Can Business Development Services practitioners learn from theories ...

Development in Practice, Volume 16, Number 5, August 2006

Can Business Development Services practitioners learn from theories of innovation and services marketing? Marjolein C.J. Canie¨ls, Henny A. Romijn, and Marieke de Ruijter-De Wildt Business Development Services (BDS) programmes have become big business for international donors and NGOs. Focusing on small enterprises in developing countries, the current BDS approach assumes that the development of commercial markets is the key to success. Yet many of these programmes continue to have a limited impact. A review of modern theories of innovation and services marketing management suggests that this may be because current BDS support practice reflects a rather limited understanding of how new markets actually develop. Drawing on the insights that these theories offer, the authors suggest that BDS practice should develop a more evolutionary approach, recognising that service innovations develop through active, on-going interaction between suppliers and customers. The article concludes with practical policy guidelines and a discussion about tools that could help BDS to adopt this more successful approach.

Introduction Since the early 1970s, small and micro enterprises (SMEs) in developing countries have attracted the attention of policy makers and international donors. These enterprises have been widely seen as holding vast potential for employment and income generation, especially for the poor. Substantial numbers of poor working people rely on such activities. For instance, at the end of the 1990s, employment in small enterprises comprised an impressive 42 per cent of total urban employment in 12 major Latin American countries. Small-scale ventures are especially important for women. In the least-developed economies in particular, many more women than men depend on them. For example, in Tanzania 85 per cent of working women are employed in the informal economy, compared with 60 per cent of working men; similarly, in Bolivia 71 per cent of working women versus 59 per cent of working men are involved in SMEs.1 Unfortunately, although the sector is important in terms of employment growth, it has performed less well in terms of productivity. In spite of many promotional programmes and projects, the great majority of small-scale enterprises (SEs) are still no more than survival activities, incapable of boosting national competitiveness and economic growth. Ineffective ISSN 0961-4524 Print=ISSN 1364-9213 Online 050425-16 # 2006 Oxfam GB Routledge Publishing DOI: 10.1080=09614520600792366

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policy interventions in the past undoubtedly contributed to this state of affairs. Problems that are often cited include bureaucratic organisation and delivery among donor organisations; inadequate expertise among project staff; the use of top – down approaches; too many shortterm and ad hoc interventions; lack of proper evaluation and follow-up; and inappropriate selection of target groups. (See UNCTAD 2003:4 – 5 for a good overview of the problems encountered in older programmes.) Since the mid-1990s, however, there has been a surge of innovative thinking in the design and delivery of support for SEs, which in turn raises the hope that they could make a more substantial impact on development. The first major innovations occurred in the field of micro-credit (pioneered by the Grameen Bank and BRAC in Bangladesh), followed by a flurry of innovations in non-financial support. While micro-credit has become a more or less established field, with its own received models of best practice, the provision of non-financial support is still very much in the process of experimentation and evolution. This article seeks to contribute to the debate about what works, and why, in the field of non-financial services for small business development. Recent approaches to non-financial support go under the general term of Business Development Services (BDS). In essence, BDS is based on the development of commercial markets. In contrast to more traditional support programmes, BDS include donors, NGOs, governments, BDS consultants, and other agencies. They all play an indirect facilitating and enabling role in nurturing the development of private providers, enabling them to offer business services to SE clients at commercial rates. The aim is to phase out initial subsidies as quickly as possible, as demand builds up and markets develop (Committee of Donor Agencies for Small Enterprise Development 2001; Hileman and Tanburn 2000: 6; McVay and Miehlbradt 2002). Some quite spectacular successes have been achieved by following this approach.2 However, many small enterprise programmes based on the new philosophy continue to struggle. For example, a recent evaluation of more than 100 BDS projects, undertaken by the Inter-American Development Bank (IDB), reported that few could show a quantifiable positive impact on the intended users of the new services.3 The financial sustainability of the enterprises has also been a problem, with many operating only while they had donor subsidies. Projects were also found to have over-ambitious objectives in relation to their short time-scales, and were less effective as a result. Moreover, at the 2003 annual meeting of BDS practitioners in Turin, it was reported that the commercial approach is not effective in reaching the poorest sections of the SE spectrum (de Ruijter-de Wildt 2003). These criticisms suggest that not enough is understood about the factors driving BDS success, and that there is a need to explore different avenues to improve BDS effectiveness and increase impact. In the light of the IDB evaluation, recent claims by some leading BDS practitioners that a fully developed paradigm of small enterprise development has now emerged (Hileman and Tanburn 2000) are perhaps premature. Others have noted that ‘whilst the principle or aim of a more demand-driven and business-like or private sector-oriented approach to SME development is widely accepted . . . , there is less agreement on the BDS prescriptions. In particular, there are very few models . . . to demonstrate many of the concepts being put forward’ (Manu 2002:69). In this article we take a closer look at the conceptual foundations of the current BDS approach, in order to examine whether these foundations are still valid when viewed in the light of two important bodies of economic theory: innovation theory and services-marketing theory. Innovation theory is relevant here, because a new business service constitutes an innovation in the context in which it is being introduced; while studies of services marketing explain that business services are innovations that are specific but intangible. They are not 426

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the same as product innovations, and so they need to be treated differently if they are to be successful. Using key insights from these theories, we suggest an expanded model of BDS market development which revolves around active and continuous interaction between suppliers and customers. The first part of the article presents the conceptual principles of the current BDS approach, followed by a discussion of the key insights from theories of innovation and services marketing We go on to consider the weaknesses of the current BDS approach in the light of these theories, illustrating these with examples taken from BDS programmes. We conclude with some policy suggestions based on our findings.

