2

3

4

5

6

is the Deputy General Manager of IFC

managed SEDF in Bangladesh. Deepak has

been working in the area of enterprise

development since 1978 with the GTZ,

Swisscontact, ILO, UNIDO and various

international institutions in Africa, Asia,

Latin America and Eastern Europe. Prior to

joining SEDF in September 2002, Deepak

was managing long-term SME and private

sector development programs in Malawi,

Kenya and South Africa. His main interests

are enterprise growth and re-engineering,

performance measurement framework,

sector analysis and value chains for market

development.

is a self-employed consultant in market-

driven small enterprise development. She

has worked in small enterprise development

for seventeen years, primarily in Africa and

the United States. For the last seven years,

she has analyzed market development

initiatives aimed at poverty alleviation, and

offered on-line and in-person training on

the subject.

Deepak Adhikary

Mary McVay

7

1 SDBS, 20062 Islam, 2005

The objective of this case study is to analyze the experiences, successes and challenges of a complexand innovative private sector development strategy which seeks to stimulate markets thatcontribute to economic growth and poverty reduction. The strategy itself emerged from theimplementation of the Sector Development and Business Services program of the InternationalFinance Corporation's SouthAsia Enterprise Development Facility, based in Bangladesh but alsocovering Nepal, Bhutan and North East India.

The SDBS strategy focuses on direct interaction with pilot businesses in target sectors to stimulatea system-wide change. The target sectors are Ready-Made Garments, Light Engineering, andAgri-Business. The program works in cross-cutting support areas including managementdevelopment and training, information technology and business linkages, and is also well-placedto address social concerns such as gender, environment and poverty. The overall aim of the SEDFstrategy is to increase economic opportunity for the poor.

Over a period of three years (2003 to 2005), the program achieved significant short-termoutcomes in firm-level growth, primarily in Small and Medium Enterprises (SMEs), and inoutreach to the poor. SEDF has directly supported technical assistance (TA) and training to 136enterprises, 20 service providers, 11 buying houses (apparels) and trained 3,017 people. Assistedfirms and service providers have reported increased sales of over US $114 million and increasedassets of more than US $35 million. This can be compared to a total program cost of US $6.08million for a leverage value of total program costs to sales increases in assisted clients of 1:19. Todate, assisted firms have created a total of 16,239 new jobs.1 One particular assisted lead firm wasable to increase its outreach from 46,000 to 75,000 small-scale farmers.2 In addition to these gainsSEDF strategy also aims to create sustainable, long-term, systemic change by linking SMEs toviable markets through a range of mechanisms that include:

1. Stimulating commercial business service markets,

2. Building the capacity of business associations to provide market linkages and firm-level sectordevelopment services,

3. Strengthening the role of lead firms in training and providing information to their SMEsuppliers and buyers as embedded service providers.

Thus the program has achieved immediate firm-level results while stimulating the developmentof target sectors on the whole, so that SMEs are in a better position to grow and generate long-term, sustainable benefits for the poor. In its initial three years, SEDF has learned valuable lessonsabout how to leverage direct firm-level interaction to produce system-wide changes and how tohelp organizations shift from subsidized, narrow work to sustainable, market-level work thatultimately benefits the poor. SEDF's experiences provide useful guidance and highlight currentchallenges in enterprise development.

8

Foreword from Donor Representatives 2

Note from SEDF General Manager 4

Acknowledgement 5

Authors 6

Executive Summary 7

Acronyms 10

Tables and Figures 12

Chapter One: Sector Development and Business Service Strategy 141.1 Market Development in Practice 15

1.2 Relevance of the Case Study 17

1.3 SEDF Background 17

1.4 SEDF Sector Development and Business Services (SDBS) Strategy 18

1.5 Results 30

1.6 Lessons Learned 42

1.7 Challenges 45

1.8 The Case Study Structure 46

Chapter Two: Ready-Made Garments (RMG) Sector 482.1 Summary 49

2.2 Characteristics of the RMG Sector 52

2.3 Market Opportunities and Threats 53

2.4 SEDF Interventions and Indications of Wider Market Development 58

2.5 The RMG Intervention Process 72

2.6 Lessons Learned and Current Challenges 76

9

Chapter Three: Light Engineering Sector (LES) 783.1 Summary 79

3.2 Characteristics of the LES 83

3.3 Market Opportunities and Threats 84

3.4 SEDF Interventions and Indications of Wider Market Development 89

3.5 The LES Intervention Process 99

3.6 Lessons Learned and Current Challenges 105

Chapter Four: Agri-Business Sector 1084.1 Summary 109

4.2 Characteristics of the Agri-Business Sector and the Emerging SDBS Strategy 112

4.3 SEDF Interventions and Indications of Wider Market Development 116

4.4 The Agri-Business Intervention Process 122

4.5 Lessons Learned and Current Challenges 123

Chapter Five: The Strategic Change Process 1265.1 How the SDBS Transformation Came About 128

5.2 Mentorship 132

5.3 Monitoring and Evaluation 133

5.4 Lessons Learned and Current Challenges 141

ANNEXES A Bibliography 144

B Indicators Flow/RMG Program Logic Model 148

C Contributors 150

10

A2F Access to FinanceAMM Apparel Manufacturing Management

BASC Business Advisory Services Center BASIS Bangladesh Association of Software and Information ServicesBDS Business Development ServicesBEE Business Enabling EnvironmentBEIOA Bangladesh Engineering Industry Owners' Association BGMEA Bangladesh Garment Manufacturers and Exporters AssociationBIFT BGMEA Institute of Fashion Technology BKMEA Bangladesh Knitwear Manufacturers and Exporters Association BL Business LinkageBRAC Bangladesh Rural Advancement CommitteeBUET Bangladesh University of Engineering and Technology

CBDS Consortium for Business Development ServicesCFC Common Facility CentreCIDA Canadian International Development AgencyCIES Consortium for Industrial Engineering ServicesCSF Common Service Facility CSR Corporate Social Responsibility

DFID Department for International Development

EC European CommissionEEF Equity Entrepreneur Fund ERP Enterprise Resource Planning EU European Union

FFC Fertilizer Firm Client FGD Focus Group DiscussionFPC Food Processing Client

GAP Good Agricultural PracticeGDP Gross Domestic ProductGPM Garment Production Management GSP Generalized System of PreferenceGTZ German Agency for Technical Cooperation

11

HACCP Hazard Identification and Critical Control Point

IDS Institute of Development StudiesIFC International Finance CorporationILO International Labour OrganizationIPNS Integrated Plant Nutrition System IT Information Technology

KSA Kurt Salmon Associates

LES Light Engineering Sector

M&E Monitoring and EvaluationMDT Management Development and TrainingMFA Multi-Fiber Agreement MGS Modern Grocery Superstore MIS Management Information SystemsMNC Multi-national Corporation

NEOF Nutrient-Enriched Organic FertilizerNGO Non Government Organization

PFI Partner Financial InstitutionPIP Productivity Improvement ProgramPLM Program Logic ModelPOO Plan of OperationPSD Private Sector Development

RBPMS Results-Based Performance Monitoring System RMG Ready-Made Garments

SAARC South Asian Association for Regional CooperationSAP System Application ProductSDBS Sector Development and Business ServicesSDI Sector Development IncentivesSEDF SouthAsia Enterprise Development FacilitySME Small and Medium Enterprise

TA Technical Assistance

UAI User, Attitude, ImageUNIDO United Nations Industrial Development Organization

VAT Value Added Tax

WTO World Trade Organization

12

LIST OF TABLES PAGE NO

Table 2-A Bangladesh's Garments Market Position (1999-2000) 54

Table 2-B PIP Findings from Diagnostics of 21 Pilot Firms 61

Table 2-C Results from Canada Trade Fair 67

Table 2-D Examples of Productivity Improvements Due to ERP Software 70

Application in RMG Firms

Table 5-A Progress Status Report 140

Table 5-B Assumption Status Report 140

13

LIST OF FIGURES PAGE NO

Figure 1-A SEDF's Sector Development and Business Services Strategy 19

Figure 1-B SEDF Market Development in Practice 24

Figure 1-C SDBS Program Overview 32

Figure 1-D Program Cost Input Structure: SDBS Costs, Changed Sales and Asset Value 33

Figure 1-E SDBS Budget: Expenditure Stream 33

Figure 1-F SDBS Expenditure Pattern 34

Figure 2-A RMG Sector Overview 51

Figure 2-B RMG Cost Input Structure: SDBS Costs, Changed Sales and Asset Value 52

Figure 2-C The Ready-Made Garment Sector in Bangladesh 56

Figure 2-D Association Development Strategy 60

Figure 3-A LES Overview 82

Figure 3-B LES Cost Input Structure: SDBS Costs, Changed Sales and Asset Value 83

Figure 3-C Simplified SME Light Engineering Value Chain Map 85

Figure 3-D SEDF LES Development Strategy Roll-Out 90

Figure 3-E Improvements in the Foundries 93

Figure 3-F Productivity Changes in Pilot Re-Rolling Mill 94

Figure 4-A Agri-Business Sector Overview 111

Figure 4-B Agri-Business Cost Input Structure: 112

SDBS Costs, Changed Sales and Asset Value

Figure 5-A SDBS Planning Framework 135

Figure 5-B SDBS Monitoring Framework 136

Figure 5-C Main Baseline Data Screen 137

Figure 5-D Service Input Data Screen 137

Figure 5-E IFC/SEDF Central Budgeting System 137

Figure 5-F Monitoring Form 138

Figure 5-G SDBS Results Report 138

Figure 5-H Outcome Level Results 139

Figure 5-I Impact Report 139

14

SECTOR DEVELOPMENT AND BUSINESS SERVICE STRATEGY

15

1.1 Sector Development And Business Service Strategy:Market Development In Practice

The experience, accomplishments and challenges of the SEDF's sector developmentstrategy offer donors and practitioners valuable lessons for balancing the need forimmediate results with the goal of long-term, systemic change. The pilot initiatives put inplace market mechanisms that are beginning to show signs of success, sustainability, wideoutreach and significant impact.

