Helping Entrepreneurs Grow Small Businesses in Emerging Markets
Helping Entrepreneurs Grow Small Businesses in Emerging Markets
Many experts believe one of the best ways to improve economic conditions in emerging markets is to help entrepreneurs — especially those running small businesses — grow.
These small, often times informal, firms include dressmakers, restaurants, auto repair shops, metal fabricators, cleaning services — the list is vast and ever-changing. The World Bank counts about 400 million of them across Africa, Asia, and Latin America, where they make up about 60% of the jobs and 40% of the GDP.
Stephen J. Anderson is intensely interested in improving the performance of these entrepreneurs. An assistant professor of marketing at Stanford Graduate School of Business, he knows that even a slight overall bump in growth among this class of firms could translate to greater prosperity for millions of small-scale entrepreneurs and the employees they lead.
Anderson has focused much of his research the past six years on sub-Saharan Africa, where he has overseen several multi-year field studies involving thousands of small firms — all with the aim of measuring the effects of marketing-based interventions.
In one stream of work, he’s analyzing the impact of improved marketing capabilities with interventions such as marketing skills training in South Africa, customer resilience strategies in Uganda, insourcing and outsourcing marketing expertise in Nigeria, marketing analytics in Rwanda, digital marketing tools in Kenya, and external customer-facing modernization in Mexico.
In a second stream of work, Anderson is examining interventions focused on product development, including business model innovation in Uganda, locked loans in Ghana, the lean startup method in Kenya, professional service platforms in Nigeria, and scaling minimum viable products in Peru.
He spoke to Stanford Insights recently about what his studies are revealing and exactly how they work.
What’s the biggest challenge that small-scale entrepreneurs face in emerging markets?
Lots of people assume that it’s access to finance — that they just need money. Something like 80% of the firms I study lack access to credit. And surely that is an important constraint to growth. You do need cash. But you also need customers. You have to identify or create a market — where people will actually pay you money in exchange for your offering — before the financial capital can be effectively invested in the business. You have to understand what different customers want or need, and how you’re going to address those preferences or solve those problems. Do you stick with your existing design or service, do you tweak it, or do you maybe offer something entirely different? How do you address their needs in a way that’s differentiated from competitors? Are you targeting a large enough segment of customers? And then once you do that, how do you scale revenues and sustain profitable growth?
Those are universal issues for all entrepreneurs, though, yes?
Right, but it’s not typically something people lead with when they come in to help businesses in emerging markets. Often when a multinational or NGO wants to help, it’s just, “We’ve got to come in with money. Money’s going to solve it.” In recent years, there’s been a lot of great work on small firms and how to help them grow, but it has tended to focus on either finance or operations. The marketing aspect has kind of been ignored.
What kinds of marketing interventions are most effective?
That’s what I’m trying to figure out with my first research program. I have a few projects completed now and seven more still in progress. My hope is at the end of a study — each one usually takes four years from inception to data completion — we’ll have one important takeaway about the role of marketing and entrepreneurship. Most often, it’s how a given marketing intervention increases performance (what we call “the mechanism of change”) that offers the key insights that we can use to generalize beyond the context of an individual country.
One of your first studies measured the impact of marketing skills training in South Africa. How did that work?
This project was the start of my work on building marketing capabilities. It involved recruiting hundreds of entrepreneurs across greater Cape Town, then randomly assigning some to a marketing course, others to a finance course, and the remainder to a control group that did not receive any training. To design and deliver a strong intervention, we teamed with a local NGO to recruit successful businesspeople from the area who wanted to give back to their community. They were experienced managers, most with professional degrees who knew that community and that economy. They met the small-scale entrepreneurs in classrooms on a weekly basis for 10 sessions of marketing- and sales-focused training (or finance and accounting classes for those in the other experimental group). The courses were both intense — involving four hours of in-class time and four hours of homework per week — and practical, with an emphasis on changing practices in one’s own firm. Dividing the training into two separate interventions not only allowed entrepreneurs to focus on building one business skill at a time, but also gave us the chance to gain an understanding of how each one worked.
What was the primary finding?