Basic principles of the current BDS approach The current BDS approach organises service delivery along commercial lines and requires indirect facilitation among those involved (see Figure 1). Donors, NGOs, and other development agencies (commonly called BDS facilitators) offer private-sector service suppliers (BDS providers) technical assistance and incentives to encourage them to design, initiate, and launch new services and enter new markets (McVay and Miehlbradt 2002). Activities are diverse, but all are meant to help SME clients to start up and then improve their businesses. The main types of service provided include market access; input supply; technology and product development; training and technical assistance; infrastructure; policy/advocacy; and alternative financing mechanisms. Figure 1 illustrates the chain of actors involved in facilitating BDS market development. At one end are the international donors who contribute public development funds that are used by international facilitators to develop new ideas, promote good practice, and initiate innovation. These organisations in turn finance programmes and projects in partnership with local BDS facilitators that promote the actual BDS providers. These local organisations are involved in actual service delivery, exploring new markets, developing new services, setting standards,

Figure 1:

Facilitating BDS market development

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or influencing government policy. BDS providers are the supply-side actors who are in direct contact with the SE clients (Hileman and Tanburn 2000:11 –12). The most significant improvement of this organisational set-up over older supply-driven programmes is that the development and delivery functions are performed by different actors (i.e. the local facilitator and the local provider). This enables the facilitator to serve a wide range of local providers. It also avoids direct market-distorting interventions by development agencies. Instead, these agencies indirectly stimulate market-development activities that are undertaken by others operating in the private sector. In the past, the development and delivery functions were carried out by the same agency. This required in-depth knowledge of a wide range of industries and expertise in many different kinds of service function. Not surprisingly, these generalist organisations frequently degenerated into large ineffectual bureaucracies, supplying services that were of limited use. The approach also frequently induced severe market distortions, as many programmes could rely on continuing subsidies, which in turn were passed on to clients in the form of highly subsidised services. This led to very wasteful programmes. In addition to the separation of the development and the delivery functions, new-style BDS programmes seek to ensure effective service provision by being market-driven. Unlike earlier programmes, stringent commercial criteria are now imposed. New services must quickly prove their worth in the market, by means of the clients’ willingness to pay for them. Services that fail this test will automatically disappear, as BDS facilitators withdraw their support (McVay and Miehlbradt 2002). It is expected that BDS should be provided on a commercial basis, even to the poorest sections of the SE sector, given the right product design, appropriate delivery, and suitable payment mechanisms (Committee of Donor Agencies 2001). BDS facilitators have used market surveys as the main mechanism to research potential demand for new services. Commercial survey techniques commonly used in the private sector have proved popular. In addition, BDS draws on techniques such as rapid participatory rural appraisal (the PRA family), sub-sector analysis, test marketing, and action research (McVay and Miehlbradt 2002). On the face of it, then, the new-style organisation of SE support constitutes a major advance in terms of flexibility and functional specialisation, incentive structures, market orientation, and organisational principles. Yet in practice many programmes still experience a range of problems that impede effectiveness and restrict coverage. Common complaints include criticism of weak markets for many services (particularly in rural areas), a mismatch between BDS supply and demand, and discrepancies between the BDS needs of small enterprises and their willingness to pay for these services. It is likely that some of these problems are merely transitional, resulting from inevitable time-lags between the conceptualisation and practical implementation of the new principles. Effective application of the new BDS model undoubtedly requires improvisation and adaptation in order to make it work in specific contexts. It takes time for practitioners to get used to new ideas and to fine-tune them to meet local market needs. However, we believe that such problems may not be the only cause of the continued lack of impact, and that the current BDS model is still at odds in some respects with the key principles of two established economic theories that are crucial for successful service innovation. To illustrate this, we shall briefly review the key insights from innovation theory and services-marketing theory and contrast them with current BDS practice.

Insights from theories of innovation and services marketing A central claim of innovation theory states that making users active partners leads to a greater uptake of new products and services, because users’ needs are better satisfied. This approach 428

