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Group or individual incentive programmes?

The next era of manufacturing

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ISSUE 1 • MAY 2015

6 Myths of product development

INSIGHTS & SOLUTIONS

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Contents 6 How manufacturing will evolve in the next decadeThe manufacturing sector has changed and old ways of doing things will no longer work.

8 Making incentive programmes work for everyoneWell-designed, intelligent incentives can be a great advantage for companies seeking to retain employees for the long term, but beware of rewarding individuals over the team.

12 Free up cash flow with asset financingTempted to purchase your asset outright? You might be impacting your business’s future cash flow. Toni Fritz gives expert advice on the best solutions when buying your assets.

14 Six myths of product developmentMany companies treat product development as if it were similar to manufacturing, however the two are profoundly different.

24 Are you adequately covered?Your business may have insurance, but are you adequately covered? Bryan Verpoort walks you through the lesser known facts of your risk insurance.

26 The risks & rewards in AfricaPhilip Myburgh shares his insights into what’s involved in successfully moving your business into Africa.

28 Manufacturing sector introductionAn overview of the sector looking at opportunities and threats for new entrants.


Moving Forward

2015 is set to provide some reason for cheer, as global

growth is expected to accelerate from 3% last year to around 3.3% this year. However, there will be a notably high amount of country differentiation, where some markets will perform well, others will be tapered and some could even continue to underperform.

A key theme in 2015 will be the decline in oil prices, which will have a large part to play in the shaping of world affairs. This decline could additionally boost global GDP by a respectable point six of a percentage point.

The local landscapeSouth Africa is a net oil importer and should see an improvement in transportation and logistics costs due to the decline in oil prices. We can also expect the monetary policy authorities and central banks to be less inclined to raise rates, and possibly consider lowering interest rates for a more favourable inflation outlook.

In light of the current electricity climate, the investment cycle simply cannot perform in the absence of a secure power supply and with prospects of an increase in base load capacity. The investment cycle growth rate will therefore be not much more than 2% in 2015, casting a favourable high to households as a source of growth inspiration.

Inflation should fall quite significantly in 2015 to a predicted 3%, where a few months ago it was hovering around 6%. Households will therefore feel richer giving people a sense of real gains;

however the actual nominal income will remain more or less static.

Long-term visionsThe reserve bank will remain cautious when considering trimming rates, particularly too pre-emptively, as it may later be compelled to raise the rates again should inflation rise in 2016. In all likelihood, the South African Reserve Bank will probably relieve its benchmark interest rate static in 2015, which would be good news as it indicates a decision not to tighten the monetary policy.

Overall we should look to a South African 2015 with a glint of optimism and enjoy this transient period of lower fuel prices. Build buffer stocks, reinforce corporate and personal balance sheets, and buffer savings, instead of going out and liberally spending this windfall. In this respect, I think we could inject a greater sustainability into the long term simply by being sensible about our spending programme for 2015. •

Goolam

Goolam BallimChief Economist and Head of Research,Standard Bank Group

A look forward

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2Manufacturing is not monolithic

No two manufacturing industries are exactly alike; some are more labour- or more knowledge-intensive. Some rely heavily on transport, others need to be close to the customer.

The largest segment include industries such as autos, chemicals and pharmaceuticals. These depend heavily on global innovation and R&D, and also require close proximity to markets. The second-largest segment is regional processing, which includes printing and food and beverages. The smallest segment, with just 7% of global manufacturing value-added, produces labour-intensive tradables.

3Manufacturing is entering a dynamic new phase

By 2025, a new consumer class will have emerged, and the majority of consumption will take place in developing economies, creating new market opportunities. Meanwhile, in established markets, demand is fragmenting as customers ask for greater variation and more types of after-sales service. A rich pipeline of innovations in materials and processes – from nanomaterials to 3-D printing to advanced robotics – also promises to create fresh demand and drive further productivity gains across manufacturing industries and geographies.

As a result, manufacturers and policy-makers need new approaches and capabilities. Companies must develop

a detailed understanding of specific emerging markets, as well as the needs of their existing customers. They will also require agile approaches to the development of strategy – using scenario planning rather than forecasts, for example.

The location of manufacturing plants will be a key change. Labour-intensive industries almost always follow the path of low wages, but others, with more complex needs, must weigh factors such as access to low-cost transport, consumer insights, or skilled employees. The result could well be a new kind of global manufacturing company – a networked enterprise that uses “big data” and analytics to respond quickly to changing conditions and can also pursue long-term opportunities. •

It’s been a tough ten years for the global manufacturing sector, following the rise of developing economies, a massive economic downturn, and falling manufacturing employment

rates in developed economies. “Manufacturing the future: The next

era of global growth and innovation”, a major report from the McKinsey Global Institute, presents a clear view of how manufacturing contributes to the global economy today, and how it will probably evolve over the coming decade. Here are the three key findings:

1Manufacturing’s role is changing

Globally, manufacturing continues to grow. It now accounts for approximately 16% of global GDP and 14% of employment. However, when manufacturing’s share of GDP peaks in an economy, both employment and output start to fall. This is because as earnings rise consumers have more money to spend on services.

In addition, the traditional separation between manufacturing and services no longer holds true. Services – everything from logistics to advertising – make up an increasing amount of manufacturing activity.

In the long run, manufacturing’s share of employment will remain under pressure because of ongoing productivity improvements, faster growth in services, and global competition, which pushes advanced economies to specialise in activities requiring more skill.

Trends

How manufacturing will evolve in the next decade

The manufacturing sector has changed and old ways of doing things will no longer work. BY MONIQUE VERDUYN

SKILLS DEVELOPMENT IS CRITICAL

According to McKinsey’s report, two key priorities for governments and businesses are education and the development of skills. Companies have to build their R&D capabilities, as well as expertise in data analytics and product design.

They will need qualified, computer-savvy factory workers and agile managers for complex global supply chains. In addition to supporting ongoing efforts to improve public education – particularly the teaching of maths and analytical skills – policy-makers must work with industry and educational institutions to ensure that skills learned in school fit the needs of employers.


As a child, you may have hated washing the car, but chances are that if you were offered R50 to do it, the task would have been much

more attractive. Many companies employ a similar logic, offering employees a variety of incentives to encourage them to work harder and meet certain targets or benchmarks.

Lucrative incentives in the form of bonuses or overseas trips, for example, make it worthwhile for employees to stay at your company, even if a salary offer from a competitor is more attractive. Incentives can also make employees feel as if their hard work is appreciated, making them feel greater loyalty toward their managers and the company as a whole.

GOALS OF A GOOD REWARD SYSTEMOn her blog on TalkDesk, clinical psychologist Shauna Geraghty says that to develop an effective rewards programme, you have to identify the desired outcome of the rewards. The goals should include the following:

1Attract talented employees Rewards should be used to entice

talented employees to the company or position. Companies should allocate a certain amount of funds to the recruitment and hiring of high calibre employees.

2Motivate employees to perform optimally

Most programmes focus on the motivational component of rewards. They use rewards to shape employee behaviour in the most desired direction. This outcome should be carefully considered when designing a rewards programme.

3Foster personal growth and development

Rewards should be used to encourage and promote personal growth and professional development. When rewards are used to encourage employees to engage in behaviour that will increase their work performance, the company ultimately benefits from a more skilled workforce.

4Increase employee satisfaction with their work

Rewards can promote engagement with work, resulting in increased workplace satisfaction. They can motivate an employee to persist in the face of

challenges, come up with creative solutions to tackling tasks and encourage them to derive more pleasure with their work.

5Keep talented employees from leaving

When employees love what they do and are rewarded for their performance, they are less likely to leave their company. Keeping talented employees on board should be a priority of any company. Thus, companies should devote resources necessary to ensure that their rewards programme meets the needs of their most talented employees.

