Categories
Addressing persistent market failure Knowledge Intensive Business Services Private Sector Development Service sector Thinking out loud Unlocking and Leveraging Knowledge

The increased importance of knowledge-intensive business services in a knowledge-intensive era

As some of you may know, my PhD research was all about knowledge intensive business services and market failures. In a recent publication I wrote a short piece on knowledge intensive business services that we did not use in the final publication. I thought that perhaps it would be useful to some of my readers if I simply posted it here.

Your thoughts and contributions would be appreciated.

Over the last fifteen years, development practitioners have become more aware of the importance of business services to small enterprises. For many, the essence of the debate about Business Development Services (BDS) was about providing commercially viable ‘business development services’ or BDS to small enterprises. Typically these services related to generic or strategic services (Committee of Donor Agencies for Small Enterprise Development, 2001). In many cases generic (and unappreciated) services were promoted to small enterprises not really interested in competition or improved performance, but in survival. Furthermore, BDS interventions were not always systemic in nature and frequently did not consider how markets function[1]. Value chain practitioners were quick to respond by identifying business services that were needed by actors in value chains, and finding ways to increase commercial transactions in these services in order to strengthen the enterprises.

Almost at the same time an academic debate was going on about the increased importance of knowledge and specialised services as inputs into manufacturing and the rest of the economy (Wölfl, 2000, Wölfl, 2003, Bryson and Daniels, 2007). In the knowledge-based era, business is becoming more knowledge intensive, resulting in certain services being labelled as knowledge-intensive business services or KIBS (Roberts, 2003:130, Toivonen, 2004, Miles, 2007:278). Miles (2007:277) explains that almost all activities in an economy are based on some knowledge, and that all societies are knowledge based. Over time the knowledge intensity not only of manufacturing (and intermediate goods) but also of farming and the service sector has increased. Knowledge-intensive business services are concerned with the collection, analysis and distribution of information and knowledge, and play a significant role in the creation, dissemination and application of knowledge both within and between firms at the level of the region and the nation and internationally (Antonelli, 1999, Andersen et al., 2000, Miles et al., 1995).

The discussion of knowledge in business services should focus on what knowledge services are used for. Miles (2007:277) explains that when people refer to knowledge intensiveness, they refer to highly specialised knowledge, or codified knowledge. This knowledge is about the principles, ‘know why’, and methods that can be generalised across numerous specific situations and problems, and should be contrasted with ‘know-how’ and ‘know-whom’ knowledge which is tied to particular tasks and places.

Miles et al. (1995:ii) define knowledge-intensive business services as services that:

  • rely heavily upon professional knowledge;
  • supply products which are themselves primarily sources of information and knowledge to their users (for example reports or training consultancy);
  • use their knowledge to produce services that are intermediate inputs to their clients (for example communication and computer services);
  • own knowledge-generating and information-processing activities;
  • are of competitive importance and supplied mainly to other businesses.

Knowledge-intensive business services can be classified into two broad classes. First is the social and institutional knowledge involved in many traditional professional services, with the emphasis on problem solving or applying rules and procedures (Miles, 2007:280). Accounting or communication services typically fall into this class. Second is the knowledge that has risen to the fore in recent years, which is more focused on science and technology. These services often deal with artefacts and the real world, such as aircraft, engineering, construction and infrastructure. There are services such as architectural design that often combine these two classes of services.

Kox and Rubalcaba (2007:31-34) explain that business services also play an important role in national innovation systems by performing the following functions:

  • They develop technological advances through engineering and other fields.
  • They develop non-technological innovations in areas such as accounting, organisational development and consultancy.
  • They diffuse knowledge between firms by spreading ‘best practice’ information.
  • They play an important role in surpassing human capital indivisibilities[2]. This is especially important for small and medium sized enterprises that could previously (due to internal economies of scale) not afford access to certain professional services.

Many of the services mentioned in this section operate at the frontiers of new technologies and are essential for the success of other high-technology industries (Di Cagno and Meliciana, 2005).

