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.

Responsive but not pro-active innovation in business

During last year I conducted more than 100 interviews at engineering and high-tech firms in South Africa. This fieldwork was part of trying to better understand the innovation systems of which these firms formed part. On reflecting on the interview notes, I am shocked by a pattern that shows that the greater majority of these firms had a mainly responsive strategy to innovation. This means that many firms mainly did development and research work once customers asked for a specific improvement or change in a product. At least they are very responsive, but how to get from responsive to pro-active?

Although there were many firms that had a more pro-active approach to research and development, they were in the minority. Very few firms started from a scientific or technological base, combined with some or other research problem. Even firms that reported formal research and development budgets were mainly busy with incremental improvements on existing products.

From the very small sample that I have I can see that firms that had some kind of official or formal approach to research and development outperformed firms without these systems. It begs the question whether they first performed better and then engaged in product development (based on some research), or whether they first formalised research and then improved their performance. This question leads us nicely to the important point that innovation goes beyond product and process research, and that it also includes business management innovations. My research definitely supports the idea that more innovatively managed firms seems to be more creative in terms of research and development aimed at product or process innovations.

Many firms in South Africa complain that being pro-active requires fast amounts of working capital, as the economies of scale are too low to warrant huge investments. So many firms work from a successful past product. This has two implications. Firstly, that new entrants will struggle to get in at all. Secondly, that firms without a product to build on would be in deep water. But does this also pose an opportunity? Does this mean that if we can find new technological ways to overcome scale dependencies we can create new markets? Secondly, in a country with very demanding and sophisticated customers, should there not be many entry points that are not so scale dependent?

My New Years resolution is to investigate the relationship between science in business and innovation in business. Why are so few firms using a more scientific approach or basis in their business? Can science in business be stimulated? Can we use our technological and scientific base to create completely new markets, thus moving from fast and customised response to pro-active market creation?

PS. With scientific approaches in business I do not necessarily mean having labs full of white coated scientists brooding over bubling concoctions.  More about that in a next post.

How do you think we can deepen the use of science in business?

User-led innovation

Here is another short article that I wrote on the topic of user-led innovation. Many of my clients are asking about this topic. Because we are so far away from the industrialised countries, and because we have such huge geographical spaces to cover, we are faced by sophisticated and sometimes unreasonable demands. Therefore lead firms, lead customers, government and problems solvers are all asking for some very demanding solutions. Many of them are not waiting for new innovations to come from the markets, they are simply innovating to solve their own problems.

In recent years the focus in value chain promotion has increasingly emphasised the importance of systematic and market-based interventions. Within innovation system promotion, markets are important not only as selectors or buyers of successful innovations. Specialised users or unmet local needs could also be used as an impulse to stimulate innovation in a specific part of a value chain. The challenge here is not to ‘import’ technology or ‘solve’ a problem, but to get industry and its supporting structures to respond to this opportunity. This can often be achieved by better articulating unmet needs, or facilitating interaction between innovative producers and user groups.

Authors such as Von Hippel (2005, 1988) have over the years made a strong case for recognition of the innovations introduced by users, especially lead users. For instance, Von Hippel argues that customers (markets) often know what design criteria they have, and if a producer can capture this knowledge then new products could be created. Other authors, most notably Michael Porter, has in several publications indicated that the force of market demand not only shapes the design of products and technologies or strategies of firms (i.e. 5 Forces analysis), but that it could affect industry structure (i.e. the Diamond of Competitiveness). In his work Porter also emphasises the role of sophisticated or demanding customers in the innovativeness of firms.

Lead users may also provide unique opportunities for firms to innovate by customising or combining existing elements of technologies to respond to the needs of a potential customer group. For instance, many medical devices originate from the US or Europe. But surgeons and operating theatre staff working in distant locations may have unique functional requirements for these instruments, and if approached or observed in their working environments may provide important clues or insights on how instruments can be customised to improve their functionality. While firms in developing countries may be far from large markets, they are often close to specialised or niche users that may then create opportunities for innovators.

The risk of an emphasis on user-led innovation is that path dependence may occur and that blindness to rival technologies may result in a marketplace being disrupted by a rival technology. Path dependence occurs when producers respond to the demands of a certain kind of customer through investment choices that do not allow the producer to switch to a different technology or market. These customers may in turn be exposed to other market forces or technological change processes that may affect their continued demand for a given technology. The risk of the strong governance of strong buyers in the chain may then lead to a tunnel view that does not consider the upgrading potentials and requirements of the whole innovation system in the sector or region, but a too-narrow perspective on companies and their need to upgrade according to the demands of the main buyers and final customers[1]. The insights as well as interventions may be too narrow and may not lead to more proactive knowledge loops but to a reactive orientation that does not encourage new ways of doing things in the system.

Experienced value chain practitioners will be able to identify the opportunities and the risks of working with lead users as sources of innovation, as in value chains lead customers often emerge who can be used to better position certain actors in a chain. Although this usually works to the benefit of certain kinds of chain actors, it could also be argued that it deepens the dependence on specific kinds of customers (resulting in path dependence).

Sources:

VON HIPPEL, E. (1988) The sources of innovation, New York, NY, Oxford University Press.

VON HIPPEL, E. (2005) Democratizing innovation, Cambridge, MA, MIT Press.

[1] For instance, the IDS has published several papers on this and related topics which can be found at http://www.ids.ac.uk/go/idsproject/clusters-in-the-global-economy

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!

Twelve business ideas that are changing the world – Link

Here is a link to a 12 episode series published by the Times and the Times Online. In the series, they interview 13 influential business figures from a wide range of sectors as they explain an idea that they think is fundementally changing the way we do business today. Although some episodes were published as long ago as 2007, most are still relevant and though provoking. The Times now charge for their content, so I found that these episodes sometimes download from Podcast Directory, and at other times don’t….

Here are the direct links to the episodes:

1. Medicine in the developing world

Innovative partnerships are crucial to overcoming diseases like malaria, which, as well as their devastating cost in human terms, are hampering the economic progress of developing nations

2. Government as a business

A strong and efficient public sector is fundamental to the strength of any society, and governments can draw lessons from the private sector

3. Micro finance and its role in 3rd world poverty relief

The provision of financial services in the developing world is a crucial means of ensuring sustainable economic growth and lifting people out of poverty

4. Private equity modern entrepreneurship

Sir Ronald Cohen, Founding Partner and Executive Chairman, Apax Partners Worldwide. Successful entrepreneurship and the importance of the private equity industry in the British economy

5. Vacating HQ: how social innovation is redefining the corporate world

Ben Verwaayen, CEO, BT: Technology is changing the way we do business, bringing the world’s best talents together

6. The flexibility of industry’s new access to capital

Sir David Walker. Author, the Walker Report into private equity. Tuning the balance between transparency and secrecy in the world’s most private industry

7. The business of engineering

Engineering has changed the world and can continue to do so, but first it must change its own fate

8. The evolution of the equity market

From their origins in the seventeenth century, today’s high-tech stock exchanges are playing a crucial role in global economic development and are at the heart of the globalisation story

9. The day corporates gained responsibility: the chief executive’s view

How companies turned the inevitable into the profitable

10. The day the corporates gained responsibility: the investors view

11. New world order

The global marketplace for skills is revolutionising business and communities – but where will it lead?

12: The democratisation of information

Jay Adelson, Founder and Chief Executive, Digg. The internet is changing the way we access and share information, and it gives us all a voice

13: Powering the future

Britain must reinvent its attitude to energy if it is to meet the challenges of climate change and fuel inequality

I hope that you are able to download these episodes.

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?