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grew as a reaction to early innovation models that adopted a linear approach to the innovation process; it has proved to be very successful in practice. In a stylised view of these early models, innovation begins with research, followed by development, which in turn leads to production, and finally to marketing. There are no feedback loops in this system (see Figure 2). There is also a clear division of labour between the different stages in this sequence of activities, particularly between those involved in knowledge seeking and those pursuing activities geared towards knowledge use (Clark 1995:250). However, the hierarchical notion that innovation is initiated by research, the results of which are then pushed down a pipeline, has been generally disproved. In a world characterised by imperfect information, innovation is inevitably an iterative process of trial and error and incremental adaptation at every step. On-going feedback is an essential ingredient of the learning process, creating innovations of all kinds. This evolutionary view of innovation has gained widespread acceptance, variously denoted as the coupling model (Rothwell and Zegveld 1985) or the chain-linked model (Kline and Rosenberg 1986). In these models, ‘knowledge is not best conceived of as “stuff” flowing down a pipe, but rather as a more “entropic” substance whose value has the “non-linear” property that it depends ultimately on the interplay between the supplier and the recipient [of the innovation]’ (Clark 1995:253). A particularly important feature of evolutionary-innovation models is the recognition that active involvement by end-users throughout the process is crucial for success, and that supplier-dominated markets promote unsatisfactory innovations (Lundvall 1988: 356, 365; Gardiner and Rothwell 1985). The crucial contribution made by users is well illustrated by Von Hippel’s famous study of innovation in the scientific-instruments industry. In this case, users perceived the need for more advanced instruments, invented the instrument, built a prototype, proved the prototype’s value by applying it, and diffused detailed information on the usefulness of the invention and how it could be reproduced. Only after all these stages had been passed did an instrument manufacturer enter the process, to develop machinery to improve the design and carry out production and marketing. This pattern deviated starkly from the conventional linear model, where the manufacturer is supposed to start with an idea that s/he develops into a workable new product that will then be brought on to the market. Clearly, in some industries users do take the lead in developing innovations, while the suppliers who are ultimately responsible for producing the new products play only a subsidiary and facilitating role (Von Hippel 1976:220– 1). The importance of involving users is by no means limited to hi-tech innovations in economically advanced countries. It applies equally to simple adaptive innovations in less developed economies. There are manifold examples of this. Biggs (1989) has noted with reference to agricultural innovations that farmers and extension agents have complementary knowledge and skills. When they support and strengthen each other’s search for improvement, innovations will evolve in ways that are best adapted to the users’ needs. On the basis of a broad survey of innovations in health, agriculture, and irrigation, Gamser (1988) notes that the central task for technological assistance to developing nations should be to enable them to make better use of the enormous body of user knowledge that they

Figure 2:

The conventional linear model of innovation

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already possess. More recent work by Douthwaite (2002) contains various examples of industrial and service-type innovations, from both advanced and developing countries, which also show that adopting the pipeline model has a limited effect. Douthwaite contrasts this with what he calls a ‘learning selection’ approach to innovation, based on evolutionary principles. Danish windmills, Philippine farm equipment, particular brands of open-source software, and Local Exchange Trading Systems (LETS) are examples of innovations that were allowed to evolve over a period of time. This gave the innovations a chance to be perfected – a process which often took several years. While active and on-going user involvement is important for the development of suitable new products, there is another reason why such participation is so vital in innovation. Various researchers have pointed out that the process of interactive search and improvement itself enhances and improves the ability of those in the informal economy to carry out independent research and make contact with the formal sector. Lundvall points to the importance of adequate (re)search capabilities among users for a well-functioning national innovation system as a whole, arguing that ‘lack of competence of users and the tendency of producers to dominate the process of innovation might be as serious a problem as lack of competence on the producer side’ (Lundvall 1988). Clark also points out that building capacity for assimilating, processing, and using relevant information which is crucial for economic competitiveness and sustainable growth cannot depend on hierarchical organised systems. Rather, it needs to rely on local actors, because they alone have the expert knowledge of their particular situation – and this is the key to successful innovation (Clark 1995:255 – 6). While intensive user-involvement is generally important, the actual extent of user participation and initiative will vary across sectors. Von Hippel’s study is an example of a user-dominated sector in which the locus of innovation is clearly to be found among the users. The services sector, which has special relevance for our topic, is also known for its high user-involvement. Unlike physical products, services constitute processes that are produced and consumed simultaneously, requiring the physical presence of the consumer during their production. The link between service production and its consumption is so close that the interaction of the two parties in the process is often referred to as ‘prosumership’. Customers have a dual role. They both use a service and participate in the process of producing it. In this sense they are co-producers. Since each customer has unique individual characteristics and perceptions, each will have an idiosyncratic and heterogeneous demand for services. This means that in a sense each act of providing a service has to be custom-made (Zeithaml and Bitner 2003:21). Prosumership is necessary even for the delivery of well-established services, for example annual training courses, consulting, or advertising services. But it is all the more vital in the design and development of new services. Knowledgeable and demanding customers are a valuable asset to the service-producing firm when they support the development of new ideas, solutions, and technologies by sharing their requirements, strategic insights, information, and knowledge (Gro¨nroos 2000:9). However, these benefits will not occur spontaneously. A vital requirement is the establishment of lasting relations with customers. Provider and buyer have to earn each other’s trust and loyalty, and they have to become used to each other’s ways of thinking and acting. A shared understanding of problems and opportunities is needed for effective interaction. This does not develop overnight: it needs to be cultivated. The two parties need to learn to view each other as partners. The marketer must not view the customer as an outsider who should be persuaded to choose the seller’s solution, whatever it takes (Gro¨nroos 2000). The relationship needs to be nurtured on a continuous basis, in such a way that the customer is treated as a customer at all times, even when no services are actually being purchased. 430

