The growing necessity for fast tracking our economic development in South Africa and the pivotal importance of entrepreneurship in achieving this has led to recent calls for an entrepreneurial revolution in this country.
This sense of proactive urgency is to be encouraged, yet such calls can be undermined when we lack a clear understanding of the tools for such a revolution. Part of this is symptomatic of a broader entrepreneurship challenge. We see its powerful benefits, but after 40 years of intensive research we have not made significant progress in unlocking the secrets of the entrepreneurship phenomenon.
This tension is captured in a recent comment where Raymond Ackerman concluded that the entrepreneur is the modern alchemist, making something out of nothing. This simple description captures both the power associated with entrepreneurial culture yet also reinforces the mystery surrounding its process. And it is this notion of mystery that continues to hinder the full potential that entrepreneurial thinking and action can bring to society.
The entrepreneurial domain
It is normally seen as the domain of those particularly gifted and brilliant, outside the reach of the ordinary man. The process itself is also not well understood, resulting in it being seen as a phenomenon rather than something that can be given more broad application. Yet if we reverse a few hundred years, this so called ‘great man’ explanation was exactly the situation where science found itself in the sixteenth century.
Before the intervention of Francis Bacon, scientific endeavour was the preserve of those special people, equipped with unique talents, who were able to divine the patterns of Nature. Scientific progress was accidental, circumstantial and largely dependent on the breakthroughs of a select few. In short it was a phenomenon.
Then Bacon initiated the process of codifying the actions of scientists, leading to the understanding of empirical evidence and experimentation that became the building blocks of the scientific method. In so doing he launched a scientific revolution with profound implications.
The simplest illustration of the benefits of the scientific method is that at the time of its introduction we travelled in horse carriages at a few kilometres per hour along the ground and now a mere two hundred years later we can travel at thousands of kilometres per hour into space.
The expansion of science has been so dramatic that according to Resnik, there are more scientists alive right now than have ever lived in the last two and a half thousand years of human history. Today, the scientific method is taught indiscriminately.
Not only is it taught to potential scientists at graduate and postgraduate levels, but everyone at every level, and especially starting at a young age, is taught it as an essential mindset and skill that is carried through, and forms part of the core of all education. The scientific method therefore gave us the tools for the scientific revolution allowing us to harness the potential of Nature.
Finding an entrepreneurial method
What if the key to unlocking an entrepreneurial revolution was to similarly see entrepreneurship not as a phenomenon but as a method? Entrepreneurship would then be released from the confines of a sub-category of economics and elevated to the level of a social force. In Entrepreneurship as Method: Open Questions for an Entrepreneurial Future, Professor Saras D. Sarasvathy and Sankaran Ventakaram postulate exactly this – that entrepreneurship should be seen as a method comparative to the scientific method.
The impact of codifying entrepreneurship in this way has the potential to be as significant in the field of human endeavour as the scientific method was in the field of Nature. Sarasvathy predicts that the entrepreneurial method will achieve no less than unleashing the potential of human nature. This paradigm is still at an early stage of exploration, but already the implications are significant.
First, everyone can benefit from the reasoning and problem solving skills that emerge as part of this method. (It would become necessary to introduce its logic as an essential part of basic education) Secondly, it creates a powerful tool that can be more intentionally used to take on large problems at the centre of progressing humanity.
But if experimentation was the tool of the scientific method, what is the tool of the entrepreneurship method?
Sarasvathy stumbled upon a possible answer after completing a study on 27 expert entrepreneurs. Despite the perception that we live in a commercial world dominated by prediction (a world where the aim is to use causal or rational thinking to achieve a previously identified goal), the findings of this study showed that the dominant logic of these individuals was effectual thinking – the exact opposite of causal thinking.
Effectual thinking is a mode of thinking where possible new ends are imagined using a given set of means. An illustration of the difference between causal and effectual thinkers is seen by the examples of conquerors such as Alexander the Great creating his empire out of the known world (causal) in comparison to explorers such as Columbus discovering the new world (effectual).
Building on the base of effectuation, the entrepreneurial method explores a method of human action that starts with what you have available, both in terms of your internal and external resources before then iteratively moving forward, taking into account evolving uncertainties and building partnerships to co-create a new future. The implications of these tools for South Africa are particularly exciting.
