Technology is pervasive and central to economic success. This is true of .... LED strategies must, therefore, prioritize job creation and poverty alleviation.
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TAMING JANUS
TECHNOLOGY, BUSINESS STRATEGY AND LOCAL ECONOMIC DEVELOPMENT
DAAN TOERIEN
TAMING JANUS
CONTENTS Foreword and Acknowledgements
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Chapters 1.
Introduction
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2.
Wat is Local Economic Development
5
3.
Technology-driven Revolutions
13
4.
The Janus Dilemma
21
5.
The End of Work
31
6.
Competition and Competitivity
54
7.
Strategic Positioning
71
8.
Resolving the Janus Dilemma
81
9.
The Bear Trap of Quad A
87
10.
Quad B: of Genius and Business
94
11.
Quad C: High-tech Heaven
105
12.
Efficient, Automated Quad D
115
13.
Nations and Technology Choices
121
14.
Local Authorities and Technology Choices 136
15.
Prospering in Quad B
142
16.
Closing the Ring
160
17.
The Quad Tool and LED Strategies
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FOREWORD AND ACKNOWLEDGEMENTS Two major influences prompted the writing of this book.
In the first case, my career in science and
technology, attendance of a Senior Executive Program at the Massachusetts Institute of Technology and the reading of some insightful books such as The Second Industrial Divide of Michael Piore and Charles Sabel, The End of Work by Jeremy Rifkin and Plowing the Sea: Nurturing the Hidden Sources of Growth in the developing World by Michael Fairbanks and Stace Lindsay, stimulated an awareness of the power of technology in economic development, both as a benefactor and as a destroyer. The Janus nature of technology prompted thinking about how technology could in a simple manner become part of planning for economic development.
Over a number of years I
gathered information on the topic and formulated some ideas of how such challenges could be approached.
Secondly, when traveling through South Africa, the growing evidence of rapid and often unstructured urbanisation in many rural towns, prompted further thinking
about
phenomenon.
the
role
of
technology
in
this
After I settled in the coastal town of
Stilbaai and became involved, as a volunteer, in the issue of local economic development in the Langeberg
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(now Hessequa) region, the evidence that technology was a driver of many of the economic dynamics of rural South Africa, prompted the writing of the book.
Throughout the period of formulating ideas and writing the book, my wife Marie gave me her whole-hearted support. I thank her for her patience to allow me to fulfill this quest.
I also acknowledge the stimulating discussion with Ben Fouché after a visit to Glenfiddich in Dufftown, Scotland. The discussion first clarified the core requirements for sustainable business success in a low-tech environment. Stroebel Hofmeyr and Heinz Stoffregen provided useful comments. Johan Strydom, a former colleague at the Council for Scientific and Industrial Research (CSIR), was was part of a twoman team that first suggested the use of an early version of the Quad Tool to the South African Department of Trade and Industry. I thank Wilma Groenewald for checking the language of the final manuscript.
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“We have, at last, achieved our political emancipation. We pledge ourselves to liberate our people from the continuing bondage of poverty, deprivation, suffering, gender and other discrimination”. Nelson Mandela, 1994
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INTRODUCTION This book is about a challenge and a riddle that are interlinked.
I use South African examples to discuss the issues involved; however, similar examples can be found in many different countries. The principles are, therefore, universal. THE CHALLENGE Local authorities in South Africa have become the wardens of economic growth in their jurisdictions according to section 153 of the Constitution, the Municipal Systems Act as well as various other Acts. Municipal councillors and officials have the legal responsibility and accountability to foster local economic development (LED); yet, many, especially in the rural areas, are poorly prepared to take up the challenge. They often lack, among others, in-depth knowledge of business strategy and technological issues. I contend that these are crucial elements in fostering LED. THE RIDDLE Some world-class low-tech South African businesses have over the last decade achieved remarkable business and export success despite being located in rural areas. These businesses did not come about because of economic planning. So if economic planners did not have a hand in their evolution, why did these rural enterprises succeed during a period when many bigger South African companies struggled? Was it pure luck, something that cannot be planned for or be controlled? Or is there an explanation that can be used to foster more of these urgently needed businesses?
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Mayors, councillors and municipal officials, and/or their nominees, a group that I collectively refer to as LED practitioners, are confronted by these questions. The challenge involves, as I will show, the making of difficult choices, i.e. which type of technologies and/or businesses should be fostered in their jurisdictions, and which to avoid. These choices are not currently on the LED agenda of most local authorities, and there is little understanding that they should be. The challenge for LED practitioners is further exacerbated by the fact that in 2003, ten years down the road of the New South Africa, economists and researchers on the one hand, and government officials on the other hand, were still disagreeing strongly about the appropriateness of the growth strategy selected by government about a 1 decade ago . If the highest levels of government and the foremost professionals and academics cannot agree on how the South African economy should be driven, what chance does a LED practitioner in a rural district of the country have of choosing the right development projects? TECHNOLOGY Technology is pervasive and central to economic success. This is true of countries but also of regions. I will show later that it is also true as far as local authorities are concerned. LED practitioners, therefore, have to make technology choices in charting their jurisdictions’ economic futures. What is technology? Many people equate the word ‘technology’ to information technology (the so-called IT or computer-based technologies of the Information Age). When I use the term technology I refer to it in the sense it is used by 2 Steele : “Technology is the system by which a society satisfies its needs and desires”. Steele also pointed out that technology can be defined as “knowledge of how to do things”. It obviously spans all of man’s activities. Therefore, I refer to technology encompassing its total range – from what is known as low technology (or low-tech) through to what is called high technology (or high-tech). We have to consider the total range of the technological landscape when we debate the issue of technology choices. In so doing, we have to remember that the quantity and quality of the work force at our disposal must balance the technological strategy we want to pursue. To pursue a high-tech strategy, we must have a highly skilled work force. A low or mediumskilled workforce prohibits or limits the choice of high-tech strategies.
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This brings us to an unfortunate reality about South African human resources. Our competitiveness in this area is poor. South African human resources are rated lowly in international comparisons. This means that by and large LED practitioners in South Africa lack the luxury of the availability of highly skilled work forces. Most local authorities have to plan to succeed whilst having only low-tech options for LED. This brings us back to the riddle, which can now be further expanded. EXPANDING THE RIDDLE I have referred to some low-tech, globally competitive companies in South Africa. These companies do not employ cutting edge technology to create a competitive advantage, yet they have clearly differentiated and competitive products. They are located in rural areas where the lack of skilled manpower is more severe than in metropolitan areas. What is the basis of their success? If we understand this, we might be able to replicate it, not by random luck, but by planned design. Their full story is told later. THE IMPORTANCE OF TECHNOLOGY CHOICES The purpose of this book is, therefore, to state why technology choices are important in LED and to would-be entrepreneurs. It starts by examining the meaning of the term LED before turning to a short history of technology-driven revolutions and their important lessons for modern times, including the fact that communities are time and again confronted by the challenge of adopting certain technologies or perhaps staying behind. This leads to the issue of the Janus Dilemma: the twin faces of technology; one beneficial, the other destructive and how these relate to LED challenges. The twin concepts, competition and competitiveness, are examined in order to begin understanding and dealing with this dilemma. This raises the issue of strategic positioning, an important result of making technology choices. The application of a simple tool, the Quad Tool, helps to resolve the Janus Dilemma. Four basic competitive positions and their underlying business models are examined. These are linked to the technology choices of several countries. These principles are then applied to expand on the challenges of local authorities. I examine the pre-conditions for creating vibrant and sustainable low-tech enterprises. How the riddle can be solved is illustrated using examples from South Africa. Finally, a short section develops the ideas of how the LED practitioner could be assisted in his/her important work.
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“Insofar as local government is concerned, there is nothing as urgent and as critical as the training of councillors. Their ability to raise funds and manage them, to play their role in multi-million rand housing and infrastructure programmes, to attract investments, to deal with the distortions of the apartheid era and to work with communities in partnership for development, are skills that should be built more intensively”.
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Nelson Mandela, Parliament, 7 February 1997
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WHAT IS LOCAL ECONOMIC DEVELOPMENT? In order to create the right conditions for LED, councillors, municipal officials and LED practitioners must understand what is meant by the term and why it is important. WHAT IS LED? There is not a single universally accepted definition. Therefore, I will consider two South African views of LED: (i) that of the Department of Provincial and Local Government (DPLG), and (ii) that of the Development Bank of South Africa (DBSA), and two international views: (iii) that from the World Bank and (iv) that of Dr Jörg Meyer-Stamer of the Deutsche Gesellschaft fűr Technische Zusammenarbeit (GTZ) LED according to the DPLG 3 This department does not provide a formal definition for LED but identified a number of key principles that underscore LED. In the first instance, poverty and unemployment are the main challenges facing South Africa. LED strategies must, therefore, prioritize job creation and poverty alleviation. LED must target previously disadvantaged people, marginalised communities and geographical regions, black empowerment enterprises and SMMEs to allow them to participate fully in the economic life of the country. The department suggests that there is no single approach to LED. Each locality must develop an approach that is best suited to its local context. LED promotes local ownership, community involvement, local leadership and joint decision-making. LED also involves local, national and international partnerships between communities, businesses and governments to solve problems create joint business ventures and build up local areas. LED uses local resources and skills and maximises opportunities for development. LED involves the integration of diverse economic initiatives in a comprehensive approach to a local development. LED relies on flexible
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approaches to respond to changing circumstances at local, national and international levels. LED according to the DBSA 4 The DBSA states that local economic development aims, as a primary goal, to attract financial resources to the local economic system and to keep it there in ways that maximise the benefits to the local population and economy. LED has two primary goals: (i) to create an increase in sustainable and acceptable job opportunities, and, (ii) to increase the benefits of money spent in the local economy. The DBSA analysed the LED concept further by breaking it down into its constituent parts and considering the meaning of each. The concept “local” includes job creation that also benefits the poorer part of the population, reducing the leakage of money from the region (money, therefore, circulates in the region and each rand has a greater local impact), local inputs, materials and resources are being used, local entrepreneurship is stimulated, and local opportunities are created. The concept “economic” includes benefits that exceed costs, achievement of sustainability, producing products or services that costeffectively satisfy proven market needs, the efficient use of resources, competitive prices, and an increase in the magnitude and productive capacity of the local economy. The concept “development” includes a more equal spread of incomes in a region, the development of entrepreneurial, job and life skills, better use of under-utilised human, financial and natural resources, the creation of a better life for all, and, conditions under which natural resources are not depleted and the economic sustainability of projects are not jeopardised. The DBSA cautioned that the LED concept might have been contaminated by views that short-term programmes for poverty alleviation are ingredients of economic development. They are not. In addition, economic development is also not economic growth at all cost. For instance, when such growth is based on the overexploitation of natural resources, it is not economic development. The stripping of marine resources might bring money into a coastal community but once the marine resource crashes, money flow to the community ceases. There has been no LED.
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LED according to the World Bank 5 According to the World Bank , LED is the process by which public, business and non-governmental sector partners work collectively to create better conditions for economic growth and employment generation. The aim is to improve the quality of life for all. Practising LED means working directly to build up the economic capacity of a local area to improve its economic future. The local economy must be prioritised and the productive capacity of local firms, entrepreneurs and workers be increased in order to succeed in a fast changing world. The ability of communities to improve the lives of their members today depends upon them being able to adapt to the rapidly changing and increasingly competitive market environment. To build a strong local economy each community must identify its unique local conditions that can help or hinder economic development. These local attributes must form the basis for designing and implementing a LED strategy. To build a strong local economy, each community should undertake a collaborative process to understand and act upon its own strengths, weaknesses, opportunities and threats. That will make the local area more attractive to businesses, workers, and supporting institutions. Successful private enterprises and productive public-private partnerships create wealth in local communities. One of the aims of LED is, therefore, to create more of these. Private enterprise, however, depends on favourable local business conditions to achieve prosperity. Local governments have an essential role in creating such conditions. LED is thus a partnership between local government, business and community interests. LED according to German consultants 6 Dr Jörg Meyer-Stamer of the GTZ stated in the Stutterheim Newsletter that defining LED is not an easy task. One way of trying it anyway, is by saying what it is not. LED is not an industrial policy. It is also not identical with SMME promotion, though the latter may be part of it. LED is also not regional planning. Planning can make an important contribution to LED but because there is often economic development without anybody having planned for it, the process of planning does not secure subsequent economic dynamism. LED is also not community development. Community development is about solidarity – it is about self-help groups, mutual assistance and voluntary work to help the
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disadvantaged and to solve health, education, housing and other problems. So what then is LED in his view? He believes it is about competitiveness; about companies thriving in competitive markets and locations thriving in a competitive, globalized world. LED is, therefore, mostly about processes that create improved local competitiveness. It is about local activities to make markets work better. It is not about distorting markets, and it is not about substituting them. LED aims at remedying market failures such as barriers to entry, information problems and high transaction costs. He states that LED is not about projects such as helping three ladies to raise chickens, or throwing a heap of money at a few people who want to open a funeral parlour (without any prior experience in the sector), or setting up hawker stalls. LED is about creating favourable framework conditions for businesses, not about running businesses. Running a business is the task of riskaccepting entrepreneurs. The core idea of LED is to make the risks involved in running a business calculable, and to make sure that the market for business ideas can work properly. According to Meyer-Stamer, LED typically targets three types of firms: local businesses, external investors, and new entrepreneurs. Typical initiatives include: the provision of industrial estates, skills development programmes that cater for the specific demands of local firms, entrepreneurship development programs and business incubators, cutting red-tape, simplifying and streamlining license procedures, and creating first-stop or one stop agencies, creation and strengthening of business support institutions, especially for micro, small and medium firms, strengthening of business associations, business networking initiatives and increased articulation between supporting institutions. WHY IS LED IMPORTANT? Since World War II investment money has become increasingly mobile between jurisdictions and the economies of many regions of the world have grown exceptionally. This is also true at the level of local authorities; they have increasingly become the wardens of economic growth in their jurisdictions. LED became a goal to pursue.
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LED practices evolved over the last fifty years and three waves of LED 5 can be distinguished . From the 1960s to the early 1980s, the public sector was responsible for attracting mobile manufacturing investments from outside the local area. The public sector also sought foreign direct and hard infrastructure investments. The tools they used included grants, tax breaks, subsidised loans, subsidised hard infrastructure investments and the recruitment of cheap labour. By the mid-1980s to the mid-1990s the emphasis had changed. LED was still driven by the public sector, but the retention and growth of existing local businesses became a focus. There was continued emphasis on inward investment attraction, but targeted to specific sectors or from specific geographic areas. The tools used included direct payments to individual businesses, provision of business incubators and/or workspace, provision of advice to and training of SMMEs, technical support, business start-up support, and hard and soft infrastructure investment. After the late 1990’s, LED has become a cooperative effort that is public sector led. The emphasis has shifted to the creation of favourable business environments, human resource development, rationalisation of regulations, public/private partnerships, the leveraging of private investments for the public good, and improving quality of life and security for communities and potential investors. Inward investment attraction is highly targeted to build on the comparative advantages of local areas. Viva la difference Globalisation increased the challenges of local authorities; both in terms of opportunities and competition for investment. Local businesses have to consider the challenges involved in being able to develop new, often foreign, markets but to also face the prospect of international competitors entering their local markets. Yet, many small towns and their surrounding rural areas have been able to find niche opportunities at a national or international level by building on their inherent advantages. These advantages must be identified and fostered and the factors influencing them, be identified. Multinational companies are continually looking for more cost-efficient sites in which to locate. Agglomeration economies also influence decisions by firms to locate in specific places. There they benefit from sharing markets, infrastructure, labour pools and information with other firms. The comparative advantage of a local economy is also influenced
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by the quality of management of the local authority. The availability or lack of water, roads, electricity, transport, sanitation, telecommunications and suitable industrial sites depends, among others, on the local authority. Labour productivity in a local economy is influenced by housing, health and education services, skills availability, security, training opportunities and public transport. Local conditions determine a community’s comparative advantage and hence its ability to attract and retain investment. The processes and procedures to which a local authority subjects businesses is also a major 1 determinant of local comparative advantage. The World Bank suggests that local governments often have a large number of complex, poorly managed, expensive and unnecessary business registration systems. Reducing these can quickly improve their investment climate and foster an image of being business friendly. Other impacts The government’s macro-economic, fiscal and monetary policies create the “playing field” for local communities. National regulations and legal requirements (e.g. environmental standards) also influence the shape of local business climates, either helping or hindering LED goals. Decentralisation of government functions and a greater mobility of private industry create opportunities for, but also pose threats to, the LED goals of communities. Communities within and between regions sometimes compete to attract external and internal investment. Communities can also collaborate with one another to achieve LED, e.g. by supporting infrastructural or environmental improvements with broad regional impacts. Successful local economies often require social, as well as economic and environmental, renewal. Strategies and plans for LED and regeneration need to interface with anti-poverty strategies and should involve disadvantaged and excluded groups. The lack of a technological dimension It is noteworthy that none of the above views of LED considers technology to be an important issue. The assumption seems to be that all localities have the same technological options and choices available. Yet, this is an illusion. Silicon Valley could, for instance, not have happened in another locality. It needed the inputs of individuals and
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facilities at Stanford University. This illustrates that not every region will have the same technological choices and unless this is understood, LED strategies are in danger of pursuing unattainable goals. We must now turn to the importance of technology and technological choices as important elements in LED. “Difference in the timing of risks and rewards is often a crucial consideration. As a society, we steeply discount the future. Thus, longer-term consequences receive little attention until they strike us in full force”. Robert M. Adams
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TECHNOLOGY-DRIVEN REVOLUTIONS Robert Adams proposed
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that technology, perhaps the most salient feature of our time, affects everything from jobs to international law, yet ranks among the most unpredictable facets of human life. He developed a new approach to understanding the circumstances that drive technological change, stressing its episodic, irregular nature. Bursts of innovations that mark the advance of technology were rare in antiquity but have gradually accelerated and now have become an almost continuous feature of our culture. This evolution has been shaped by a host of interacting social, cultural, and scientific forces rather than any deterministic logic. In addition, it has repeatedly shifted in direction. We must trace these events in order to understand the huge impact of technology on our lives and futures. PRIOR TO INDUSTRIAL REVOLUTIONS Europe of the Middle Ages was one of the most inventive societies that 8 history had known . Landes described how the use of technologies such as the water wheel, eyeglasses, the mechanical clock, printing and gun powder allowed Europe to catch-up and exceed the Islamic world and China. However, the First Industrial Revolution resulted from a different set of factors.
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The survival and history of human kind depended for millennia on soil fertility and the changing of seasons. Climate and ecological succession determined a country’s or region’s economy and the pace of economic development was set by the ability to harness the energy of wind, water, beast and man. In the late Medieval Era some developments in England created the foundations for the wholesale conversion of economic life to 9,10 machine power . This opened new trade routes and resulted in a growing population and the emergence of cities. A market economy increased the flow of economic activity and placed strains on England’s ecological carrying capacity. Forests were felled to build ships for the navy and to provide potash, building materials, and energy for a growing population. As the forests were destroyed an energy crisis was created. The exploitation of an untapped energy source, coal, had to be considered. The challenge was its extraction from the ground. The scene was set for the First Industrial Revolution and technology was its driver. THE FIRST INDUSTRIAL REVOLUTION The First Industrial revolution began in England in the 18th century, and spread in unequal fashion to the countries of Continental Europe and elsewhere. In a span of four decades, the life of western man, the nature of his society and his relationship with the other people of the world, were totally transformed. The heart of the First Industrial Revolution was an interrelated succession of technological changes. Material advances took place in three areas: (i) a substitution of mechanical devices for human skills, (ii) inanimate power, particularly steam, took the place of human and animal strength, and (iii) there was a marked improvement in the sourcing and working of raw materials. The metallurgical and chemical industries were born. 7
The steam engine was conceptualised in the late seventeenth century . A French physicist, Denis Papin, working in Germany at about 1680, designed such an engine. The need for better mining techniques, stimulated Thomas Savery to invent a steam-driven pump to flush excess water from underground mines. Thomas Newcomen put the first working steam engine into an English coal mine. This made it possible for coal to be mined deeper because until then ground water had always flooded English mines. Thus the coming together of coal and machines to produce steam, marked the beginning of the modern economic era and the first leg in a long journey to replace human labour with mechanical power.
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Newcomen’s engine started the Age of Steam . For the following 250 years, the model of technology was mechanical. Steam power was used to mine ore, produce textiles, and manufacture a wide range of goods that had previously been crafted by hand. Steam ships and steam locomotives moved raw materials. Steam-driven manufacture in northern and central England in the late 18th and early 19th centuries revolutionized the production of finished goods. The steam engine was a new kind of “work slave” - a machine whose physical prowess by far exceeded the power of animals and human beings. 9
Paul Kennedy described the effect of mechanical production vividly: “Even in their early forms, power-driven looms could produce twenty times the output of a hand worker, while a power-driven “mule” (a spinning machine) had two hundred times the capacity of a [hand] spinning wheel. Moreover the coal needed to fuel those machines and the manufactures flowing from the newly established factories in which the machines were grouped, could be hauled by locomotives possessing the capacity of hundreds of pack horses. No earlier technological breakthroughs produced anything like the rise in output that flowed from the Industrial Revolution.” Technology had changed the world. Industrial organisation was totally changed. The size of productive units grew in size because of the machines and power required. This made possible the concentration of manufacture. Shop and home workroom gave way to mill and factory, providing a new bridge between invention and innovation. The concepts of “employer” and “worker” were born. Binding them together were the economic relationship (the wage) and the functional relationship of supervision and discipline. The factory city became the new way in which communities lived and worked - a far cry from their previous rural 11 existence. For instance, David Landes stated that: “[The] Englishman of 1750 was closer in material things to Caesar’s legionnaires than to his own great-grandchildren”. THE SECOND INDUSTRIAL REVOLUTION 10 According to Rifkin , the Second Industrial Revolution occurred between 1860 and World War I. It was caused by a new cluster of new technological innovations. Oil began to compete with coal as source of energy and electricity was effectively harnessed for the first time. This new source of energy could drive motors, light up towns and cities, and helped to create instant communication between people. Distances could now be traversed in an instant. The telegraph and telephone, the
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electric dynamo, the cinema and the radio provided man with new capabilities and wonders. Inventors and entrepreneurs came up with a multitude of new products. Soon machines were becoming ubiquitous and essential components of the new “modern” way of life. Spectacular advances were also made in chemical science and the invention of the internal combustion machine provided a new mobile source of power. The trend to shift the burden of economic activity from man to machine intensified in mining, agriculture, transport, and manufacturing. THE THIRD INDUSTRIAL REVOLUTION Nuclear energy was devastatingly demonstrated in Hiroshima and Nagasaki in 1945. Then in 1946, the first computer (the famous Electronic Numerical Integrator and Computer or ENIAC) was built. Thus began the Third Industrial Revolution in which information, rather than mechanical processes, is the organising principle of work. Peter 12 Drucker is of the opinion that a new basic civilisation started coming into being with these events. The Third Industrial Revolution is now having a significant impact on the way society organises its economic activity. “Machines that can think” numerically controlled robots and advanced computers and software are invading the last remaining human sphere; the realm of the mind. Properly programmed, these machines are increasingly capable of performing conceptual, managerial, and administrative functions and of coordinating the flow of production, from the extraction of raw materials to the marketing and distribution of final goods and services. The Third Industrial Revolution continues, and indeed accelerates, the process of 10 replacing humans by machines . 10
The advent of the computer Rifkin vividly described that man dreamt for a very long time about creating machine surrogates to replace humans. Writings from antiquity describe automata that could mimic animals, birds, and human beings. The first automatic calculating machine was invented by Blaise Pascal in 1642. Leibnitz added multiplication to the calculating machine’s repertoire. In 1821, Babbage produced the first theoretical work on modern computation and some of his concepts were too early for the technological capabilities of the time - he envisaged a printer fifty years before typesetting machines and typewriters were invented! The first fully functional modern calculating machine was invented by William Burroughs in the late nineteenth century. Its commercial
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success contributed to the business success of the U.S.A. A competition held in 1890 by the U.S. Census Bureau led to the development of a tabulation machine by Herman Hollerith. This machine reduced the time to process the census results by two-thirds. The inventor then set up his own company, the Tabulating Machine Company, to market his new machine. The company’s name was changed in 1924 to International Business Machines, and later to IBM. The first programmable digital computer was invented in 1941 by a German engineer, Konrad Zuse. His machine was developed to assist civil engineers. At about the same time, British Intelligence invented its own non-programmable computer to help decode German military communications. This machine helped to provide the Allies with critical information on U-boat movements during World War II. Scientists of Harvard and the Massachusetts Institute of Technology (MIT) invented a programmable computer (the Mark I) in 1944. In 1946, scientists at the University of Pennsylvania unveiled ENIAC which was made up of 18 000 radio tubes, 70 000 resistors, 10 000 capacitors, and 6 000 switches. This machine weighed more than thirty tons and was the first fully electronic general-purpose digital computer. It led to the Universal Automatic Computer, or UNIVAC, the first commercial electronic computer. By 1951, six electronic computers were running. Public attention was first focused on the computer when CBS used one in the U.S.A. to predict President Eisenhower’s landslide victory over Senator Adlai Stevenson. IBM at first scoffed at the commercial potential of computers, but eventually embraced the new technology and bet the company’s future on it. In 1953, IBM came out with the Model 650, a machine that could be rented on a monthly basis and which became a hugely successful business machine. Over the next few years, American businesses rented thousands of these new computers. The first-generation computers were big and cumbersome. They required high-voltage inputs and generated lots of heat. They were complex and costly to make and were continually breaking down. Before long, scientists were able to substitute the more expensive vacuum-tube components with small solid-state transistors. These second-generation computers revolutionized the industry, dramatically reducing the size and cost of computers while increasing both their efficiency and capacity. A third generation of computers emerged in the late 1950s with the
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introduction of integrated circuitry in a single manufacturing process. In the early 1970s, fourth-generation computers based on micro-technology and microchips emerged, once again reducing costs and streamlining processes, making the computer a ubiquitous part of daily life in every 10 industrial country . 10
“Thinking machines” The term “artificial intelligence”, coined in 1956, refers to the art of creating machines that perform functions that require intelligence when performed by people. The modern computer is able to take on tasks of increasing complexity and, in the process, fundamentally changes our 10 concepts of ourselves and society . It is expected that by the middle of the 21st century, computers will be able to out-think the average human mind. LED practitioners have to understand the implications of this and plan accordingly. LESSONS FROM THE PAST At the start of the Industrial Revolution the growth of the British population was so high that it prompted the writing of the famous essay on population growth by Malthus. However, the machines of the First Industrial Revolution boosted productivity in England to such a degree that both national wealth and general purchasing power outpaced the rise in the numbers of Britons, thereby averting Malthus’s predicted catastrophe. The steam-driven British manufacture naturally attracted the attention of many foreigners. Visitors from all over observed the brave new world of industrial production where steam engines converted heat into work through the mechanism of machines. What impressed them about these 9 machines was that they were rapid, regular, precise, and tireless . Choice is important The application of steam-driven machines in industries clearly enhanced the power of Great Britain, especially during its struggle against the French in the Napoleonic wars. Industrialisation thus gave a fresh twist to the age-old competition among the Great Powers. France had to take note of what was happening in Britain. 8
David Landes reflected upon the role of effective government in industrialisation. He commented on the phenomenon of resorting to authoritarian practices: “The heart of the choice is ambition, a hunger for growth and the fruits of growth that chafes at delay, has no patience for
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the workings of the free market, and sees in authority a means of forcing the gates of time. To a degree the calculation is correct: in so far as the attitudes and values of the society are such that its members will not respond creatively or rationally to opportunity, if direction and stimulation from above are indispensable. Yet to an even greater degree the calculation is ideological, based on the value judgments about the contrast between stereotypes of capitalism - exploitive, unjust, enriching a few at the expense of the many - and socialism - egalitarian, placing the resources of the society in the hands of the representatives of the society, for the benefit of all.” The issue of technological choices The earlier Industrial Revolutions have shown that technological choice is an extremely important issue for countries and regions. There is little doubt that technology will determine circumstances of future South African generations. Choices have to be made about the technologies that will be used to provide a livelihood to those future generations. The most likely agent to make the choices will be the national and/or regional authorities. However, will they be in a position to make choices and implement them? We must now examine technology’s two faces.
