Posts Tagged ‘informal business’

Fundamental Elements of Informal Sector Commercial Activity

There are two key elements which underpin the dynamics of any business or commercial enterprise in the informal sector. These are Time and Money.

A generalized framework can be diagrammed, as shown above, where the dotted line denotes the degree of uncertainty and volatility of an individual’s cash flow patterns – whether from a variety of informal economic activities – such as for the farmer or trader; or from the salary received for a white collar job. The X axis – Time – denotes the increasing accuracy of estimating the Arrival date of a cash payment (from some revenue source), and the Y axis – Amount – denotes the increasing accuracy of estimating the Amount that will arrive. Their relative ability to estimate Arrival and Amount with any degree of accuracy is indicative of their ability to forecast and plan for expenditure.

Thus, at one end of the continuum, one can position an odd jobs labourer who may or may not get paid work on any given day, and is unable to predict with any degree of certainty what type of job he’ll get selected for, nor for how many days it will last. It could be as basic as loading a truck for half a day’s pay, which in turn might even be in kind, and not cash. And, at the other end of this continuum, one can position a the typical white collar salaried professional or civil servant who knows with certainty exactly on which day they will receive the salary and exactly how much will arrive.

 

Positioning and Location

Now, we can frame these two elements of the commercial operating environment in the form of a position map, as shown above, that maps the ability to plan expenditures against the stability of the cash flow. The red arrow is the continuum of certainty and stability of Timing and Amount of an income stream, anchored by the most vulnerable odd jobs labourer at one end and the relatively most secure salaried professional at the other.

Where it gets interesting is the relatively liminal space in the middle where the various economic actors in the informal economy constantly shift position as they seek to mitigate the volatility of their income streams, through a variety of mechanisms. Much of their decision making is related to their own perception of uncertainty and ability to forecast.

For the purpose of this explanatory diagram, I have selected 4 typical examples drawn from different sectors of the informal economy common in the developing country context. Each are at the more vulnerable end of their own segments i.e. a subsistence farmer, rather than one with an established cash crop; or a small roadside kiosk rather than an established general merchandise store in a market town; since they have not yet achieved the goal of their business development strategies to move their own entrepreneural ventures towards relative stability, and thus provide more insight on the relationship between cash flow patterns and investment and expenditure planning.

The hawker of goods at a traffic light or junction is in a comparatively more fragile situation than the kiosk owner with a fixed location who works to develop relationships with passing customers in order to convert them to regulars at her store. Unlike the kiosk, which might be located near a busy bus stop, or outside a densely populated gated community; the hawker cannot predict which cars will pause at the red light as he darts through traffic shouting his wares. However, compared to the odd jobs labourer, the hawker has comparatively more control over his income generation since his is not a passive function of waiting to be picked from the labour pool in a truckyard or construction site.

The smallholder farmer might actually be better off economically in many ways than his urban brethren involved in informal retail, being able to live off the land more cheaply than in the city. Experienced farmers, for the most part, are able to predict with reasonable accuracy, more or less the quantity of their crop, and the estimated timing of the harvest. However, his sense of uncertainty is often perceptually greater due to the unmitigatable impact of adverse weather conditions, or the sudden infestation of a pest or blight, any of which could at any time completely destroy his harvest, and thus, his expectations. This sense of insecurity in turn influences his decisions on expense commitments to far ahead in time, or too large a lumpsum at some point outside of his regional harvest season. The farmer’s income streams are relatively more out of his control than the disposable income in the pockets of the kiosk’s customer base.

The market woman with her display of fresh produce, at the entry level of inventory investment capacity, might only have one or two different varieties of vegetables or fruit to sell, and may not yet have established a permanent structure – a table, a kiosk – in the market. She might start off with only a tarpaulin on the ground with some tomatoes and onions for sale. Unlike the traffic intersection hawker, however, she is more likely to begin by assuming a regular placement and location as this establishes the foundation for her future business development, through the factors of discoverability and predictability among the customers in that locale.