However, there is a tendency for business services, especially the more specialised services, to be concentrated in urban areas. This means that firms have access to specialised services and are able to outsource less critical business activities, while concentrating on their core business areas. The service providers who serve these businesses play an important role in diffusing knowledge between firms.

Sources

ANDERSEN, B., HOWELLS, J., HULL, R., MILES, I. & ROBERTS, J. (2000) Knowledge and innovation in the new service economy, Cheltenham, Edward Elgar.

ANTONELLI, C. (1999) The microdynamics of technological change, New York, NY, Routledge.

BRYSON, J. R. & DANIELS, P. W. (2007) The handbook of service industries. IN BRYSON, J. R. & DANIELS, P. W. (Eds.). Cheltenham, Edward Elgar.

COMMITTEE OF DONOR AGENCIES FOR SMALL ENTERPRISE DEVELOPMENT (2001) Business development services for small enterprises: principles for donor intervention. Washington, DC, Committee of Donor Agencies for Small Enterprise Development, The World Bank SME Dept, The World Bank Group.

DI CAGNO, D. & MELICIANA, V. (2005) Do inter-sectoral flows of services matter for productivity growth? An input/output analysis of OECD countries. Economics of Innovation and New Technology, 14, :149–171.

KOX, H. L. M. & RUBALCABA, L. B. (2007) Analysing the contribution of business services to European economic growth. Bruges European Economic Research Papers. Belgium, College of Europe.

MILES, I. (2007) Knowledge-intensive services and innovation. IN BRYSON, J. R. & DANIELS, P. W. (Eds.) The handbook of service industries. Cheltenham, Edward Elgar.

MILES, I., KASTRINOS, N., BILDERBEEK, R., DEN HERTOG, P., HUNTINK, W. & BOUMAN, M. (1995) Knowledge-intensive business services. Users, carriers and sources of innovation. Brussels, European Commission, European Innovation Monitoring System (EIMS).

ROBERTS, J. (2003) Competition in the business services sector: implications for the competitiveness of the European economy. Competition and Change, 7, :127-146.

TOIVONEN, M. (2004) Expertise as business – long term development and future prospects of knowledge-intensive business services (KIBS). Department of Industrial Engineering and Management. Helsinki, Helsinki University of Technology (Espoo, Finland).

WÖLFL, A. (2000) The service economy. Business and industry policy forum series. Paris, Organisation for Economic Co-operation and Development.

WÖLFL, A. (2003) Productivity growth in service industries: an assessment of recent patterns and the role of measurement. OECD Science, Technology and Industry Working Papers. Paris, OECD Publishing.


[1] This is the topic that I dealt with extensively in my PHD dissertation.

[2] Indivisibilities refer to the difficulty of subdividing something into smaller parts. For instance, it is not possible to divide an engineer into smaller pieces. You either appoint an engineer, or you cannot afford to. With the emergence of the knowledge-intensive service sector, a small enterprise cannot gain access to a service provider for a fraction of the cost of appointing a full-time engineer.

Categories
Bottom Up Development Local Economic Development Private Sector Development

Developing territories from the bottom up

Its been a while since I have made a post, largely because watching the discussions in our local press is so amusing and entertaining. I had to keep my fingers in fists not to type anything I would regret later. This is a poor excuse, so let me get back to the reason why you are reading this post.

Strangely, our discussions here in South Africa is not yet focused on the real issues of how to grow the local economies. Most projects contained in Integrated Development Plans are still un-systemic and often deal more with social than with business and growth related issues. Yes, with our history this is important. But I would immediately argue that it is possible to have systemic interventions (that unlocks growth and investment) that at the same time also has benefits or leveraged impact for the poor and marginalised.

Why are we not talking about building local meso-level institutions that not only supports local industries or address local issues, but at the same time draws on science and research to create new solutions? Why are so many local municipalities still doing such shallow Local Economic Development? At what point will the private sector at the local level realise that they need to be more reflective of their competitiveness and cooperation. OK, granted, this happens in some places. But not everywhere. And not enough.