In its first three years (2003 to 2005), the program has achieved the following short-termoutcomes in firm-level growth and outreach to the poor:

• SDBS has directly supported technical assistance and training to 136 enterprises, 20service providers, 11 buying houses and trained 3,017 people.

• Assisted firms and service providers report increased sales of over US $114 millionand increased assets of more than US $35 million.3

• Assisted firms have created 16,239 new jobs,4 and one assisted lead firm alone hasincreased outreach to small-scale farmers from 46,000 to 75000.5

This can be compared to the total sector program cost of US $6.08 million, to date. SEDFcalculates a leverage value of total program costs to sales increases in assisted clients of1:19.

These pilot initiatives have stimulated market activities that show signs of sustainability,wider outreach and, by implication, more significant and sustained impact for theprogram. For example:

1. Stimulating commercial business service markets: SEDF built the capacity of sixRMG service providers (three RMG consultants, two training institutes and onebusiness association) so they were able to sell training, technical assistance and market

3 SEDF, 20064 SDBS, 2006 5 Islam, 2005

16

linkage services. SEDF provided sector development incentives (SDIs)6 to 34 pilotfirms and, to date, the supported providers have sold services to a further 133 firmsat full cost.

2. Building the capacity of business associations to provide market linkage andfirm-level sector development services: SEDF supported an RMG trade associationto organize two international trade fairs. The association has since organized furthersix trade fairs without SEDF assistance.

3. Strengthening the role of lead firms in training and providing information totheir SME suppliers and buyers as embedded service providers: SEDF supporteda nutrient-enriched organic fertilizer manufacturer to increase its outreach from46,000 to 75,000 farmers, by establishing a network of 27 dealers and 4,500 retailersthrough training and counselling.7

4. Inducing sector wide better practices: SDBS assisted the foundry and re-rolling millsub-sectors (within Light Engineering Sector) by introducing better practices underthe guidance of international shop floor experts (assisted by local service providers) toreduce costs and improve efficiency. The foundry companies realized a saving of US$27 per ton of cast products, amounting to a net saving of US $400,000 per annum.The re-rolling mills achieved cost and efficiency savings ranging from $18,224 to$158,641 per month. Besides improving sector performance, this also created ademand for local service providers in two sub-sectors.

From 2003 to 2005 – mid-way through its implementation – SDBS has provided SDIsthrough various forms of technical assistance to firms, business associations, consultantsand training institutes for three types of sector development initiatives:

a) Pilot firm-level assistance: These interventions serve to develop and demonstratesupport services, provide SEDF with a clear entry point to the market, and establishSEDF legitimacy among key industry stakeholders/leaders as a facilitator whounderstands the industry-specific needs.

b) Lead firm assistance: These interventions reach large numbers of very smallbusinesses by improving market channels in which large firms buy from or sellto/through SMEs.

c) Capacity building of service providers (business associations, consultants andtraining institutions): This work strengthens association outreach to SMEs anddevelops subsidiary services geared toward SMEs. It also includes assisting varioussector specialists in developing new markets or new service products.

The SDBS experience has generated important lessons around the value of direct firm

6 An SDI is a cost-sharing grant to firms, services providers, or associations offered to provide incentive for the client totry technical assistance services. It covers only technical assistance, is always cost-shared, and aims to stimulate widermarket development.

7 Adhikary, SDBS Strategy 2005

17

relationships in stimulating system-wide changes. During the evolution of the strategy,and as the strategy continues to develop, the SDBS team has encountered challenges thatcontribute to an understanding of how to link SMEs with viable markets on a sustainablebasis and also how to do so in ways that benefit the poor. This chapter, which serves as asummary of the SDBS strategy and experience to date, describes the pragmatic strategy,presents the results of the program, and summarizes the challenges faced and lessonslearned.

1.2 Relevance of This Case Study

The SDBS program targets small and medium enterprises (SMEs), but the experiencepresented here is relevant to a wide range of development experts and practitioners. Inusing a sector development approach, the SEDF team found a need to loosen targetingdefinitions and boundaries in order to link SMEs with broader markets and systems. Inone case, a lead medium-sized firm trained small-scale retailers who in turn trained very-small-scale farmers. In another case, SEDF partnered with a trade association thatincluded the largest exporting businesses as well as the target SMEs.8 Thus, programstargeting a wide range of businesses can benefit from the strategic lessons in this casestudy. Learning from SEDF work is also relevant to a range of contexts beyond smallenterprise development, including value chain development, local economic development,cluster development, and making markets work for the poor.

The analysis is intended for two key audiences:

• Donors and development strategists looking for cost-effective ways to improvevalue chain competitiveness in order to benefit the poor. The SEDF program hasdemonstrated positive short-term results and is showing indications of system-wideand sustainable change. The process elaborated here could be further developed andsupported in other contexts. The key recommendation is for a strategy of directengagement with market actors at the top of the value chain (where applicable) whichcontributes to and complements system-wide analysis and support-marketdevelopment to ensure sustainability and broad sector improvements.

• Development practitioners looking for methods that meet the need for immediateresults while contributing to more sustainable, market-wide change. The SEDFexperience offers practical examples of program activities and the sequencing of theseactivities for fast yet systemic results. The main recommendation is to start withdirect, firm-level assistance and proceed to more market-wide interventions.

1.3 SEDF Background

The SouthAsia Enterprise Development Facility (SEDF) is a multi-donor funded, IFCmanaged initiative with the broad goal of contributing to the reduction of poverty in

8 Adhikary, SDBS Strategy 2005

18

Bangladesh, Nepal, Bhutan and North East India by developing and enhancing viableSMEs. SEDF was set up in Dhaka in October 2002 and has since then been working onincreasing the competitiveness, performance, and growth of the SMEs in the region.These enhancements are expected to contribute to growth and improvement of economicand social conditions on a broader level. The vast majority (80%) of SEDF's work is inBangladesh.

SEDF has developed a systematic and holistic approach to support the SME segment inits target countries. The three main program components are:

• Increasing access to finance for SMEs: The growth of SMEs in developing countriesis constrained by their inability to access/leverage formal external funding. Theobjective of this component of SEDF is to assist in making finance more readilyavailable to SMEs. This is achieved through (i) technical assistance to PartnerFinancial Institutions (PFIs) to enhance their capacity to finance SMEs and therebyincrease their loan portfolios to the SME segment, and (ii)development/dissemination of new financial products geared towards the needs ofSME clients through commercial banks and PFIs.

• Improving the business environment for SMEs: This component of SEDF workstowards identifying various business environment issues and regulatory/policyconstraints that affect SMEs. It also facilitates various interventions to increaseinter/intra regional trade, undertakes investment climate surveys and implementsrelevant solutions, builds the capacity of business associations with a focus on genderissues and aims to raise awareness of environment and socially responsible practices inits component programs.

• Increasing access to business development services: SEDF has identified RMG,LES and Agri-Business as focus areas for its sub-sector development work. Thiscomponent works to increase the access and use of business services by SMEs throughboth demand stimulation and supply side interventions to improve thecompetitiveness and performance of SMEs.

The third SEDF component and its evolution from "access to business developmentservices" to "sector development and business services (SDBS)" is the subject of thiscase study.

1.4 The SEDF Sector Development and Business Services Strategy

The SEDF sector development and business service (SDBS) strategy has emerged throughexperience (both successes and failures) and will continue to be refined as the programcontinues. An overarching philosophy and process has solidified thus far in two ways.First, SEDF's focus on helping SMEs compete profitably in critical markets drives all

19

program efforts. Second, SDBS’s path to market development is through strategic firm-level work that transitions into leveraged, sector-level interventions. This strategy isdescribed below and further detailed in the sector chapters.