With my coauthors [Rajesh Chandy of the London Business School and Bilal Zia of the World Bank], we found that either type of training can lead to more profitable firms, but in different ways. The entrepreneurs who got marketing training tended to improve and become more profitable through a “growth” focus. They increased sales, purchased extra stock, and added more part-time staff, as well as increased the marketing and sales activities implemented in their businesses, that kind of thing. By contrast, the finance group increased profits by adopting a greater “efficiency” focus. They didn’t increase sales substantially, but they did decrease costs and improve the conversion of inputs to outputs. They also implemented more finance and accounting practices.
Any other takeaways from that South Africa study?
We looked at which subgroup of firms benefit the most from marketing training. In line with developing a growth focus, we found that building marketing and sales skills really seemed to help entrepreneurs who (prior to the course) lacked exposure — meaning they’d never lived or traveled outside their existing town or worked in a larger company, so they hadn’t been exposed to different products or market contexts. You know, many of these places are quite insular. Social and geographical mobility is constrained. Gaining broader exposure is a challenge for a lot of these entrepreneurs. So they’re the ones who tended to get the biggest bang for the buck from marketing training.
How did that study differ from your work on business model innovation in Uganda?
The Uganda project was the beginning of my second research stream, which examines the role of product development. This initial study looks at business model innovation — also known as pivoting — and whether firms in emerging markets can shift how they create, deliver, and capture customer value. For the marketing intervention, we used a one-on-one remote coaching model that facilitated connections across markets. Through our partner, we recruited hundreds of professionals in advanced markets all over the world, about 40 different countries. The coach could be an MBA grad in New York, or someone working for Deloitte in London, or someone with valuable business experience who just wants to help others. The coaches Skyped with local entrepreneurs from around Kampala once a week or every other week for six months to help them come up with ways to shift the direction of their businesses. While there is inevitably some knowledge transfer, it is difficult to effectively train someone on the other side of the world via email, phone, and Skype. But that was OK. We were more interested in how to stimulate pivots (not business practices) and then measure their impact on firm sales. It was less about skills and more about changing product-related strategies.
Can you give a specific example of how that might work?
Say there’s someone with a shop that sells DVDs and prints photos. But after analyzing the market and gathering feedback with the guidance of her coach, the entrepreneur realizes that what her customers really need is someone to repair their electronic equipment, and that she has that capacity. Or maybe she learns that people are capturing many more short videos (as smartphone usage increases in Africa), but they have no way to edit, compile, and store them. So the entrepreneur shifts the strategic direction of her firm and dedicates resources to offering new services that better solve a growing problem in the market — in other words, she performs a “customer need” pivot. Her coach helped her rethink how to create value for customers and deliver it.
And the coaches have the experience to help them see that?
Exactly. Sometimes the entrepreneurs just need a nudge from someone who’s looking at the firm’s offering or market context from a different viewpoint, who can get them to go out and talk to their customers, or reexamine their product economics, or see what their competitors are offering, or figure out what else they could do with the materials, equipment, and skills they already have to redesign the firm’s value proposition.
This is a woman selling DVDs on the street?
No. Across my studies, I try to stay away from subsistence-level vendors selling stuff on the side of the road. While it’s impossible to get large samples — a must for these field studies — filled with transformational entrepreneurs, we at least try to avoid recruiting survivalist entrepreneurs. We make sure they’re operating out of a physical structure or building or office, so they’re a little more established and serious.
With some potential to scale?
Perhaps. Or at least with the motivation to grow, even if it’s just creating a job or two. That’s one of the trickiest parts of this research: How do you target and screen the entrepreneurs for these types of interventions? We’re looking for the cream of the crop.
How does that work?
We start with thousands of businesses. It’s the same for most of my studies.
How do you find them?
Door to door. It’s a massive operation. There’s a research manager, field coordinators, and a team of 20 to 30 enumerators on the ground. We divide a city into market regions and then hit every business we can find over the next two to three months. I call it the “PTP,” or pound-the-pavement, approach — and it tends to be more effective than simply relying on secondary lists passed on by NGOs, companies, or government offices. We also have our recruiting surveys programmed on tablets, which allow for quicker and more accurate data entry of their business characteristics, and which also capture GPS coordinates. Often the small firms in these countries don’t have postal addresses, so we obtain a mix of GPS, landmarks, and phone contacts for them and their family. If they turn out to be a good fit for the study sample, it’s critical that we’re able to find them again.