It seems to me that so many solutions are still driven from the national level of government (and business) in South Africa. At what point will locals start demanding “economic” service delivery, which means infrastructure that supports the growth, profitability and expansion of business. Why bother with “small town economic development” if the potholes in the main road are as deep as opencast mines? (see the picture further down below)

Perhaps a reason for this hesitance to seriously and systemically engage in “Territorial Development” is because Local Economic Development is still seen as a narrow field of enterprise support through public planning instruments, instead of being seen as a multidisciplinary approach aimed at improving the local economic system. The systems perspective and an understanding of the complexity of this systems seems to be lacking. You cannot develop the tourism sector in a small town by itself, without dealing with retail, infrastructure, and many other issues.

I know there are many places that gets this right, and where a proper and interactive relationship exist between local government and local business.  But we need much more than a few anecdotal examples. We need to inspire our local businesses to invest, to grow and expand. Inspire them to paint their shops, and tidy their yards. Get them to think of new ideas, new opportunities. Only when we unleash the creativity of our existing businesses will new businesses emerge.

Look at the nice pothole below. The largest employer in this little town is moving to Johannesburg. Guess what, hardly any of its employees are staying behind and starting businesses. With them, they take their spouses, who are often providing services as teachers, medical staff, managers in other firms, and local consumers.

– Why would locals start a business here in this town?

– Why is fixing the potholes and the general look of the town not a major priority?

If business was important here, the main street would not look like this

– How can a few isolated “entrepreneurship” training and other isolated projects undo the impact of the large corporate moving away?

– Why can not a single business person here remember when last a local official contacted them to find out if there is anything that the municipality to can do to support the business in growing.

I think I know the answer. Business is simply not important here. LED in this place is about little projects and not about the bigger system. Business people also tend not to block roads and burn councillor houses.

Perhaps we should coin a new phrase “local private sector development” to describe what we should be doing as Territorial Development Practitioners. But then again, we know that you have to look at the whole system at the territorial level, so perhaps this title is not a good idea. To grow territories from the bottom up would need a focus on the private sector, but it would also require attention the public sector, both as a provider of critical infrastructure and other services, as well as a coordinator of many essential (and often overlooked) public goods. My main point is this. While the national frameworks are important, local energy is what matters. South Africa appears to be trying to build local economies from the top down (depending on national policy, grants and programmes), and not from the bottom up with based on an  understanding the local economy, opportunities and constraints, and then using local energy and resources.

Categories
Innovation Private Sector Development Thinking out loud

Stimulating demand led innovation in Africa

To do business in Africa is not easy. I am not being pessimistic with this statement. I am based in Africa because I believe in our opportunities here. But lets face some truths:

  • We are far from input suppliers (a problem for many and an opportunity for others)
  • We are far from our customers (I mean those international customers or the pockets we have on the continent)
  • Things take longer to arrive here (inputs and my Amazon book parcels), and
  • We stretch our infrastructure on a daily basis (roads, rail, health, education).
  • It is not difficult to trade between countries, or to find partners, markets etc. because of various barriers (I think Europe and Asia is ahead of us in overcoming technical and cultural barriers to trade – whether perceived or real)
  • Our societies spend a huge amount of time arguing, blaming and politicising that could probably be better applied to solving problems and exploring opportunities
  • We have many government and market failures (more on this in another post) that only benefits elites (public and private)

Most people think that we have to innovate to reach markets that are far far away, line Europe or the US. Or we think that we have to out-innovate the Asians. But we have something right here under our noses. We have demands from consumers, businesses, policy makers. These demands are not yet always expressed as needs. If you think it is important to save energy in Europe to save the planet (or save money), then we have an additional and more urgent reason to save energy – our constraints to produce enough to go around. Same for water, food, technology and other areas.

So why are we not exploiting the opportunities created by local demands and unexpressed needs?

I think part of the answer is about our policy incentives, and then another part is about our low self esteem. Ok. There is also the fact that innovation is increasingly becoming difficult, because consumers are getting so smart at selected the better products that combines elements of good design with functionality (functionality alone often doesn’t make the cut). What I mean with difficult is that you have to spend a lot of time searching for the right components, process technology (and perhaps even patents).Many of you will probably come up with other reasons as well.

