Business model innovation in manufacturers in developing countries

The topic of Business model innovation is receiving increasing attention as a solution to surviving in turbulent economic times. The discussion on business model innovation to me seems to be driven by finding ways to respond to opportunities, unmet needs, creating new markets or thinking up novel ways of doing business. Many articles on business model innovation contains phrases like “responding to change”, “rapid” and “creating opportunities”. From my experience of engaging with many typical manufacturers in developing countries they don’t identify with this literature. It seems like many firms are able to absorb external changes, partly by ignoring them or simply by being to paralyzed to change. I think in some instances this is also their saving grace in the short term, although in the long term it might erode the competitiveness and dare I use the word “resilience” of the firm.

From my weekly engagements with business, it seems like we need to get our industries in developing countries to better respond to semi-permanent or emerging long term framework conditions. It reminds me of the story of the frog in the pot of water on the stove; because the heat (negative framework conditions) is increasing slowly most firms do not realize the pending disaster of not making these external forces part of core business strategy. I think it is called conditioning.
What many of the manufacturers that I am engaged with are struggling with is finding ways of responding to some of the obstacles, irritations or constraints in their environment that seems to become established or permanent features over time. In South Africa, many manufacturers are waiting, hoping, or lobbying for electricity prices to come down, for labour to become more reasonable, for government to curb the influx of more competitive imports, for inputs to become cheaper, for government investment grants to increase, etc. At the same time, the average size of orders are going down as other countries are able to manufacture the same quality at a much lower landed cost.
From visiting more than 50 manufacturers in traditional manufacturing sectors like valve, pump and industrial equipment this year I can see that those manufacturers that take these external factors as drivers for change or key considerations in their strategy are thriving. While the rest of manufacturers seems to be making mainly small incremental adjustments, hoping that something in the external environment would change returning them to their previous levels of competitiveness. The problem is that too few firms have the will to respond to some of the slow moving changes in their environment. Those firms that do change their business models to adjust to the prevailing circumstances are doing well despite still being in the same country as those firms that are simply trying to cope.
So what I would like to see is a dialogue on how to use business model innovation to deal with these semi-permanent constraints in the external economic environment as drivers for innovation within firms. To me it seems that many manufacturers do not feel driven by opportunity anymore, especially when they perceive the prevailing economic and political conditions to be negative or anti business.
In the field of promoting innovation systems we have hardly come up with systemic models on how to induce widespread change in how business models are designed, created, changed or even shelved. At the moment the topic still seems to driven by dialogue in business schools, or by advocates of social responsibility.

In the shadow of value chains

Over the last few years value chains have become an important topic for donors and development practitioners. I say “again” because as with many other topics there is a tendency for these topics to be seasonal (read fashionable). This is great because every time it becomes fashionable new ideas are brought in, while old experiments provide valuable lessons and knowledge.

The purpose of this post is not to discuss value chain promotion. Just to make sure you understand what I am going on about, I will briefly define a value chain as the path of a product through a conversion process that starts with design (or raw materials), production, distribution and in some cases even consumption. An agricultural value chain will often start with seed, and will end up as a processed food product. On the mesopartner.com website there are several great publications and a LEDCast episodes on the topic of value chains.

In many of the areas where I am working there is a tendency by officials and development practitioners to take on the very tough commodity value chains. These value chains are typically in the traditional sectors and include end products like sugar, wood, furniture, fish, and many other agricultural products. These value chains are very

A huge pile of yellow wood and meranti, waiting to be burnt

A huge pile of yellow wood and meranti, waiting to be burnt

attractive, as they typically reach into rural areas, involve a large number of people, create many jobs, and often involve small farmers and less educated workers. But these value chains are also the oldest, which means that the actors have had a lot of time to mobilise strong interest groups, entrenched positions, and comfortable way of doing things.

When you look around these traditional value chains, you often find dozens of smaller value chains that are overlooked. Hence the title, “in the shadow of value chains”. These chains include biomass (leaves, sawdust, feathers, etc), traditional medicine and exotic plants (in the case of forestry), wood offcuts (in the case of furniture).

A mountain of sawdust

A mountain of sawdust waiting to be blown away by the wind

In these secondary value chains are typically very small, and may appear insignificant at first glance. But closer scrutiny may reveal some interesting opportunities to start new firms, or to create skills upgrading opportunities for unemployed or unskilled workers. Extreme care must be taken to not raise false hope, or to push the vulnerable into businesses that they are not able to run competitively. It does not matter whether a trust, cooperative, project or society is used, as these are simply means to an end.

During the analysis these secondary value chains make an extra effort to see why entrepreneurs have not already pursued this idea or opportunity. Also try to determine what the minimum scale is that is required to pursue the opportunity commercially. The economies of scale typically pose a huge barrier to entry in rural or marginalised areas.

I believe that there are huge opportunities in the emerging sector of climate technology and environmental management. I recently saw a biomass to gas converter that can be installed in a community for only a few thousand US dollars. The converter is fed with biodegradable mass and then provides the community with gas for heating, lighting and cooking (another example here). There are many new technologies now entering the marketplace that can give rural areas a complete head start, with biodiesel being a obvious example. It would be great if we can find ways to link cleaner technology and climate technology with new innovative and competitive business processes within the context of value chain promotion!

Firstly, do you have any experience in working with these secondary value chains? Which products, technologies or end markets have you worked with?

Secondly, do you have pictures of obvious resources or business opportunities that are not exploited? I would like to build up a library of pictures of these products, so please post them to this blog so that we can get a movement going on these value chains.

Thirdly, have you investigated CDM and other climate technologies that have the potential to not only save the environment, but to improve the competitiveness of sectors and value chains?

If you are interested to read up a bit more on the green news in South Africa, then head over to Urban Sprout. They have a great website and lots of resources and links to keep you busy. If you are keen to get involved in investigating some of the value chains that are often overlooked, and that may offer interesting opportunities for exploiting by-products chains then share your ideas here!

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