1.4.1 Sector Goals Drive the Program

First, SDBS targets critical sectors, develops and implements a strategy for enhancingSMEs competitiveness and profitability, and invests in cross-cutting markets and activitiesthat support the core strategy. This strategy is depicted in Figure 1-A.

Figure 1-A. SEDF's Sector Development and Business Services Strategy

SEDF’s main target sectors are Agri-Business, Ready-Made Garments (RMG), and LightEngineering (LES). SEDF activities in cross-sector areas support its sector work. Theseareas include: management development and training (MDT), information technology(IT), and business linkages (BL). They also include social issues: gender, the environment,and poverty. SEDF develops specific sector strategies to help SMEs reach and reap benefitsfrom target markets by improving market linkages, productivity, quality and othercompetitiveness factors. Cross-sector activities support this main goal in each sector. Forexample:

• The MDT team develops manuals and trains trainers for RMG and LES traininginitiatives;

• The IT team stimulates the software market for process improvement softwarespecific to RMG firms; and

20

• The business linkage team is helping RMG buyers improve compliance withcustomer social responsibility policies.

The strategy is to channel more, diverse resources towards a single goal of helping SMEsreach and perform well in specific markets in the most effective and sustainable waypossible.

a) Why a Sector Strategy?

SEDF's rationale for using a sector strategy is rooted in the market, and the philosophythat helping SMEs reach and perform well in viable markets is the key to their survivaland growth.9 Firm-level assistance to SMEs is inefficient, expensive and usually notsustainable. In order to have a high return on investment, a wholesale strategy is required.Current strategies include microfinance, BDS market development, enablingenvironment work, and sector development. A holistic sector development approach isable to address many of the limitations of the current strategies:

• Microfinance alone does not address critical issues facing SMEs including internallack of capacity and external, structural market constraints such as monopolies, lackof market access, poor access to inputs and infrastructure, lack of innovation and poorquality standards.

• BDS market development – in isolation of an approach to help firms reach markets– has limited impact because the focus is on sustainable service provision, rather thansignificant, high priority benefits to firms.

• Efforts to address the enabling environment for SMEs – in isolation of considerationfor the markets SMEs operate in - are often broadly focused, so that they miss thedetailed, daily policy issues and practices that block SME progress.

In contrast, sector development addresses target businesses – and the poor people linkedto them – in their natural, complex and most relevant context – the markets they buyfrom and sell to.

In order to survive, businesses must respond to the market and let the market driveproducts, service, and strategy. A "sector" is the real market – the one that makes or breaksa business. It defines the business, where it gets its inputs, how it sells, and to whom. Bytaking an industry perspective, a program can identify and address collective challengesfacing SMEs and the entire value chain as they try to survive and thrive in today's globalmarkets. Then, business support services, financial services and enabling environmentchanges can be brought to bear in enhancing SME efforts to reach and profit from viablemarkets. A sector development initiative can also easily drive or support geographicallyfocused initiatives such as cluster development or local economic development byeffectively linking communities with viable markets. A key lesson from SEDF's sector

9 Adhikary, various presentations, 2004 - 2006

21

work is the importance of integrating the above three strategies into its sector work, tosupport firms in reaching markets on a widespread, sustainable basis.

b) Why SMEs?

IFC's mission is to promote sustainable private sector investment in developing countriesas a way to reduce poverty and improve people's lives. IFC is the largest multilateral sourceof loan and equity financing for private sector projects in developing countries. Withregard to large firms and large projects, the IFC invests directly, mobilizes private sectorinvestment and provides advice and technical assistance. The IFC has long recognized thatSMEs are a critical part of any economy and that the IFC's large investments do notalways reach these firms. The IFC has adopted a wholesale approach to reaching SMEs.With micro and SME finance, IFC invests directly in financial institutions, where singleinvestments in such institutions can easily reach large numbers of SMEs. IFC alsopromotes policies that support a vibrant financial services market. In the arena of technicalassistance and business development, IFC stimulates sub-contracting/linkages with largefirm investments, promotes a supportive business-enabling environment (BEE), andprovides technical assistance through regional facilities, such as the SEDF.10

The SEDF sector development approach offers a sustainable, wholesale strategy forreaching SMEs. The current approach has evolved over a period of time where initiallyIFC regional facilities typically offered firm-level matching grants that helped SMEs gainaccess to international expertise and markets – on a cost-sharing basis - to grow theirbusinesses. Although impact on individual firms was significant, programs were costly andnot highly sustainable. In contrast, the sector development approach (that SEDF is nowpracticing) offers a wholesale approach to helping SMEs grow by:

• Extending SDIs for technical assistance to lead firms who build SME supplier andbuyer capacity;

• Extending SDIs for product/market development and technical assistance to traininginstitutions, consultants and business associations who provide services and createmarket linkages for SMEs on a profitable basis; and

• Driving this work, as well as financial services and enabling environment work, witha sector development strategy in which all activities are focused on helping SMEssurvive and thrive in a specifically identified market.

While some individual SMEs continue to receive cost-sharing support, the purpose of thisassistance is to develop and demonstrate services that will ultimately become sustainablein the market.

In its sector development work, SEDF also partners with a wide range of businesses of allsizes, as well as service providers such as consultants, trainers and business associations thatrepresent large and small business. So, why focus on SMEs?

10 Various IFC documents on strategies

22

SMEs make up the majority of businesses and employ/provide income to the majority ofthe poor in developing countries. They remain a critical route to helping the poor worktheir way out of poverty. SMEs often play a critical role in significant industries, such asagriculture, food processing, Ready-Made Garment, light engineering, and more. Theirproductivity and market readiness affects an industry's overall competitiveness. Thus,SEDF focuses on SMEs as a route to poverty reduction and economic growth.11

1.4.2 Practical Approach to Market Development

The following process lays out the SDBS's current process for developing target sectorsand support markets that have emerged based on experience. SDBS engages directly withfirms in the value chain and uses that engagement to support and transition into broader,more sustainable market development activities.12 Broader market development isachieved through partnerships with associations and business service providers, such ascommercial consultants and training institutions, or lead firms that provide free servicesto suppliers or SME buyers as a way to embed their services. This strategy has evolvedfrom exploring how a firm-level assistance approach could be leveraged to contribute towidespread, systemic sector change. The elements of this process follow:

1. Selecting partners and interventions: SDBS launches program activity in selectedsectors with partnership building and basic industry analysis such as backgroundreading, interviews with industry experts and leaders, focus group discussions andfirm-level diagnostics with lead firms in the sector. In partnership with these leadfirms and sometimes the associations they lead, SDBS identifies key marketopportunities, critical problems in taking advantage of the opportunities, and highpriority, feasible solutions. SEDF backs solutions that partners invest in.

2. Pilot initiatives: For interventions that attract private sector initiative, SDBS offers asector development incentive (SDI) mechanism to support pilot initiatives thatgenerate private sector solutions to critical sector constraints. These cost-sharinggrants have been extended to pilot firms, business service providers and tradeassociations to cost-share activities such as:

• Consulting services to improve firm-level productivity. In this process,consultants are trained and specific service packages are developed;

• Consulting services to improve a lead firms' outreach to smaller firms;

• Development of training materials and training of trainers;

• Development of SME-specific products and services, e.g. software for RMGfirms;

11 Various SDBS Documents12 This process was documented as part of this case study, based on analysis of SEDF process to date and future plans.

It will no doubt continue to evolve as SEDF's strategy evolves and with additional practical experience.

23

• Business associations' market-linkage activities such as trade shows;

• Consulting services to business associations to improve member outreach andmember services, and

• Development of finance solutions for SMEs traditionally unable to accessfinance.

All SDBS activities, except sector studies, are cost-shared by private sector partners.

3. Replication: SDBS then analyses and documents the experience, modifying itsstrategy and, when relevant, replicates the initiative. During this process, SDBScreates systems for sustainable support service delivery after SEDF support ends. Forexample, SDBS develops manuals and guidelines, documents success stories, trainsconsultants and trainers and builds the capacity of trade associations.

4. Exit: SDBS promotes successful initiatives often through trade associations andpublications, usually using assisted firms as spokespeople. SDBS builds the capacityof providers all along, helps them develop marketing and business plans, and remainsavailable for advice and mentorship after direct subsidies end.

This process, depicted in Figure 1-B, is repeated, often simultaneously, for additionalinterventions in the target sectors and support markets.

There are several critical elements to make this process work without getting boggeddown in "traditional" firm-level assistance. These include:

• Complementary and continuous value chain analysis to maintain a broad visionfor the sector and to set clear sector development goals;

• A monitoring and evaluation system that helps to identify strategic firm-level andpartner-level investments, and reports progress not only of firm-levelperformance but also of sector-level objectives;

• A performance system that assesses staff according to sector developmentobjectives, not just their ability to make deals;

• Learning from and documenting pilot experiences, publishing success stories andstrategies, and recognizing the learning value in failures; and

• Consistent engagement with a wide range of partners, and constant mentoringand capacity building throughout the process.