But here is a question worth spending our collective brain power on: what can we do to stimulate more demand led innovation here in Africa?

The OECD last year had an interesting seminar on this topic. I am relieved to find that industrial countries are also thinking about these things (it means we are not so far behind), but I am very envious because we also need to be discussing these things in Africa. Perhaps our greatest resource is not our minerals. Perhaps it is the huge number of problems that we still have to solve, and the millions of demands that are not yet articulated. But how do we turn these challenges, problems (or opportunities if you like) into profitable ventures?

Any ideas?

Categories
From the field Innovation Local Economic Development Private Sector Development Technology and innovation management

Connecting innovation systems with local and regional economies

Many of you have asked me how I connect my current focus on innovation systems and technological upgrading with industries with my past experiences of local and regional economic development. I thank you for repeatedly asking this question, and apologise for not providing you with an answer. The reason for my silence was that I was also not exactly sure how to connect these topics. But I think I am now starting to understand how these topics relate to each other.

Let me try to explain this.

Before I continue I need to make sure that you understand that an innovation system is far more than one or two innovative firms.  Freeman (1987:1) defined an innovation system as “the network of institutions in the public and private sectors whose activities and interactions initiate, import and diffuse new technologies.The emphasis is mainly on the dynamics, process and transformation of knowledge and learning into desired outputs within an adaptive and complex economic system.

So how does innovation systems work within regions or places? Well, it is often affected by issues such as trust, social and informal networks, formal relationships, common customers or common inputs and other factors. You will notice that it sounds very similar to the characteristics of a cluster in its early days. The main characteristic of a local or regional innovation system is that it is mainly focused on a specific geographic space and on the specific knowledge spill-overs that occur around certain firms, industries or institutions unique to that space.

You will immediately notice that innovation thus favours places with more people and more firms. You are right, a close relationship exist between density of interactions between people (provided for by towns and cities, nightlife, and frequent social exchanges) and the innovation system. It does not mean that innovations are limited to these spaces, but simply that they emerge faster or with more success in these spaces. This is largely caused by the increasing importance of knowledge exchange and interaction between firms, knowledge service providers and technological and educational infrastructure. But more about that in a seperate post.

I want to leave you with 3 questions that I have found to be useful to better understand the relationship between places and innovation systems. I use it frequently at the start of an assessment into an innovation system, or to stimulate thinking of public and private leadership.

1) Why are people innovating in this specific location (and not on another space)?

2) How does this space or place support innovation, and more specifically, how does it reduce the costs of innovation?

3) How do innovations in firms affect this space?

Bear in mind that with innovation I mean product, process as well as organisational or business model innovations.

Ask these questions and let me know what you find. I am sure that you will find that many places do not actively support innovation (unless you have some really determined or stubborn innovators there). Nor do they make it cheaper for people to innovate, exchange knowledge or stimulate joint problem solving (or opportunity exploitation). To me it also seems increasingly obvious that the role of cities and towns in Africa are not fully exploited in national economic development as spaces for innovation.

In South Africa, innovation happens mainly in 9 major and about a dozen secondary urban spaces. No amount of public policy will break this pattern until settlement patterns change, or until smaller places start to attract skilled people that can afford to innovate from cities.

So how can we support innovation systems in each and every town? How can we built regional and local institutions that reduce the cost and risk of innovation. Again, I dont mean only product development as an innovation. I mean process and business model innovation as well.

Until we can build our own local technological and educational institutions using local priorities and local resources from the bottom up the trend of urbanisation and migration to the major centres will continue. This is great in terms of reducing the costs of innovation, but it makes us very dependent on national policy, and only a few good local administrations. I would prefer a situation where we can build our local institutions around local issues, this giving firms in for example a mining region a head start in innovating around problems or opportunities related to mining.  For instance, in the Mpumalanga  province (South Africa) we have a lot of coal mining with its associated problems. Why is it so difficult to create a small but focused research institute or technological institute in a town that will focus on applied research and knowledge generation around environmental technology related to coal mining? Could this not be an impulse with environmental solutions as well as innovation as outcomes? I could imagine that such an institute could create positive externalities in a space that would lead to innovation that our both cutting edge and relevant to our society.