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Obviously, companies cannot realistically create on-going partnerships with their entire customer base. Some customers – perhaps even the majority – may not be interested in, or capable of, establishing and entertaining close contact with their service suppliers. However, active partnering with a small group of enterprising customers is generally enough to enable a service provider to build a successful customer-driven service strategy. Innovation-diffusion models have frequently shown that the initial uptake of new products and services tends to be driven by a few highly motivated pioneer adopters. These are generally users who can handle risk and are interested in co-experimentation and contributing to the incremental improvement of early prototype designs, without caring too much about financial gain. The key to a supplier’s successful market development lies in identifying certain lead users who are prepared to act as early development partners. More risk-averse users will be enticed to adopt the innovation once it has evolved into a more workable design, and they can see its practical application (Rogers 1995). Evolutionary theory allows us to view these interactive user–producer processes from a broader perspective than the more traditional approach adopted in linear models of innovation. Several evolutionary theorists have adopted the concept of the innovation system, which suggests that innovations develop in a ‘network of institutions in the private and public sectors whose interactions initiate, import, modify, and diffuse new technologies’ (Freeman 1987:1). The notion that there is a broader context which influences market dynamics at the micro level is particularly significant in the case of business services. It is unlikely that buoyant demand for the new services will develop in the absence of sufficient demand for the products from the potential users of these services. In other words, business services comprise a derived demand, which is organically linked to the demand further down the line. Awareness of this interdependency is crucial for understanding the scope for initiating and developing new business services. To conclude: in the process-based theories described above, the strategic orientation of the service-producing firm is integrally geared towards customer-relationship management and networking, as the foundation for long-term competitiveness. This clearly contrasts with the short-term, narrow view that characterises the older transactional approach to marketing, whereby the main task of marketing is seen as selling goods and services to a somewhat anonymous and isolated market. The main effort is geared to achieving short-term sales and profit. Making customers buy is what counts. There will often be a trade-off between shortterm value-creating activities and investment in long-term, sustainable customer partnerships implied in the relational view of customer-marketing management. The latter strategy cannot work if the firm’s shareholders change their portfolio at the first sign of disappointing quarterly results. For relational marketing to succeed, the company’s financiers need to be patient and committed to the long-term development of the firm (Gro¨nroos 2000:10).

Implications for BDS delivery in the light of these theories Let us now examine the existing BDS model as depicted by leading practitioners in the light of the innovation and marketing theories described above. The first point to note is that although the BDS model is in many ways different from the purely supply-driven support programmes of the past, it still exhibits certain features that remind us of the traditional linear model of innovation. Some of the key literature still gives the impression that the best way to develop new BDS markets is to push them through a pipeline, which runs in a top –down fashion from donors through facilitators and providers to end-users. We have also noted that there is a clear-cut division of labour between the parties, with the facilitators being seen as the prime source of new ideas and initiatives, while the providers Development in Practice, Volume 16, Number 5, August 2006

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essentially implement them. The main role of the users is to accept (or reject) what is being offered. The concept of the user as a passive recipient is well illustrated in Hileman and Tanburn’s elaboration of the BDS model. They visualise end-users as ‘the entrepreneurs who run small enterprises [who] invest their time and money in business development services which they hope will increase incomes or secure survival’ (2000:12). From our perspective, this description misses the point. Small enterprises are also innovative producers in their own right and are capable of forming their own ideas about their business requirements; as such, they can play a crucial role in the actual design and development of new BDS solutions. By contrast, Hileman and Tanburn see the importance of SEs in the development process in terms of characteristics that are not related to innovation, such as providing a large workforce and a major consumer group. In one respect, from the perspective of evolutionary-innovation theory, the recent BDS model introduces a new problem, stemming from the idea that local BDS facilitators should no longer be involved in direct service delivery. This obstructs direct interaction between the chief generators of the ideas and the potential users of new services. The communication runs through the intermediary of the BDS providers, which are essentially supposed to implement the new ideas furnished by the facilitators, although they are not the chief idea initiators. However, in practice this institutional separation between the roles of market facilitator and provider has sometimes been experienced as problematic and undesirable (Manu 2002). Our earlier review of the theory highlights why this problem occurs, and why it is unwise to adhere dogmatically to a policy of separation when it is clearly counterproductive in a particular context. As already discussed, innovation theories show that direct, on-going interaction between generators and users of innovations is the key to the evolution of new products and services that will truly meet market needs. The systems aspect of evolutionary thinking makes us aware of another problem with the BDS pipeline-like approach, which is that the typical customer (the SE) is actually not at the end of the line. In current BDS practice, the final market for products made by the users of the business services remains out of view. Since lack of demand for SE products is a common problem in less-developed economies, this could be a serious limitation in many cases. The systemic innovation model addresses this problem up front, through broaderfocused interventions. It suggests the need for business-services markets to be stimulated in a context where viable end-markets for the products of client enterprises already exist, or where the stimulation of end-markets is itself an essential part of the support intervention. The way in which BDS programmes are currently market-driven is also at odds with modern theories of innovation and service marketing. Due to stringent donor requirements of rapid commercial sustainability, there is clearly a risk that potentially valuable ideas will not be given a fair opportunity to undergo the needed incremental improvements that can only arise from a prolonged period of user – producer interactions. Innovation theory indicates that new market development is often an evolutionary and repetitive learning process, in which relationships are gradually formed and institutionalised. It rarely results from a quick try-out of a new service that is conceived as a final off-the-shelf design, intended to maximise the number of short-term commercial transactions. Many case studies of successful innovations around the world support this perspective. The question, ‘How can practitioners select high-impact services?’, posed in the BDS Turin Background Reader (McVay and Miehlbradt 2002), is looking at the issue the wrong way round, if one adopts an evolutionary-innovation perspective. Locally appropriate services are not amenable to ‘selection’ by external agencies. Success is more likely when such agencies make initial suggestions (in collaboration with the other relevant local actors), which form a starting point 432