Machines are worshipped because they are beautiful, and .... they are hated because they are hideous. Bertrand Russell
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THE JANUS DILEMMA The Roman god Janus kept the gates of Heaven, so he became the god of doors and gates. Because a door can let you in, or let you out, Janus is often pictured with two faces, one looking forward and one 10 looking back. Technology also has two faces . The “good” face of technology is its ability to ease the lot of man, releasing him from
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drudgery and routine. The “bad” face of technology is its negative impact on society through the replacement of humans by machines. Each face of technology has its adherents. Some people have visions of a coming techno-paradise, others of imminent techno-doom. The LED practitioner must consider the implications of both faces of technology. It is, therefore, necessary to explore these issues in greater detail. THE POSITIVE FACE OF TECHNOLOGY From the end of the previous century modern science and technology 10 became a new frontier, especially for Americans. According to Rifkin between 1883 and 1933 American science fiction authors pumped out a large stream of “dime store pulp novels extolling the virtues of a future kingdom on earth, a technological utopia of material pleasures and unlimited leisure”. The age-old Christian vision of eternal salvation was tempered by the new belief in an earthly paradise. The public could look forward to the day when they could enter this technologically-mediated world where their hopes and dreams would finally be realised. Rifkin said: “The idea that science and technology - harnessed by a nation of dedicated and faithful laborers steeped in the modern work ethic - would direct us into an earthly kingdom of great wealth and leisure continues to serve as a governing social and economic paradigm to the present day”. The technological utopians had an obsession with the potential of efficiency. They believed that more efficient machines and more efficient use of time would lead to a workerless future of vast material abundance and unlimited free time. “Efficiency” became to mean the maximum yield that could be produced in the shortest time, expending the least amount of energy, labour, and capital in the process. The basic logic of the efficiency-adherents was that greater efficiency would shorten the amount of personal labour required to perform a job, and thereby gain more wealth and free time. The engineer became the new hero of the technological age. The positive face of technology is amply demonstrated in all of our lives. Technology pervades our lives; we use technology in virtually everything we do on a daily basis. We use tools to eat, to do our ablutions, to travel, to communicate, to write. Our foods and drinks are the result of technologies. When we are ill, technology helps the medical practitioner to diagnose the cause and to treat the condition. Technology also creates huge business opportunities; technology companies dominate lists of the world’s top companies. The pervasiveness of technology
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often lulls us into taking it for granted. The LED practitioner should not fall into this trap. The implications of technology must be carefully considered because, although being pervasive, it is not freely available to everyone. THE NEGATIVE FACE OF TECHNOLOGY The Third Reich’s fanatical obsession with technological efficiency and the development and use of nuclear bombs by the U.S. in World War II, 10 stimulated second thoughts about the technological utopia . Mankind was constantly reminded that modern technology also had an awesome power to destroy the future. However, the launching of Russian space satellites in the 1950s and 1960s and the Cold War’s arms race, once more rekindled the technological vision. Incidents such as the Challenger disaster, the Three Mile Island debacle and the Chernobyl accident, however, served as powerful reminders of the downsides of technology. Today, the growing threat of global pollution and the spectre of continuing “jobless growth” are constant reminders of the environmental and social tolls of modern technology. There is a fear that technology improvements will lead to a higher output of goods than the global marketplace of consumers can possibly absorb. The unfortunate result will be a seemingly permanent and expanding 10 surplus in the productive capacity of the world. Rifkin outlined vividly how technology enables the process of replacing humans by machines, leading to the “end of work”. Where will the markets for all the products come from if most people are unemployed and few have the means to buy? Is Africa with its chronic unemployment and small economy a harbinger of the future? 10
Rifkin commented that despite the negative aspects of technology, the dream that one day science and technology would free humanity from a life of hardship and toil, and usher in an earthly kingdom of abundance and leisure, remains alive and surprisingly vibrant among many of the younger generation. TECHNOLOGY – AN IRRESISTIBLE FORCE The LED practitioner in South Africa has to come to grips with many technological realities. An irresistible force is presently shaping the economic and social world - the replacement of humans by machines. The destabilising effects of what has been called the Third Industrial 10 Revolution are being felt all over the world. In every advanced economy, new technologies and management practices are displacing
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10
workers . For instance, in the Organisation for Economic Cooperation and Development (OECD) countries, 35 million people were unemployed by the middle of the 1990’s and an additional 15 million either gave up looking for work or unwillingly accepted part-time jobs. Unemployment was also rampant in most parts of the developing world: in Latin America urban unemployment was over eight percent and India and Pakistan were experiencing unemployment rates of more than 15 percent. South Africa was part of this trend – for most of the 1990s, we experienced “jobless growth”. Conservative estimates now put unemployment in South Africa at close to thirty percent. The rising unemployment due to technology displacement is one of the most important social issues of our times. This is also true in South Africa. The South African government and society, including LED practitioners, are confronted by a dilemma of enormous proportions one that I call “the Janus Dilemma”. Essentially the dilemma deals with the issue of creating millions of employment opportunities at a time when millions of people in all economic sectors are in danger of being made redundant by the new modern technologies. The LED practitioner should understand and focus on the elements of the dilemma. THE JANUS DILEMMA Why dilemma? According to the Oxford dictionary a dilemma is “a logical or actual position between two or more unwelcome alternatives”. 14 Charles Hampden-Turner reminded us that dilemmas have “horns” . The use of this metaphor is helpful in understanding the challenges facing us. Hampden-Turner said: “When two horns compete for your attention and the one ignored, impales you, then the prospects for leadership are not pleasant.” In South Africa’s case, the apparently unwelcome alternatives, or “horns’, are the unemployment of the mass of its people versus the uncompetitiveness of the mass of its industries. Large numbers of unemployed in the country are an extremely unwelcome political problem. Uncompetitive industries are an extremely unattractive economic problem. If we examine the dilemma from the viewpoint of the South African government, a number of factors must be considered. With the arrival of the New South Africa, any political party hoping to govern the country needs popular support. The very high unemployment level amongst the previously disadvantaged, largely black, group of South Africans means that the creation of employment opportunities, particularly for this group, must be a high priority for every political party, particularly the ANC. It is,
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therefore, no wonder that the ANC government has set national goals for employment in its GEAR (Growth, Employment and Redistribution) strategy and re-affirmed the importance of employment creation at its Conference in 1997, and regularly thereafter. The government is, however, also faced with the need to have a viable economy to create the financial means for rapid upliftment and development. To have access to export markets, capital, technology, and other factors of production, the government has signed the agreements that have led to the creation of the World Trade Organisation (WTO). Being a signatory, created access for South African exporters to foreign markets, but it also opened up the South African market to foreign competitors. As a consequence, the protection of local, uncompetitive industries by way of tariff and other barriers had to be phased out over time. South African companies that strive for success will have to be able to compete with the best in the world, and have to adopt the technologies and practices associated with being part of the best. As a consequence of this reality, the South African government also had to set national goals for export promotion as part of GEAR. According to the Janus Dilemma, the goals of large-scale employment and international competitiveness seem to be in direct conflict with one another. Were South Africa to opt for the wholesale introduction of new technologies to enhance its international competitiveness, large numbers of presently employed South Africans could be added to the sizable rank of the unemployed or underemployed. For any political party and government this is a highly unattractive choice, particularly if you represent the peoples’ hope for the creation of employment. However, if South Africa does not choose to adopt new technologies, we might stay behind in the global race for markets, having little to offer or compete with. For a while, jobs might be retained, but eventually unemployment would follow the demise of uncompetitive enterprises. But can it really be so bad that councillors, municipal officials and LED practitioners have to worry about it. Let us examine some historical lessons. HISTORICAL LESSONS The horns of the Janus dilemma are represented by the choice that every nation, every region and every locality seem to face - either accept the new technologies as the basis for future economic prosperity and
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face unemployment problems, or, reject these technologies and accept that your future generations might be left behind the rest of the world. This choice, although less clear at the time, also arose during the First Industrial Revolution. At that time, foreign observers viewed the new manufacturing in England with fascination as well as apprehension. The Industrial Revolution clearly enhanced the power of Great Britain, something that many governments desired. However, these observers also had to reflect on the potential effects of industrialisation on their own societies. The working conditions in the new factories were clearly very different to those of cottage-based industries, often being unhealthy and introducing 9 a strict regimen of work. Paul Kennedy framed the questions that confronted governments at the time as follows: “Could the preindustrial inhabitants of the Rhineland or Silesia be turned into city-dwelling proletariat without inviting social convulsions? Worse still, how could one deal with the mass of craftsmen, handloom weavers, and the like who lost their jobs to the factory system, or influential guilds fighting hard against redundancy? To fail to match English practices was problem enough; to imitate them would mean profound changes in the way one lived, worked, and earned one’s keep.” The way in which many countries dealt with these questions, shaped the future of their citizens for many generations. The same kinds of questions are confronting LED practitioners today. It is sobering to consider that the dilemma might in some countries or regions never be deliberately considered and debated. The route followed will, however, have long lasting consequences, as illustrated by two historical lessons. The First Industrial Revolution and India 9 The First Industrial Revolution profoundly affected India. Kennedy stated that: “Because the Indian states had been unable to resist Britain’s East India Company militarily, their subjects could do little when British machine-made textiles, not only cheaper but of better quality than native cloth, poured into the country, driving out traditional domestic producers in the process.” The traditional Indian handloom industry was destroyed in the process. The First Industrial Revolution changed the relative positions of India 9 and Britain . At the onset of the Industrial Revolution (ca. 1750), the British and Indian peoples had roughly similar per capita levels of
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industrialisation. By 1900, the per capita level of India’s industrial development was only one percent of that of the United Kingdom. The fact that the new manufacturing technologies were not adopted extensively in India in the period 1750 to 1900 (whether as a result of conscious or unconscious choice), created a bleak future for numerous generations of Indians. The same was true for many other countries faced by the same choices at the time of the First Industrial Revolution. This example shows how undesired long-term consequences can arise when the leaders of a country or region fail to consider the effects of technology displacement. This is particularly true if a national or regional debate on the subject is not started in time. Technology and the African-American experience 10 Jeremy Rifkin told a gripping story about African-Americans and technology displacement. At the beginning of the 20th century, the black population of the United States was mostly confined to the south-eastern part of the country and involved in a form of agriculture that had changed little since the first slaves were brought to America. While the Civil War had given black Americans their political emancipation, according to Rifkin they still remained at that time yoked to an exploitative economic system that kept them in a state of near servitude. The white plantation owners were able to reassert control over their former slaves by instituting the sharecropper system. Farmland was leased to these sharecroppers and they were provided with housing, seed, farm tools, and mules. In return, forty percent of their harvest had to be given over to the landowner. The monthly stipend, or “finish”, provided to the sharecroppers to cover monthly expenses, was always too little, forcing tenants to borrow on credit from the plantation general store. Goods were often marked up, and interest rates on credit were generally exorbitant. As a result, by the time the harvest was in and tallied, the sharecroppers inevitable found that they owed the landlord more money than their share of the harvest was worth, forcing them into further debt and dependency. Cotton was the crop produced by most sharecroppers. Picking cotton balls at harvest time was a gruelling task and lasted from sunrise to sunset. A seasoned picker could pick about 90 kg in a day. A large unskilled labour force was needed for cotton farming.
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Industrial development was rapid in the northern part of the U.S.A. in the latter decades of the nineteenth and the early part of the twentieth century. During and after World War I, the manufacturers were cut off from traditional European sources of immigrants and they desperately needed unskilled labour. They began recruiting heavily among southern blacks. In the early decades of the century, a growing number of blacks began migrating to northern cities to escape the impoverishment of the rural South. Thus the technologies that created the manufacturing industries of the Second Industrial Revolution started a migration of black Americans. Millions of blacks, however, still remained dependent on cotton production in the South as a means of livelihood. In October 1944, the first successful demonstration of a mechanical cotton picker happened just outside Clarksdale, Mississippi. This device could pick fifty times more cotton in a specified period than a labourer. The mechanical cotton picker became a central issue in an unfolding political tussle. Many black servicemen, recently back from World War II, were beginning to challenge “Jim Crow” laws and segregation statutes in the South. White landowners were advised by a peer to acquire mechanised cotton pickers in order to change as rapidly as possible from the 10 sharecropper system to completely mechanised farming . In 1949, only six percent of the cotton in the South was harvested mechanically. By 1964, it was seventy eight percent, and by 1972 it was one hundred percent. For the first time since slavery started to provide labour in the agricultural fields in the South, black hands and backs were 10 no longer needed for cotton production. According to Rifkin , technology made the sharecropper system obsolete and planters evicted millions of tenants from the land, leaving them homeless and jobless. The push of mechanisation in southern agriculture and the pull of higher wages in the industrial cities of the North further contributed to the mass movement of black Americans from the South to the north. More than five million black men, women and children migrated north in search of work between 1940 and 1970. Although African-Americans were unaware at the time of their trek north, a second technological revolution had already begun in the manufacturing industries of Chicago, Detroit, 10 Cleveland, and New York. According to Rifkin this revolution might again lock them out of gainful employment.
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At first, blacks found limited access to unskilled jobs in the auto, steel, rubber, chemical, and meat-packaging industries. Northern industrialists often used them as strike-breakers or to fill the vacuum left by the decline in immigrant workers from abroad. However, over time, the fortunes of black workers improved steadily. But a forty-year decline started in the mid-1950s. Automation then started to make itself felt in the manufacturing sector in the U.S.A. Hardest hit were unskilled jobs in the very industries where black workers were concentrated. Between 1953 and 1962, 1.6 million blue-collar jobs were lost in the 10 manufacturing sector in the U.S.A. Rifkin observed: “Black workers, who just a few years earlier were displaced by the mechanized cotton picker in the rural South, once again found themselves victims of mechanization. .... In manufacturing operations across the entire northern and western industrial belt, the forces of automation and sub urbanization continued to take their toll on unskilled black workers, leaving tens of thousands of permanently unemployed men and women in their wake.” The introduction of computers and numerical control technology on the factory floor in the 1960s accelerated the process of technology displacement. The histories of technology’s influence on the Indian cotton spinners and the black Americans remind us that groups of disadvantaged people can unwittingly become the victims of technology displacement. The conditions of rural black Americans at the time of these events did not differ materially from those experienced presently by millions of South Africans. Perhaps the “jobless growth” of the past decade already reflects an impact of technology displacement. In addition, the danger that further technology displacement resulting from the Third Industrial Revolution could create conditions under which numerous South Africans will not have a chance to become productively employed, is very real. To prove this statement, I examine the status quo of a number of industries in the next chapter. “For two hundred years, manufacture and assembly have been amended in all sorts of ways; but whatever the innovations of Taylor and Ford, or “just-intime” production, the key element was human beings coming together in a place of work. Now we are witnessing a technology-driven revolution which breaks from that process; by replacing factory workers with robots to increase productivity, automation takes more and more human beings out of the factory until perhaps only a few supervising engineers remain.”
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Paul Kennedy
5
THE END OF WORK The concept of work has been central to the structure of civilization. We have seen that the adoption of the new technologies of the First Industrial Revolution dramatically changed the life of many people, at first in England and later in other countries. It placed steam-driven 9 machines and their human attendants within a “factory system”. Before that, most forms of manufacture were decentralised cottage-based activities and piece work formed the basis of payment. In the new factory systems, humans were assembled together and required to work in a standardised fashion to a rhythm set by machines. Workers worked in fixed “shifts” of ten to twelve hours, and were paid an hourly rate. Because the machines’ requirements were supreme, the workers had to live nearby, in employer-provided “row houses”. 9
The factory system created an urban proletariat . Succeeding generations were increasingly removed from their forebears’ preindustrial way of life. Time ceased to be a relaxed concept and “my cow or ox” could no longer be more important than “my job”. In the beginning many people and papers riled against the “slavery” and the discipline that were introduced by this new way of working; yet, over time it became the established norm. The system introduced by the First Industrial Revolution still today entails broadly what we understand under the term “work”. However, the concept is under attack by new technologies and this is changing the world as we know it. THE THIRD INDUSTRIAL REVOLUTION AND THE END OF WORK 10 Jeremy Rifkin pointed out that the constant pursuit of efficiency became a focal point of the factory system. This pursuit revealed the negative face of technology; that of removing man from the production process. Work is now being systematically eliminated in the industrialised and partly-industrialised nations of the world. New sophisticated computer, information and communication technologies
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are being employed in a wide variety of work situations. Intelligent machines are replacing human beings in countless tasks, forcing large numbers of blue and white collar workers into unemployment. During the past decade, South Africa also experienced the negative effects of this phenomenon. 10
Rifkin said that corporate leaders and mainstream economists tend to play down or ignore the reasons for the rising unemployment figures in the developed world. They hold out the promise of an exciting new world with high-tech automated production, booming global commerce and unprecedented material abundance. Yet many groups and working people remain sceptical as shown regularly by demonstrations during meetings of bodies such as the International Monetary Fund (IMF) and 10 the WTO. Rifkin pointed out that every week more employees learn that they are being let go. In factories around the world, people wait, in fear, hoping to be spared one more time. He said: “The strange, seemingly inexplicable new economic disease spreads, destroying lives and destabilizing whole communities in its wake”. Rifkin estimated that by the early 1990s more than 2 million jobs were 12 being lost annually in the U.S.A. alone. Peter Drucker estimated that employment in manufacturing is going to continue dropping, reaching less than 12 percent of the American workforce in the next decade and 15 Clem Sunter predicted a reduction in the manufacturing workforce in South Africa. 9
Paul Kennedy pointed out that Japan is leading this revolution in how industrial goods are made, i.e. the replacement of human beings in the factory by robots and other automated equipment. For two hundred years, manufacture and assembly have been amended in all sorts of ways; but whatever the innovations, the key element was still human beings coming together in a place of work. Kennedy stated that: “Now we are witnessing a technology-driven revolution which breaks from that process; by replacing factory workers with robots to increase productivity, automation takes more and more human beings out of the factory until perhaps only a few supervising engineers remain. If that aim is achieved, the wheel will come full circle. The industrial “serfs” of the factory system, whose working conditions appalled foreign observers in England in the 1820s, will finally have been replaced by robots ...”. 10
Rifkin added: “The ranks of the unemployed and underemployed are growing daily in North America, Europe, and Japan. Even developing
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nations are facing increasing technological unemployment as transnational companies build state-of-the-art high-tech production facilities all over the world, letting go millions of labourers who can no longer compete with the cost efficiency, quality control, and speed of delivery achieved by automated manufacturing. In more and more countries the news is filled with talk about lean production, reengineering, total quality management, post-Fordism, decruiting, and downsizing. Everywhere men and women are worried about their future. The young are beginning to vent their frustration and rage in increasing antisocial behavior. Older workers, caught between a prosperous past and a bleak future, seem resigned, feeling increasingly trapped by social forces over which they have little or no control. Throughout the world there is a sense of monumental change taking place - change so vast in scale that we are barely able to fathom its ultimate impact. Life as we know it is being altered in fundamental ways.” The thrashing of Macdonald’s outlets in France some time ago and demonstrations during IMF and WTO meetings bear out Rifkin’s predictions. These views are shared by other prominent people. “Business reengineering” has been a corporate “buzz word” for the past fifteen years and has been a main instrument in the pursuit of operational 16 effectiveness. Hammer and Champy estimated that re-engineering typically results in the loss of more than 40% of the jobs in a company and can lead to the loss of up to 75% of the workforce. Middle management is particularly vulnerable to job losses from business reengineering. In the private sector of the U.S.A. alone, some studies in the early nineties predicted the loss of up to 25 million jobs during the first stage of re-engineering. Comparable job losses were also expected in Europe in the years ahead. Some business consultants then said that they can see many ways by which jobs can be destroyed, but few by which new jobs will be created. Some business leaders think this could become the biggest social issue in the next 20 years. Jacques Attali, a French 10 minister and technology consultant to President Mitterand, predicted the end of the era of working man and woman. He declared that: “Machines are the new proletariat. The working class is being given its walking papers”. However, these dire predictions were not totally borne out during the 1990s. The economic boom caused by the “Goldilocks” economy of the U.S.A. in the 1990s, resulted in the lowest unemployment numbers that
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the U.S.A. experienced since the 1970s. However, the spectre of job losses re-emerged after the bursting of the “technology bubble”. Throughout the world the economy faltered and unemployment figures rose. We must examine the problem further. AUTOMATION 9 Japan already had 176 000 industrial robots in use by 1988 . In the same year, Western Europe had 48 000, the U.S.A. 33 000, and the rest of the world 23 000. By 1999, Japan had 650 000, Europe 210 000, the U.S.A. just over a 100 000 and the rest of the world 120 000 industrial robots. With only 0.3% of the world’s land surface and 2.5% of its population, Japan’s industrial robot population was 40% larger than the rest of the world combined. Why did Japan and not the U.S.A with its strong science and engineering heritage, become the world leader in robotics? Paul 9 Kennedy suggested that the answer lies more in demography than in factors such as a highly educated workforce, a long-term commitment to develop key industries, easily available capital at low interest rates, high levels of R&D investment, masses of engineers, a dedication to topquality design and efficient production, cut-throat competition between firms, a government-encouraged leasing company (JAROL) for automated equipment or “just-in-time” production techniques. The chief reason for Japan’s commitment to automation has been a serious labour shortage that existed from the mid-1960s and threatened to reduce Japan’s export-led boom. The low birth rate and the aging of the Japanese population exacerbated the labour shortage. The economic advantages for Japan of employing industrial robots were overwhelming. America, on the other hand, did not have an overall labour shortage. Its average wage was lower than that of Japan and the effective use of robots required changes to factory lay-outs that many American companies were not willing to make. In addition, American unions saw robots as a threat to employment. Two countries and two technological choices, driven by different imperatives. But can America and other industrialised countries avoid automating their production facilities further? The answer is most probably no. To stay competitive with Japanese and other manufacturers, America will have to automate more. The impact of automation is best illustrated by the FANUC manufacturing plant near Mount Fuji in Japan. This facility comes perhaps closest to representing the “factory of the future”. Paul
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9
Kennedy commented: “Like aghast observers at Britain’s early steamdriven factories, foreign visitors to the FANUC automated factory appear awed by the sight of robots moving around inside the building, clicking and whirring as they solder circuit boards, examining their work with camera eyes, passing items from one robot to another, work which continues after dark when the lights are dimmed”. Were these visitors to be South African political or business leaders or LED practitioners, would this be the future they would choose for their country or region? ROBOTIC PETS AND HUMANOIDS At the start of the new millennium, automation even entered the arena of pets. Researchers at Sony spent five years creating Aibo, its robot puppy. The company introduced 5 000 of its robotic puppies in Japan and the U.S.A. to great acclaim. Aibo is an autonomous robot dog. This means that it can learn, grow, and make its own decisions based on its environment and communication with its owner. The word Aibo has a dual meaning. It's an acronym for 'Artificial Intelligence Robot,' and also means 'friend' in Japanese. According to Sony: "Aibo isn't just a computer processor with a few sensors slapped on. Aibo has instincts, emotions, and really learns." Aibo's construction is fascinating. Its many movable joints allow it to move like a real dog. Upon boot up, its movements mimic a recently born puppy, wobbling slightly as it slowly walks. Aibo's movements then get more advanced as it gets used to the ground surface it's walking on. It can perform a wide variety of tricks. It can lie down, get up, sit, shake hands, fetch a ball, and even, if it wants to, have an accident on your carpet. Aibo even has an own unique personality. Sometimes it's glad to see you, but not at other times. Aibo recognises a gentle pat on the head as a positive gesture. It also recognises a slap on top of the head as a negative gesture. It will let you know how it's feeling. If it's happy, its eyes are green. They turn red if it is mad or upset. It also communicates with body language and its actions. If it is upset with you, it may not fetch when you tell it to. Instead, it may decide to have another accident on your carpet. Annual RoboCup soccer tournaments have been started. The first was held in 1997 in Nagoya, Japan. At the RoboCup held in Stockholm in 1999, Sony’s dog-like robots were the champions. A new expo for personal robots, Robodex, has also been started and the first was held
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in Yokahama, Japan. Various personal robots were exhibited to a spellbound audience. What will the future hold? Some views are that humans could make good use of mechanical devices that walk, talk, and think like us but vastly exceed our capabilities in memory, computational skills, and raw physical strength. For instance, they could be used as labour in hazardous environments, help soldiers on the battlefield or care for elderly people. SUBSTITUTING EMPLOYEES BY SOFTWARE Human body and brawn were replaced by machines in the first two industrial revolutions. The modern computer-based technologies promise a replacement of the human mind itself, substituting “thinking machines” for human beings across the entire gamut of economic 9,10 activity. The implications are going to be profound and far-reaching . More than 75% of the labour force in industrialised countries, not to speak of industrialising countries, engage in work that is little more than simple repetitive tasks. Automated machinery, robots, and increasingly sophisticated computers can perform many, if not most, of these tasks. Some predictions in the mid-1990s suggested that in the U.S.A. alone that means that in the years ahead more than 90 million jobs in a labour force of 124 million are potentially vulnerable to replacement by 10 machines. Rifkin estimated that fewer than five percent of the companies world-wide have begun to make the transition to the new machine culture. He predicted that massive unemployment of a kind never experienced before seems all but inevitable in the coming decades. 17
Wassily Leontief, a Nobel laureate and economist, warned in the mid1980s that: “the role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors”. Caught in the throes of increasing global competition, rising costs of labour and the need to provide adequate profits for share-holders, multinational corporations seem determined to hasten the transition from human workers to machine surrogates. This is because the massive investments started in the 1980s in computers, robots and other automated equipment are now paying off in terms of increased productivity, reduced labour costs, and greater profits. This resulted partly from the fact that corporations have begun to restructure the workplace to make it compatible with a high-tech machine culture.
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Smaller companies that are in competition with these global companies will have to follow suite to be competitive, or die. Sceptics can still say that there are many industries which will not be subjected to these pressures. So let us examine some every day examples. THE FUTURE OF AGRICULTURE One reason why Malthus’ dire predictions about a food shortage in England in the mid 18th century were wrong was that a simultaneous “agricultural revolution” dramatically increased agricultural output in th England. In the second half of the 20 century, world food production 9 increased at a faster rate than ever before in human history . World grain harvests rose 2.6 times in those years, which was more than the increase in global population. The “green revolution” in Asia also produced greatly advanced strains of plants which, together with improved mechanization, yielded crops (of rice for example) which were two to three times as high as those of traditional varieties. 9
Kennedy pointed out that after 1984 the pace of increase in global agricultural production had slowed down considerably. He worried that we might be at the beginning of an ominous long-term trend in which population grows faster than food production and that this could increase the number of seriously undernourished people in the world. It is, therefore, necessary to consider the effects of science and technology on agricultural outputs and agricultural labour. Two aspects need special attention, i.e. automation in agriculture and the future of biotechnology. Automation in agriculture The high-technology revolution is not normally associated with farming. Yet some of the most impressive advances in automation have occurred in agriculture and is doing so continually. This raises serious questions about the future of farm labour in countries around the world, including South Africa. The effects of mechanisation over the last century on agriculture in the 10 U.S.A. have been studied well and is presented here to illustrate the evolution of agricultural technologies. In 1880, it took more than twenty man-hours to harvest an acre of wheat in the U.S.A. This number was reduced to 12,7 by 1916 and by 1936, it was only 6,1 man-hours. The
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resultant productivity improvement meant that instead of crop shortages, overproduction became a problem. The nature of the American society was changed. Where about 60 % of the workforce was directly involved with agriculture in 1850, it is less than 3 % today. More than 15 million 10 men and women have left farms in the U.S.A. since World War II . Farm mechanisation in the U.S.A. took many forms. Mass-produced cast iron ploughs replaced handcrafted wood ploughs in the 1830s. By the 1850s, horse-drawn mechanical reapers were in use. Later in the century, giant grain combines that weighed up to fifteen tons and each requiring forty horses to pull, could cut swaths of grain up to 10m wide. By 1892, the first gasoline-powered tractor was built and by 1910, 25 000 tractors were in use. By 1920, the number was 246 000; by 1940, more than 1,6 million; and by 1960, 4,7 million. Twenty five thousand motor trucks were already in use for farm work by 1915. By 1980, this had increased to more than 3,5 million trucks. The workhorse disappeared from American farms in the early 1950s. The gasoline engine harnessed to trucks, tractors and other equipment now does all the heavy work on farms. Mechanisation of agriculture in the U.S.A. went hand-in-hand with new plant-breeding techniques designed to introduce varieties and strains 10 that were more uniform and easier to manipulate by machines . This happened to crops such as cotton, tomatoes, and maize. Geneticists produced higher-yielding crops and the use of high-yield mono-culture crops also led to the wide-spread use of chemical pesticides, fungicides and herbicides. Animal husbandry was improved by scientific breeding programmes, and the use of specialised feeds and animal-based pharmaceuticals. The factory feedlots of cattle and pigs and factory farming of poultry allowed the use of large-scale production systems. The mechanical, biological, and chemical revolutions in agriculture have put millions of farm labourers in the U.S.A. out of work. This increased the agricultural output of American farm workers tremendously. In 1850, a single farm worker produced enough to feed four people. Today a single farmer supplies enough to feed some 80 people. Software and agriculture “Thinking machines” will have further profound effects on agriculture in 10 the developed world. Rifkin stated that the mechanisation process which began with the horse-drawn steel plough in the 1850s, is nearing completion today with the introduction of sophisticated computerised
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robots in the fields. These robots will control the whole production system. In addition, research and development in countries such as the U.S.A., Israel, Australia and Western Europe are being aimed at the development of sophisticated software systems to support farmers. In the near future, expert systems will collect data on weather changes, soil conditions, and other variables from computer-based sensors located on the land and use the information to make specific recommendations to the farmer. Highly specialised robots will be instructed, in turn, to carry out many of the computer-generated action plans. Human beings will be largely removed from the farming process in the ultimate form of this “new agriculture”. BIOTECHNOLOGY Biotechnology is seen as one of the technologies that will drive the future economy. It involves any technique that uses living organisms or processes to make or modify products, to improve plants or animals, or to develop micro-organisms for specific uses. The modern gene-splicing technology is enabling genetic engineers to insert genes from one organism or cell into the genetic material of other organisms or cells. The recipient cell’s strength, or size, or resistance could be altered in this way. The computer is indispensable to these new technologies because it and its software are the means used to decipher, isolate, and analyse genetic information, as amply demonstrated by the enormous progress th that was made in the Human Genome Project by the end of the 20 century. 10
Jeremy Rifkin observed: “The long-term impacts of the new biotechnologies are likely to be as significant as the impact of “pyrotechnologies” over the course of the first five millennia of recorded history. For thousands of years human beings have been using fire to burn, solder, forge, and melt metallic ores, creating a range of useful materials. Now for the first time, molecular biologists are able to add, delete, recombine, insert, stitch and edit together genetic materials across biological boundaries, creating novel new micro organisms, plant strains, and animal breeds that have never existed before in nature. The shift from pyrotechnologies to biotechnologies is epochal, with potentially profound consequences to the way future generations will reshape their relationship to the biosphere”. Biotechnology is, therefore, a new stage in man’s search to produce more crops and better animals. For thousands of years, selective breeding was used by farmers and animal scientists to improve plants
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and livestock. Today genetic engineers can achieve in months or years, what would have taken decades before using conventional breeding programmes. On February 22, 1997 the news that Ian Wilmut had created an exact copy - a clone - of an adult Dorset sheep created quite a stir in the world. BusinessWeek commented: “The grand, tumultuous pageant of human history is, in a large part, propelled by technology. Metal working and improved agriculture carried civilization out of the Stone Age. In the 19th century, the Industrial Revolution gave rise to mighty machines and sprawling cities. In the 20th century, physics became king. Physicists split the atom, explored the bizarre world of relativity and quantum theory, and harnessed the power of tiny chips of silicon. Along the way they transformed the world with the atom bomb, the transistor, the laser, and the microchip. But now, many experts believe humankind is poised to ride a new wave of scientific knowledge in the headlong rush to the future.” The U.S. Patent and Trademark Office extended patent protection to any “man-made” creature in 1987, thereby recognising life for the first time as manufacture. Today, thousands of micro-organisms and plants and some animals have been patented. Patent authorities have, therefore, accepted the idea that living organisms are reducible to the status of manufactured inventions, subject to the same engineering standards and commercial exploitation as inanimate objects. 9
Paul Kennedy does not consider biotechnology to be a menace. He suggests that it will produce winners and losers, as all earlier technology-driven revolutions. He reminded us to distinguish between biotechnology which will enhance the output of crops in the field, and the newer science which is creating synthetic products in vitro, in the laboratory. Both have profound implications, but it is the latter which could seriously change agriculture by the middle of the next century. Like the steam engine and electricity, biotechnology is one of the new technologies that could introduce a new historical era and greatly change the way people live. Biotechnology and outdoor agriculture One reason for a new agricultural revolution is the emergence of large multinational agrichemical and biotech corporations that are racing to 9 offer new products . They see their task as bringing new goods to a world market, without necessarily worrying about the regional impacts and social consequences. Because they compete with one another, these companies do their research in secret and restrict its use by
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patents and other means, e.g. know-how. This is a major difference with the “green revolution” of the 1960s. The global agribusiness complex hopes to make the transition from petrochemically-based agriculture to gene-based agriculture in the 10 coming century . Their primary goal is to increase productivity and to lower labour requirements. For instance, to eliminate the cost of insecticides and the labour to monitor and spray crops, scientists are engineering pest-resistant and/or bio toxic genes directly into plants. Frost-resistant and nitrogen-fixing genes are also receiving a lot of attention. Four companies (Montsanto, American Cyanamid, Eli Lilly and Upjohn) have spent more than a billion U.S. dollars on the research and 9 development of Bovine Growth Hormone . This hormone produces a 10 ten to twenty percent increase in milk production per cow . Swine producers are experimenting with a porcine growth hormone, Australian researchers are investigating the possibility of genetically-engineered sheep that could grow up to 30 percent faster and/or produce more wool and Scottish scientists have produced transgenic sheep that can produce antitrypsin at levels fifteen times higher than what can be produced by blood plasma. The productivity gains are so spectacular that a flock of 1 000 ewes could match the entire world production of the 10 protein . Biotechnology and indoor agriculture The coming together of the computer revolution and the biotechnology revolution into a single technological complex, is the beginning of a new era of food production - one divorced from land, climate, and changing 10 seasons . Rifkin said: “While the first technological revolution in agriculture replaced animal power and human labour with machinery and chemicals, an emerging biotechnology revolution might soon replace land cultivation with laboratory cultures”. Some consider that the food industry will be transformed into a high-technology sector in line with the broader dynamics of the industrial system and the post-industrial society. The upside of this revolution is obvious. The downside can be 10 demonstrated using an example given by Rifkin . Vanilla is the most popular flavour in America. One-third of all the ice cream sold in the United States is vanilla ice cream. Over 98 percent of the world’s vanilla crop is grown on the Indian Ocean islands of Madagascar, Reunion and the Comoros, mostly by peasant farmers. Vanilla is expensive to produce. Two U.S.-based biotechnology firms have announced that they have successfully produced vanilla in tissue cultures in the laboratory,
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and that they envisage being able to produce vanilla in the laboratory at a fraction of the cost of natural production. This could eliminate the need for vanilla-production on these islands, causing an economic catastrophe. Vanilla beans account for more than 10 percent of the export earnings of Madagascar, and about two-thirds of those of the 10 Comoros. Rifkin estimated that more than 100 000 peasant farmers on the island could lose their livelihood over the next several decades. It is not only specialised products such as vanilla that could be affected. 10 A Dutch study suggests that upwards of 10 million sugar farmers in the third world, including South Africa, may also face a loss of livelihood as laboratory-produced sweeteners begin invading world markets during the next decade. Scientists are just beginning to explore the great potential of tissue10 culture production in the laboratory . Researchers have, for instance, successfully grown orange and lemon vesicles in tissue culture. Could orange juice be produced in vats, eliminating the need for orange groves? Such a development could devastate citrus growers and all of their support systems, including their labour sources, in South Africa. It must be understood that farming has been declining in economic importance for the better part of the 20th century as an increasing number of its activities have been expropriated by the input sector on the one hand and the marketing sector on the other. For example, chemical fertilizers replaced animal manures; commercial pesticides replaced crop rotation, mechanical tillage and manual labour; and agribusinesses have taken over the harvesting and transport of farmers. It has now become possible that chemical and pharmaceutical companies might eliminate the farmer altogether. As in the case of the Indian handloom spinners, the new technologies might eliminate millions of jobs in the whole agricultural grid. The consequences for a country dependent on its agricultural sector, not only for internal use but also for export earnings, 10 could be devastating. Jeremy Rifkin commented: “Tissue-culture substitution could mean the near collapse of national economies, unprecedented unemployment, and default on international loans, which, in turn, could lead to the destabilization of commercial banking and to bank failures in first-world nations”. He continued: “Even more unsettling, the manufacturing and service sectors, which have traditionally absorbed displaced rural workers, are undergoing their own technology revolution, shedding millions of jobs to
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make room for re-engineered, highly automated work environments. Transnationals are entering a new era of fast communications, leanproduction practices, and just-in-time marketing and distribution operations relying increasingly on a new generation of silicon-collar workers. Much of the human workforce is being left behind and will likely never cross over into the new high-tech global economy”. South Africa needs to be very careful in its expectations of the ability of its agricultural sector to provide jobs and future export earnings. We have to understand where we have sustainable competitive advantages and where not. THE FUTURE OF THE MANUFACTURING WORKER It is useful to use examples to illustrate some of the issues involved in the manufacturing sector. Textile production was one of the first areas affected by the First Industrial Revolution. More than 200 years ago, the first steam-powered machines were applied to the spinning of wool in England, launching a revolution in the way goods are produced. The labour-intensiveness of the sewing process has meant that automation even now lag behind in the textile industry. In recent years, however, the textile industry has also begun to catch up with the automation in other industries by way of the introduction of lean-production practices and advanced computer automation systems. The goal is to introduce flexible manufacturing and just-in-time delivery so that orders can be 10 “tailor-made” to individual consumer demand . Although the sewing of garments still remains labour-intensive, companies have been able to cut production time in other areas of the manufacturing process. Some now use computerised automated clothlaying and cutting machines, and some electronic sewing machines have also been introduced. The introduction of robotics is, therefore, also playing a role and has created a renewed vision for textile production in developed countries. The price for the increased productivity is, however, a reduction in traditional textile jobs. This process is also happening in South Africa where the President of the Textile Federation has stated that the industry must “invest or die” and that jobs will have to be sacrificed in the process. Another pertinent example is the automotive industry which world-wide produced close to 56 million light vehicles by 2000. The use of robotics have led industry experts to predict that early in the new millennium, Japanese-owned factories will be able to produce a finished automobile
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in less than eight hours. The future plans of some Japanese motor companies include the use of “smart” robots. The argument for this was that the payment of higher wages to workers who cannot by any standards be described as anything more elevated than machine minders is rapidly becoming unattractive, and where a man is employed solely for unloading one machine and loading another, the substitution of a robot is not a only glaringly obvious course but also increasingly easy to justify financially. In addition, robots are not subject to random variations in performance. For all practical purposes a robot is working as hard, as conscientiously, and as consistently at the end of the shift as it is at the beginning. But it is not only in Japan where this industry is changing markedly. According to the Original Equipment Suppliers Association, the auto industry in the U.S.A. expects to generate more dramatic changes in the period 2001 to 2005 than in the previous 100 years. In the U.S.A. and Europe, re-engineering, technology displacement and restructuring have resulted in massive lay-offs of blue collar workers on assembly lines. In the 1990s, many motor companies, including General Motors, Mercedes-Benz, Nissan and Renault planned to eliminate some of their work forces. This resulted in some militant behaviour from workers. South Africa was also not spared. During the 1990s “jobless growth” resulted in the loss of hundreds of thousands or jobs, many in the manufacturing industries. The use of robots in manufacturing is, however, not the end of the line. Industrial engineers are developing even more advanced machine surrogates. The machines of the future will have voice communication, a general purpose programming language, experiential learning 9,10 capabilities, three-dimensional vision, colour sensitivity, etc. The goal is to approach, as closely as possible, the human capabilities to process environmental data and to solve problems, while avoiding the problems presented by human agents, e.g. absenteeism, labour disputes, strikes etc. It is estimated that each robot replaces four jobs in the economy, and if the machine is used continuously, it will pay for itself in just over a 10 year . In virtually every major manufacturing activity, human labour is being steadily replaced by machines. Today, millions of working men and women around the world are trapped between economic eras and are increasingly being marginalised by the introduction of new labour-saving
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9
technology. Kennedy remarked: “… we may be witnessing the beginnings of a new industrial revolution, involving the automation of the manufacturing process. In many ways, the similarities between the steam engine and the robot are striking. Both are a new way to make things that simultaneously reduces the physical efforts of workers and enhances overall productivity; a process that creates new jobs and eliminates many others; a stimulus to social change as well as to new definitions of work. Like the steam engine, robotics affects international competitiveness, raising the per capita output of nations that invest heavily in newer technology and weakening the long-term relative position of those unable to do the same.” The issue of making technology choices is once again brought to the fore. 10
Rifkin estimated that by the mid-decades of the coming century, the blue collar worker will have largely passed from history, a casualty of the Third Industrial Revolution and the relentless march toward ever greater technological efficiency. Developing countries, in particular, have to face this issue squarely. If robots can do the job better than humans, where will they be installed? In the developing country where the support of the robots is much more problematic or in a developed country where the 9 necessary support systems are already in place? The answer is glaringly obvious, not in the developing country. This question is of particular importance to South Africa and LED practitioners. We hope to grow our economy by creating jobs in manufacturing. But if technology is rapidly making the manufacturing worker redundant, can the goal of creating and retaining employment in the long run be satisfied? I return to this question is later on. THE FUTURE OF THE MINE WORKER The mining industry, which is of particular interest to South Africa, also faces the elimination of jobs. In the American mining industry this has 10 been happening for a very long time according to Rifkin . In 1925, 588 000 men (about 1,3 % of the American workforce) mined 520 million tons of coal and lignite. In 1982, fewer than 208 000 men and women produced more than 774 million tons of coal. With the use of advanced computer technology, faster excavation and transportation equipment, improved blasting technologies, and new processing methods, mining companies have been able to increase output at an average annual rate of 3% since 1970. This has eliminated more jobs in the American mining industry. For instance, in 1992 alone, 45 000 mining jobs were eliminated. By the mid-1990s it was expected that at the end of the 20th
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century, the American workforce needed to produce all the coal needed for domestic and overseas demand, would be less than 133 200, or 24 percent lower than in 1995. The reduction in the prices of minerals and precious metals during most of the 1990s put severe pressure on the South African mining industry. To stay competitive, the mines had to rationalise severely and many jobs were lost. The mining industry plans to further upgrade technology and 15 this will again put pressure on mining jobs. Clem Sunter does not expect the longterm trend towards declining commodity prices to change, indicating that the pressure on the mining industry and its ability to remain a major supplier of jobs in South Africa will not cease. THE FUTURE OF THE SERVICE WORKER Computers that can understand speech, read script, and perform tasks previously carried out by human beings are going to change the service 9,10 industries radically . The service sector can no longer be viewed as the unbridled engine of job creation in the U.S.A. in the future. Routine personal services and an increasing number of more complex service functions will be taken over by intelligent machines. Productivity gains in industries like banking, insurance, accounting, law, communications, airlines, retailers, and hotels have resulted in job 10 losses in many countries. Rifkin pointed out that there can also be another sting in the tail - there was growth in higher paying jobs but a shrinking in lower-paying jobs. The service industries have also targeted the implementation of reengineering and automation and impressive productivity gains are achieved. Outsourcing of certain functions, the use of voice-mail, automatic teller machines, point-of-sale banking and the use of electronic cheques have revolutionized the banking industry. The paperless electronic office has become a goal of modern business. In the modern banking sector, electronic systems are a world apart from the labour and paper-intensive and totally inefficient, banks I have encountered during a visit to India in the early 1990s. The exchange of foreign currency in that country is a slow and frustrating experience. When these new technologies are applied in banking in the developing world, many jobs will be affected.
