|International Best Practice in Micro and Small Enterprise Development - Working Paper 2 - Micro and Small Enterprise Development and Poverty Alleviation in Thailand - Project ILO/UNDP: THA/99/003 (ILO-ISEP - ILO - UNDP, 2000, 80 p.)|
|3. Business development service instruments|
Marketing services cover a wide range of services, including information on local and foreign markets; assistance in undertaking a market appraisal study; assistance in accessing foreign markets and in using distribution channels; and technical assistance in developing designs in line with market demand and packaging materials. Marketing services may also be classified according to whether they are provided during the input phase (e.g. product development and design, raw materials supply) or during the output phase (e.g. quality control, packaging, transport).
In contrast to other services, there are fewer organizations providing services to MSEs in the area of marketing. The only MSEs that do manage to get help are those involved in the production of handicrafts. Non-government organizations, government agencies and subcontractors who market the output of the craft workers provide this assistance. International non-government organizations that promote fair trade are also present in many countries, and provide technical and marketing assistance to groups of craft workers.
The following observations and lessons from international practice are worthy of note.
· A market with limited growth potential. MSEs mostly supply the immediate local market. Very few are able to access the regional or national market, and even fewer can directly access the export market. Only those involved in subcontracting indirectly access foreign markets. This explains, to some extent, why MSEs are predominantly represented in the trade and services sectors, which are better suited to supplying local markets.
· Production aimed mostly at the consumer goods market. Most MSEs in the manufacturing sector produce consumer goods. Very few produce intermediate inputs or capital goods, which require a much larger market than the one they are able to access. The limited business linkage with the larger firms partially explains why MSEs are not involved in non-traditional subcontracting arrangements.
· Limited or no attempt to investigate new market opportunities. Micro and small enterprises do not usually have the necessary skills for simple market research, and they may not be tempted to investigate new markets if they feel that they cannot expand production.
· Subcontracting potential and problems. In many countries, the main market outlets for a large number of MSEs are through contractors. Subcontracting is usually restricted to a narrow range of products including for example, garments, leather goods and footwear, electronic assemblies, and handicrafts. There are many types of subcontracting arrangements such as those where the subcontractor produces the finished product without any input from the contractor (this is mostly the case of handicrafts), to those where the contractor is closely involved in all aspects of the production (these are mainly the equivalent of labour contracts where the subcontractors provide mostly its labour). In some cases the motives of the contractor are to avoid the minimum wage and other labour legislation since many subcontractors are part of the informal sector. Subcontracting is not usually viewed by the contractor as a form of a mutually beneficial business linkage with smaller firms, which should be nurtured into a long-term relationship (e.g. the type of relationships established between contractors and subcontractors in Japan). Some contractors use intermediaries who keep for themselves a substantial part of the contract payment.
The following promising initiatives for expanding the MSEs' market potential provide some solutions to the above questions.
3.4.1 Facilitating access to larger markets
The following examples illustrate some new and effective ways of improving access to larger markets.
a) Providing a mix of marketing and ancillary services
This example is based on an IDB project implemented in Colombia by a business development service provider (PCS) which was previously established with IDB assistance. It shows how a marketing service provider can help MSEs overcome various constraints which prevent them from accessing larger and more profitable markets through the provision of a mix of marketing and ancillary services, such as financial services and training. This example also shows that it is possible to achieve almost full cost recovery.
PCS works with approximately 1,000 micro-enterprises (less than ten workers), with 50 per cent being women and 50 per cent being informal sector enterprises. These enterprises produce a variety of consumer goods for the local and national markets. The approach is based on the premise that for producers wishing to penetrate new markets or improve their position in the current market, the use of an intermediary may significantly reduce marketing costs, provide important consumer feedback, and open up access to a larger client base. The time-consuming tasks assumed by marketing service providers include identifying new clients or markets; consolidating existing ones; sourcing good raw materials; and figuring out how to ship various kinds of goods to different destinations by various means of transportation. From working in specific sectors, marketing service providers often become experts in relevant issues, such as consumer preferences, and new trends and designs. This expertise translates into important suggestions and ideas for the producers in terms of what to produce and how.
