AFRICA SMME CONFERENCE, JOHANNESBURG, 25 OCT 2007

INTEGRATED SUPPLY SIDE MEASURES FOR

VIABLE AND COMPETETIVE SMALL BUSINESSES

VUYO MAHLATI

INTEGRATED SUPPLY SIDE MEASURES FOR

VIABLE AND COMPETETIVE SMALL BUSINESSES

COMPETETIVENESS

LINK WITH

‘ECONOMIC PERFORMANCE’

Economic Performance Measures– Sustained ROIC– Sustained Revenue Growth

Foundations of Economic Performance

IndustryIndustryStructureStructureIndustryIndustryStructureStructure

Relative Position Relative Position Within the Within the

IndustryIndustry

Relative Position Relative Position Within the Within the

IndustryIndustry

- Overall Rules of Competition - Sources of Competitive Advantage

Good or Bad Business Good or Bad Position

• The fundamental unit of strategic analysis is the industry− Defining the relevant industry a company competes in is essential to strategy

• Company economic performance results from two distinct causes, and strategy must encompass both:

Source: Prof M. Porter, 2007

Marketing& Sales

(Lead generation, Model home

display, Sales force, Customer

selection of personalized

options)

Land Acquisition & Development

(Identify attractive markets, Secure

land, Procure entitlements and permits, Prepare

site)

Construction

(Design, Engineering, Schedule and

manage construction

process)

Closing

(e.g. Customer Financing,

Contract, Title, Closing)

After-Sales Service

(e.g. Warranties, Customer

Complaints)

M

a

r

g

i

n

Primary Activities

SupportActivities

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Procurement(e.g. Materials, Subcontracted Labor, Advertising, Services)

Technology Development(e.g. Product Design, Testing, Process Design, Materials Research, Market Research)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Foundations of Competitive Advantage: Defining the Industry Value Chain

Value

What buyers are willing to pay

Source: Prof M. Porter, 2007

There can be different ways of configuring the value chain in the same industry

GovernmentPolicy

Threat of SubstituteProducts or Services

Threat of New Entrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Suppliers

Bargaining Powerof Buyers

Industry Structure in ContextRole of Government

Source: Prof M. Porter, 2007

ASGI-SA: Isolating key constraints

Relative volatility of the currency and interplay among main indicators

Cost and efficiency of national logistics system and some infrastructure

Binding constraints that inhibit movement to a higher range of investment, job-creation and thus economic growth

Deficiencies in state organisation, capacity and strategic leadership

Regulatory environment and burden on small and medium enterprises

Barriers to entry and competition in sectors of the economy

Size of domestic market and distance from major global markets.

Shortage of suitably skilled labour and disjointed spatial settlement patterns

Value Proposition: A case for:-

• Integrated Supply Side Measures that are:– Demand-driven– Enhancing value-chain based mainstreaming– Prioritizing economic performance– Building on existing potential– Adaptive to context, and– Optimize/Maximize – Collaborative Strategies

Value Proposition: A case for:-

• Integrated Supply Side Measures that CAN:– Bridge the small and big; informal and formal;

rural-urban, 1st and 2nd economy divide – Move from isolated micro projects to scalable

interventions– Maximize the Procurement potential in both

public and private organizations

SMME CHALLENGES

• Current growth context has relied on imports of consumer goods

• Poorly developed alternative markets available at low income households

• Weak capability of new producers & distributors to penetrate existing markets

HSRC

SMME CHALLENGES

• GDP growth of 5% has not translated to massive reduction in unemployment & poverty.

• Level of SA productivity is amongst the lowest in the world – ranked 47 out of 50 countries. SA Productivity Institute Study, 2004

• Level of entrepreneurship amongst the lowest in the world – at 12% compared to 56% in developing countries. Global Entrepreneurship Monitor Study 2005.

• Most small businesses are not making profit – just surviving.• CIPRO is recording the highest number of company/cc registration

in the last 2 years, yet most of these companies are dormant. • BEE deals are not redistributive in nature …very small amount of

these deals trickle into the 2nd economy. • Various Small Enterprise Development initiatives are not well

coordinated resulting in waste of resources. • Too much reliance on what the government does to develop small

enterprises Source: Dreamplus

BUSINESS PYRAMID

00000000000000000000000000000000000000000000

000000000000000000000000000000000000000000000000000000000000000000000000

0 0 0 0 0 0 0 0 0 0 00 0 0 0 0 0 0 0 0 0

0 00 00 00 00 00 00 0 0 00

0 0 0 0 0 0 0 0 0 0

Private Limited Co’s Public companies

Private Limited Co’s Few CC’s, Partnerships

CC’s, Sole propriety, Unregistered businesses

Source: Dreamplus

Micro/ small

small/medium

Big

At the bottom of the pyramid businesses focus on survival as they struggle to make a decent profit

100%92% <R8000p.m.

0%

78% <R3500p.m.

35% <R400p.m.

Corporate Sector

Medium

Small

Micro

Survivalists

Mainly Urban

Mainly Rural

PA

RA

STA

TA

L C

OV

ER

AG

E

UPPER CLASSMainly White Males

MIDDLE CLASSAll Races

LOWER MIDDLE CLASSMainly Black

POOR LOWER CLASSMainly African

POOREST OF THE POORMainly African Female

CO

MM

ER

CIA

L B

AN

KIN

G C

OV

ER

AG

EStandard BankFirst National Bank

ABSANedbank

Etc.

IDCDBSA

LandbankKhulaEtc.