Part of South Africa’s entrepreneurship struggle is due to a simple lack of belief. In the 2011 Global Entrepreneurship Monitor Report, the percentage of the South African population who perceive that they have the capabilities to be entrepreneurial was just under 43%, which is nearly 10% below the average of our peer countries. If the entrepreneurial method inculcates an understanding that the process starts with our given means, however limited those means might be, it will act as a powerful catalyst to counter the current lack of belief in our abilities.
Second, a key finding in the initial studies around the entrepreneurial method is that entrepreneurial action is largely about interaction. This is in contrast to the historical focus on the role of the individual or the team, rather than the importance of the interactions between them and the numerous stakeholders involved in the entrepreneurial journey.
While this might seem a small shift, an orientation towards negotiation and relational exchanges with a more sociological bias as a basis for value creation, plays directly to the inherent and proven strengths of South Africa’s history – a heritage that a cursory glance at the categories of our Nobel Prize winners immediately demonstrates.
Intentional revolutionary thinking
This requirement for the tools of a revolution was illustrated again in an unexpected context recently when Waleed Rashed, co-founder of the April 6th Youth Movement that led to last year’s freedom revolution in Egypt, met with a small group of Allan Gray Fellows. Besides the inspiration of interacting with a 29 year old who already has ‘liberating his country’ on his CV, the abiding insight from his story is how intentional they were in understanding how the tools of social media, understanding the mindset of their target market and creating channels for those aspirations would ultimately ensure that the “revolution would no longer sit inside you, but be taken out and made realities.” Whether it be in science, freedom or entrepreneurship, revolutions require tools.
A picture of large scale adoption of the entrepreneurial method fast tracking our economic progress by leveraging the power of entrepreneurship as a social force is a compelling one. It is a picture of the entrepreneurial revolution – a revolution finally activated with the right tools. No longer need we deal with the mystery of alchemy, instead focusing on the certainty of science, applying an understood logic and thinking process to improve the state of the country.
How Economic Crime Is Impacting Business In South Africa
77% of SA organisations have experienced economic crime and CEO’s and boards are increasingly being held accountable for economic crime.
South African organisations continue to report the highest instances of economic crime in the world with economic crime reaching its highest level over the past decade, according to PwC’s biennial Global Economic Crime Survey.
South African organisations that have experienced economic crime is now at a staggering 77%, followed in second place by Kenya (75%), and thirdly France (71%). With half of the top ten countries who reported economic crime coming from Africa, the situation at home is more than dire.
The Global Economic Crime and Fraud Survey examines over 7200 respondents from 123 countries, of which 282 were from South Africa.
The rise of economic crime
Trevor White PwC Partner, Forensic Services and South Africa Survey Leader, says: “ Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77% South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%. However, this year saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016.”
Related: PwC Focus On Sugar Tax
Economic crime in South Africa is now at the highest level over the past decade. It is also alarming to note that 6% of executives in South Africa (Africa 5% and Global 7%) simply did not know whether their respective organisations were being affected by economic crime or not.
While the overall rate of economic crime reported was indeed the highest for South Africa, the period-on-period rate of increase for South Africa and Africa as a whole was below that of our American, Asian and European counterparts.
Global indicators of a rise in economic crime
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25% increase since 2016 to 53% in respondents who indicated they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and 14%, respectively.
Asset misappropriation continues to remain the most prevalent form of economic crime reported by 45% of respondents globally and 49% of South African respondents. While the instances of reported cybercrime showed a small decrease in the South African context (29% in 2018 versus 32% in 2016), it retained its second place in the global rankings (31%) albeit at a lower rate of occurrence than 2016.
One of the new categories of economic crimes was that of “fraud committed by the consumer”.
It is the second most reported crime in South Africa at 42% and takes third place globally at 29%. This was followed closely by procurement fraud (39% in South Africa versus 22% globally). This indicates that the entire supply chain in SouthAfrica is fraught with criminality.