Now if you think about it, then Africa is rich with millions of ideas (also known as opportunities, challenges and obstacles) that could serve as impulses to create, stimulate or grow local innovation systems around relevant issues. Dont get me wrong, I dont mean that the public sector must do the research, and then the private sector must commercialise the research (although a little of this certainly helps). I mean that public funds or public private partnerships could be used to establish local institutions that create positive advantages for firms to innovate within regions through reducing the costs of finding relevant information (about a problem, opportunity or technology) and by highligthing opportunities for application of new ideas (by better articulating demand or applications). But there must be sufficient scale of infrastructure to allow the people with the right knowledge, experience and perhaps financial resources to settle in the region to exploit (or address) the opportunities through innovation.

Let me know what you find when you ask these questions.

PS. I know I will receive hundreds of angry e-mails that I am implying that rural areas are doomed.  Re-read my post before hitting ‘send’.

Categories
Innovation Private Sector Development Technology and innovation management

Where does innovation come from? – part 1

I have been asked to share some of my work on innovation. Below is a short piece from a publication that I am working on dealing with innovation systems.

While product and process innovation is better known and often receives the most attention, competitive advantage often emanates from organisational and business model innovations that emerge within societies. Innovation is a powerful explanatory factor behind differences in performance between firms, regions and countries.

According to Fagerberg et al. (2005:4-5), invention is the first occurrence of an idea for a new product or process, while innovation is the first attempt to carry it out in practice. Thus invention and innovation could be closely linked, although in most cases it is separated in time (sometimes decades or centuries), place and organisation. However, the fact that innovation typically emerge within a complex system is often overlooked. For instance, Schumpeter explained that the innovator that invented the steam locomotive still had to wait for others to develop the different aspects of the rail system before the locomotive could be commercially viable. The steam engine was initially invented in a completely different context, again illustrating how inventions are dependent on the context in which it arises.

While many innovations can be linked to well-funded research programmes, this is not always the case. Firms usually innovate because they believe there is a commercial benefit to the effort and costs involved, and this process typically starts by reviewing and re-combining existing production factors (Schumpeter, 1964/1911). Sometimes increased competition, changes in market structure or market demand, or changes in technological performance also affect the innovation process. To turn an invention into an innovation, a firm typically needs to combine several different types of knowledge, capabilities, skills and resources from within the organisation and the external environment. The role of this knowledge and learning interaction will be described in the next sub-chapter. The willingness or interest of an individual in tinkering and exploring better solutions is influenced in part by the organizational context of the innovator, but is also influenced by factors such as education or qualifications, meta-level factors such as culture, personal characteristics (such as patience, inquisitiveness or tolerance of failure) and the institutional environment. Other factors, such as competitive pressure, problem pressure, or social and economic incentives also play a role.

Frequently, policy makers, universities and technological supporting institutions erroneously describe innovation in a linear model that assumes that innovation is applied science. It is assumed to be “linear[1]” because it is believed that there are a series of well-defined stages that innovations go through from research (science), followed by development and finally production and marketing. In this linear model scientific research is deemed to be the most important step as it is the first step in the process. Although there are some cases that followed this path, these are the minority. Very often this line of reasoning is brought by people wanting to justify larger research budgets.

Notes

[1] The “linear” innovation process was first criticized by (Kline & Rosenburg, 1986)

Sources

FAGERBERG, J., MOWERY, D.C. & NELSON, R.R. 2005.  The Oxford handbook of innovation. Oxford ; New York: Oxford University Press.

KLINE, S. & ROSENBURG, N. 1986.  An overview of innovation. In The positive sum strategy: harnessing technology for economic growth. Landau, R. & Rosenburg, N. (Eds.), Washington, DC: National Academies Press, pp. 275-305.

SCHUMPETER, J. 1964/1911.  Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus. Berlin: Duncker und Humblot.