Making incentive programmes work for everyoneWell-designed, intelligent incentives can be a great advantage for companies seeking to retain employees for the long term, but beware of rewarding individuals over the team. BY MONIQUE VERDUYN

INDIVIDUAL VERSUS TEAM-BASED REWARDS

Individual Rewards:

Monetary compensation above and beyond salary that is linked to results or accomplishments.

This type of incentive programme is also known as pay-for-performance. Examples of this type of reward are: merit pay, bonuses, commission plans and profit sharing. In “The Effects of Incentives on Workplace Performance: A Meta-analytic Review of Research Studies”, sponsored by the International Society for Performance Improvement (ISPI), it was found that individual-based performance programme increased employee performance by 19%.

Team-based Rewards:Monetary compensation that rewards individuals for teamwork and/or rewards teams for collective results.

Team-based incentive programmes can be extremely effective in increasing individual and team performance. They can also be very effective in shaping employee performance to be more in line with company values and goals. Team-based reward systems have been found to increase employee performance by as much as 48%.

Insights


THE SHORTCOMINGS OF PLANS THAT REWARD INDIVIDUALS ONLYThe use of financial rewards has featured prominently on the agendas of human resource researchers and practitioners, with incentive payment having been proven to offer the greatest productive benefit, and research continuing to support the role of incentives in raising productivity. As a result, performance-contingent payment is often advocated as a means of encouraging higher productivity.

However, there is also evidence that individual incentive plans can have unintended and negative consequences such as:• The neglect of job aspects not covered

in performance goals• Reporting of invalid data on

performance• Negative social sanctions for high

performers, and • The encouragement of self-interest

instead of organisational commitment

One study, “Work Incentives in a self-determined group”, published by the American Sociological Review, reported an example of employees neglecting aspects of a job not covered by performance goals. The case study of retail sales employees in a department store showed that when an individual incentive plan, tying pay increases to sales volume was introduced, sales volume increased, but work on stock inventory and merchandise displays suffered.

Employees were uncooperative, to the point of ‘stealing’ sales from one another

and hiding desirable items to sell during individual shifts. Other studies have provided examples of how individuals on piece-rate incentives or bonus plans tied to budget outcomes, distorted performance data. One described how workers on piece-rate plans engaged in games with the time-study man who was trying to engineer a production standard; a second described how managers covered by bonus plans tied to budgets bargained with their supervisors to get a favourable budget standard.

Many studies of individual incentive plans – including the ground-breaking Management and the Workers by FJ Roethlisberger and WJ Dickson – have shown clashes between work group production norms and high production by individual workers. These led to social sanctions for the high performers, often resulting in social ostracism by the group, for example.

These studies also suggested that development of restrictive social norms had some economic foundation: employees feared that high levels of production would lead to negative economic consequences such as job loss, lower incentive rates, or higher production standards. Restrictive norms were also more common when employee-management relations were poor, and employees generally distrusted managers.

These findings suggest the dangers of using individual incentive plans for employees in complex, interdependent jobs requiring work group cooperation; in instances in which employees generally

distrust management; or in an economic environment that makes job loss or the manipulation of incentive performance standards likely.

A 2010 paper, “Analysing compensation methods in manufacturing: Piece rates, time rates, or gain-sharing?”, by Susan Helper, Morris M Kleiner and Yingchun Wang, reported that manufacturing organisations were less likely to use piece rate incentives for hourly workers when their jobs were more complex, or when their assigned tasks emphasised quality over quantity.

SOLUTIONS FOR AN IMPERFECT WORLDIn a perfect world, where employees who work the hardest always reap the most rewards, incentives pose no problem. But that is a reality in few companies, which means incentives can breed resentment and disharmony among teams and employees.

While individual rewards and team-based rewards both have a positive influence on performance, it seems that team-based rewards are the better option. The research suggests that effective employee rewards programmes should include both types, but with an emphasis on team-based rewards, as they have a tendency to have the largest and most healthy impact.

Most importantly, managers seeking to develop or enhance an employee-rewards programme must first understand the components required for success. Doing so could mean the difference between implementing an ineffective employee rewards programme and a successful one. An intelligent employee rewards programme will result in increased profits, better employee satisfaction and a bigger ROI. •

Insights

Both individual rewards and team-based rewards have a positive influence on performance. However, team-based rewards can have more of a significant impact on employee performance.

UNINTENDED CONSEQUENCES

Many studies of individual incentive plans have shown clashes between work group production norms and high production by individual workers, which led to negative social sanctions for the high performers (for example, social ostracism by the group).


Purchasing an asset with your company’s cash could result in cash flow implications later on in your business. Instead of purchasing your asset outright,

first consider vehicle and asset financing, which will allow you to acquire the right type of asset without affecting your business’s vital cash flow.

CONSIDER THISHere are some tips and words of advice when financing your vehicles and assets:

1 Should you dip into your overdraft or home loan?

Match the right type of financing facility for your business requirements and steer away from using short-term financing solutions when financing a vehicle or asset. For example, it’s not advisable to use an overdraft to purchase a vehicle, as an overdraft is a consumption of cash flow.

Once you’ve utilised your overdraft, you’ll have placed your business into a negative cash flow cycle and it might take some time before your business is restored to its positive cash flow position. Instead, use your business overdraft to finance something that can be repaid within 30 days to three months.

Using your home loan to finance the purchase of an asset is also not a recommended solution. Personal and business finances should remain separate and the mixing of these balance sheets could cause inaccurate expense forecasting. Additionally, the use of your credit card to finance an asset will result in higher interest rate charges, while asset finance interest is charged at a far lower rate.

We recommend that you first discuss with your accountant what the tax benefits for your business will be for the different types of loan solutions, before you make a decision on what will be more beneficial for your business.

2 Access to cash flowWhen purchasing a vehicle, first

look to asset finance, which will give you full access to your cash flow. When you purchase an asset with business cash you’ll have outright ownership of the vehicle, but you’ll also have limited the amount of liquid cash you have on hand. On the other hand, by purchasing through an instalment plan, the amount will be paid over a specific time-frame and you will still continue to have access to your business’s cash-flow.

There is also no penalty to paying off your asset early, and you have the option to shorten the instalment term to 12 months if this is a better fit for your business.

3 Financing imported assetsCustomers are not always aware

that they don’t have to pay cash for imported assets. Standard Bank runs a division called Interim Finance, which can assist you in financing that asset.

If, for example, you’ve ordered a manufacturing plant from overseas, we can assist you in financing the delivery of that asset. We will also assist you with the forward exchange contracts

and can issue you a letter of credit to be provided for the payment of the asset to the offshore company. Once your asset is in South Africa, we would then convert the loan agreement according to your own preference.

If you’ve ever paid cash for an asset and have realised in hindsight that your cash flow will be constrained by the decision, you can also apply for asset finance within three months of the purchase. •

Toni Fritz is the Head of Vehicle and Asset Finance, Business at Standard Bank

Free up cash flow with asset financingTempted to purchase your asset outright? You might be impacting your business’s future cash flow. Toni Fritz gives expert advice on the best solutions when buying your assets.

Financing Solutions

ASSET FINANCING APPLICATION

What the bank will consider:

• How long your business has been operating for?• Can the business financials support the repayment of the asset?• Do any directors have a bad credit rating?• What is the age of the asset you want to purchase?

Do your research

Understand what the best fit for your business will be when considering purchasing an asset. Look at the current competitive landscape that you operate in and speak to the bank. Based on our own customer insights and industry experience, we can advise you on the best options for your business.

