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 IndustryStructureIndustryStructure Relative Position Within the Industry Relative Position Within the Industry - Overall Rules of Competition - Sources of Competitive Advantage Good or Bad BusinessGood 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 Support Activities 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

Government Policy Threat of Substitute Products or Services Threat of New Entrants Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers Industry Structure in Context Role 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, 1 st and 2 nd 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 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 2 nd 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 Private Limited Cos Public companies Private Limited Cos Few CCs, Partnerships CCs, 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 PARASTATAL COVERAGE UPPER CLASS Mainly White Males MIDDLE CLASS All Races LOWER MIDDLE CLASS Mainly Black POOR LOWER CLASS Mainly African POOREST OF THE POOR Mainly African Female COMMERCIAL BANKING COVERAGE Standard Bank First National Bank ABSA Nedbank Etc. IDC DBSA Landbank Khula Etc. Deregulated Commercial Lending Industry NGO Financial Initiatives Financial Services Social Grants 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 Social Responsibility 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 <100 Empl. Turnover R <10 Employees No Employees UNBANKED Source: WDB

DFI mandates - focus areas Retail Business Finance Infrastructure Other Housing TYPE OF USE Tourism Manufacturing Mining Housing Agriculture SECTORS NDA IDT NHFC IDC KHULA Land bank DBSA NTSIKA RHLF Retail Business Finance Infrastructure Other Housing TYPE OF USE Tourism Manufacturing Mining Housing Agriculture SECTORS NDA IDT NHFC IDC KHULA Land bank DBSA NTSIKA/ SEDA RHLF 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 orientation Culture 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 garment cluster 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 value chain Textile + garments value chain Global buyers Training institutions Business promotion Finance institutions

PROCUREMENT Anglo Americans 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 Study Facts (2003 – 2004 Fyr) DetailsFigures Sample of tenders issued by Municipality215 Tenders withdrawn13% Tenders awarded to Big Construction Co58% Tenders awarded to white SME22% Awarded to HDEs7% HDE that sell tenders (no equipment/ collateral)92% HDE Failure rate (those that did not sell)60% HDE outright success rate0.224% Estimated BEE portion of R90bln budget0.23% Estimated years to have 50% of HDE participation223

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 Make Loan Available to SME Contribute to TA cost Provide Technical Assistance Manage loan repayment Project Management Financial 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)

Thank You!