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for further exploration and development by the parties involved. This is an example of the evolving process of ‘prosumership’. By emphasising quick and simple interventions, the current BDS approach can only address relatively superficial market failures. This emphasis is of course understandable, given the donors’ concern for financial sustainability. In fact, the current priorities of BDS donors show a striking resemblance to those of the commercial shareholders of many Western corporations, obsessed as they are by short-term financial impact. It is perhaps logical that a preoccupation with payback criteria has come to dominate the donor agenda, given the poor record of financial sustainability of earlier SE-support programmes, and a political climate which makes rigorous commercial demands on service organisations. Yet the zeal to achieve rapid financial sustainability of BDS is probably constraining the most promising options to create genuine lasting improvements in people’s welfare and contribute to local capacity building for sustained innovation. There is a need for a more responsible, balanced, and nuanced approach that navigates between the two extremes, recognising the incompatibility between achieving quick financial results and overcoming deep-rooted market failures, but also taking into account the ultimate need for market discipline. It is heartening to note that some major donors are beginning to recognise this need and as a result are returning to a more genuine developmental approach. For instance, the InterAmerican Development Bank evaluation admits that the complexities involved in market development have been underestimated in terms of project design, and that objectives have been too ambitious in relation to the limited time and budget allocations. A more gradual approach is advocated for its second-generation projects. There are also indications of changes at the project-implementation level. For instance, BDS intervention strategies are now being categorised according to the potential strength of supply and demand in the markets to be developed. Where demand and supply can be mobilised relatively quickly, BDS interventions could focus more closely on indirect facilitation and/ or information supply. A slow-moving situation calls for more education and capacity-building activities that would obviously take longer to translate into commercially sustainable results. The current BDS approach to market research also needs to be discussed in the light of the innovation theories reviewed earlier. BDS concentrates on obtaining basic information about demand, supply, and the interactions between them by conducting a market survey or rapid appraisal, using BDS facilitators. The outcome claims to be a picture of a BDS market, showing how it works and where the main problems are. These surveys tend to concentrate on creating SE demand for BDS services. They are influenced by the features and benefits that SEs perceive such a service should have, and by their willingness or ability to pay. According to McVay and Miehlbradt (2002), the sort of information that these exercises produce is not valued by potential users, many of whom are unaware of the service at all. In our opinion, the surveys are useful but limited. If they are the only instrument used to gather market information, the role of the potential clients will be limited to providing initial information to BDS facilitators and suppliers. The fact that potential users could also be active co-developers of new services will go unrecognised. Indeed, this appears to be the case in many BDS programmes. The modern services-marketing literature suggests that effective development of new markets will often require suppliers to develop a more inclusive marketing strategy, in which users are viewed as mature and equal partners. This model revolves around the building of active, on-going supplier– customer relationships which facilitate the creation and exchange of new ideas between those involved in the market. In this model, market research is not limited to a one-shot activity that is separated from the actual delivery of services. It must be an on-going, interactive process, which is integral to the service provision itself (Zeithaml and Bitner 2003). Development in Practice, Volume 16, Number 5, August 2006

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Finally, from the perspective of evolutionary theories the current BDS approach still takes a somewhat limited view of customer diversity. First, the services-marketing literature stresses that each individual’s service needs are highly idiosyncratic, and to some extent BDS has already recognised this need for individualisation. Attempts to introduce flexibility in service delivery have been made: for example, a voucher system allows clients to choose from a range of training or advisory activities. However, the literature on innovation theory suggests that creating individual choice in service use is only one aspect of successful targeting. A dynamic interaction between producers and users is required for new service development; but some users are capable of playing a key role in this process, while others are not. It is important to identify and engage risk-taking lead-users at the early stage of project design and planning: people who can help BDS suppliers actually to co-design a new service. Innovation theories suggest that it is also important to differentiate between certain user groups. Again, this brings a new perspective to a common BDS problem. Concern that socially and/or economically disadvantaged groups have weak purchasing power when it comes to buying business services may in fact be symptomatic of another underlying problem. There are many obstacles that prevent disadvantaged groups from participating effectively in the earlier stages of innovation (service design and development) that give rise to these new services. It is therefore not surprising that the resulting services will have features that from their point of view are inappropriate. Since women are strongly represented among the poor, both as entrepreneurs and as consumers, and since BDS claims to address poverty through its projects, the involvement of women as entrepreneurs and end-users in all stages of new service development is an issue that requires urgent attention. It is important to recognise the formidable constraints that restrict women from active user-involvement in service development. They include the following. . Financial restrictions caused by lack of independent access to external financial sources. This impedes productive investments of all kinds, so that SEs run by women tend to cluster in capital-scarce activities in saturated markets, with limited scope for innovation. . Social and cultural barriers to communication with (male) BDS suppliers and facilitators, which hamper interactive, on-going, incremental innovation. . Family and social obligations that make multiple demands on their time and thus hinder their full participation in BDS schemes. Women’s business activities are often a supplement to family income, undertaken at home on a part-time basis as and when household tasks allow. Family responsibilities could also make women relatively risk-averse, which discourages innovative behaviour. . Institutional constraints such as political under-representation due to lack of organisation, which makes it difficult for women to network and to have a voice as a distinct interest group. . Educational disadvantages, in comparison with male entrepreneurs. This can make it harder for women to understand and express their business problems and needs, thus impeding their systematic capacity to seek to improve their business. While these constraints are formidable, female entrepreneurs still constitute an interesting user segment for BDS. In fact, taking women entrepreneurs seriously as customers – in the sense of being fully fledged participants in new service development – will often make good sense from a commercial point of view. Involving women from the start in the design of new services could ultimately create major additional markets for BDS suppliers, while at the same time tackling poverty through the development of products that might help women. Sadly, short-term financial sustainability is probably not feasible in most cases, given the deep-seated nature of the constraints to be addressed. 434

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Although there are many BDS projects with a largely or exclusively female clientele, only scant attention has to date been given to gender issues in the BDS debate. Clearly there is a great deal of work still to be done in this area (but see Jones 2004 for a useful overview).

