Category: Thinking out loud

The Death of a Guru: Eli Goldratt

On June 11 Dr. Eliyahu M. Goldratt passed away (1947 – 2011).  While he was not so well-known in the development field, his thinking and influence had a deep impact in the world of management and especially manufacturing operations.

He is most famous for the creation of the Theory of Constraints. There must be hundreds of consulting firms all over the world that make a living from his ideas, and his ideas have made manufacturing viable even in countries with high manufacturing costs. In his most popular book, The Goal, he uses a novel format to get the reader excited about certain challenges within a manufacturing firm. This was followed by several other books that challenged dominant paradigms in since the 1980s. I can still remember reading The Goal the first time and the applying the insights in my first business. All my staff also read the book and we applied the theories in our work at customers.

But you would be wrong to think this book and theory is about manufacturing. It is about change. Actually, come to think of it, it is about equipping managers to frame their concerns, and then think them through. From my daily experience of interviewing firms to find ways to improve their competitiveness, I know that this is a problem. Managers of firms are too scared to write down their fears or concerns. They just allow them to nibble away at their confidence.

Take a look at the following example of how a very simple 5 step process can be used as a mantra to equip managers to think things through. One of the many useful processes developed by Goldratt is called “the thinking process”. I believe this is relevant also to economic development. It is a set of tools to help managers (in our case it would be translated to stakeholders) through the steps of initiating and implementing a project. It helps people to not only think through a problem, but it actually helps to build momentum towards a specific set of solutions. The thinking process steps are:

  1. Gain agreement on the problem
  2. Gain agreement on the direction for a solution
  3. Gain agreement that the solution solves the problem
  4. Agree to overcome any potential negative ramifications
  5. Agree to overcome any obstacles to implementation

These steps seem very obvious for people that are trained in change management. Not surprisingly Theory of Constraints practitioners would refer to these steps as working through layers of resistance to change.

I hope that Goldratt consulting and the whole Theory of Constraints movement will continue to share and promote their learning. We need this kind of frank discussion in the developing countries. If only we had such a neat and concise framework in economic development.

Dear Eli, Rest in Peace.

Market failure or marketing failure, or just old ideas under new labels

I am often stunned at how development agencies and practitioners justify their interventions to support enterprises as “overcoming market failure”. To me it seems there is a huge misunderstanding of what a market failure is, and how one can intervene to overcome the under-performance of markets. Over the last 8 years I have done intensive research into market failures, so let me do some copying and pasting from my thesis (Cunningham, 2009). The sarcastic comments where of course added in today ;-). Sorry Anja and Lucho, this is not the summarised version yet.

Here is the theory part….

Although economists describe perfectly competitive markets, in the real world markets do not always perform perfectly or optimally. When markets do not perform in an optimal way economists refer to the situation as a “market failure”. The MacMillan Dictionary (1986) describes market failure as “The inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optimal’ level”. Reference is made to the allocation of resources not being at the desired or optimal level. Samuelson and Nordhaus (1992:741) define a market failure as “An imperfection in a price system that prevents an efficient allocation of resources”. In this definition reference is made to the importance of the price system being able to reflect the true costs and value of a product, with natural monopoly, imperfect competition, asymmetry of information and externalities cited as examples.

Market failures are often visible in the forms of the growth of monopolistic firms and other non-competitive organisations, and when factors of production stand idle or certain kinds of opportunities are not pursued by business. Markets also fail when externalities such as water and air pollution are not included in their costs by firms, so that they make private profit at the cost of society. Roberts and Boudreaux (2007) explain that when a market fails this is effectively caused by failures in the institutional arrangements that support the market.

What this means in practice

Thus addressing market failure is about getting markets to perform more efficiently or optimally in the way that resources are allocated or decisions made regarding the production of goods and services. While certain interventions will be aimed directly at the market, other interventions are needed at the institutional level, and only some will be aimed directly at enterprises.

So a quick test here would be for you to check how much time you are spending working with enterprises, and how much time on market systems and the supporting institutions (which could be organisations, but mostly means far more than this).

It takes time. Lots of it.

At this point it is important to realise that it takes demand and supply some time to find the right signals such as price. Unfortunately us development practitioners don’t like this part, but it can take a long time (sometimes a decade) for a market to figure out what the main drivers are (price, quality, value, etc). In a healthy market there is a range of product offerings at different prices targeting different customer profiles. These offerings may have very little relationship with the original products and firms that created the market in the first place.