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10
Jeremy Rifkin was also of the opinion that the electronic office will eliminate millions of clerical workers in the next decade, and the trend will continue during the rest of the 21st century. The retail sector will also not escape the trend. Wholesalers are becoming redundant through E-commerce systems and the whole logistics chain will increasingly be managed by electronic and not human means. Ecommerce has opened up new opportunities for entrepreneurs. The food industry, be it in the preparation of foods, fast-food outlets, restaurants or bars, will also feel the consequences of the Third Industrial Revolution. Today, fewer workers can serve more customers 10 more quickly and efficiently, eliminating jobs in the process . Internet bookstores offer millions of books for sale. I have regularly used such a service and have had a book delivered in South Africa only four days after ordering it from Seattle on the American west coast. Waiting for an order to be fulfilled by a regular South African bookstore can take months. Full text retrieval technologies are also improving rapidly. No 10 wonder that Rifkin foresaw problems for the traditional job of librarian . The professions are also being affected by the Third Industrial Revolution. For instance, robots are used in complex human surgery hip replacements, eye, ear and brain surgery. Artificial intelligence is used to support the work of scientists and engineers, eliminating some needs for technical assistance. High-tech synthesizing machines are redefining the way music is made by reducing sound to digitized form. Once digitised, the sounds can be stored and, when needed, be combined with other digitised sounds to create an entire symphony orchestra. These technologies have partly eliminated the market for handmade pianos. “Morphing” technologies, still expensive at the moment, allow movie and 10 television producers to digitize all aspects of an actor’s work . The digitized data can then be used to create new roles and performances for an artist, even when long dead. There is little doubt that these technologies will eventually affect the jobs of all people associated with movie productions. There are some interesting challenges in the service sector for many developing countries. The price exacted from the developing countries for entrée to global markets is the opening up of their own markets, not
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only for products but also for services. Many service companies in the developed world realise that there are growth opportunities in the developing world and they aim to establish a presence there, either by establishing new companies (when allowed) or by obtaining a part of or all the shares of service companies in developing countries. Once established, the introduction of modern technologies impact jobs in these companies. For instance, South Africa has seen the entrance of international banking concerns and an American and a Malaysian company in its telecommunications industry. Inefficient local service companies do not have a competitive advantage in a global world, and inefficient service workers face the loss of their jobs. IMPACT ON PEOPLE Job losses are today occurring in industry after industry world-wide. The backlog in employment opportunities is severe. The International Labour Organisation (ILO) estimated in 2000 that an additional 500 million jobs are needed world-wide to reduce unemployment and provide jobs for persons entering the job market. Only a few rich, industrialised countries were able to reduce their unemployment numbers in the years preceding the end of the millennium, and part of that was due to the ‘technology bubble’. Understanding the impact on the people whose jobs are lost is more difficult. In the U.S.A., one of the first areas in which labourers were removed from their traditional working areas was silk weaving. Samuel Gompers, America’s first labour leader, described it as follows according 10 to Rifkin : “One of my most vivid early recollections is the great trouble that came to the silk weavers when machinery was invented to replace their skills and their jobs. No thought was given to these men whose trade was gone. Misery and suspense filled the neighborhood with a depressing air of dread. The narrow streets echoed with the tramp of men walking in groups with no work to do”. This description reflects the experiences of a multitude of South Africans. 18
According to de Geus , the task of the senior management of every company is to ensure the company’s survival and prosperity. The issue of what happens in the long-term to the people made redundant by the implementation of new technologies is by definition not the concern of the company as long as it has fulfilled its legal obligations with regard to the redundancy process. The long-term future of the unemployed, therefore, becomes the concern of the community in which they live and of authorities at many different levels - local, regional and national.
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CONCLUDING THOUGHTS The “end of work” represents the negative face of technology, one of the horns of the Janus dilemma. It is surprising that technology as a causal factor in “jobless growth” is hardly ever debated in South Africa despite 10 9 the fact that authors such as Jeremy Rifkin and Paul Kennedy , have elaborated on technology’s potentially disastrous consequences. The public and private sectors, and LED practitioners in particular, can no longer afford to ignore the issue and its consequences. 10
Rifkin’s analysis is very pessimistic and provides little hope that developing countries will be able to escape the negative impacts of the Third Industrial Revolution. Does this mean that South Africa like the Indian hand spinners is doomed to continuous “jobless growth”? Unless we can resolve the Janus Dilemma we could well have to face a future in which large numbers of people remain outside the formal economy. To examine the possibilities of resolving the dilemma we must first examine a couple of concepts that influence economic success, i.e. competitiveness and strategic positioning. The following two chapters deal with these issues.
“Competitiveness is not unfair, but it is rough. It does change the rules of the game, and forces countries, companies, and people to adapt. And this, of course, is sometimes painful”. Stéphane Garelli
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COMPETITION AND COMPETITIVENESS Competitiveness has become a central preoccupation of advanced and developing countries struggling to survive in an increasingly open and integrated world economy. The intriguing title of one of David Landes’ books: The Wealth and Poverty of Nations – Why Are Some so Rich 8 and Some so Poor provides tangible evidence of this preoccupation. It has become necessary to understand why economic powers have arisen and disappeared and this question even extends to considerations of LED. The First Industrial Revolution made Britain the world’s greatest power for much of the 18th and 19th centuries. Then at the turn of the 20th century, the U.S.A. took Britain’s place. Economic prosperity was not the prerogative of the West only. For almost a millennium and long before the rise of the West, China had the world’s largest economy. At that time it was the most technologically advanced nation. Yet, by the th middle of the 20 century its leadership was gone and its population impoverished. Argentina prospered between the World Wars. To the dismay of the Western powers the Soviet Union’s industrial production expanded rapidly under a centrally planned system after World War II. The USSR was admired by many of the newly independent, but economically less developed nations in Africa and elsewhere. After World War II, economic prospects in South East Asia were bleak. Japan was defeated and its economy destroyed, Hong Kong was a poor island, Korea was in the midst of a bloody civil war, Singapore was a sleepy city with an uncertain future, experiencing racial tensions and extreme poverty, and Taiwan had an agricultural economy under threat of a continuing civil war with Mainland China. Four and a half decades after the end of World War II, Japan was a world leader in technology and had the world’s second largest economy, and the phenomenal economic growth of the four Asian Tigers (Korea, Hong Kong, Singapore and Taiwan) was well documented. Rapid economic growth had lifted the countries of the East Asian region to stunning prosperity within a generation. By then, the economies of the USSR and Argentina were under pressure and contrasted starkly with
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East Asia’s success. The prime lesson is that different economic systems, development strategies and government policies had produced very different outcomes. Stated differently, the development strategies (choices effected consciously or sub-consciously by the leaders and the people of countries and/or regions) in the decades after World War II, determined the well-being, or lack thereof, of their next generations. The same is true for regions. For instance, the rise of Silicon Valley during the 1980s and 1990s is well known. The market capitalisation in the late 1990s of companies located in Silicon Valley exceeded that of all of the companies on the Paris stock exchange. Regional success stories also abound from other countries: Italy’s “industrial districts”, Oxford and Cambridge in the U.K., Tsukuba Science City in Japan, the city of Bangalore in India, Sophia Antipolis, a science park in southern France, to mention but a few. 19
Michael Fairbanks and Stace Lindsay asked why the developing world has had such a torrid time creating wealth for the majority of its citizens. They responded: “The reason, we have come to conclude, is that the traditional way of competing is flawed; leaders in the developing world must find new ways to compete in a global economy.” This insight is of particular importance because it singles out the choices by which a country, and by the same token a region, chooses to compete in the global economy, as being particularly important. Choosing the right economic development strategy is the first step towards success. Economic strategies, including LED strategies, should accept that a nation or region or local authority will have to compete with others. Competition, therefore, matters very much. Competitiveness is an important associated concept. Let us explore these concepts further in order to reveal their relationship to LED. THE IMPORTANCE OF COMPETITION AND COMPETITIVENESS There are broadly different views of competition and competitiveness. 20 Lester Thurow wrote in 1992 : “What was an era of niche competition in the last half of the twentieth century will become an era of head-to-head competition in the first half of the twenty-first century. Niche competition is win-win. Everyone has a place where they can excel; no one is going to be driven out of business. Head-to-head competition is win-lose.” He concluded that the winners will prosper economically, the losers not. 21
Stéphane Garelli said on the other hand: “Competitiveness is not unfair, but it is rough. It does change the rules of the game, and forces
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countries, companies, and people to adapt. And this, of course, is sometimes painful”. To him competition is not necessarily “win-lose”. Michael Porter, the American academic legend on competition and 23 competitiveness, said in 2003 that: “[T]he basic starting point for thinking about competitiveness is that prosperity of any area is fundamentally driven by productivity. If you can be very productive, if you can produce a lot of output with a day of work or a pound of capital invested, you can be prosperous. If you can produce a lot of output you can pay yourself a high wage. On the other hand, if you’re not productive, if you can’t produce very much valuable output in that day of work or that pound of capital invested, you’re going to be resigned to having a low wage. Productivity is what determines prosperity”. Sources of prosperity are, therefore, created and not inherited. Competitiveness is based on the capacity to innovate, which in turn leads to an increase in productivity and this enhances prosperity. Porter outlined the crucial need for the maintenance of institutions of collaboration such as chambers of commerce, school networks, and industry associations. 24
Porter added elsewhere that nations or regions compete in offering the most productive environment for business. He explained that competitiveness is determined by the productivity with which a nation or region uses its human, capital, and natural resources. Productivity sets a nation’s or region’s standard of living (wages, returns on capital and returns on natural resource endowments). Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced. What matters for prosperity are not what industries a nation or region competes in, but how firms compete in each industry. 23
According to Porter , the productivity in a nation or region is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national or regional prosperity. He indicated that competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition. The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries. He warned that devaluation does not make a country or its regions more competitive. Whatever definition of competition is used, it is clear that the competition among nations and among regions (even in the same nation) and the
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competitiveness of nations and regions are realities that influence human well-being. They have to be taken into account by LED practitioners. WHY DO SOME COUNTRIES OR REGIONS PROSPER? Some people ask why some countries or regions fall behind and others charge ahead in the economic race, or in other words, why there is a difference in their respective competitive abilities. Short of military conquest, economic growth is the only viable means for a country or region to sustain increases in wealth and living standards. Throughout history, the economic growth rates of countries or regions have varied widely - and this matters. If growth rates differ by a few percentage points over a long period, it makes huge differences to living standards and the balance of economic power between nations or between 20 regions. Lester Thurow illustrated this as follows: “The economic race does not go to the short-term sprinters. It requires a marathoner’s ability to put together a century of 3 percent or better annual growth rates. The task is very hard. .... [I]t is simply impossible for any country to become rich in the context of a rapidly rising population. .... [T]o make new human beings into modern productive workers takes a lot of investment”. Many people have during the 20th century contributed to a better understanding of the concept of competitiveness. People like Schumpeter, Solow and Porter have made major contributions in this regard. I am not presenting a comprehensive review of this topic, but concentrate on some issues stemming from the now regular activities that compare the competitiveness of countries. One of these is performed by IMD located in Lausanne, Switzerland and is reported annually in their World Competitiveness Yearbook. I have made extensive use of their information because I find the data useful and their views helpful to enhance an understanding of competitiveness 21 concepts . So let us return to the different views of competition. Lester Thurow’s 20 views of competition as a head-to-head affair is based on the premise that the developed countries in the economic triad of the world (the U.S.A., Europe and Japan) will attempt to dominate the seven key industries foreseen for industrial activity and growth in the 21st century: microelectronics, biotechnology, the new materials-science industries, telecommunications, civilian aviation, robotics and machine tools, and computers and software. Not every country in the Triad will have a stake in each of these industries. He, therefore, predicted that some will win
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and some will lose, and that the winners will essentially take all. He consequently envisaged competition as being head-to-head. We can ask what about the developing world that does not dominate in any of the seven key technologies? Is the developing world doomed in perpetuity to economic failure? 23,24
Michael Porter said that nations, regions (and by the same token local authorities) compete by offering the most productive environment for business. Winners use their human, capital, and natural resources to best effect. Their companies compete effectively in the industries they choose to operate in. Stéphane Garelli and co-workers at IMD have another concept of global 21 competition . In their view, world competitiveness is the ability of a country (and therefore also a region) to create added value and thus increase national or regional wealth by managing assets and processes, globality and proximity, attractiveness and aggressiveness, and by integrating these relationships into an economic and social model. WINNING AND LOSING NATIONS AND REGIONS 21 Garelli’s ideas are useful extensions of Porter’s views. He said that there are “winning” countries whose economies grow fast and “losing” countries whose economies stagnate or grow slowly (this also applies to regions and local authorities). Nations (or regions) compete, but not necessarily at each other’s expense. For Garelli the world economy is 20 not, contrary to Thurow’s views , a zero sum game, i.e. improvement in one country’s (or region’s) economic position does not have to be at the expense of the economy of another country (or region). What are the issues that determine the competitiveness of countries (or 21 regions) according to Garelli ? Assets and processes Some nations or regions can be rich in assets - land, people, natural resources, etc. - but not necessarily competitive, e.g. Brazil, India, Indonesia, Venezuela, many African countries and Russia. On the other hand, there are nations such as Singapore, Japan and Switzerland or regions such as Hong Kong and Singapore that are poor in natural assets but are very competitive. These countries or regions have mastered what Garelli calls “the transformation process”.
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Between 1950 and 1996, Japan received only four Nobel Prizes in exact sciences and economics, compared to 164 awarded to the U.S.A. and 44 to the U.K. In fact, none of the fundamental technological breakthroughs that had changed human business lives between World War II and the end of the millennium were discovered in Japan. Companies in the U.S.A. and Europe invented the transistor, the robot, the video recorder, the computer, the fax, the compact disk, and the colour TV. The Japanese, however, were extremely successful in making and marketing these products - they excelled in the ability to transform an idea into a product or a service more cheaply, more quickly and more effectively than their competitors. There is, therefore, a difference between competitiveness that stems from a nation’s or region’s assets and that which is achieved through transformation processes. This crucial distinction is important, since the future seems to belong to those nations and regions that master the transformation process. 19
Fairbanks and Lindsay observed: “A great many developing nations are in economic crisis today, but not exactly because they are doing the wrong things. Rather, they are doing the right things for times they no longer live in”. They added that they have seen in developing countries patterns repeating themselves over and over: “[L]eaders of countries who over rely on the abundance of their natural advantages to compete in world markets and create prosperity for their citizens; little or no learning about end-users, competitors, cost structures; little forward integration into sophisticated markets; an over reliance on government support; and, by and large, poor relationships between government and private sector.” The same could be said of many regions that fail economically. Globality and proximity 21 Garelli pointed out that every nation (and, therefore, every region) must deal with two types of co-existing economies - the economy of proximity that is composed of traditional activities such as plumbers and butchers, social activities such as medical practitioners and teachers, administrative activities such as governing and providing justice, and consumer-supporting activities such as after-sales services and customisation, and, the economy of globality that is composed of firms that perform international (or extra regional) operations.
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The economy of proximity provides added value close to the end user. On the other hand, the economy of globality uses the fact that factors related to production need not necessarily be close to the end user. It uses the comparative advantages of nations or regions worldwide, particularly regarding operational costs. A local value chain has to be managed in the economy of proximity. The economy of globality needs a global value chain. The economy of globality has grown enormously in the past 25 years. It has been expanded by the General Agreement on Trade and Tariffs (GATT), the creation of the World Trade Organisation (WTO), the acceleration of international financial flows, and the massive growth of foreign direct investment supported by the opening of world markets. Privatisation in many countries also helped this expansion. Privatisation transferred many telecommunications organisations, airlines, and public utilities in the past decade from the economy of proximity to the economy of globality. Globalisation exerts effective pressure on prices. When an economy is open (i.e. there is access to markets and industry sectors), the factors of production can be allocated much more efficiently. More business opportunities are created, but also more competitors, and price competition increases. This enhances competition on the basis of cost efficiency. Garelli said: “Nations with a high domestic standard of living and operating costs, mainly wages, are thus going through a harsh adaptation process”. This is a hard new reality to accept. Garelli predicted that the friction between globality and proximity would be at the centre of the economic debate in the coming years. The public in many countries and regions, as illustrated in many of the recent public demonstrations against the World Bank and the WTO, perceive the economy of globality as one that destroys jobs at home, does not guarantee revenues, remains unpredictable and, ultimately, is not loyal to the nation. Therefore, there are strong advocates, especially in many industrialised countries, for the maintenance of a strong economy of proximity, shielded from the disturbances of the economy of globality. The same arguments are sometimes uttered by inefficient state-owned enterprises in developing countries. The idea to promote the economy of proximity has severe limitations. A growing part of the global economy is increasingly outside the control of national and/or regional governments. One of the stated aims of LED is
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to attract money flows into a local economy. This is the equivalent of the earning of foreign exchange by a nation. To gain the foreign exchange needed to pay for imports, countries need to exports products and services to other countries; regions need to “export products or services” to other regions, even within the same nation. But do they understand under what conditions will they have products and services that could be exported successfully? Solutions to this dilemma may be found by creating the right balance in another fundamental competitiveness relationship: aggressiveness and attractiveness. Attractiveness and aggressiveness Every national economic success story since the Second World War has been export led. These nations tested their competitiveness in world markets and succeeded. Every economic failure since the war had occurred in those nations that refused to accept the verdict of world markets. The above is probably also true for regions in their own context. Nations and regions vary in the way in which they manage their relationships with the business community. Some nations and regions endeavour to be “attractive”, i.e. they create a domestic environment which is conducive to direct investments from external sources in their territories - through trade, partnerships with foreign enterprises, etc. National examples include Ireland and Thailand. Other nations, e.g. Korea and Japan, manage the internationalisation process by being aggressive. Ireland is not very aggressive in international markets, and Korea is not very attractive for foreign investment. The U.S.A. seems to be the exception - it is both very attractive and very aggressive. The challenge for South Africa and South African regions is to find ways to manage both attractiveness and aggressiveness simultaneously. Attractiveness has the added benefit that it tends to create jobs locally. 21 Garelli pointed out that economies today cannot prosper only on the basis of financial revenues; they must also create jobs locally. For example, some people query the value of the development of Saldanha Steel for the residents of Saldanha. Few permanent jobs were created and a number of unattractive consequences arose, such as environmental pollution that became the burden of the local community. Attractiveness is, therefore, a key to a region’s competitive strategy since it leads directly to new job creation. Value systems and learning in competitive societies
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Nations and regions do not compete with products and services alone, but also with education and value systems. A nation’s or region’s infrastructure has to be managed with a high degree of efficiency. 21 Garelli stated: “ ... a competitive society must develop the capacity to revise itself quickly so that it can adapt to a changing environment. This process entails adjusting its value systems and mastering the ability to make fundamental choices” (the emphasis is mine). Individuals have the potential to learn. Groups and/or teams can also learn. Arie de Geus, the well-known business strategist and author, 18 postulated that companies are “living” entities, and also learn . In fact, “organisational learning” has become an important concept in management and business practice and many persons argue that it is absolutely necessary for the survival of enterprises. The capacity of a nation or region to “re-engineer” itself, must include learning, but at a national or regional scale. 23
What is learning? According to Kolb , learning is an experiential and cyclical process which involves the sequence of “doing” followed by a period of “reflection”, i.e. thinking and feeling about how well did we do. Reflection allows us to “connect” issues (i.e. causes and consequences). Now we are in a position to “make decisions” about how to do better in future. Only if the act of redoing involves different actions, i.e. changed behaviour, has learning taken place. This process also forms the basis for a community to restructure or re-engineer itself. 21
Garelli identified four stages in the evolution of the value systems that form the motivating forces in a society: (i) hard work, (ii) wealth, (iii) social participation, and (iv) self-achievement. By the mid-nineties South Korea with an average working week of 54 hours, was in the hard work phase, and so was China. Singapore was in the wealth stage although people still worked very hard, they had begun to pay attention to increasing their revenues. Participation at all levels in decisionmaking in Japan was indicative of the social participation stage. The U.S.A. and Europe were in the self-achievement stage. Developing countries, South Africa included, cannot escape the fact that hard work must form the basis of its evolution to become a winning nation. But hard work at what? This question must be resolved further. Value systems and making choices Value systems evolve over time, and one of the key responsibilities of a modern society is to create the ability to manage this transition and to
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make choices. We have seen earlier that the debate on the choices between having a society that creates jobs but is unsuccessful in the earning of foreign exchange, and a society that is successful in export earnings but fails to create jobs, is central to a significant social problem and to competitive policies. Therefore, to remain competitive, nations and regions have to assess their economic models continuously, manage the evolution of their value systems, and, finally, cultivate the ability to determine fundamental options. Successful approaches in one region may not export easily to other regions. The critical element in choosing is not found by designing competitive policies, but rather by determining the social costs acceptable to the society that seeks to enhance its position in global markets. However, from the onset the long-term effects of policy choices have to be debated and understood. 21
Garelli concluded: ”The concept of world competitiveness merges both the tangible and the non-tangible aspects of how a nation creates wealth. It encompasses an economy’s social dimensions, such as value systems and education, which too often have been ignored. And it integrates this model into a timeframe. This approach establishes bridges between disciplines such as macroeconomics, management, public policies and the social sciences. It is not, however, a mathematical theory which provides recipes for the present or formulas to predict the future. It simply serves as the best possible representation of how nations create and accumulate wealth today. Therefore, world competitiveness is one of the most powerful tools in modern economics”. This approach must also apply to regional competitiveness and LED practitioners should take note of it. THE COMPETITIVENESS OF BUSINESSES It is, however, not sufficient for the LED practitioner to consider competitiveness only from a national or regional perspective. It is also necessary to consider it at the level of individual enterprises. Some years ago Morgan Stanley, the international investment-banking firm, compared the competitiveness of a large number of enterprises worldwide. They asked analysts around the world to identify companies with a sustainable competitive edge. The measure for this was the growth rate achieved over a five-year period and the comparison excluded very small enterprises. Of the top 238 companies, 125 were American, 21 British, 19 Japanese, 12 French, and 10 German. Twentythree other countries had at least one competitive company, and this included South Africa with a single representative company, Pepkor.
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Morgan Stanley’s analysts concluded from their study that competitiveness at the company level boils down to doing one of two things exceptionally well: either product differentiation or low-cost production. Their findings are in line with the long-held views of Michael 25 Porter that business enterprises can only compete on the basis of either product differentiation or cost leadership. Enterprises must either have unique or differentiated products or services (and the ability of product innovation), or the ability to produce and/or deliver commodity products cheaper (or have the ability to reduce production costs faster) than anybody else. In developing countries Political leaders and business leaders in developing countries are often asking for special treatment from the developed countries. A legitimate question, therefore, is whether the concepts outlined above also apply to 26 their countries and businesses? According to Michael Porter firms in developing economies often compete on price with “me-too” strategies. He suggested that while the improvement of operational effectiveness is a first step in moving beyond this mode of competition, it is by itself not sufficient. The essence of strategic positioning is making choices or tradeoffs about the unique way a company will deliver value to its customers compared to its competitors. Firms must establish clear competitive positions with distinctive brand reputations. Activities in the value chain must become increasingly tailored to the firm’s unique strategy. 19
Fairbanks and Lindsay used Latin America as a test bed for examining the problems of developing countries to achieve export success and increased wealth for their citizens. They discovered a number of recurring patterns. Domestic producers in developing countries often assume that advantages in natural resources and cheap labour will gain them leading positions in export markets, and they, therefore, fail to create the conditions for innovation. Weak groupings of related and supporting industries seriously disadvantage firms. Firms also tend to produce goods, and then look for markets in which to sell them. Little homework is done on understanding buyers’ needs before pushing products to new buyers. In addition, there is little understanding of the long-term strategic implications of choosing to serve certain segments of buyers. Many firms of developing countries are typically at the mercy of distribution intermediaries, who have a great deal of bargaining power over them and shield them from critical market learning. The firms that practice forward integration tend to set up mechanisms that promote
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short-term profits and fail to re-examine and re-invent their sources of competitive advantage, or in other words, they fail the organisational learning test. Governments of developing countries often feel over-responsible for the success of industry, but historically they have not been effective in helping to create sustainable advantages. Businesses often become under-responsible for their futures, and having grown accustomed to a lack of real competitive pressure and regular help from government, they begin to rely on easily imitated advantages. In addition, some companies and governments in developing nations do not understand nor appreciate their position relative to competitor companies, regions or nations. Operating without that knowledge inhibits the ability of firms to shape the future of their industries. As the competitiveness of export industries in many developing nations becomes more desperate, public and private sector divide into opposing sides, and each assumes that the other is to blame for the failure at hand. The public sector accuses the private sector of strategic mismanagement; the private sector accuses the public sector of failing to create a supportive macroeconomic climate. The irony is that both sectors appear to be correct. SYSTEMIC VIEW OF THE PROBLEMS OF DEVELOPING COUNTRIES 19 The patterns observed by Fairbanks and Lindsay can be viewed in “systems thinking” terms. Systems thinking evolved after World War II at the Massachusetts Institute of Technology. It is a branch of science that uses holistic models to understand interrelationships between different factors. It has become a very powerful tool because it helps to explain why we often have unexpected outcomes when confronting complex problems. 19
Returning to the patterns observed by Lindsay and Fairbanks , we see that the mindsets of senior managers drive the management focus of their companies. Businesses in developing countries have traditionally focused on the exploitation of natural resources through commodity products, not by pursuing differentiated products. Thus, these enterprises compete on price, not uniqueness. As a consequence, when under pressure of competitors, managers will often seek competitive advantage in cost reductions, including tight control of labour costs. Managers are also inclined to lobby government to use tariffs and such
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measures to keep competitors at bay. They also expect government to use financial policies that will manipulate the currency value to their advantage, even if it is hurtful to the national well being. If government does not yield to these lobbying efforts, acrimony starts building up. In a period of declining commodity prices, the strategy tends to be “to do more of the same” and to increase the operational effectiveness of their 26 businesses. However, Porter believes this does not constitute a sustainable competitive advantage because competitors are doing the same. The end result is a whole new dynamic leading to increased automation, job redundancies, loss of worker loyalty, etc. Systemic thinking also explains why it is so difficult for these businesses to move to new and more sustainable competitive advantages. The first problem is the inability of managers caught in the traditional mindset, to focus on innovation as a driver in the creation of differentiated products. They do not understand the process of innovation and its management; they do not believe that innovation is critical to their future; they do not in time create “capacity” in their organisations to innovate; they do not create market intelligence support structures; and they do not work with government to optimise their innovation efforts. The other important player is government. It sets industrial and financial policies and industries and companies react to these. Fairbanks and 19 Lindsay described how companies in developing countries react to financial policies in ways to optimise short-term gains, even if those are against government’s wishes. The differences between government perceptions and managers’ perceptions determine the level of acrimony between them and this drives actions by both government (e.g. actions re tariff protection) and managers of companies (e.g. lobbying efforts). Government also reacts to market success (or the lack of it) as measured against national goals. Some of these measures might be in terms of export earnings and/or the creation of jobs, or in corrupt countries, the extent to which corrupt officials benefit. The success (or lack of it) shapes the perceptions of government and determines government actions. These may either aggravate the acrimony between government and industry, or drive government actions beneficial to industry success (such as efforts to create support structures). Because companies in developing countries often use distribution or marketing intermediaries and it is not in the interest of these persons to provide market intelligence, the companies do not directly learn about user wants and needs. The lack of market intelligence is a major
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shortcoming and questions such as what do customers want and what are their future needs; who are the competitors; what are their products and their cost structures, etc., need to be answered. In the traditional way of doing business in developing countries, these issues were not important, but in the global economy they are. 19
Fairbanks and Lindsay stated: “What has been most difficult for Andean leaders - indeed, for most leaders of developing countries - to grasp is that to advance the prospects of domestic businesses, their governments must master the details of how successful global businesses make competitive choices, strategic choices, in an age of global markets and networked information technologies.” Government, also at the local level, must, therefore, be a partner to a country’s business community in order to achieve business success. 27
Roberts and LaFollette Araujo provided further insight into the economic travails of Latin America. They showed how a “rent-seeking” tradition developed over centuries on this continent. During the reign of the Spanish Empire, the so-called House of Trade had total administrative and judicial control over economic affairs through the whole of the Spanish Empire. Great responsibility was placed in the hands of a few. The co-mingled administrative, legislative and judicial functions lead to severe conflicts of interest and the transfer of wealth to governing elites. The Spanish Crown tried to abolish competition. The king’s officers saw the realm as a single economic organism and allocated production to protected areas where neither competition nor change was supposed to upset the balance regulators were trying to 27 achieve. Said Roberts and Araujo : ”With monopolies at their foundation, the Spanish American colonial economies evolved along a different path than the North American colonies, where relative economic freedom had spawned competitive industries and thriving agriculture”. They added: “The development-planning approach sponsored by the World Bank and the United Nations in the second half of the twentieth century strengthened the rent-seeking culture that had hindered Latin American economic progress for 400 years”. CONCLUDING THOUGHTS It is clear that the competitiveness of nations and regions is determined by many different factors and is a complex issue. Some years ago Professor Rias van Wyk pointed out that competitive strategy has evolved from “competitive advantage” to “competing for the future”. The latter requires the ability to visualize the “landscape of the future”, to
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determine which part thereof can be occupied and defended, and to go for it. It requires planning that is future-based, and it would be fatal to think that the future will be merely an extension of the past. All of these issues are part of the concept of strategic positioning. This issue is explored in the next chapter.
“Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways”. Michael Porter
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STRATEGIC POSITIONING What is strategic positioning? Michael Porter offered sage advice. He said the strategic positioning of an enterprise is the way it chooses to draw customers away from its existing competitors by altering its product or service offerings and/or how it plans to draw new customers to its 26 existing products or services . Strategic positioning is obviously limited by what an enterprise chooses to do and what it can do with a given set of competences. It follows that the strategic positioning of an area, e.g. a town, region or a country, is the sum total of the strategic positioning of all the enterprises within its boundaries or jurisdiction. Local authorities, regions or countries have a choice in the kind of enterprises they want to operate within their boundaries or jurisdictions, but are limited by the technologies of their existing enterprises and the competences of their work forces. To induce change, these authorities can use carrot-andstick approaches to acquire a desired set of enterprises, e.g. tax concessions (carrot) or exclusion of certain kinds of enterprises (stick). The fact that the economies of many developing countries and/or local authorities in their domains are not creating new employment
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opportunities is of great concern because of high population growth rates in these countries. There seems to be a lack of understanding of the causes of this phenomenon, particularly of the crucial roles of technology and technology choices in strategic positioning. As a result, blame is apportioned to many and proposals for quick fixes are the order of the day. The inability to create employment and the lack of competitiveness due to inappropriate strategic positioning, are linked, and the former cannot be addressed without considering the latter, especially given the technology revolution (Third Industrial Revolution) taking place in the world. The next question is how one could bring these factors together in a coherent model that is easy to understand. Traditional economic analyses depend very heavily on long-standing classification systems, e.g. the Standard Industry Classification (SIC) codes. These systems are not very useful in understanding the link between competitiveness and employment. As a consequence, I have developed new ways to derive additional and important insights that may help us to resolve the competitiveness-employment conundrum that I call the Janus Dilemma. LEARNING CURVES The learning or experience curve (Figure 7.1) helps one to think about competitiveness. It simply states that when a unique new product or service is introduced to a market and there is a demand for it, it can command a price premium because of its uniqueness, or in other words, its differentiation. As time passes, competitors enter the fray and knowledge (information) is generated to produce or deliver the product or service more efficiently, thereby reducing its price per unit. Eventually the product or service ends up as a commodity and then the only competitive advantage is cost-leadership. Michael Scott-Morton of the Sloan Business School told me and my classmates during a Senior Executive Program at MIT: “The experience curve is an iron law of business. If somebody is ahead of you in size and learning, it is hard, if not impossible, to catch up”. It is sobering to consider that every product and service is subject to this “law”. The learning curve of a particular industry is helpful to understand the strategic positioning of particular enterprises competing in that industry. For instance, companies such as 3M, Hewlett-Packard, Texas Instruments and the big pharmaceutical companies specialise in bringing new products to market. They have, therefore, to excel in product innovation and will invest large amounts of money in research and development. One could say that they ‘live’ high on the learning curve (point A in Figure 7.1). Their survival strategy is to
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have a ‘pipeline’ of new products or services being developed. The expectation is that each of the new products or services will enter the market at a high price per unit and give them a suitable financial reward before ‘followers’ can catch up (e.g. the pharmaceutical companies dream about new drugs that will produce a turnover of a billion dollars in their introductory year). As a consequence of this strategy, the information or knowledge content of the activities of these companies is extremely high and they expend large sums of money on research and development and/or acquisitions to remain able to compete in this way.
A
PRICE PER UNIT
B
TIME Figure 7.1 The learning curve
The companies that introduce new products seldom follow a product all the way down the learning curve until it becomes a commodity. However, other companies specialise in being followers - they do not develop new product concepts, but once these have been proven in the market, they are ready to move in and compete by using exceptionally efficient production systems to become the low-cost producers. They ‘live’ low (point B in Figure 7.1) on the learning curve, and the information/knowledge content of what they do is lower and of a different 28 nature. According to Utterback they specialise in process technology and process innovation rather than product technology and product innovation, and often use incremental improvements in their processes to drive costs down. In other words, they do not worry so much about what new product or service could be supplied, but rather how to
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produce an existing product or deliver an existing service more costeffectively than their competitors. How do the companies that specialise in product technology protect themselves against the “followers”? Protection of the intellectual property associated with their inventions is often part of their strategy, particularly patenting, protecting know-how, and defending trademarks and copyrights. A valid patent on a differentiated product concept confers a time-dependent monopoly on the production and marketing of this product. Thus the patent holder and/or his licensee(s) have a monopoly on the invention for a period of time, and can, for as long as the patent is in force, enjoy the benefits in terms of a higher price per unit that this legal monopoly bestows. However, after expiry of the protection, the “iron law” becomes operative again - the lowest cost producer will have the competitive edge. The pharmaceutical industry provides examples of this. The major pharmaceutical companies in the USA, Japan and Europe make extensive use of patents to protect their new drugs and their strategy is obviously to differentiate themselves by having unique drugs on offer. Pfizer and Viagra provide an example of this. These pharmaceutical companies need the high prices associated with novel drugs to fund their extensive efforts to develop new drugs. On the other hand, Indian pharmaceutical companies such as Cipla specialise in the production of ”knock-offs” of patented drugs at a fraction of what they sell for in the industrialised countries. Cipla’s strategy is to benefit from lower production costs made possible, amongst others, by cheap labour in India, lax patent laws and not having to fund costly and time-consuming R&D programmes. The learning curve does not only pertain to manufactured goods, but also to all enterprises specializing in delivering commodities such as minerals and agricultural products. The supply of commodities such as electricity and water provide examples from the service industries. These companies also ‘live’ low on their learning curve and must excel in the technologies and processes with which they extract or produce their final products in order to be low-cost producers. They are, therefore, also experts in process rather than product technology. Obviously this only holds under conditions where they are not protected by law or tariffs. One-channel marketing mechanisms, whether they apply to agricultural products or fish, tend to create the illusion that competition is nonexistent and that innovation is not necessary. The fallacy of such a view
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is increasingly exposed by the dynamics of a global economy and this is reducing attempts by governments to interfere in the market place. 19
Fairbanks and Lindsay pointed out that developing nations that remain dependent on commodities as the mainstay of their economies, could not expect to increase the general living standards of their populations. Commodity prices have been under pressure for a decade or longer, and, their downward price trend has meant that all cost factors, including worker compensation, have been under severe pressure. Under these conditions, the exploitation of natural resources can hardly form the basis for the general improvement of living conditions of the population of a developing country. Earlier chapters recorded how the decreasing costs of computers and the trend to “smart” machines exacerbate this problem. Commodity prices can, therefore, in the future be expected to remain under severe price pressure. The consequences for developing countries are severe. Their economies are inordinately dependent on commodities, and because this dependence limits the ability of their economies to increase the employment opportunities in their countries, their economic strategies need to be re-engineered. To understand how this could be approached, we first need to consider the issue of product and/or service differentiation. PRODUCT AND/OR SERVICE DIFFERENTIATION The differentiation of products or services is necessary in virtually every business venture. This holds true whether an enterprise ‘lives’ high or low on the learning curve. Almost every enterprise endeavours to differentiate its name, products or services from those of its competitors, even when it is a supplier of commodities. In the latter case the differentiation will often be on the basis of some property such as quality, delivery or service excellence or trade mark. In other words, an enterprise can enhance the value of its coal or maize or grapes, etc. by stringent quality assurance and/or being a dependable supplier. If one seeks value-based pricing however, differentiated products or services must be offered. Such differentiation can be achieved in a number of ways. The most obvious way is the creation of intellectual property such as patents, know-how, copyright and registered designs. The use of registered brand names (often protected by trade marks) is also an obvious, and in some cases, very successful differentiation strategy (just think of Coca-Cola, the foremost brand in the world). Even
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the locality of an enterprise, in a country or even within a city or town, is a means of differentiating it from its competitors. For instance, a restaurant located in a particular part of a city differentiates itself from similar restaurants located in other parts of the same city. The origin of products is often also synonymous with an image of superiority. Scotch whisky, Persian carpets, Kashmir wool products, French champagne, Waterford crystal and Delft porcelain are but a few examples of differentiation by origin. Kiwi fruit produced in New Zealand often carry little stickers with “New Zealand” on them, implying that they are superior in some way. Examples from South Africa are the use of the brand names “Outspan” and “Cape Fruit” to differentiate South African fruit in the European and other markets from those of competing countries. Terms such as Stellenbosch wines, Paarl wines and Breede River Valley wines provide a geographic differentiation of South African wines. PRODUCT DIFFERENTIATION AND THE LEARNING CURVE Virtually every type of product or service has its own version of positioning in terms of the learning curve. A few examples might be useful to illustrate the concept. Let us consider food supply services. On the commodity side we find street vendors who sell standard commodity products such as fruit, “pap and wors” or pies. Higher in the chain we find franchises that sell different types of fast food and restaurant and pub chains specializing in “family meals”. Increasing differentiation is found in ethnic restaurants (African, Italian, Indian, etc.) usually situated in a particular suburb of a town or city. The highest level of differentiation is usually found in the one or two high-priced restaurants specializing in “French cuisine” in a particular city. The image of “French cuisine” as representing the ultimate in food is so well established that the dishes and wines served during a state banquet for the Japanese Emperor by the British Queen were all French. Medical services range from rural community health clinics operated by nursing staff who provide some very basic services (commodities), through services provided by medical doctors who have standard medical practices in towns, to specialists offering highly differentiated specialist services usually only in the larger metropolitan areas. Consider watches. One can buy mass produced watches of little known brand names for very low prices. Somewhat higher differentiation is achieved by the Swatch concept and it achieves higher prices. Brand
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names such as Rolex are associated with uniqueness, quality and exclusivity, and price tags of many thousands of rand. In between one finds all kinds of other brand names and qualities of watches. Some cater for specialised groups, e.g. for divers or sportsmen, while others depend on flashy designs. Wine and whisky provide more examples. On the one hand, specific, well-known and old brand names are associated with the best wines and best whiskies and these attract huge price premiums. On the other hand, bulk supplies usually result in “no-name brands” of doubtful quality selling at low prices. In between there is again a whole range of wines, many from specific cultivars and cellars (in the case of wines) or malts and distilleries (in the case of whiskies) that offer a range of values for money. Similar examples can be developed for virtually all services and products - from the products that we use every day to more esoteric things such as art and music. Once we accept the concept that the learning curve is a useful tool, we can formulate a basic business truth: understanding the location of a product or service on the learning curve applicable to its industry, enables more rational analysis of the competitive strategies that could lead to higher prices. The better a product is differentiated, the higher will it be positioned on its industry’s learning curve and the better is its ability to attract price premiums.
TECHNOLOGY AND STRATEGIC POSITIONING I have shown that it is extremely important to take technology into account in LED. However, how do we find a simple way by which technological considerations can be brought into LED planning? Two concepts are generally used to describe broad technology domains: low technology (or low-tech) and high technology (or high-tech). Most people understand that technology is really a continuum ranging from very low technology to very high technology, but, nevertheless, find it useful to distinguish between these two broad technological domains. We must also accept that these two domains are not sharply divided but are separated by a somewhat fuzzy divide (Figure 7.2). The terms low technology (low-tech) and high technology (high-tech) can be used to create a way of thinking about technological choices in LED initiatives. For instance, it is tacitly accepted that low-tech refers to labour-intensive operations using little or no technology (i.e. little or no automation) whilst
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high-tech refers to technology-intensive operations employing cuttingedge technology and/or high levels of automation. LOWEST TECHNOLOGY
HIGH-TECH
LOW-TECH
HIGHEST TECHNOLOGY
THE TECHNOLOGY CONTINUUM
Figure 7.2 Defining the terms low-tech and high-tech The use of the two technological terms alone, however, is not sufficient to solve the problem of creating a useful mental model for LED planning purposes. It has to be further enriched. 25
Michael Porter suggested that there are really only two possible strategic positions for business enterprises: they either
UBIQUITOUS
DIFFERENTIATED PRODUCTS
COMMODITY PRODUCTS
ABSOLUTELY UNIQUE
THE PRODUCT/SERVICE CONTINUUM
Figure 7.3 The link between commodities and differentiated products
compete on the basis of differentiated products or services, or they compete on the basis of commodity products or services. There is also a fuzzy divide between commodity products or services and differentiated products or services (Figure 7.3). I have combined the low-tech/high-tech axis with a commodity products/services-differentiated products/services axis to form a “competitive positioning diagram” that I call the “Quad Tool” (Figure 7.4). It is a two-by-two matrix with four quadrants (I prefer to call them quads).
DIFFERENTIATED PRODUCTS/SERVICES
COMMODITIES
B
C
A
D
HIG
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LOW
HIGH TECHNOLOGY
Figure 7.4 The Quad Tool It allows one to delineate four basically different strategic positions: Quad A Strategic positioning to deliver commodity products or services using low technology or low automation. Quad B Strategic positioning to deliver differentiated products or services using low technology or low automation. Quad C Strategic positioning to deliver differentiated products or services using high technology or high automation. Quad D Strategic positioning to deliver commodity products or services using high technology or high automation. I will demonstrate that the Quad Tool is useful to analyse the competitive position of individual enterprises, or regions, or even countries. It is necessary to quantify the economic activities in each of the quads. Combination of this information with an understanding of the success criteria in each of the quads, allows more rational reflection about the existing and potential future strategic positioning of a local area. I will demonstrate these concepts in more detail in following chapters. But first we have to return to the question of resolving dilemmas in order to understand how the Quad Tool can assist us in LED.
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“Anyone knowledgeable about human societies can cite innumerable examples of societies that refused crops, livestock, and other innovations that would have been productive”. Jared Diamond
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RESOLVING THE JANUS DILEMMA The Janus dilemma means that South African political, business and community leaders, including LED practitioners, face very difficult choices: to employ cutting edge technology to enhance the competitiveness of local enterprises and sacrifice jobs in the process, or to protect jobs at the expense of less competitive enterprises and, therefore, run the risk of the eventual demise of those enterprises because of a lack of competitiveness? These are obviously very complex issues to deal with.
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Similar kinds of predicaments are often encountered in the business world when businesses seem to have only unwelcome alternatives in dealing with complex problems, e.g. the freedom-control or short-term long-term conundrums. In most business environments there is an inherent stress in the decisions of how much freedom to give and how much control to exercise in its operations or what emphasis to place on short-term goals and what on long-term goals. It is, therefore, necessary to examine how successful businesses deal with dilemmas and strive to reconcile the apparently irreconcilable. THE BUSINESS WORLD AND DILEMMAS 29 Charles Hampden-Turner addressed the question of how value could be created when businesses, or individuals, are forced to handle the conflict between alternate choices. The conventional way is to choose only one solution. Hampden-Turner said: ”Allied to this general approach is the vision of the leader as a dauntless decision-maker choosing between the life and death of the organization, agonizing at the lonely pinnacles of power before “cutting off” (decido) all options but the fateful, chosen path”. I submit that over decades, political and other leaders in South Africa have acted in this mould - their supporters either expected that of them, or they saw themselves in the role of “the dauntless decision-maker”. But is this the only way forward for the LED practitioner? 29
Hampden-Turner pointed out that there is also another, unconventional, way in which businesses, or individuals, choose. This is when they combine values in particular configurations, despite the fact that these values may initially clash and resist one another. HampdenTurner concluded that there are two forms of choice - choice as “eitheror” and “both-and”. We have to examine possible ways by which South Africans and LED practitioners can find reconciled solutions to the Janus Dilemma. To prepare the ground for my arguments, it is firstly necessary to examine more closely the either-or option of dealing with the dilemma. VISUALISATION OF THE JANUS DILEMMA 29 Hampden-Turner showed that the visualisation of dilemmas is very helpful in their resolution. Attempts to resolve dilemmas broadly involve four possible approaches as shown in Figure 4.1. We can: ignore the dilemma, choosing to abdicate the responsibility to find a reconciled solution, or,
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look for compromises, which by definition will provide a weak solution for either horn, or, end up in continuous conflict with neither side getting total satisfaction, but vehemently opposing the solution of the other side, or, actively seek a win-win (or 10,10) solution. Adopting extreme positions (only competitive enterprises [0,10] or only jobs [10,0] ) would not allow us to find reconciled solutions for the handling of the Janus dilemma. The 0,10 position means that we blindly adopt the new technologies without considering the devastation that could be wrecked on the South African economy as large numbers of additional people are made redundant by the introduction of machines (some people would maintain that this is what happened during “jobless growth” over the last decade). The 10,0 position means that we ignore the new technologies and continue with labour-intensive practices, which on the long run lead to the demise of uncompetitive industries and equally large unemployment or requires continuous isolation from the rest of the world and a shrinking economy. These two extreme positions represent the horns of the dilemma - ready “to impale” the LED practitioner.
Only competitive enterprises
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8,8 = Continuous conflict Competitive enterprises 5,5 = Compromise
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Figure 4.1.
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Visualisation of the Janus Dilemma (employmentcompetitiveness conundrum)
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Should the LED practitioner choose to ignore the existence and reality of the dilemma, he/she would provide no solution to the conflict between on the one hand the legitimate claims of the presently unemployed and underemployed to gainful employment, and on the other hand the legitimate claims of businessmen, entrepreneurs and investors to operate competitive and viable businesses. Like the Afro-Americans of the Deep South, we could then become the ignorant victims of the consequences of the Third Industrial Revolution. What about compromises? If we pursue the possibility of finding compromise (5,5) solutions, we have to remember that a compromise represents at best a fifty percent solution for either horn of the dilemma. The harsh realities of the global economy do not allow the luxury of 50 percent solutions. Trying to get to an 8,8 solution means that we risk having much conflict between the proponents of the two extreme solutions. Neither side will be fully satisfied, yet see their solution within grasp. The unemployed and underemployed will continuously be pitched against businessmen, investors, and the like. Government will be forced into making uncomfortable choices between the two camps, knowing that it cannot really pitch the one against the other - it needs to protect its support base and it needs a viable economy. The LED practitioner in South Africa has no choice but to look for reconciled, and win-win, solutions, or in other words, finding a 10,10 solution. For a win-win situation, he/she has to find a “both-and” solution, creating world-class enterprises and jobs at the same time. And if your workforce is relatively unskilled, you have to find low-tech means of achieving this. EXAMPLES OF DILEMMAS AND THEIR WIN-WIN SOLUTIONS The American Government The government structures of the U.S.A. offers one of the most useful examples of finding a 10,10 solution to a significant dilemma. The founding fathers who wrote the American Constitution were confronted by the question of how to balance presidential and congressional power. They created an elaborate system of checks and balances between these two powers in the structures of the American government. There system has been remarkably successful - for more than two hundred years neither a President nor the Congress has been able to grab
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totalitarian power in the USA. This example shows how a structural solution can provide a win-win situation. Balancing freedom and control in the business world Businesses and many other types of organisations struggle with the issue of balancing freedom and control (see earlier mention of this dilemma). Win-win solutions are often found in either time or in structures. For instance, a period of greater control can follow a period of greater freedom, or vice-versa. A “win-win” situation is, therefore, created over time. Structural solutions are also possible - by recognising that parts of an organisation should have greater freedom and other parts more control. For instance, it is inappropriate to manage the R&D activities of a business, which depend on creativity, in a highly structured fashion. However, the financial management procedures, which are subject to generally accepted accounting procedures and formal audits, must clearly be highly structured. Balancing conservation and exploitation South Africa has often been exposed to acrimonious debate on the dilemma of the conservation versus exploitation of natural resources. The case of dune mining at Richards Bay some years ago is a particular case in point. Some of the solutions proposed for this particular dilemma offered the potential of reconciled solutions. For instance, the CSIR pointed out that the disturbed dunes could first be mined and then be conserved. This would have made it possible to gain both benefits over time - exploitation and conservation. However, conservation was the solution that was adopted. This means that the mining potential is still there, and it is still possible that a future authority might succumb to the temptation to sacrifice the area’s natural beauty to the economic benefits of exploitation. The conservation/utilisation dilemma is also amenable to structural solutions. It is possible to decide that a part of a country will always be conserved, come what may. The rest of the country can then be utilised. In this way, both needs can be satisfied. However, like the case of the American government structures, this decision must then be totally enforced over time. For instance, in the case of the Kruger National Park, coal and other mining, cattle herding and the construction of commercial roads to link the Limpopo Province with Mozambique have been mooted from time to time. Because the Kruger National Park represents a part of South Africa that has been set aside for conservation, no mining, no cattle herding, no commercial roads should
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be allowed in a win-win solution, whatever economic and/or political arguments are made to the contrary. TOWARDS A WIN-WIN SOLUTION TO THE JANUS DILEMMA I have outlined the nature of the Janus Dilemma and the need to find win-win solutions that will allow us to use technology appropriately and to create large-scale employment. To examine the power of the Quad Tool to help us to resolve the Janus Dilemma, we have to examine the properties of each of the Quads. This is done in the following chapters.
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“Today, millions of African-Americans find themselves hopelessly trapped in a permanent underclass. Unskilled and unneeded, the commodity value of their labor has been rendered virtually useless by the automated technologies that have come to displace them in the new high-tech global economy”. Jeremy Rifkin
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THE BEAR TRAP OF QUAD A Enterprises located in Quad A use low technology and/or automation to offer commodity-like products and/or services to the market. When the economy of a country or region is predominantly based on enterprises producing commodities or providing commodity services by low-tech means, one could call it a Quad A country or region. Examples of such enterprises and countries are the low-cost textile and clothing manufacturers of countries such as Pakistan, India and China. SUSTAINABLE COMPETITIVE ADVANTAGE IN QUAD A 25 Porter has regularly reminded us that the only strategic position that enables a sustainable competitive advantage for enterprises focusing on commodity products or services is when such an enterprise can maintain cost leadership. The management of costs is, therefore, an absolute prerequisite for sustainable success in Quad A, even if the products or services are made or provided by low-tech means. The importance of low labour costs Because labour costs usually form a significant part of the total costs of low-tech operations, the maintenance of low labour costs is a major requirement for the delivery of price-competitive products or services by Quad A enterprises. This is a major reason why many commodity enterprises in industrialised countries have moved their production
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facilities to developing countries. For instance, Forbes Global wrote in 30 July 2000 as follows about Tetsuro Funai, Japanese billionaire and owner of Funai Electric, the world’s largest maker of VCRs and Lexmark printers: “What is his secret? Other Japanese electronics outfits, out of a combination of nationalism and loyalty to their employees, keep a large portion of their manufacturing in expensive Japan. He manufactures his goods at ultra efficient plants in China, where labor costs are already minimal.” 10
Jeremy Rifkin provided additional and important insights: “In the 1970s capital-intensive, highly automated production seemed to be linked to industrial economies like the United States, and the jobs that went offshore were low-tech, low productivity jobs like sewing blue jeans and assembling toys. Now with computers, telecommunications and new forms of cheap transport, highly advanced production has been successfully transplanted to third world countries..... that being the case, the cost advantage of cheap third-world labor is becoming increasingly less important in the overall production mix”. The implications of Rifkin’s words are that as computer-aided manufacturing develops, it will become possible again to manufacture cheaply in industrialised countries. This paints a dire picture for the developing world. The application of computer technologies in the production processes of commodity-like products and processes might make low-cost labourers redundant wherever they are! We might see modern versions of the Indian hand spinners being put out of business by events far away in the north of England during the First Industrial Revolution and over which they had no control whatsoever. QUAD A AND STRATEGIC POSITIONING Having most of the businesses in a particular locality positioned in Quad A is undoubtedly the worst of all possible worlds. Such enterprises have little or outdated technology at their disposal to produce commodities that are under price pressure. Their competitive advantage stems mostly from the availability of cheap human labour or natural resources. Yet they have many competitors providing similar products or services, and if the competitors’ cost structures are cheaper, there is little hope of survival. There is little to win in this situation. I can use many examples to illustrate extreme cases of Quad A activities. The mental model I use to remind myself of how desperate it can become to operate a Quad A business, derives from what I have
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seen in India - the pedi-cab transport services offered by rickshaws. Here you have a human being eking out an existence by providing the motive power to move another human being to a destination; and the rickshaw’s only competitive advantage may be in the decorations on his pedi-cab! Another example comes from South Africa. One often sees individual vendors offering in-season fruit such as prickly pears for sale next to main roads. Because these fruits are sourced from the veldt, it is easy for competitors to do the same. Hence, the vendor has numerous competitors offering the same product in the same area, often being willing to reduce their prices to make a sale. The nature of these opportunities offers the chance of survival at best, not that of building competitive businesses and lucrative and satisfying job opportunities. Developing countries and Quad A Why is the position of developing countries often so desperate? Most economies in the developing world are largely dependent on 19 commodities according to Fairbanks and Lindsay . Their enterprises are, therefore, mostly located in Quad A and they survive foreign competition in the global economy only behind walls of tariff and/or other protection - India being a prime example, especially during the period from 1948 to 2000. The governments of Quad A countries face many problems and dilemmas. If such a government decides on an export-led strategy to strengthen its economy and improve the lot of its citizens, it needs access to lucrative foreign markets. However, to achieve this, the government has to open its own markets, exposing its low technology and uncompetitive enterprises to merciless competition by foreign enterprises using world-class operations. Making its economy more competitive, requires changes in policies and investment in technology (moving from Quad A towards Quad D), which in turn requires the availability of investment funds. But its own sources of capital are limited and it has to approach foreign investors. These investors are demanding, requiring political stability and the free movement of money. The use of higher technology and automation in a Quad A dominated country makes people redundant and upsets unions and voters. Politicians are generally extremely aware of political realities. A new economic reality for such a government is that the logic of global competition demands that its enterprises have to be world-class to
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compete successfully in its own markets. However, becoming worldclass means rising unemployment which is an almost impossible political price to pay. Such a government and its politicians face real dilemmas. I believe in a simple dictum - all enterprises located in Quad A are at extreme risk, no matter in which country or locality they are located. Even if these enterprises are operating in an “economy of proximity”, they will have many competitors and this will drive sharp price wars. Enterprises operating in the “economy of globality” will have to be worldclass to survive. To need tariff barriers, sliding exchange rates and/or other government actions to remain competitive in your own markets, is not sustainable in the Knowledge Age and the logic of global markets. Protecting your enterprises by excluding foreign companies from your markets, leads in turn to being excluded from their markets. The choice is either being a participant or an outcast, ignored and forgotten by the rest of the world. This situation explains in part what has happened to Africa in the world economy. ESCAPING THE BEAR TRAP Strategic repositioning entails shifting a national or local economy away from Quad A to other quads. We have to consider what would be possible in most developing countries. A general lack of high technology skills, low investment in R&D in these countries and largely illiterate populations, preclude major and rapid shifts from Quad A to Quad C. Thus the only medium to long-term solutions possible for their problems should be sought in shifts to Quad B and/or Quad D. The business challenges involved Diversifying to Quad B Diversifying to Quad B involves a set of very difficult challenges. Jim 28 Utterback showed that there are two basic skill sets to consider in innovation: competence in product innovation and competence in process innovation. The former sustains the ability to compete in differentiated products and services, the latter the ability to compete in commodity products and services. Moving from Quad A to Quad B thus requires the acquisition or development of a totally different competence than that usually present in commodity-driven businesses. Meeting this challenge means in the first instance that business managers must enter unknown territory (and how can you give leadership in an area where you have little or no competence?). In addition, they face the possibility of defocusing and betting their businesses. For instance, I have often heard officials of mining
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companies in South Africa say: “We are only a bunch of miners”, really meaning: “You should not bother us with these outlandish ideas about value addition. We know how to get things out of the ground, not how to make things”. As a result, it is easier for the managers of commodity-based enterprises to stay in commodities and to consider the replacement of humans by machines, than to consider moving to differentiated products. In other words, a move from Quad A to Quad D is more “natural” than a move to Quad B. When a country’s or region’s economy is by and large dependent on commodities, the processes to keep the commodity-based enterprises competitive can in the modern computerised world only lead to an ongoing inability to create jobs and improve general living standards. This is bound to fuel acrimony between government and the business world. 18
Arie de Geus illustrated that some businesses endure for long periods, some even for centuries. For instance, Stora, a Swedish company, has been around for more than 700 years! In order to survive for such long periods, some of these companies had to change their total businesses from time to time. Under such circumstances, the management of an enterprise might have to consider moving from commodities to differentiated products, or vice versa. The lesson we can take from De Geus is that given that the commitment exists, it is possible to totally change the nature of a business. Crossing the chasm between a commodity-driven business to one based on differentiated products or services, requires leadership - leadership that can set direction, the ability to align staff and stakeholders to this direction, and the provision of continuous motivation and inspiration to staff and stakeholders to achieve the change. The leader must be willing to accept not only business risk, but also to risk personally, especially for his or her reputation. Secondly, the necessary product development skills must be acquired or developed to support the new strategic direction and culture. Thirdly, the necessary resources must be made available and plans be developed and executed. Managers who cannot act as change masters have little chance of success. It is, however, not impossible to achieve this as the following example shows. Diversifying to Quad D The more “natural” move for Quad A businesses to Quad D involves investment in technology and automation (or mechanisation). Thus,
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there is a requirement for investment funds to buy, acquire or develop the necessary equipment and/or technology. In addition, staff members need to be trained to use the new equipment or technology. When it is impossible to do in-house training, trained people have to be attracted from elsewhere. The colonial heritage of the developing world and its lack of high-class R&D facilities have often resulted in a long history of licensing-in of foreign technologies and the acquisition of overseas equipment. This has in certain cases stunted the development of own unique process technologies in developing countries, e.g. South Africa. The acquisition of foreign technologies often also comes at a price of being excluded from certain markets that the technology licensors keep to themselves or license to other licensees. Escaping the bear trap of Quad A is not for the timid business manager. The political challenge Politicians in developing countries who want to move their countries or regions away from being overly dependent on commodities, also face enormous challenges. A major move to Quad D will enable their commodity-based enterprises to use technology and automation to become globally competitive, but at the cost of replacing humans by technology and machines. This will bring about “jobless growth” and the ranks of the unemployed will be swelled. A major move to Quad B will require a new set of competences, i.e. the competences to conceive product ideas and to develop differentiated products or services. Such a move would not improve the sustainable competitive advantages of their existing commodity-based enterprises. This creates a new problem that must be resolved. As indicated in Chapters 4 and 8, dilemmas are not optimally resolved by choosing “either-or” solutions. This is also true in this case. The salvation of the LED practitioners in countries and regions populated by Quad A enterprises, must be sought by simultaneously moving existing commodity-based enterprises to Quad D to make and/or keep them globally competitive and by creating new enterprises in Quad B. A general shift of commodity-based enterprises to Quad D must, therefore, be accompanied by an additional shift to differentiationbased enterprises in Quad B. The strategies and policies of national, regional and local governments and authorities should aim to achieve these two shifts in concert. This will demand at the outset outstanding
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leadership from politicians and business leaders, particularly because they might have to fight labour unions all the way.
“Locked in a glass cabinet on the second floor of the 53rd Street branch of the New York Public Library sits a teddy bear. It’s a bit ragged-looking but it’s the foundation of a billion-dollar enterprise. This plaything belonged to the late Christopher Robin Milne, son of the English author A.A. Milne, creator of Winnie the Pooh. The Pooh Bear still provides plenty of comfort to his beneficiaries, thanks to the millions of dollars in royalties that flow into the Milne estate each year.” Louise Rosen, 2000
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QUAD B: OF GENIUS AND BUSINESS In the modern high-tech and global world, sustainable competitiveness in a low technology/automation environment sounds incongruous. Yet, 18 some reflection rapidly changes this view. Arie de Geus reminded us
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that there are many businesses that have endured over decades, if not centuries. By definition their sustainable competitive advantage could not have been based on high technology or high automation and, yet, they have endured for a long time. In addition, scrutiny of the lists of the world’s richest persons (as supplied among others by Forbes magazine) reveals that Warren Buffett, the investment guru is the second richest e.g. 33 individual in the world. Books about Buffett’s success reveal that his success is based on specific insights (or know-how) about investments, not on technology. The paradox of sustainable low-tech competitive advantage in an increasingly high-tech world requires further examination, particularly with regard to the unemployment problems being faced by South Africa and other developing countries.
THE LOW-TECH BUSINESS WORLD AMONG US Almost every country has many low-tech/low automation enterprises producing differentiated products or services. These often differ widely in the kind of products or services that they provide. Many of these enterprises have obvious sustainability since they have been around for 18 a very long time . Others are of recent origin. I have studied these businesses and concluded that the long-life Quad B businesses invariably have a number of underlying similarities. Stated differently, they use the same basic business model that results in competitive advantages that are sustainable over time. I will briefly outline the elements of the basic business model before discussing each element in greater detail. Building Competitive Advantages in Quad B Successful low-tech businesses with sustainable competitiveness usually have the following characteristics: Their products or services are more often than not elements of “good or gracious” living. These products or services help to create an ambiance that reflects the selfexpression of the user or they help to amuse, entertain or stimulate the user. These businesses are founded on one or more of the following: (i) outstanding human talent (or human excellence, a talent that cannot be duplicated by a machine) and/or (ii) know-how that can be protected over time and/or (iii) a natural or man-made attraction.