That is, in addition to Timing and Amount of Income – the cash flow patterns and sources – we begin to see the role played by location – Place1, as a supporting element of the commercial activity in the informal economy. While farmers are least likely to have much control over the location of the land they may inherit, their risk mitigation strategies to minimize volatility of their income streams and maximize their ability to plan for the future and manage emergencies will be discussed in depth in the section2 on rural household financial management. These practices are the foundation of business development strategies commonly observed in the informal economy in developing countries which tend to be less urbanized, and as is often the case, more dependent on agriculture as a component of national GDP.

 

Appendix
1 People, Pesa, Place: A Multidisciplinary Lens on Innovating in Emerging Markets
2 Rural Household Financial Behaviour on Irregular Income Streams at the Base of the Pyramid

Cash in hand

streetI needed to convert some euros into Ivorien francs in Abidjan last month and my colleague suggested Treichville market as the go to place. On our way there, I’d imagined it would be one of those hole in the wall currency exchange kiosks one sees in global cities from Singapore to South Africa. There would be a flashy LED signboard showing the day’s rates or a humbler blackboard, making the shop’s function unmistakeable.

When we found a suitable street corner to park, the two young men showed up and asked us how much we wanted to change. After a bare minutes negotiation and the flash of the ubiquitous calculator, money changed hands. They were grinning at the minuscule amount I was changing and encouraged me to return with more, offering a range of currencies they handled. Surely this was the shadower side of the cash based informal economy, I thought?

bzcardAh non, madame! Here is our business card, I am the manager of this shop and we are always here on this corner, see, it is even printed on the card.

What is formality and informality when you have a business card with your address and phone number?

The mechanization of donkey water, a symbol of economic progress

Bye-bye

There’s a snippet of interesting insight in this news article from Hargeisa City in Somaliland. Traditional donkey carts supplying water are being replaced by motorcycles and this has been framed as a sign of increasing development and economic activity by the journalist.

Bajaj Water tankers gradually negating Donkey drawn water distributors in Somaliland

Its a local invention, this “Bajaj Water Tanker” as its called, a prime example of the jugaad or ingeniously creative solutions to inadequate infrastructure and unreliable systems that one can see peppered across the developing world.

In his interview, Mr Fanax, shown above with his innovation above, answers a few questions on the difference between using this modern technology versus the donkey cart he used previously.

Q. is there any change in the price of water from your previous charges?

A. yes I used to sell a drum of water at 12.000 SL but now I sell at 9.000SL

Q. how long have you used the motor cycle, how many liter of water does the tank carry, how many liters of fuel do you use?

A. I have used the motor cycle for 3 months, the tank carries 400 liters of water equivalent to 2 water tanks. I use 4 liters of fuel per day equal to the food that is given to the donkey (grass and maize)

Q. how do you customers see the changes that you have done?

A. they are happy with the changes in terms of price, the faster way of getting water and even on the cleanliness

Q. what do you suggest to your friends who use donkey cart?

A. it’s a good question. Be ambitious and ensure that you change from using a donkey to a more modern way.

Interestingly, the price of water has come down, although one would imagine that a donkey might have been cheaper to maintain than a gas guzzling vehicle. On the other hand, he gets around faster and can make far more deliveries transporting double the volume of water and thus might still be making more money than previously.

What strikes me is how the concept of “modernization” and “progress” is perceived, in the context of the individuals daily life and operating environment, whereas to those of us accustomed to piped water, the need for water delivery might still be considered primitive or backward.

There’s a whole new vocabulary of aspiration evolving within the informal economies kickstarted by prosperity.

Estimating price in unexplored and untapped markets

In addition to estimating the size and value of the Kenyan cyber cafe industry for our client, Village Telco of Cape Town, South Africa, we were tasked with finding out what would people pay for their product, the Mesh Potato. This challenge was the equivalent of walking up to someone and asking:

How much would you pay for this thing you’ve never heard of and you’re not sure what it does?

We discovered it was through the long rambling conversations we were having with our selected cyber cafe owner operators that we were able to get to this point of being able ask such a question. The conversations allowed us a peek into the way they thought about investing in new technology, and in many ways, reflected back to us the basics of the “BoP” consumer mindset that had already been identified previously.  For example:

Maximizing ROI (return on investment)

When asked what he’d pay for a Mesh Potato, our friend Moses responded with a question, “It depends,  how much money will it make for me?”

