Lauren Haworth: Opportunities for SA business in 2016

*This content is sponsored by The Loyalty Specialists. Their Rewards, Your Growth, Our Speciality.

by Lauren Haworth*

There is no argument that we have significant challenges in South Africa and there is a lot to be upset about, but you can make a choice right now about your approach. This country is predictably irrational – we know questionable decisions are made…but nothing is hugely surprising and there is opportunity in that. Manage expectations and plan, prepare and practice patience.

You know that the taxi in front of you is going to stop in the road on the left lane or cut in front of you at an inopportune time. How do you know? Because they always do. They are predictably irrational. It doesn’t justify their behaviour but we can understand that two things are factual:

1. They will do the most irresponsible and irrational thing you can imagine
2. You can anticipate this and make pre-emptive decisions that eliminate your vulnerability almost entirely

If you acknowledge that it’s a high probability that the taxi driver will do as mentioned above, then logically you should switch lanes or choose a different route, you can decelerate or accelerate out of the potential ‘kill zone’ or choose a less busy time to commute. You can make a decision based on the balance of probabilities. Once you have made a decision not to get excited about every irresponsible action taken, then you can let the rush of stress-activators wash over you and focus on the real stuff – we need to plan and operate in anticipation.

This is not about sticking your head in the sand, but about filtering through the hype and focusing on what is actually driving the tornado at its source. You have to be aware of what is going on across the globe, but emotionally mature enough not to become beguiled by everything and everyone.

Everything in this world has a natural duality. Good and bad, healthy and unhealthy, male and female, night and day, right and wrong, assets and liabilities… and the list goes on. To survive, you need to identify both and capitalize where possible.

To begin, we need to make a choice: Pro or Anti-South Africa

Greg Castle, Executive Director at DGB (SA’s largest Wine & Spirit Producer and Marketer) looks inwardly on this issue and says that, “Company boards and executive teams need to stop being manipulated by short-term investors and superficial politicking. South Africans are quick to focus on the negatives, and lose sight of the myriad of opportunities and advantages that stand before them.

We first need to get our mindset right and believe in ourselves, not defined by what misguided politicians say in the public space.  Our independent watchdogs including the legal system, Public Prosecutor, free press, and the like, have stood the test of time and stand fast.

The next step is for the Government and private sector to jointly focus every possible resource on the development of entrepreneurship and the roles we can play in helping to develop this economy. We need to stop pointing fingers away from ourselves. The starting point however is to believe in ourselves as a nation with a can-do attitude in order to make it happen. It’s time for less focus merely on BEE and more on creating the right environment in order to develop and encourage entrepreneurial businesses, even at grassroots level.

Together with better education, these are the key factors to reduce unemployment, crime and drive sustainable growth. Take the wine industry for example, most South African wine producers and consumers have no idea how incredible the quality of wine is that we can produce in this country and export around the world. It shouldn’t take foreign buyers and consumers to have to tell us what we have and that we undervalue ourselves.  We need to start believing”

— BUSINESS TIPS FOR SUSTAINING GROWTH

An Article in the Harvard Business Review displayed the results of a year-long study conducted, analyzing the strategies of 4,700 companies during three global recessions.

The main aim was to see how companies changed their resource allocations prerecession and during, using six balance-sheet items:

1. Number of employees
2. Cost of goods sold (COGS) normalized by sales
3. R&D expenditures
4. Sales, general and administrative expenditures
5. Capital expenditures
6. Plant, property and equipment stock

Four groups were identified in this study, based on their specific combinations of changes in resource allocation. In addition, the study was formulated around the concept that human beings are hedonistic (seek pleasure and avoid pain) and that this manifests in businesses at top level cognitive adaptions to unusual circumstances, like a recession:

1. Prevention-focused companies: cut back further on one or more of the six components, relative to their competitors and did not increase expenditure on any of them more than the competitors had.
   1. [prevention-focused people are concerned with safety, security and responsibility. They strive to avoid bad outcomes – so these companies make primarily defensive moves and were more concerned with what competitors were doing, whilst trying to minimize losses and risk].
2. Promotion-focused companies: did increase expenditure on at least one of the six components and also did not increase expenditure more than competitors did.
   1. [Promotion-focused companies are motivated by ideals and aspirations that provide pleasure. They are driven by goals such as advancement, achievement and growth. – so these companies invested more in offensive moves.
3. Pragmatic companies: adopted both a prevention and promotion focus (offensive and defensive moves employed)
4. Progressive companies: reduced COGS but had not cut headcount more than their peers and they also allocated more resources, relative to their competitors to market-related items (deployed the optimal offense and defense)

The results were not as you might expect. The firms that cut costs faster and deeper than rivals didn’t necessarily flourish. They had the lowest probability (21%) of pulling ahead of the competition when times got better. Businesses that boldly invested more than their rivals also didn’t thrive much either but enjoyed slightly more chance (26%) of becoming leaders after the downturn.

Read also: Lauren Haworth: Mastering Customer Retention. 4 must follow tips.

Moral of this story

Don’t approach every decision with a cost-minimizing lens. Don’t expect to do the same with less, learn to operate more efficiently. Don’t centralize decisions on cost-cutting – cuts across the board could pass-over small initiatives which could in fact boost the company post-recession. Don’t breed pessimism, it permeates through the company. Don’t foster the environment that threatens more cuts, it fosters as disempowerment.

In the same breath, companies that invested too aggressively in one or more of the items, didn’t fare well post-recession either. Hewlett Packard’s ambitious change agenda in response to the 2000 recession saw major investments in asset acquisitions, R&D expenditures, corporate branding campaigns and global expansion, but they really battled to match the profitability levels of IBM and Dell. By 2004, their earnings were 8.4% less than IBM and 0.9% less than Dell.

In the companies which over-emphasize optimism and marginalize naysayers – its highly likely for realities to be overlooked. Neither extremes work.

The companies that did succeed after the downturn deployed a specific balance of reducing costs selectively by focusing more on operational efficiency and less on reducing headcount and they invested quite significantly in marketing, R&D, and new assets (plants and machinery). These are the progressive companies. The leaders, post-recession.

Planning and patience

Whilst many SMEs are stringent with their capital, effort and resources at any given time, they must plan in such a way that should a relevant opportunity present itself, there will be sufficient stores of these three available to throw at it.

This is not always an easy task, but certainly something to aim for. Stores for a ‘rainy-day’ will help one SME capitalize whilst others are lingering with the slow economy.

Business Incubators:

One of the largest challenges for any SME is finding sufficient funds to stabilize and grow. Here is a list of incubators operating in and helping South African businesses – perhaps worth an application?

1. Transnet Enterprise Development Hub
2. SA Business Hub
3. The Innovation Hub
4. Swiss Business Hub
5. Pick n Pay Small Business

Other options include Shanduka Black Umbrellas; Seda Incubation; Raizcorp; BizQube; Timbali Technology Incubator; and Vumela Enterprise Development (FNB). This is not an exhaustive list, but a start.

Joint Ventures or collaborative consumption:

Forward-thinking companies are joining ventures for more reach, access and leverage to get to users on a limited budget. Cross-branding marketing is one really valuable but under-utilized option. In addition, you have the likes of Airbnb (an online service that matches people seeking accommodation with hosts who have space in over 26,000 cities around the world) which facilitates collaborative consumption. Find complimentary business partners and leverage off their strengths and reach.

Read also: Micro business challenges keeping owners awake at night

Operational investment and data analysis:

Keeping your existing customers happy costs far less than new business acquisition, so consider allocating more resources into operations to improve customer experiences. Improve your websites, ensure they are responsive (are read and operated easily on any device). Use online analytics to track user behaviour on your website and identify the most popular areas, as well as the pages where large traffic drops off. This is a brilliant way to track customer spending habits and identify your most profitable products and services to focus on in the slow economy.