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However, just meeting the above requirement is not sufficient for enduring success. These enterprises must still be differentiated from others with similar products or services. One of the most powerful ways of doing this is through branding. The building of a strong brand name is, therefore, a critical success factor. There must also be a demand for these products or services, or it must be possible to build a demand. Their markets are often local but are increasingly global. Global markets are rapidly becoming more sophisticated. As a consequence, the production of high-quality products or services is also a prerequisite for success. The success of a brand is often associated with an image of quality excellence, leading to a need to excel in quality management. The sophistication of the global markets and sharp competition also drive a need for continuous innovation. This leads to improvement of products or services and the way they are packaged. Successful businesses are often, but not always, part of a geographic cluster of similar businesses. Outstanding marketing and logistics competences are necessary to create awareness of and to deliver the product or service to the market, wherever the market is located. World-class marketing and logistics operations are thus also prerequisites. Production levels of the product or service must be carefully managed to balance supply and demand in conjunction with pricing strategies. VALUE OF THE BUSINESS MODEL Does this business model provide new insights? I believe that the model explains the enduring success of old industries such as the wine, whisky, cognac, fashion and perfume industries as exemplified in enterprises and companies such as LMVH, Richemont, Swatch, Gucci, Hermés, Bulgari, Chateau Margaux, Nederburg and a host of others. It also explains the success of the publishing industry, the movie industry and the performing arts industries in cities like London and New York. Insight is provided into the restaurant, music, and tourism industries as well in the growing world sport industry. The success of many of the new financial service enterprises also seems to depend on the same model. Lastly, it also explains the enduring success of companies such as Coca-Cola or Royal Doulton - neither being a high-tech haven but both having added tremendous economic value to their shareholders or owners over a very long period. Let us examine the different drivers of the business model:
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Outstanding human talents Individual genius, abilities, skills and/or experiences are indispensable in Quad B. In many cases, the success of a venture is firstly and foremost dependent on these traits. Let us consider the Scotch whisky industry, which is centuries old. In the case of whiskies such as Glenfiddich, the 34 world’s top single malt Scotch whisky, the stilHMAn uses his equipment and experience to decide on the “middle cut” in the distillation process that will go into casks to be matured. Later on blending the malts of different years is the responsibility of the blender affectionately called the “Nose”, a person who is exceedingly skilled in and has the rare physical abilities to blend the malts from different years to produce a final product that meets the character and quality goals of the company. Without the excellence and skills of the still man and the blender, a whisky company’s existence could be endangered. Blending is also central to the production of all well-known blended whiskies, where a particular blend sometimes consists of 15 to 50 different whiskies. Thus, the whisky industry depends on the skills of its blenders, and so does the cognac, brandy and perfume industries. Outstanding designers form the nucleus of the fashion industry, outstanding authors that of the publishing industry, outstanding composers and musicians that of the music industry. Winemakers are central to the wine industry, and scriptwriters and actors to the movie and soap opera industries. Where would the professional golf, soccer, rugby, and tennis industries be without the abilities and skills of gifted individuals such as Tiger Woods, Vijay Singh and Ernie Els? In financial management services the name of Warren Buffett is held in awe. His skills have made him one of the richest individuals in the world and turned his company, Berkshire Hathaway, into a top company in global 35 comparisons . Pop stars become famous and rich and disc jockeys and the hosts of talk shows rivet the attention of large audiences. Machines cannot (yet) duplicate these outstanding human talents; hence, the latter's’ pivotal role in business sustainability in Quad B. Just consider the words of Bernard Arnault of the multi-brand company LMVH: “Transforming creative ideas into products that are successful from a business standpoint requires a very special talent. We have to mix these two very different universes, the entrepreneurial and the creative. .... The creative universe is full of irrationality and unpredictability, but if you are in our business and do not live in and with it, you fail.”
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The human talents central to Quad B are enduring. Authors do not conceive their ideas differently today than a century ago, neither do artists. This is also true for chefs, wine makers, whisky and perfume blenders, etc. Although their sporting equipment might have been improved, the sporting talents of today’s athletes are basically the same than athletes of earlier decades. What is in an attraction? To experience in person the Grand Canyon or African wildlife, one has to go to Arizona or Africa. To see the fjords of Norway in person, you have to go to Norway. Millions of people visit cities such as New York and London every year to experience their theatres, museums, architecture, shops, etc. Unique attractions, natural or man-made, therefore, confer the opportunity on countries or regions to exploit these through tourism. Tourism being essentially low-tech is, therefore, a Quad B industry. It is also one of the growth industries of the world and in a specific locale, tourism can endure as long as the attraction(s) and the necessary support systems for handling tourists are maintained in an adequate fashion. Equally, if a country wants to start a tourism industry, it must have some natural or man-made attractions, and the necessary tourist support infrastructure must be developed and maintained. When you have know-how Proprietary knowledge or technology is another basis for enduring success in Quad B. A chef does not share his secrets for a special sauce with the world, yet the sauce is the outcome of a “technology” - his recipe to make it. A winemaker does not tell his secrets for producing outstanding wines. An author does not share all of the secrets of how he/she conceives and executes ideas for a book, or a musician those for a piece of music. Coca-Cola has not shared the secret of the composition of its syrup with the world for more than a century. This know-how has provided the platform on which to build the strongest brand in the world. And when India some years ago wanted to exact the secrets of the Coca-Cola recipe for the privilege of Coca-Cola having access to the large Indian market, Coca-Cola chose to withdraw from India! The Lambeth Studio of the Doulton Company in Britain grew from a handful of people in the 1860s to 200 by 1880 and doubled again by 1900. By then it dominated decorative pottery in the world. New ways of
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firing and the production of exotic glazing or new colours were constantly pursued. For instance, a distinctive cobalt blue glaze was given the official name of ‘Doulton blue’ at the Vienna Exhibition of 1873. The know-how created by the Doulton Company was an important part of its success. The man-machine interface It is necessary to understand the man-machine interface of Quad B enterprises. Although an outstanding human talent or an attraction or know-how forms the basis of these enterprises, it does not mean that automation/mechanisation or high technology plays no role at all. In fact, to achieve operational effectiveness, the activities supporting the former factors are often highly automated or use advanced technologies, e.g. automated bottling plants in wineries and distilleries, modern presses in book publishing, etc. Improved sport equipment, e.g. advanced materials in shoes, clubs or racquets assist modern sporting heroes. Nevertheless, the primary differentiation of Quad B businesses is still conferred by either human talents or know-how or an attraction or a mixture of the above. It is not conferred by technological means. A faster and more efficient bottling plant does not produce a better wine neither does a better printing press produce a better book. Technology enhances operational effectiveness, not strategic differentiation. The power of combination When an enterprise is able to combine two or more of creative genius, natural or man-made attractions and know-how, its competitive advantage escalates rapidly. The genius of Andrew Lloyd Webber combined with London’s theatre infrastructure has resulted in musicals that enthral audiences for years. The genius of the golfing greats at the Masters on the Augusta golf course rivets audiences year after year, not only at Augusta, but also in front of TV screens around the world. The genius and know-how of the top chefs of the world are manifested in culinary creations that captivate clients in restaurants located in the world’s top cities. Los Angeles remains a preferred destination for established and budding actors, reinforcing Hollywood’s role as the primary location for major movie houses. The Disney enterprise’s theme parks combine the creativity and know-how of artists, writers and technologists and specific locations in California, Florida and France. The combination of pottery artistry with know-how of glazes and colours is important in the success of the Royal Doulton Company. But that is not enough
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Even if the above prerequisites are in place, it does not mean that success will naturally follow for individual enterprises or countries. Success demands still more. What is in a brand? Because of the importance of marketing in Quad B, branding is an imperative. It can take different forms. It can be tied to a company name, e.g. Coca-Cola or Royal Doulton, an individual, e.g. Christian Dior, Luciano Pavarotti or Tiger Woods, or even a geographical location, e.g. Scotch whisky or French wine. The marketing skills of sport promoters and television stations excite the public about sporting events such as the World Cup of soccer, the Trinations or Five Nations rugby competitions, the major golf championships, and Wimbledon, the American Open and French Opens in tennis. Sport has become a major Quad B industry all over the world and its major events have been neatly branded. The modern sporting heroes have become major brands themselves. Apart from their obvious links to the sport they excel in, their names are used to sell all kinds of other products and services. Surely, if Tiger Woods or Ernie Els lend their names to a product it must be good! The origin of products is often synonymous with an image of superiority. Scotch whisky, Persian carpets, Kashmir wool, French champagne, Waterford crystal and Delft porcelain are but a few examples of differentiation by origin. This type of “informal” branding is often crucial to sustainable success in Quad B. Scotland has acted to prevent other countries from producing “Scotch whisky”. France fights the use of certain French wine terms, such as champagne and grand cru by foreign wine makers. The European Union negotiated robustly with South Africa to stop using the terms port and sherry for products that South Africa has been producing for more than 125 years. The EU considers these terms to be the exclusive domains of Portugal and Spain. Formal brand names are equally important in Quad B. The Coca-Cola brand name is known worldwide, worth a fortune (the value of Coca-Cola 37 brand was estimated in August 2003 at $70.45 billion and is assiduously protected, and so is many other brand names. The marketing genius of Sir Henry Doulton created the Royal Doulton brand that protects a business that has prospered for more than a century. Just think of the respective values of the Gucci, Pierre Cardin, Christian Dior, Glenfiddich, Remy Martin, Bally, Chateau Margaux and Robert Mondavi brand names. For example, the market capitalisation of LMVH,
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Richemont, Swatch, Gucci, Hermés and Bulgari, the top purveyors of luxury goods in the world, was $65 billion in 2000. Linking the potential of human genius, natural or man-made attractions and/or know-how to well-known (and protected) brand names creates enormous barriers to entry for competitors and provides the ability to ask and receive high prices. A brilliant wine under an unknown label will not attract the same price as a good wine under a well-known label, and the same is true for authors, whiskies, cognacs, perfumes, etc. Thus, being able to market Quad B products and services under a specific brand name is an important driver of success in this Quad. Is there a market? Successful enterprises in Quad B must in the first instance have a product or service that is marketable. This means that there must be a market for the product or service, or it must be possible to develop a market. A century ago, brandy and soda, and not whisky and soda, was the preferred drink of Victorian England. The Phylloxera infestation of the French vineyards around 1880 created an opportunity to market Scottish whisky to the English market. The whisky blenders and distillers seized 34 this opportunity . John and Thomas Dewar, James Buchanan and Sir Peter Mackie, to name a few, achieved the successful positioning of their whisky brands, Dewars, Black and White and White Horse in the English market. By the end of the 19th century, whisky had gone from a parochial drink to one of broad appeal. Johnnie Walker whisky got to be known throughout the world through the ‘merchant venturer’ system goods were entrusted to the captain of a ship who would sell them overseas on commission at the best price he could get. Finally the whisky companies took it upon themselves to promote their own products overseas and their representatives made world tours to set up agencies in many countries. Thus whisky became an international 34 drink . Sir Henry Doulton, a forward thinking, energetic and entrepreneurial Victorian business man turned a well established business that produced earthenware sewage and water pipes into a world famous name linked 31 to art pottery . Henry Doulton was first approached by John Sparkes, head of the newly formed Lambeth School of Art, in the late 1850s with the proposition that some of the students should be allowed to try their hand at potting. After some time, Doulton agreed and a corner of the Doulton factory was set-aside for the artists. Doulton understood that his factory’s goods had to be marketed and he was ahead of his time as a
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publicist and was quick to realise the value of the exhibitions that were organised all over the world in the 19th century. He never missed an opportunity to display his firm’s goods - for instance, Royal Doulton exhibited at the London Exhibition of 1862, the Paris Exhibition of 1867, the London International Exhibition of 1871, the Vienna Exhibition of 1873, etc. The firm’s success at international exhibitions continued into the 20th century. In most cases, but not all, marketing is actively and often extremely innovatively pursued by successful Quad B enterprises. Outstanding marketing is a key to successful sales of perfume, whiskey, cognac, books and music. An image of mystique and an air of exclusivity are often created. The allure of a perfume, the “super abilities” of an athlete, the exclusivity of a wine or a creation by a top designer, the genius of an artist, the legendary skills of an investment adviser, etc. are skilfully used by marketers to create wants in the markets being targeted. The mystique results in endurance over decades - it is now still as fashionable to sip Glenfiddich as decades ago. How does the person in a far away country who has never had a whisky know that a particular brand is suitable to offer his guests? The marketers tell him/her and he/she trusts their message. Quality Quality has become a major differentiator of low-tech products. The success that quality management has conferred on enterprises has been e.g. 38 described by many . Quality management often accompanies brand management as a means to aid a strong differentiation between low-tech enterprises. The importance of good living Many Quad B products can be linked to “good or gracious living”, i.e. the satisfaction of the higher human needs. Stated differently, these products help people to express themselves. For instance, a hostess who buys candles to create a special ambiance at her dinner table is expressing herself by this action. The products reflect her values and world vision. The same can be said about the use of many products based on art. Some products aim to entertain. Music and musical shows, soap operas and sporting events (live or televised) are examples. A person must have achieved a certain income level before the attendance of sporting
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events become possible. People fighting for survival do not drink expensive wines or whisky. They do not use perfume or have the time or resources to read books, or to buy art. They do not go to expensive restaurants. On the plus side, as the average living standard of a country increases, the markets for Quad B products expand. World-class logistics Many Quad B enterprises produce all of their products in a single, or at most, a few venues. However, they market their products all over the world. For instance, all Glenfiddich’s whisky is produced in a single location in Dufftown, Scotland, but is marketed in more than 180 countries. Glenfiddich has to influence the prospective buyers in all of these countries and to do this, they have to understand how to position their whisky in terms of the wants, needs and cultures of each country. This is not a trivial exercise. In addition, their logistics system have to be able to get the product to the market in balance with demand. Must all be geniuses? If success in Quad B is largely based on outstanding human talents, does this mean that everybody active in this sector has to be a gifted human being? The answer is clearly no. In fact, one or a small group of talented persons can create or sustain the employment of a lot of other people. For instance, the winemaker is central to the employment of the people who grow and harvest the grapes, those who work in the winery and those who man the distribution and marketing systems. He and other winemakers create the conditions for wine competitions and the people who organise them, the wine judges, wine magazines and writers, etc. In short, they create work for many others. The chef is central to the employment of waiters and other support staff in a restaurant. A collection of restaurants in a city creates the potential for magazine articles about the best restaurants, etc. Sport stars enable the employment of a host of people involved in the lucrative sport industries. The success of one sport as a television spectacle means that others can also be pursued. New sport industries, employing thousands of persons, make it possible to worldwide follow English, German and Italian soccer or South African, New Zealand and Australian rugby. Innovation and Quad B
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Innovation is also an important component of sustainable success in Quad B. Outstandingly successful Quad B enterprises have a record of success in innovation. A prime example is the Doulton Company, which not only allowed artists the freedom to produce what ever they chose to 31 do, but also encouraged experimentation with colours, glazes, etc. Individual sport stars and teams innovate constantly to improve their chances of success, and so do fashion designers, chefs, winemakers, and other gifted individuals. Many Quad B enterprises are small or medium-sized, occur in specific geographic locations, and have to compete for market share in hotly contested markets. This drives continuous improvement of their product or service ranges. Awards and other means of comparison of different products often further enhance innovation. This is very true for the wine and restaurant industries, but extend further. Whilst visiting an arts and crafts market in Accra, Ghana, I was very aware of how keenly artists located in stalls next to one another, were observing my choices regarding their competitor’s goods - this would obviously later influence their own product offerings. I have also been watching for a decade or longer the innovation in product offerings of wood carvers in Mpumalanga, South Africa. For instance, the use of bright colours as a means of differentiation was first practised by a few, then more, and now has added an important additional means of artistic expression and product differentiation. A visit to the museum of the Coca-Cola Company in Atlanta, U.S.A. illustrates that marketing innovation is a crucial part of Coca-Cola’s success. When know-how that endures over time forms the basis of business success, one can expect that innovation in the production system and marketing of the products will become an important part of achieving operational effectiveness and business success. Business sustainability in Quad B Sustainable competitiveness is possible in Quad B as discussed above. The model for success is becoming clearer. Individual entrepreneurs and businessmen, national and regional governments, and LED practitioners in the developing world, can use the model to create or enable the creation of robust and sustainable low-tech businesses. Protection of human talents, natural or man-made attractions, or knowhow is central to sustainability and, thus, long-term protection of the employment and livelihood of many.
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“MIT [Massachusetts Institute of Technology] is a hotbed of technological innovation, having spawned more than 4,000 companies, which employ 1.1 million people and have annual sales of $232 billion.” Dick Schmalensee, Dean, Sloan Business School
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QUAD C: HIGH-TECH HEAVEN Quad
C countries, regions or enterprises produce differentiated products or services, using high technology and inputs of “knowledge workers”. High-tech products or services, largely produced in the triad of the USA, Europe and Japan, command tremendous price premiums. This is illustrated in Table 11.1 by comparing the price commanded by different products per mass of the final product. It is clear that when the “knowledge content” of a product rises, it uses fewer natural resources relative to its price. High-tech countries are, therefore, less and less dependent on the natural resources offered by the resource-rich countries.
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Table 11.1. Added value of certain products Product satellite jet fighter super computer jumbo jet semiconductor colour TV standard motor car cargo ship
Added value per kg (2000 Rand) 250 000 32 000 21 000 4 400 1 250 200 60 13
THE AMERICAN GOLDILOCKS ECONOMY By the end of the twentieth century, the “Goldilocks” economy of the U.S.A. was about nine years old - an unprecedented and continuous expansion that started in April 1991. This remarkable surge in the U.S. economy was led by Quad C enterprises and ushered in the postindustrial society. It was soon dubbed the “new economy” and its nature and the reasons for its existence were debated hotly. Whatever the outcome of these debates, the American economy was the envy of most of the world. Two broad trends supported the “new economy” - the globalisation of the business world and the revolution in information technology, especially the digitisation of information. The transcendent digital technology, dependent on knowledge workers, has created new companies and new industries at a staggering rate. Just consider the history of Silicon Valley 39 as sketched by BusinessWeek . In just 40 years, this 80-kilometre-long corridor had grown to host one-fifth of the world’s biggest electronics and software companies. The market value in 1997 of some $450 billion of its publicly held companies was close to that of the entire French stock market, and by far exceeded the market values of Hollywood ($56 billion) and Detroit ($113 billion). The magazine, Forbes Global, regularly lists technology’s 100 richest people. As Microsoft, rocketed to a $165 billion market capitalization (more than the GDPs of Chile, Guatemala and Costa Rica combined) in only 22 years, its founder Bill Gates became the world’s wealthiest individual. Oracle, Intel, Dell, Hewlett-Packard, Gateway 2000, Motorola, Cisco, Intuit, and Sun Microsystems are but a few of the Quad
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C enterprises that helped to spawn technology’s wealthiest individuals in the late 1990s. Viagra, Pfizer’s new impotence drug, burst on the scene in 1998. Within a month it was clear that the drug would be a blockbuster and would achieve sales of $10 billion a year. Other drugs in the pharmaceutical pipeline are being developed to control everything from minor irritations like baldness and wrinkles to debilitating diseases such as arthritis, memory loss, and incontinence. These new lifestyle drugs could turn the pharmaceutical industry into an engine of economic growth rivalling the information technology sector. Differentiated products created by information technology or the biological sciences provided the engine for the surge in growth of the U.S. economy in the 1990s. Even the confluence between biology and information technology added to Quad C business opportunities. For instance, some companies exploit extensive DNA libraries and databases through specially developed software. Subscriptions to such databases can cost about $5 million a year, and many pharmaceutical companies are benefiting from such services. NOT ONLY THE UNITED STATES The impact of high technology was not limited to the U.S. economy. In the United Kingdom, the economy boomed in 1997 and 1998 and its hottest growth came from strong, home-grown industries such as pharmaceuticals. Entrepreneurship also blossomed in the hallowed halls of Britain’s universities. Technology and life science businesses were mushrooming around universities in London, “Oxbridge” and Edinburgh, creating “millionaire dons” in the process. In small Finland, cellular technology spawned not just Nokia but also jobcreating start-ups that have boosted employment opportunities. Germany’s SAP had soared to global dominance with its powerful software that can run all aspects of a business - from order taking to factory accounting. For instance, SAP’s R/3 runs the back offices of about half of the world’s 500 top companies and a $20 billion industry has grown up around SAP, comprising consultants, trainers, specialists, and hundreds of software makers who sell add-on programs. The small island of Taiwan was transformed in forty years from an agriculturally-based economy to the world’s largest supplier of a long list of high-tech gear: computer monitors, modems, motherboards,
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keyboards, power supplies, scanners, pointing devices, desktop and notebook computers. Taiwan’s success in becoming a major export nation depended largely on the establishment of many small Quad C businesses. The Taiwanese government did not draw up elaborate economic plans. Instead they invested heavily in science and engineering education, and funded semiconductor and computer research projects. As the government-funded research projects began to produce results, they were sold to private entrepreneurs.
EVEN IN SOUTH AFRICA And in South Africa, the sale of Thawte Consulting in 1999 to Verisign, an American Internet company, for $575 million, startled the South African business world and public. In a few short years, Mark Shuttleworth created the kind of wealth that has taken South Africa’s foremost business families many decades to achieve. He proved that Quad C success is possible even in developing countries. How did he do it? Mark Shuttleworth did not sell traditional assets such as land or plant to Verisign. He had launched the world’s first crypto web server, Sioux, in 1996 and simultaneously established the first non-US based certifying authority. Thawte became a global provider of digital certificate products, services and solutions that create security, privacy and authentication in electronic commerce. Thawte grew into the world’s second largest Internet certifying authority in just two years, with a global market share of 42%, offices in South Africa, the U.S.A., and representatives in 20 other countries. These “knowledge assets” are what Verisign paid such a large sum of money for. WHAT OF FRANCE? The story in France in the 1990s is different to that of the U.S.A. To finance the bloated public sector in France, social charges for employers were among the highest in the world, and corporate taxes were on the rise. That plus a suffocating level of state regulation, sent a wave of French entrepreneurs fleeing to Britain and the U.S.A. As a result, France was relatively deficient in the new, fast-growth industries such as biotechnology. WHAT DRIVES SUCCESS?
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Because of differing success rates in different countries, it is necessary to understand the criteria for success in Quad C. I use the American success in Quad C as an example. Reflection shows that it had a number of important drivers: Open financial markets Entrepreneurial and creative abilities are probably randomly distributed around the world. But opportunities for those abilities to blossom are not randomly distributed. The open access to capital, not natural resources or luck, is why the U.S.A. is the most prosperous and powerful nation in the world. The U.S.A. has created a system in which anyone with talent and energy has access to the financial resources needed for success. And entrepreneurs have flocked there from all over the world and achieved success. Lists of Forbes Global of the 400 richest Americans, regularly contain the names of many foreign-born people. Banks, venture capitalists, underwriters and stockbrokers in the U.S.A. do not care much who your grandfather was or whether you went to college. All they care about is if they can make money by backing you. That is not true in Japan, Brazil, France or even Germany. Giant banks and giant corporations dominate their economies and their governments involve themselves to a greater or lesser extent in the capital markets. When governments do not interfere In contrast to the U.S.A., governments in Asia, Latin America, Africa, and, to a lesser extent, Europe, have always controlled capital markets. If a single party rules its supporters and family members get the loans. This is true in Latin America, Africa, and even Japan. Those with strong entrepreneurial urges but no connections have no option other than to move to places where political and family contacts matter less and brains and ambition count for more. In this way, the U.S.A. gets the entrepreneurial cream of virtually the whole world. The link between open financial markets and entrepreneurs is nothing new. It happened in the Italian city-states of the Renaissance and in Amsterdam in the 17th-century. Scotland, after its free-trade agreement with England in 1707, opened its financial markets. Within a few decades, Edinburgh and Glasgow were transformed from dowdy towns into centres of trade and learning. Later London, as part of the British Empire, became the most significant financial market in the world. When the U.S.A. offered even greater openness towards the end of the previous century, the foreign-born swarmed to the U.S.A. and created
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whole new industries - e.g. the retailing, garment trade and the movie industries. If it is so simple, why have other countries not opened their financial markets to all like the U.S.A.? The answer is simple and cynical. If you make capital open to all, you threaten the privileges of ruling establishments. From ancient times, those in power have kept a stranglehold on capital markets, demonstrated once more in the East Asian collapse in 1998 or in the recent history of Zimbabwe. The importance of venture capital The open financial markets of the U.S.A. have spawned a large venture capital industry. More than $50 billion per annum has been invested during the 1990s by venture capitalists in the U.S.A. Although other countries, particularly in Europe, are starting to increase their venture capital, the U.S. is still the world leader by far. The void between sources of funds for innovation and traditional, lowercost sources of capital available to ongoing concerns is filled by venture capital. This requires that the venture capital industry provides a sufficient return on capital to attract private equity funds, attractive returns for its own participants, and sufficient upside potential to entrepreneurs to attract high-quality ideas that will generate high returns. But in addition, venture capitalists are looking for managers with good potential in particular industry sectors. By investing in areas with high growth rates, venture capitalists limit their risks to the ability of the company’s management to execute. Entrepreneurs who are good managers and leaders will have a stronger negotiating position than those who don’t - investment in them will be seen as a more prudent risk. What do venture capitalists avoid? More than 80% of the money invested by venture capitalists goes into the “adolescent phase” of an industry’s life cycle. Venture capitalists avoid both the early stage of development, when technologies are uncertain and market needs are unknown, and the later stage, when competitive shakeouts and consolidations are inevitable and growth rates slow dramatically. The adolescent phase of development of an industry is characterised by the appearance of many new products and an industry standard does not yet exist. This phase is obviously dependent on a core competence in product development. The
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shakeout phase indicates that the industry standard has been decided and that the future belongs to those companies that can provide the best value for money whilst delivering the industry standard. This, as illustrated before, requires a core competence in process technologies. Venture capitalists do not invest in this stage. Stated differently, venture capitalists invest in Quad C ventures, but only if the initial market and technical uncertainties have been overcome. They want to be certain there is a market for the specific type of product or service. Once the industry standard for a product becomes evident the improvement of its manufacturing becomes the focus of innovation. This drives it towards Quad D. Venture capitalists do not invest in Quad D products and services. They, therefore, invest in core competences in product development, not in core competences in process development. Initial Public Offerings (IPOs) and share options Taking his company public is part of the dream of every entrepreneur. By the mid-1990s during the “technology bubble” in Silicon Valley, one company went public every five days on average, and 62 new millionaires were created every day. IPOs also form an important part of the strategies of venture capitalists and the timing of IPOs is crucial to the whole process. The issue of share or stock options is closely tied to IPOs. Many of the Quad C companies offer their staff share options, which can make them inordinately rich. For instance, Microsoft had by the late 1990s created twelve of the hundred wealthiest individuals involved in technology companies in the U.S.A. Fostering entrepreneurship and technical excellence Outstanding universities have played an important role in the Quad C success of the U.S.A. The universities of New England, North Carolina, Texas and California have been particularly influential. For instance, Stanford University professor Frederick E. Terman encouraged William Hewlett and David Packard to turn their idea for an audio oscillator into a company. The resulting company, Hewlett-Packard, became the forerunner of the powerhouse of companies that populated Silicon Valley with new technologies. Stanford University and the University of California, Berkeley played major roles in creating a talent pool and a spirit of entrepreneurship to feed the needs of Silicon Valley. Entrepreneurs who have had business success, often provide donor ships in the form of finances or time to the universities where they studied. This in turn strengthens the willingness and ability of these
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universities to foster technical excellence and entrepreneurship. Immigrant entrepreneurs seeking to benefit from the U.S. venture capital system also strengthen the talent and entrepreneur pool of the U.S.A.. Innovation Innovation is also a main driver of new Quad C ventures. The U.S. has the best R&D infrastructure in the world. The financial support for R&D by the U.S. government and existing businesses enable researchers and technologists in universities and corporate laboratories to do the R&D that spawns new innovations suitable for commercialisation through new ventures. Super-competitiveness in the information technology industry greatly enhances this innovation. In addition, the dream of entrepreneurs to succeed as others fuels competition and innovation. Culture Culture is a prime determinant of success in Quad C environments. For instance, in Silicon Valley, the competitive and “can-do” culture was a huge part of its success in the 1990s. Traditional ways of doing business were turned around. The “can-do” attitude is linked to a total belief in digital technology and its future. Risk-taking is the norm and the only penalty is not for failure but for the lack of trying. People rarely care in Silicon Valley about your education, your ethnic background, your family pedigree, what you wear or how old you are. What matters is how smart you are and the ideas that you can create. THE VIRTUOUS CYCLES OF QUAD C It is, therefore, possible to identify a number of interacting virtuous cycles that drive success in Quad C in the U.S.A. It is important for the LED practitioner to understand these virtuous cycles in order to evaluate Quad C opportunities in a particular geographic area. The financial cycle. An open financial market gives rise to a venture capitalist industry. This industry is willing to invest in new ventures and it supports the management and operations of these ventures. If some of the ventures are successful opportunities are created for IPOs. Successful IPOs in turn support the growth of an open financial market. The innovation cycle The U.S.A. has some of the best universities in the world, many of which foster technical excellence and a spirit of entrepreneurship. This has created a talent pool of technically proficient entrepreneurs who are
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eager to take innovations into new ventures. Some of the successful ventures have become world-class companies and in turn many provide donor ships of money and time to support the universities, completing the virtuous cycle. The talent pool is strengthened by entrepreneurs who have been involved in ventures, people who come from the large companies with ideas for new ventures and immigrants. The government receives taxes from enterprises and provides, together with the worldclass companies, the highest levels of R&D funding in the world. This R&D results in innovations that are suitable for venturing. There is super competition for success between individuals, and between new ventures and existing companies. This fosters unbelievable levels of effort and outstanding innovations. The culture cycle A “can-do” culture fosters a willingness to risk and enter into new ventures. The fact that some of these ventures succeed, strengthen the stories and myths about the Information Age, and this strengthens the “can-do” culture and all it entails. LESSONS FROM QUAD C SUCCESSES The lessons from Quad C are simple. Any country or region wishing to emulate the American success in Quad C will have to ensure that it has all of these elements in place. Half measures will not be good enough. Entrepreneurs wishing to attract funding from venture capitalists have to innovate in the right industry and exhibit excellence in management and leadership. “From working with modest if ingenious tools and techniques, we have become masters of great machines and invisible forces. Putting aside magic and superstition, we have passed from tinkering and intelligent observation to a huge and growing corpus of scientific knowledge that generates a continuing flow of useful applications.” David S. Landes, 1998
12 EFFICIENT, AUTOMATED QUAD D
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At the end of the Medieval Era, the stage was set for the wholesale 9,10
conversion of economic life to machine power . The First Industrial Revolution then started a process in which man was replaced by machines. Machines, unlike man, were rapid, regular, precise, and tireless. These qualities of the original steam machines and their later offspring meant that over time and in industry after industry, companies would replace human labour with machines. During and after the First Industrial Revolution, steam power dominated. In the Second Industrial Revolution, oil started to be important and then electricity was effectively harnessed. The Third Industrial Revolution emerged after World War II. The “thinking machines” of the Information Age are now being harnessed to automate industry after industry to increase productivity and profitability. In 1999, I spent a few days at the Hannover Fair, a major window on the state of the German industry. Amongst others, the Fair focused on technologies for factory automation. If ever I doubted the existence of a trend in the replacement of human beings by machines, the Fair removed my final doubts. Science and engineering are now bundling a multitude of different technologies to create the “smart” machines of the future that will run manufacturing enterprises virtually without the aid of humans. Michael Cox and Richard Alm commented in their book, Myths of Rich 40 and Poor : “We have a tremendous stake in allowing the churn to grind forward, putting our labor resources to work raising living standards, to give us more for less. We can’t get around it: The churn’s promise of higher living standards can’t be reaped without job losses. No amount of wishful thinking or dazzling new policy can make it otherwise.” This means we must understand the dynamics of this quad in order to be able to plan for and handle its consequences. THE DRIVERS OF SUCCESS IN QUAD D What are the drivers of the quest for higher efficiencies? Cost leadership If you offer commodity-based products or services, cost leadership is the only way to create a sustainable competitive advantage. This forces commodity companies towards greater efficiencies and, amongst others, increased investments in automation. Machines can do more than humans. They do not tire, go on vacation or strike. The smarter the machine, the more it can diagnose its own problems and even call for
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help. A case in point is the installation of smart lifts in buildings. These lifts are telephonically linked to a service company. When a sensor detects the start of a problem, the service company is notified. The problem is often rectified before the owner of the building even knows about it. Commodity producers have, therefore, to worry continuously whether their operations are world-class. This is true whether they produce commodity products such as steel, gold, wheat, maize, standard automobiles or household goods, or commodity services such as fast foods or hotel accommodation. These enterprises have to invest to improve their processes, particularly by the automation of their operations and the improvement of their processes. Re-engineering the workplace In the 1980s, many companies faced by increasing competition from abroad and greater competition within each industry at home, searched for new ways to cut costs and improve market share and profits. They increasingly turned to the new computer and information technologies for help and started to explore business process re-engineering (BPR). 2 Michael Hammer, one of the fathers of BPR, expressed the belief that BPR will for a number of decades have a significant impact on many industries - there is a lot of human inefficiency in the world that can be improved by better organisation or be replaced by machines. BPR focuses on processes. It is, therefore, more of a Quad D technology than of any of the other quads, and is particularly effective in improving the processes of those companies with commodity-based products and services. Falling commodity prices As we entered the new millennium, the quest for improved abilities to produce more and more with less and less, has lead to a worldwide competitive crunch for the producers or manufacturers of commoditybased products and services. The prices of commodities went into a downward spiral during the 1990s, putting enormous pressure on many companies and countries, and enhancing efficiencies. This situation has not been reversed to any great extent to the present. Globalisation Globalisation is seen as an unstoppable force. In the global logic, countries have to open their markets to the products of others if they
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want to be able to market their own products in the other countries. The consequences for commodity producers are that they have to be globally price-competitive even to compete in their own home markets. It is impossible in the long run to hide behind tariff barriers and other means of protection. The export imperative The economies of resource-rich countries, particularly developing countries, are often primarily based on the export of natural resources. Without the export earnings, these countries would be in dire economic straits. These economic realities influence the behaviour and decisions of businessmen and politicians. THE SYSTEMIC CYCLES OF QUAD D If we view the above from a systems thinking point of view, we can isolate four cycles that combine to create the complex total Quad D system:
The cost leadership cycle. As the cost leadership of a company comes under pressure, its margins deteriorate and stakeholder satisfaction decreases. This impacts on the mindset of business managers and forces business strategy reevaluation in order to enhance operational efficiency and cost leadership. The Business Process Reengineering (BPR) cycle If a company’s cost leadership is not threatened, there is little reason to change its business strategy and to consider BPR as a means of improving its competitive position. However, if its competitive position is threatened, the reason for considering BPR increases in line with the threat. In Quad D enterprises, BPR focuses on four broad areas for improvement: (i) new or improved staff competences as influenced by training programmes, (ii) new or improved business processes, (iii) investment in plant and equipment, and (iv) increased automation (as a subset of the former). Increasing the operational effectiveness of Quad D enterprises often requires process improvements because this is the only option to stay globally competitive. This in turn requires investment in a new or
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modified plant. The investment funds must be recovered from margins. The shareholders portion of profits is usually limited given the fact that Quad D enterprises require large investments in new or improved equipment. Decisions to automate can also be influenced by labour union activities, (e.g. strike levels), political implications (automation is politically unpopular in countries with high unemployment rates) and potential capital costs. For instance, if strike levels become debilitating, the level of automation will increase or the company will move elsewhere. The actions of a militant communist labour union in Japan led to precisely such a situation. During the 1960s, there was unrest in many of Japan’s electronic firms, including Funai Electric, due to the demands of this labour union. When the labour union would not ease up, Tetsuro Funai, owner of the company and now a leading Japanese billionaire, decided to move his manufacturing base across to China where he built ultraefficient manufacturing plants and used low-cost labour. The company is now the world leader in the manufacturing of VCRs. The competitor cycle The cost management position of a commodity-based enterprise determines its cost leadership position and its ability to survive at particular commodity prices. The level of competition to which it is subject, also influences the prices it hopes to earn from its commodities. With more competition, the lowest cost producers will lower their prices in order to out-compete their rivals. Benchmarking the abilities of its competitors, including the levels of their automation, is an important influencer of management’s mindset and the assessment of its need to change business strategies. The political cycle The need to earn foreign currency from the export of natural resources forces politicians to accept increased automation of resource-based companies despite the negative impact on employment figures. This dynamic was well illustrated in South Africa over the past decade when politicians such as Minister Alec Irwin regularly explained why restructuring of many South African enterprises, with concomitant loss of jobs, was necessary to increase their competitiveness. The need to earn foreign exchange by means of globally competitive enterprises exceeded the pain of large numbers of jobs being lost in the restructuring process.
