Topic: Business Development

Introduction

As the South African National Framework for Local Economic Development (LED) states: "LED aims to enhance competitiveness and thus encourage sustainable growth that is inclusive."

Local economies' competitiveness is "the degree to which a local economy can, under free and fair market conditions, produce goods and services which meet the test of local, national and international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term" (definition by OECD).

Hence, competitiveness of a local economy depends heavily on the local private sector comprising of any size of large, medium, small and micro enterprises and its performance. In order for enterprises to perform, grow and ultimately create jobs and income for the people of the local economy, many ingredients are required, such as a policy environment conducive to enterprise competitiveness, access to the factors of production such as labour, land, capital, infrastructure, technology and innovation and expanding markets for products and services.

Policy makers and other stakeholders from the public, private and civil sector of a local economy can rely on a variety of established instruments and approaches to contribute to the competiveness of local enterprises and therefore of the local economy. Special emphasis is thereby given to Small Business development since Small Businesses are the back bone of any economy and the main driver of economic growth that is sustainable if it translates into reduced poverty through the creation of jobs and income.

Definition

Small Business Development is a field of intervention that intends to strengthen individual Small Businesses as well as their interlinkages in a local economy through a variety of approaches. The ultimate objective of intervention in Small Businesses Development is to improve Small Businesses performance in local economies, as a means to achieve higher economic growth, employment and income, reduce poverty, and meet social objectives.

As stated in the SA LED Framework: "Local Government is not directly responsible for creating jobs." Rather, it is responsible for ensuring that the overall economic and social conditions of the locality are conducive to the creation of employment and income opportunities.Therefore, one of the four strategies of the SA LED Framework is about Small Business Development:

Strategy 3 aims at "Intensifying enterprise support and business infrastructure development in local areas" and thereby focuses on supporting functions for Small Businesses to develop. The strategy specifically elaborates on Business Development Services (BDS) for Small Businesses to increase their performance and access to finance for Small Businesses to grow. The following paragraphs therefore elaborate on BDS and Access to Finance.

Characteristics of Market Development
  • It is a systemic approach: instead of assisting the Small Businesses and farmers directly, it tries to develop systems that ensure that the poor have access to services that they need on a sustainable basis to fight poverty.
  • It is an indirect approach: working to develop these systems inevitably results in a time lag between project interventions and Small Business level impacts - it is not a "quick-fix" approach.
  • It is an incremental approach: This requires evolving packages of interventions over time, in different service markets or group of markets to improve the competitiveness of a sector.
     
    (See http://www.katalystbd.com/content.php?id=18&pid=16 for a successful example of this paradigm shift.)

As stated in the SA LED Framework: "Local Government is not directly responsible for creating jobs." Rather, it is responsible for ensuring that the overall economic and social conditions of the locality are conducive to the creation of employment and income opportunities.Therefore, one of the four strategies of the SA LED Framework is about Small Business Development:

Strategy 3 aims at "Intensifying enterprise support and business infrastructure development in local areas" and thereby focuses on supporting functions for Small Businesses to develop. The strategy specifically elaborates on Business Development Services (BDS) for Small Businesses to increase their performance and access to finance for Small Businesses to grow. The following paragraphs therefore elaborate on BDS and Access to Finance.

Key Issues

Business Development Services include training, consultancy and advisory services, marketing assistance, information, technology development and transfer, and business linkage promotion. A distinction is sometimes made between "operational" and "strategic" business services. Operational services are those needed for day-to-day operations, such as information and communications, management of accounts and tax records, and compliance with labor laws and other regulations. Strategic services, on the other hand, are used by the Small Business to address medium- and long-term issues in order to improve the performance of the Small Business, its access to markets, and its ability to compete. (From: Business Development Services for Small Businesses: Guiding Principles for Donor Intervention, 2001 Edition)

There are different types of BDS depending on the delivery mechanism:

  • Transacted services: This refers to a situation where there is a distinct supplier of knowledge and information, often outside the value chain, and a payment in cash or kind takes place. Examples include management consultancy, advertising services and market research.
  • Embedded services: This refers to services that are packaged or bundled within commercial transactions in the value chain. There is normally neither a distinct service provider nor a fee paid. Examples include design advice to a manufacturer from a buyer or knowledge on input use from an input supplier.
  • Public Benefit Services: This refers mainly to services provided by chambers or associations which have an effect beyond a single Small Business. Examples include advocacy for business friendly regulations or information on new trends and opportunities.