So it takes time, that is why a market can be described as a dynamic system with feedback loops.

“But firms dont know what to produce or who to sell to – there is a market failure!”

This argument is held forward mainly by small enterprise development practitioners, although even academics in business schools sometimes argue that you can solve a market failure through better marketing.

It is important to distinguish between the economics concept of market failure, and the business management result of a marketing failure. In marketing management literature a marketing failure implies that a firm has made a poor judgement in its marketing strategy, or that marketers have failed to understand that marketing should not be seen as a functional discipline but as an integrative business process. When firms fail to capture a market share due to poor marketing strategies, this can be referred to as a marketing failure. The solution too marketing failure is not in economics or sociology, but in better business management.

The verdict

So how can a development practitioner claim to assist in overcoming market failure by assisting a firm to write a business plan, or by helping a firm to find a venture partner or a new customer? Or how can a university justify developing a product for a firm using state funds in order to overcome market failure.That is just bad development practice. Even if you could somehow justify these interventions on some sub-clause somehow related to a market failure, it remains highly un-systemic and the “failure” will persist.

Recycling old ideas under new labels

I suspect that despite huge international policy pressure for development programmes to address market failure, many practitioners are simply recycling their old tools like poverty alleviation and small enterprises development under new labels.

Perhaps it is best if  you just call what you are doing marketing and business management support, then at least you can refer to a whole pile of business management books.

PS.

Bear in mind there is a whole group of people that dispute that market failures even exist (I even agree with many of their arguments), as well as many groups that believe that markets are evil and should not exist (I agree that markets ARE NOT ALWAYS the best transaction mechanism). But let us leave something for another day.

References:

CUNNINGHAM, S. 2009. The role of market failure in the utilisation of Quality Management services by the tooling industry. Ph.D Thesis, North West University,

PEARCE, D.W. 1986.  Market Failure. In Macmillan dictionary of modern economics. Pearce, D.W. (Ed.).

ROBERTS, R. & BOUDREAUX, D. 2007.  Boudreaux on market failure, government failure and the economics of antitrust regulation. In Library of Economics and Liberty – EconTalk.  Liberty Fund, Inc., Indianapolis, IN. [Web]  http://www.econtalk.org//archives/2007/10/boudreaux_on_ma.html [Date of access: 2 February 2009].

SAMUELSON, P.A. & NORDHAUS, W.D. 1992.  Economics. 14th ed. New York, NY: McGraw-Hill.

Why the advanced sectors are so often overlooked

It is amazing how little support the advanced sectors of our economy receives from public sources. It seems like this disinterest is caused by multiple factors. One, it is not in line with the priorities of the labour movement. The labour unions prefer a focus on job creation for low skilled workers. However, research has also shown that every professional worker in the knowledge sector creates a multiplier of jobs for lower skilled workers. But like an official told me last week: “the problem is that we don’t want the rich people with skills to get richer. We want the poor people without skills to benefit”. Before you laugh, many development agencies and donors are nurturing the same ideas.  Can someone please explain to me why we choose to cap the income of the ‘rich’ and ‘skilled’? The fact that there is such a high premium on skilled workers are symptoms of a much bigger problem. Can someone also again explain how we are going to get people out of poverty by focusing exclusively on the people in the trap?

Let me get back to my main argument…

The second reason why the advanced sectors are overlooked is because they are so difficult to understand. Knowledge is often not a product in itself, but an input into other production sectors. Therefore it is difficult to describe, capture, measure and report on. But the truth is that more and more of our economic sectors are becoming knowledge intensive. Even something is ‘simple’ as farming (which was done mainly be people with low academic qualifications less than 50 years ago) is now increasingly knowledge intensive. This knowledge intensity is partly due to technology, but also because of the natural specialisation that occurs within industries. A challenge is that we do not do enough in developing countries to embrace and measure the knowledge economy (which is not about clever academics).

The third reason the advanced sectors receive so little public support is because the business sector itself struggles to justify or articulate their needs. The problem with specialisation is that everyone is indeed on their own little island. Thus fragmentation is part of the character of the system.