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THE FRUITS OF SUCCESS Scrutiny of the lists of the world’s richest persons (as supplied among others by Forbes Global) reveals that the richest family in the world still comprises the heirs of Sam Walton. Sam Walton’s fortune was made by 32 creating WalMart, the large American superstore . This enterprise is the archetype of a Quad D enterprise. There is an absolute focus on efficiency and all processes and systems are aligned to achieve ever higher efficiencies. The wealth of the Walton family attests to the potential financial success of this business strategy for owners of such enterprises. However, the loss of jobs is the price that the rest of society pays. THE COMPLEXITY OF QUAD D The integration of the above cycles illustrates the complexity of Quad D, an issue that must be understood by LED practitioners. Success in this quadrant is not simple, explaining why large, process-driven companies usually populate this quadrant. These companies are increasingly multinational enterprises and their operations span the globe. They are locked in fierce price competition with their global competitors. No wonder small local companies in developing countries have little chance to compete successfully on price with these multi-nationals. 19
Michael Fairbanks and Stace Lindsay asked: “Why has the developing world had such a difficult time creating wealth for the majority of its citizens? The reason, we have come to conclude, is that the traditional way of competing is flawed; leaders in the developing world must find new ways to compete in a global economy. But before they can hope to pursue these new ways, we need to clearly understand the limits of the old.” This is also true for LED practitioners. For example, LED practitioners operating in rural South Africa are often confronted by the fact that the economies of many rural communities are based on Quad A and Quad D enterprises, especially in the agricultural sector. As farmers get crunched in a “price-cost pincher”, their only resort is to increase their farms’ productivities by increased mechanisation of operations. In the process, these enterprises move from Quad A towards Quad D. This contributes to farm workers being replaced by machines. The redundant workers usually move to towns where they swell the number of unemployed job seekers. A case in point is the southern Cape of South Africa where I live. The mainstay of the local economy is the production of agricultural
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commodities, particularly grains, wool and milk. During 1990 to 1997, the population growth rate in this rural area was minus 2,1% per annum whilst it was 3,0% per annum in the towns. The depopulation of the rural area and the increased urbanisation process exacerbated the need to create jobs in the towns but little value was added locally to the primary agricultural products. The economies of the towns are primarily dependent on the agricultural sector and the loss of agricultural workers reduce the markets of local businesses. The overall dynamic was a decline in the economies of the towns and increased poverty overall. The above dynamics raise two issues that are important to the LED practitioner, particularly in locations and regions where economic activities are forced to shift from Quad A to Quad D. THE BROADER INFLUENCE OF TECHNOLOGY I have described how the use of automation and mechanisation move farming enterprises from Quad A to Quad D. However, the LED practitioner must also understand that technology renewal has had a broader impact than merely automation and mechanisation. The history of farming in the southern Cape illustrates that improvements in transport technology opened new opportunities for grain farmers; they could send their produce to new markets. However, in these markets they were subject to the competition of farmers from elsewhere and subsequent price squeezes. Because they delivered agricultural commodities their only competitive advantage resided in cost parity or leadership. This was sought by seeking better economies of scale (i.e. increasing the size of farming operations) and automating and/or mechanising operations. Smaller farmers went under and were bought out by larger farmers. Farming operations became increasingly more technologically complex. This trend is continuing with the adoption of minimal tillage practices that use complex equipment to minimise the input costs of grain farmers in order to maximise profits. Improvements in communication technologies (first the telegraph, telephone and radio, later television and fax, and now computers and Internet) have also enabled the farmer to be absolutely informed about markets and market trends world-wide. For instance, the South African grain farmer now competes with grain farmers in America, Canada, the Ukraine, Argentina, Australia, etc. and he must be informed about their operations and markets.
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CONCENTRATION OF WEALTH The LED practitioner in an area dependent on commodity producers is faced with a significant dilemma. The application of new technology to move Quad A operations to Quad D (e.g. automation and mechanisation in the case of grain farming) leads to fewer owners of important economic assets of a community whilst at the same time fewer workers find employment in that economic sector. These owners may become wealthier in the process as illustrated by the growth in the wealth of the Walton family. However, many workers may at the same time lose their jobs and become a burden on the rest of the community. If the LED practitioner succeeds in convincing a Quad A owner not to adopt technological means to maintain or improve his enterprise’s competitiveness, the enterprise will probably succumb to competition. If the enterprise is assisted to improve its technology, jobs will be lost. I have pointed out earlier (Chapter 9) that this is often also an issue at a national level. Resolving this issue is “a wicked problem”; there is no single correct answer to the problem.
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“Why has the developing world had such a difficult time creating wealth for the majority of its citizens? The reason, we have come to conclude, is that the traditional way of competing is flawed; leaders in the developing world must find new ways to compete in a global economy. But before they can hope to pursue these new ways, we need to clearly understand the limits of the old” Michael Fairbanks and Stace Lindsay, 1997
13
NATIONS AND TECHNOLOGY CHOICES I
have shown earlier that some nations are more competitive than others. I have also shown that the strategic positioning of a nation is often the consequence of technological or other choices made consciously or unconsciously. Here we must keep in mind that to not make a choice is indeed making a choice. If a country or region decides for political, cultural, educational or whatever reasons, not to pursue a specific technology, then it has made a choice and will eventually enjoy or suffer the consequences of that choice. A hot debate developed about the issue whether national striving and intervention in the economy of a country are appropriate. The economist Paul Krugman abruptly dismissed the idea: “the views are based on a failure to understand even the simplest economic facts and concepts.” 11 David Landes on the other hand, was more circumspect: “... yet the proponents of state intervention have not surrendered. We are talking here of two goals, power and wealth; and two ideals, distributive justice and impersonal efficiency. All of these hang together. Each has its own appeal, constituency, and justification”. Landes added: “The issue presses in those countries where enterprise is wanting. In a world of rapid change and international competition, can society afford to wait for private initiative? Look at the role of the state in such exemplary countries as Korea, Taiwan, and even Japan: triggering, sheltering, and guiding nominally free market enterprise.” Landes also reminded us: ”State intervention is like the little girl who had a curl right in the middle of her forehead: when she was good, she was very good; and when she was bad, she was horrid.“
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If we accept that national (or for the same matter regional or local) government’s intervention could be desirable, a new question arises: how to know what economic balances to strive for? The Quad Tool is an aid to help us understand by allowing fairly simple comparisons to be made easily of how different nations (or regions) position themselves strategically. I use some examples to illustrate the concept. THE USA The U.S.A. is strong in both differentiated and commodity products and services. Stated differently, it possesses product as well as process technologies and competences. The exploitation of its mineral and oil resources by means of sophisticated technologies and a service sector that provides wide-ranging basic services, mean that the country is strong in Quad D. American agriculture is probably the most advanced in the world and it exports many agricultural commodities – it also has many Quad D enterprises. In addition, the chemical and other industries in the U.S.A. are highly effective producers of chemical commodities, also giving it strength in Quad D. America is leading the world in many of the “Information Age” technologies, e.g. aerospace technologies, computer and software development, biotechnology, etc. Therefore, it also has outstanding strength in Quad C. Its strong economy also requires the presence of a strong service sector. Many of these enterprises are positioned in Quad C (e.g. outstanding universities, business consultancies, R&D laboratories, etc.). Despite the successes in Quads C and D, many American businesses are positioned in Quad B and are supported by the strong economy. For instance, the professional sport industry in the U.S.A. is very strong. World-class athletes like Michael Jordan and Tiger Woods command huge contracts for their services. It is also not surprising that outstanding foreign athletes flock to the U.S.A. to benefit from the strong sport industry - e.g. in tennis, golf, basket ball, baseball, athletics, gymnastics, etc. The U.S.A. also has a strong wine industry. Hollywood is the leading location for the world’s movie industry. Designers and artists of all kinds, chefs and financial wizards flock to its major cities. In addition, suppliers from outside the U.S.A meet some of the demand in the U.S.A. for Quad B products and services. For instance, French wines, Russian caviar and even Zimbabwean sculpting are sold there.
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The strong economy stemming from strengths in Quads B, C and D in the U.S.A. also created a demand for Quad A services. For example, Forbes Global mentioned that experienced nannies can demand extraordinary wages in Silicon Valley, and even gain stock options because both parents of small children are often involved in start-up companies. The strong economy also created a huge demand for the Quad A services of gardeners, waiters, security guards and other service people. The Quad Tool illustrates that the U.S.A. has undoubtedly the most balanced economy in the world (Figure 13.1). It teaches us the importance of balance in an economy, whether it is a national or regional economy. A second lesson is the importance of strength in Quad C. In the U.S.A., such strength generates demand for products and services from all the other quads, adding to their success, not only in the U.S.A. but also in other countries. INDIA After British rule ended in India in 1947, political leaders such as Gandhi and Nehru selected economic development strategies based on labourintensive operations. The Indian economy became highly regulated and mostly closed to foreign competition. In time local corporate dynasties emerged. Without having to respond to consumer demand because of exclusive access to government licenses and plenty of regulations to keep competition at bay, these new conglomerates thrived. The resulting lack of innovation and the choice to go for labour-intensive industries resulted in India being strongly positioned in Quad A. Fifty years later there was a growing tendency to admit that the extreme focus on labourintensive activities (Quad A)
Differentiated Products/services
Commodity Products/services
B
C
Strong
Strong
A
D
As needed
Strong
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High
Low Technology
Figure 13.1 Strategic positioning of the U.S.A. according to the Quad Tool
had not been to India’s long-term advantage; it stagnated when other Asian countries, including populous China, not only caught up with it, but surpassed it by far.
Differentiated Products/services
Commodity Products/services
B
C
Relatively weak
Growing
A
D
Long time focus
Relatively weak
High
Low Technology
Figure 13.2 The strategic positioning of India according to the Quad Tool
There is now in India a move away from Quad A. For instance, the Indian chemical, pharmaceutical and textile industries are increasingly focusing on the effective production of commodities, and in this quest, automation is becoming more prominent. This means a move towards Quad D. The success of the Indian software industry has become legendary and the dream of Indian youngsters. The Indian software industry’s export earnings in 2000 were in the order of U.S.$6.3 billion, almost 15% of India’s total exports. This industry expected to gross $87 billion by 2008, with $50 billion coming from exports. It also expects to employ an additional 2.2 million “knowledge workers” by 2008.
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Why is India successful in Quad C? A history of Tamil mathematics and outstanding training and outstanding education in cities such as Bangalore, have resulted in large numbers of world-class Indian software engineers, a fact utilised by many multi-national companies. For instance, India’s universities are pumping out 122 000 engineering graduates a year, and the number reaches nearly 1 million when the graduates from polytechnics and computer training institutes are included. India, thus, has been deliberately strengthening its Quad C capabilities, and is reaping the rewards in terms of export successes. A large part of the Indian economy is, nevertheless, still positioned in Quad A. A very large part of the Indian population and many of its small businesses are involved in manufactured goods, some also for export purposes. Some of these products are differentiated on the basis of Indian designs or unique skills. However, most of these products are commodities, competing only on price. Few, if any, of the world’s best-known brands are Indian. The picture that emerges for India is that of an unbalanced economy skewed in the dominance of Quad A enterprises. However, there is a healthy and growing strength in Quad C, and some development in Quad D. One of the major challenges for India seems to be to concentrate on the rapid and further strengthening of its Quad B industries according to the success criteria for this quad.
TAIWAN No one would have predicted in 1949 that in the late 1990s Taiwan would prosper whilst its Asian neighbours were going through a deep economic crisis. Before and during World War II, Taiwan had been occupied by the Japanese and this had created a typical colonial and agricultural society largely dependent on the production of commodities such as rice. Then the Nationalist army of General Chiang Kai-shek withdrew from the Chinese mainland and settled in Taiwan, adding large numbers of people to its already sizable population. With no natural resources and an agriculturally based economy, the country’s prospects were dismal. However, Chiang Kai-Shek did not just bring soldiers. He also brought some civil servants, intellectuals and a handful of businessmen. These
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administrators took over from the departing Japanese colonial bureaucrats. The new government followed a strategy of “progress 41 through stability”. According to Yu-ming Shaw , Taiwan mapped out a steady path from agriculture to light industry to heavy industry, and achieved a lot of success. Then in the early 1980s, technocrats in the Taiwan government realised that the island’s move from poverty to prosperity based on low-cost and labour-intensive manufacturing of consumer items such as garments, toys, footwear and sporting goods, would not sustain the drive to greater prosperity. Taiwan had by then reached full employment and further gains would have to be made in a different fashion. Stated differently, it had to move its economy away from Quad A domination. The Taiwanese government did not draw up elaborate economic plans. Instead it invested heavily in science and engineering education and funded semi-conductor and computer research projects. As the government projects began to produce results, they were sold to private entrepreneurs. The government had also established the Hsinchu Science Park in the late 1970s and this was followed recently by another science park in the city of Tainan. Taiwan followed a decentralised economic model. Whereas giant firms today dominate Japan and Korea, Taiwan is packed with thousands of agile, entrepreneurial manufacturers of high-tech equipment. Each company focuses on doing one or two things very well and they sustain the world’s best low-cost high-tech manufacturing base. Unlike the Japanese and the Koreans, the Taiwanese do not compete with their own brand names. They partner any foreign firm seeking efficient, lowcost high-tech manufacturing. Forbes Global: “The small island is the world’s largest supplier of a laundry list of high-tech gear: computer monitors, modems, motherboards, keyboards, power supplies, scanners, pointing devices, desktop and notebook computers. No wonder Taiwan’s treasury bulges with foreign reserves...” Taiwan’s success in becoming a major export nation started in the 1950s by moving from commodities (Quad A) to differentiated products produced by many small businesses in Quad B. Two decades ago they started concentrating on high-tech products (Quad C), but also positioned to become the world’s best and lowest-cost manufacturer of high-tech equipment (moving towards Quad D) (Figure 13.3).
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To achieve success in Quads C and D, Taiwan realised the importance of outstanding education and research and development. They have built a series of outstanding universities, but they also followed unconventional approaches. This can be illustrated by a personal experience. Two colleagues from the South African CSIR and me, visited Taiwan in the early 1990s. The purpose of our visit was to learn from their strategic management approaches. Within the first days of our visits we detected a refrain that emerged regularly in our discussions - a reference to the “overseas Chinese as a national asset”. When we asked why this common refrain, the following story was told. When Taiwan was confronted in the 1960s by the fact that many of its best students were leaving the country to study in the U.S.A. and were then remaining in that country, a solution for this problem was sought. The solution illustrates the patient and long-term approach evident in the success achieved by Taiwan – the Taiwanese government decided to make sure that the best students go to the U.S.A. Our informant told us: “Because they were Chinese we knew that one day they would return to Taiwan, bringing technology and money with them”. This is precisely what happened and the “overseas Chinese” became an important cog in their long-term planning and eventual success in the high-tech world.
Differentiated Products/services
Commodity Products/services
B
C
Relatively Strong
Strong
A
D
Strong
Growing
High
Low Technology
Figure 13.3 The strategic positioning of Taiwan
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Taiwan’s experience illustrates the powerful influence of “good” government intervention in achieving a balanced economy. It supports the case for planning a road to the future, and it shows that patience has to be exerted in achieving some of the long-term goals. The Taiwan example also illustrates the power of focusing on good education and strong R&D. Instead of abandoning “overseas Chinese” or labelling them as part of a “chicken run”, this group was carefully nurtured as a future source of technology and competitive advantage. SOUTH AFRICA’S POSITION? Contrary to Taiwan, the development of the South African economy was not a result of a planned approach, but rather a result of the random exploitation of the country’s natural and mineral resources. For instance, 42 Fine and Rustomjee showed the extent to which the South African economy is dependent on mineral commodities. I did a Quad analysis some years ago of the South African economy using economic data from 1996. It was based on a 1998 sectoral report 43 of the IDC reporting on 79 different sectors of the South African economy. The quad performance and strategic positions in 1996 of the various economic sectors are presented in Table 13.1. Table 13.1 Quad performance of the South African economy in 1996 Quad
No. of sectors
Value addition (%)
Export earnings (%)
Employment (%)
A B C D
40 19 4 16
15.6 21.3 16.0 27.7
16.2 13.2 5.6 67.9
27.5 19.0 8.6 18.2
Value addition to employment ratio 0.57 1.12 1.86 1.52
Forty of the sectors or sub-sectors were located in Quad A, 19 in Quad B, only four in Quad C and 16 in Quad D (Table 13.1). Therefore, fiftysix of the sectors or sub-sectors (those in Quads A and D) dealt essentially with commodities. Only 23 sectors or sub-sectors dealt with differentiated products and some only marginally so. Employment opportunities related to commodities One reason for understanding the Quad distribution of South African industrial sectors is the link to employment creation. In the 1996
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analysis, Quad D was the main value adder (~ 28%) to the South African economy but supplied fewer than 20% of the employment opportunities. This amply illustrated the nature of this quadrant, namely the production of commodities with higher machine-intensiveness and lower labourintensiveness. Given its machine-intensiveness, Quad D was also a significant importer. Because there is a need to further increase the machineintensiveness of this quad in order to remain globally competitive, it would be inadvisable to base a significant part of the nation’s expectations of sustainable job creation on the expansion of this quad (yet this is what the government’s growth strategy seems to aim for). Nevertheless, the quad is vitally important in the earning of foreign exchange as reflected in a very high export to employment ratio of 3.73. As such, the activities in this quad must be protected and nurtured. Quad A, the other producer of commodities, contained the largest number of sectors or sub-sectors and was the largest source of employment opportunities (27.5%). However, given its size, it contributed only about 16% of the value added to the economy and to exports. Its low value addition to employment ratio supports the contention that this sector cannot be the most important platform of an effort to improve the average living conditions of South Africans because it offers little opportunity to create jobs paying high wages. It could, however, be used to create labour-intensive, but low pay, employment opportunities. The South African government, however, resists such a strategy. A conundrum is that much of agricultural commodity production in rural areas falls in this quad and this limits the degree to which the living standard of rural communities can be elevated (this issue is discussed further in the next chapter). Quads A and D together comprised all of the commodity producers in the country. They added just over 43% of the value in the economy, produced about 45% of the employment opportunities in the country and produced about 86% of the export earnings. Some sectors of the economy, e.g. the mining sector, have to a great extent moved to Quad D. Anyone who has been down a gold mine must have been impressed by the vast logistic operations involved, exemplifying the process-based nature of such enterprises. No wonder that commodity-based companies such as Anglo-American, Harmony and Goldfields are dominant players in the international world of mining.
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Even South African agriculture is increasingly moving to wards Quad D as explained in the previous chapter. Export success after 1996 The export performance of the South African economy after 1996 was quite remarkable, almost tripling in Rand terms to the end of 2002 (Figure 13.4). It is important to establish which quads contributed to this export growth. An analysis of export data available on the website of the Department of Trade and Industry showed that the Pareto principle applies. Twenty out of almost a 100 sectors of the economy contributed just over 84% of all exports in 2002. A SOUTH AFRICAN EXPORTS 350,000,000 300,000,000
RAND (000)
250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 0 1996 1997 1998 1999 2000 2001 2002
Figure 13.4 South African exports during 1996 to 2002 ranking of the latter sectors (Table 13.2) according to an export ratio (2002 exports divided by 2000 exports) showed that Quad B sectors lead recent growth in South African exports - five of the first seven sectors were Quad B sectors (or had some Quad B components). Quad D was also prominent in export growth, but Quads A and C were relatively insignificant contributors. Consideration of how the two leading export sectors (based primarily on motor vehicles and wines respectively) achieve product differentiation is revealing. South African manufactured automobiles
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Automobiles have largely become a commodity product and differentiation is, therefore, crucial to business success. The South African automobile manufacturers are part of, or are associated with, large international automobile companies. They, therefore, make use of established and strong international brands (e.g. Mercedes-Benz, BMW, Volkswagen, Toyota) and international distribution systems to gain a share in worldwide markets. This strategy will work as long as the parent companies are willing to manufacture part of their worldwide production for export in South Africa. Because they also have manufacturing facilities elsewhere, or could establish them reasonably easily, it is not a foregone conclusion that South Africa will remain a preferred manufacturing location over the long term. The country will only remain attractive if local manufacture contributes to the competitiveness of international automobile companies. The government’s Motor Industries Development Plan (MIDP) that has made local manufacturing Table 13.2 The top twenty South African export sectors (Rand billion)
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SECTOR OF THE ECONOMY Motor vehicles and components Beverages & spirits (including wines) Plastics & plastic materials Machinery Fish and crustaceans Furniture
2002
2001
2000
Quad
11.959
2002/ 2000 1.92
22.907
17.388
4.822
3.408
2.616
1.84
B
3.539
2.747
1.987
1.78
D
20.272
17.517
11.399
1.78
B
2.925
2.182
1.700
1.72
A
B
4.952
3.384
2.882
1.72
B
Wood and wood articles
3,794,916
2,612,097
2,231,026
1.70
A+B
Mineral fuels & mineral oils Edible fruits and nuts
30.431
26.095
18.608
1.64
D
6.259
4.724
4.049
1.55
A
Organic chemicals
4.070
3.142
2.635
1.54
D
Aluminium and aluminium articles Ores
9.686
7.306
6.323
1.53
D
11.468
9.058
7.547
1.52
D
6.708
5.544
4.498
1.49
B
4.435
3.928
2.983
1.49
D+B
Electrical machinery and equipment Paper and paper articles Inorganic chemicals
6.508
5.077
4.414
1.47
D
Precious ores
61.224
46.835
41.991
1.46
D
Articles of iron or steel
3.683
2.733
2599
1.42
D
Iron and steel
24.988
18.008
18.892
1.32
D
Other unclassified goods
30.318
29.866
26.048
1.16
-
Wood pulp
2.996
2.722
3.309
0.91
D
operations attractive to the international companies, has, therefore, been an important reason for the export success of the motor vehicle industry.
South African wines Although local vineyards account for just 1.5% of the world's vineyards, South Africa ranked in 2002 as number eight in volume production of wine and produced 3% of the world's wine. About 350 000 people were employed both directly and indirectly in the wine industry. This included farm labourers and those involved in packaging, retailing and wine tourism. The latter employed some 48 000 people in 2002. In 1999 the
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wine industry contributed 9.7% (R14.6) billion to the Western Cape’s gross geographic product and some R3.5 billion was generated indirectly through wine-tourist activities centred in the Winelands. Exports of natural (i.e. non-fortified) bottled South African white wines for the 2001 calendar year reached 114.6 million litres, an increase of 23% on the previous year. Exports for the same period of bulk white wine were at 61 million litres, accounting for 35% of exports by volume. Despite a shortage of red wines, export sales of bottled reds grew for the year to 56.3 million litres, an increase of 27%. Countries where bottled export sales of South African wines reflected significant growth for 2001 compared with 2000, were France where exports increased 93% and Canada where exports grew 49%. These magnificent achievements were realised during a strong downturn of the world’s economy! How do the wineries differentiate themselves? A part of differentiation is done by the selection of the type of wine that is made. South African wineries are increasingly focusing on five noble varieties: Cabernet Sauvignon, Merlot and Pinotage, and Chardonnay and Sauvignon Blanc, although Shiraz plantings are also on the increase. Another important part of the differentiation is due to the fact that each winery that exports bottled wines is uniquely identified through its trade name. Stated differently, a Vergelen wine can never be a Van Loveren wine, or vice versa. As a wine’s reputation of being good value for money is built, the name and competitive advantage of the winery is strengthened. Another differentiator is the vintage because no two years are precisely the same. Lastly, the excellence of the manager of the vineyards and of the winemaker combine to fulfil the promise of each harvest, and these differ from winery to winery. Wineries are increasingly taking part in international wine exhibitions and competitions, thereby building their brand names and reputations. Wineries are able to create tremendous and sustainable competitive advantages. No wonder that you find wineries in Europe that are more than 700 years old. Strategic positioning of South Africa The changes in the repositioning of Quad A South African enterprises since 1996 is summarised in Figure 13.5. The continuing restructuring of the economy in the 1996 to 2003
Differentiated Products/services
B
C
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Commodity Products/services
A
D
Figure 13.5 The changes in the strategic positioning of South Africa in 1996 to 2003 period resulted in many Quad A enterprises becoming more technologyintensive and moving towards Quad D (shown by the heavy horizontal arrow). However, in the process many jobs were sacrificed. Sadly, there were few, if any, specific government policies to allow the strengthening of Quad B, either by creating new Quad B enterprises or refocusing existing Quad A enterprises (shown by the light vertical arrow). It was also impossible to reposition Quad A enterprises in Quad C given the need for highly trained human resources in Quad C enterprises. This requirement could not be met from the relatively poorly trained workers made redundant in the restructuring of the South African economy during this period (shown by the blocked diagonal arrow). The use of the Quad Tool to analyse South Africa’s strategic positioning leads to at least one startling conclusion. It might perhaps behove the South African government to amend its growth policies to enable those Quad A enterprises operating in the “economy of globality” to move to Quad D as rapidly as possible. Such a move would, however, be at the expense of further job losses. The government must, therefore, also put policies in place to foster the specific development and growth of Quad B enterprises. Such a dual approach (also discussed in Chapter 8) could provide a “both-and” or win-win solution to the Janus Dilemma faced by the country.
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“[L]arger numbers of people from more points on the globe than ever before have aggressively come forward to participate in history. They have left behind centuries, even millennia, of obscurity in forest and desert and rural isolation to request from the world community – and from the global economy that links it together – a decent life for themselves and a better life for their children”. Kenichi Ohmae
14
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LOCAL AUTHORITIES AND TECHNOLOGY CHOICES Although the previous chapter built the case of the utility of the Quad Tool in analysing the strategic positioning of a country, the LED practitioner can still question its utility for examining the strategic positioning of a region or municipal area. To illustrate that it is indeed useful to apply the Quad Tool in such cases, I will use two examples to illustrate the concept. Firstly, I will provide some information about the so-called “industrial districts” of Italy. Secondly, I will examine the challenges of a rural South African local authority INDUSTRIAL DISTRICTS IN ITALY Whilst economies all over the world went into recession and stagnation in the late 1970s and 1980s, a few localities stood out as exhibiting 44 remarkable resilience and even growth . Several districts in Italy were part of this phenomenon and it is worth taking a closer look at them. The so-called Italian “industrial districts” specialise in particular 44 products . For instance, Sassuolo in Emilia Romagna specialises in ceramic tiles, Prato in Toscana in textile products and Montegranaro in Marche in shoes. Cento in Emilia Romagna is a centre for mechanical engineering, Nogaro in Veneto specialises in wooden furniture and Canneto sull’Oglio in Lombardia makes toys. The reasons why they are 44 successful have been studied extensively . The success of the Italian “industrial districts” does not derive from large vertically integrated corporations with internal resources and the ability to reap benefits from economies of scale and market. On the contrary, small, often family-owned, businesses linked together by an articulated division of specialisation are the mainstays of success. They produce differentiated products, mostly by low-tech means. According to my criteria, they house mostly Quad B enterprises. in 44
Brusco explained that parts Italy were underdeveloped in the 1950s and early 1960s and possessed quite a number of small artisan firms producing goods destined to be replaced over the next 20 years by mass-produced goods. These enterprises operated in areas such as clothing, pasta making, blacksmithing and carpentry. The enterprises were labour-intensive, paid low wages and used low technology. The
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economy of southern Italy at that point in time was, therefore, largely based on Quad A enterprises. A gradual evolution to “industrial districts” then took place. An Italian “industrial district” typically is a small area in which there are some 10 000 to 20 000 workers and around 1 000 to 3 000 firms that are vertically integrated, often operating within a single industrial 44 cluster . Some of the small firms use technologies comparable to those of larger firms and achieve high efficiencies even if wages are low. The district is characterised by horizontal competition amongst firms but vertical integration. Brusco said: “Competition occurs among equal firms, i.e. firms working on the same product or the same activity. Thus, there is a great deal of horizontal competition, in the sense that firms, which do lathing, compete readily with one another. Conversely, there is considerable vertical co-operation with firms that do drilling or planing. Thus firms which are different are ready to work together, while firms which do the same thing compete strongly against one another”. 24 Porter indicated that these characteristics are typical of so-called industrial clusters. Some regions in southern Italy became economically very successful and according to the criteria of the Quad Tool, many of their businesses are now located in Quad B. Their history illustrates that it is possible to move a regional economy from Quad A domination to Quad B domination. THE HESSEQUA MUNICIPAL AREA (HMA) I live in the southern Cape of South Africa and have been closely involved in the LED activities of the Hessequa Municipality. This is a rural area with an economic base (according to ‘standard’ economic analyses based on the SIC code, Table 14.1) dominated by Quad A enterprises. The economic growth rate of the HMA has for some time been lower than the population growth rate. The Gross Geographic Product (GGP) per capita is only about R16 000 per capita, far below the average GNP of South Africa, and is declining over time. Table 14.1 The main SIC sectors of the economy of the Hessequa Municipal Area Sector
Agriculture
Contribution to Gross Regional Product 52%
Contribution to employment 33%
Growth rate 1990 – 97
Quad
-1.4%
Mostly A, few
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Mining 10% 1% -1.2% Manufacturing 1% 6% 0.3% Electricity 1% 1% 3.9% Construction 1% 11% -1.8% Trade 7% 11% 1,9% Transport 13% 3% 3.8% Finances 7% 3% 2.7% Services 7% 24% -0.6% Other 2% 8% 1.3% * Through the supply system of Eskom, the national electricity supplier
D A A D* A A A B, some D A -
However, the standard SIC classification (Table 14.1) does not provide full insight into the regional economy. For instance, the coastal towns of the HMA are very dependent on tourism and the holiday industry (many people from elsewhere own holiday homes in these towns). Many retired people have also settled in the coastal towns. SIC analyses provide little insight into the ‘holiday/tourism’ and ‘retirement’ industries. Application of the Quad Tool is useful in developing further insight into the local economy and its potential future development. Its strategic position and LED options The strategic positioning and the LED options of the HMA are summarised in Figure 14.1. In essence, the strategic position of the HMA is analogous to that of South Africa as a whole. Its economy is skewed towards a dominance in Quad A, weaknesses (but also potential) in Quads B and D, and an absence of significant strength in Quad C. Let us examine the different parts of the HMA economy.