Categories
From the field Private Sector Development

Open data from Worldbank enables development

I know you will immediately point out that the Worldbank already announced on the 20th of April that they will open up access to it developmental data. But then I know that many development practitioners are working so close to the ground that data from the Worldbank may seem to be very far from the problems in rural economies.

But….

I think it is time that we stand back a little. Perhaps it is time to ask some old questions in new ways. And then to look at the data to see if it supports our logic.

For instance, why are development practitioners trying to stimulate “growth” in rural areas? Can you even remember why? Or maybe ask “what happened to wealth and prosperity?”.

Is building wealth in Africa still important to us? Or are we now all working on poverty alleviation?I. I think we all know that we have to find ways to stimulate local capital accumulation, savings and investment in Africa. But is this possible if we all work on rural development?

Please do not read anything into these questions, other that I sometimes get the feeling that we have forgotten what we are working for. And the more I play with the data from the Worldbank and Gapminder, the more I wonder if we are perhaps pushing the rope rather than pulling it.

Back to the data. Take a look at a report about the opportunities offered by better data according to some experts (Hans Rosling and Beth Noveck).  The data is now presented at a new website of the Worldbank. Hans Rosling is better known for Gapminder, a site that you should definitely look at for its innovative visual presentations of data.

To me it seems that we should be supporting the more advanced sectors in Africa. We should be asking questions about stimulating innovation, private sector development, and economic growth in the cities. We’ve known for more than 100 years already that cities play an important role in economic growth and prosperity of nations. That is why I bet that you prefer to live in a city if you are a knowledge worker! It makes me wonder why so many development practitioners seem to want to keep people in the rural areas…..

Categories
Industrial Policy Private Sector Development Technology and innovation management

Stimulating the formation of manufacturing business in South Africa

My international readers must please forgive my focus on my beloved home country in this post. But this is a topic that is close to my heart that we have to resolve in South Africa to secure the wealth and prosperity that our nation so desire. But perhaps you have faced the same challenges wherever you work.

I receive many requests to assist with the ‘creation of industrial businesses’ in South Africa. As this is a topic that is close to my heart I usually respond very enthusiastically to these requests. But in the last year or two the reality of the difficulty of establishing these kinds of businesses have dawned on me. Let me take you through my thinking.

Lets look at what it takes to start a manufacturing business. Firstly, you need an entrepreneur. This person must take the lead and mobilize and marshal the right resources, people and processes to take advantage of some opportunity. I think you would all agree with this statement. But if you unpack this sentence then you find three potential bottlenecks:

a)      you need an entrepreneur;

b)      this person must take the lead and mobilize the right resources, people and processes

c)       you need an viable opportunity

Point a) is a challenge. To start a manufacturing business the entrepreneur stands a far better change if the individual has technical or scientific competency or experience in the industry. With the current incentive environment many black or female candidates with the required competencies are better of in the corporate world, where large salaries and other perks are available. With the shortage of experienced or highly qualified advisors, most white candidates that meet this requirement have incentives to rather provide consulting services to government or large business. Many development programmes try to work around this problem by taking young inexperienced people, or even worse, vulnerable unemployed people, and try to establish them as entrepreneurs despite the fact that they would prefer employment rather than being a business person. I can go on for pages about this issue, but let me stop here.

Point b) is a second challenge. The role of an entrepreneurs goes beyond having a bold vision or being able to spot a great opportunity. The entrepreneur must mobilize resources and recruit sufficiently experienced or qualified people to work towards exploiting the opportunity. It doesn’t end here, as the most important role of the entrepreneur is to use their leadership skills to organize their mobilized resources and people into business and manufacturing processes. The latter is really difficult if the entrepreneur does not have management or manufacturing experience. Of course, we can all think of examples of individuals who have built viable businesses without management or technical skills. These cases are rare for many reasons, and it often depends on the character of the individual and the tolerance of their customers to pay for the steep learning curve that small under-resourced or under-managed enterprises have to go through. Say for instance, an entrepreneur can secure enough capital to start a manufacturing business, but they do not have any manufacturing experience. Unless they are able to recruit and trust a suitable qualified and experienced person that can take the responsibility on the technical side of the business, their investment is doomed. The inverse is also true. When a person that is technically competent starts a business, they might have trouble with the management of the administration and business processes of the enterprise unless they are able to recruit staff with sufficient experience to reduce the risks on that side of the business.