That is, as a business owner, his evaluation of the product’s price was intrinsically linked to its ability to generate an income stream. Maximizing the return on the investment is his primary criteria – whether it will save him money or a significant amount of time, and how soon will that possible are all the factors that go into the decision to purchase. His question also implicitly holds the corollary premise of Minimizing Risk.

So rarely was the price seen in isolation but instead it was considered in context of a variety of other factors.  For business owners, their primary value driver was “Is this a source of increased income for me?”

Another factor was that of the need to question assumptions underlying traditional models for assessing pricing – from wikipedia’s entry on the underlying assumptions used in Van Westendorp’s model:

The assumption underlying the Price Sensitivity Meter (PSM) is that respondents are capable of envisioning a pricing landscape and that price is an intrinsic measure of value or utility. Participants in a PSM exercise are asked to identify price points at which they can infer a particular value to the product or service under study. PSM claims to capture the extent to which a product has an inherent value denoted by price.

What if price is not the intrinsic measure of value or utility but long term revenue generation potential is?

Until we are able to gather enough insights over the course of a number of such studies and come up with frameworks customized for a very different operating environment, it will only be through the willingness to question all our assumptions and adjusting our approach that we will be able to make reasonably accurate assessments for these untapped markets.

The Informal Economy Symposium, Barcelona on October 12th 2012

Our aim with this symposium is to explore the global scope, innovations and potential futures of the informal economy.

Opening Keynote will be John Keith Hart, who coined the term “informal economy” and the day long symposium on the 12th of October will be closed by John Thackara.  There will be three panel discussions, as follows:

PANEL 1: SCOPE, MEANING AND TENSIONS IN THE INFORMAL ECONOMY

This panel will explore the scope, tensions and influences of the informal economy. It will set the stage, provide case studies, and present new themes that make clear why the informal economy is a key topic for business and society today. It will address critical questions for the symposium: What are historical foundations, contemporary developments, conception and misconceptions of the informal economy? What parts are institutionalised or marginalised and which are not?  What does regulation look like?  How is the informal economy similar or different in emerging vs. developed markets?  What kinds of goods and services does it include?  Are there good and bad informal economies? How are the informal and formal linked? How do labor, goods and services move within and between them? Why does contemporary business need to understand the informal economy?

PANEL 2: THE FUTURE OF MONEY AND THE INFORMAL ECONOMY

This panel will explore the use of money and other exchanges in the informal economy. This panel builds on the previous, starting with the premise that the informal economy is a place to create new value for business and society. It will discuss the relationship between regulated finance and informal exchanges, focusing on, among other things, mobile money. Some key questions to be addressed include: How is the use, exchange and idea of money similar or different in formal vs. informal economies? How do digital technologies encourage and expand informal practices and exchanges?  What are the ways to establish financial links and other bridges between formal businesses and informal practices? What are specific financial needs in various informal economies? What are the challenges faced by companies operating in financial services and other businesses when addressing the context and practices of the informal economy?
panelists: Ben Lyon, Ignacio Mas, Niti Bhan  moderator: Rich Radka

PANEL 3: INNOVATION AND OPPORTUNITIES IN THE INFORMAL ECONOMY

This panel will look at innovation within the informal economy. Rather than approach informal economic practices as make-do strategies of people in the margins, panelists explore the potential for the lean and agile practices of the informal economy to adapt to contemporary global shifts. Some key questions to be addressed include: Can informal economic practices be indicators of future economic activity? What can these practices teach us about our own innovation efforts and modes of doing business?  What does the persistence of informal economies mean for the future of business? What challenges does it present? What are some ways companies can act on opportunities?

You can register for the symposium here, or follow the blog and twitter hashtag #informaleconomy.

Rise of tricycle pushcarts in Mexico

ClubOrlov has a guest post from a small Mayan fishing village in Mexico by a writer only known as Albert, who observes this informal economic activity and its players closely:

photocredit: author

What struck me is that I cannot recall a time in the past decade that I have been observing these vendors when there were more of them. Call it a sign of the times, but every few hours another passes by the front of my house, shouting out what he or she is selling. In the morning its newspapers and fresh, hand-made tortillas. Around lunchtime is it fresh garden vegetables, epizote, bread and other kinds of unprepared food. There might be a tricycle for fruits and juices, another for tomatoes, onions and peppers, another for potatoes, beans and rice. By late afternoons they may pass by with fresh sweetbreads, steaming hot tamales, or corn on the cob.