Some practical illustrations In this assessment of current BDS practice, we have necessarily had to generalise to some extent, which inevitably means that we have not been able to do justice to the achievements of many BDS programmes. In fact, some BDS programmes already appear to practise important evolutionary principles and have a more distinct process-and-system orientation than the standard model. The Kenya Ceramic Jiko stove For example, the programme to develop the well-known Kenya Ceramic Jiko (KCJ), an improved cooking stove with higher fuel efficiency, shows a range of evolutionary features that appear to have contributed significantly to its success. With more than 250,000 KCJs distributed in Kenya in 1989 alone, the project has achieved a great deal (Jeans et al. 1990). The starting point in the early 1980s was the existence of a ready market for low-priced, fuel-efficient stoves. Kenya has many low-income households which depend on charcoal for cooking and heating. These households were faced with ever-rising fuel prices as a result of steadily increasing pressures on the country’s wood resource base. The Kenya Energy and Environment Organisation (KENGO), the implementing NGO, recognised that stoves could be produced cheaply by producers in the informal sector, using scrap materials. The NGO had a good understanding of various contextual factors in the local innovation system and ‘a clear idea of the range of obstacles in the way of upgrading the quality of Jiko production and of the different channels open for the delivery of support to [stove] producers’ (Dawson and Jeans 1997: 23). In addition to the market factor, another key element was the involvement of highly creative and innovative local jua kali (meaning ‘hot sun’ in Kiswahili) craftsmen. Building on their capacity, local master craftsmen were actively involved in a programme of technical design work, alongside NGOs and other institutions. Technical problems were addressed jointly in a process of on-going interaction between entrepreneurs, technical-aid organisations, and funding agencies (Juma 1989: 134). The approach to BDS provision was allowed to evolve through a process of trial and error, and the model that truly addressed the producers’ needs was not achieved overnight. Initially, BDS providers emphasised technical training for local artisans, to help them to master the production of the ceramic liner of the Jiko. However, after sustained efforts the local potters proved unable to produce these to the required specifications and quality, so this part of the process was subcontracted to medium-sized enterprises in the formal sector. BDS providers helped these firms to develop commercial production lines and fostered linkages between them and the informal metalworkers. The project also made good use of innovative and capable lead-users. For example, after an initial, workable design had been in use for some time in urban households, a local stove manufacturer made modifications that would enable the KCJ to be used in rural areas, using firewood as the fuel. This promising initiative was taken up by KENGO, which helped the firm to perfect its model. Charcoal stoves in Sudan A sister project which developed similar charcoal stoves in Sudan took the evolutionaryinnovation approach a step further. For one thing, the project implementers were keenly Development in Practice, Volume 16, Number 5, August 2006

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aware that the end-users were women, involved in SEs, and that the project’s success would ultimately depend on addressing their needs. To this end, the project staff engaged female researchers who ‘. . . were far more familiar with cooking practices and needs than many male researchers on the project. Moreover, in the devout Islamic society of Khartoum, men were not permitted to enter the kitchen areas of most homes and interview women to whom they were not related. Any field trials, therefore, required women to play a major role in data gathering’ (Gamser 1988: 85). This was a good start, but it was still not enough. In the later stages, it became necessary to adopt a broad systemic perspective and to make special efforts to include disadvantaged groups. The project involved the metalworkers as fully developed customer – partners, and also began to involve prospective women end-users as direct participants. They evaluated test designs and provided feedback and suggestions about possible improvements. Ultimately this made the difference between success and failure. A public procurement programme in Brazil The third example of evolutionary innovation concerns a public procurement programme of small enterprise products in the Brazilian state of Ceara´. The key to the success of this programme too lay in its broad systems approach, specifically focused on creating final demand for the products of small enterprises, rather than on the design of BDS interventions. In this respect, the project did better than the example of the Sudanese stove, because the decision to focus on the end-users was made at the beginning, as opposed to being introduced later in response to initially disappointing experiences. In the Brazil project, government departments asked local firms to fulfil orders for products like school desks, electricity poles, and school repair works. This market had previously been open only to large-scale companies. Initially the government departments were critical of product quality, and as a result the firms concerned had to address obstructions in their production processes to ensure acceptable quality standards. This need focused their demand for external BDS support, and the assisting agency, the Brazilian Small Enterprise Assistance Service (SEBRAE), found it easier to work with the firms on site as problems were discovered. A good example of this assistance in practice is provided by a group of small sawmills. ‘When SEBRAE first started working with the . . . producers, the agency’s frequent rejections of defective products or parts translated into a self-imposed pressure to improve the quality of the labor force. As a result, the saw mill association took upon itself the cause of upgrading skills in the town’ (Tendler and Amorim 1996:415). The same mechanism was evident among a group of woodworking firms, which ‘told of how they would meet together before a visit by the SEBRAE technician in order to draw up a list of common problems they were facing in the course of fulfilling their order. The technicians, in turn, reported that they liked working this way much better. It made their task easier, they said, because they could concentrate on the problems brought to them by their clients’ (ibid: 416). This clearly illustrates that the producers were acting as co-producers in the development of BDS. It also draws out the ongoing interactive nature of the BDS support. The SEBRAE experience is a clear success story: the number of small firms grew and employment increased as the quality and design of the products improved over time. A few years after the programme began, firms successfully diversified into new private-sector markets without SEBRAE assistance. Over time, the BDS assistance scheme run by SEBRAE also became commercially viable (the agency received a five per cent commission on all successful orders). But at the same time it is important to stress that several years of sustained investment was needed to create a sustainable BDS market, as was also the case for the African stove projects. 436