Types of payment mechanism for BDS

In addition to different types of services and types of delivery mechanisms, there are different types of payment mechanisms for BDS. The price of the service may be charged as a direct fee, as a component of the price of a bundled service (e.g. when Small Businesses accept a lower price for their products in exchange for technology assistance from buyers), or on a commission basis (e.g. when marketing service providers are paid upon successful sale of products). There is some evidence that Small Businesses are more willing to use services offered on a commission basis than on a fee basis, since this type of payment mechanism reduces risks and cash-flow requirements.

The actors involved in BDS include:

  • Small Businesses, the demand side of the BDS market.
  • BDS providers, the supply side of the BDS market, provide services directly to Small Businesses. They may be individuals, private for-profit firms, NGOs, parastatals, national or sub -national government agencies, industry associations, etc. They may also be firms whose core business is not services but who provide them as part of a broader transaction or business-to-business relationship.
  • BDS facilitators support BDS providers, for example by developing new service products, promoting good practice, and building provider capacity. BDS facilitators can also work on the demand side, for example by educating Small Businesses about the potential benefits of services or providing incentives to try them. Other BDS market facilitation functions include the external evaluation of the impact of BDS providers, quality assurance, and advocacy for a better policy environment for the local BDS market. BDS facilitation is a function normally carried out by development-oriented institutions having the objective of BDS market development, which may include NGOs, industry and employers' associations, government agencies, donors and others.
  • Governments who may provide funding for BDS projects and programs. Beyond BDS interventions, the principal role of governments is to provide an enabling policy, legal and regulatory environment for Small Businesses and BDS providers, as well as public goods such as basic infrastructure, education and information services. There are also many facilitating functions which governments can play in the future, to promote more vibrant service markets.
Key issue in Small Business Development in South Africa: Access to Finance

There is high demand for credit from Micro and Small Businesses in South Africa. Market research indicates that 1.4 million Small Businesses reported a need for external funding to start or develop their business. The policy response has been positive, creating a number of development finance institutions, a micro finance apex fund, Small Business development organizations, and provincial development corporations.

On the supply side, banks in South Africa have identified Small Business as a growth area. The large banks have created specialized Small Business departments. Smaller banks are finding Small Business a natural niche as the large banks out compete them in the corporate segments. In addition, the Financial Services Charter has created targets for banks to extend services to previously under-served segments.

However, while demonstrating willingness to reach this market segment, the supply side responses are inadequate and primarily cherry picking. Total lending by the large four banks to black empowered Small Business is estimated at US$200 million (0.13% of GDP). Of the micro and Small Business population reporting a financing need, only 233,000 (17%) managed to obtain the required finance. Those that did manage to raise finance did so primarily by way of loans from friends and relatives (78%) and grants (6%) from government agencies and NGOs. Only 11,000 - a mere 0.8% - got finance from the main stream banks. 37% of South Africans have no financial products. For Previously Disadvantaged Individuals, PDIs (both female and male), the percentage is even higher at 42%. Critical products such as home loan have very low penetration - only 2% of black men and women have home loans. Thus demonstrate that only few have collateral with which to secure borrowings for their Small Business.

Key challenges remain in reaching the target segments - banks need more and better Small Business banking capacity, a large information gap makes transaction costs high, and Small Businesses need services to improve their competitiveness and comply with stringent bank requirements. These challenges can be overcome with outside help which can assist the sector to catalyse, and deepen the market, and to demonstrate profitability in Small Business finance.

Critical Success Factors

What has not worked..