Differentiated Products/services
Commodity Products/services
B growing
C absent
Growing through tourism, holidaymaking & lowtech value added products
Largely absent
A strong
D limited
Dominated by agriculture, mining and transport
Limited to some farming operations and electricity supply by Eskom
High
Low Technology
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Figure 14.1 The strategic position of the LMA Quad A in the HMA Quad A in the HMA is dominated by agriculture, construction, mining, transport and a large service component (e.g. the Hessequa Municipality and the municipal services it supplies). Agriculture, the mainstay of the economy, is focused on commodity products, particularly grains (wheat and barley) and animals (sheep, ostriches, cattle). The value of agricultural output shrunk during the period 1990 to 1997, just before a serious drought struck the area, putting further pressure on farming operations. This resulted in two important dynamics: (i) farmers reacted to overcome the so-called pricecost squeeze resulting from decreasing prices and rising costs in agricultural commodity production, by increasing the mechanisation (automation) of their operations (replacing humans by machines), and, (ii) smaller farming operations were taken over by bigger farming enterprises, resulting in a loss of job opportunities for farm workers. The increasing adoption of minimal tillage practices by grain farmers is for instance a direct strategy to minimise costs in order to increase farm profitability. The people that could no longer make a living in the agricultural sector moved to the towns in order to find a livelihood. The population of the rural area of the HMA started shrinking (growth rate of minus 2.1% per annum) whilst that of the towns grew (growth rate of 3.0% per annum). Poverty is, therefore, a growing problem because of large-scale unemployment in some of the villages and towns, and a shrinking regional economy. The primary production of the agricultural sector by far exceeds the needs of the local population of some 44 000 people. Because there is very little local value addition to the agricultural commodities, the benefits of value addition are largely captured elsewhere. For instance, the HMA is a prominent producer of milk and ostriches. However, cheese from milk produced in the HMA is made in adjacent local authorities. Ostrich abattoirs are also located outside the HMA in Mossel Bay and Swellendam and the production of value added products from
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ostriches, e.g. leather goods, are manufactured in Oudtshoorn, also outside the HMA. What about the future? If the agricultural sector remains trapped in Quad A, its slow demise is a foregone conclusion as globalisation proceeds and the negative effects of global warming become more pronounced. What then are its options for the future? The Quad Tool suggests the following. Firstly, farmers that choose to concentrate solely on the production of commodity products such as wheat, barley, canola, ostriches, sheep, cattle and milk must be encouraged to use technology to acquire and maintain cost parity or leadership. The consequences of this strategy will be further job losses in agriculture, a trend towards fewer but larger farming operations and an increased technology-intensiveness in farming operations. However, it will also create a higher need for contractors to become engaged in delivering some of these technological services. The Hessequa community will have to confront, debate and handle the difficult moral issues of benefits for the few versus negative effects on the many in balance with the economic realities of uncompetitive farming operations in a highly competitive world. Black economic empowerment through worker participation in shareholding may be one solution in this problem area. Secondly, farmers need to diversify their operations in order to reduce the financial and others risks they face. In particular, one has to consider their migration towards Quad B. Agri-tourism as part of eco-tourism could be helpful in this regard. There are already a number of farmers that have started focusing on agri-tourism and this will link them with the vacation/tourism industry that is growing strongly in the HMA. Thirdly, entrepreneurs could open up totally new opportunities in the HMA. For instance, small vineyards have been established with the long-term goal of establishing one or more wineries in the region. If these are successful, this might point the way to a totally new Quad B economic sector. It is notable from the region’s agricultural history that entrepreneurs coming in from elsewhere introduced agricultural practices that soon became the norm. The introduction of Merino sheep th in the early 19 century created opportunities for commercial sheep and th wool farming. Early in the 20 century an entrepreneur showed that commercial wheat farming was possible and this led to the large-scale production of first wheat and eventually a host of other grains.
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Construction The fortunes of the building industry are closely linked to the development dynamics of the coastal towns of the HMA. This industry provides a livelihood for about one in eight workers in the HMA and as the coastal towns boomed through property development, the importance of the building industry as an employment provider escalated. The sustainability of this industry as an employment provider is obviously affected by the cycles in building activities experienced in South Africa. Mining There are few mining operations in the HMA. The major mining activity is a bentonite mine whilst quarries provide sand, stone and limestone. All of these enterprises need to be as technology-intensive as is required to stay price competitive in fiercely contested commodity markets. There are zeolite deposits that are used minimally at the moment. One of the economic options is to develop a cluster of small enterprises producing value-added products from this resource. Transport The transport sector is based on three local strengths: (i) the N2 national highway passing through the region, (ii) the railway line that crosses the HMA and (iii) a number of transport firms that primarily serve the agricultural and construction industries. More than 1,5 million light vehicles and 120 000 heavy vehicles use the N2 highway annually. Future economic plans must include the development of enterprises producing products and delivering services to benefit from this “mobile market”. The service industry The local authority is a large provider of services. Employment statistics show that private households are the largest source of employment for females in the HMA. This indicates that the ‘holiday/tourism’ and ‘retirement’ industries are particularly important in job creation in Quad A for females. Strengthening of these industries would enhance employment opportunities for females. Quad B in the HMA Quad B is populated by enterprises serving the holiday and tourism markets, e.g. guesthouses and B&B establishments as well as a few
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producers of value-added products. This quad holds definite promise of sustainable employment and should be strengthened rapidly. In particular the production of aloe products, thatch tiles and cheese producers should be encouraged. However, new Quad B enterprises must also be considered, particularly those that can benefit from the holiday/tourism industry and the better use of the N2 national highway. Increased tourism offers many opportunities for LED in the LMA. For instance, the attraction potential of world-class archaeological discoveries at Blombos Cave could particularly be linked to plans to strengthen tourism in the Overberg and Hessequa regions. The integrated management of tourism and appreciation of the need to develop world-class marketing for Quad B enterprises should become part of strategies to strengthen the vacation/tourism industry of Hessequa. Quad C in the HMA The relatively low skills base of the work force in the LMA does not provide for a rapid local expansion of Quad C. However, the linking of those factors that attract retired people to settle in the LMA, e.g. a good quality of life because of a safe environment endowed with attractive natural resources and a wonderful climate, could perhaps be used to entice “knowledge workers” who no longer need to be present in the large cities in order to provide services to their clients, to settle in the HMA.. This would contribute to a strengthening of the local economy as well as the HMA’s Quad C capabilities. Quad D in the HMA Wind is rarely in South Africa considered to be a natural asset. Yet, there is a strong and growing wind power industry, a Quad D activity, in the world because of the need to generate ecologically-friendly electricity. The wind regime of the HMA could perhaps supply the potential to grow a local wind power industry that could create a source of income for previously disadvantaged groups in the HMA. A link to “green manufacture” could further strengthen the local economy. This brief summary has shown that the Quad Tool allows a holistic appraisal of the strategic positioning of a local economy and its implications for development strategies. I have also shown earlier that the quad Tool provides insight into the strategic positioning of countries as well as regions. It is now necessary to examine Quad B which is
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clearly an important issue in LED considerations in South Africa and elsewhere, in greater detail. “One machine can do the work of fifty ordinary men. work of one extraordinary man.”
No machine can do the
Elbert Hubbard
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PROSPERING IN QUAD B
LED practitioners in developing countries, many rural regions but even large cities, are confronted by the challenge to find ways and means to add value to the staple commodity products of their regions. They have particularly to create the conditions that will give rise to the production of differentiated products or services. In doing so, they have to seek the creation of sustainable competitive advantage for enterprises in their jurisdictions, often despite limited levels of education and training being available there. It is, therefore, necessary for them to know more about the industries of Quad B where sustainable low-tech businesses are possible. Some traditional and emerging Quad B industries as well as some specific Quad B case studies are examined in this chapter, but please note that this is not a full list. That task would be too exhaustive for the purposes of this book. THE BASIS OF QUAD B As explained earlier, Quad B enterprises and industries are founded on one or more of the following: (i) human genius or excellence, (ii) knowhow, and/or (iii) man-made or natural attractions. Some of the Quad B industries are old, having endured over many centuries, e.g. the wine industry. Others are young, having been spawned by modern technologies. Let us examine specific examples.
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HUMAN EXCELLENCE OR GENIUS AS A BASIS The test for the inclusion of a low-tech industry into this category is whether machines can provide the critical ability that one or more human beings fulfil in the industry. If machines can do the same job faster and more reliably, the industry is not part of Quad B, but rather of Quad A. The wine industry Wine is an important part of gracious living and the worldwide wine industry is huge. The world’s wine production was 27 billion, 26.1 billion and 25.9 billion litres in 1996, 1997 and 1998 respectively. At a conservative estimate of R15 (~$2.5) per litre, it is evident that the value of worldwide wine industry is at least R375 billion (~$150 billion) per annum. The importance of the wine industry to the economies of the Western Cape and its contribution to South African export success were outlined in Chapter 13. Its human excellences In the case of excellent wineries, outstanding viticulturists have the knowledge to grow outstanding grapes in the soils and climate of their particular location(s). Outstanding winemakers’ skills turn these grapes into great wines. These two skills are central to the wine industry. Without viticulturists and winemakers, the owners and other staff of wineries would not have business enterprises or jobs. The wine industry has tremendous sustainability. I have referred earlier to wineries in Europe that are more than 700 years old. Wine production was one of the first local industries developed by the Dutch settlers in th the 17 Century and it is still going strongly. The South African wine industry is reminiscent of the cluster model of the Italian “industrial district”: many small, often family-owned businesses that compete with one another for market share, but with vertically integrated cooperation with suppliers and other enterprises. The competition drives innovation in the industry, allowing it to develop world-class competences.
The cognac industry The cognac industry is a special case of the brandy industry and is associated with the Cognac area of France. The Charente River rises in
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45
the relatively high country between Limoges and Angoulême in France . It meanders westwards through 120 km of fertile land, which has become the only area of the world where one of the world’s greatest brandies, cognac, is produced. French law (followed by the laws of many other countries) limits the name, cognac, to the strictly controlled distilled 2 wine of this region, some 11 000 km in extent. The region produces approximately 150 million bottles of cognac per annum (Table 15.1). Valued at a conservative R100 (~$17) per bottle, the cognac industry of the Charentais is worth a minimum of R14,5 billion (~$2.4 billion) per annum. This is not bad for an area of nominally only 105 km by 105 km. Table 15.1 The world market for cognac Market segment
Bottles sold in '96 (millions)
Market Share % in '96
Market Share % in '95
Europe Asia Americas Oceania
68.0 45.1 31.3 0.9
46.6 31.0 21.5 0.6
47.1 31.6 20.3 0.6
Africa Total
0.4 145.7
0.3 100.0
0.3 100.0
Four producers, Hennessy, Martell, Rémy Martin and Courvoisier dominate the cognac market (Table 15.2). The value of the cognac sales of each of these companies exceeds R1 billion (~$ 166 million) per annum. Who provides the human excellence in cognac making? Tradition and the law require that cognac be distilled twice. The first distillation is the première chauffe and the second, the bonne chauffe. The quality of the distillation process depends on the distillers and their skills and 45 experience count. Cyril Ray wrote in his book, Cognac ,: “However up to date the distillery
Table 15.2 The major producers of cognac
Producer
World-wide sales (1995-96) Millions of bottles
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Hennessy Martell Rémy Martin Courvoisier Total
33.0 25.0 20.0 12.0 90.0
and its apparatus, there is no substitute for human skill, in vast numbers of instances passed on from father to son.” The other person central to the cognac industry is the maître de chai of the firm, or taster-in-chief. He is responsible for buying, maturing, blending and much else in the firm. The present maître de chai of Hennessy is the seventh generation of the Fillioux family serving the company in this capacity, and much know-how is passed from one generation of the family to the next. The maître de chai of Martell is 45 also from a long-serving family. Cyril Ray wrote about Monsieur Chapeau, the maître de chai of Martell as follows: “[he] has told me how in tasting samples, whether from Martell’s own vineyards and distilleries, from brokers or bouilleurs de cru, he looks first to see if in the first place the wine had been right - the grape picked at the proper ripeness, fermentation correct; then if there had been carelessness in the distillery separating heads and tails from heart at precisely the right moment; if temperatures had been wrong or the flow from the condenser too slow or too fast; whether there was any smack of oiliness, or hint of scorching in the spirit. He claims, quite incidentally and modestly, in the course of conversation, to be able to tell by the taste of a young cognac if there is something wrong in the very shape of a still.” The human excellences of the distiller and the taster complement one another perfectly and provide the basis for a multi-billion Rand industry, which provides for the livelihood of many and the wealth of the owners. The South African brandy industry 46 André Brink, noted South African author, described the beginnings of the South African brandy industry as follows: “But only in the memorable Year of Our Lord, 1672 could it be reported that the assistant cook on board of the Pijl had managed, by double distillation, to transform two leaguers of the worst Cape wine into ‘three anchors of delicious brandy’.” Others soon followed him and brandy became an integral and indispensable part of life at the early Cape. The brandy industry had its th 328 anniversary in 2000, making it one of the oldest industries in South Africa.
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Like the cognac industry, South Africa’s brandy industry depends on human excellence and skills. Brink in his study of the local brandy 46 industry commented as follows: ”And when it comes to the process commonly used in South Africa – as in the Cognac region – one, in fact, compelled by law, the layman who talks confidently of ‘factory production’ is quite mistaken. Not only science and knowledge are applied – art as well” and “… the manufacture of brandy remains safely in the hands of the great distillers, as much an art as a science”. He added elsewhere: “The blending of brandy is the last and finest part of the art. For its colour and character in the bottle depends on the blender’s sense of proportions: his taste and his decision.” The brandy industry dependent on the skills of distiller and blender is a solid Quad B industry. Brandy is South Africa's favourite spirit with average annual sales of over 45 million litres with a retail value of over R2 billion (~$330 million) 47 per annum . South Africa is the 5th largest producer of brandy in the world with more than 4.5 million brandy drinkers in South Africa, and about 50 brandy trademarks. The brandy cellars welcome visitors, and in 1997 a Brandy Route was launched in the Western Cape to encourage tourists and brandy lovers to visit South Africa's foremost brandy cellars 47 and to taste the spirit made from the soul of the grape . Similar to the wine industry, the brandy industry has become a tourist attraction. The Scottish whisky industry Scotch whisky “is unquestionably Scotland’s greatest gift to good living” 34 . The export earnings in 1995 for the U.K. from Scotch whisky were $3.63 billion. To provide some perspective on these figures, it amounted to overseas sales of 30 bottles every second, which earned $118 every second. Stated differently, it earned $273 000 for every employee in the whisky industry. No wonder that Scotch whisky is one of the United Kingdom’s top five export earners. Whisky has become an international drink. For instance, the international market distribution of “bottled-in-Scotland” malt whisky in 1995 was: U.K. 19%, the rest of Europe 17%, the USA 16%, Italy 15%, France 14%, Germany 7% and the rest of the world 12%. The whisky industry is also tied to tourism. Over one million visitors were welcomed to Scotch whisky distilleries in 1995.
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Although whisky was drunk for centuries in Scotland, it needed some 34 luck before it conquered the English palate . The Englishman’s traditional drink was brandy and soda. However, a Phylloxera outbreak th in the second half of the 19 century ruined the French cognac industry and by the 1890’s the English brandy drinker had to look for suitable alternatives. Whisky, after skilful marketing by owners of Scottish 34 distilleries, became the preferred replacement . The human skills on which the whisky industry depends start, as in the 34 cases of cognac and brandy, with the distiller. Skipworth wrote: “Since, however, the middle cut cannot be chosen by tasting or by smell, selection must depend on the unerring eye of the experienced still man. With the aid of his hydrometer, he knows when the real spirit is running” and added “Clearly, the great malt distilleries rely heavily on the skill of the still man for their reputation. One error of judgment could impair their product..”. He added: “Of all the processes involved in making Scotch whisky, maturation is probably the most mysterious”. He wrote the following about blending: “The object of blending is to produce a whisky of a definite and recognizable character. But it [sic] also to achieve consistency – the blend should never vary from the standard customers have come to expect. To be able to do this can take many years of experience. …. Throughout the blending process it is the blender’s nose which is the final judge.” The whisky industry is also clearly a Quad B industry.
The apparel and fashion industry The apparel and fashion industries of the world are enormous judged from information available on the Internet. For instance, the French apparel industry in 1998 was made up of 4 500 companies, employed 230 000 persons, and had total sales of $47.54 billion. Women’s wear represented 52 percent of apparel production and reached $14.65 billion. Men’s wear represented 33 percent and reached $9.28 billion whilst children’s wear represented 15 percent and reached U.S.$ 4.33 billion. The United Kingdom apparel industry’s sales have grown on average 17% per annum since 1990, and are now at almost $40 billion per annum. At 25% growth, the specialised women’s wear sector showed the highest increase in sales over the same period. The total sales of German textiles rose 1.4 percent in 1998 to $18.24 billion. Growth in
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Germany’s textile industry depended mainly on growth in export markets, mostly to other EU member nations. Employment in the German textile industry, however, declined to 129 987 in 1998 (a 2.0 percent reduction). The U.S.A. has the globally most modern and productive textile industry because it changed dramatically over the past two decades. The industry is now high-tech and globally competitive. There are now more than 6 000 textile establishments in the U.S.A. and the industry consists of a diverse, fragmented group of facilities that range from small, family-owned and operated facilities that typically use older, traditional manufacturing techniques to huge integrated mills that operate the most up-to-date machinery and production equipment. In 1998, the U.S.A imported textile goods to the value of $69.1 billion, making it the largest importer according to the World Trade Organization (WTO). Exports from the U.S.A. are around $17 billion per annum. Designers provide the human excellence or genius dimension of the apparel and fashion industries. For instance, the fashion industry in New York is well known and serves as an example of how this industry can add value to a city or region. The fashion industry in New York has annual sales of approximately $14 billion. Over 5 100 fashion showrooms are located in New York's Fashion Center. Outstanding designers form the nucleus of the industry and New York City has eight schools dedicated to fashion, including the Fashion Institute of Technology (FIT), Parsons School of Design and the High School of Fashion Industries. FIT, with 12 000 students, is the world's largest fashion school. Some designers have become fabulously successful. Just consider Giorgio Armani who founded his company together with partner Sergio Galeotti in 1975 and today it is a billion-dollar per annum enterprise. He carefully nurtured his brand mystique through turbulent periods and 48 today Hollywood stars lust after his clothes . His net worth was as a result estimated at $1.7 billion in 2001. According to Forbes Global, Pierre Cardin, the well-known French designer, had by 2002 been involved for 50 years in the design business. His wealth was then estimated at $600 million. Esprit, a laid-back Californian company, was started by two young people in the 1960s and was taken over by a Hong Kong entrepreneur in 2002. He appointed Heinz Krogner, a Czech-born German, as CEO.
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Their business model uses, amongst other, a centralized design facility in Germany where 1 200 styles emerge monthly and has resulted in a 50 billion-dollar per annum company . One of Esprit’s competitors is the Swedish company, Hennes & Mauritz (H&M), the largest apparel retailer 51 in Europe with sales of $5.8 billion in 2002 . H&M focuses on the younger generation and its 95-person design group is encouraged to draw inspiration from real life. They travel a lot to new places to look at people, to see colours and smell smells. Machines cannot do what the designers do for the fashion and apparel industries. Clearly these are Quad B industries. The sport industry Professional sport has in the past decades emerged as a large worldwide business. The list of professional sports is long and varied: soccer, American football, tennis, rugby, athletics, cricket, baseball, basketball, ice hockey, skiing, darts, snooker, etc. Some of these sports serve as the focal point for huge gatherings of athletes, e.g. the fouryearly summer and winter Olympic Games or the World Cup competitions in soccer, rugby or cricket. To win the right to present the Olympic Games or World Cup events has become an issue of national pride and some countries and officials will even stoop to doubtful practices to win this right. How big is the sport industry? It is enormous. Let us look at some numbers extracted from the Internet and magazines. Soccer is one of the most widely played sports in the world. Time reported in June 2000 that in Europe, the cradle of soccer, the top league’s teams have experienced a surge in revenues. The Spanish clubs, F.C. Barcelona and Real Madrid, will each earn a reported minimum of $117 million over the next eight years. The leading Italian clubs will earn $44 million per annum from 2003. The top German teams will share $284 million annually over the next four years. The broadcasting contract covering England’s Premier League clubs will exceed $3 billion over the next three years. The total player payroll of the Premier Soccer League in the U.K. in 1997 was $360 million for 1760 players. This payroll was expected to grow by about 25% per year. Rupert Murdoch’s News Corporation bought the rights to Southern Hemisphere rugby in 1995 for $550 million. Thus the Super 12 competition was created, and thereafter, business and rugby would forever be interlinked. The gross revenues of the National Basketball
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Association in the USA were $1.7 billion in 1998. The American TV network, NBC, paid $1.75 billion for a four-year contract to broadcast the basketball games of the National Basketball Association. The Professional Golfers’ Association (PGA) Tour in the USA had a $400 million budget in 1999 of which $123.3 million was earmarked for the purses of players. Prize money for the professional golfers in the PGA Tour had jumped by almost 200% in a decade. $300 million was spent on U.S. skiing equipment in 1998 and 4.2 million skis were sold. And in 1999, 3.2 million tennis rackets were sold in the U.S.A alone. Who is central to the sport industry - the owners of clubs or their administrators? Don’t believe that for a moment. The people who are central to these industries are the athletes, especially those with exceptional abilities. Take Michael Jordan as an example. Upon his retirement from basketball, Newsweek wrote: “Jordan is more than a basketball star. As marketers say, he’s a power brand - a player whose popularity and reach is peerless in the history of sports business.” Jordan had promotional deals with at least 13 companies that came to an estimated $45 million in 1999 and his total earnings came to an estimated $69 million in 1998 alone. Vinny Testaverde, an American football player signed a three-year, $6.5 million a year contract with the New York Jets team in 1999. Michael Owen, one of soccer’s brightest prospects, signed as an 18 year old, a six-year $8.2 million pact with the boot manufacturer Umbro. Greg Norman, the Australian professional golfer grew his company, Great White Shark Enterprises, into an estimated $142 million private enterprise in seven years. The earnings of Michael Schumacher, Ferrari’s leading driver of their Formula One team, were estimated at $50 million per year. The golfing prodigy, Tiger Woods, landed contracts worth more than $40 million soon after winning his first major title, and has gone from strength to strength after that. Why do these athletes receive such enormous pay cheques and prodigious promotional contracts? Professional sport has become part of entertainment and without the skills of super athletes a particular sport industry is dead as a business opportunity. These stars provide the means to create a livelihood as well as riches for many people associated with the sport industries. As a consequence these stars earn huge fees and become brands in their own right; brands that can be used to sell all kinds of other goods. The sport industry is clearly also a quad B industry. The movie industry
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The movie industry combines several human excellences. In the first instance there is a writer who conceptualises a story. Then a producer recognises the potential value of this story and a director combines the story line and the acting skills of actors into a product for public consumption. This combination of human skills, with movie stars at the centre, is essential for a huge industry with outstanding sustainability. The revenue of a blockbuster feature film such as Titanic can approach or exceed $1 billion. Despite intense competition with other forms of entertainment (such as music and sports), movie attendances have exceeded one billion paid-for admissions annually since 1976. According to statistics provided by the Motion Picture Association of America, worldwide box office receipts for feature motion pictures have grown from $1.2 billion in 1970, $2.8 billion in 1980 to over $9 billion in 1998. This increase is all the more remarkable because ancillary markets such as home video, cable and (foreign) television markets have undergone explosive growth during this same period. Hollywood is the leading name in the production of movies. According to Monitor Company, the movie and television industries contributed approximately $16 billion to the economy of California's, directly employing 164 000 and indirectly employing another 184 000. Thousands of screenplays are in development in the U.S.A. at any given time. However each year only 450 to 500 are produced into movies, 60 to 80 of which are shot in places such as Mexico and Canada. The Western Cape has positioned strongly to benefit from movie productions and the Cape Town area is increasingly being used a production site. Bollywood in India has also become a major movie production site, especially for the large Indian market. Movies had a single major source of revenue in the U.S.A. and abroad prior to 1985, namely the movie theatre. Today there are new movie markets such as home video, cable and pay-per-view. These markets have been growing so rapidly that they are no longer just ancillary markets. The ability to exploit a movie in many markets diminishes investment risks and increases earning potential. In some instances, low budget movies have lost money in the theatres and still earned profits overall from ancillary sales. Star Wars was one of the first motion pictures to demonstrate, on a major scale, how valuable ancillary markets (consisting of such spin-offs as toys, games, T-shirts and novelty items) can be. Jurassic Park
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continues to generate spin-off sales that may eventually be as significant as the revenues the picture has already earned in various other markets. I have presented just a few examples of the numerous industries and enterprises that constitute Quad B. For instance, I did not dwell on success of writers such as J K Rowling, author of the Harry Potter books, who became one of Britain’s richest women in a few short years, nor the music industry built on the abilities of stars such as the Beatles or Madonna. I hope that these few examples illustrated the principle that the excellence of a few outstanding human beings can be used to sustain large, profitable and sustainable industries that add enormous value and provide jobs for many. Let us now examine the importance of know-how in business success and job creation. KNOW-HOW AS A BASIS From sugar water to the world’s most valuable brand Some years ago I listened to a senior faculty member of the Sloan Business School at MIT lecturing on business strategy. He mentioned that some companies producing rather mundane products have been creating enormous value for shareholders. One of these companies, produced “sugar water with a dubious taste”, yet, added some $45 billion of economic value in a matter of a few years. He was referring to CocaCola, a company with humble beginnings but now possessing the bestknown and most valuable brand in the world. It was recently valuated at $70.45 billion by Interbrand and BusinessWeek So let us explore the history of this fascinating company. An Atlanta druggist, Dr. John Stith Pemberton, invented "Coca-Cola" syrup in 1886. He mixed it in a brass kettle hung over a backyard fire. The initial marketing was as a "brain and nerve tonic" and it was sold in drugstores. Frank Robinson, a bookkeeper, suggested that the name should be "Coca-Cola", chosen because both words named ingredients (kola nuts and coca leaves) found in the syrup. In addition, two "C's" would look well in advertising. "Coca-Cola" was one of many exotic patent medicines sold during the 1800s in the U.S.A. that actually contained traces of cocaine. Innovation was part of the evolution of the product. A customer’s request resulted in the syrup being mixed with soda water and the exciting outcome was that Coca-Cola became a fizzy, carbonated drink. Joseph Biedenharn first bottled Coca-Cola in 1894 and by 1914 he had
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acquired a fortune of $50 million. By 1903, the use of cocaine was controversial and Coca-Cola stopped advertising the drink as a cure for headaches and other ills. The bottles used for Coca-Cola were also changed from time to time. At first, the Hutchinson stopper-type glass bottle with an iron stopper and rubber washer was used. The second type was the crown-top with straight sides, utilising a cap instead of a stopper. Millions of these bottles were used until imitations became a problem. The Chapman Root Glass Company invented the bottle known as the “hobbleskirt” specifically for “Coca-Cola”. They modelled the bottle after a cocoa bean. The bottle was patented in 1915. Marketing innovations used by Coca-Cola included the use of different slogans, e.g. "Thirst Knows No Season" (1922), “Around the Corner From Anywhere" (1927), "Things Go Better With Coke" (1963) and "It's The Real Thing" (1970). "Coca-Cola" was sold in a 6-bottle carton for the first time in 1923. The brand name "Coke" was used for the first time in magazine advertising in 1941 and it first appeared on bottles in 1941. The brand name "Diet Coke" was first introduced in 1982. The first (1894) outdoor sign advertising "Coca-Cola" still exists in Cartersville, Georgia. The company assiduously protects the recipe for Coca-Cola. I have recounted before how Coca-Cola responded to a demand by the Indian government that Coca-Cola could enter the Indian market only if the recipe of its syrup was made public. The company chose to stay out of the large Indian market for a long time rather than reveal its secret recipe. The recipe together with the know-how of marketing a rather simple product in virtually every country in the world has remained the mainstay of Coca-Cola for more than one hundred years. This is a truly Quad B company. Warren Buffett The name Warren Buffett is synonymous with outstanding results in financial asset management. He was the second richest person in 2003 according to Forbes Global. His former daughter-in-law, Mary Buffett, 52 pointed out that Buffett is the only billionaire who has made it to the Forbes list of wealthy individuals solely by investing in the stock market. Over a 32-year period his investment portfolio produced an average annual compounded rate of return of 23.8%.
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Buffett developed unique investment insights (which he does not share freely) and used this to manage the assets of people with the initial courage to invest in his activities. After some time he acquired a company, Berkshire Hathaway, which became the vehicle for much of his investments. His success was phenomenal. By market capitalisation, Berkshire Hathaway became one of the most valuable companies in the U.S.A. In addition, his know-how created phenomenal wealth for his investors. For instance, he turned the initial investment of $100 000 of one of his early investors into more than $1 billion some two decades later. Warren Buffettt is the prime example of how the know-how of investment managers has created a huge financial management industry in the world. The know-how of investment managers creates their competitive advantages and this is not easily shared. This is also a Quad B industry. Of chickens and a colonel Colonel Harland Sanders began franchising his chicken dinner business at the ripe age of 65. That business has grown to be one of the largest retail food service systems, now known as KFC, in the world. More than two billion of the Colonel's "finger lickin’ good" chicken dinners are served annually, in more than 82 countries around the world. What is the basis of his success? When he was 40, the Colonel began cooking for hungry travellers who stopped at his service station in Corbin, Kentucky. He did not have a restaurant but served people at his own dining table in the living quarters of his service station. As more people started coming just for food, he moved across the street to a motel and restaurant that seated 142 people. He always experimented with food at his restaurant. Over the next nine years, he perfected his secret blend of 11 herbs and spices and the basic cooking technique that is still used today in KFC outlets. The recipe is locked away in a safe in Louisville, Kentucky. Only a handful of people know that multi-million dollar recipe (and they've signed strict confidentiality contracts).
Confident of the quality of his fried chicken, the Colonel devoted himself to a chicken franchising business in 1952. He visited restaurants right across the U.S.A., cooking batches of chicken for restaurant owners and their employees. If the reaction was favourable, he entered into a deal
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that stipulated a royalty to him of five cents for each chicken the restaurant sold. By 1964, Colonel Sanders had more than 600 franchised outlets for his chicken products in the U.S.A. and Canada. That year, he sold his interest in the U.S. company for $2 million. Under the new owners, Kentucky Fried Chicken Corporation grew rapidly. It went public in 1966 and was listed on the New York Stock Exchange in 1969. Eventually, PepsiCo acquired the company and it became known as KFC. In January 1997, PepsiCo announced the spinoff of its quick service restaurants, KFC, Taco Bell and Pizza Hut, into an independent restaurant company. The secret recipe of Colonel Sanders and the right business model led to a multi-billion dollar multi-national business, truly a worthy example of the power of Quad B. It illustrates why so many enterprises in the food and restaurant business worldwide provide wonderful business opportunities. We must now turn to the last of the platforms on which to build a Quad B enterprise, namely attractions. ATTRACTIONS AND TOURISM Tourism is an enormous industry. Close on 700 million tourist arrivals were registered worldwide and tourists spent $476 billion in the year 53 2000 . South Africa’s share of this was only in the order of 1.0%. Tourism provides jobs for about 207 million people worldwide and this is 53 expected to grow by 53 million in the next decade . There are different kinds of tourists, allowing niche tourism marketing. The “normal” tourist visits other countries to see the sights and experience the culture. Business tourists are also extremely important to many countries, also South Africa. Ecotourism has also become big business, in South Africa too. New tourist categories have appeared on the scene in the last decade. For instance, the events of 11 September 2001 in New York resulted in many Americans deciding to stay at home and tour in their own country. On the other hand, political adventurers choose to go to weird and wonderful places to experience something different. Outreach tourists go to places where they can help in poverty relief or community projects. The ‘New Pilgrims” are religious visitors to countries such as India, Ethiopia or Greece, rather than going to Israel or Nepal. Some people are interested in the practices of sangomas or shamans and travel to places where they are found. The nature of tourism
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Tourism is basically a low-tech industry, centrally dependent on either natural or man-made attractions. Differentiation is achieved by means of the uniqueness of the attractions offered. London is a unique attraction, so is Paris, New York, Sydney or Cape Town. The Kruger National Park in South Africa is a unique nature reserve, so is Yellowstone National Park in the U.S.A or the Serengeti National Park in Tanzania. The varied nature of attractions Attractions come in all shapes and sizes. About seven million tourists 54 visit the V&A Waterfront in Cape Town annually . It has become one of South Africa’s most popular attractions, probably because of the bundling of a host of attractions. Within the Waterfront there are a working harbour, hotels, shopping centres, restaurants, coffee shops and taverns, an aquarium, cinemas, an IMAX theatre, arts and crafts markets, etc. The Chelsea Flower Show in London is based on flowers from all over the world. The Victoria Falls draws tourists to Zimbabwe and Zambia, the Niagara Falls tourists to the U.S.A. and Canada. Egypt’s pyramids are part of the reason why several million tourists visit the country every year. The annual migration of about a million wildebeest from the Masai Mara in Kenya to the Serengeti National Park in Tanzania draws large numbers of tourists to these two countries. White death sharks draw tourists to Gansbaai, South Africa. In the Charlevoix region of Canada a tourist can go dog sledding. White water rafting is an attraction in many parts of the world while game farms are popular eco-tourist destinations in South Africa. The isolation of Gamkaskloof in South Africa, also known as “The Hell”, brings visitors from afar. They come to learn about the allure of a place where a community lived for more than 200 hundred years in virtual isolation from other human beings. Desert safaris are offered in Egypt and tourists can visit the largest dunes in the world in Namibia. The fame of the Otter Trail in the Tsitsikamma National Park, South Africa, has resulted in a long waiting list of would-be users. The attraction of the new “Whale Route” at the De Hoop Nature Reserve, Western Cape, is growing. The salient lesson from these examples is that any place that wants to promote tourism must identify and focus on its unique features. South Africa has a huge number of different attractions and these are increasingly effectively used in promoting tourism.
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The power of combination A combination of attraction and either human excellence or know-how can create wonderful business opportunities. The art collection of the Louvre in Paris is world-renowned and helps to draw millions of visitors every year to Paris. The Rijksmuseum does the same for Amsterdam. London and New York are known for performing arts that draw numerous visitors annually. A single example will illustrate the point. The shows for which London and New York are especially well known combine the attractions of major cities with a theatre infrastructure and the genius of composers, writers and artists. Andrew Lloyd Webber composed the musical, Cats, basing it on the verses from TS Eliot's 1939 children's book Old Possum's Book of Practical Cats. It became the longest-running musical in London and in New York. It was seen by more than 50 million people in 300 cities across the globe and grossed £136 million at London box offices and a further £1.25 billion worldwide. It was a remarkable success. Many other examples could be drawn from areas such as sport and music, but the above examples are sufficient to illustrate the remarkable power of tourism’s many guises to be a positive factor in economic development. Having explored how Quad B can contribute to prosperity, it is now time to return to the riddle mentioned in Chapter One.
