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5. Exploring commercial options


Characteristics of successful small enterprises
Elements of a successful enterprise strategy
Problems commonly faced by small enterprises
Planning NWFP enterprises

Managing risk
Building entrepreneurial and management skills
Credit support for small enterprises

Overview of processing options
Summary
References
For further reading



This chapter focuses on characteristics and strategies that help enterprises succeed, and on how to diagnose and address the common problems that small-scale producers face when entering commercial trade. It outlines an approach for planning an enterprise, reducing the risks involved and improving entrepreneurial skills. Finally, it looks at credit needs and options for adding value locally, often through local processing, for greater rural income.

Many small-scale enterprises start without adequate information or planning, and, as a result, many of them fail. Small (often household) enterprises can comprise up to 70 percent of a country's forest-based manufacturers (Chipeta, 1995). But studies have found that only about 20 percent of new small-scale enterprises succeed in the long run (FAO, 1995).

What do these statistics mean? In part, they signal that small enterprises can enter markets selling forest products relatively easily, but only a small portion of these enterprises manage to adapt to the changing circumstances of supply, market demand and competition.

What types of enterprises succeed? What do they have in common?

Characteristics of successful small enterprises


Successful forest-based small-scale enterprises generally share the following characteristics:

able entrepreneur - a resourceful and capable manager can overcome many obstacles;

marketable product - the entrepreneur must continually assess the future of the product's market: Will price trends for the product (and its substitutes) cause its market to grow or decline? What new products threaten to replace it?

reliable supply of materials - processors and traders need a predictable and stable supply for maintaining markets. Forest degradation can threaten an enterprise's supply of materials and its credibility with traders and consumers;

favourable infrastructure and access to credit - access to transportation, utilities and credit for capital investment heavily influence an enterprise's chances for success. Small enterprises can overcome the conditions that favour larger operations by grouping together.



Elements of a successful enterprise strategy


With the factors described above, combined with a good knowledge of the resource, producers can explore ways of increasing their income from NWFPs. Figure 5.1 illustrates how the improvements outlined in Chapter 4 contribute to an enterprise strategy for increasing income. Experience with small enterprises suggests the following lessons (Clay, in press):

• start with products for which a local market already exists. Entering an existing market allows producers to start repaying costs immediately, but creating markets for new products takes time;

improve harvesting techniques and reduce post-harvest losses (see Chapter 4). This includes storing a product until the "off" season, when it can fetch a higher market price, and relatively low transportation costs;

• increase the product's competitiveness by: (1) reducing costs of production, (2) creating a niche market, or (3) improving management of the resource (for example, by enrichment planting for better yields and easier harvesting);

adopt a simple strategy. Complex production/marketing strategies permit more unforeseen difficulties. Management ability is the biggest challenge for most rural entrepreneurs; simpler management strategies favour them;

start with one product and gradually diversify. First, choose the easiest product that yields a good revenue for the time involved. Invest profits in the processes required to produce a second market item. The income from the first product can also leverage credit for a larger operation;

diversity the markets for each product. Before expanding from local to regional or national markets, estimate the added costs and benefits. Stay informed about research on new products and on changes in populations and preferences. Nostalgia markets are growing in most countries (see Chapter 7);

add value locally, usually through processing. Subsector analysis (see Chapter 3) helps to identify how much value accrues at each stage in the production-market chain and which stages are most profitable;

• continually study the available technology for potential improvements;

know the quality standards required by buyers, and the standard of the enterprise's product. Products such as food, soap, shampoo and cosmetic products often must meet health and safety requirements. Learn about those minimum standards, and decide how to have the product evaluated;

organize with other producers for collective strength. This helps to reduce each producer's costs for transportation, storage or materials, and also helps in negotiation with manufacturers in downstream processing (See Chapter 8);

demonstrate the ecological viability of the enterprise. Use results of regular harvest impact assessments (see Chapter 2) to appeal to environmentally-minded consumers.