Perhaps final reason is because development practitioners and public officials think that the clever dudes in the advanced sector can help themselves. Well, have you ever noticed what happens with collective intelligence without a facilitator – it goes down. Putting a bunch of experts in the room will not necessarily result in clever expert ideas coming out. Furthermore, the business owners in the advanced sectors are fierce rivals, all fighting or lobbying for their ideas to become standard. Perhaps I should add that even highly educated and specifically highly experienced people are also blinded sometimes, or are sucked down a dependency path. A final point is that the advanced sectors in other countries are getting really advanced support from the public sector, so leaving our advanced sectors to help themselves is not a wise idea in the longer term. If you want to see what income inequality looks like, then leave the game for just a few to play, with high risks and even higher rewards to the few people that can overcome the technical, market and government obstacles placed in their way (if it sounds familiar it is because it is already happening. Come to South Africa if you want to see this).

Might I add that many donors also prefer to work with the poor and the helpless for political reasons, despite the fact that so many research reports have shown that you cannot solve the problem by working on the symptoms.

So perhaps we need to take a step back and look at the levers created by the advanced sectors in developing countries. We need a more systemic perspective of what is driving change and prosperity in these countries.  I am convinced that we should shift our attention from trying to get one more farmer into a system with no margins, and shift our attention to the industries in the countries we work in. We should use our diagnostic tools to overcome market failures, low economies of scale, and help articulate demand that can create new industries (or new pressures to improve performance).

How competition changes comfort zones

AFP reports that Stephen Elop the CEO  of world-leading mobile phone company Nokia explained that Nokia is “standing on a burning platform,” surrounded by a “blazing fire” of competition.

As consumers we celebrate that competition drives firms to come up with better products. But for firms it takes a lot of effort to stay in the game.

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.

Are we doing better than we thought?

I believe that property ownership is an important source of start up and expansion funding for many kinds of enterprises. Authors like Prahalad and De Soto have written extensively on the importance of recognising property as an asset class that allows all kinds of enterprises to bloom.

An article in Fin24 caught my eye this morning. It is about research conducted by the credible economist and researcher Mike Schüssler into property ownership in South Africa. The research shows that black ownership of properties have increased significantly, with 41.7% of primary residential ownership in the hands of black owners. The governments housing programme has contributed to this market, and have assisted many people to own their first property. The report also seems to show that commercial banks have recognised the growth potential in this market, and have assisted with loans to first time and second time buyers. What I find interesting is that the research shows that 31.7% of black home owners also owns a second property, and that 260 000 black households were currently partly living off rental income. Wow, there is an interesting market for you.

Although there are still huge differences in the values of the properties, having something small that belong to you and that has value is probably underestimated.

Are we doing better than we thought? I know that the government is not satisfied with many low cost houses, but I still think that we need to give the government credit here for starting a process that has created a huge asset base in the black communities. Another related question is whether banks are maybe more helpful than we thought. It seems to me that there are a huge number (more black than white) bondholders in the current market. Yes, I know the whites are the minority, and yes, there is still a lot of room for improvement. But please pause for a moment and reflect on how far we have come!

What happens when the leadership signals that the institutions are unfair

I sometimes hang my head in shame. While political and business elites are being prosecuted, senior political leaders step up in support of them. Now I know the risks of posting something related to politics, but I am deeply concerned by this trend. Let me start with the reason – politics aside.

If you start from the premise that strong institutions play a critical role in growth and the reduction of poverty, then the importance of the legal system is clear. But as many clever people have argued, institutions are not only formal laws, clever lawyers and courts. It is also the meta-level attitude of the populations towards the justice and legal system. In South Africa, I suspect a large part of the population, both black and white, do not trust this system. Thus while we have a strong formal legal system, the informal meta level trust in this system is lacking.

While we understand the hesitation of some government leaders to support this same system that has been used in the last few years to try and bring them down, the general distrust communicated EVERY DAY undermines our countries progress. It seems in the past the legal system was frequently abused to achieve political goals – so there might be more to this distrust. Certainly our justice department should be very worried about this – and mechanisms to prevent this should be installed.

And now to the case that prompted me to write this post. It involves John Block, the ANC Northern Cape chairman and provincial finance MEC. Last week he appeared in court on some serious allegations. Despite that fact that many of the accusations relates to his crimes against the government in the province (hence also against the society), senior government leaders came out with almost unconditional support for “their man”.

The Premier issued a statement outside the court: “Being mindful of the principle of one being innocent until proven guilty, and taking into cognisance the legal maxim of audi alteram partem [hear the other side of the story], the premier of the Northern Cape, Mrs Hazel Jenkins, together with the members of the executive council, offers their full support to .. Block, pending the outcome of the court case.”

