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DEVELOPING ALTERNATIVES volume 7 issue 1 spring 2001 T H E B R A V E N E W W O R L D O F B U S I N E S S D E V E L O P M E N T S E R V I C E S C O N T E N T S The Brave New World of Business
DEVELOPING ALTERNATIVES volume 7 issue 1 spring 2001 T H E B R A V E N E W W O R L D O F B U S I N E S S D E V E L O P M E N T S E R V I C E S C O N T E N T S The Brave New World of Business Development Services by David Knopp Preparing Palestinian Business for Global Competition by James Packard Winkler Market Development of BDS in Transition Economies: A Balanced Approach by Michael Field The Limits of BDS Market Development Or Why We Need Network Strategies by C. Richard Hatch Since 1970, DAI has been exploring alternative paths to development. DAI generates ideas through research, shares these ideas with the development community through publications, and tests the ideas in the crucible of development projects. Developing Alternatives provides a forum for DAI s professional staff to expose their ideas to a wider audience. Articles treat policy issues of topical interest and aim at promoting broad discussion. The opinions and interpretations presented are those of the individual authors and do not necessarily reflect the views of any government or donor agency. Reproduction of the contents is permitted with an acknowledgment of the source. We solicit and encourage comments from the staff of DAI as well as from DAI s clients and collaborators. 25 The Challenge of Measuring BDS Market Development: Complexity and Formal Causation by Paul Bundick Paul Bundick is Chief of Party of DAI s Zimbabwe Economic Opportunity Special Objective Project. Prior to this, he was the director of the Microenterprise Best Practices Project and Chief of Party of the Tanzania Finance and Enterprise Development Project. Michael Field is a senior development staff member at DAI who specializes in business development services, providing technical leadership in implementing aggressive demand- and supply-side tools for small business programs. C. Richard Hatch has been working on small enterprise development and network strategies in Europe and the United States for 20 years. He is DAI s technical consultant on an action research project in India under the Microenterprise Best Practices Project. David Knopp, an enterprise development specialist at DAI, participates in short-term assignments requiring technical expertise in the design and implementation of business development interventions. James Packard Winkler directed DAI s Small Business Support Project in West Bank and Gaza from 1997 to He currently is Chief of Party of the follow-on Market Access Program. Guest Editor: Paul Bundick Series Editor: Kurt Olsson Designer: Joanne Kent Development Alternatives, Inc., 7250 Woodmont Avenue, Suite 200, Bethesda, MD USA Telephone: Fax: Internet: 1 T H E B R A V E N E W W O R L D O F B U S I N E S S D E V E L O P M E N T S E R V I C E S by David Knopp Nietzsche, famous for his aphorisms, once quipped, The overthrow of beliefs is not immediately followed by the overthrow of institutions; rather, the new beliefs live for a long time in the now desolate and eerie houses of their predecessors, which they themselves preserve because of the housing shortage. Sardonic tone aside, Nietzsche s insight has relevance for the field of business development services (BDS), the focus of this issue of Developing Alternatives. BDS can be defined as any non-financial support that improves an enterprise s ability to compete in a market-based economy. This support covers a wide range of services, such as training, marketing, research, business management, information, and accounting, as well as higher-end strategic services such as technical assistance, consulting, and product development. As a practice area, we are entering a period of creative turbulence. The provider-centric perspective, so characteristic of the past decade, is giving way to more complex ideas about the development of BDS markets. Our view of BDS programs is broadening; old ways no longer satisfy. But newer beliefs so full of promise often still live inside yesterday s design, implementation, and performance measurement structures. The challenge BDS practitioners face is the design and implementation of effective interventions that support the survival, growth, and competitiveness of small and medium-sized enterprises (SMEs), 1 a critical driver of economic growth in developing countries. However, our knowledge about how to do business development is continuing to evolve. This issue of Developing Alternatives examines the discussion and debate surrounding that evolution. Evolving Models Over the last 30 years, business development has undergone fundamental changes, from models of direct service provision to approaches emphasizing building the capacity of providers to more complex designs that address market development and the transformation of business systems. The earliest and simplest model can be defined as the service delivery model. In this model, a funded intermediary organization determines the needs of an SME sector and provides direct services, often heavily subsidized, to clients. Although the service delivery framework ensures coverage among the target group, the lack of concern for the local supply of services, as well as the greater context in which the program operates, often leads to short-lived interventions that do not necessarily meet the needs of SMEs (Figure 1). Throughout the early 1990s, donors struggled to integrate BDS into their development programs. One major problem was that, in many developing countries, a culture of entrepreneurship did not exist, much less a universe of BDS providers. To FIGURE 1. SERVICE DELIVERY MODEL Direct Services by Fully Funded Organization Direct Technical Assistance Direct Training SMEs or Target Group 1 There is no commonly accepted definition of micro, small, or medium-sized enterprises. Some definitions use the number of employees to differentiate among categories; others use assets or annual turnover. In this journal, we adopt a simplified approach, treating SMEs as formally registered firms with paid employees and microenterprises as primarily informal enterprises. 