The third point is around the opportunity, and the ability of small enterprises to pursue them. One of the huge business process innovations of the last decades is the emergence of franchises. In a franchise, a proven and tested business system is replicated throughout a market. Think of a car-rental business. If you wanted to start a car rental business 15 years ago, you would need finance for several cars, staff at your outlet, technical staff, and cleaning staff. Now the likes of AVIS and others have mastered their business and technical systems to the point where a franchise in a small town can use tried and tested methods to run an office. The person managing the branch or franchise earns far less than you would be satisfied with, and plugs into a national (or even global) administrative system that manages salaries, vehicles, insurance and logistics. It would take a very brave business person to try and compete with such a hugely refined and efficient business system. And if you think of it carefully, then some of the basic rules of economies is that these kinds of system makes a society wealthier, as the productivity of each person working in that franchise branch is much higher than it would have been in your independent outfit. To compete against these business innovations (the innovation of a decentralized management and administrative system backup up by a highly efficient logistical system) you would need to have a highly differentiated business with many innovations. I am not saying it is impossible, I am simply saying it will not be easy.

OK, that is a service business example. For an entrepreneur to pursue the manufacturing of almost any product, they need suppliers, service providers, process information, marketing channels. The days where a single business making a completely integrated product are over, as these opportunities are often only profitable in a large scale. Manufacturing now takes place in ‘value networks’. So if I wanted to manufacture speakers, I have to establish myself within these networks. Despite the fact that almost an electronic student knows how to create a set of speakers, without knowledge of these networks and industrial systems it would be very difficult to establish a profitable and competitive speaker manufacturing business. So unless my product is completely unique or differentiated, I have to depend on existing systems to build my business.

Why are there so few serious entrepreneurs pursuing detergent mixing, or candle making or many of the other business formats that are often promoted by small enterprise promotion agencies? I think the main reason, is that the opportunity to build a business where a viable return on investment can be secured is limited. This means that vulnerable people are being helped to establish businesses where most sensible investors would not even venture into. If anyone can copy your business model even without acquiring the right skills or technical competencies, then how would you secure your investment?

We need to rephrase the objective of small enterprise development in South Africa. What we need to promote in South Africa is that experienced and technically competent people working in large corporates must have incentives to quit their secure jobs in order to pursue higher risk business opportunities. We need people with management skills, or with scarce technical skills, to start tinkering and designing new businesses, new products, new management systems in order to gain an advantage or an ability to secure a return on investment. Let these people create the jobs for the people that are lacking entrepreneurial skills or technical skills.

Let me know what you think!

Categories
Knowledge Intensive Business Services Private Sector Development Service sector Thinking out loud

Finance now SA’s biggest sector

In a new report by the SA Institute for Race Relations (SAIRR), it is reported that the financial sectors contribution to the country’s GDP in 2008 was 22%, the manufacturing sector 19%, while government itself added 15%. Mining is at 9.5% and agriculture at 3.3%. The report confirms statistics from Statistics South Africa that shows that Gauteng now contributes 34% to the national GDP, with KZN at 17% and the Western Cape with 14.5%

Traditionally the manufacturing sector is the largest contributor but over the last decade this contribution is declining, while the business and financial services sector grows. If you think of it, South Africa has a really advanced knowledge intensive business sector, and strangely this sector is not recognised as a strategic asset by the government. This business and finance sector is closely related to manufacturing, as well as other financial services. Aside from this 1st class service sector, there is a whole consulting and NGO sector that has emerged to supply state-subsidised services to small enterprises. Unfortunately, the services of these service providers, nor the customers that they serve, are competitive.  And because these services are often driven by templates and recipes, they are not knowledge-intensive. For small enterprises to take markets from larger competitors, or for local firms to excel in the region and globally, they need knowledge intensive services. Something that is expensive, but valuable. OK, I got a bit side tracked there!

