Business Networking Forum

“Enhancing Entrepreneurship in SME Development and Export Consortia”

“Overview of SME Development and the Role of Business Networking”

By Mr. Oudet SouvannavongVice-President of Lao National Chamber of

Commerce and IndustrySecretary General of the GMS-Business Forum

1st September 2010Mekong Institute , Khon Kaen, Thailand

Presentation Agenda

Characteristic Problems of SMEs Importance of SME Networking SME and the Value Chains Example of Horizontal and Vertical Networking

Characteristic Problems of SME – relative to their size

SME can play a key role in triggering and sustaining economic growth and equitable development in developing countries

SMEs are often unable to capture market opportunities which require: Large production quantities Homogeneous standards; and Regular supply.

SMEs experience difficulties in achieving economies of scale in the purchase of inputs such as: Equipments Raw materials Access to Finance Consulting services, etc

Characteristic Problems of SME – relative to their size Small size also constitute a significant hindrance to

the internalization of functions, which are the core of the enterprise dynamism such as: Training Market intelligence Logistics; and Technology Innovation.

Small scale prevent the achievement of specialized and effective internal division of labor, which fosters cumulative improvements in productive capacity and innovation.

Because of the continuous fierce struggle to preserve their small profit margin, SME are often locked in routines and are unable to

innovate their products; and process beyond the boundaries of their enterprises to

capture new market opportunities.

The Enabling Business Environment Impact on SME Business - Factors Enterprise registration Legal and Regulatory Framework Accounting and Finance Tax Systems Availability of Credit for SME Labor Laws and regulation Non Tariff Barriers and Measures Monopolies and cartels Macro-economic stability (inflation,

commodity price increase, etc.)

Importance of SME Networking SME can address the problems related to their

size and improve competitive position; On the account of the common problem they

all share, SME are in the best position to help each other.

Networking is made through HORIZONTAL COOPERATION between SMEs occupying the same position in the value chain. SME can collectively achieve optimal scale in the

use of machinery and SME can pool together their production capacities

to satisfy large-scale order.

Importance of SME Networking

Networking is made through VERTICAL COOPERATION with other SMEs as well as Large-scale enterprises along the value chain. SMEs can specialize on their core business and

give way to an external division of labor. Inter-enterprise cooperation gives rise to a

collective learning space (invisible college), where ideas are exchanged and developed , and knowledge shared in a collective attempt to improve

product quality and occupy more profitable market segments.

Importance of SME Networking Networking of SME, providers of Business

Development Services (BDS) and local policy makers can help shape a shared local development.

Networking refers to a group of SME that cooperate on a joint development project by complementing each other and specializing in order to overcome common problems, achieve collective efficiency and conquer new markets beyond their individual reach.

There are “Clusters” that indicates a sector and geographical concentration of enterprises i.e. specialized suppliers of raw materials; or a pool of specialized skills.

Vertical and horizontal cooperation is made along a Value Chain or a Supply Chain.

SME and Value Chain

Value Chain Definition

The sequence of related business activities (functions) from the provision of specific inputs for a particular product to primary production, transformation, marketing and up to final consumption.

The set of enterprises (including SMEs) that perform these function i.e. the producers, processors, traders and distributors of a particular product

A business model for a particular commercial product using a particular technology and a particular way of coordinating production and marketing.

The Importance of Value Chains Markets do not always develop & function on

their own Public services are insufficient – or lack altogether Infrastructure is bad The legal and administrative rules are not

appropriate Lack of trust, skills, transparency, etc.

Economic Globalization Calls for close coordination of production and distribution

along the chain to comply with quality requirements and reduce costs of logistics

Networking between firms in order to promote investment and enhance value addition

Vertical Integration in Value Chain

• SME in the rural areas are mostly left off the retail revolution.

Vertical integration connect retailers back to the production and processing stages of the production system

i.e. in food system Retailers can now dictate terms to SME food

manufactures forcing changes back through the system to the farm level

As the balance of power shifts to retailers, SMEs in all parts of the food systems are being marginalized

Scoping Value Chains

Difference in Value Chain

Difference in Value Chains

Difference in Value Chains

Chain Bottlenecks

Horizontal Network: EMASIM Metalworking Network in Honduras – 11 SMEs with 4 workers each

SMEs were invited to a training course. The entrepreneurs get to know each other better. Helped by a Consultant , they started to analyze common problems and searching common solution.

The supply and cost of raw materials was indentified as the most urgent problem. → A common raw material supply center was created→ A common Loan obtained by SME Bank→ A common revolving funds established as the network working capital.

Based on progress achieved the network extended their cooperation to production level→ Exchanging tools,→ Indentifying and sharing large orders (metal construction,

maintenance works in large supermarkets and offices buildings)→ Examining ways to complement their production processes.

To diversify production and target new market segments, the Network collectively invested in new larger equipment and establish a separate independent enterprise to manage the new equipment to service the Network members.

Quantitative result: the collective sale increased by 200% in comparison to the total individual sales prior to Network establishment. Employment increased by 15% and fixed assets by 98%

Horizontal & Vertical Network: Chai Lao Handicraft

6 handicrafts enterprises joined an export product promotion project for the Japan market Study on the Japan market demand (standard

requirement) Set up value chain from silk production to handicraft

production Set up of standards for export Branding of products Collective exhibition and sale under the brand “Chai

Lao”. The Network further expanded their market for the

production of kimonos under the same brand

Recommendation – Roles of Stakeholders

Chai Lao Exhibition

Project Clustering and Networking of GMS Transport and Logistics Operators

Local transport and logistics operators have low awareness about GMS-CBTA protocols, CTS and other regulations and standard requirements for operating in the economic corridors. They lack expertise and technical skills and corporate management.

Local operators need to upgrade themselves to standard requirements.

Local operators need to extend their operation outside their boundary

They have not the capacity to renew transport fleets and infrastructure because they lack funds and credit.

Project Clustering and Networking of GMS Transport and Logistics Operators

• Networking of local transport and logistic operators in the GMS is promoted for operating in the GMS corridors.

• There are 4 clusters Northern Cluster 1

(Yunnan-Myanmar-Thailand-Laos)

Northern Cluster 2 (Yunnan, Quangxi, Vietnam)

East West Cluster (Vietnam, Laos, Thailand)

South Cluster (Vietnam, Cambodia, Laos, Thailand)

Project Clustering and Networking of GMS Transport and Logistics Operators

B2B Network transport and logistics operators is established in each clusters

Set a “Charter of Standards” covering safety, community responsibility, driving hours, environment, etc.

Training of operators and drivers on the charter standards and CBTA

SME Banks Credit to Network Members for improving standards and increasing fleets

Support from Government and Development Partners provided on capacity building development to B2B Network

References SME Cluster and Network development in the

developing countries: The experience of UNIDO; by Giovanna Ceglie and Marco Dini (UNIDO)

Entrepreneurship and Marketing Strategy: The SME under globalization, Gary Knight, Journal of International Marketing

The role of global value chains in agribusiness SME development in the GMS, Anthony M. Zola, Expert group meeting on promoting SME’s participation in global value chains in the GMS.

Promoting SME development: some issues and suggestions for policy consideration, Thitapha Wattanapruttipaisan.

Value Chain Link Training Module, GTZ Foreign Trade Development of SMEs in Lao PDR, Oudet

Souvannavong Informatisation of SMEs in Laos, Oudet Souvannavong