Toni Fritz


Product Development

Six myths of product developmentMany companies treat product development as if it were similar to manufacturing, however the two are profoundly different. This failure to appreciate critical differences has given rise to several fallacies that undermine the planning, execution, and evaluation of product development projects. BY STEFAN THOMKE & DONALD REINERTSEN

Most product-development managers are always struggling to bring in projects on time and on budget.

They never have enough resources to get the job done, and their bosses demand predictable schedules and deliverables. So the managers push their teams to be more parsimonious, to write more-detailed plans, and to minimise schedule variations and waste. But that approach, which may work well in turning around underperforming factories, can actually hurt product development efforts.

Although many companies treat product development as if it were similar to manufacturing, the two are profoundly different. In the world of manufacturing physical objects, tasks are repetitive, activities are reasonably predictable, and the items being created can be in only one place at a time. In product development many tasks are unique, project requirements constantly change, and the output – thanks, in part, to the widespread use of advanced computer-aided design and simulation and the incorporation of software in physical products – is information, which can reside in multiple places at the same time.

The failure to appreciate those critical differences has given rise to several fallacies that undermine the planning, execution, and evaluation of product development projects. Together, we have spent more than 50 years studying and advising companies on product-development efforts, and we have encountered these misconceptions – as well as others that arise for different reasons – in a wide range of industries, including semiconductors, autos, consumer electronics, medical devices,

IDEA IN BRIEF

Many companies approach product development as if it were manufacturing, trying to control costs and improve quality by applying zero-defect, efficiency-focused techniques. While this tactic can boost the performance of factories, it generally backfires with product development. The process of designing products is profoundly different from the process of making them, and the failure of executives to appreciate the differences leads to several fallacies that actually hurt product-development efforts.

In this article, the authors, a Harvard Business School professor and a consultant, expose these misperceptions and others. They look at six dangerous myths:

1. High utilisation of resources will make the department more efficient.

2. Processing work in large batches will be more economical.

3. Teams need to faithfully follow their development plan, minimising any deviations from it.

4. The sooner a project is started, the sooner it will be finished.

5. The more features a product has, the better customers will like it.

6. Projects will be more successful if teams “get them right the first time.”

The authors explain the negative effects these “principles” have when applied to product development, offer practical guidelines on overcoming them, and walk readers through a visual tool that will help them keep projects on track.


software, and financial services. In this article we’ll expose them and offer ways to overcome the problems they create.

MYTH 1

High utilisation of resources will improve performance

In both our research and our consulting work, we’ve seen that the vast majority of companies strive to fully employ their product-development resources. (One of us, Donald, through surveys conducted in executive courses at the California Institute of Technology, has found that the average product-development manager keeps capacity utilisation above 98%.) The logic seems obvious: Projects take longer when people are not working 100% of the time – and therefore, a busy development organisation will be faster and more efficient than one that is not as good at utilising its people.

But in practice that logic doesn’t hold up. We have seen that projects’ speed, efficiency, and output quality inevitably decrease when managers completely fill the plates of their product-development employees – no matter how skilled those managers may be. High utilisation has serious negative side effects, which managers underestimate for three reasons:

1. They don’t take into full account the intrinsic variability of development workMany aspects of product development are unpredictable: when projects will arrive, what individual tasks they’ll require, and how long it will take workers who’ve never tackled such tasks before to do them. Companies, however, are most familiar with repetitive processes

like manufacturing and transaction processing, where the work doesn’t change much and surprises are few and far between. Such processes behave in an orderly manner as the utilisation of resources increases. Add 5% more work, and it will take 5% more time to complete.

Processes with high variability behave very differently. As utilisation increases, delays lengthen dramatically. (See the sidebar, right “High Utilisation Leads to Delays.”) Add 5% more work, and completing it may take 100% longer. But few people understand this effect. In our experience with hundreds of product-development teams, we have found that most were significantly overcommitted. To complete all projects on time and on budget, some organisations we worked with would have needed at least 50% more resources than they had.

It is true that some variability is the result of a lack of discipline, and that some product-development tasks (like designing components for an airplane prototype or performing clinical trials) include more-repetitive work. But even if some of the work is predictable, when it’s combined with other unpredictable work, you will see queuing problems.

2. They don’t understand how queues affect economic performanceHigh utilisation of resources inevitably creates queues of projects. When partially completed work sits idle, waiting for capacity to become available, the duration of the overall project will grow. Queues also delay feedback, causing developers to follow unproductive paths longer. They make it hard for companies to adjust to evolving market needs and to detect weaknesses in their product before it’s too late. Ironically, these problems are precisely the ones that managers think high utilisation will allow

their teams to avoid.Even when managers know that they’re

creating queues, they rarely realise the economic cost. Although that cost can be quantified, we’ve found that the vast majority of companies don’t calculate it. Managers need to weigh queue costs against the costs of underutilised capacity in order to strike the right balance.

3. In product development, work-in-process inventory is predominantly invisibleManufacturing queues consist of physical things, and when inventory in a factory doubles, it’s obvious. That’s not the case in product development, where inventory largely consists of information, such as design documentation, test procedures and results, and instructions for building prototypes. When inventory doubles in an engineering process, there are no physical signs. Moreover, because accounting standards require most research and development (R&D) inventory to be carried at zero value, financial statements give no indication of serious inventory excesses in product development.

It is very difficult to fight a problem that you can’t see or measure. Consider the situation at a major pharmaceutical firm. Several years ago its newly appointed head of drug discovery faced a managerial dilemma. Like other senior executives who run large R&D organisations, he was trying to find ways to make his scientists more innovative. He wanted them to experiment more with new chemical compounds that could generate promising new drugs and, at the same time, to eliminate unpromising candidates as early as possible. Experiments with living organisms, however, were the responsibility of testing, a department that was not under his control and was run as a cost center.

Product Development

It was evaluated by how efficiently it used testing resources, which naturally led to high utilisation. Consequently, the scientists in drug discovery had to wait three to four months for the results of tests that took a little more than a week to perform. The “well-managed” testing organisation impeded the discovery unit’s progress.

The obvious solution to such problems is to provide a capacity buffer in processes that are highly variable. Some companies have long understood this. For decades, 3M has scheduled product developers at 85% of their capacity. And Google is famous for its “20% time” (allowing engineers to work one day a week on

anything they want – a practice that means extra capacity is available if a project falls behind schedule). However, in our experience this kind of solution is quite hard to implement. As we will discuss, few organisations can resist the temptation to use every last bit of available capacity. Managers reflexively start more work whenever they see idle time.

But there are other viable solutions:

Change the management-control systemsFor the pharmaceutical company, this might involve taking steps to align the objectives of the testing unit with those

The curve above is calculated using Queuing Theory, the mathematical study of waiting lines. It shows that with variable processes, the amount of time projects spend on hold, waiting to be worked on, rises steeply as utilisation of resources increases. Though the curve changes slightly depending on the project work, it always turns sharply upward as utilisation nears 100%.

HIGH UTILISATION LEADS TO DELAYS


of the discovery unit. The company could, for example, reward testing for prompt responses (measuring time from request to completion of test) rather than resource utilisation.

Selectively increase capacityAdding extra resources to the areas where the utilisation rates are 70% or higher can significantly reduce waiting time. If the pharmaceutical company did this in testing, it would obtain feedback on new chemical compounds far faster. In settings where testing is conducted with computer modeling and simulation, increasing capacity is often relatively inexpensive, since it just involves buying additional computer equipment and software licenses.

Limit the number of active projectsIf the pharmaceutical firm couldn’t increase testing’s capacity, it could still lower the utilisation rate by reducing the number of active projects exploring new chemical compounds. The discipline of putting a hard limit on what goes into a product-development pipeline often results in sharper focus and clearer priorities.