2 create a cadre of capable service providers, donors made major investments (that is, subsidies) in facilities and systems, while providing technical assistance directly to BDS providers. Providers were instructed to offer pre-defined courses to target populations at heavily (often 100 percent) subsidized rates. Donor financial support was often tied to strict reporting requirements, which narrowed the flexibility and nature of the services offered. In short, donor support reflected a heavily supply-side orientation. This is characteristic of the provider-centric model (Figure 2), where a donor agency provides funding to set up or strengthen a service provider (a nongovernmental organization or a private company), either directly or through an intermediary. The provider in turn supplies the needed or desired services to SMEs. FIGURE 2. PROVIDER-CENTRIC MODEL Provider-Centric Tools Capacity-strengthening inputs Skills training Product development Seed capital and institutional development subsidies BDS Provider Heavy Supply-Side Orientation Funded Organization (Facilitator) SMEs or Target Group The predominately supply-side orientation of the provider-centric model had several distorting effects. It soon became apparent that providers were heavily dependent on subsidies, with the result that the donor rather than SME was viewed as the client. As a result, products were not always designed to meet client needs and many services were simply too expensive. Any BDS provider attempting to develop a service on commercial terms was unable to compete with the subsidized offering and, thus, was crowded out of the market. Moreover, because donor subsidies were linked with the achievement of milestones and performance targets, providers were given little incentive to innovate or refine their services. Perhaps most damaging was the disconnect in feedback between service providers and SMEs. Consumer preference was difficult to measure because courses were free or were offered at heavily subsidized rates. The provider-centric model failed to take into account the development of markets at the systems level. It also failed to address some fundamental questions: How could BDS be made more affordable and genuinely address the needs of SMEs? What could be done to ensure quality in service delivery, as well as in outreach, to the SME sector? Could BDS be sustainable in a post-donor environment? How could donor distortion be avoided? Questions such as these prompted the development community to come up with a new model. Microfinance practitioners had already established best practices that influenced the discussion. Microfinance had shown that the poor as well as SMEs will pay for the right service. Microfinance also had proved that a commercial approach, followed up with careful performance measurement, offered the best opportunity for a sustainable intervention. However, serious differences remained microfinance methodology was based on a high volume of transactions and a standardized approach, which did not necessarily apply to the delivery of BDS. Influenced by microfinance s commercial orientation, BDS shifted toward a more ambitious private-sector approach, with an emphasis on the market. This led to the evolution of the market development model (Figure 3), where the goal of an intervention is the creation, development, and continued evolution of a well-functioning BDS market. The approach stresses the importance of commercial transactions between suppliers and consumers, with FIGURE 3. MARKET DEVELOPMENT MODEL BDS Providers Funded Organization (Facilitator) Market Development Tools Vouchers to stimulate demand Marketing and information Public relations campaigns SMEs or Target Group 3 an emphasis on demand-side interventions to stimulate BDS markets. The model assumes that BDS are private goods and, as such, are best provided commercially. Currently the preferred framework for donor intervention, the market development model has been further refined by a working group composed of members of the Committee of Donor Agencies for Small Enterprise Development. The group s work culminated in Guidelines for Donor Intervention, which characterizes the BDS market development framework. A few of the paper s key recommendations are: Donors should strive for outreach at the industry level to develop the market rather than provide direct support to specific BDS providers. Development programs should encourage more market players offering a broader, yet more specialized, array of services. Subsidies must be designed for specific market development objectives. Subsidies should be used selectively and should support a gradual shift toward a commercial market. Unlike earlier views that assume SMEs would not buy services unless they were heavily subsidized, SMEs will pay the full cost of BDS they need if products are appropriate and affordable. Through the market development paradigm, supply-side strengthening has been replaced with a demand-driven model that emphasizes commercial, business-like interventions. Market Dynamics A New Way of Thinking The evolution of intervention models illustrates how we are still learning, testing, and developing appropriate levels and methods of BDS intervention. There has been a shift from tightly defined and controlled supplier interventions toward models that stress pure market-oriented transactions. But in our desire to draw clearer distinctions between the old and the new, we have created the mistaken impression that the old models have merely been set aside as failed ideas. Each new BDS approach in effect has vanquished the old. In this journal, we propose an alternative perspective. Insights learned from previous models should not be discarded outright but incorporated as useful tools in an expanded understanding of the problem. Just as Einstein s views on relativity did not negate Newtonian laws of physics but placed them in a new context, old BDS models can become special cases in a larger view of the problem at hand. Some proponents of market development have failed to see that in certain cases supply-side interventions designed to build up BDS providers might still be a valid tool within a market development orientation if such an intervention is needed to accomplish the broader objective of BDS market development. Markets are complex and dynamic systems. Rather than adopt a radical demand-side-only approach to market development, as some have done recently, I propose a more balanced view, one that I term the market dynamics perspective. In this view, absolutist prescriptions are replaced by a broader, more pragmatic systems approach to BDS interventions and market development employing a variety of tools and approaches. The market dynamics perspective builds on previous learning and integrates former models as tools (when appropriate) within this larger systems view. Thus, depending on the dynamics of a specific market under consideration, an intervention would use a specific mix of demand- and supply-side interventions to get the job done. Figure 4 illustrates the market dynamics perspective, showing how a practitioner might approach the market with a combination of demand- and supplyside tools. These tools are best applied strategically at critical leverage points to reinforce the development and functioning of BDS markets. The market dynamics perspective relies on timely feedback to adjust its approach and to provide information to BDS suppliers and donors on market demand. This feedback allows them to adjust their products and tailor the services they offer to meet the effective demand. 