These elements are represented in the center box of Figure 1-B.

24

Figure 1-B: SEDF Market Development in Practice

a) What is the Role of Market Analysis in SEDF's Strategy?

In SDBS's strategy, market analysis is more of a management tool than a program designtool. Both the BDS market development and value chain development fields promotethorough market analysis up-front in the project cycle. SEDF's approach is to integratemarket analysis throughout the project cycle, and to link it with other core managementfunctions.

SEDF applies market assessment, monitoring, documentation, learning and training atevery step in the project cycle. This approach is critical to transforming firm-levelassistance into sector-level change. At each step, these functions play a different role inadvancing SEDF's sector development strategy. For example:

1. Selecting partners and interventions: SDBS assesses and conducts basic sectoranalysis at this stage, but focuses more on firm-level diagnostics for a window into thesector from the SME vantage point. SDBS sometimes holds seminars with SMEs toraise awareness of broader sector concerns, and discusses their perspective and reactionto some proposed solutions. At this phase, staff learn a lot about the target sector andSMEs from potential partners.

2. Pilot services and interventions: SDBS assesses the performance of pilot initiatives,using the information to revise service offerings. Pilot initiatives often act as providertraining opportunities as SDBS matches more advanced experts with less experiencedbut more affordable and accessible trainers or consultants. The basic consulting

25

service packages and training curricula are developed and documented at the pilotphase. Lessons are incorporated into decisions about further investment andreplication and final document production. At this phase, SDBS gathers baseline andimpact data on assisted firms, which is facilitated by the SDI agreement.Documentation of activities is also important for staff evaluation and incentives. Thisphase also generates professional development as SDBS staff learn about new servicesfrom partner experts.

3. Replication: For replication, SDBS finalizes consulting and training manuals, trainstrainers and publishes success stories from pilot initiatives to support widerpromotion. At this phase, SDBS monitoring becomes more challenging as subsidiesare withdrawn, but SDBS endeavors to continue to assess firm, provider and sectorlevel outcomes. At this stage, SDBS team members share their experience with otherstaff working on other sectors and initiatives to disseminate knowledge gained.

4. Exit: As SDBS exits key markets, the team assesses sustainability. In some markets,withdrawal has come immediately with replication, and in other markets SDBS hasexited only to see markets slow down. In high potential cases, SEDF has come backin with lighter subsidies to support the market until it is larger and more robust. Atthis stage, SDBS also engages in broad sector analysis to identify subsequentinterventions that will continue to strengthen SMEs in target sectors. At this phase,SDBS is in a stronger position to share its learning with the broader developmentcommunity.

Thus, SDBS integrates analysis, monitoring, documentation, learning and training intoall stages of the project cycle. Market assessment is one of many driving forces in projectmanagement. This process is supported by a learning environment, a program culture ofinnovation, and a safe climate for sharing both successes and failures.

b) What is an SEDF Intervention?

In the SEDF context, an "intervention" generally refers to an SDI given as technicalassistance at a point of leverage in the value chain within the target sectors. It is expectedthat an intervention at the point of leverage has the potential to generate maximumimpact or create an entry into the sector. The only other expenditure that the SDBS teamhas is for research and publication, evaluation, dissemination and management. An SDIis a cost-sharing grant for technical assistance (consulting services) to building capacity offirms, association or service providers. SDIs are temporary subsidies targeted to stimulatesector development. Clients are fully aware of the full cost of service, the temporary natureof the grant, and its broader purpose. There is an in-house SDBS team comprising ofvalue chain analysis experts and subject matter specialists who assist clients in determiningappropriate work and finding potential service providers. SEDF SDIs are offered to arange of partners for various strategic activities. These include:

26

• Pilot firm consulting: This originates as a low-cost diagnostic and evolves into anSDI for more intensive, focused consulting services for pilot firms, who procureservices from private consultants. During the pilot process, standard processes,manuals and tools are developed, and the capacity of selected consultants is enhanced.Any resulting success stories are shared at trade association events, to promote theservice and the trained consultants. Additional firms access services with less SDBSsupport and eventually with no support.

• Lead firm consulting and strategic support: This firm-level assistance is targeted tolarger businesses that play a pivotal role in the value chain, for example as inputsuppliers to smaller firms or purchasers of smaller firm products. These lead firmsoften provide "embedded" services to their smaller customers or suppliers.

• Support for business association activities: SDBS provides some financial supportto business associations for technical assistance to identify and develop marketlinkage, training or other services that the association will ultimately provide tomembers on a sustainable basis. SEDF does not provide operational funding forassociations.

• Support to service providers: Service providers include consulting firms, consortiaof consultants, software development firms, training institutions, associations, etc.SDBS supports this group usually through SDI for technical assistance for productdevelopment, training of trainers, and support for collaborative marketing events. Intwo cases, SDBS took the initiative to stimulate the formation of consortia of serviceproviders to leverage collective expertise.

SDIs are never issued to cover operating expenses or firm-level capital investments, but areused instead to fund capacity building initiatives through technical assistance. They arenot subsidies to help firms pay for services on an on-going basis. Rather, they aretemporary incentives used as a tool to stimulate demand and supply of support servicesthat strengthen sector competitiveness and inter-firm linkages.

c) How are Interventions Selected?

Interventions can emerge from staff, firm or provider inquiries, market analysis, ordiscussions with partners. In selecting an intervention, SDBS first considers the followingkey criteria:

• Does it match with the SEDF mandate? Is it primarily SME focused and does it fallwithin selected sectors/components?

• Does it create significant strategic value? Does it add significant value to sectorcompetitiveness? Are there significant backward and forward linkages to generatesignificant impact?

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• Is it sustainable? Will it continue even after SEDF is out? Is there a provider to drivewider market dissemination?

• Is it business led? Is it in high demand among SMEs?

Once the above criteria are met, interventions are then checked against the following:

• Poverty focus

• Counterpart contribution

• Growth potential

• Outreach (scale)

• Gender focus

• Environmental impact

d) Why Firm-level Assistance?

While direct firm-level assistance is often considered the antithesis of sustainable, marketdevelopment, SDBS uses firm-level assistance in a strategic manner to launch and enhancesector development strategies. For SDBS, firm-level assistance, through SDIs, is crucialfor:

• Entering the sector: Through firm-level support, staff build trust, strengthenrelationships and demonstrate expertise that brings credibility to the program.

• Understanding the sector: Rather than trying to understand the sector from a ‘top-down' or external market assessment, firm-level assistance allows firms to participatein the process of developing interventions. The SEDF team is able to gain an insider'sperspective on the market opportunities, key product lines and value chains, andchallenges in reaching markets. Understanding the challenges facing firms and thetype of technical support they want helps SDBS identify demand for support services.

• Developing and testing service models: Pilot engagement with individual firmshelps SDBS and selected service providers to develop appropriate service packages anddelivery mechanisms. These initiatives are often developed into case studies fortraining other providers, and/or are used to develop manuals for other firms orproviders to use.

• Engaging and training service providers: During pilot firm-level assistance, SDBSengages consultants and training institutions who would be positioned to offerservices over the long run. Often, less experienced providers are partnered with more

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experienced international experts who train and mentor the newer providers.Sometimes, however, the market demands and itself pays for access to internationallevel expertise on a regular basis.

• Engaging and training lead firms and intermediaries: Often, lead firms orintermediaries in the value chain like the concept of increasing the value that theyoffer SME suppliers and buyers, but are not sure how to go about it and lack faiththat there are effective strategies for engaging SMEs in ways that generate SME loyaltyto the lead firm or intermediary. SDBS targets technical assistance to these firms inorder to leverage their market position to serve large numbers of SMEs. This thenserves as a model for replication among other lead firms and intermediaries.

• Demonstrating and promoting success: Pilot engagement with key firms providessuccess stories to promote the services. Specific clients often present their experiencesto encourage others to use services to increase productivity and improve quality. Theydo this to increase overall competitiveness of the sector, which ultimately helps theirown market position. Also the copycat syndrome which is very prevalent in the SMEsector works well to disseminate and emulate these success stories.

• Balancing short-term and long-term results: Some direct firm-level assistance givesthe program outreach and impact numbers needed to meet strict, short-term projectgoals, while also contributing for long-term sustainability through marketdevelopment.

e) What Is SEDF's Exit Strategy?

SDIs are a derivative of matching grants. A typical criticism of matching grants and directfirm-level support is that it is hard to exit from this assistance and that the assistancedistorts, rather than stimulates, private market development. SEDF has exited somemarkets and is in the process of exiting some others. The team has market-exit in its visionthroughout the project cycle. In many cases, SDIs were for one-time activities thatsupported market development. In other cases, SEDF has taken steps to support asuccessful exit and to stimulate demand for private services that enhance the sector. Thesesteps include:

• Buy-in via cost-sharing at the provider/partner level: Many sector developmentprograms offer free services and subsidies to sector development partners such asbusiness associations, consultants, training institutes, and lead firms. In contrast,SEDF ensures buy-in with the requirement of a matching cost share contribution forall activities apart from sector assessments. These include:

» Initial firm-level diagnostics

» Development of training curricula and training trainers

» Mentoring of consultants and development of consultant manuals and tools

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» Institution building for associations

» Developing the capacity of lead firms to work with SMEs

» All pilot firm-level activities – training, consulting services, trade showattendance, etc.