The issue of sustainability was considered from the beginning of the project. In relation to buying, selling or brokering (i.e. the standard functions of a marketing service provider), the issue of sustainability is a relatively simple one, and it uses a simple mark-up mechanism. However, it was also felt that clients also needed some ancillary services, such as training and financing, without which the marketing services would have little impact. The cost recovery for these services is not feasible in the short-term for a number of reasons, although it may be possible to achieve it in the long-term. Therefore, it was possible to achieve a high, overall level of cost recovery through subsidising the non-profitable ancillary services by revenues from the profitable marketing services. Thus, by end 1998, PCS was able to cover its full operational and administrative costs. In addition to profits derived from the buying and selling activities, PCS was able to increase revenues by playing the role of an intermediary in subcontracting arrangements. An important ingredient in the success achieved by PCS is the elaboration and application of a long-term marketing strategy based on an in-depth investigation of the sectors that it covered. Based on this strategy, PCS was then able to decide which clients it should serve, which services it should provide, and how they should be provided.
b) Improving subcontracting arrangements for the benefit of subcontractors.
In the simplest form of subcontracting, the subcontractor independently produces the goods at the request of the contractor, using its own equipment and materials. Payment is made once the goods are delivered. In the other extreme, the contractor is fully in charge, using the subcontractor simply as a source of labour - sometimes "cheap" labour. Apart from handicraft production, this type of subcontracting is more prevalent in the garment industry. Subcontractors are generally financially weak and cannot afford to wait until they have finished processing the orders before they can be paid. Some principals take advantage of the situation by imposing very low prices on the goods.
Financial services provided by the contractor may take various forms, depending on the subcontracting arrangement. The contractor may provide the materials needed for producing the goods and may also provide some advance payments to cover labour costs, or provide both the materials and the advance payments. In labour subcontracts, the contractor is in full control of the production, providing the technology, designs, tools and equipment, as well as the materials. Subcontractors are used in these cases mostly because the cost of labour is lower than the cost of the contractor's own employees.
In many countries, subcontracting has given rise to abuses by contractors - squeezing the price down by playing large numbers of subcontractors off against each other. Subcontractors are usually not able to use legal means in the event of the contractor refusing to pay the contract amount for one reason or another. Subcontractors can strengthen their bargaining power vis-a-vis the contractor if they form subcontractors' associations on a sectoral basis.
In the Philippines, the ILO provided assistance to subcontractors involved in garment making and in the production of footwear and leather goods by helping them to establish associations in these two sectors and by training the managers of these associations in various aspects of subcontracting. The assistance may take various forms.
· The government may adopt specific legislation on sub-contracting with a view to protecting both the principals and the sub-contractors (mainly the latter under current conditions) in the case of unfair practices or conflicts,
· To promote the establishment of sub-contractors' associations in each of the most important sectors where sub-contracting is prevalent. The role of these associations will be to provide information to members on sub-contracting arrangements; provide legal aid to members in the case of conflicts with the contractor; train members in negotiating and following up sub-contracts; adopt policies for an appropriate range of sub-contract prices in order to avoid pressures from the principals to lower prices and train members in relation to quality control avoiding delays, and other key topics.
· Through information and workshops, the government could induce the principals to establish more positive relations with the subcontractors. The impressive growth of the industrial sector in Japan can be partially attributed to the very positive relationship established between principals and their sub-contractors.
c) Promotion of subcontracting and partnerships
Various types of linkages are considered essential for the growth of small and medium enterprises as it is recognised that without such linkages large enterprises may find it difficult to achieve global competitiveness. There are two major types of linkages: up-stream linkages with suppliers and contractors, and down-stream linkages with the distribution and marketing channels.