Figure 5.1. Diagram illustrating how small-scale NWFP producers can increase their incomes (adapted from ATI, 1994)

Examples

Remove competing vegetation
Harvest more selectly, learn about better equipment use
Construct ventilated store room, dry fruits for shipping
Monitor insect damage, use big-pesticides when needed
Sort produce by quality grades
Assess processing options, install processing facilities, packaging
Group sales to traders at standard prices based on quality
Collectively rent transport for taking products to market; obtain credit for members; store product for off-season price benefits



Problems commonly faced by small enterprises


An example from Indonesia: Rattan



In local markets, the most prominent NWFPs will usually be readily apparent. Where local markets are not developed, however, a first problem that enterprises encounter is identifying a marketable product.

Other problems faced by rural producers include the following (Pswarayi-Riddihough and Jones, 1995; FAO, 1987):

lack of marketing information. Producers often lack information on: (1) the price of their products, both in local markets and as inputs to downstream processing, (2) product volume required by the market and how much competitors provide, and (3) quality standards;

unreliable source of raw materials. Small-scale producers often have little land area and poor-quality growing stock;

post-harvest losses. Poor transport and storage facilities can cause producers to lose 25-50 percent of a harvest, losses compounded by wasteful processing;

lack of processing. Many producers do not process their items further, either because they lack information or equipment for processing or they doubt that processing will significantly improve their earnings;

transportation and infrastructure. In remote areas, high transport costs and poor infrastructure (for example, roads or inter-island ferry service) reduce many producers' ability to compete in markets;

lack of effective credit. Lacking collateral or flexible lending terms, many producers cannot get credit for working capital from formal financial institutions. They then rely on informal channels, such as local merchants, who usually command high interest rates;

unfavourable policies. Policies governing imports, exports and pricing can create high economic barriers for producers.

Many of these problems are due to information gaps that producers can bridge. Others require institutional changes that only a committed government can bring about.

An example from Indonesia: Rattan


Forest dwellers in Indonesia have traded rattan through channels leading to international markets for nearly fifteen centuries. Until the mid-1960s, East Kalimantan, on the island of Borneo, exported more rattan than timber. Rattan continues to be Indonesia's most important NWFPs.

In East Kalimantan, hundreds of small-scale rattan enterprises trade with exporters. Rural households work in rattan and rattan handicrafts because these enterprises use relatively simple technology, rely on raw materials that have traditionally been abundant, require little capital, and provide jobs for skilled and unskilled labour (Hadi, 1991).

Most of the island's interior lowland forests are divided among more than 100 timber concessions (Peluso, 1991). Rattan collectors pull the rattan from the treetops, then use machetes to cut it and remove the thorny sheath. Next, they fold it in bundles of 4-6 m lengths, pack the bundles in units of about 28 kg each and air-dry them, sometimes removing the stem's outer coating. Each generation of forest dwellers has passed on the knowledge of how to collect and cultivate rattan.

The collector sells his produce to a river trader, who takes it by boat to a first-stage processing centre. Processors wash and sand the rattan and then air-dry it in the sun for 1-2 weeks. It is then graded by size and treated (either by smoking or boiling) to improve its colour and protect against pest damage. Wholesalers and retailers then buy the sorted rattan. At a further processing stage (either in East Kalimantan or on Java), cottage industries work the rattan into handicrafts and furniture. Furniture is also produced in large scale mechanised units.

The rattan trade as it has evolved tends to dictate specific niches for the ethnic groups involved. The collectors are mostly tribal groups such as the Dayaks and Kenyahs, mainly rural swidden agriculturalists. In the river trade, Muslim groups such as the Bugis and Banjars predominate. Chinese-Indonesian traders dominate the coastal, inter-island and international trade.

The rattan industry continues to keep rural collectors involved, but even in this well-established sector they encounter most of the problems mentioned above. Table 5.1 illustrates how these problems can be diagnosed, and what measures might address each problem.