Talent acquisition, and training:

It’s common practice to reduce the headcount in tight times in order to reduce the cost base, but ensure that the people you have identified to stay on and push are talented as well as motivated and open to cross-training. This cross-training will add extra safeguards to the business by ‘backing-up’ knowledge and skills. This creates additional capacity at a limited additional cost.

The fun part of SMEs is that job titles are not fixed and the variety of aspects required to be learnt and mastered by each person is vast. You want multi-skilled, self-motivated people who embody the business goals and objectives. They are the ones who will push through the hard times, work the long hours, do more than is expected of them because they believe in the vision of the company.

If, however, permanent staff are not an option, consider employing interns or part-timers to fulfill important needs at a lower cost and liability.

Talent churn is a disaster for SMEs – hold onto your best performing staff, create an environment that allows them to grow, achieve and remain motivated. Seriously invest in your people. As Richard Branson says, “If you look after your staff, they will look after your customers.”

Marketing spend

One of the worst things you can do is cut marketing spend all together when revenues are low. Adjust spend and focus it through online avenues with specific audience targeting and in-house communication to existing customers. Internet marketing can cross boundaries and borders, speak to specific audiences with affinities relevant to your industry and catch them when they are searching for similar products and services…at far less of a cost. Online advertising is also measureable, innovative, omnipresent and accountable.

In addition, vamping up creativity in your ads will help differentiate you from your competition! Nando’s is particularly good at capitalizing on current affairs with humorous responses that offer some respite to the fear-mongering in this country and around the world.

Read also: Brilliant analysis: Macroeconomic headwinds SA business faces in 2016

Adopt Circular Business Models (if applicable)

A Circular Economy is an industrial restorative model. It’s an economy, which does not produce waste or pollution, and utilizes renewable sources of energy. “The circular economy involves a distinction and careful management of two different types of materials within a closed-loop economy: materials of biological origin which can return to the biosphere as feedstock (biological nutrients such as forest products) and technical materials which cannot biodegrade and enter the biosphere (technical materials like plastics and metals). This type of economy seeks transformational changes across the breadth of the value chain in order to retain both types of materials in the ‘circular economy loop’ and preserve their value for as long as possible.”

Circular business models have had numerous success stories with often “significant cost-savings potential, especially in the automotive, machinery and equipment sector and electrical machinery sector. Beyond cost savings, closing loops and increasing the re-use of materials, it will reduce demand for virgin materials and thus help to mitigate both demand-driven price volatility on raw material markets (Iron ore) and supply risks. These models have also been associated with significant technological and organization innovation and employment potential, reduced liabilities and warranty costs of firms due to longer-lasting, healthier and more environmentally friendly products.”

SMEs could also benefit from circular business models by saving material costs, creating competitive advantages and new markets.

Internal business attitudes towards ‘green solutions’; financial capacity; lack of government support and effective legislation; lack of information; administrative burdens; lack of technical skills are all natural barriers to entry for these solutions. If some creative SMEs can find ways to gain financial access (crowdfunding?) and influence these factors above, then perhaps they have the potential to adopt such a resource-efficient model.

See your resources as investments and your customers as users, then SMEs can work out how to maximize along the value chain and how to enable the assets to be continually re-introduced to markets, according to Co.Exist’s article on business models driving the circular economy.

