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Educating South Africa’s micro-entrepreneurs, investing in livelihoods

Professor Rajesh Chandy examined how training could support micro-entrepreneurs and help their businesses to prosper.

By Rajesh Chandy 14 March 2016

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Mass poverty is one of the world’s most fundamental problems, typically addressed through multi-billion aid programmes. But a grass-roots research project in the impoverished townships of South Africa suggests that there is another, sustainable solution.


It isn’t the first study into the impact of applying business thinking to social issues. But prior initiatives on skills training among micro-entrepreneurs in developing countries have tended to show that any benefits are small or short-lived. This project is remarkable because it is the first to demonstrate the opposite. Rajesh Chandy, who holds the Tony and Maureen Wheeler Chair in Entrepreneurship at London Business School (LBS), and is one of the three academics who devised the project, points out: “You can solve some of the problems of poverty and growth in the world by doing better business.”

Micro-entrepreneurs represent the most common type of business in the world. Yet we tend to ignore these business people – even though they are hiding in plain sight. If we can help them transform their business lives, then we will probably transform the lives of their communities as well, given the prevalence of these kinds of businesses.

Professor Chandy explains: “Micro-entrepreneurs represent the most common type of business in the world. Yet we tend to ignore these business people – even though they are hiding in plain sight. If we can help them transform their business lives, then we will probably transform the lives of their communities as well, given the prevalence of these kinds of businesses.” Not only that, but the lessons learned that will inform policy in emerging economies such as those in southern Africa could also be applied in developed markets. “By studying the lives of business people many thousands of miles away, we might even learn a bit about ourselves,” Professor  Chandy believes.


These are grand claims. Professor Chandy’s co-researchers are Stephen Anderson-Macdonald PHD2009 (formerly a PhD student at LBS, now at Stanford University) and Bilal Zia of the World Bank. Dr Anderson-Macdonald moved his family to South Africa, so he was personally involved in establishing the base for the work, which formed his LBS PhD dissertation. This involved door-to-door visits to 10,000 micro-entrepreneurs. That number is important. It meant that the project could select participants differently from previous studies that have looked at the impact of business training.


“Our definition of an entrepreneur is a person who sets up a business or businesses taking on financial risks in the hope of profit,” explains Dr Anderson-Macdonald. “But we realised that to benefit from business skills training, people had to display aspiration to grow and they also needed basic capability. So we asked the entrepreneurs in our South African research locations the simple question: ‘Do you want to grow your business in the next five years?’ A lot of people said ‘No’. They were not entrepreneurs out of choice but out of necessity. They were making ends meet until they could get a job. We defined basic capability as having premises – even if those premises were a shack.”


Using these criteria, the team whittled the project down to about 800 micro-entrepreneurs. They were surprised to find that hair and beauty service providers represented 12% of the group – making it bigger than any other single industry or service.


“We divided the group into three,” Dr Anderson-Macdonald explains. “One group would receive intensive financial training, the second would get marketing training and the third segment would be the control group. We told this last group that places were full and that we would provide the training 18 months later, a commitment that we upheld.”


The businessmen and women were randomly allocated to one of the three groups. That was important because the thesis was not only that business training would improve the micro-entrepreneur’s prospects, it was to establish what kind of business training would best support different entrepreneurs. Unlike similar, earlier studies, the training offered more than general business skills, differentiating between finance and marketing. It provided 60-70 hours across 10 weeks – an intensive approach relative to earlier research projects. It followed their fortunes initially for 18 months.


Perhaps not surprisingly, give the care and type of training, this project delivered a strikingly different set of conclusions to earlier work. By several measures, both the finance and marketing groups did better than the businesses that had received no help.


Survival


Perhaps the most basic measure of performance is business survival: was the business still operating 18 months later? Strikingly, almost a third of those in the control group (i.e., the business as usual group) were no longer operating 18 months later. In contrast, roughly 80% of those in the marketing and finance groups were still operating at the end of the same period.


Profitability


Businesses that had received training of either type increased. For both the finance and marketing groups, monthly profits were more than 40% ahead of businesses that had received no training.


However, the routes to higher profits were very different according to which type of training had been given.


Employment


The control group businesses actually saw their employee numbers go down. Compared to those firms, average employee numbers in the businesses that had received finance training increased – and the record of the marketing group was even better. In round terms, an average firm involved in the study would have 1.5 employees – excluding the proprietor – before training got under way. But following the course in sales and marketing, an average firm would expand and would have two employees. The increase in employment in firms that had received finance training was more modest.


Sales


Both types of training helped businesses to increase sales, but the growth was stronger for enterprises that had gone through the marketing course relative to the control group. After 18 months, their sales were more than one-fifth higher than those of the control group.


Marketing vs Finance


Marketing training tended to shift a firm owner’s focus towards top-line growth – pursuing bigger sales and using more staff. Meanwhile, the finance group concentrated more on improving efficiency by controlling costs. Bilal Zia says: “That’s the real punchline: both types of training help improve profits as long as they’re targeted at the right people; but the route to that improvement depends on what sort of training was received.”


The Cape Town study also suggested that it was those firms that were more established and looking like they had a solid future that benefited most from the finance training. They were the ones that achieved the greatest increases in monthly profits. The implication is clear: once a firm has reached a certain threshold in terms of size and scale, improved finance and accounting skills can make a real difference in reducing costs and increasing efficiency.


Meanwhile, the marketing and sales training programme appeared to bring the greatest gains for micro-entrepreneurs with little experience of other markets and businesses outside their own limited area. Measured by sales, participants who had never travelled outside Cape Town or worked in a different business benefited most from the marketing programme. They achieved far greater sales increases than other entrepreneurs who had previously had broader experience.


Zia says: “The effectiveness of training is likely to depend on who is receiving that training.  One size does not fit all. Customisation is key.”


Professor Chandy offers an interesting experience that shows that this finding can be applied thousands of miles away from townships. “We’re doing some research with CEOs of large, publicly listed organisations in the United States,” he explains. “Very much like the micro-businesses in South Africa, those who have had a background in marketing tend to talk more about growth and to focus on top-line issues than those with finance backgrounds, whose focus tends to be more on efficiency. There are general principles that seem to transcend geographical areas.”


The project is already having an impact on policy in South Africa: through sharing their findings, the team hopes to influence better business in a much wider sphere. “Think of the millions of micro-businesses around the world,” says Dr Anderson-MacDonald. “If better business skills can help them do better, then the impact of interventions like these could be truly profound.” 

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