“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least as fast as that!” Lewis Carroll
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I mentioned a riddle in Chapter One when I referred to some extremely successful low-tech rural South African businesses or events that have achieved remarkable business success in the last decade. They include in some cases enviable export success. Yet, I have never returned to the riddle itself up to now. Why not? The answer is that the case for the existence of Quad B and the business model that is crucial to its success, had to be developed before South African examples could be discussed sensibly. That time has arrived. I present two cases drawn from rural settings. LED practitioners planned neither. In fact, even the people who started them had no clear idea of where they were heading, but after time astonishing success was achieved. This success forces us to consider how developments of this kind could be handled in LED. My contention is that consideration of technology and business strategy as put forward in this book can assist LED practitioners. A powerful message from this book is that different business models support successful enterprises in every quad. Once this is understood, it becomes possible for the LED practitioner to check or ensure that the right business model is being followed. The two Quad B cases highlight some particular lesson(s) that should be remembered by LED practitioners. So let us consider the examples. OF CLAY AND ARTISTS Fée Halsted-Berning and her husband settled in 1985 on a farm, Ardmore, in the midlands of Natal. The farm is in an area densely populated by small-scale peasant and subsistence farmers along the reaches of the Injasuti River. Rural poverty in this area is high and the general education level low. Yet, Fée created a globally competitive Quad B enterprise using her own skills and human talents available locally. As a ceramic artist she started a ceramic studio at Ardmore as a way of easing rural unemployment. She followed, by chance rather than design, the principles for business success in Quad B. Let us examine the story 55 of Ardmore as described vividly by Gillian Scott . In so doing, I will use Quad B headings to illustrate why Ardmore is a classical Quad B enterprise.
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Differentiated products Ardmore produces collectable ceramic art. Each ceramic piece is unique and as explained more fully later, is marked as such. The beautiful, colourful ceramics came to be prized possessions, not just in South Africa, but overseas as well. Outstanding human talent Fée Halsted-Berning was trained in the Department of Fine Arts of the University of Natal, Pietermaritzburg. A visiting American lecturer, David Middlebrook, played a valuable mentor role in her development. He influenced her approach to ceramic art and her willingness to experiment with different forms of sculpting, glues and glazes. He also taught her how to set up exhibitions, manage finances and sell works of art. After leaving the university, she worked with David Walters, a potter, and learnt how to manage a studio and discovered that artists could sell their wares successfully directly from home, rather than just through commercial galleries. Once they were installed on Ardmore, these experiences allowed Fée to set up a studio. Energy and determination were required to establish a small ceramic studio on the farm. A small thatched outbuilding, with a fireplace and a wall painted by a former Italian prisoner of war, was the picturesque setting for Ardmore Ceramics. A variety of elements and experiences influenced Fée’s art work - the local fauna and flora, a rural lifestyle, the figurines and flatware produced by English studios and factories such as Staffordshire and Doulton, her childhood in Zimbabwe, her own art collection and her experience as a painter. Fée, missing her art students and being lonely, asked Janet Ntshalintshali, wife of the induna of the farm, to find someone who would be willing to learn the fundamentals of ceramic art. Janet’s daughter, Bonnie, found it hard to cope with the work of a farm labourer following childhood polio and she joined Fée as a studio assistant. This was the start of an exceptional relationship. Bonnie gradually forged her own idiom and style, and she excelled. In 1990, Fée and Bonnie won the Standard Bank Young Artist Award for Visual Art. A successful exhibition at the Grahamstown Art festival followed. Many awards and accolades were to follow. Bonnie’s work is present in every major public art collection in South Africa and is sought after by collectors. Sadly, Bonnie Ntshalintshali died in 1999 from Aids. In remembrance of her, a Bonnie Ntshalintshali Museum was unveiled in
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2003 at Springvale Farm in Rosetta in the Natal midlands where a second art studio was set up when Fée and her husband moved there. Fée, Bonnie, Phineas Mweli, Josephine Ghesa, Wonderboy Nxumalo 55 and other artists put Ardmore on the map . As the Ardmore Studio grew in popularity, it grew in size. More people joined and became artists, by 1998 there were about forty-five. Some persons became modellers and others, painters. And some of the others started excelling despite the fact that most have no formal art training and limited schooling. The artists of Ardmore are all distinct individuals who assume responsibility for their productivity and are allowed freedom of expression. To find ideas, they use many illustrated reference books and magazines, drawing inspiration from plants, animals, birds and insects, most of which, even if they are indigenous to Africa, they have not seen in reality. These visual sources are combined with Zulu folklore, myths and legends, and Christian narratives of the Old and New Testaments. All of this is transformed into the “Ardmore style” – a rhythmic design with sculptural extrusions, exuberant colour and 55 meticulous patterning . Many of the artist are recognised in his or her own right. To name a few Punch Shabalala, Mavis Shabalala, Mirriam Ngubeni, Phumelele Nene, Beauty Ntshalintshali, Beatrice Nyembe, Nhlanhla Nsundwane, Elizabeth Ngubeni and Phineas Mweli. Vuzi Ntshalintshali received the Premier Award at the 2002 Africa Earth Exhibition held at MuseuMAfricA, Johannesburg and Andrew Sokhela received the Third Award. When Bonnie Ntshalintshali and Phineas Mweli both died in the same month in 1999, it was feared that it would spell the end for Ardmore. However, Fée kept her vision alive. She brought other artists forward and proved, by major sales at Christie's in London and to Zanele Mbeki, the wife of the South African State President, among others, that Ardmore is prospering. Strong brand name Fée worked hard to build the name of Ardmore. As she increased her marketing efforts the name became well known. Its success attracted competitors and it had to differentiate its work effectively, also for collectors.
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Each piece produced at Ardmore bears on its base, in addition to the name Ardmore, the names of the modeller and the painter and the year in which it was produced. In order to confirm the authenticity of the Ardmore signature, a distinctive “A” appears on the base of all originals produced in the studio since 1997. In this way, the power of the brand, Ardmore, is coupled to the human excellence of the modellers and the painters to create differentiated products that are virtually impossible to duplicate. The brand is now so well established that Christie’s of London sells work of the studio at some of their auctions. Quality management The artists themselves take a significant responsibility to maintain quality, and the fact that final payment depends on sales, helps to prevent shoddy work. Measures such as the use of lead-free paint are used to ensure quality that is acceptable internationally. Running a rural business is taxing. Great distances must be travelled and overheads are high. Fée provides all the transport, materials, water, electricity, kilns, equipment, workspace, telephone, fax and marketing expertise. She sees her main function as selling Ardmore ceramics on a continuous basis. Local and international markets Ardmore started its commercial existence humbly. Fée and Bonnie painted ducks from a commercial mould. This was expanded to include eggcups and coffee mugs. The money earned this way was used to purchase the materials to produce functional ware and, later, art objects. Fée realised that Johannesburg, the main art centre in the country, offered an opportunity to expand the market for Ardmore’s products. Once the studio became known, first a local and then an international following developed. Ardmore’s products can now be found in many galleries and shops in South Africa and abroad. Some years ago, with pride, I showed my wife an Ardmore piece in one of Paris’ main shops for luxury goods – a teapot at a price of Ff 2800 and clearly not commodity ware Marketing David Middlebrook fostered an understanding in Fée that marketing is important, including exhibitions. At first she exploited the tourists visiting Champagne Valley in the Natal midlands. Then the 1990 Standard Bank Young Artist Award provided exposure and media attention. Fée used her friends and relatives in Johannesburg in a networking operation to
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organise house shows of the studio’s wares. Contacts made on these occasions led to more home displays and a network of Ardmore enthusiasts, locally and internationally. Fée avoided the flea- and craft markets and bypassed the expenses of exhibiting at commercial galleries. Selling directly to the public has several advantages. South African and foreign visitors are able to learn about the creative processes involved in Ardmore ceramics, while the artists have 55 developed self-confidence and a belief in their creativity . Now that the Ardmore brand is well established other ways to market have opened up. I have mentioned the auctions of Christie’s of London. There is also an Ardmore website where a lot of information can be garnered. Production levels The size of the studio and the fact that the Bernings moved to another farm in 1995 meant that Fée needed a studio manager at Ardmore. She found an able manager in Mbuse Moses Nqubuka. He managed the packing and firing of kilns, ordering the clay, paints, glazes, brushes and tools. He handled the orders, organised the artists, train apprentices, and paid the monthly wages. His bookkeeping and records had to be accurate since artists work for a basic monthly salary and receive a bonus for every piece that is sold. The studio struggles to meet popular demand as well as to present showcase exhibitions both in South Africa and internationally. Pricing strategies Ardmore Studio produces clearly differentiated pieces of ceramic art, not craft. This allows them to charge prices in line with the reputation of artists. By producing collectibles, collectors will invest in the artwork, creating the possibility of increasing prices over time. This in turn, creates a sustainable business over time, as demonstrated by Royal Doulton, a similar kind of enterprise that is more than a hundred years old. Innovation The artists are free to express themselves. Their mutual work environment also fosters a cross fertilisation of ideas and influences. 55 Gillian Scott wrote : “Drawing their ideas from a huge range of illustrated sources, from artwork and photographs, folklore and legend, imagination and personal observation, the artists of Ardmore Studio responded without judgment to a wide range of stimuli, and transformed them into painted and glazed clay forms. In so doing, the women and
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men of Ardmore discovered their own ingenuity, adaptability and resourcefulness. They learnt to work together, and to respect one another’s skills. They found job satisfaction, self expression, and both social and economic empowerment”. Fée has created an environment in which creativity thrives. Gracious living and Ardmore Art lovers and the well to do are mostly the buyers of Ardmore products. Early on, Fée’s direct marketing to the art lovers of Johannesburg was a stroke of marketing genius. Later on Ardmore products were offered for sale in some of the top luxury shops in cities such as Paris. Nowadays Ardmore’s association with Christie’s of London means that art lovers from over the world have the opportunity to buy Ardmore art. Geographic cluster of similar businesses There is not yet a cluster of ceramic art studios in the midlands of Natal. It is, however, tempting to speculate that Ardmore could be the forerunner in the development of such a cluster. Once more studios develop, the supply and logistics problems will be fewer and more and more skills and experience will develop in the local population to continue a heritage of ceramic art work. THE WARM ART OF AFRICA Ilse Appelgryn was a teacher in Bredasdorp, South Africa until the Western Cape Provincial Department of Education declared her 56 redundant in 1994 . Feeling rejected and somewhat depressed by events she looked around for something to do. Her aunt Jo had painted candles as a hobby and had taught Ilse as a child how to do it. She had inherited her aunt’s candle forms and started experimenting with the painting of candles. The demand from local gift shops was such that soon she had to employ people. Initially she had a little production unit in her kitchen with four local women working for her. Soon she had to expand Kapula Candles, the name chosen for her company because of her saying: “I’m making a 56 couple o’ candles” . I will use the shortened version, Kapula, in this story about this wonderfully successful venture. By 1996, Kapula had a total of 15 employees and the business moved out of Ilse’s home to a cottage in Bredasdorp. However, the demand kept on increasing and 40 more local women were employed to decorate 56 the candles . The business then moved to a factory in the Bredasdorp
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Industria, from where it still operates presently. The factory currently occupies 4 buildings, and runs with a staff of over 200 permanent employees, all of them from the local community. Kapula is now one of the largest job-creators in Bredasdorp, and thus makes a valuable contribution to the social well-being of the local community. Let us consider Kapula from Quad B perspectives. Differentiated products Kapula produces functional decorative art, referred to as “the warm art of 56 Africa” . Specific designs, used to produce the colourful and distinct hand-painted candles, provide unique and differentiated products. Each candle is handcrafted and hand painted. No two candles will look exactly the same, making each one a work of art. The candles are made 56 from top quality imported wax, wick and pigment . These candles, produced in many different sizes, can be used in many different ways in a home to create special effects, e.g. for a special candle-lit dinner or making a colourful display in a corner. The candles are part of gracious living. Outstanding human talent Kapula’s success is based on two human talents: a design talent and the ability to decorate a large number of candles with specific designs. From the start, Ilse paid a lot of attention to the creative part of the business. For instance, during the formative years she subcontracted two family members who lived in Cape Town, Linda and Quinton Brand, to manufacture the candles. This enabled her and her team to concentrate on the delicate task of hand-decorating the candles according to her designs. A design capability is, therefore, a core competence of Kapula. Only a few people, including Ilse, provide the designs for all of the candles, 56 although all staff members can contribute to design ideas . Quality management Every candle is examined before being accepted as meeting the quality criteria of the company. This happens during the production as well as the decorating stages. It was also necessary to develop other skills. Along with the rapid expansion of the company, a human resources department was
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56
established to recruit, train and develop the workforce . The skills involved in decorating the candles are highly specialised, and the painters are trained for three months to perfect their skills. The attention to quality and the improvement in skills paid off in spades. For instance, Kapula was the only handcraft company selected to 56 represent South Africa at the Hanover EXPO 2000 in Germany . In the same year, Ilse was also honoured as the Black Management Forum’s Western Cape Entrepreneur of the Year. Strong brand name Kapula has worked hard at building and protecting its trade name in the countries where its products are sold. It keeps on monitoring for possible transgressions of its copyrights and infringements of its brand. 56 It has had to act against such infrigements . Local markets Initially, Kapula’s production was sold to local gift shops but this expanded very quickly. About 400 South African shops are now stocking 56 products from Kapula . In addition, the first Kapula Gallery was opened in 1999. An old barn was transformed into a spectacular showcase for Kapula products, as well as matching ceramics, textiles, clothing and other accessories. Another gallery was recently opened next to the N2 Highway in Riversdale. These galleries are popular tourist attractions. It 56 is also possible to tour the factory where the candles are decorated . International markets The interest of an American visitor to South Africa led to Kapula’s first exports. This stimulated consideration of growing exports and Kapula 56 was soon exporting to Japan, Australia, New Zealand and Europe . Through an international partnership, Kapula also opened a branded retail outlet and a gallery in Berlin. About 80% of Kapula’s production of 4,5 250 000 candles per month is exported . Kapula has received several awards from the Cape Chamber of Commerce to recognise its contribution to national and international economic growth, as well as its 56 contribution to South African export programmes . Marketing Local gift shops were the first target market of Kapula. However, Kapula used trade fairs as a means to market its products and to garner 56 intelligence about market needs and opportunities . During 1997, Kapula attended its first local trade fair. Kapula joined the Department of
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Trade and Industry in exhibiting in Singapore in 1998, alongside other South African manufacturers. Since then Kapula has exhibited in Birmingham, Frankfurt, Atlanta, New York, Tokyo, Lisbon, Barcelona and 56 Paris . In 2001, Disney World Florida invited Kapula to do a candle painting demonstration in Disney’s “Animal Kingdom”. Three of their 56 employees went over to carry out the request . Production levels Ilse’s husband, André Appelgryn, a former human resources manager, joined Kapula some years ago to take over the management of the 56 company . This allowed Ilse to concentrate on the creative side of the business. All candles except for a single type are manufactured by 56 hand . In 2001, the company that Ilse subcontracted to Linda and Quinton Brand to do the manufacturing of the candles, now called 56 Kapula Handcraft, also moved to Bredasdorp . This streamlined operations. Kapula Handcraft produces various ranges of designer handcrafted candles that complement the range of colourful hand-decorated candles. Both types of candles have become hugely popular and specific ranges have also been developed for several reputable retail chains in South Africa. So far the demand has been such that the company had to grow to maintain the balance between demand and production. Pricing strategies Kapula is not competing in a commodity market. Its products are unique decorative and functional pieces of art and are priced accordingly. When a relative of mine mentioned that Kapula’s candles are pricey, I reminded her that she had to “compete” with buyers in Germany and other first world countries to buy Kapula’s candles. The strength of the Kapula brand has allowed them to charge high prices for their unique products. Innovation Innovation in terms of designs, component materials, production systems and marketing is a hallmark of Kapula. Staff members regularly attend exhibitions in different parts of the world in order to become aware of trends in customer requirements and quality. The outlets in Berlin also provide insight into European customer needs and requirements, as well as of fashion trends. There is a clear willingness in Kapula to take on new things as illustrated by the large number of different designs on offer and their move to produce designer
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handcrafted candles in addition to the hand-decorated candles. In addition to the above, Kapula has also started making pottery products and decorating them with their candle designs. This has broadened the scope of their operations and product offerings. Geographic cluster of similar businesses Although the manufacturing and painting of candles has become widespread in South Africa, there are not yet other manufacturers of Kapula’s calibre. No clear cluster of candle makers has thus developed, an opportunity that could perhaps be exploited in the southern Cape. LESSONS FOR LED PRACTITIONERS Ardmore and Kapula are but two of a host of South African rural enterprises that produce world-class quality art products using the innate e.g. 57,58 but often untrained skills of the local populace . Their success brings a powerful message of hope to and some strong lessons for LED practitioners. World class rural enterprises The first lesson is that world class enterprises are possible in rural settings in South Africa and elsewhere. The two case studies illustrate that world-class capabilities are present in rural South Africa but these capabilities have to be discovered and unlocked. A person with outstanding human talents, such as Fée Halsted-Berning was able to unlock the artistic potential of typical rural South Africans to such an extent that the world-class capabilities of Bonnie Ntshalintshali and other artists emerged. In the case of Kapula, the hidden talents of a schoolteacher were buried until she lost her job. Thereafter, Ilse Appelgryn used her outstanding talents to enable ordinary people from the rural southern Cape, to produce world-class functional and decorative art. In both cases world-class rural enterprises were built and livelihood was provided to many poor rural families. Job satisfaction, self-expression and social and economic empowerment enriched the lives of people who otherwise had little hope. This is precisely what is needed in many parts of rural South Africa and elsewhere. Ardmore and Kapula-like enterprises have to be created in their thousands, and LED practitioners have to be able to create the support systems that would enable their successful creation.
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It is probably important that neither Ardmore nor Kapula originated as result of a LED initiative. This suggests that because the nature of Quad B enterprises and the business model on which they depend, are not generally known and applied, LED practitioners are largely unable to recognise Quad B opportunities in their jurisdictions or potentially successful Quad B start-ups. They are also not able to develop plans to create the conditions under which such enterprises could arise. This has to be redressed. The power of training Both case studies show the power of training. When Quad B enterprises are started, sufficient attention must be given to the training of staff. World-class enterprises cannot be built on inferior capabilities, and training is a means to convert inferior into superior capabilities. The right business model Success in Quad B depends on meeting the criteria of its business model. It is not good enough to do a part well and the rest not. Holistic planning and doing must be the order of the day. And this requires leadership. National, provincial or local government cannot come and “do it for us”. They can, however, help us to do it by creating the environment wherein such enterprises can be established and built. LED practitioners must, therefore, ensure that the business plans of prospective Quad B enterprises address all of the necessary success criteria listed for such enterprises. This issue is further addressed in the next chapter. A MESSAGE OF HOPE A sceptic could well ask if Ardmore and Kapula are rare outliers. The answer is no, they are not. I will present three arguments why I say so. Firstly, there are a large number of local and overseas Quad B businesses that have already excelled but were not included in my case 57,58 studies . Secondly, a number of magazines in South Africa, particularly South African Country Life, regularly present articles on start-ups or enterprises that fit some, if not all, of the Quad B criteria. These examples illustrate that there are many possible ways in which the benefits of Quad B opportunities can be exploited in South Africa and elsewhere. Some of the entrepreneurs involved in these activities may not be using the full business model. If a LED practitioner spots this, timely advice could steer the business in the right direction. The third argument follows.
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Wine, the liquid art In addition to what was argued in the previous paragraphs, we can take heart from the success of the South African wine industry that produces “liquid art” and is an integral part of gracious living. I showed in earlier chapters that the wine industry is a prime example of a Quad B industry. I also mentioned that it is very valuable to South Africa. But how valuable? 59
According to SAWIS , there are 4 390 primary wine producers and 388 wine cellars in South Africa. The industry provides a livelihood to 345 000 farm workers and their dependants as well as 3 500 wine cellar staff members. In 2001, some 530 million litres of wine were produced, of which over 177 million litres were exported. Despite the instability in the world economy following the bursting of the technology bubble in the late nineties and the 11 September 2001 attacks, South African wine exports rose every year in the period 1995 to 2002. By 2001 wine exports were about two-and-a-half times higher than the 72.8 million litres exported in 1995. The industry has in all respects become sustainable and is globally competitive, ensuring that it will continue to provide a livelihood to many South Africans. But the wine industry’s worth is not just in terms of workers and exports. Apart from income taxes on individuals working in the industry and wine companies as well as VAT on wines sold, the South African government extracts an excise tax of just over 80 cents per litre of natural wine and wine-based drinks produced by the wine industry. This tax, regularly referred to as a “sin tax” in the budget speeches of the Minister of Finance, produces an income of more than R420 million for the South African government. Surely, the expansion of this industry and the creation of other Quad B industries should be a focus of LED strategies. Applying the lessons contained in this book should be on the agenda of every LED practitioner. The next chapter examines the strategies that could be followed.
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“If you are superior in all of these seven things, you have won before you have even done battle. If you are inferior in all of these things, you have lost even before you go into battle. Therefore it is possible to know the victor beforehand.” Zhang Yu in The Art of War
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THE CHALLENGES OF LED PRACTITIONERS
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LED practitioners might by now be convinced that world-class skills and opportunities might be lurking in their jurisdictions, waiting to be discovered and unlocked. It should not to be left to the vagaries of chance as happened in the cases of Ardmore and Kapula Candles. It should rather be planned for by considering technology and business strategy issues during strategic planning of LED. The Quad Tool could be very useful in this process, not only identifying opportunities in a single quad but in all of them. Once this premise is accepted, LED practitioners will probably still be wondering just how such planning could be done. This chapter provides some suggestions as to how the Quad Tool could be employed. ADJUNCT TO STRATEGIC PLANNING 5 Best practices in LED as proposed by the World Bank suggest that a municipality or region should follow a five-stage LED process that includes: organising the effort. This includes mobilising public, private and non-governmental sectors of a local jurisdiction to become involved in developing a LED strategy, doing an assessment of the local economy. This includes determining the context of the local economy by doing a thorough assessment, creating a LED strategy. The professionals in local government and principal stakeholders need to balance economic development with environmental and social needs. A structured process must be followed to achieve this, implementing the LED strategy. This must be driven by a broad implementation plan that contains individual project action plans, and, reviewing the LED strategy. An annual review of the LED strategy and action plan should be carried out. The consideration of technological issues and the use of the Quad Tool do not replace the best practices but provide a useful adjunct, particularly to the stage dealing with the assessment of the local economy. THE LOCAL ECONOMY ASSESSMENT A local economy assessment develops insight into the present situation in a local economy and involves collecting strategically important
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5
information and analysing it. The World Bank suggested that useful information includes: demographic information, economic information, information about conditions that enable business development, information about hard infrastructure, and regional and national information. Technology is not mentioned as a component of such an assessment and is apparently considered to be available when needed. Is this necessarily true? I do not think so. Technologies are not equally available to every region or local authority. For instance, the Gauteng Province in South Africa can pursue a “technology hub” but this is not possible in most rural municipalities. They have to pursue other LED strategies, often based on low-tech approaches. The case for the specific inclusion of technology issues in LED assessments was developed earlier in the book. If implemented, local economy assessment must, therefore, be expanded to also consider technology issues, and the Quad Tool can be used for this purpose.
APPLYING THE QUAD TOOL The Quad Tool provides an understanding of strategic business positioning (see Chapter 7). I have found it useful, both at a national level as well as the level of a local authority, to use the tool as follows: The level of technology applied I identify industry sectors and sub-sectors for a national or broad analysis, or specific businesses for a local economy analysis. Thereafter I estimate the technology positions of each of the sectors, sub-sectors or specific businesses using a ten-point scale. I use a point of zero if the technology employed is absolutely ubiquitous with many competitors using the same technology or a point of 10 if the technology employed is absolutely unique to the world and no one else has access to it. The degree to which the technology employed by a sector, sub-sector or enterprise is unique or ubiquitous is estimated between these two extremes. Issues to remember are whether the entity being assessed owns patents or know-how relevant to production or delivery systems.
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A few examples are helpful to illustrate the above concepts. If a company owns a unique process to produce a valuable additive to fuels, it would score close on 10 for the technology it owns. If a small business owns a unique secret recipe to produce a special product, e.g. bread, it will score relatively high on this scale because of its know-how. On the other hand, if a business provides a lawn-mowing service, its technology is very ubiquitous. I will score it close to zero. The level of products produced or services delivered I next estimate the position of the products or services for each of the sectors, sub-sectors or specific businesses, also using a ten-point scale. I use a point close to zero if the products or services are ubiquitous with many competitors having the same products or services. I use a point of 10 if the products or services are absolutely unique to the world and nobody else produces or delivers the same products. The position of the rest of the products or services of a sector, sub-sector or enterprises is bounded between these two extremes. Some examples are again helpful. The basic question here is to what extent an enterprise’s products or services are uniquely differentiated from those of others. For instance, if a company owns the rights to a unique and useful pharmaceutical, I would score it at 10 points. If a small business produces unique collectible art that is clearly associated with particular artists and follow the Quad B business model, I would also score it high on this scale. On the other hand if an enterprise produces a product that is identical to that of many other producers, e.g. wheat or maize, I would score it very low on this scale. Craft products are often virtually indistinguishable from one another and I would also score enterprises that produce them, low on this scale. Constructing and interpreting strategic positioning diagrams I use the Quad Tool to present the strategic positioning in the economy being assessed. This reflects the existing balances in that economy and provides strategic insight into possible courses of action. The strategic positioning of different economies can have almost infinite variation. It is, therefore, necessary to have an understanding of the major challenges of each quad. Domination of Quad A enterprises Many economies in the developing world, including rural regions, are skewed towards the production of commodity products or services by
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low-tech means. When this is encountered, there are strategic implications that need to be considered. In an economy dominated by commodity products or commodity services, it is necessary to determine if those products or services are destined for markets where global competitors are present (even if this is in South Africa). This creates one scenario that needs to be considered. However, if these products or services are destined for a market of proximity where no global competitors are present, a second scenario should be considered. The market of globality (Refer to Chapter 6) In the first scenario, the enterprises will have little to differentiate their products from those of their global competitors. They will be under extreme price competition from international competitors and unless they have some clear cost advantage or benefits from a continuous weakening in the local currency, they will be forced to increase their technology intensity in order to remain price competitive, thereby moving towards Quad D. They will also have to invest further in technology in order to stay competitive against their global competitors. Because these enterprises are likely to be earners of foreign exchange, their continued operations could be very important in LED. As a consequence LED practitioners might have to consider how LED policies should be adopted to ensure that this group of enterprises remain globally competitive. This could mean that certain mindsets might have to be changed. Firstly, an acceptance of the need to restructure the local economy would be necessary. An example of such a mindset is reflected in the tolerance by the South African government, personified by Alec Irwin, of the restructuring of the South African economy over the past decade. Secondly, LED practitioners will probably also be subject to the efforts by stakeholder groupings such as unions to block a move to greater technology intensiveness. For instance, members of Cosatu, Solidarity and other trade unions have actively campaigned to block some restructuring efforts. LED practitioners will have to develop ways of dealing with such pressures. Thirdly, it is theoretically possible to sketch a situation in which LED practitioners consider the adoption of a mix of policies to attain different
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important objectives. In such a case, the LED practitioners could consider policies to ensure that the appropriate technology intensiveness is obtained in enterprises that are moving towards Quad D, knowing full well that this might lead to job losses. To counter the devastating effect of job losses, they could consider policies that ensure that individuals, who have lost their jobs because of technology improvement, are retrained to acquire new skills that might be helpful in Quad B enterprises. The next step of the LED practitioners could be to strengthen Quad B as a means of providing new job opportunities. The market of proximity (Refer to Chapter 6) The second scenario involves Quad A businesses operating in the market of proximity. The LED practitioner must understand that these enterprises will not be subjected to fierce global competition but to fierce local competition. For instance, an enterprise providing a lawn-mowing service will have neither international nor competitors from neighbouring towns. Instead it will have local (the same town) competitors because the technology is fairly ubiquitous and there are reasonably low barriers to entry. It will still be in a fierce price competition and if the business goes under, the economic opportunity will probably be utilised by somebody else from the same community. In such a case, there is no real LED benefit except perhaps that it might represent a redistributive mechanism. A value for money service based on quality is the key to business success for Quad A enterprises in a market of proximity. Provision of business advice and training would help these enterprises to survive in a fiercely competitive local world and LED practitioners could consider providing this. Upwardly mobile Quad A enterprises LED practitioners are also challenged to identify those Quad A enterprises in their jurisdictions that produce craft products but have a potential to move to Quad B. Such enterprises need to cross the divide between Quads A and B and the challenges are similar to promoting Quad B enterprises. The next section deals with this topic. Promoting Quad B enterprises Many rural economies are focused on the production of commodity products or services. As a consequence, the skills base of these economies tends to focus on processes rather than products. There are too few enterprises focused on differentiated products as a result. In
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addition, the pressure to increase the technology intensiveness of such economies, results in job losses and these unfortunate people do not have the skills to cross the divide between Quads A and B. The challenge to establish more Quad B enterprises and to create a workforce skilled in serving these enterprises means that in the first instance, there should be a focused effort to identify opportunities to create new Quad B enterprises or to move Quad A enterprises to Quad B. In this process, the LED practitioners will have to become adapt in identifying human skills, know-how or attractions that could supply the base for establishing Quad B enterprises. LED practitioners will have to ensure that the Quad B business model is holistically employed by these enterprises. Telltale signs of this are the production of low-tech differentiated products or the delivery of low-tech services for which a market demand exists or could be built. These products or services must be based on either human excellence, knowhow or an attraction (or a combination of two or more), and must lend themselves to “gracious living”. LED practitioners must ensure that the human skills, know-how or attraction are available at all times. Training programmes should be used when necessary. There should be participation in trade fairs or the use of other means of obtaining intelligence to gain an understanding of market needs and/or trends. LED practitioners must also ensure that the importance of branding is understood by the enterprise and that the brand name is continually built. In addition, the enterprise must build outstanding marketing and logistics competences to create awareness of and to deliver the product or service to the market, wherever it is located. It must also ensure that production levels of the product or service are carefully managed to balance supply and demand in line with pricing strategies. The LED practitioners must look for innovation efforts that improve products (and their packaging) and/or services. In the end the LED practitioner must also pursue the possibility to build a geographic cluster of similar businesses. Building the “new economy” No community should be left behind in the race for business opportunities based on the technologies of the Knowledge Era. Like the th Indian hand spinners of the 18 century who did not recognise the dangers of the new British spinning technologies, every community
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today must be alert to the opportunities and/or dangers that the Knowledge Era technologies represent. So what should LED practitioners be looking for? They have to look for high-tech opportunities and have to understand the drivers of success of this quad. Telltale signs are the availability of a high-level skills base and the presence of high-technology entrepreneurs with a “can-do” culture that enables the fostering of entrepreneurship and technical excellence. Innovation is important. It is also important to look for signs of financial stimuli such as initial public offerings and stock options, in order to attract and retain high-level staff. Open financial markets, the availability of venture capital and venture capitalists, and the absence of inappropriate government interference in business ventures are needed to create a supportive environment. Commodities and high technology The challenges of Quad D are particularly tough for LED practitioners, especially those operating in rural environments. On the one hand, they must be able to handle the requirements and demands of Quad A businesses seeking survival in a move to Quad D and on the other hand, they have to be able and ready to handle the opportunities that the new telecommunication and computer technologies create for high-tech entrepreneurs, even in rural settings. Most, if not all, LED practitioners will be confronted by the shift of enterprises from Quad A to Quad D. These LED practitioners should, therefore, understand the nature of globalisation as it influences business ventures even in isolated countries such as South Africa. They must also understand the importance of cost leadership in the business strategies and the process-based nature of commodity-based businesses. Understanding the power of technology and business process re-engineering (BPR) to increase the operational efficiencies of commodity-based enterprises and awareness of technology trends that might alter the competitiveness of commodity-based enterprises in their jurisdictions are other requirements. They have to understand the influence of technology in decreasing commodity prices over time. The handling of the Janus Dilemma, i.e. the replacement of humans by machines in the quest for greater efficiencies and cost leadership, brings particularly difficult issues to handle. The LED practitioners must be able to formulate strategies to lessen the impacts of the dilemma in their
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jurisdictions. These include the moral issues associated with a loss of jobs and the concentration of the ownership of regional assets. Finally, they must understand the importance of commodity exports for their jurisdictions and for their country. FINAL THOUGHTS The challenges facing LED practitioners are daunting because the wellbeing of millions of people depends on their ingenuity and determination to create the supportive environment for new economic opportunities. The inclusion of technology as an issue in LED planning and implementation provides an additional and powerful tool to handle the LED challenges that we face. Doing this does not require rocket science; in fact, we can go a long way by using a simple two-by-two matrix, the Quad Tool, to assist us. However, the challenges still require the LED practitioner to be aware of many technological issues and to think holistically. The words of Bertrand Russell: “Machines are worshipped because they are beautiful, and… they are hated because they are hideous” reflect the dilemma and challenge confronting LED practitioners. They have to be aware that technology can bring huge rewards, but also huge penalties. It does not help if part of a society benefits from new technological developments, and others suffer because of them. Only if the right balance is achieved, will the total community be the real winners. Herein lays the ultimate challenge. Now new tools and insights are available to help us handle the Janus Dilemma and its challenges for the ultimate benefit of our offspring.
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