A few business models have been suggested which seem to be making progress include:

1. The concept of leasing services rather than selling ownership of them. This way, it facilitates a closer relationship with customers and encourages repeat business with added benefits of an upsell. (BMW’s car leasing agreements or Vodafone’s Red Hot Plan which leases phones on an annual basis and allows for upgrades at the end of each cycle)
2. Recover and re-condition products which can be re-introduced into the market to earn a second or third round. (The second-hand car market could refurbish the cars, offer warranties and financing options at appropriate and reasonable rates)
3. Not all products can be re-conditioned in their entirety, but perhaps they have components that are highly valuable and can be re-purposed?
4. Recycling – can we make high-quality and useful products from recycled items? “Starbucks, for example, is actually aiming to turn thousands of tons of its waste coffee grounds and food into everyday products by using bacteria to generate succinic acid which can then be used in a range of products from detergents to bio-plastics and medicines”. In addition, there is also the huge benefit of coffee grounds which can be used in addition to egg yolks and shells plus tea bags to make seriously potent fertilizer for your homes, communities and farms.

We have finite resources on the planet, so how can we creatively innovate and re-use products or components to fuel businesses and the global economy?

Smaller is better

There are perks of being an SME, especially flexibility. The agility to maximize your advantage by completing business tasks quicker and at less cost.

Fail fast

Don’t mess with that which works, but if it doesn’t work – experiment. Experiment small and have a closed-loop so that if something fails, it fails fast and can be overcome with minimal subsequent damage, lost time and expense.

Back-up

In this country, we cannot afford to not have plan B, C, D and E. Always back-up your data and information, regularly with multiple back-ups in separate locations.

Internationalise your business

An infamous case study of Blackball Rentertainment demonstrates that internationalizing your business, at least in the form of sales initially, is a fantastic way to diversify risk and increase revenue. The top tips recommended from this case study stated in the Edinburgh Group’s study of SME’s contribution to the global economy includes:

• Learn to empower yourself – seek out and recognize opportunities and capitalize on them
• Embrace online advertising – it’s a comparatively cheap way of advertising your business, but it can reach a broader market, both nationally and internationally.
• Find a local partner – having someone on the ground in the country you wish to expand in helps tremendously. Finding a person who understands the customs and practices can be a great asset as a representative of your business.
• Try to be an entrepreneur at all times (don’t forget the over-arching goals)

Companies with greater internationalism tend to report higher turnover growth.

IDEAS TO KICKSTART the creative engines:

Innovation where it counts

Innovation can make all the difference, but companies shouldn’t be pursuing innovation for innovation’s sake. Review the cost base and focus spend on areas that have the highest growth potential.

A low-risk way of expanding is to look internally at existing customers for inspiration. What more can you give them? Look at the small things that will make a difference to them.

One incredible example was seen in Lima, Peru which is situated at the edge of the Atacama Desert (one of the driest places on earth). Lima receives almost no rainfall. “About 700,000 people have no access to clean water for drinking or bathing. Another 600,000 of the city’s 7.5 million residents rely on cisterns for their water, which must be filled by pumps or by hand and cleaned regularly.

But Lima’s Pacific Coast location experiences humidity of more than 90 percent on summer days, from December to February. So engineers from Peru’s University of Engineering and Technology (UTEC) have devised a way to turn that humid air into usable water. In December 2012, they erected a billboard in the Bujama District of Lima that by early March had produced 9450 liters (about 2500 gallons) of water.

“The idea came about because UTEC was facing a slump in enrollment as the new semester approached; the engineering department wanted a way to attract more engineering students to the university. They went to Peruvian ad agency Mayo Publicidad, and the partnership of engineers and marketers crafted an advertisement that would provide a very visible demonstration of the university’s engineering projects. The water-collecting billboard was born.

Electricity from the city’s power lines runs the five condensers inside the billboard. Like the condenser in your home air conditioner, the ones in the UTEC billboard are cooler than the air outside. When air contacts the cooled surfaces of the condensers, the air also cools, and the water vapor in the air condenses into liquid water. After reverse-osmosis purification, the water flows down into a 20-liter storage tank at the base of the billboard. The billboard generates about 96 liters of water each day, and a simple faucet gives local residents access to the water. UTEC has not yet announced whether the water will be available for free, but the billboard reportedly cost only about $1200 to install.”

Enrollment jumped up by 28% by April 2013 and it has made an unbelievable difference to the people who now have access to clean drinking water. Simple, smart, and eco-friendly.