Make the work-in-process inventory easier to seeOne method is to use visual control boards. These can take a number of forms, but the key is to have some sort of physical token, such as a Post-it note, represent the development work (see the exhibit “Typical Work-in-Process Control Board” on the opposite page). A control board should display all active work and show what state each part of the project is in. It should be at the centre of the team’s management process. Teams can hold 15-minute daily stand-up meetings around such boards to coordinate efforts and keep work moving.

MYTH 2

Processing work in large batches improves the economics of the development process

A second cause of queues in product development is batch size. Let’s say a new product is composed of 200 components. You could choose to design and build all 200 parts before you test any of them. If you instead designed and built only 20 components before you began testing, the batch size would be 90% smaller. That would have a profound effect on queue time, because the average queue in a process is directly proportional to batch size.

The reduction of batch sizes is a critical principle of lean manufacturing. Small batches allow manufacturers to slash work in process and accelerate feedback, which, in turn, improves cycle times, quality, and efficiency. Small batches have even greater utility in product development, but few developers realise the power of this method.

One reason is the nature of their work flow. Again, because the information they’re producing is mostly invisible to them, the batch sizes are too. Second, developers seem to have an inherent bias to use large batches – possibly because they incorrectly believe that large batches produce economies of scale.

In a well-managed process, the batch size will balance transaction and holding costs (see the exhibit “How to Determine Optimal Batch Size”). It’s similar to buying eggs at the grocery store. If you buy a 12-month supply on a single trip, your transaction cost is low, but most of the eggs will spoil, increasing your holding cost. If you buy a one-day supply at a time, your spoilage will be low,

but your transaction costs will be high. Intuitively, you try to strike a balance between the two.

The companies that understand how this works have exploited IT advances to reduce batch sizes, often with astonishing results. Some software companies that used to test large batches of code every 90 days are now testing much smaller batches several times a day. A manufacturer of computer peripherals that used a similar approach with its software group reduced cycle time in software testing by 95% (from 48 months to 2.5 months), improved efficiency by 220%, and decreased defects by 33%. The cost savings were twice as high as the company had expected. Although those results were exceptional, we have found that reducing batch size improves most development projects significantly. Similarly, computerised modeling and simulation tools have dramatically lowered the optimal batch size of experimentation and testing in companies that develop physical products.

MYTH 3

Our development plan is great; we just need to stick to it

In all our consulting work and research, we’ve never come across a single product-development project whose requirements remained stable throughout the design process. Yet many organisations place inordinate faith in their plans. They attribute any deviations to poor management and execution and, to minimise them, carefully track every step against intermediate targets and milestones. Such thinking is fine for highly repetitive activities in established

Product Development

manufacturing processes. But it can lead to poor results in product innovation, where new insights are generated daily and conditions are constantly changing.

A classic study of technical problem solving done by Thomas Allen of MIT highlights the fluid nature of development work. He found that engineers who were developing an aerospace subsystem conceived of and evaluated a number of design alternatives before selecting one that they judged to be the best. Along the way their preferences changed frequently, as they tested and refined competing technical solutions. This is typical in innovation

projects: Testing and experimentation reveal what does and doesn’t work, and initial assumptions about costs and value may be disproved.

Defining customers’ needs can also be hard to do at the outset of a product-development project. When you think about it, that’s not surprising: It isn’t easy for customers to accurately specify their needs for solutions that don’t yet exist. In fact, familiarity with existing product attributes can interfere with an individual’s ability to express his or her need for a novel product. Customers’ preferences can also shift abruptly during the course of a development project, as

TYPICAL WORK-IN-PROCESS CONTROL BOARD

Control boards make invisible work visible by showing the precise stage that each work item is in. In designing the boards, most teams limit the number of tasks at each stage to prevent delays. This simple board contains features that might be found on a software project that involves a team composed of six to 10 people.


competitors introduce new offerings and new trends emerge.

For all those reasons, sticking to the original plan – no matter how excellent its conception and how skillful its execution – can be a recipe for disaster. This is not to suggest that we don’t believe in planning. Product development is a set of complex activities that require careful coordination and attention to the smallest detail. However, the plan should be treated as an initial hypothesis that is constantly revised as the evidence unfolds, economic assumptions change, and the opportunity is reassessed.

MYTH 4

The sooner the project is started, the sooner it will be finished

As we discussed earlier, idle time is anathema to managers. They tend to exploit any downtime by starting a new project. Even if the task cannot be completed because people have to return to another project, managers reason that anything accomplished on the new project is work that won’t have to be done later. Such thinking leads companies to start more projects than they can vigorously pursue, diluting resources.

This dilution is dangerous. If a company embarks on a project before it has the resources to move ahead, it will stumble slowly through the development process. That’s problematic because product-development work is highly perishable: Assumptions about technologies and the market can quickly become obsolete. The slower a project progresses, the greater the likelihood it will have to be redirected. Indeed, one branch of the military discovered that its cost and

schedule overruns were exponentially proportional (to the fourth power) to a project’s duration. In other words, when the original schedule of a project doubled, the cost and schedule overruns increased by a factor of 16.

The importance of reducing the amount of work in process is evident when we look at one of the classic formulas of queuing theory: Little’s Law. It simply states that, on average, cycle time is proportional to the size of the queue divided by the processing rate. Thus, if 20 people are ahead of you in line at Starbucks and the barista is serving five people a minute, you will be served in four minutes. You can shorten the cycle time by raising the processing rate or by reducing the number of jobs under way. In most settings the latter is the only practical choice.

For some product developers the solution has been to rigorously control the rate at which they start work. They match it to the rate at which work is actually completed; carefully manage the number of projects in process; make sure that once a project is launched, it is adequately staffed until it is completed; and resist the temptation to steal resources from an ongoing project to squeeze in new ones.

MYTH 5

The more features we put into a product, the more customers will like it

Product-development teams seem to believe that adding features creates value for customers and subtracting them destroys value. This attitude explains why products are so complicated: Remote controls seem impossible to use,

computers take hours to set up, cars have so many switches and knobs that they resemble airplane cockpits, and even the humble toaster now comes with a manual and LCD displays.

Companies that challenge the belief that more is better create products that are elegant in their simplicity. Bang & Olufsen, the Danish manufacturer of audio products, televisions, and telephones, understands that customers don’t necessarily want to fiddle with the equaliser, balance, and other controls to find the optimum combination of settings for listening to music. Its high-end speakers automatically make the adjustments needed to reproduce a song with as much fidelity to the original as possible. All that’s left for users to select is the volume.

Getting companies to buy into and implement the principle that less can be more is hard because it requires extra effort in two areas of product development:

Defining the problemArticulating the problem that developers will try to solve is the most underrated part of the innovation process. Too many companies devote far too little time to it. But this phase is important because it’s where teams develop a clear understanding of what their goals are and generate hypotheses that can be tested and refined through experiments. The quality of a problem statement makes all the difference in a team’s ability to focus on the few features that really matter.

When Walt Disney was planning Disneyland, he didn’t rush to add more features (rides, kinds of food, amount of parking) than other amusement parks had. Rather, he began by asking a much larger question: How could Disneyland provide visitors with a magical customer experience? Surely, the answer didn’t come overnight; it

Product Development

required painstakingly detailed research, constant experimentation, and deep insights into what “magical” meant to Disney and its customers. IDEO and other companies have dedicated phases in which they completely immerse themselves in the context in which the envisioned product or service will be used. Their developers read everything of interest about the markets, observe and interview future users, research offerings that will compete with the new product, and synthesise everything that they have learned into pictures, models, and diagrams. The result is deep insights into customers that are tested, improved, or abandoned throughout the iterative development process.

