Business learns from past mistakes

By Ian Hamilton Fazey

As the UK looks for new ways to encourage entrepreneurship, Italy might be thought a good place to look for lessons. It has a highly successful scheme to help young people start business; entrepreneurship seems part of the culture; working for yourself commonplace. There is an assumption that if people fail – and 46 per cent do so within five years – they will learn from their mistakes and start again.

Few Italians start a business with bank support. They save their start-up capital, sometimes for years, and borrow from parents, other family members and friends. Italy has almost no merchant banks and the fragmented banking sector is tightly regulated of past banking failures. Banks have therefore become risk-averse and reluctant to lend.

Of scores of entrepreneurs interviewed for the OECD evaluation, only two had successfully borrowed money from the bank under the government loan guarantee scheme, thus avoiding up to three years of saving to accumulate capital. The rest had started from their own or privately-borrowed resources and then used growing turnover to expand. This was found to aid survival, nurturing financially conservative entrepreneurs, who did not over-extend and calculated risk carefully.

Parallel to this is an outstandingly successful government-funded scheme to encourage young entrepreneurs under 24 highly selective, the Youth Entrepreneurship Agency approved only 1,056 projects out of 4,603 applications in the first 10 years. Successfully applicants are tutored and advised, and the survival rate is running at 82 per cent.

The agency is now allowed to take equity stakes in the most promising ventures. In addition, an unsecured “loan of honor” – voluntarily repayable from future profits – has been introduced in southern Italy to help get over the problems of financing businesses in poorer areas where the banks really could not care less.

From the Financial times

Ethics

Slavery in shoe factories

Millions of pairs of shoes sold on the UK`s high streets are produced in the Third Word under slave labor conditions, according to a published yesterday.

The research highlights working condition endured by thousands of workers in places such as China, Vietnam and Brazil, where child labor, poverty and health risks are common.

The report – Just How Clean Are Your Shoes? – has been prepared by the catholic aid agency Cafod. It does not, however, want stores to boycott shoe produced in developing countries because this could lead to the closure of some factories, causing further poverty for workers.

Instead, it was retailers to lay down rough rules to ensure overseas suppliers pay sufficient wages to meet basic needs, offer basic employment rights and refuse to use child labor. And it wants companies to employ independent inspectors to make manufacturers keep to their code of conduct.

British consumers spend ₤5 billion a year on 213 million pairs of shoes – and four out of five pairs are imported. Last year, one in every four pairs of shoes sold in the UK was made in China, where shoes can be produced ₤1.77 a pair. It would cost ₤13.95 to make similar shoes in the UK. In some Chinese shoe factories, new workers can be paid 38p for a nine-hour day and up to a third may be deducted for board and lodging. Workers have only one or two rest days a month and three days holiday a year.

In Shenzhen, China`s booming enterprise zone just outside Hong Kong. Cafod found a factory employing children where there were no fire exits or fire extinguishers. Two years ago twenty workers died in a shoe factory in the same region.

Cafod highlights the punishment and humiliation to which some workers are subjected. It was reports of manages punishing workers for slow work by foreign them to kneel with their heads on the floor. In Brazil, women are regularly examined to make sure they are not pregnant when they apply for jobs. In one factory workers were allowed only four minutes a day to use the lavatory. Cafod is also worried about the health risks to workers, especially children, of using industrial glues and solvents without any ventilation or proper protection.

A spokesman for a British retail chain said the company passionately deplored the use of child labor and frequently inspected suppliers’ premises. It was considering toughening the code of conduct.

Ethics

Being ethical

Being ethical can be a clever marketing strategy. Increasingly, consumers are influenced by ‘non-commercial’ factors, such as whether a product harms the environment. Firma such as Ben & Jerry’s, an ice cream maker, and Body Shop International, a cosmetics retailer, have strengthened their brands by publicizing their ethical standards. Cummins Engine, a maker of diesel engines, made its products greener whole lobbying for stricter pollution laws.

But such ethical self-promotion can be dangerous. Body Shop was publicly forced to change a claim that its products were not tested on animals (some of the ingredients in its cosmetics had been tested on animals by other firms in the past). The error led many consumers to question Body Shop’s ethical standards.

Some think that the best way to persuade managers to think more ethically is to take account of stakeholders. Laura Nash of Boston University’s Institute for the Study of Economic Culture argues that managers should see their role in terms of ‘covenants’ with employees, customers, suppliers and so on. Such covenants should have a single goal: to ensure that a business creates long-term value in a way that is acceptable to all these ‘stakeholders’. A manager would view his business in terms of relationship rather than products; and see profit as a result of other goals rather than an objective in itself. But such ideas tend to go against shareholder capitalism.

The best answered may be a simple ones. Ethics rules should be clear (for instants, should an employee pay bribes where this is accepted business practice?) and they should be regularly tested. Some companies are turning to ‘ethical audits’. In its annual report Ben & Jerry’s carries a ‘social performance report’ on the firm’s ethical, environmental and other failings. Carried out by Paul Hawken, a ‘green’ entrepreneur, the audit has sometimes frustrated Ben Cohen and Jerry Greenfield, the company’s founders. So far, however, they have always published it. That may be why Ben & Jerry’s reputation remains good where others fade.

From The Economist

Change

A NEED FOR MORE SPEED

Pearl, which specializes in the low to middle income end of the life assurance market, was in crisis when Richard Surface, an American, arrived from Sun Life. Market share was falling, costs were rising, the product range was too complex. “The best of the sales force were leaving, the worst were hanging around, productivity was dropping and we were selling uneconomically”, he says.

His solutions were radical: completely changing management, cutting back costs and halving the product range. Twelve out of 14 top managers were replaced, with four “outsiders” chosen to provide a broader perspective. The most important reform concerned the sales force. Instead of having one sales agent covering an area, Pearl introduced teams of three – an area manager and two agents – covering a wider area. It was a delicate task, not just because it involved cutting more than 1,000 jobs but because it also meant pay cuts for some who stayed. While some agents were promoted to area managers, the two “supporting” agents had less responsibility.

Mr. Surface insisted on implementing this new structure in a few weeks. He believed the sales force was demoralized and further uncertainty would be bad for the company. “We go fast around here. We don`t plan everything in micro detail. We accept we are going to make mistakes”. He has some blunt advice for companies when it comes to getting staff behind a big upheaval: “Too many companies think you have to communicate with everybody in the same way. You have to segment your staff for the same reasons and in the same way as you segment your customers”.

Mr. Surface identifies three types of employee: high flyers, “anxious” people and “cynics and refuseniks”. Anxious people want certainly and leadership, he argues, while refuseniks are basically lost causes. “Many managements make the huge mistake of trying to convince them and turn them round. We didn`t. we drove round them. We don`t waste time trying to convert the unconvertible”, he says. “You don`t have to bring all staff with you in a major change. You need a coalition. You start with the vital few in key jobs, the anxious will follow, and the cynics will step aside”.

The figures suggest Pearl got it right. Operating costs were £411 million in 1995 but the following year were £265 million. Market share recovered to 2.2 per cent from 1.5 per cent in 1995, but it is still well short of the 6 per cent level achieved in the 1970s.

Change