The SDIs communicate to partners the market value of the services they are receiving andbuild their capacity to use such service, so they may build this cost and process into theirown budgets and processes in the long run.

• Buy-in via participatory planning: Development of a sector development strategyin partnership with assisted firms, so that the firms buy into the temporary nature ofthe assistance and invest in the longer-term vision of a strong sector and strongsupport markets.

• Strategic firm-level support: Identification and support of strategic firm-levelsupport activities; limiting support to strategic or pilot firms, and to capacity buildingactivities, rather than, for example, capital investments.

• Transparency: Up-front and clear explanation of the short-term and limited natureof the assistance.

• Accountability: Holding staff as accountable for sector development as for makingdeals.

• High quality TA: Selection of high quality support providers and simultaneouscapacity building of accessible service providers. Sometimes developing a nationalmarket for a particular service is neither practical nor advisable if firms can afford andaccess higher quality international expertise.

• Target the top of the value chain: Targeting assistance to better-off firms at the topof the value chain who can pay for services in the long run, who can drive value chainexpansion, and who can transfer knowledge and skills as needed to their small-scalesuppliers and/or buyers, for free or in an embedded mode.

Three years into its initiative, SDBS is still engaged in most of the markets it hassupported. This is in part due to the evolving nature of the SDBS strategy. The SDBSteam expects the market development process to accelerate now that a clear strategy is inplace throughout the program. Nevertheless, SEDF has found that the timeframe for exitvaries for different sectors and different services markets. More capitalized andsophisticated firms – in RMG for example – take up innovative offers faster than lesscapitalized, more traditional or less sophisticated firms – in LES for example. SDBS is stilllearning valuable lessons about market exit, but maintains its vision for sustainabilitythroughout the project cycle.

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1.5 Results

From 2003 to 2005 – mid-way through its implementation – SDBS has provided SectorDevelopment Incentives (SDI) for technical assistance to firms, business associations,consultants and training institutes for three types of initiatives:

a) Pilot firm-level assistance: These develop and demonstrate support services, provideSDBS with a clear entry point to the market, and develop SEDF legitimacy amongkey industry stakeholders/leaders.

b) Lead firm assistance: This work reaches large numbers of very small businesses byimproving market channels in which large firms buy from or sell to or through SMEs.

c) Capacity building of business associations, consultants and training institutions:This work strengthens association outreach to SMEs, and develops associationservices geared toward SMEs. This also includes assisting various sector specialists indeveloping new markets or new service products.

SEDF gathers quantitative outcome data from providers and firms who receive assistance.This is complemented by independent impact evaluations. In addition, SEDF studies thesustainability of its pilot initiatives and their broader contribution to sector-level change.SEDF has made significant progress in developing an effective monitoring and evaluationsystem of firms who receive direct and indirect assistance, but challenges remain inmeasuring and interpreting broader market-level results. A brief summary of the resultsrelated to some of the intervention are outlined here.

1.5.1 Immediate Outcomes

Outreach and Employment

Between 2002-2005, SDBS has provided SDIs to 167 clients – SMEs, lead firms, serviceproviders and business associations. Together, they have in turn trained 3,017 clients, ofwhich a mere 177 were women. Assisted clients have generated 16,239 jobs, of which themajority (65%) were women. This includes 318 new supervisory jobs for women. Basedon a total program cost of $6.08 million to date, these figures represent a program cost of$374 per job generated by an assisted client. In total, assisted firms employ 126,003people, of whom 62% are women.

Client Financial Performance, Compared to Program Costs

To assess immediate results from SDI investments, SDBS tracks financial performance ofclients receiving SDIs – firms, business association and service providers. SDBS requestsclients to self-report their financial and employment information upon applying for an

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SDI. SDBS then visits or calls each client every six months to one year during and aftertechnical assistance and requests the same information again. This information iscompared, and the difference between sales prior to technical assistance and after technicalassistance is compared. SDBS measures several different simple leverage ratios, includingthe two that will be described throughout this report:

a) Direct program cost leverage: This is the ratio of the SDBS portion of technicalassistance costs to the sales increases in assisted clients. This is a short-term, proxyindicator of the value of SDBS immediate investment in a particular venture.

b) Total program cost leverage: This is the ratio of total costs, including SEDF cost ofTA, client contribution to TA, research and development and SDBS staff, SEDFoverheads, and IFC overheads to client assistance. This is the most heavily loaded costcalculation and the most conservative ratio. It is expected that investments in firmswith SDIs will leverage changes in the broader sector that are not reflected in the firm-level data reported here, and that the substantial research and development costs willbe spread out over time, changing this ratio over time.

SDBS and the authors are fully aware of the limitations in the accuracy of the data andthe method's ability to attribute measured change to the program. Nevertheless, the SDBSteam uses this measure as a practical and loose proxy for actual cost-benefit analysis.

Between 2003-2005, the direct program cost leverage was 1:24. The total program costsrelated to these outcomes was US $6.08 million, creating a total program cost leverage of1:19. In addition, assisted client generated an increase in assets of US $35.5 million.13 SeeFigures 1-C and 1-D for more details.

13 Reported increases in client profits, which are much less reliable, totaled US $5.6 million

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14 Source: SEDF Accounts and M&E (Actual total value from 2002 to March 2006)15 The cost/s of program shared by client/s16 The costs of program incurred in SDI costs and other common costs like sector mapping, diagnostic, research etc.17 The cost includes all program cost (SDI, common costs), SEDF admin cost and IFC overheads18 Value includes actual expenditure from FY 2003 to FY 2005 and estimated expenditure from FY 2006 to FY 200819 Program SDI Cost/Program Client Cost Sharing20 Changed value of sales / Direct Program Costs21 Changed value of sales/ Total Program Cost

Figure 1-C. SDBS Program Overview

2003 2005 Changed Changed 2008(Baseline) (Monitored) Value % (Projected)

A Clients

a.1 Service Providers (no.) 11 20 9 81 26

a.2 Enterprises (no.) 82 136 54 66 580

a.3 Buying Houses 11 13

Total 93 167 63 67 619

B Intervention (no.) 83 265 182 219

C Training

c.1 Total participants (no.) 823 3,017 2194 266

c.2 Female participants (no.) 63 177 114 180

D Program Impact

d.1 Staff (no.) 109,764 126,003 16,239 15

d.2 Female Staff (no.) 67,630 78,202 10,572 16

d.3 Female Manager/Supervisor (no.) 1,050 1,368 318 30

d.4 Sales Domestic in US$ 43,107,409 48,131,017 5,023,608 12 53,906,739

d.5 Sales Export in US$ 821,007,830 930,795,823 109,787,993 13 1,051,799,280

d.6 Assets value in US$ 501,640,633 537,089,590 35,448,957 7 574,685,861

d.7 Profit 35,135,969 40,768,856 5,632,887 16 47,291,873

E Cost Inputs14

e.1 Program SDI cost in US$ 1,694,201

e.2 Program Client cost15 sharing in US$ 182,586

e.3 Direct program cost16 in US$ 4,786,470

e.4 Total program cost17 in US$ 6,080,000 11,730,67018

F Assets Performance

f.1 Sales/Assets 1.72 1.82

f.2 Profit/Assets 0.070 0.076

G Leverage

g.1 Clients' participation leverage 19 1:9

g.2 Direct program cost leverage20 1:24

g.3 Total Program cost leverage21 1:19

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Figure 1-D. Program Cost Input Structure; SDBS Costs, Changed Sales and Asset Value

1.5.2 Distribution of SDBS Expenditure

The total SDBS budget (expenditure stream) is outlined below to give an indication ofhow efforts were focused across different sectors/components.

Figure 1-E. SDBS Budget: Expenditure Stream

Actual Estimated

Sector/Component 2003 2004 2005 2006 2007 2008 Total

RMG 1,079,314 110,200 609,094 580,600 622,000 622,000 3,623,208

LES 15,591 387,768 188,260 375,000 365,000 365,000 1,696,619

Agri-Business 22,436 700,465 439,986 325,000 250,000 250,000 1,987,887

IT 82,659 244,290 126,462 150,000 150,000 150,000 903,411

Linkages, Poverty - 179,361 469,510 569,000 598,000 598,000 2,413,871

Special Projects 127,916 3,158 400,400 287,100 287,100 1,105,674

Yearly Total 1,200,000 1,750,000 1,836,470 2,400,000 2,272,100 2,272,100 11,730,670

Cumulative Value - 2,950,000 4,786,470 7,186,470 9,458,570 11,730,670

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Figure 1-F: SDBS Expenditure Pattern

1.5.3 Improvements in Competitiveness at the Firm, Provider, and Sector Level

SEDF also gathers detailed information from selected assisted firms and providers tobetter understand the extent to which, and how, its work may be contributing tostructural, sustainable and/or sector-wide change.

a) Ready-Made Garment Sector

SDBS's strategy in Ready-Made Garment (RMG) is to help the RMG sector remaincompetitive in the face of radical shifts in global garment trade policy. Its initialinterventions aimed to increase SME productivity and quality, and strengthen direct SMElinkages with new export markets. SDBS is currently focused on inter-firm linkages withinthe sector – both vertical and horizontal – to continue increasing market access, andenhancing compliance with labor laws and other social responsibility standards.