Related: PwC: Pria Chetty
When combined with the high instances of bribery and corruption reported (affecting more than a third of organisations at 34%), the resultant erosion in value from the country’s gross domestic product (GDP) is startling. Accounting fraud, which is usually perpetrated by senior management and results in the largest losses, increased from 20% to 22%.
Accountability of the board
Accountability for fraud and economic crime has moved into the executive suite, with the C-Suite increasingly taking responsibility, and the fall, when economic crime and fraud occur.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95%).
85% of South African respondents indicated their organization had a formal business ethics and compliance programme in place.
In addition, 20% of local respondents indicated that the CEO (who is part of the first line of defence) has primary responsibility for the organisation’s ethics and compliance programmes, and is therefore more instrumental to the detection of fraud and the response to it.
PwC Focus On Sugar Tax
The proposed sugar levy is unlikely to make sizeable dent in fiscal deficit, but the Sugar Beverage Industry is offering a helping hand to reduce obesity.
In 2016, the National Treasury announced a Sugar Beverage Levy (SBL) on sugar-sweetened beverages (SSBs) scheduled to take effect April 2018. The aim of the levy was to prevent and control obesity in South Africa, but key industry players also viewed it as a potentially significant new source of revenue that could help plug the growing fiscal deficit.
The fiscal deficit has been widening as National Treasury faces slow economic growth and a shrinking tax base. Initially estimated at 3.1% of GDP, fiscal deficit projections increased to 4.3% of GDP in October last year.[i]
However, official data suggests the deficit already reached R195 billion in the first 8 months of the 2018/19 fiscal year, so it could amount to approximately R250 billion, thereby exceeding Finance Minister Gigaba’s October projections by 25%.
The levy has undergone various changes since it was first announced.
When the levy takes effect in April this year, it will amount to 2.1 cents per gram of sugar per 100ml, above 4 grams per 100ml.
This is down from an initial 2.29 cents per gram of sugar with no exempted amount.[ii]
Our estimations suggest the tax burden is approximately 10% given current levels of sugar content, down from approximately 20% previously. In addition, industry has recently reacted to the news of the SBL, reducing the sugar content of popular beverages by including non-nutritive sweeteners.
In addition to efforts to reformulate, the industry introduced smaller bottle sizes to curb excessive sugar consumption and limit the excise tax burden.
SBL excise revenue estimations
We estimated that in a scenario in which the beverages industry makes no change to the sugar content of SSBs, the levy would result in an estimated R1.5 billion loss in sales revenue and a R 1.4 billion excise revenue gain for government.
However, a reformulation by industry would result in a lower loss in sales revenues of only R1.07bn and lower than expected excise revenue gain for government of R990mn.
Given the estimated fiscal budget deficit of up to R250bn, additional revenues of between R990mn and R1.4bn are unlikely to make a significant dent in plugging the deficit and could support the assertion that the levy will focus on curbing sugar consumption rather than providing significant additional revenue inflows.
In our quantitative analysis of the proposed tax on SSBs, we use the PwC Economic Impact Assessment Model to derive the potential impacts, based on a 10% sales reduction calculation due to potential excise driven price changes.
Although excise revenues are expected to increase, other tax revenue streams are likely to experience a decline. Not considering excise impacts, the prospective tax revenue loss stemming from reduced sales revenues and showing in lower VAT, corporate income tax (CIT) and personal income tax (PIT) could range between R363 million and R518 million in the reformulation and non-reformulation scenarios, respectively.
Therefore, the net impact on estimated tax revenue combining the implications for excise tax, VAT, CIT and PIT revenue would only range between R631 million and R856 million, subject to which scenario is implemented.
It is unclear whether the SBL levy will assist in reducing consumers’ sugar consumption. However, industry facilitates lower sugar consumption by reducing bottle sizes and through reformulation.
Smaller sizes nudge consumers to lower sugar consumption
In addition to reformulating popular SSBs, the beverages industry has altered the size of the 500ml buddy bottle to 440ml, potentially nudging consumers to reducing their sugar consumption.
The move to the 440ml bottle represents a 12%[iii] reduction in size and means that sugar content fell from 53 grams in the 500ml bottle to 46.6 grams in the 440ml bottle.