Determining what to hide or omitTeams are often tempted to show off by producing brilliant technical solutions that amaze their peers and management. But often customers would prefer a product that just works effortlessly. From a customer’s point of view, the best solutions solve a problem in the simplest way and hide the work that developers are so proud of.

One company that has understood this is Apple. It is known for many things – innovative products, stylish designs, and savvy marketing – but perhaps its greatest strength is its ability to get to the heart of a problem. As the late Steve Jobs once explained, “When you start looking at a problem and it seems really simple, you don’t really understand the complexity of the problem. And your solutions are way too oversimplified. Then you get into the problem, and you see it’s really complicated. And you come up with all these convoluted solutions….That’s where most people stop.” Not Apple. It keeps on plugging away. “The really great person will keep on going,” said Jobs, “and find… the key underlying principle of the

By shrinking batch sizes, one company improved the efficiency of its product testing by 220% and decreased defects by 33%.

Changes in batch size affect two primary costs: the transaction cost and the holding cost. As batch sizes become larger, average inventory levels rise, which raises holding costs. But at the same time, transaction costs decrease, because it takes fewer transactions to service demand.

The optimal batch size is the point where the total cost (combined holding and transaction cost) is lowest. When a company operates near this point, small deviations have little impact. For example, if a company operates at less than 20% above or below the optimal batch size, total costs increase less than 3%. So even rough estimates permit a company to capture large economic benefits.

HOW TO DETERMINE OPTIMAL BATCH SIZE


problem and come up with a beautiful, elegant solution that works.”

Determining which features to omit is just as important as – and perhaps more important than – figuring out which ones to include. Unfortunately, many companies, in an effort to be innovative, throw in every possible bell and whistle without fully considering important factors such as the value to customers and ease of use. When such companies do omit some planned functionality, it’s typically because they need to cut costs or have fallen behind schedule or because the team has failed in some other way.

Instead, managers should focus on figuring out whether the deletion of any proposed feature might improve a particular product and allow the team to concentrate on things that truly heighten the overall customer experience. This can be determined by treating each alleged requirement as a hypothesis and testing it in small, quick experiments with prospective customers.

Development teams often assume that their products are done when no more features can be added. Perhaps their logic should be the reverse: Products get closer to perfection when no more features can be eliminated. As Leonardo da Vinci once said, “Simplicity is the ultimate sophistication.”

MYTH 6

We will be more successful if we get it right the first time

Many product-development projects fail to meet their objectives for budgets, schedules, and technical performance. Undoubtedly, poor planning, rigid processes, and weak leadership all play

a role. But another cause that’s often overlooked is managers’ demand that their teams “get it right the first time.” Requiring success on the first pass biases teams toward the least-risky solutions, even if customers don’t consider them much of an improvement over what’s already available. Worse yet, teams have little incentive to pursue innovative solutions to customers’ problems.

To avoid making mistakes, teams follow a linear process in which each stage (specify, design, build, test, scale, launch) is carefully monitored at review “gates.” Work on the next stage cannot begin until the project passes through the gate. As the project moves down the line, significant commitments are made and the cost of responding to new insights increases by orders of magnitude. Successful tests in late stages are celebrated, and surprises, no matter how valuable they are, are considered setbacks. Unfortunately, such a linear process flow can cause project overruns because test feedback is delayed, teams cling to bad ideas longer than they should, and problems aren’t unearthed until it’s expensive to solve them.

A tolerance for “getting it wrong the first time” can be the better strategy as long as people iterate rapidly and frequently and learn quickly from their failures. Advances in simulation and rapid-prototyping technologies have made operating in this fashion vastly easier and less expensive.

Consider what we found in a study of 391 teams that designed custom integrated circuits. Teams that followed an iterative approach and conducted early and frequent tests made more errors along the way. But because they

used low-cost prototyping technologies, they outperformed (in terms of the time and effort required) teams that tried to get their design right the first time. The teams that faced high prototyping costs invested more effort on specification, development, and verification. And because they did their iterations later in the process – and did far fewer of them – they delayed the discovery of critical problems.

Experimenting with many diverse ideas is crucial to innovation projects. When people experiment rapidly and frequently, many novel concepts will fail, of course. But such early failures can be desirable because they allow teams to eliminate poor options quickly and focus on more-promising alternatives. A crash test that shows that a car design is unsafe, a drug candidate that proves to be toxic, or a software user interface that confuses customers can all be desirable outcomes – provided that they occur early in a process, when few resources have been committed, designs are still very flexible, and other solutions can be tried.

Demanding that teams “get it right the first time” just biases them to focus on the least-risky solutions.

A classic example of the advantages of the “fail early, fail often” approach is Team New Zealand’s surprising victory in the 1995 America’s Cup. To test ideas for improving the keel design, the team used two nearly identical boats: one boat that was modified during the course of the project and a “control” boat that was not. On a daily basis, the team simulated hypotheses on a local graphics workstation, applied those that looked promising to the one boat, raced it against the control, and

Product Development

analysed the results. In contrast, its competitor, Team Dennis Conner, which had access to more-powerful computers (supercomputers at Boeing), ran large batches of simulations every few weeks and then tested possible solutions on one boat. The result: Team New Zealand completed many more learning cycles, eliminated unpromising ideas more rapidly, and ended up beating Team Dennis Conner’s boat Young America.

What we hope is becoming clear by now is that experiments resulting in failures are not necessarily failed experiments. They generate new information that an innovator was unable to foresee. The faster the experimentation cycle, the more feedback can be gathered and incorporated into new rounds of experiments with novel and potentially risky ideas. In such an environment employees tend to persevere when times get tough, engage in more-challenging work, and outperform their risk-averse peers.

But creating this kind of environment isn’t easy – a topic that Amy Edmondson of Harvard Business School explored in Strategies for Learning from Failure in Harvard Business Review, April 2011. Failure can lead to embarrassment and expose gaps in knowledge, which can undermine individuals’ self-esteem and standing in an organisation. After all, how often are managers promoted and teams rewarded for the early exposure of failures that lead a project to be killed – even though the early redeployment of precious resources benefits the company? This is especially true in organisations that have built a “zero tolerance for failure” or “error-free” (Six Sigma) environment.

Thomas Alva Edison understood all this. He organised his famous laboratories around the concept of rapid experimentation, locating machine shops

for building models close to the rooms where experiments were conducted so that machinists could cooperate closely with researchers. The labs had libraries containing a vast number of volumes so that information could be found quickly; nearby storerooms with ample quantities of supplies; and a diverse workforce of craftsmen, scientists, and engineers. Edison wanted to make sure that when he or his people had an idea, it could be immediately turned into a working model or prototype. “The real measure of success is the number of experiments that can be crowded into 24 hours,” he said.

Advances in information technology, such as computer-aided design, modeling, and simulation, have already allowed companies to make great strides in developing better products in less time and at a lower cost. Many companies, however, have not tapped the full potential of these tools, because their management thinking has not evolved as quickly as the technology: They still approach the highly variable information-generating work of product development as if it were like manufacturing. As advances in IT continue, the opportunity to improve the product development process will become even greater. But so will the risks for companies that fail to recognise that product development is profoundly different from manufacturing. •

Stefan Thomke is the William Barclay Harding Professor of Business Administration at Harvard Business School.

Donald Reinertsen is president of Reinertsen & Associates, a consulting firm in Redondo Beach, California. His most recent book is The Principles of Product Development Flow (Celeritas Publishing, 2009).

© 2015 New York Times News Service.