A man with his tricycle grinding stone offers to sharpen machetes, knives, scissors, shovels, or any other sharp objects. A man with a blender (12V but it could as easily be pedal-powered) makes cups of shaved ice with sweet corn or coconut.

You can buy a tricycle brand-new, assembled, already painted in taxi colors of orange and white, and be ready to take a fare straight from hardware store to wherever they are going. The price of a new Chinese-built trike is 3200 pesos, about US$229.32 at today’s rates. The board that goes across the bars for a seat was salvaged from the trash at no cost, but perhaps some cushioned fabric is sewn over to help you through the potholes. Typically a fare pays 20 pesos ($1.43) for up to a 10-block ride.

I asked a tortilla vendor who plies a regular daily afternoon route how much he sells in an average day. “100 kilos” is what he said. His corn tortillas sell for a 3-peso mark-up over the tortilla factory (and there are three of them within a 5-block radius). So if he sells 100 kg, he makes 300 pesos per day, enough to pay for the tricycle in just under 11 days. Perhaps his wife has a masa roller and automated oven at home and he makes his own tortillas and the margin is even better.

Stopping by the largest of the tortilla factories in town — a one-room addition to a family home, which now employs three women from outside the family to turn corn meal masa into machine-stamped tortillas — I inquired how many tortillas they make in a typical day. “Ocho o nueve,” she said, meaning eight or nine metric tons — 8000 to 9000 kilos — and remember, this is just one of three within a short distance, and many people prefer to make their own at home. The entrepreneurial drive explores for available niches and fills them. Many of these factories supply restaurants and grocery stores. Retail home sales pass through bulk buyers at the tortilleria, like my local trike man, who do just fine with the small margin people are willing to pay for the convenience of not walking around the corner.

I noticed that my man sometimes gets lucky and lands a really big sale, however. Maybe someone is throwing a big party (and this happens often) and needs 20 kg. Or a tendajón finds itself short on a holiday weekend and buys 50 kg. His route is pretty small, just a few blocks, but if his son could run his trike in the mornings, or a second trike in the afternoon when he is making his rounds, perhaps he could extend his family’s range and double their earnings. Then again, as I’ve seen, he’s not interested in that, preferring to live quite adequately on 300 pesos per day ($21.50) in a town where the average unskilled worker makes even less than that. Or perhaps he has another job already and is just enlarging the family’s income by putting in a few extra hours while schmoozing with his neighbors.

For me, I’d rather save 3 pesos and ride my bike a couple blocks to the tortilleria, but that’s mainly because, being a writer, I need excuses to force myself out of my chair. As times have become tougher for average people, I’ve also noticed more homes along my bike route opening their front rooms to make tendejóns or comidas economicas. A comida economica provides a home-cooked meal with table service, giving the buyer a plate of whatever the family is making that day. A tendejón is an informal home store. It might have home-grown pigs, chickens or eggs for sale, or garden produce. It shares the same root word, tener (to have), as the more formal store or mini-mart (tienda), but whether for legal reasons or just wanting to keep it more neighborly, a tendejón is an unpredictable collection of wares in someone’s living room, next to their Christmas tree and fluorescent blinking statute of the Virgin of Guadelupe.

Between the tendejón and the tienda lie the more formal abarrotes, or package stores, which usually sell cold beer, insect repellent and junk food. These are usually under a residence or in an adjoining building to the family’s principal dwelling. There are one or more abarrotes, tendejóns and tiendas on nearly every block.

Tricyclos are a common sight in much of Yucatán Peninsula, as they are in Asia, Africa, South America and other parts of the two-thirds world. In the United States you mention a tricycle and people think of Monty Python or Laugh-In. In the global south they are multifunctional and ubiquitous. You see them as fishermen’s friends, beach-roving gear-buckets for surfers, portable crepe parlors, bellhop cabin service, and the poor man’s moving van.
 