Table 5.1: Problems in rattan production in East Kalimantan, with possible improvements

Problem type

Specific situation

Possible remedy

Low production

Over-exploitation: rampant over-harvesting, traditional checks have lost their force, and misuse of logging concession rights that wastefully destroy rattan-growing systems

Rattan garden cultivation, as initiated by Dayak and Kutai; creation of more diverse village agroforestry systems; better enforcement and/or coordination with logging operations


Seasonality: only collected between agricultural activities; can be transported by river only during certain seasons

Improve storage (see below)

Post-harvest losses

Discoloration of rattan and fungal growth caused by immersion in river or exposure to rain; other losses caused by powder post- beetle, black water spots, rot and uneven colour

Improve storage through collective organization; create first-stage processing centres closer to collection sites

Lack of processing

Access to more advanced technologies limited by ethnic connections

Create processing centres upriver at bulking villages, closer to collection sites; obtain instruction in furniture making skills

Weak managerial and trade skills

Varies by ethnic tradition: Bugis, Banjar and Chinese have strong trade experience; Kenyah, Busang and Pasir are uncomfortable in business environment due to a more democratic social tradition, not profit-oriented

Increase marketing contacts with overseas importers, for example through trade shows

Market information

Downstream preferences not known

Increase marketing contacts

Labour costs

Wages are relatively high (3 times Java wages), competing with sawmills and plywood factories

Increased local processing would make high wages effective

Transportation

Dominated by traders; competes with less bulky, higher-priced cargoes such as plywood

Higher-value processed products will be better able to compete

Credit

Obtained mainly through shopkeepers, setting up ties of long-term obligation

Create credit alternatives

Source: Peluso (1991).

Planning NWFP enterprises


Planning is a major part of modern approaches to management. Planning builds on the assumption that anticipating a range of possible events enables the manager to respond to events as they occur. In some traditional cultures, however, long-term planning is a foreign concept, and can be considered arrogant or presumptuous. The Navajo language contains no word for planning. Attempts to build commercial enterprises in NWFPs must consider this cultural issue and its influence.

People starting an enterprise (particularly a group enterprise) should clearly identify their short-and long-term goals for the enterprise, and then review what experience and resources (cash, credit, equipment, land) each person brings to the enterprise.

Next, the entrepreneurs should review their past experience for activities that have made up their strengths, and weaknesses that need improvement. What problems have the members encountered in previous production, harvesting, processing and marketing activities? How have they dealt with them?

Prospective entrepreneurs should particularly consider their experience and lessons in the following areas (ATI, 1995):

raw material supply - How will the enterprise ensure an adequate supply of materials to meet buyers' demands? Can sustainable harvests from wild sources meet this demand, as estimated by subsector analysis (see Chapter 3) and marketing information? (see Chapter 7)

legal control/access to the natural resource - What other communities/organizations or individuals claim access to the resource? By what arrangements will the enterprise share benefits with them, and among enterprise members?

• markets for the forest product - What markets exist for the product as harvested? What are other markets for possible processed products? (See Chapter 6) What is the level and nature of access to each market? Who are the competitors? (See Chapter 7);

• appropriate processing technology - Which technologies permit the enterprise to start simple and then become more sophisticated? Which are adequate/efficient? What equipment is needed? What energy and/or water sources does the technology require? What skills? What storage and transport facilities?

• good management - Who has experience with management of similar ventures? What roles do deal-making and record-keeping skills play?

• financial requirements - What capital does the enterprise possess? What is required for the first six months? What formal (banks, extension services) and informal credit sources exist? What are their terms?

Finally, when enterprise has identified the areas where it lacks experience, it should explore what outside services can help improve skills in these areas. Government and university extension services, agricultural marketing services, NGOs and development agencies are all potential sources of training and other forms of assistance.

Managing risk


Before embarking on a commercial enterprise, everyone involved should clearly understand the risks and have a plan that would address them. Four measures for managing risk in an enterprise were mentioned earlier: (1) start with products for which a local market already exists; (2) adopt a simple strategy; (3) start with one product and gradually diversify; and (4) diversify the markets for each product.

An enterprise can minimize risk by starting with small, pilot-scale commercialization, based on known markets and their preferences for the specific product. Pilot-scale production and sale allow the enterprise to get a more accurate picture of the market, make adjustments while costs are relatively low, and refine its marketing plan.

The level of risk varies with the nature of the enterprise and the type of markets. In general, distant markets involve greater risks to the producer than nearby markets (see Table 5.2).