From 2003-2005, 127 RMG firms have received subsidized services through 6 majorservice providers - 2 institutions, 1 association and 3 consulting companies - supported bySEDF. Altogether 1,110 people from the RMG industry have been trained during thisperiod. Pilot work, and its results to date, include:

• Increasing international market access: SEDF supported the Bangladesh GarmentManufacturers and Exporters Association (BGMEA) to organize two Bangladeshgarment trade fairs – one in Canada and one in Japan. Sixty RMG firms participated.At the Canada trade fair – organized to take advantage of Canada's granting of duty-free access to Bangladesh – exporters received on the spot direct orders of US $6.5million. The year prior to the trade fair, firms were losing orders in Canada, but theyear after the trade fair, the number of buyers increased by 128%, the number oforders increased by 150% and the value of the orders increased by 891%. The trade

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fair in Japan was much less successful compared to the Canadian trade fair, withparticipants coming to the conclusion that they could not compete against theChinese in that market22.

• Facilitating international marketing and networking: SDBS assisted BGMEA toorganize a "Bangladesh RMG Buying Trip" to attend fairs as a platform to secure newbuyers. The key focus of the fair was to create direct contacts between local RMGcompanies and potential buyers from US, Canada, Australia and EU countries todevelop confidence among the international buyers. Eleven reputed buyers fromvarious countries visited Bangladesh and are currently engaged in negotiations withRMG companies.

• Increasing productivity and quality through access to training and technicalservices: Working with the Bangladesh University of Engineering and Technology(BUET), SDBS supported the development of two training products and directtraining of 215 participants. The majority of participants (85%) were from 84 RMGfirms, while the rest were individuals hoping to develop or advance careers in theRMG sector. SDBS later surveyed participating firms, who reported improvedperformance as a result of the training. For example, participants in the trainingprogram attribute to the training average productivity increases of 17%, reduced costof 11%, and time saving of 9%.23

• Productivity improvement program (PIP):SDBS also stimulated demand for productivityimprovement consulting services among RMGfirms by conducting diagnostics on a cost-shared basis with 29 RMG firms using highcaliber international expertise in collaborationwith local budding experts.24

• Increasing productivity and quality throughenhanced information technology (IT)applications: SDBS linked its RMG and ITsector development work to supportdevelopment and dissemination of EnterpriseResource Planning (ERP) software. SEDFsupported a pilot initiative with firms andsoftware developers. SDBS also provided technical assistance to two software firms todevelop and market a software package for RMG firms. The package links all aspectsof RMG operations and financial management to provide senior management with adetailed, integrated, fact-base perspective on business performance. This is considereda critical step towards modernizing RMG production.

The direct sector cost leverage for RMG for the period was 1:60, and the total sectorcost leverage was 1:47.

Benefits to Assisted Companies

• Actual line production relativeto line capacity increased by3.1%

• Rework reduced by 15%• Production lead time

decreased by one day• Employment turnover reduced

by 13%• Total export/sales turnover

increased by 14%• Sales value per sewing

machine increased by 9.7%

(Emran, 2006)

22 Nehal Mahatab, Mini Research on RMG Export23 Emran, n.d.24 KSA, 2003a; KSA 2005

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SEDF has developed replication and exit strategies for theabove initiatives. Progress to date in achieving sustainableand market-wide changes include:

» BGMEA organized six additional trade fair events for itsmembers in 2005, without SEDF support. The tradefairs in UK and Italy were modeled on the Canada tradefair. In four cases, BGMEA facilitated memberattendance at mainstream trade fairs, two in Germanyand one each in USA and France. An average of 25 firms

attended each trade fair. Altogether, the fairs generated 128 immediate new orders,worth US $75 million.25

» In 2005, BUET offered 15 training or consulting service packages to the RMGindustry, generating approximately US $38,000 revenues – without SDBScontribution. SEDF is replicating this strategy in knitwear with BGMEA Institute ofFashion Technology (BIFT). For BUET, this represents a significant inroad into theRMG industry.

» SEDF built the capacity of the RMG trade association to link members with privatesector consultants for productivity improvement. In 2005, BGMEA facilitated US$315,000 worth of such consulting services without SDBS financial support.

» Assisted software providers increased their SME customer base from 22 to 37, andincreased revenues from SMEs from US $100,000 to US $400,000. At least 30 RMGfirms have purchased and are using improved software again without SDBS support.These are indications that the market has potential for take-off.

b) Light Engineering Sector (LES)

SEDF's focus in LES has been to improve product quality and manufacturing processesand to reduce cost of inputs for LES firms. Because LES firms supply machinery,equipment and spare parts to a wide range of SMEs and businesses in key economicsectors, LES improvements can increase the competitiveness of small-scale manufacturingand some critical service sectors (such as vehicle repair). To date, SDBS has assisted 27firms through four service providers. The total number of individuals trained through theprogram is 218.26 SDBS's pilot assistance focused on foundries, steel re-rolling mills andmachine shops – the integral components of the LES value chain:

• Foundries: SDBS piloted technical assistance with 6 out of some 100 foundries in thetarget market. These foundries implemented no/low cost process improvements thatreduced rejection rates by 3.4%, increased efficiency of input use by 8.0% andincreased yields by 9.8%.27 The improvements lay a foundation for better quality andreduced costs for light engineering firms purchasing cast metals.

Benefits to RMG assisted serviceproviders

• Partner service providers'income from training andconsultancy to RMG sectorincreased by 182%

• The number of servicesoffered increased by 32%

(P. Jha, SDBS M&E System, 2006)

25 SEDF, 200626 R.Gopal, SEDF, 200627 Calculations by the authors based on data from SEDF, n.d.e

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• Steel re-rolling mills: SEDF piloted technical assistance with 5 out of some 100 inthe target market. (The need for intervention emerged from an industry and valuechain analysis). These mills reduced melting losses from 22% to 8.7%. Gasconsumption went down by 8%, and losses were reduced from 11% to 6.5%.28

Subsequent interventions involving capital expenditure have achieved 60% reductionin gas consumption.29 The improvements lay a foundation for better quality and lowercost steel inputs for light engineering firms and the entire sector.

• Machine shops: SEDF piloted technical assistance with 9 major machine shops.These machine shops adopted a range of process improvements such as procurementof quality inputs, use of better cutting tools, setting standard gauges for consistentmeasurement, etc. The impact of these pilot initiatives is currently being assessed.Initial positive results include the use of tungsten-carbide inserts in cutting tools in 8pilot firms that resulted in a 45%-116% increase in metal removal rate; 30-60%savings in machining time; 90% time-savings; and 30% cost reduction.30 If this canbe replicated, then thousands of small machine shops can benefit.

The direct sector cost leverage for LES for the period was 1:6.4, and the total cost leveragewas 1:5.

Building on these pilot initiatives, SDBS launched sector-wide replications initiativesincluding:

» Establishment of the Consortium for Industrial Engineering Services (CIES):This group of 5 engineering consultants is replicating process improvements on acommercial basis. To date, CIES has sold services to 22 LES firms – foundries, steelrolling mills and machine shops. SDBS supported the group with mentoring andtraining during the pilot initiatives, and development of manuals for the processimprovements. SDBS remains engaged by subsidizing follow-up monitoring services,and will phase out in the coming 1-2 years.31

» Trade association development: SDBS has partnered with a leading LES tradeassociation to provide training to workers of member firms. SEDF is subsidizing thedevelopment of course materials and training of trainers, while members pay for theactual training. Workers from 27 firms have been trained and results are beingmonitored.32

An intangible outcome has been a slow shift in the culture and attitude of the LES sectorfrom being completely closed to the potential for improvement, to a more open attitude.In fact, one of the major challenges SDBS faces in the LES is the slow pace of change andthe multiple layers of complex constraints in this traditional and secretive sector. SDBS'scurrent focus is:

28 Venkatramanan, 200529 SEDF, 2005b30 SEDF, n.d.g31 SEDF, 2005b; Adhikary, various documents 2005-200632 R Gopal, 2005-2006

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• Strengthening inter-firm linkages within geographic clusters;

• Increasing dissemination of process improvements and cost reduction techniquesthroughout the sector;

• Developing market-led products that will support, among others, the RMG sector;

• Piloting financial services targeted to LES firms.33

c) Agri-Business

SDBS's work in the Agri-Business sector began as direct, firm-level support and hasevolved more recently into leveraged, strategic sector work, based on successful strategieswith a few firms. The main strategy that emerged is one of working with large firmsclaiming major market shares with a view to reaching out to the SMEs downstream alongthe value chains. The direct sector cost leverage for Agri-Business for the period was 1:3,and the total sector cost leverage was 1:2.

