an upsurge in demand. The demand is lead by state owned companies that are suddenly obliged to procure manufactured content locally, and by local industries that realize that years of underinvestment and fighting to survive against cheap and sometimes lower quality goods have left many sub-sector uncompetitive.

But these two reasons are also having an effect on each other. I have been applying many of the principles and tools of Social Network Analysis in my diagnostic work for the last 2 years, and for the last year I have been using SNA as my main diagnosis instrument. This recent course have simply forced me to read up more and more on many of the theories and the concepts behind the instruments I have been using. I am still trying to figure out how to do this kind of diagnosis fast, and how to teach these instruments and theories to the practitioners that we (Mesopartner) are working with around the world. At this moment the diagnosis that I am doing in valve, pump, tooling, automotive and industrial equipment is still slow and it takes all my attention.

What is the benefit of taking a SNA approach to sub-sector development?

  1. Well, firstly, a network diagnostic very quickly reveals whether there is a cluster or even a value chain. We often assume that these constructs are real, but in the last few years we have learned that just because all the actors that should be in a chain are there doesn’t mean that a value chain exists. Same goes for a cluster, just because all the elements are there doesn’t mean there is a dense network of cooperation, knowledge exchange and systemic competitiveness.
  2. Secondly, a network view assists with understanding the deeper relationships, trust patterns and information flows in a small part of a real system. These relationships makes it possible to predict how information flows, who the thought leaders are and how influential institutions, leaders, officials and business people are. This is directly relevant for my work with innovation systems.
  3. Lastly, Social Network Analysis also highlights how complex even a single link in a value chain can be. When you look at the spider web of relations, ownership structures, communication channels and knowledge spillovers, then you see how traditional development interventions have completely missed the leverage points.

All I can do at this moment is to commit to blog more frequently once this course is done. I will share some of the results of the industrial diagnosis that I am currently busy with in a few weeks time. Below I will give a sneak preview of the network map of the valve manufacturing cluster in South Africa. You will immediately see that some manufacturers (in red) and some foundries (in blue) are more connected than others. The yellow dots are valve manufacturers that are not yet part of the formal valve cluster structure. Hardly any additional analysis is needed to show that the more connected firms are the ones we should work with.

 

Cluster drawing 4

However, the additional analysis that we can run on this cluster further narrows the choices of whom to work with to get both the highest impact (in terms of both ability to grow their business, increase employment and meet customers needs) and in terms of getting the highest demonstration and spill over effects. The latter is important, because when you want to upgrade an industry you should prioritize firms that are able to create positive spillovers and that others are willing to follow. To do this kind of analysis we need a combination of qualitative and quantitative information, and we use specialized software applications. But more about this in a future post!

Help – the industry I am working with is uncompetitive and many do not care

In most strategic management textbooks 4 generic factors are identified that can be used to build competitive advantage: efficiency, quality, innovation and customer responsiveness. These four factors are highly interrelated, as an improvement in customer responsiveness for instance could result in improved quality and better efficiencies. By addressing these four factors a business can reduce its costs and can create a differentiated position in a market. Let me briefly expand on the four factors.

Generic competitive advantage

  • Superior efficiency: a manufacturer converts inputs into outputs. Inputs are basic elements such as land, capital, labor,raw materials or knowledge. Firms that manage this conversion by constantly trying to find better ways to reduce costs, improve throughput and reduce wastage tend to be able to be more price competitive.
  • Superior quality: means that products are reliable and that they can do the job that they were designed for, meeting the specifications and performance requirements of customers. In most cases it is difficult to ensure consistent and reliable products without a system in place to control quality
  • Superior innovation: This is about the novelty of the products, process or services of the firm. It is not just about the great design of the product, but about the total offering and how customers can interact with the firm. Thus it includes how the company thinks about its own structures, internal systems, relations with markets and customers, use of technology and product development.
  • Superior responsiveness to customers: A firm that is highly responsive to its customer not only meets their requirements, it strives to anticipate and exceed those requirements. Although this could be about flexibility to respond to customers demand, in most cases it is not. It could simply be to find a way to respond the needs of customers in a creative way.

Enough of the strategy lesson. Back to the real world where we are all trying to use our own limited resources to promote particular industries or regions.