Traditionally, donors and governments have intervened in BDS markets at the level of the BDS transaction: directly providing services to Small Businesses via public BDS providers, or permanently subsidizing services delivered by other BDS providers. In the old approach, donors and governments have tended to substitute for underdeveloped BDS markets, possibly crowding out existing or potential commercial providers of services. Traditional approaches have failed to achieve high outreach, since the numbers of Small Businesses served is limited by the amount of subsidies available. In addition, institutional sustainability has been low, since programs often cease when public funds are exhausted; this effect has often been masked in industrialized countries by the much greater level of funding available.

Mind shift in BDS - Facilitation

The BDS market development paradigm is driven by the belief that the objectives of outreach and sustainability can only be achieved in well-developed markets for BDS, and not by direct provision by donors and governments. This shifts the focus of public and donor intervention away from direct provision and subsidies at the level of the BDS transaction, toward the facilitation of a sustained increase in the demand and supply of services. In the market development paradigm, subsidization of transactions should be replaced by private payment for services. Similarly, donor and government support should be shifted away from direct support to particular BDS providers toward facilitation functions that develop the market in a sustainable way. The objective of BDS market development challenges donors to push the commercial orientation of the BDS market as far as possible through strategic investment with a development orientation. (From: Business Development Services for Small Businesses: Guiding Principles for Donor Intervention, 2001 Edition)

Critical success factor for Access to Finance: a market driven approach

As the experience of Absa Bank has shown, there are several crucial success factors for a commercial bank or any other financial institution to provide Access to Finance to Small Businesses:

  • It is crucial for a commercial bank to develop a strategy for Small Business finance: Absa has set up and invested in a Small Business finance unit that has developed a broad set of products for business start ups and expansion. Today, the unit is still cross subsidized by other business units, but it is Absa's explicit goal to have a sustainable business unit addressing the needs of Small Businesses.
  • In the down scaling process, the bank allows itself time for learning in order to understand Small Businesses and their needs better and adjust the products accordingly. There are parastatal organizations such as Khula Finance that support the downscaling process of financial institutions by providing a guarantuee scheme for Small Business loans. This risk sharing mechanism allows financial institution to target new clients.
  • It is essential to have a clear understanding of roles and responsibilities of the private financial sector and parastatal organizations: strategy and product development is a core business of a financial institution while mechanisms for risk sharing with a temporary function can be developed and provided by organsiations like Khula Finance.

Voucher schemes for BDS market development

If government decides to fund BDS projects and programs, it can choose a voucher scheme as proposed in the SA LED Network:

What is a voucher scheme? Voucher schemes allow qualified Small Businesses to choose from a wide variety of services the ones that best fit their needs and pay for them with the help of vouchers which can be fully or partially subsidized by government or donors. Both the Small Business and the BDS provider face a reduced risk because of the voucher subsidy and therefore are less reluctant to interaction, learning and innovation.

Why implement a voucher scheme? Voucher schemes put choice in the hands of consumers, in our case Small Businesses, rather than bureaucrats or international donors and generate benefits for a large number of Small Businesses and BDS providers:

  • To improve the income-generating potential of poor entrepreneurs.
  • To reach a large number of Small Businesses.
  • To develop a more competitive and vibrant market:
    • to stimulate the demand for services
    • to develop more exigent consumers by giving them the power to choose and the informa-tion to make good choices;
    • to entice training providers, who enjoy reduced risks and increased revenues, to invest in the development of new courses;
    • to provide a greater variety of more affordable courses to microentrepreneurs, and to bring about a restructuring of the training market in a fundamental and sustainable way and diminish the power of the privileged state-sponsored training providers.

Theoretical Knowledge

Title & Detailssort descending User Ranking Popularity
Assessing Business Development Impact: A Management Framework for Improved Economic and Socio-Economic Performance Reporting
Year: 2008
Format: Report
0
No votes yet
442
Assessing Markets for Business Development Services - What have we learned so far?
Author(s): Alexandra Overy Miehlbradt
Year: 2002
Format: Article
0
No votes yet
595
FinScope 2010 South Africa Small Business Survey
Author(s): TNS Research Surveys
Year: 2010
Format: Study
0
No votes yet
1,712