If you read this statement carefully, then even a novice would notice some serious flaws in this argument.
To start with, Block is not innocent until proved guilty. He is presumed innocent unless proved guilty. He is not innocent, he is presumed to be so. This principle, taken with the audi alterem partem principle the Premier cites, means that the state prosecutors have as much right to be heard as Block. Their allegations against Block hold as much weight right now as Block’s protestations that he is innocent. I think the senior leadership of the ANC needs to realise that they cannot fight “corruption” if they constantly undermine the legal system and the legal process. If this is really a conspiracy, then hopefully his legal team would be able to prove this. However, I think it is important that we send strong messages that we support our legal system, and that if he is innocent, this will be proven. However, if he is guilty, then our society should celebrate this. I remember some years ago that senior government leaders walked with Tony Yengeni to prison, almost as if to say that they system was unfair for catching him out. These small acts eats away at the pillars of our institutional system.

What does this have to do with development? Well, if senior officials and leading business people seem to be above the law, what messages does this send throughout the system? I am increasingly detecting a very bad attitude at the micro level, both in business and government.  This is re-enforced by signals coming from our leadership. Many government people that do not care about business or their jobs, they are busy building their own careers (or busy with something else). Many are afraid to be caught out as being incompetent in their jobs, and quickly revert to accusations of racism whenever confronted about their lack of delivery (nevermind service). Businesspeople, especially smaller and younger firms, are heading into the market with an entitlement attitude. Wheeling and dealing to get deals, thinking that dealmaking adds economic value. It hardly does. When will we come to our senses?

In our society, with is fragmentation and developing nature, there are many opportunities for public and private elites to exploit vulnerabilities or opportunities in a way that is not beneficial for our society. There are temptations everywhere. While we are building this new system (which is still young) we are bound to have good people go bad. Nobody stands above these temptations. But we need to know that when you cheat, you will be caught and processed.

For our institutions to work for us, we need to endorse them, support them, and work on our societies meta-attitude towards them. Our leaders should be sending messages saying “we have a fair and just system, and we believe that our system will find the truth”. Somebody credible should stand up and proclaim that if you are dishonest, then you are stealing not from the whites, but from the society. And if you are dishonest, you will be caught, and you will be prosecuted. No matter how important you are now, no matter how great you behaved in the past.

If this undermining of the legal system continues, our country will probably still survive, but not in a just way. This is simply due to the fact that the fragmentation in our society means that some people will still be able to find clever ways of running their enterprises despite the turmoil. This too I see on a weekly basis- business people that are innovating new products, processes, business models – building tremendous and healthy wealth in the process. But this is not enough for the society as a whole, as most people will face a decline in living standards, while those that can raise above the system (by accessing institutions in other societies for instance) will thrive.  If things get too bad, a lot of these people will follow international investors to other places where the institutions, both formal and informal, are working in support of growth and development.

Promoting the case of business growth in developing countries

I knew something like this had to exist. An unapologetic argument of why we should focus on building business in developing countries, and why topics like corporate social responsibility and other issues are considered by business as “taxes” or “distractions”.

“The case for business in Developing Economies”  by Ann Bernstein provides such a case. When you open the book you find endorsements from a wide range of credible people, including one of my favorite authors Martin Wolf (Chief Economics Commentator, the Financial Times).

In too many conversations companies are painted as bad guys, and profit is even sometimes described by people as “undesireable”. Somehow, business is now associated with environmental destruction, exploitation, and excessive profits. Ann questions some of these labels. She also question whether we should not put more pressure on business to focus on profits, growth, wealth creation.

For the official review of the book, click here

For a podcast where Ann Bernstein is interviewed about her views, click here

 

Happy reading!

Re-learning the things we once knew

I have recently spent a time browsing through old documents, textbooks and manuals as part of my preparation for a “creative facilitation” event to be conducted in South Africa in October 2010. I am stunned by how much I can immediately recognise, and how much I have vaguely remembered. Perhaps I should do this more often. Just browse through old documents and old books.

It is funny to find something I wrote in 2005 and then think “wow, how cleverly this was written!“. I even re-discovered some useful summaries I had made on process consulting, change management and facilitation.

What have you recently re-discovered?

New feature enabled on the site

One thing about this blogging platform is that they are constantly adding new features.  I have enabled the feature that makes it easier for you to share any my posts with others. At the bottom of each post (just above the comments) there is a share button. Click it and share!

A few of you have asked me how often I plan to update this site. Generally I am trying to post an entry every two weeks. Perhaps you should subscribe to the site (top right) then you wont miss any new postings!

Thank you for all your feedback!

Shawn