Here are the questions that keeps me awake about this project:

What if the industry that I am working with do not seem very eager to develop any real advantage around any of these four factors?

What must I do to improve the competitiveness of the region if the firms do not seem to even care about their own competitiveness?

For the last few weeks I have been wondering about these questions as I visit a range of manufacturers as part of a process to stimulate a regional innovation system in an industrial area. By visiting many firms in this region I noticed a big gap between those that are  are differentiated or excellent and the rest. The gap is so big that I sometimes wonder if it ever would be possible to move or support firms to cross over the empty space between those that can be described as “excellent” versus the “average”. Knowing that I only have a limited time, and the organization that I am supporting (An University) only has limited resources, I started worrying about helping all the firms. But this is not possible nor is it desirable.

All the average firms can offer many arguments for their current state. They lay the blame at policy uncertainty, high costs of borrowing, crime, political interference, expensive employees, low skills and many more. Many would say that they are component manufacturers that depend on the strategies and innovations of their customers (we just make what they want how they want it). Very few firms ever acknowledge that their current state is a reflection of past strategic choices taken deliberately or that played out to the current status because of not making decisions.

Yet, almost each of the excellent firms that we come across in our fieldwork focused on getting some basic principles. Many started monitoring their costs and wastage to try and improve their efficiencies. They focused on equipping their staff to understand the business, the products and the process, resulting in lower failures and higher quality. They spoke to their customers to find out how they can offer better services and products, even when they were just manufacturers of components used in someone else product. They focused on the quality of their products by looking at the quality of their process, their equipment, their systems and their management.

Those that are excellent are not necessarily better educated, better off financially, or better engineers. They just took charge despite being in the same economy, the same reason and even the same sector, with all the same environmental factors that the average firms use as a reason to do nothing. Sometimes the firms that are now excellent where started by disgruntled employees quitting the average firms. Or in other cases, the excellent firms were started by people from outside the sector moving in with a different perspective and approach.

What bothers me is the way the public sector responds to the manufacturing sector with their funding, support interventions and incentives. The strange thing is that most public sector interventions are aimed at the average or below average performers. It is almost as if the logic is that they are weaker and therefore they need protection and special care. Well, if economics is the study of how humans allocate scarce resources, then we should be very worried about directing too much of our scarce resources to firms that cannot use the resources the society endow them with (capital, labour, land and knowledge). Of course there are exceptions, but the problem is finding a fair way of deciding when it is justified to protect a firm and when it is best to let a struggling firm fold in so that the resources can be redeployed to other people that are able to use these same resources in a better way.

So what can we do when we are faced with this situation? Here are some of the ideas that we are working on now.

Lets say, of the 50 manufacturers we want to work with, 5 stand out as trying harder than the others. Perhaps another 5 or so are ambitious but they just don’t seem to know where to start, who to work with or where to go. We argued that we start with the first 5 (already good) and the 2nd five (the almost there). Then we invited any of the willing from the rest of the group (3 more stepped to the front). Now we have a core group to work with. Now we are trying to find ways to better connect them with each other, trying to get them to identify their own and their common competencies and opportunities. We have arranged a few pilots to support some of these firms to try and improve their own performance, and we have arranged some events with experts to discuss common issues.

But we have to remind ourselves that we cannot create competitive firms if they do not at least work on the four generic advantages outlined earlier. We cannot improve the competitiveness of the region without being able to show firms that are excellent. Trying to get these generic factors under their control is a minimum requirement. We should never use public resources to support firms that are not serious about improving their overall performance. Furthermore, everything that we do should become public knowledge in this industry and perhaps in the downstream customers, perhaps one of the other firms or even a customer decides to step up and form part of our initiative.

  • Have you also had an experience like this? The firms you are expected to work with just don’t seem bothered by their current status or improving their game?
  • Hey, what else should I do?
  • How do we use the principles of innovation systems and good development practice to get firms in a region to work together to improve their competitive performance in order to improve the economics of the region?

Localisation and building domestic manufacturing capacity

At the moment I am spending most of my time working with the more traditional manufacturing sector in South Africa. Traditional apparently means non-advanced, but it would be a mistake to think that because a particular object (like a metal casting) has been made for 8000 years that there is nothing advanced about it. For instance, in a typical foundry you find very different technical, engineering and management capacities that must be combined in order to make metal components for very demanding customers.