The point is that the knowledge intensive inputs into manufacturing is increasing. This implies that South Africa is shifting from simple manufacturing (where few intermediary services are required) towards integrated or advanced manufacturing, where a lot of business service (or intermediary) inputs are required. My research earlier this year showed that some manufacturing enterprises in the electronics and metals sector are depending on more than 50 of their product value from contributions from specialised service providers. Wow!

So if you are working with manufacturing enterprises, wean them from wanting to use free or subsidised services and get them to engage with specialists. There is no other way to compete!

Categories
Private Sector Development Process and Change Facilitation Promoting Value Chains Sustainable Economic Development

In the shadow of value chains

Over the last few years value chains have become an important topic for donors and development practitioners. I say “again” because as with many other topics there is a tendency for these topics to be seasonal (read fashionable). This is great because every time it becomes fashionable new ideas are brought in, while old experiments provide valuable lessons and knowledge.

The purpose of this post is not to discuss value chain promotion. Just to make sure you understand what I am going on about, I will briefly define a value chain as the path of a product through a conversion process that starts with design (or raw materials), production, distribution and in some cases even consumption. An agricultural value chain will often start with seed, and will end up as a processed food product. On the mesopartner.com website there are several great publications and a LEDCast episodes on the topic of value chains.

In many of the areas where I am working there is a tendency by officials and development practitioners to take on the very tough commodity value chains. These value chains are typically in the traditional sectors and include end products like sugar, wood, furniture, fish, and many other agricultural products. These value chains are very

A huge pile of yellow wood and meranti, waiting to be burnt
A huge pile of yellow wood and meranti, waiting to be burnt

attractive, as they typically reach into rural areas, involve a large number of people, create many jobs, and often involve small farmers and less educated workers. But these value chains are also the oldest, which means that the actors have had a lot of time to mobilise strong interest groups, entrenched positions, and comfortable way of doing things.

When you look around these traditional value chains, you often find dozens of smaller value chains that are overlooked. Hence the title, “in the shadow of value chains”. These chains include biomass (leaves, sawdust, feathers, etc), traditional medicine and exotic plants (in the case of forestry), wood offcuts (in the case of furniture).

A mountain of sawdust
A mountain of sawdust waiting to be blown away by the wind

In these secondary value chains are typically very small, and may appear insignificant at first glance. But closer scrutiny may reveal some interesting opportunities to start new firms, or to create skills upgrading opportunities for unemployed or unskilled workers. Extreme care must be taken to not raise false hope, or to push the vulnerable into businesses that they are not able to run competitively. It does not matter whether a trust, cooperative, project or society is used, as these are simply means to an end.

During the analysis these secondary value chains make an extra effort to see why entrepreneurs have not already pursued this idea or opportunity. Also try to determine what the minimum scale is that is required to pursue the opportunity commercially. The economies of scale typically pose a huge barrier to entry in rural or marginalised areas.

I believe that there are huge opportunities in the emerging sector of climate technology and environmental management. I recently saw a biomass to gas converter that can be installed in a community for only a few thousand US dollars. The converter is fed with biodegradable mass and then provides the community with gas for heating, lighting and cooking (another example here). There are many new technologies now entering the marketplace that can give rural areas a complete head start, with biodiesel being a obvious example. It would be great if we can find ways to link cleaner technology and climate technology with new innovative and competitive business processes within the context of value chain promotion!

Firstly, do you have any experience in working with these secondary value chains? Which products, technologies or end markets have you worked with?

Secondly, do you have pictures of obvious resources or business opportunities that are not exploited? I would like to build up a library of pictures of these products, so please post them to this blog so that we can get a movement going on these value chains.

Thirdly, have you investigated CDM and other climate technologies that have the potential to not only save the environment, but to improve the competitiveness of sectors and value chains?

If you are interested to read up a bit more on the green news in South Africa, then head over to Urban Sprout. They have a great website and lots of resources and links to keep you busy. If you are keen to get involved in investigating some of the value chains that are often overlooked, and that may offer interesting opportunities for exploiting by-products chains then share your ideas here!