PRACTICAL GUIDELINES FOR OVERCOMING COMMON FALLACIES

A checklist for today’s product-development managers

1. Make queues and information flows visible.

2. Quantify the cost of delays and factor it into your decisions.

3. Introduce resource slack where utilisation is highest.

4. Shift the focus of control systems from efficiency to response time.

5. Reduce transaction costs to enable smaller batch sizes and faster feedback.

6. Experiment with smaller batches; you can easily revert to large batches if this doesn’t work.

7. Treat the development plan as a hypothesis that will evolve as new information becomes available.

8. Start projects only when you are ready to make a full commitment.

9. Aim for simplicity: Ask what features can be deleted, not just what can be added.

10. Experiment early, rapidly, and frequently, with computer models and physical prototypes, in controlled and real-life customer environments.

11. Emphasize overlapping and iterative – not linear – process designs.

12. Focus on quick feedback instead of first-pass success.

Deciding what to omit from a product is as important as figuring out what to include.


does your transporter have the correct certifications and the right vehicles to carry your goods?

3 Load sheddingYour business is no longer a start-

up and your company concerns have become more complex. Factors such as load shedding can have a devastating effect on your business, which is why you should speak to an expert to help you determine where your business risks lie and what type of cover you need, specific to your business.

For example, business interruption cover does not mean the business is covered should production be interrupted due to load shedding. This is because business interruption follows a trigger event, and must be as a direct consequence of something, such as a loss of profits due to an event such as fire, hail or theft. If your business was affected due to load shedding, such as the loss of perishable stock, you wouldn’t be able to claim for business interruption as the loss of power was due to an indirect consequence.

4 Different covers for break-ins and staff theft

In insurance terms, there is a distinction between theft and staff fraud. Theft is normally carried out by a third party, while staff theft or fraud is carried out by an internal party, such as an employee. Companies sometimes only buy theft cover, which means they are insured if they experience a break-in through an external party, but not when there is internal theft or fraud.

5 Protecting your business from staff theft and fraud

As a business owner, you want to trust the people that help you run your company. One of the problems with

growth – particularly rapid growth – is the necessity to hire many new employees quickly. The result is that you don’t always have the time or capacity to analyse whether the right types of managers and staff have been appointed. Often, the business owner finds out too late that an untrustworthy individual has been hired, but by then the company has already been defrauded.While this is often a real threat for growing businesses, there are steps

you can take to ensure that internal theft and fraud doesn’t affect the performance of your business, or worse, result in devastating losses that might cripple the company.

6 There is no ‘one-size-fits-all’ business insurance

Sometimes business owners are led to believe that the insurance they have purchased will cover them in all instances, only to find out too late that this isn’t actually the case. We take the approach that your business needs are unique and we advise our customers on exactly what and where they are covered, as well as what steps they should take to minimise risk in those areas where they may not be covered.

Insurance may not cover you in all instances and businesses need to plan for all eventualities. Your risk specialist can help you determine these areas so that you and your management team can put the right precautions in place to protect your business. •

Bryan Verpoort is Head of Corporate & Business Insurance at Standard Bank

Are you adequately covered?Your business may have insurance, but are you adequately covered? Bryan Verpoort walks you through the lesser known facts of your risk insurance.

A UNIQUE INSURANCE SERVICE OFFERING

Buying insurance cover based only on low prices may leave your business exposed to risks that you thought you were adequately covered for. Our process is to focus on understanding what it is that the customer needs specific to their segment; we identify what type of business you are operating, and then provide the relevant product based on your business requirements. It’s important to us to cut out what won’t be necessary for your business and rather provide you with a solution specific to your business requirements.

Standard Bank’s approach is to embed value in our customer offerings and invest time and expertise in finding the right solutions for you. This means not only looking at the right solution fit, but helping our customers to understand and mitigate their own business risks.

For more information, contact your banker or call 0860 999 334.

TAILOR INSURANCE TO YOUR MANUFACTURING BUSINESS

The needs and risks of manufacturing businesses are complex and you will need professional advice to assist you in structuring the right cover. One type of manufacturing business will not be insured in the same way as the next, and we would need to understand exactly what it is that you’re manufacturing and how your business processes work.

We also like to ‘walk the risk’ and understand the ‘housekeeping’ of how the business operates, where goods are stored and what risks are involved in the business.

Bryan Verpoort

Managing Risk

You’ve worked hard to get your business to where it is today and have invested in risk cover to prepare your business for any eventuality. But are you

100% certain that you have the right type of insurance to suit your unique business needs, and are you actually covered?

UNFORESEEN RISKSHere are six unforeseen risks to consider when assessing your current business insurance and how you can mitigate them:

1 Critical machinesManufacturing can be quite

complex, depending on the quantity and type of machines you may be operating, which can all impact the risks involved in your business. As a manufacturer, you would need to comprehensively understand your production and manufacturing processes and how these could affect your business.

For example, if your business is dependent on one critical piece of machinery, you should consider obtaining machinery breakdown cover, which would cover your business for sudden unforeseen damage to that machine, as well as the loss of profits your company might incur with the machine out of production.

2 Fire and transportation of goods

The risk of fire at a manufacturing facility is common and could prevent your business from completing essential work. We recommend that you consider business interruption insurance, which would cover you for the loss of profits resulting from a fire.

Also, if your business supplies chemicals, you should carefully examine how these are being transported. If you’ve outsourced their transportation,


I’m a firm believer in the opportunities that African countries have to offer businesses. The growth is evident, as is the demand for a large amount of products that haven’t been available

to many of these markets in the past. What we have to be mindful of is that the risks are considerably higher than what the average businessman in South Africa would be exposed to.

A shift in focus to manufacturingInternational brands that typically manufacture in the East are starting to look towards East Africa as an alternative. The cheaper cost of labour and large transport hubs is making these countries an attractive option.

Governments across Africa are also becoming more aware that they cannot just rely on one or two commodities, but are focusing on stimulating the manufacturing environment and creating other jobs in their countries.

What are the risks of doing business in Africa?Most businesses need a good site to operate from and the lack of infrastructure in much of Africa makes this a massive undertaking. Infrastructure can impact significantly on transporting your goods to and from your site and if your business relies on bringing goods in through a harbour, this can also be a big challenge. As a

business owner, you must be well aware that by the time your product gets to your outlet in a specific town, the cost that you originally estimated might be significantly higher because of a more challenging supply chain. You now need to adjust your prices, but still fall within what the market will pay.

The LSM market that you target in South Africa might be significantly different to the market that you will be targeting in a different African country, in part due to the price adjustment you might have to make as a result of the additional costs of the supply value chain.

Many African countries also have political challenges that you need to be fully aware of. In much of Africa, political leadership might change quite abruptly, which can impact the business environment – laws may be changed at any given time, which is why partnering with the right people on the ground is key, and will assist your business in adapting smoothly to business disruptions.

How long does it take to register a business?One of the challenges that businesses face in certain African countries is the sheer amount of time it can take to register your business. For instance, registering a business in Rwanda may take 10 to 12 days, while Nigeria can take up to 45 days. Be aware of the ease of doing business

in each country when weighing up which country is best suited to your business and needs.

What mistakes do businesses make when moving into Africa?One of the biggest mistakes that businesses make is seeing Africa as one country. Every country is unique in its approach, its culture and its regulatory environment and even within the country itself there will be different regions where the culture can differ drastically. Business owners should not expect to be able to bring a South African offering and mind-set into a different African country and expect it to work.

How do I find potential business partners or industry experts in Africa?We pride ourselves on being experts on the countries that we operate in and consistently engage with our customers and the market within these countries so that we’re able to guide you at a high level on the opportunities available on the continent. We can also facilitate the next phase. Once you have decided on the country that you’d like to establish your business in, we can introduce you to local business leadership who truly understand the granular insights of that specific country.

Standard Bank will also introduce you to other clients of ours that might be able to assist you in the upstream or downstream of your supply chain. In this way, we can add value to all clients involved and ensure a better chance of success for our customers, as well as improving their ability to deliver. •

The risks & rewards in AfricaHead of Franchising, Business Banking Africa at Standard Bank Group, Philip Myburgh shares his insights into what’s involved in successfully moving your business into Africa.