Localisation in South Africa (and in other places like the US) means to bring orders that have gone offshore back into the country. It often involves trying to rebuild manufacturing capacity that once existed in a country, but that originally developed under completely different economic conditions. For instance, 30 years ago many manufacturers grew in South Africa, starting very small and growing over time. About 10 years ago these manufacturers closed, or moved offshore. In the meantime global market consolidated and found low cost producers. To now try and create this capacity again is not an easy task. Firstly, you don’t have 20 years for experimentation in technologies, business models and market segments. Secondly, customers already now know what they want, and this usually includes a proven product at a competitive price. The new enterprise must hit the ground running with proven technology, management and adequate resources. This means that you have to develop both local producers and their supporting institutions, service providers and their markets at the same time. Bear in mind that their competitors overseas are benefiting from this same ecosystem developing naturally.

Localization is seen by some as the opposite of globalization and outsourcing. But buying from a local manufacturer is still outsourcing . As far as localization as the antidote to globalization is concerned, this is not correct, as localized products often enter world markets again, as does local knowledge workers that are now mobile due to their enhanced expertise. Localization is about creating local manufacturing capacity. It is about more than just helping local entrepreneurs start firms – it is often about finding or developing unique local capacity that meets very specific local requirements. It is therefore often driven by public policy- however the most successful localization is often driven by businesses wanting certain suppliers or competencies nearby.

Perhaps another way of looking at localization could be to see it as part of a natural cycle. Products are made locally at $x and a small volume supported by a limited local market. Over time standards, low cost production methods evolve, market consolidate and production concentrates in a few places able to reach scale and efficiency. Now the numbers are high – new entrants struggle to enter as existing firms ramp up efficiency. Right about then flexibility is lost, management becomes expensive, and you may be sharing production facilities with current and future competitors. In the meantime, products evolve, markets and applications differentiate, and suddenly there is a need for more specific production to meet a specific market. this is where a local producer with the right technology, people and business model could gain a foothold (if only they knew about the opportunity). The cycle might just start all over again. This is just one simple example. I acknowledge that many countries have not been able to recapture orders once they are lost to offshore competitors – partly because several economies have also progressed up the value chain. But for developing countries, evolving up a value chain is a very painful process that is often not possible.

From the demand side we have a different perspective. Multinationals or large local manufacturers wanting to localize typically have an existing production system, or they are expanding local capacity. They have advanced or well developed management systems, markets, products and supply chains. Often, buying local is not first choice as they might have invested already in capacity elsewhere, although localization is frequently a requirement of developing country procurement policies. So they first localize non-core activities, the crumbs or components where few things can go wrong. For local manufacturers, this is the toughest place to enter, as these basic components are often like commodities – they are standard, and hence competitors have already reached scale and efficiency levels that are hard to beat.

For buyers, another problem is that local manufacturing capacity is hard to identify and secure. Existing manufacturers in developing countries are either undergoing BOOM or BUST. The boomers are just to busy in markets and products they already understand, and the busters just cant be trusted. Lastly, large multinationals that tries to localize production very often draw their domestic engineering, management and other skills directly from the very limited skills pool that exists locally, attracting skills from the local manufacturing sector that is hard to replace.

So some insights:

a) firstly, don’t let your local manufacturing sector collapse, even if they are not entirely local or entirely politically correct

b) don’t assume that multinationals can easily do business with local manufacturers, don’t depend on checklists.

c) don’t assume that all that your local manufacturers need are some orders from the big firms or government – they are most likely behind in multiple areas, such as skills, working capital, engineering technology and capacity

d) it is not just about technology. Large firms giving technology to local firms is not the solution. Local firms must get a deeper understanding into the market, the drivers of change, the drivers of performance and manufacturing management methods.

e) for a local manufacturer to grow, take on new (demanding) customers, add additional shifts, manage a busier schedule, recruit and train more staff – all these things require change. Remember to assess the readiness of local entrepreneurs to change, invest and expand.

 

Lastly, localization should not be  about import substitution at all cost, because this reduces the buy local decision to a costing issue. Isolating local manufacturers from international markets will not help in the long run. Rather, the focus must be to connect local manufacturers with global markets, knowledge pools, trends and developments.