Market Development through Strengthening Distribution and Supply Chain

• Assistance to a nutrient enriched organicfertilizer company: Indiscriminate use ofchemical fertilizer is a growing concern forsustainable agricultural in Bangladesh. While theminimum requirement of organic matter in soil is5%, the current status is only 1%. Bangladeshneeds to adopt and vigorously practice theIntegrated Plant Nutrition System (IPNS) underwhich crop-specific nutrient enriched organicfertilizers are to be applied in combination withchemical fertilizers. This practice will reduce usageof chemical fertilizers to a great extent (30-40%equivalent to US$215/ha) and increase the yieldby approximately 15-25%.34 Currently there areonly three licensed companies who are producingcertified organic fertilizer of which the SDBSassisted company is the market leader in terms ofhighest coverage per acre thanks to its continuousresearch and development on the product. SDBSprovided technical assistance in reshaping andbuilding its marketing capacity for establishing aneffective supply chain.

• Assistance to an emerging grocery superstoresupply chain: SDBS entered into a partnership

The Lead-Firm Approach to ReachingSMEs and Smallholders

Faruq Fertilizer Limited, a producer ofnutrient enriched organic fertilizer,approached SEDF for assistance inmarketing. The company used SEDFsupported technical assistance toestablish and train a network of 27dealers and 500 retailers. Thetechnical assistance guided amarketing initiative that included amass communication advertising blitz,re-packaging, training of dealers andretailers in sales skills and inproviding on-farm technical advice tofarmers through retailers. Thetechnical assistance helped to expandthe company's customer base from46,000 farmers to 75,000. Volume ofsales increased from 556 MT to 1,835MT, with sales increasing by 230%and profits by 30%. Apart fromenvironmental and soil healthbenefits, farmers' crop yieldsincreased between 15% and 20%using the fertilizer.

33 M Sirkar, Zaman, Ali, Quader 2005/0634 Islam 2005

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with a pioneering food retailing chain in Bangladesh. SDBS cost-shared a supplychain diagnostic as well as cost-shared a training initiative with the company and 15of its suppliers. The objective was to enhance supplier capacity in handling technicalissues and in small business management. As a result of the training, supplierrejections rates declined from 7% to 5%, which translated into increased sales of US$15,000 within three months, at a cost of only US $3,400 to SDBS. SDBS is in theprocess of replicating similar methodology with seven other superstores.

Current intervention within large firm supply chains of seeds and poultry

Poultry: In poultry, SDBS is working with five major players who account forapproximately 60% of the market share of day old chicks, feed etc. One of them is a fullyintegrated, backward and forward linked company with 700 contract farmers. SDIs at thelarge farm level are strengthening embedded services critical to the survival and growth ofthe contract growers. These large firms provide inputs, technical advice, credit linkages,lab facilities, and guaranteed markets to their small-scale contract farmers.

Besides the major players in poultry, there are thousands of small farms not directly linkedto these value chains who are trying to survive and grow on their own. SDBS hasidentified and plans to support private service providers who offer commercial servicesdirectly to the small poultry farmers with the ultimate aim of linking them to the growingmarket channels.

Seed: SDBS is working with a few leading seed companies claiming 45% of formalvegetable seed business who have links to more than 2000 small scale contract seedgrowers that supply seeds to the company. SDBS's strategy is to work with thesecompanies at different nodes of their supply chain with the ultimate objective tostrengthen their capacity to reach out to more seed growers as well as to increase latter'saccess to embedded services.

Agri-Machinery: SDBS looked into the value chains of several key agriculturalmachines/tools including power tillers, irrigation pumps, threshers, sprayers, corn shellersand rice mills. These are the items in high demand, but there is a missing link betweenmanufacturers and farmers. SDBS will focus its activities on:

• Improving quality through process and design improvements in collaboration withthe LES team.

• Improving accessibility as well as affordability through promoting rental service ofselected Agri-Machinery

• SEDF is working in partnership with one of the largest NGOs in promoting therental service of Agri-Machinery. While the NGO will provide credit to the ruralbased service providers for procurement of the Agri-Machinery, SEDF will facilitateprovision of technical assistance in packaging and promoting this service to the localcommunity.

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d) Cross-Sector Support Initiatives

SDBS has also integrated cross-sectorinitiatives in its target sector developmentwork. These are information technology (IT),management development and training(MDT) and business linkages (BL). Originally,SDBS supported development in these areasindependently of its sector work. In 2004,however, SDBS began to focus its cross-sectormarket work to support sector development.Since then, SDBS investments in cross-sectorsupport have resulted in sustainable access forfirms in target sectors to key business servicesthat are contributing to improved sectorperformance.

Information Technology: SDBS promotedthe use of "enterprise resource planning"(ERP) software to enhance improvedperformance in RMG firms. SEDF supportedtrade shows, seminars and focus groupdiscussions with some 20 software and 200RMG firms participating, and firm-levelsupport to two software firms. At least 30RMG firms have purchased and are usingimproved software on their own without anySDBS support.35

Management Development Training: Inaddition to cross-sector development ofmanagement training and consulting services,the MDT team facilitated sector developmentwork with sector-specific management trainingand consulting tools and training of trainers.This was possible through the establishment ofa Consortium for Business DevelopmentServices (CBDS) to fill the market-gap of asingle source for a wide range of technicalassistance services. In its first 18 months, theconsortium generated sales of US $164,550with an SDBS direct cost of only US $41,009.

Lessons from a Sector DevelopmentFailure: Information Technology

On the surface, the IT sector seems like anobvious choice of a promising economicdevelopment sector: high growth,competitive advantage in terms of costand trained engineers, and trend towardsoutsourcing from high to low wagecountries. The SDBS team thought, ifIndia can do it, why not Bangladesh? Infact, the raw numbers for SDBS's IT sectordevelopment work are strong, with a 1:25leverage ratio of direct SEDF cost to salesin assisted pilot firms. So, what was theproblem? Assistance in the IT sector hasweak backward linkages to other parts ofthe economy. The SDBS team found thatsales growth in IT firms stopped there, atthe firm level. The firms and the entiresector are small and not very laborintensive, and the people employed arerelatively well educated. And,investments for some areas were quitecapital intensive. For example, thedevelopment of a training facility for 3-Danimation would cost over US $1 millionand would graduate only 20-30 peopleper year. Fundamentally, although thesales figures added up, the SDBS teamdidn't see the benefits of the programgoing to the poor.

So, SDBS shifted gears. What the mid-term evaluators and the SDBS teamobserved was that software designed forthe domestic market – RMGmanufacturers in particular - had strongerbackward linkages because it had thepotential to increase productivity, qualityand competitiveness of coremanufacturing sectors that employedlarge numbers of poor people. And, it didso by enhancing the quality of work, notdisplacing workers. Thus, SDBS began tosee IT as a support market to its coresector development work, rather than apromising economic development sectorin and of itself.

(SQW, 2005)

35 SEDF, 2006

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Business Linkages: The main focus of businesslinkages activity is to help SMEs identify andcapitalize on opportunities to sell to larger firms.The business linkage group focuses on linkageswithin target sectors, among target sectors, andwith IFC invested companies. By focusing itsattention on target sectors, the business linkageteam enhances overall program strategy andimpact. The following is an example of a pilotactivity with potential for stimulating morewidespread change: the business linkage teamprovided SDIs for training to 16 SME suppliers toan emerging modern grocery chain in order toimprove the quality of produce and servicerelating to Agri-Business. The rejection ratesdeclined from 7% to 3%, with an immediateincrease in sales of US $15,000. The experiencealso demonstrated the potential for improvingthese linkages. The business linkage team istraining and coaching consultants to replicate thisservice with this client/chain and other emergingsupermarket chains with primary focus on agri-business linkages.