Table 5.2: Comparison of risks and benefits of three levels of NWFP trade

Type of market

Relative risk to producer

Nature of trade

Local rural markets

Low: low transport costs; market preference information easily accessible

Can experience slow growth, linked to agricultural activity; demand for NWFPs declines with increased exposure to cheap manufactured products

Urban and national markets

Medium: transport costs higher; information on market preferences less accessible

Potentially fast growth, due to growing urban migration of rural people who bring customary tastes to the city; for traditional products, urban markets can be larger than international ones

Regional markets (neighbouring countries)

Somewhat higher: higher transport costs; more information needed not only on regional markets but on export-import regulations and duties

Potentially strong within regions with shared ecological and cultural characteristics; deserve more study

International markets

High: frequently requires intermediaries to gain information on product standards; more sophisticated market preferences(which often cause higher production costs) and international trade rules

Historically, tend to experience boom bust sequences of quickly rising demand, followed by swift decline as technologies for making cheaper substitutes become available

(Source: FAO, 1995)

As Table 5.2 indicates, international trade in NWFPs involves more risk. Historically, NWFPs that attract international markets have quickly become the focus of intensive efforts to replace forest sources with domestic sources and/or cheaper synthetic substitutes. This risk is compounded by the greater need to meet international standards, ensure reliable high-volume supply, track distant market trends and cover high advertising costs. Figure 5.2 illustrates the fluctuations for three internationally traded NWFPs: gum arable, lac and rattan.

To reduce the risk of producing an export item, an enterprise could select a product that the source country currently imports. This strategy can divide the risk between two markets, assuming that the export and national markets have comparable preferences and standards (De Silva and Atal, 1995).

Figure 5.2. Exports of Sudanese gum arable, Thai lac exports and Indonesian rattan for the period 1981-1988. (Source: Lintu 1995; Durst et al., 1994)

Building entrepreneurial and management skills


Entrepreneurial training for producers
Marketing training for producers, extension workers and policy-makers



In a commercial venture, good management and entrepreneurial skills are as important as good planning. Plans are useful as reference points and for clarifying goals. Good management adapts plans to respond to changing conditions and opportunities.

Entrepreneurial ability is rare among small-scale NWFP producers entering the business world. This is a problem in all countries; small enterprises in industrialized countries such as the United States fail as frequently as enterprises in Botswana - around 80 percent over a five-year period (FAO, 1995).

Entrepreneurial training for producers


Some development agencies and NGOs offer training in deal-making and other entrepreneurial skills for NWFP enterprises. The USAID-funded Biodiversity Support Program has linked small-scale enterprises and cooperatives in southern India with sources of information on business management, biological resources and social issues (FAO, 1995). The international NGO, Conservation International, has a group of experienced business professionals who help local enterprises get established and make market linkages for forest-based products, including oils, palm products, nuts and foods. In particular, they help local enterprises in the areas of management, market development and finance (Conservation International, 1994).

Marketing training for producers, extension workers and policy-makers


Among enterprise skills, marketing is often a serious blind spot. This is because: (1) more than other activities, marketing requires information from outside the producer's domain, (2) in extension, marketing has received less emphasis than production, and (3) many rural producers have little experience in a market economy.

5. In Indonesia, leaflets of nipa palm are made into roofing material by an elderly lady who would otherwise be unemployed. (Photo: FAO)

6. Ilex paraguayensis leaves to be dried and grounded to produce "mate", a popular drink in Argentina and southern Brazil. (Photo: T. Frisk)

7. Balanites aegyptiaca nuts, oil extraction in Burkina Faso. (Photo: S. Guinko)

8. Rattan processing in West Malaysia. (Photo: M. Kashio)

Text box 5.1: Matching technology and markets: Examples in Brazil and Kenya

Safrole oil production in Brazil

A project in the Brazilian Amazon shows how to reduce risk by identifying an appropriate processing method and markets at the same time. With research support from the Natural Resources Institute of the UK, the project evaluated native aromatic plants as candidates for cash crops which farmers could grow in sustainable agroforestry systems. The project used criteria of marketability and ease of domestication.

The project first considered processing plant oils as ingredients for the international perfume industry, but the risks of uncertain supply, complex quality standards and competitive pricing proved too great to justify the investment.