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Towards a market-driven approach to BDS: conclusions and policy suggestions Prominent BDS practitioners claim that their programmes aim to ‘build on the dynamics of the market’ (de Ruijter-de Wildt 2003). This conceptual starting point constitutes a major advance over earlier supply-driven programmes in which commercial sustainability was a non-issue. Yet to date few BDS programmes have succeeded in facilitating the development of truly selfsustainable markets. If market-driven project interventions are such a good idea, why is it so hard to make them work? In this article we have suggested that the reason is because BDS still needs to develop a more organic view of what is actually involved in the development of new service markets. Drawing on insights from modern innovation and services-marketing literature, we propose an augmented BDS model. This model is based on an evolutionary view of how markets emerge as a result of continuous interaction between potential suppliers and customers over a period of time, within a larger system that shapes the dynamics of this process in different ways. We suggest that entrepreneurs who exercise (potential or actual) demand in emerging BDS markets have a much more active and complex role to play than is currently acknowledged by most BDS experts. When small entrepreneurs exercise demand for a certain good or service, the market transaction that takes place is more than a quick financial exchange: it is the culmination of a long and on-going process of interaction between the parties. We therefore believe that BDS programmes should move beyond a perception of BDS users as more or less passive respondents to a quick market survey, and as buyers of services who ‘. . . reward [suppliers] with sales, contracts or business deals’ (Hileman and Tanburn 2000:12). The design of BDS programmes should instead reflect an awareness that the relationship between supplier and customer is a two-way affair. In other words, there should be built-in possibilities for progressive customers to co-determine the direction and priorities of innovations, to be able to act as partners in the actual design of new services, and to provide continuous feedback. If BDS customers on the demand side are to gain influence over the BDS agenda, the locus of BDS interventions will need to be broadened beyond the supply side of the market, where it currently resides. Regular focus-group discussions and action research, already in use in some BDS projects, could help to make this happen. It seems to us that these types of market-research instrument, which can facilitate sustained user-involvement, warrant far more attention than the market survey techniques currently used. But in order to take customers seriously, the BDS project implementing agencies will have to make special efforts. It will not be enough to invite suppliers in the expectation that customers will appear spontaneously. Many will not, unless they are actively approached and made to feel welcome. Special needs must be addressed carefully, and constraints on project participation must be understood and taken on board. This is especially critical when customers belong to disadvantaged groups, because of the major obstacles faced by such groups to engaging in innovation activities. There are some hopeful signs that recent initiatives in BDS practice are in fact moving in this direction. For instance, the coupling of non-financial services provision to the supply of microcredit is a potentially valuable approach that could build a wider customer base among the poor. However, a lot more needs to be done in this area, particularly with regard to targeting women and disadvantaged groups. Community-development practice can provide some valuable lessons to BDS practitioners, with its emphasis on capacity building and empowerment through group formation, networking, education, and social and political organisation. These Development in Practice, Volume 16, Number 5, August 2006

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elements are seen as essential building blocks that need to be in place before a commercial approach to market development can have any chance of success. This shift towards a more customer-oriented and dynamic approach will require a certain reordering of priorities on the part of donor organisations and implementing agencies, along the lines of the changes adopted by the IDB. Such agencies need to take a more flexible approach, recognising that giving BDS a quick kick-start cannot be a universal recipe for success. Recent efforts by BDS practitioners to differentiate interventions on the basis of demand and supply conditions are a valuable first step in this direction. This type of approach makes it clear that there are many different reasons for market failure, and that it is simply impossible to try to tackle them all with the same solution. In situations where market failure is deep-rooted, BDS markets cannot become sustainable unless the services are permitted to develop organically over longer periods of time. This allows a learning process in which emerging markets are institutionalised and relationally embedded, and local people’s capacities as mature market players are enhanced. Sometimes this will take years rather than months. However, it is important to underline that this is not a plea for a return to old-style programmes, with their endless dependence on subsidies. Instead we need to build on the strong features of successful BDS programmes, with their attention to effective performance incentives and efficient organisation, and to graft these principles on to a more dynamic concept of market development. The examples of good practice discussed here indicate how this could be achieved. Notably, they all shared a broad systemic perspective, which focused attention on the endusers and the role of final demand. By addressing these issues from the start, muchneeded ‘market pull’ was provided, which in turn enabled viable producer services to emerge further up the value chain. This means that the project is more likely to be genuinely market-driven than is likely to happen within the current BDS model. It seems to us that this approach deserves wide replication. Sub-sector analysis is another already existing tool of potential use to BDS practitioners. It can help to develop a broad systems perspective by systematically pointing up the main blockages along the entire value chain, and suggesting intervention points to address them. Finally, we would stress that all of the successful examples described above experienced a lot of trial and error along the way, but much was learned because failures were not suppressed: on the contrary, they were treated as challenges to be overcome, and viewed as opportunities for making progress. Allowing time and space for learning is absolutely vital in marketdevelopment projects. Just as important, BDS practitioners must continue to engage in active and critical debate and reflection among themselves.