Moving Into Africa

CREATE NEW NETWORKSStandard Bank will also introduce you to other clients of ours that might be able to assist you in the up stream or downstream of your supply chain. In this way, we can add value to all clients involved and ensure a better chance of success for our customers, as well as improving their ability to deliver.

Philip Myburgh


T he manufacturing sector stimulates the growth of other activities, such as services, and

enables important outcomes such as employment creation and economic empowerment.

The diverse structure of the South African economy is a critical aspect of the country’s historical and current growth performance. The manufacturing sector continues to occupy a significant share of the South African economy, despite its relative importance declining from 19 percent in 1993 to about 17 percent in 2012 in real terms.

According to Media Club South Africa, the sector contributed 15.2% to South Africa’s GDP in 2013, making it the third-largest contributor to the nation’s economy.

All ten main industrial sectors have contributed to growth in South Africa’s manufacturing sector, according to

Statistics South Africa. Manufacturing is dominated by industries such as agro-processing, automotive, chemicals, information and communication technology, electronics, metals, textiles, clothing and footwear.

A plan for actionUnderpinning this sector is the Department of Trade and Industry’s (DTI) Industrial Policy Action Plan (IPAP), which aims to achieve structural development and to increase competitiveness of South African manufacturing.

IPAP states that sustainable long-term development should be underpinned by higher growth, exports and labour-intensive, value-adding economic activity in the production sectors, led by manufacturing. According to the plan, manufacturing should play a critical role in economic development, particularly in a resource-rich economy such as South Africa’s:• Manufacturing has direct

employment-creation potential and

is the engine of rising per capita income and employment through its stimulation of the rest of the economy. Rising per capita incomes are particularly important for sustained growth and employment creation in the consumption-driven service sectors of the economy, which have become critically dependent on unsustainable levels of household debt. This impacts acutely on women, particularly the working-class and poor urban and rural women.

• Manufacturing is central to South Africa’s export strategy, based on value-added, labour-intensive tradable products that generate revenues that have a significant, positive impact on the balance of trade.

• Manufacturing plays a critical and indispensable role as a driver of innovation and productivity growth.

• Manufacturing must increasingly provide machinery and other

Manufacturing Sector Introduction

South African manufacturing output on the upSouth Africa has developed an established, diversified manufacturing base that has shown its resilience and potential to compete in the global economy.

inputs for the infrastructure build programme, which is central to South Africa’s growth strategy and, more generally, into public goods, including transport, health, education and housing.

Growth areasAccording to Statistics South Africa, the manufacturing industry ramped up output by 4.1% during the three months to the end of November 2014 compared with the previous quarter. Leading the way at the close of 2014 was the motor vehicles, parts, accessories and transport equipment industry, where production bounded ahead by 16.7%.

Other significant growth areas included:• The radio, television and

communication apparatus sector – up 8.1%

• Electrical machinery – up 6.9%• Textiles, clothing and footwear –

up 7.3%.

More modest growth was recorded in:• Food and beverage output –

up 0.7%• Wood and wood products, paper,

publishing and printing – up 1%• Furniture and other manufacturing

– up by 1.2% • Glass and non-metallic mineral

products – up 1.1%.

Sector growth contributionsThe motor vehicle sector contributed 1.4 percentage points, iron and steel 1.1 percentage points and the petroleum and chemical sector 0.8 percentage points to the combined 4.1% ramped up output. During the same period, the value of sales of manufactured products rose by 3.9%.

Production levelsLooking at the individual industry sectors in relation to their 2010 production levels,

food and beverage is at 107.2%, and the radio, television and communication apparatus sector is well above it, at 145.2%, as is the motor vehicle industry, at 115.9% and the petroleum and chemical sector, at 110.8%.

Two other sectors are lagging behind the overall figure: wood and wood products (102.6%) and iron and steel (103.8%). The rest are still below their 2010 output level: textiles and clothing (98.7%), glass (98.3%) and furniture (96.2%). •

1) Sector Overview


SWOT analysis of the manufacturing industryWhat are the key factors that affect the success of the industry in South Africa?

2) Sector Drivers

A ll ten main industrial sectors have contributed to growth in South Africa’s manufacturing sector,

according to Statistics South Africa. A look at the latest research reveals the following strengths, weaknesses, opportunities and threats:

Strengths• The strengths of the manufacturing

industry are that it is relatively stable. Although the demand for manufacturing tends to fluctuate with the ups and downs of the economy, it is characterised by regular periods of recovery following any downturns. Additionally, manufacturing has become highly efficient over the last century, with the ability to maximise both the productivity of the workers and machines to maximise profits.

• South Africa has world-class infrastructure, exciting innovation, research and development capabilities and an established manufacturing base. It is actively involved in the development and roll-out of new green technologies and industries, creating new and sustainable jobs in the process and reducing environmental impact.

Weaknesses• A weakness of the manufacturing

industry is that much of it is built on the production of non-essential goods. This means that a severe downturn in the economy can have a crippling effect on it.

• Another weakness is that it is a mature industry. This means that there is heavy competition and little room for growth. As a result, the manufacturing industry can be a cash-cow for those who are already in it but may be unattractive to new entrants.

• Set prices that affect the economy, such as electricity tariffs and petrol prices, form part of the macro policies that need to be reviewed to enable the manufacturing sector to work efficiently and affect the economy positively. As this is a national challenge, government should play an enablement role and not an intervention role.

• An adversarial relationship between government, labour and business severely hampers a coordinated approach for the good of the sector.

Opportunities• Manufacturing is among the top

three multiplier sectors in terms of value addition, job creation, export earnings and revenue generation for every R1 invested, according to Deloitte’s 2013 report, “Enhancing manufacturing competitiveness in South Africa”.

• Opportunities in the manufacturing industry are in the technology and bio-technology areas. These are growing market segments with higher profit margins.

• Foreign markets with a growing middle class are providing opportunities for technology and bio-technology manufacturers to increase their profitability through exports.

• The future of manufacturing in South Africa lies in the country’s ability to become a stable business destination, globally competitive and beneficiate locally produced products.

Threats• Over 300 000 South African

manufacturing jobs have been lost or exported to other countries since the beginning of 2008, with the majority going to China.

• The South African business

environment has worsened while administered prices in Brazil, Russia, India and China have decreased by over 36% in the last decade.

• By contrast, electricity costs have been raised by over 170% in South Africa, and this is predicted to continue to escalate at more than double the forecasted inflation rate.

• Our domestic market is vulnerable to imports from China, India, Brazil and other countries which offer much higher incentives and protection to their manufacturers.

• The largest threats to the manu-facturing industry today are from low-wage high-productivity nations like China, India and Brazil. India, for example, has the ability to sup-ply highly educated workers at low wages to fill roles in the high-tech manufacturing market segment.

• There is a need to review the bulk infrastructure pertaining to the reliability of water and electricity supply that allows for manufacturing to take place.

• Frequent strikes indicate that the collective bargaining system is placing pressure on manufacturing and that more leeway has to be given to other methods that were successful in some areas of industry, such as central bargaining. •

The future of manufacturing in South Africa lies in the country’s ability to become a stable business destination, globally competitive and beneficiate of locally produced products.



Launching a manufacturing start-upManufacturing is the wealth-producing sector of the economy but it’s also a sector that has many special considerations.

3) Starting Up

I n manufacturing, components, parts or raw materials are used to make goods or products. These are sold directly to consumers or to other manufacturing businesses

that use them to make something else. Manufacturers have machines and employ people who usually work in an assembly line, putting a product together in a sequence that goes down the line.