Next, a pepper shrub (Piper hispidinervium) showed promise for making products with less-demanding technology and greater market potential. The shrub's leaf contained high concentrations of the chemical safrole, the starting material for two products: an industrial fragrance material (heliotropine) and a biological insecticide ingredient, piperonyl butoxide. Furthermore, the pepper shrub yielded safrole in a more environmentally sound manner than existing sources, which involved destructive harvests of natural forests in Brazil (for Ocotea pretiosa) and in Viet Nam and China (for Cinnamomum camphora). From the market point of view, the shrub offered access to an existing market without major risk of being replaced by a synthetic substitute.

From the perspective of "keeping it simple", the pepper shrub scored highly for three reasons: (1) its weed-like growth suggested it could be easily domesticated for repeated harvests, (2) the plant's essential oil could be extracted relatively easily and sold as a valued industrial chemical for its safrole content, and (3) product quality depended on the genetic trait of leaf-oil content, and not on complex cultivation and harvest techniques. Three years of cultivation and pilot-scale processing (including market testing of the oil) have yielded promising results.

Gum arabic processing in Kenya

NRI also conducted research for a Kenyan NGO interested in producing value-added gum arabic products for the international printing and pharmaceutical industries. Discussions with these industries in the UK revealed that production technologies for spray-dried or formulated products were very complex. However, a simpler process, which would reduce the larger lumps of gum to smaller pellets (known as kibbling), proved feasible and would yield profits through value addition to the Kenyan producers. This illustrates the lesson that the processing approach that at first appears most attractive may not be the appropriate option (Coppen et al., 1995).

To address this, producers and extension workers should receive training in marketing skills (see Chapter 7). To improve government support for enterprises, middle- to upper-level officials should receive training in providing incentives and market information links. Surveys of training needs can pinpoint offices and training topics that will produce the greatest effect, as they have in Indonesia (Ollikainen, 1991) and the Philippines (Lintu, 1991). The Regional Community Forestry Training Centre (RECOFTC) in Thailand offers short-term training courses in the marketing of NWFPs.

Training successful entrepreneurs in other fields to make them aware about the benefits from linkages with NWFP enterprises can improve the entrepreneurial capability in the NWFP sector. An example of this comes from India where the Canadian International Development Research Centre (IDRC) has sponsored such linkages with entrepreneurs in the medicinal products sector (IDRC, 1994).

Credit support for small enterprises


To understand the high failure rate for small enterprises, one must distinguish between lack of skills and lack of conditions that permit enterprise success. An underlying factor in the failure of many small enterprises is their narrow margin for absorbing risk. In Africa, for example, small-scale ventures may fail in situations where a minimal infusion of credit could lead to success. Credit for rural enterprises can be made more flexible (for example, in terms of collateral guarantee), and development agencies supplying credit for new enterprises should share the financial risk as partners. Credit institutions should also offer greater support to women's groups, which frequently lack access to credit. Chapter 10 explores forms of institutional support that promote growth.

Overview of processing options


NWFPs offer the full range of processing options, from little or no processing (fresh foods, nuts and spices), to relatively simple technologies (preserved foods and handicrafts), to intermediate processing (traditional medicines, vegetable oils, sweeteners, dyes, waxes and tannins) to more complex, expensive processes (such as for essential oils, gums, and balsams) that usually require centralized facilities (De Silva and Atal, 1995).

To choose the right processing technology, an entrepreneur needs information on (1) the characteristics of the resource and the raw material, (2) potential markets and (3) the enterprise's capacity and technology. Chapter 6 looks at processing options in more detail.

Summary


• To increase the competitiveness of small rural enterprises in NWFPs, entrepreneurs should:

- improve production and its reliability;
- reduce losses through improved harvest and post-harvest techniques, including transport;
- inform themselves of marketing and processing options;
- start with an existing product and a simple strategy.

• Review the strengths, weaknesses and sources of support for the enterprise.

• Keep risks to an acceptable minimum with a considered management strategy that monitors the risks associated with different markets, and starts with pilot-scale production.

• Improve skills and capabilities through training and review of experience.

• Improve profitability and sustainability with some form of local processing, or local value addition. The key factors in this decision are: (1) know what processing options are feasible for the given resource and abilities, (2) know what market opportunities exist, and (3) match the processing technology with the market prospect, perhaps starting on a pilot-scale basis.


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