Thursday, May 08, 2008

In Search of the Global Customer

The success of micro-enterprise sectors is becoming increasingly important to developing economies. So I looked for the perfect ingredients for micro-enterprise in Colombia. All that’s missing are picky, fussy, disgruntled, hard-to-please global customers. (Continued from "How to Build an Entrepreneur".)

The only pieces of the development puzzle that seemed to me to be missing from the stalls of Ciudad Kennedy in Bogotá and the storefront shops of Armenia in Colombia's coffee-growing region were customers differing significantly from the micro-entrepreneurs.

There was no question the merchants and manufacturers I saw could handle the needs of the local markets where they were building their businesses — what I couldn’t see was how they would learn to serve the larger world of customers beyond the neighborhood.

Are all customers really created equal?

And that’s the problem with the vast majority of micro-enterprises — they stay micro. They reduce poverty — surely job number one — but they don’t ignite broader growth.

This is more ironic than it sounds. One of the buried assumptions of standard, neo-classical, equilibrium-based economic development theory is that customers are homogeneous.

What matters — according to a neo-classical explanation of the shockingly different results that poor and rich countries have achieved over the last 50, 100 or 200 years — is their combination of economic inputs. Customer reactions to what the producers in those countries offer don’t matter in the equilibrium model for the reason that they’re all rational consumers.

Suppose some customers are not so rational

But suppose we entertain one small deviation from the buried assumption. Let’s imagine, simplistically, that there are two kinds of customers in the world. One is the rational consumer of economic legend. To be more precise, she is a well-heeled, well-financed and well-informed consumer in a rich, developed country.

The other is less fortunate — short of cash, without credit, nervous and very, very risk-averse. In the case of business consumers among this second group, he may even be willing to take a bribe.

You are what your customer buys

Which kind of customer would you prefer if you want to grow your micro-enterprise into a small business — and from there into a large one and eventually a national corporation or an international contender? It depends on how competitive your business is.

The first kind of consumer is probably better for better businesses. So a micro-enterprise sector lacking access to that kind of consumer may not evolve particularly good businesses that can compete on an international playing field.

While this may be a shocking heresy for mainstream development economists, I suspect most business readers will readily grant that something about customers matters deeply to the results of an economy.

Networks can net bigger fish

The problem is practical — how do you bring the stall-owners of Ciudad Kennedy and shop-owners of Armenia to the world-class customers best able to guide businesses to competitive success?

And if it’s too hard to bring the micro-enterprises of the developing world to the markets of Europe, East Asia and the United States, who might help bring the customers of the world to the micro-enterprises?

The ready-made network of microfinance institutions

The answer, I suspect, is any network of micro-enterprises that understands the opportunity.

In some cases, microfinance institutions will shape or create those networks. It’s not that these little lenders are a kind of skeleton key to all the mysteries of development economics — it’s just that a lot of them are going to be in the right place at the right time.

The reason is that the simplest way to raise the profile of the micro-enterprises of Colombia — and the many emerging markets like Colombia in the world — is to aggregate them. Size matters.

Networks can make their members less risky

Moreover, an established group of micro-enterprises with diverse competences can greatly reduce the risks of a buying agent or procurement officer working for a company that is unfamiliar with the group’s home market.

Such a buying agent always faces a trade-off — whether to stick to tried-and-true suppliers even though they may be expensive or to try to find less expensive emerging market providers who pose larger risks to the completion of a project.

Bangladesh's example

Grouping together ten or 20 micro-enterprises in an emerging market can lower the risk that any one of them will fail to deliver its part of a client’s project. Groups large enough to build reputations will respond to incentives to monitor and help one another.

Call them solidarity groups in recognition of the groups of poor borrowers willing to provide cross guarantees on the loans Nobel-laureate Mohammed Yunus learned he could safely extend to them through his pioneering Grameen Bank of Bangladesh.

Just as Yunus’ solidarity groups of mostly female micro-entrepreneurs enhanced their creditworthiness by guaranteeing one another’s loans and monitoring one another, a solidarity group of more sophisticated micro-enterprises can monitor one another’s progress against contractual requirements for a set of shared clients.

A new life for microfinance

Microfinance institutions could discover a second calling in the organization of these kinds of second-generation solidarity groups. One can imagine finding such groups at some point in the future in every market of the world on websites that spell out their capabilities and even track records.

If microfinance can help bring the world’s customers to their micro-enterprises, they may help solve one of the thorniest development problems we face.

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Blogger Tony Haenn said...


Have you read any of Yochai Benkler's work - specifically Coase's Penguin?

Benkler discusses the changing economic dynamics of production due to decreased communication costs. Essentially, the information transaction costs that previously suggested that organizing as a firm provided the best scale for producing an organized output are largely disappearing.

What impact would that have on your idea of aggregating micro-enterprises? Do you foresee a "hollywood" model of production appearing?

7:51 AM  

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