Notes 1. Unweighted average, calculated from individual country data. The definition of SMEs includes all people employed in urban economic activities as ‘own account’ workers (excluding professionals and technicians), and unpaid family workers, and employers and employees working in establishments with fewer than six persons engaged. Paid domestic workers are excluded. Data for Latin America are taken from the ILO Regional Database for Latin America and the Caribbean, available at www.ILO. org/public/english/bureau/stat/ (retrieved 10 February 2006). Other statistics are based on national definitions. 2. For examples, see www.seepnetwork.org/bdsguide.html (retrieved 10 February 2006). 3. IDB, MIF Evaluation – Business Development Services, December 2003, published at www.iadb.org/ mif/v2/files/ove_busdevcenters_execsum.pdf (retrieved 10 February 2006).

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References Biggs, S.D. (1989) ‘Resource-poor Farmer Participation in Research: A synthesis of experiences from nine national agricultural research systems’, OFCOR Comparative Study Paper No. 3, The Hague: International Service for National Agricultural Research (ISNAR). Clark, N. (1995) ‘Knowledge systems – interactive nature of knowledge systems: some implications for the Third World’, Science and Public Policy, 22(4):249– 58. Committee of Donor Agencies for Small Enterprise Development (2001) Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention – 2001 Edition, Washington, DC: World Bank Group. Dawson, J. and A. Jeans (1997) Looking Beyond Credit Business Development Services and the Promotion of Innovation among Small Producers, London: IT Publications. Douthwaite, B. (2002) Enabling Innovation: A Practical Guide to Understanding and Fostering Technological Change, London: Zed Books. Freeman, C. (1987) Technology Policy and Economic Performance: Lessons from Japan, London: Pinter. Gamser, M.S. (1988) Power from the People: Innovation, User Participation and Forest Energy Development, London: IT Publications. Gardiner, P. and R. Rothwell (1985) ‘Tough customers: good designs’, Design Studies, 6(1):7– 17. Gro¨nroos, C. (2000) Service Management and Marketing (2nd edn), Chichester: John Wiley & Sons. Hileman, M. and J. Tanburn (2000) The Wheels of Trade: Developing Markets for Business Services, London: IT Publications. Jeans, A., E. Hyman, and M. O’Donnell (1990) ‘Technology – The key to increasing the productivity of microenterprises’, Working Paper no. 8, Washington, DC: GEMINI. Jones, L. (2004) ‘Reaching Low Income Women with Enterprise Development Services: Challenges and Opportunities’, a discussion paper, available at www.seepnetwork.org (retrieved 10 February 2006). Juma, C. (1989) ‘Intellectual property rights for Jua Kali innovations’, in C. Juma and J.B. Ojwang (eds.) Innovation and Sovereignty: The Patent Debate in African Development, Nairobi: African Centre for Technology Studies. Kline, S.J. and N. Rosenberg (1986) ‘An overview of innovation’, in R. Landau and N. Rosenberg (eds.) The Positive Sum Strategy Harnessing Technology for Economic Growth, Washington, DC: National Academic Press. Lundvall, B.-A. (1988) ‘Innovation as an interactive process: from user– producer interaction to the national system of innovation’, in G. Dosi et al. (eds.), Technical Change and Economic Theory, London: Pinter. Manu, G. (2002) ‘Taking stock: twenty years of small enterprise development’, Small Enterprise Development 13(3). McVay, M. and A.O. Miehlbradt (2002) ‘Background Reader, Business Development Services’, 3rd Annual BDS Seminar, Turin, 9 – 13 September. Rogers, E.M. (1995) Diffusion of Innovations (3rd edition), New York, NY: The Free Press. Rothwell R. and W. Zegveld (1985) Reindustrialisation and Technology, Harlow: Longman. de Ruijter-de Wildt, M. (2003) ‘The BDS Seminar 2003: Testing the Guiding Principles’, Seminar Report, 4th Annual BDS Seminar, Turin, 8 – 12 September. Tendler, J. and M.A. Amorim (1996) ‘Small firms and their helpers: lessons on demand’, World Development 24(3):407– 26. UNCTAD (2003) Empretec Newsletter, September. Von Hippel, E. (1976) ‘The dominant role of users in the scientific instrument innovation process’, Research Policy 5(3):212– 39. Zeithaml, V.A. and M.-J. Bitner (2003) Services Marketing – Integrating Customer Focus Across the Firm, Boston, MA: McGraw-Hill.

The authors Marjolein C.J. Canie¨ls teaches in the Faculty of Management Sciences at the Open University of the Netherlands. Contact details: Faculty of Management Sciences (MW), Open University of the

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Marjolein Canie¨ls, Henny Romijn, and Marieke de Ruijter-De Wildt Netherlands, PO Box 2960, 6401 DL Heerlen, The Netherlands; ,[email protected]. Henny A. Romijn is based at the Eindhoven Centre for Innovation Studies (ECIS), Faculty of Technology Management, Eindhoven University of Technology (TUE), DG 1.02, PO Box 513, 5600 MB Eindhoven, The Netherlands; ,[email protected]. Marieke de Ruijter-De Wildt is a consultant-researcher at the Center of Rural Development Studies of the Free University of Amsterdam. Contact details: CDRVUA, Apartado 2032-2050, San Jose´, Costa Rica. ,[email protected].

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