Upgrading Micro and Small Enterprises: The Value chain

By Isaac Twumasi Quantus in Accra.

Throughout Africa, the majority of the poor earn their incomes through micro and small enterprises. Most of these firms ultimately fail to lift the poor out of poverty, leaving families unable to meet the most basic needs, including feeding and educating their children or accessing adequate healthcare.

Determining what makes some businesses succeed while others fail is a critical part of helping the poor to increase their incomes and lead happier, healthier lives.

One of the most important ingredients of a successful business is its ability to respond to market opportunities. Often, the response takes the form of “upgrading.” Small and very small firms can benefit from upgrading in several ways, including higher returns.

There are ways in which an entrepreneur regardless of size can upgrade to meet the target: improving its efficiency, improving the quality of the product it produces, specializing in new functions or activities, finding new markets and or developing new products or services for a unique market.

Each offers challenges to the entrepreneur but can ultimately lead to a more secure and consistent source of income.

Improving the efficiency of production or service delivery results in either the same level of output with fewer inputs, or greater output for the same level of inputs. For instance, a farmer could switch from furrow to drip irrigation or begin to use high-productivity seeds in order to produce a higher yield with the same or reduced level of inputs.

In addition to making the process more efficient, firms can opt to improve the quality of their products or services, or make other changes that make them more desirable to consumers.

Examples range from textile producers who introduce new colors and designs to farmers who comply with more stringent food safety and environmental standards. Both are in response to changing market demand, whether from tourists in a local marketplace or from horticultural importers on another continent.

An entrepreneur may also expand its core business activities, taking on a new role, or may abandon less profitable ones. For example, farmers or artisans may begin to buy and sell the products of other farmers or artisans in addition to selling their own products. Guesthouse operators could also begin offering excursions in addition to accommodation.

In addition to making changes in the production and delivery process, firms can explore expanded market opportunities. For instance, a firm can shift between domestic, regional or international markets, as in farmers who begin to sell to European export markets or tour guides who attract foreign visitors.

Producers may also target organic or Fair Trade markets that pay price premiums.

More dramatically, an enterprise can begin to sell to different end markets entirely, such as a leather producer who begins selling to shoe manufacturers rather than to the accessories manufacturers which he previously supplied.

Upgrading can generate greater profits but generally requires substantial initial investment and risk. One way MSEs can minimize the risk associated with upgrading is strengthening relationships among themselves and between themselves and input suppliers and buyers. Firms at the same level can pool risk, as when coffee producers organize and acquire the means to produce specialty coffee. Alternatively, firms further up the value chain can provide information, technical assistance and inputs to MSEs to make the value chain as a whole more efficient and profitable.

This article was originally posted on Africa Banking Network

Are you interested in Market Research, Recruitment and Business Leads?

Join the Africa Business Panel, powered by Africa Business Communities.

www.africabusinesspanel.com.