Senegalese research on innovation processes in their informal ICT sector

I came across some excellent research by Dr Almamy Konte and Mariama Ndong of Senegal. While I’m sure the original working paper in French must be far better than this drafted English translation, their key points are nonetheless something to make us sit up and listen, particularly with regards to innovation in the informal economy.

Research has shown that the informal sector of ICT is a sector that has recently developed (since 2000). This sector has evolved to meet the specific needs of the ICT society. Coping mechanisms in this sector spend by taking into account the social and economic populations.

Taking into account these social realities is the basis innovations noted in the sector. These innovations (social innovation, organizational innovation, and marketing innovation) are a reflection of the Senegalese society and its organization. These innovations are based on values and thus Senegalese distributive logic versus the logic of profit prevails in the capitalist system. ~ from their abstract

They have found that the innovations observed among the informal ICT sector (covering all aspects of information and communication technology such as the repair and repurposing of old equipment, sales of new and refurbished including scratch cards and accessories etc) are those that have emerged in response to cultural and social needs inherent in Senegalese society and many of the core values of the businessmen reflect this localization.

A snippet from page 10:

In Senegal, the informal sector provides enormous potential and capacity for innovation that justifies his place in the Senegalese economy. The emphasis is on using knowledge rather than the production of knowledge. Innovation has always been viewed as a transgressive action individually or in groups to improve unsatisfactory situations, or at least solve problems.

However, innovation is not a simple problem solving but it contains within itself the seeds of creativity and originality, it acts on the margins of freedom of the actors when dealing with operations increasingly demanding control (CROS, 2007, 9). Any characteristic of the informal sector in Senegal who works in the “lack of structure”, but who is under enormous pressure and intense competition in the modern sector.

Innovation is meeting a need (real or potential), a market and workable solutions. It is important to link the needs to the requirements because the informal sector in Senegal follows the demand and adapts itself. It has a great capacity for innovation and responsiveness that the modern sector itself has not.

I have highlighted the sentences that stood out for me – while I had not been able to comprehensively address this topic as well as the authors have managed to do – it was back in the Autumn of 2010 that we’d conducted a field study among the jua kali workers in Kenya to take a closer look at innovation under conditions of scarcity among the informal manufacturers and fabricators based on the same logic.

That here, the informal sector’s responsiveness to customer needs was of a level entirely different to that of the formal industry – that their inventiveness and ingenuity was partly a demonstration of their ability to make and offer for sale exactly what their market wanted. There was little or no scope for errors in an environment of resource scarcity and irregular incomes. Products sold were incomes earned, a direct correlation that Konte and Ndong observed as well:

we try to show that the innovational act in this area is beyond the theories of innovation. Indeed, here the imaginative character of the actor is based on a sense of survival. With a highly developed competition, the human being must be creative and resourceful to get a place in the economic market.

While the PDF as a whole is a treasure trove on the informal ICT sector in Senegal and related literature, this last part from their sampling exercise did also stand out for me. It is the identification of the core values that helped increase their revenues, by the participants of the study, that is the informal ICT business owners:

Social values that contribute most to the increase in turnover of UPI are honesty (Jub ak ngor), courage (Diom), solidarity (ndimbaleunté) and hospitality (téranga). Indeed, the arguments advanced by respondents in the UPI to justify the choice of social values are numerous.

Honesty for these IPU (Informal Production Unit) respondents is the value that leads to success. It helps to establish trust, to secure and retain customers. An insured customer always comes back and you can even get other customers.

Courage is an essential value for a person who seeks a horizon. For them person must be selfless in order to survive in this business. It is not easy to get up early and be present every day for a long duration (12 years for some). Thus, only the courage and perseverance can help them to move forward.

Solidarity for them is a national value, Senegalese, because Senegalese feel affection for helping each other. It serves to reinforce the links in the sense that these UPI are family so everything happens in families. This solidarity is reflected in contributions, loans among themselves and participation in happy events as unfortunate. Furthermore, this solidarity allows IPU meets their limits by complementarily. Solidarity also fixes and maintains customers (make loans). This social value is often instilled in them their religious associations(Dahira).

Hospitality is value of any good Senegalese in their opinion; some of them had to receive it in their career. A welcome to the customer saves his confidence by putting them at ease and that sometimes happens with a smile, buying fruit drinks to customers. Therefore, a client welcomed, always returns.