What kind of businesses?
You might have a tailor shop, maybe someone who’s designing jewelry. Lots of restaurants. Grocery stores. Delivery services. Printing shops. Internet cafes. Dressmakers. Some are small manufacturers, like metal fabricators or someone who works with leather. We start out by recruiting thousands of firms and narrow that down to the top 1,500 or so.
And how do you decide who gets the marketing intervention?
Several variables are used to construct what I call a GPI, or growth potential index. For example, we want to know if they have any skin in the game, so how much startup capital did they invest? Do they have permanent employees? Do they have three months of utility bills to show they’re an established business? Prior education? And so on. I use these growth proxies to calculate a GPI score. We score and rank them and move the top 1,500 to the next stage. Then we go back out and perform audits on each of these firms, which is challenging because many don’t have financial data. Out of those 1,500, we might find 1,200 who are willing to fully complete our baseline survey and also remain committed to participating in the intervention. This group gets interviewed again by our partner or an intervention team, and only 75% of them might pass this last screening step. So that leaves us with around 900 firms. This final sample is then randomly assigned into a treatment group (offered the coaching intervention) and a control group (not offered any intervention). The intervention typically runs for six to nine months.
What about measuring the impact — how do you do that?
The research team [which includes Pradeep Chintagunta of the Chicago Booth School of Business and Naufel Vilcassim of the London School of Economics], attempts to measure the changes in firm performance over time via two follow-up audits conducted with all firms in the sample, the first at about 12 months and the second at about 18 months after our initial baseline survey. I’m still analyzing the data from Uganda, but so far it appears that entrepreneurs in the treatment group were much more likely than those in the control group to pivot or implement an innovation in their business model. And, in turn, we are seeing that the entrepreneurs who received coaching increased their monthly sales in the range of 25%, compared to those who did not get any coaching.
We also tried to look at what was actually happening, in terms of the marketing phenomenon. The idea behind our intervention was to stimulate business model innovation or create a strategic change. To better understand this mechanism, we first had to create a framework for measuring different categories of pivots.
What were some of these pivots?
Well, in addition to the “customer need” pivot described earlier, another type of pivot is called “zoom in.” Let’s say you have an auto mechanic, and maybe he’s doing repairs for anyone who comes in. Whatever they want, he does it. He has no focus. He offers a broad mix of services — some are profitable, others are not. Then he gets a coach who starts pushing him to analyze what services are the most popular and most profitable, both with his current customers and other potential customers who drive vehicles in the area. He realizes that the things people want the most are just tire rotations and oil changes, done as quickly as possible. So he narrows the focus of his business and sells only the subset of offerings that tend to be in the highest demand. Using his existing skills and resources, he’s also able to train and hire apprentices who can complete these services in a cost-efficient manner. Customers are happy because they get reliable, fast, affordable auto services, and the entrepreneur is happy because his firm increases sales.
Or maybe there’s a tailor who started off just making traditional African dresses. Then throughout the coaching intervention she discovers that her customers’ husbands also want similar styles of clothes made out of the same materials. And so the entrepreneur implements a “zoom out” pivot and expands her product portfolio by making traditional African clothing for men as well.
Another pivot type could be identifying a new sales channel. Say there’s an entrepreneur who runs a drink shop that sells specialty coffees and juices. He typically sits inside the shop waiting for people to come and buy from him. He’s complacent. But along comes a coach who highlights that this is not a good strategy for growing sales and encourages the entrepreneur to explore other ways of getting his products into the market. Eventually the firm hires a bunch of guys on bodas [motorcycle taxis] to go out and deliver the drinks door-to-door, which can now be ordered via phone, text message, or email. The entrepreneur expanded his sales through a different channel.
Are these lessons that would apply in Palo Alto as much as they would apply in Uganda?
Well, these are not your typical Silicon Valley entrepreneurs who we view as being transformative. It’s not always as glamorous and flashy as that. But yes, even though my research takes place in emerging markets, I hope it leads to general marketing lessons that apply to firms across markets. We’re all just trying to create and deliver value to customers.