Industrial subcontracting and out-sourcing are modern and efficient ways of organising industrial production. New forms of industrial subcontracting, referred to as "industrial partnerships", are based on the complementary nature of the large contracting and assembling enterprises and the various specialised subcontractors and suppliers, as well as on the necessity of involving them from the early stages of the production cycle (design, testing and developing prototypes). Moreover, MSEs frequently co-operate closely with each other in order to complement their activities within the production cycle by forming production associations or clusters and, increasingly, through networking arrangements. These new forms of collaboration among enterprises tend to become more stable and more lasting with a more equitable distribution of responsibilities (risks and profits) between the various partners. In fact, such subcontracting and partnership linkages enable the MSEs to concentrate on their field of specialisation.
In order to increase the chances of success, these linkages often call for other complementary forms of linkages, such as the provision by the main contractor of special raw materials, specialised equipment, moulds, technical assistance, training, know-how and licence agreements. In some cases, equity participation or joint investments are established between the partner firms, and the traditional subcontracting relationship becomes a fully- fledged partnership.
With a view to assisting countries to promote subcontracting and partnership arrangements, the UNIDO has developed a new programme, entitled "the Subcontracting & Partnership Exchanges", known as "SPXs". These are technical information, promotion and match-making centres for industrial subcontracting and partnership agreements between main contractors, suppliers and subcontractors, aiming at the optimal utilisation of the manufacturing capacities and capabilities of the affiliated industries. SPXs should preferably be organised as non-profit industrial associations run by qualified entrepreneurs. They perform a number of core functions, including collecting and disseminating information; identifying subcontracting and partnerships opportunities; assisting in organising production clusters and associations, and in negotiating agreements with main contractors; etc. More recently, SPXs have started to provide other services, such as training and financial services.
The services are provided either directly by the SPX in the form of surveys, advice, training, awareness seminars and industrial fairs, or by referring the enterprises to other specialised organizations. Countries interested in establishing SPXs may use various instruments developed by the UNIDO for this purpose (guidelines, computer programmes for data base management, legal statutes for establishing SPXs, etc.). Over 50 SPXs have been established with UNIDO's assistance in 30 countries since 1984. The total number of companies registered in these SPXs is close to 16,000.
Production of hammocks by Ecohamaca
Ecohamaca is a network of 11 enterprises operating in the hand-made hammock sector. While the network members compete against each other in the local market, they have decided to collaborate with a view to accessing foreign markets. Previously, none of the local producers had direct exporting experience. With the project's assistance, the producers were able to standardise their production in order to collectively produce sufficient quantities for export and at the same time improve the quality and design of the products. The network also adopted a pricing policy. The group selected an ecologically friendly strategy in their production process to respond to international concerns about the environment. This strategy proved to be successful since it permitted the group to penetrate important markets like the EU and USA. In order to consolidate results and increase collaboration, the group has acquired a legal status and has hired a manager whose functions include the identification of more formal training schemes for the workers, the search for other technical and financial assistance from a variety of local SME support institutions, and improving the group's marketing strategy. Ecohamaca maintains a Web site on the Internet.
Networks or association of MSEs usually provide a wide range of services to their members including training, loans, information and, in some cases, some form of social protection. However, it is in the area of marketing (including the purchase of raw materials required for production) that networks or associations of MSEs play a particularly useful role. In general, wholesalers or exporters deal only with large orders and they may impose certain conditions in terms of quality control, timely delivery of the goods, etc. They also prefer to deal with a single client rather than a large number of small producers. Under these conditions, networks or associations of MSEs can play the role of an intermediary between wholesalers or exporters and their members. They usually take full responsibility for the timely delivery of the goods and for quality control. Networks and associations also help their members by facilitating access to cheaper and better quality materials and intermediate inputs through bulk purchases at reduced prices. An example of such linkages, from a UNIDO-assisted technical co-operation project, is described in Box 6.