Product issues play a large role in your operation: parts or finished products, wholesale or retail, inputs and outputs. On top of that, financing a large start-up operation requires in-depth planning and plentiful resources. Remember too, that this industry tends to be heavily regulated by government authorities, and it’s also unionised.

BizFilings, a US company which provides assistance and support for start-ups, offers some key advice to manufacturing entrepreneurs in its Guide to Starting and Running a Manufacturing Business.

Potentially the most complex

of all commercial enterprises, manufacturing starts with raw materials or pieces or parts that may have little value in and of themselves. Through processes of fabrication and assembly, these pieces and parts are converted into useful products.

Considerable investment and commitment requiredStarting a manufacturing business is not a decision to be taken lightly. It involves a substantial commitment.

Often, manufacturing calls for a heavy up-front financial investment for specialised facilities, complex equipment and raw materials. Workers with special skills may also be required. You must ready yourself for a broad array of responsibilities to effectively coordinate the many steps of the manufacturing process.

Obviously, manufacturing processes come in all shapes and sizes. You may be able to gather all the necessary materials and fabricate them into a

new product by yourself, with a small team, or you may require substantial machinery and equipment for various steps in the manufacturing process, as well as transport to move your inventory from step-to-step in the process.

The size, complexity, and total number of products you want to manufacture will all affect the way you plan your entry into the world of manufacturing.

What do you need to know before you begin? Before starting a manufacturing enterprise, you need to think carefully about several things. You may have come up with a great product, but the choice to become a manufacturer involves a lot more than having the perfect product.

BizFilings’ guide suggests asking yourself several questions to assess your readiness to move forward:• Do I have what it takes to be a

manufacturer?• What product will I manufacture?• How will I protect my rights to the


product?• What is the most effective method

to manufacture my product?• How much will it cost to produce my

product?• How much will my product sell for?• What is my profit margin?• What is the market for my product?• Who will buy it?• How will I market my product?• How can I finance my enterprise?• What are my tax obligations and

can I get incentives or tax breaks for starting my business?

• How will I protect myself and the business from liability risks?

Distinguishing yourself from the competition You should strive to create a unique identity for your manufacturing business in the marketplace. Your customers need to recognise that your product is different in some way from other competing products. You need to show that your product has benefits that other products can’t offer. Simply put, you must give customers a reason for buying your product instead of a competitive one.

It helps, too, if your customers see something unique and special about you and your company, not just about your product. The way you operate your business and the way you relate to customers offers additional opportunities to extend the distinctiveness of your entire enterprise. It takes a combination of character and capability to make an impression on your customers. Just like

you must give them a reason to buy your product, give them a reason for doing business with you and your company. This is the best way to distinguish yourself from the competition.

You will also need to keep a close eye on the competition so you can

keep meeting the needs of the marketplace. Ongoing research into your market will pay off in the long run. You can follow or copy, or you can innovate and respond to your competitors’ activities. But you must know about them first. •

MOVE YOUR START-UP FORWARD WITH BIZLAUNCH

Standard Bank’s BizLaunch business bank account is a specially-tailored, value-packed offering designed for start-ups and small business.

BizLaunch places a strong emphasis on helping entrepreneurs to get their businesses started the right way by concentrating on the essentials, such as keeping track of cash in and cash out, paying suppliers and depositing funds into a business bank account.

What BizLaunch offers:• My Business Online from Pastel, the market leader in accounting

software• Businesses have access to a Business Banker to discuss and meet

their needs• Free packaged content business support and tips, such as how to

start and grow a business• R325 for a point-of-sale (POS) device including tele-communication

fees and insurance per month at a commission rate of 3.25% irrespective of card type

• Basic business insurance cover at R150 per month• Online business registration services and annual returns• A 20% discounted training voucher on the basics

of how to start a business.

With BizLaunch, you can manage your business finances easily and effectively, giving you the time to focus on what’s important – running and building a successful business.


Government & industry bodies that impact manufacturingThere are a range of acts that legislate and govern the manufacturing sector, as well as industry bodies for every sub-sector.

4) Contacts

M anufacturing covers many different business areas. It is a complex industry that requires business owners to

pay rigorous attention to standards, regulations, compliance, quality, health and safety legislation and, often, international regulations too. Depending on the sector in which your business operates, you are advised to seek advice from the regulatory bodies to ensure that your business is on the right side of the law. More information on the manufacturing industry can be found through the following organisations:

GOVERNMENT

The Department of Trade and Industry Manufacturing is dominated by industries such as agro-processing, automotive, chemicals, information and


communication technology, electronics, metals, textiles, clothing and footwear.

Underpinning this sector is the Department of Trade and Industry’s (DTI) Industrial Policy Action Plan (IPAP), which aims to achieve structural development and to increase competitiveness of South African manufacturing. IPAP seeks to support and further develop the following sectors through carefully designed Key Action Plans:• Clothing, textiles, footwear and

leather• Automotive products, components,

medium/heavy commercial vehicles• Plastics and pharmaceuticals• Metals fabrication, capital and rail

transport equipment• Agro-processing• Forestry, timber, paper, pulp and

furniture• Business process services• Creative industries: Crafts, music

and film• Green & energy-saving industries• Downstream mineral beneficiation• Upstream oil & gas services and

equipment• Boatbuilding• Nuclear• Advanced materials• Aerospace and Defence• Electro-technical/ICT Services

Sector.

IPAP is fundamentally a policy and action plan designed to help build South Africa’s industrial base in critical

sectors of production and value-added manufacturing. Visit: www.thedti.gov.za

INDUSTRY BODIES

There are many industry associations throughout the country and across sectors. Here are some of them:

Manufacturing CircleFormed in 2008, the Manufacturing Circle interacts with government and other stakeholders in order to review, debate and help formulate policies which will have a positive impact on South Africa’s manufacturing base. The Manufacturing Circle is made up of a number of South Africa’s leading medium -to -large manufacturing companies from a wide range of industries. Some of the members are leading South African exporters of manufactured goods to markets around the globe, others are locally based and locally focused companies competing with the best in the world. Visit: www.manufacturingcircle.co.za

National Tooling Initiative Programme (NTI)The National Tooling Initiative (NTI), a partnership between Industry and government, is the turnaround intervention programme aimed at the rehabilitation and growth of the Tool, Die and Mouldmaking (TDM) sector and has been identified by the DTI as a key programme to support the development of South African manufacturing

competitiveness as the stimulus for sustainable economic growth and job creation. Visit: www.ntipweb.co.za

National Association of Automobile Manufacturers of South Africa (NAAMSA) NAAMSA is the official representative body for new vehicle manufacturers, major importers and distributors of new vehicles as well as local manufacturers and assemblers. Visit: www.naamsa.co.za

Plastics SA Plastics SA acts as the mouthpiece of the South African plastics industry, representing polymer producers and importers, converters, machine suppliers and recyclers.Visit: www.plasticsinfo.co.za

The South African Electrotechnical Export Council (SAEEC) The SAEEC is a non-profit company established as a public private partnership between South African business and the Department of Trade and Industry to facilitate the export growth and internationalisation of its members. All members are South African registered companies that are manufacturers and providers of products and related services from the electrotechnical sector, including electrical engineering, electronics, information technology and telecommunications.Visit: www.saeec.org.za •

Move to standardbank.co.za/invest

to the bank that offers you up to 5.25%* interest with immediate access to your business cash.

Move

• Open a MoneyMarket Call account • Minimum deposit of only R20 000 • Quick deposits, withdrawals and transfers

*Terms and conditions apply. Authorised financial services and registered credit provider (NCRCP15). The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). Moving Forward is a trademark of The Standard Bank of South Africa Limited.SBSA 199711. Moving ForwardTM

Documents

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