4 FIGURE 4. MARKET DYNAMICS PERSPECTIVE Characterized by: Provider-Centric Tools Capacity-strengthening inputs Skills training Product development Work orders Mentoring Dynamic and shifting market Supply responding and adjusting to demand signals Facilitator intervention targeted at leveraged points Variables within system affecting market BDS Providers Funded Organization (Facilitator) Market Development Tools Vouchers to stimulate demand Marketing and information Public relations campaigns SMEs or Target Group Variables Affecting the System Government Donor community Finance and banking sector Culture Information Loops and Feedback Mechanisms Market Dynamics and BDS Markets The market dynamics perspective does not offer a prescriptive methodology or a new model for intervention. It recognizes the complexity within systems and concludes that no single model alone can advance the development of BDS markets. Instead, what is required is a careful examination of the market and environment, where a set of tools can be applied flexibly. How does flexibility and innovation translate into real world application? DAI asked four experts in the field to draw on their recent experience and examine how this perspective was applied to the development of BDS markets. James Packard Winkler, in Preparing Palestinian Business for Global Competition, looks at the challenges and opportunities that BDS interventions face in volatile and unstable environments. Winkler describes a three-phased project intervention that has moved from providing firm-level assistance to developing a national economic strategy that will allow Palestinian firms to compete successfully in global markets. In Market Development of BDS in Transition Economies, Michael Field illustrates how the systems perspective has been applied to a complex SME development project in Ukraine, using a balance of supply-side capacity-building interventions and demand-side vouchers. He examines the interrelationship between shifting market signals and supplier orientation and explains why information loops and feedback mechanisms are essential for reorienting business service providers to consumer demand. C. Richard Hatch examines competition between small firms and highlights cooperation and networks as a rational strategy in The Limits of BDS Market Development. He argues that BDS practitioners have erred by focusing only on firm performance and individual transactions rather than on strategic positioning within greater systems and competitive markets. What is needed is to help clusters of firms identify different strategies and then adopt the best one. Within such a network, SMEs may leverage their own capabilities with those of others to satisfy the rigorous production and innovation demands of the market. Although practitioners may pilot-test new interventions and challenge current practice, donor performance measurement agendas and results frameworks tend to drive the direction of enterprise development. Donors and practitioners alike need to know what they are measuring before they venture too far into the unknown. Developing Alternatives ends with a discussion of performance measurement, an intensely debated aspect of the emerging practice of BDS. In The Challenge of Measuring BDS Market Development, Paul Bundick examines the limitations of the current performance measurement framework, introduces ideas from complexity theory, and explores some challenges to developing new indicators. 5 P R E P A R I N G P A L E S T I N I A N B U S I N E S S F O R G L O B A L C O M P E T I T I O N by James Packard Winkler Even amid the turmoil of the Intifada, many Palestinian businesses are working to build a viable and competitive economy. In such an environment, what kinds of BDS interventions are needed to help Palestinian businesses realize their aspirations to enter the global market? And what adjustments must the businesses make to adapt to intermittent periods of instability that undermine business gains? Business development in Palestine is different from business development in most of the rest of the world. The Palestinian Territories face unique challenges. Palestine does not yet have clear economic sovereignty. It is an emerging market, but unlike most emerging markets, the Palestinian economy is embedded within the Israeli economy, a phenomenon established during 30 years of existence within Israel. Agreements struck in Paris, Madrid, and Oslo leading to the establishment of the Palestinian Authority in 1994 initiated the transition process to independent economic and political status. However, the ability of Palestinians to manage their economy remains limited. Israel still maintains control over monetary policy, borders and ports, the flow of labor into Israel, and critical land and water resources. Moreover, it captures threefourths of the estimated $4 billion in annual trade between the two economies. If Palestinian businesses are going to become competitive in global markets, they must overcome three inter-related challenges: (1) the inertia of Israeli control over the Palestinian economy, which contributes to a business environment that favors survival-oriented thinking and engenders instability; (2) serious market and sector fragmentation within the Palestinian economy; and (3) cultural and business practices established during long periods of occupation that do not support innovative leadership. The weakness of civil society and free market institutions in Palestinian society a phenomenon noted throughout much of the Arab world presents yet another challenge to attaining both economic growth and international political legitimacy to support the aspirations of Palestinian statehood and the birth of a new economic era. These challenges loom even larger during periods of conflict, such as the ongoing Al-Aqsa Intifada. BDS in Unstable Environments: A Long-Term Phased Approach DAI, working with the U.S. Agency for International Development, has been tackling business development problems in Palestine since The Small Business Support Project (SBSP) provided firm-level BDS from 1994 to The follow-on Market Access Program (MAP) is a fiveyear effort that strives to develop sustainable business associations and business-related or
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