The second type of cross-sector work is addressingcritical social issues, specifically gender, environment and poverty issues. SEDFapproaches these issues in an integrated fashion to capitalize on opportunities for linkingsocial benefits to sustainable market-driven change processes. Some improvements that areoccurring in SEDF pilot firms include:

• Gender and working conditions: Process improvements in RMG factories lead toobjective worker incentive systems, tracked by tamper-proof computer-based MISsystems. This system erodes the discretionary power of male line supervisors overfemale workers who become less vulnerable to unfair treatment by supervisors.36

• Environment and working conditions: Process improvements in LES firms reducewastage, improve worker safety, and promote the productivity benefits of a clear,organized workshop with healthy, satisfied workers.37

• Environment and poverty: SDBS supported the promotion and distributionstrategy of an organic fertilizer manufacturer who sells low cost and cost-effectiveorganic fertilizer, generating growth in outreach from 46,000 to 75,000 small-scalefarmers.38

Poverty Impact Indicators inDevelopment

SEDF is in the process ofdeveloping poverty monitoringindicators for its sector work. SEDFhired the Institute of DevelopmentStudies (IDS) at the University ofSussex to map a causal chain forhow its sector work might reducepoverty, and to develop and testsimple, proxy poverty assessmentindicators. The IDS team did thisfor two sectors, and identified 4indicators that could be used toassess worker status in the areas ofincome, employment,vulnerability, and women'sempowerment. These areintegrated to provide an overallscore for each assisted firm, andthe system gathers lessons andsuggestions for improving povertyoutcomes. SEDF plans to integratethis type of poverty assessmentinto its regular monitoring andevaluation activities.

Tiwari, 2006

36 Moyeen and Momen, 200537 SEDF, n.d.e38 SEDF, 2006

In its work on social issues, SDBS has found increased acceptance now that it is focusedon addressing social concerns that can help make the sectors more competitive. Currently,SDBS is assisting BGMEA in carrying out compliance audits of its members. SDBS is alsoworking closely with the buyers' forum (11 international buyers) on an informal basis intrying to reach a common understanding and code for local labor laws, health and safetyissues.39

1.6 Lessons Learned

The SDBS experience thus far has generatedlessons learned from both successes andfailures. Some of these initial lessons wereinternal in the sense that SDBS staff came toagree with the perspective of the broad SMEdevelopment field that, for example, firmlevel assistance in isolation of a broadermarket development strategy had limitedscope for sustainability and widespreadoutreach. The lessons presented below reflectlessons the SDBS team and the authorsperceive as being new or surprising for thedevelopment field as a whole. These lessonsare backed by experience documented inmore detail in the sector case chapters. Thefifteen lessons are presented in three groupsaccording to theme.

Entry Points and Implementation Strategy

1. Map, act and analyze: The best entry point into the market is direct firm-levelinteraction. It builds trusting relationships and hands-on knowledge that makesaccurate sector level analysis possible. It also generates professional credibility amongskeptical private sector partners. Before engaging with individual firms it is wise to dosome basic secondary research and mapping of the sector to identify key trends,obvious constraints and key sector leaders. However, detailed, primary research is notnecessary in the beginning, and can be distracting for the program and frustrating forits potential partners.

2. The power of the matching grant: The matching grant mechanism is a powerfultool for testing specific strategic services with pilot and lead firms, businessassociations, and support service providers. When complimented with marketanalysis, participatory sector strategy development, and activities to promotesustainable service delivery, it can be effective for achieving both short-term outcomesand sustainable, system-wide change. SDBS calls its matching grants "Sector

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Lesson Learned: Integrate SMEDevelopment Components

In the early years of the project, SDBS'scross-sector initiatives, financial servicesand enabling environment work were notwell linked to sector work. Whiletargeting cross-sector markets isproductive, more leverage results fromdirecting cross-sector market interventionstoward target sectors. Currently, SEDF istransitioning to channel some of itsfinancial services and enablingenvironment resources towards sectorspecific activity as well. The challenge is tocoordinate these activities and motivateall teams to work in the same generaldirection in an integrated manner.

39 Quader, 2005/06

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Development Incentives" (SDI) to clearly identify their strategic intent and function.

3. Cost-sharing ensures strong market demand: All parties– service providers,associations, and pilot firms– benefiting from SDBS technical assistance are requiredto cost-share. This is in contrast to some value-chain development programs thatprovide full subsidies to providers or market intermediaries – and sometimes SMEs –during the pilot phase. Requiring significant participant contribution ensures that allparties are investing in the initiative.

4. A single intervention mechanism provides focus, generates rapid programresults: SDBS program staff know that no matter what, they need to generate SDI"deals" in which private firms or other partners contribute a share of the cost oftechnical assistance. They have established guidelines for approaching partners andare driven to deliver. The guidelines are fair and open to everyone in the market.Instead of debating what approach to use, staff spend more time identifying strategicpartners and helping them access appropriate technical support that will advance thesector as a whole.

Integration of Different Program Elements

5. Sector development needs support service market development: It is important toidentify and develop service markets (BDS markets) that support target sectordevelopment initiatives. Direct support to key firms will have limited impact withoutcorresponding investment in the development of support markets. Well functioningsupport markets enable additional firms to access similar services. They can also helpservice providers and firms to work together to identify the next service needed tocontinuously improve productivity and quality and to generate and respond tomarket opportunities.

6. Support market development can be small-scale: Each sector may not require awide range of competing service providers with multiple service offerings in order toadvance sector competitiveness. Rather, the development of a few, high qualityproviders may be adequate to support target sectors. The main focus should be on thesector, not the support markets.

7. Cross-sector market development should support sector development strategies:40

Developing cross-sector support markets in general will have minimal impact ontargeted sectors. More significant impact in target sectors can be generated bystrengthening sector-specific service markets.

8. Sector development needs financial and enabling environment support: Sectordevelopment is limited when not supported by sector-specific development offinancial services and the business enabling environment.

39 This is not to diminish the significant achievements of the SDBS cross-sector work in, for example, managementdevelopment and training and information technology for firms and service providers that participated. Rather, it isto say that the target sectors and the poor did not reap measurable, significant benefits from these initiatives.

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9. Integrate social issues into competitiveness strategies and services: Efforts toadvance social issues such as environmental projection, fair labor practices, genderequity or anti-poverty strategies are effective and sustainable when integrated intooverall sector competitiveness strategies.

10. Incorporate assessment, monitoring, documentation, learning and trainingthroughout the project cycle: These functions should not be relegated to thebeginning, mid-point and end of a project. Rather, they should be integrated intoregular program management. A sector development program should be given roomto evolve and respond to ever-increasing market knowledge and partnershipopportunities.

Managing and Building Capacity for the Change Process

11. Balance staff accountability with mentorship and a climate of safe innovation: Itis important to support both strong monitoring and evaluation systems that hold staffaccountable, and at the same time, to maintain a strategic perspective and a climateof innovation. A component of this is early detection of failure, in order to quicklymove on and to document learning from failed initiatives. Another is objectiveidentification of truly successful initiatives so that they can garner appropriatesupport.

12. Approach the change process gradually: Introducing new strategy to an oldorganization should be done gradually, building on the core competency of theorganization, subtly introducing new elements in often imperfect ways, anddocumenting results. The time to announce the new strategy more aggressively maybe only after results become apparent.

13. On-the-job training beats classroom learning for building sector developmentcapacity: Attracting, orienting and motivating staff with different backgrounds andviewpoints requires individual attention, mentorship and communication strategies.Sending individuals to industry training or workshops is less important than learningthrough experience, by watching and discussing with other more experienced staffmembers. Formal training is less important than working as a team to understand andadapt sustainable sector development principles, and to build professional capacity.Internal processes that facilitate information sharing, trust, learning and work synergyare more significant in capacity building than external training. When externalexpertise is brought to bear, it needs to be customized to the institutional andprogram context. Thus, the role of external training is primarily to train andcontinuously inform change agents and task managers.

14. Integrate impact assessment into the service received by the SME client: SDBSfound a practical way of monitoring its interventions by integrating the impactassessment of pilot firms into the process improvement and service delivery package.

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In LES, SDBS introduced a simple MIS system for pilot firms. For firms that receivedreplicated services, SDBS established an incentive system to encourage firms andconsultants to invest in follow-up and monitoring services. This is stimulating themarket for more in-depth services, while providing SDBS with long-term impactdata.

15. Five to ten years is an appropriate program timeframe: The original vision–inBDS market development - of short-term, "light touch" strategies achieving systemicchange is no longer relevant for sector development. Markets contain entrenchedpractices, relationships, power structures, and cultures that are difficult to penetrateand change. Industry leaders are often used to development programs coming andgoing, and are ready to play along for short periods in exchange for subsidies. Realchange especially in client mindset, takes longer. Building deep, trusting partnerships,based on mutual investment, takes time. And it takes time for changes that firmsmake – slowly to avoid risk – to have an impact in the wider market. The three-yearproject cycle is too short for systemic change at the sector level to take root, even inan action-oriented initiative such as this one.

1.7 Challenges

During its initial three years, SDBS has experienced unresolved challenges that the staff isattempting to address. These include:

1. Variety of approaches to each sector: Each target sector and support marketdemands a different approach and strategy, due to market conditions, culture andpersonalities of leaders in the industry. Standardized approaches don't work. This canbe challenging to implement and to communicate to staff, managers and funders.Having a standard mechanism – the SDI – can provide staff with a solid foundationand starting point, providing a comfort level, a goal to aim for, an output to measure.It helps to reduce constant debate among staff about how to intervene. Nevertheless,it