The implementation of the new levy could still result in an approximately 61 cent increase in the price of the 440ml bottle.
It remains to be seen how South Africans will react to the current and impending price change of SSBs and if the SBL can indeed assist in reducing obesity. It is clear that monitoring and evaluation are key tools to help government and industry understand the effectiveness of this initiative to prevent and control obesity in South Africa.
- [i] Treasury, 2017. Medium Term Budget Policy Statement. [Online] Available: http://www.treasury.gov.za/documents/mtbps/2017/speech/speech.pdf [Accessed 08 February 2018]
- [ii] SARS, 2017. SARS to collect for sugar tax (SBL) from 1 April 2018. [Online] Available: http://www.sars.gov.za/Media/MediaReleases/Pages/15-December-2017—SARS-to-collect-for-sugar-tax-from-1-April-2018-.aspx [Accessed on 06 February 2018]
- [iii] PwC calculations
What It Will Really Take For South Africa’s Businesses To Scale And Create Jobs
It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
Much has been said about the potential of SMEs to drive job creation and economic growth for South Africa. Our unemployment rate is at 26.7% – an astonishing figure that speaks volumes about the dire need for job creation. On the back of this, we are seeing increasing amounts of money being channeled into incubators and the funding of startup companies.
Although important, the starting of new businesses, unless they are completely innovative, well-timed and highly scalable, will not provide us with much-needed quick wins on our path to job creation and economic growth. It is the “low-hanging fruit” of scaling up South Africa’s established SME businesses that we believe is at the core of how we can grow this economy further.
The state of established businesses in South Africa
Established businesses that already employ 10-20 people have a working product, willing buyers and a proven business model and with some modifications, increased guidance and adequate management, they have the potential to increase their number of employees significantly as they scale up. However, a 2016/2017 report by the Global Entrepreneurship Monitor (GEM) in partnership with the University of Cape Town found that the rate of established businesses in South Africa has declined by an incredible 26% since 2015.
In fact, South Africa had one of the lowest established business rates of all the economies that participated in the GEM 2016 study (ranked 61st out of 65 economies). This, the report says, “paints a bleak picture of the SMME sector’s potential to contribute meaningfully to job creation, economic growth and more equal income distribution.” While we should not neglect the starting of new businesses, scaling up established businesses will provide young people with much needed experience to ensure that when they eventually start their own businesses, they may have greater chances of success.
How to increase the proportion of established businesses that scale up
Have a clear vision for your business
When we as business coaches work with established businesses that are scaling up, we make sure to start with the founder as their attitudes and desires determine how far the business will go. Scaling up an established business begins with a clear vision. Often, we find that the businesses owners don’t have a clear vision of where they want to take their business, and without a vision, it’s very difficult to scale.
Determine why your business exists
Linked to a clear vision, business owners need to have a strong purpose that answers the question of why they want to scale. Some business owners often see their business as a vehicle that provides them with an income, rather than the business serving a bigger purpose to impact an industry or the broader society. As a result, they often stop short of developing the full potential of their businesses.
Be willing to learn and seek help where needed
Business owners also need to have a willingness to learn. Being entrepreneurs, they often have a definitive view of the world and how it should work, which drives them to create something that they believe needs to exist (a new business venture). A risk to these strongly held views and high levels of confidence is that entrepreneurs potentially won’t open themselves up to new ideas, or to being challenged that some of their beliefs and views may, in fact, be holding their businesses back.
Business owners need to realise that they may not have all the skills to scale their business. I’ve found that entrepreneurs tend to be strong in customer service, innovation and sales, and are often weaker in people management and attention to detail – skills that become a lot more critical at the point of scaling the business.
Other areas of importance in scaling up
There are other critical areas that businesses need to address in scaling up but dealing with the founder is most critical. Strategy is one, cash flow is another, as is the question of hiring/finding and developing key talent. I will be unpacking these and more at the upcoming Business Day TV SME Summit on 8 March; and with increasing efforts by government to address the unemployment crises through platforms like the Jobs Summit announced in the State of the Nation Address, we hope that more conversations are had around harnessing the job creation power of established businesses that manage to scale up quickly and sustainably.
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