If you really want to develop your local manufacturing sector, start with the buyers and understand their needs. Understand their business risks, their cost drivers, their incentives to expand and their means to support local manufacturing. Then find out which experts they bring into their operations, what challenges they had to create and maintain their own systems – chances are that what is an inconvenience to a large firm could be a complete obstacle to a local firm. Then articulate these messages, trends and projects clearly to local producers.

I have found that the main issue for large firms wanting to localize is not price – it is reliability and flexibility of local supply. It is dedication to getting the product right at the right quality, on time. And it is also a supply chain of local engineering and management skills.

Oh, did I mention that small firms also want to localize, not just the big firms? More about that next time.

 

 

Why is private sector development such a low priority in Sub-Saharan Africa?

I will start my post by linking to another blog from Kenya. The blogger makes reference to a report by Robert Wade, professor of political economy and development at the London School of Economics, which discusses the role of industrial policy in Asia and how donors completely neglected it in Africa. In essence, Prof Wade compared the economic development activities of donors in Asia with development efforts in Africa.

I can’t help but wonder why industrial development is such a low priority for Africa.

Although donors generally respond to the demands from their developing country counterparts, I know from experience that donors also have preferential aid packages. But why is private sector development such a low priority? Why are we not seeing the same kind of productive infrastructure and technology transfer into Africa that we saw go into Asia? Even donors with “Sustainable Economic Development” Programmes are more concerned with rural development, gender and limited agri-processing support. What about building new industries, new processing facilities, new productive capacity in Africa? Instead the focus as at a micro level, and perhaps at some regional level.

Please don’t tell me it is because the enabling environment is not right. When it suited Western countries they invested in autocratic countries with very poor human rights track records.  Billions of dollars went (and still go) into countries without an enabling business environment. Most countries in Africa today are at a better governance standing than their Asian counterparts were in the 1980s-1990s.

Just thinking out loud. What can we do to make industrial development more important in Sub-Saharan Africa?

Complexity and international development

A while ago I posted an article about the exciting developments in the various fields around complexity science and development (actually there are several earlier articles making reference to this topic). Recently Marcus Jenal wrote a great review of the work of Ben Ramalingam (author of the blog Aid on the Edge of Chaos) and Harry Jones with Toussaint Reba and John Young. The paper can be downloaded here.

 

Perhaps you have noticed that I often make reference in my posts to “complexity”, “evolution” and “complex systems” in the context of development. Some have even asked me why I do this. Well, already there are moves by donors and monitoring bodies to start using a more complexity-sensitive approach to evaluation. This is not entirely fair, as too many development programmes are still designed in a very linear way (log frames, impact chains are mostly used in a linear fashion). This means that to reach your impact you must combine your programme activity with faith and good luck (plus good weather) because most programmes are operating in a sea of complexity. There are just too many factors that can influence your outcomes. And even if you hit all your targets the system may remain exactly the same way. (wink wink: I wonder why no-one is making more of a fuss of the poor track of donor programmes in South Africa that were supposed to deal with systemic failures in education, rural development and even Local Economic Development?)

Another reason I am interested in these topics (other than my usual curiosity) relates to my practical activities around building industrial systems from the bottom up. Although I am still biased towards manufacturing with some emphasis on specialized services, I am trying my best to understand the complexity of not only relations between the actors, but also between the factors that are influencing their behavior. Then throw in some factors like policies several self justified meso-level organizations, mix in some government failure, market failure, network failure and also just the uncertainty from Europe. That makes for a complex system where there are a myriad of vicious and virtuous cycles and then the dynamism of time delays.Mix into this that the political system in South Africa also fights bottom up decision making. Local stakeholders have a limited number of instruments at their disposal and can hardly hold other spheres of the public sector (and other organisations) accountable. Despite this all kinds of firms are innovating, and there are even innovation systems that involves individuals in public agencies that are committed to support local actors (even if their institutions is unwilling or incapable to assist).

I find a lot of comfort and maybe some good questions in the literature on complexity and perhaps also the literature on evolutionary economics. Perhaps I even find some comfort that even the so-called industrialized world is struggling with the increasingly complex and interrelated policy environment.

If you are working on bottom-up industrial policy then please let me know, perhaps we can exchange notes.