DeregulatedCommercial

LendingIndustry

NGOFinancialInitiatives

Financial Services

SocialGrants

Business Communities

TWO ECONOMIES OF SOUTH AFRICA TODAY

•Regulatory Environment: well developed and state supported

•Legal instruments: well developed and are fully accessed by the institutions

•Institutions/agencies: serve primarily the well-off and employed

•Skills and HRD training Clear career tracks from secondary school to management

•Resource base: massive available resources with substantial backing from the state

•Business culture: promoted by private sector

SocialResponsibility

74% <R2500p.m.

48% <R800p.m.

14% No income

•Regulatory Environment: Hardly exists•Legal instruments: Poorly developed and inhibits development of CBOs and NGOs•Institutions/agencies: Almost non-existent•Skills and HRD training No career opportunities•Resource base: Very poor and almost no state backing•Business culture: Non-existent and ignored by private sector

<1

00

Em

pl.

Tu

rnover

R1

50

00

0 <

10

Em

plo

yees

No E

mp

loyees

UNBANKED

Source: WDB

DFI mandates - focus areas

Retail

Business Finance

Infrastructure

Other

Housing

TYPE OF USE

Tourism

Manufacturing

Mining

Housing

Agriculture

SECTORS

ND

AID

T

NH

FC

IDC

KH

UL

A

La

nd

ba

nk

DB

SA

NT

SIK

A

RH

LF

Retail

Business Finance

Infrastructure

Other

Housing

TYPE OF USE

Tourism

Manufacturing

Mining

Housing

Agriculture

SECTORS

ND

AID

T

NH

FC

IDC

KH

UL

A

La

nd

ba

nk

DB

SA

NT

SIK

A/

SE

DA

RH

LF

Institution

Focus

Large

Medium

Micro/Small

BUSINESS SIZE

Large

Medium

Micro/Small

BUSINESS SIZE

A MODEL FOR ENTREPRENEURSHIP SUPPORT

Economic growth occurs Incomes increase Living standards improve Investment opportunities arise

Entrepreneurial orientationCulture Role models

Education Work experience Personal orientation

Enterprise culture

Supportive Environment

Infrastructure Finance Laws Training

Policy framework

Co-operative Environment

Institutions which are actively involved and assist with new

org development

Entry of entrepreneurs

Acquired abilities Inherent abilities

Products / Services

Results of entrepreneurship

+ Tax base is enlarged by a greater

number of new firms Technological development occurs Job opportunities arise

Prof Nieman

INTEGRATED AND COLLABORATIVE METHODS FOR LOCAL ECONOMIC DEVELOPMENT

An integrated furniture cluster

A garmentcluster

A large metal-working company

Regional service providers:• Health care• University• Wholesale trade

Farmers and small food processors

Local producer services:IT, transport, construction, ...

Local consumer services:Retail, beauty, ...

Government

Wood valuechain

Textile + garmentsvalue chain

Global buyers

Traininginstitutions

Businesspromotion

Financeinstitutions

PROCUREMENT

• Anglo American’s divisions and operations recorded R2,4 billion in procurement transactions with BEE SMEs and related business development initiatives during the 2002 financial year, up from 807 million in 1999.

SAE Case StudyFacts (2003 – 2004 Fyr)

Details Figures

Sample of tenders issued by Municipality 215

Tenders withdrawn 13%

Tenders awarded to Big Construction Co 58%

Tenders awarded to white SME 22%

Awarded to HDE’s 7%

HDE that sell tenders (no equipment/ collateral) 92%

HDE Failure rate (those that did not sell) 60%

HDE outright success rate 0.224%

Estimated BEE portion of R90bln budget 0.23%

Estimated years to have 50% of HDE participation 223

Challenges

• Lack of Access to working capital

• Lack of access to equipment

• Lack of Capital To buy Equipment

• Poor business &/or technical skills

• Poor Project Management skills

Value Proposition

• Develop a dedicated Emerging Contractor Support Programme

• Provide Technical Assistance to SME in the Construction Industry

• Facilitate a partnership between Government and Financial Institutions

Key Players in the VP

EDA

CLIENT

FINANCE INST

SMME

•Issue & award tender•Facilitate repeat business

•Issue & award tender•Facilitate repeat business

•Make Loan Available to SME•Contribute to TA cost

•Make Loan Available to SME•Contribute to TA cost

•Provide Technical Assistance Manage loan repaymentProject ManagementFinancial Management

•Facilitate material procurement

•Provide Technical Assistance Manage loan repaymentProject ManagementFinancial Management

•Facilitate material procurement

•Secure business•Meet specific requirements•Performs as per contract•Commit to support scheme

MACRO/MICRO FRAMEWORK CHALLENGES

• Rural economy revitalization thru local value creation (rural poor as labour, consumers & social service beneficiaries)

• Tradeoffs between the rate of reduction of inflation and the rate of real growth and employment creation in (particularly) the rural economy.

• Relationship between sustained economic growth and rural economic drivers

• Urban – Rural Linkages • Economic Institutions (see below)

EMBEDDEDNESSINFORMAL

INSTITUTIONS,TRADITIONS, NORMS,

RELIGION

INSTITUTIONAL ENVIRONMENT: FORMAL

RULES OF THE GAME – ESP, PROPERTY (POLITY,

JUDICIARY, BUREAUCRACY)

GOVERNANCE:PLAY OF THE GAME – ESP.

CONTRACT (ALIGNING GOVERNANCE STRUCTURES

WITH TRANSACTIONS)

RESOURCE ALLOCATION AND EMPLOYMENT (PRICES AND

QUANTITIES; INCENTIVE ALIGNMENT)

Source: Williamson, 1999.

ECONOMICS OF INSTITUTIONS

L1

L 2

L 3

L 4

Social Theory

Economics of Property Rights(Institutional Environment)

Transaction Cost Economics(Governance Structures)

Neoclassical Economics/Agency Theory(Marginal Conditions)

Thank You!

vuyo@sisekose-afrika.co.za