Read more about this project and more like it here.

Supplement Brands to Spearhead the combat of malnutrition

An opportunity exists for the supplement brands to get involved with and help both local and foreign initiatives in the combat of malnutrition. What about making specialized powders which have the accurate macronutrient ratios of protein, fats and carbohydrates to adequately nourish children at various ages? A powder can be sent across the border without contaminants and requires only water to mix. These powders can be mixed in ways similar to ‘protein shakes’ and pack a punch for minerals, vitamins and macronutrients. There is also opportunity for the same in the form of ‘gels’.

Water can be sourced in multiple ways like the creative billboard above. Companies could get involved, fund and sponsor the research, and distribution of these food sources to those in need.

Use our existing resources to facilitate learning through study notes

Our education system is for lack of a better word, abysmal. The 30% pass rate is unacceptable and limiting our nation. It’s obvious that stalling the education of the masses works in a dictatorial-government’s favour – the less we understand, the less we will fight.

If we are to educate our youth to stand strong in a competitive international environment, allowing students to pass even though they got 70% of the content wrong, must stop.

Reaching only 30% correctly means that the person does not fundamentally understand the content. I, for one, certainly wouldn’t allow a doctor to operate on me if they passed with anything less than a stellar record. We need to trust that our graduates across levels not only can recite the content accurately, but also deeply comprehend it. Without comprehension, you cannot apply principle and theory to practice. That takes inspection and selection of relevant models and practices to apply in different situations.

With the attempt to add some value in this rusted chain, I have personally started a new website called SA Study Notes. This is a non-profit organization aimed at using the resources we have in this country to facilitate learning. SA Study Notes, although in its Beta phase and requiring significant website upgrades, encourages all students from primary school through to university to share their old study notes with the website and allow them to be made available for download by anyone who has access to a phone, for free.

The prerequisite is that these students have to be the top in their subject (A’s or B – average). They are not to submit any official material, only their personal notes. No money changes hands here. This is not about profit. It’s about community service without having to give money or time – neither of which anyone has much of.

In this way, we get the best minds across grades regardless of race or class, contributing to the betterment of our society. All notes are available for free download for anyone and everyone. This will facilitate learning, contribute to social progress and encourage children to share rather than throw away valuable conceptual thought-processing. For South Africans, by South Africans. Hopefully down the line, content will be made available in audio and video formats and in multiple languages.

This is just one initiative. One step in the right direction. If we all put our entrepreneurial minds to it, I have no doubt we can uncover some valuable options.

Summary

• Identify the dualities in your industry, capitalize on the opportunities.
• Join ventures and expand your reach.
• Surprise and delight your staff.
• Innovate where it matters most.
• Find the opportunities for your business or be buried by change.

Part 2 of this opportunities article to come next week: Alternative policy strategies proposed which could help steer this country to a 7% GDP within a few years.

• Lauren Haworth is Executive Head of The Loyalty Specialists

With thanks to contributor:

• Greg Castle (Marketing Director at DGB)

References:

1. The Circular Economy: Barriers and Opportunities for SMEs. Online, available at https://www.ceps.eu/system/files/WD412%20GreenEconet%20SMEs%20Circular%20Economy.pdf
2. Exist. 5 Business Models That Are Driving The Circular Economy. Online, available at http://www.fastcoexist.com/1681904/5-business-models-that-are-driving-the-circular-economy
3. Harvard Business Review. Roaring out of a Recession. Online, available at https://hbr.org/2010/03/roaring-out-of-recession/
4. Edinburgh Group. Growing the Global Economy Through SMEs. Online, Available at http://www.edinburgh-group.org/media/2776/edinburgh_group_research_-_growing_the_global_economy_through_smes.pdf
5. OECD (2009a), Top Barriers and Drivers to SME Internationalistion. Online, available at oecd.org/industry/smes/43357832.pdf