Cart before the horse: generating demand vs. early capacity building
by Catherine LaineDecember 3rd, 2006
James T. Riordan recently wrote an interesting piece called One Buyer at a Time for the Stanford Social Innovation Review.
His article starts off with an anecdote about Shipibo-Conibo, a small village in Peru which specialized in “strikingly beautiful ceramics”. Convinced that a sufficient supply of the crafts could be obtained, a company by the name of American Trading set up a deal with Pier 1 Imports for 25,000 units. In order to come through on this huge deal, artisans had to be trained in mass production techniques, quality controls had to be instituted, and so on. They filled the order within a year and the increase in capacity greatly benefited the village’s artisans who were mainly women.
The author continues with a sort of “cart before the horse” discussion about the way in which many international development agencies approach capacity building. His argument is that there should be demand (and by demand he means a concrete order from a real customer) before you put in the big investment for capacity building.
Instead of identifying demand first and then figuring out how to respond to its peculiar requirements, too many international development organizations first build supply capacity and then try to drum up demand for the products – too often unsuccessfully.
From a purely business perspective, he’s pretty spot on. Creating demand in a market where there previously was none is very difficult and can require significant marketing expenses to be successful. It is also reasonable to question the prudence of large upfront expenditures for training, equipment or whatever when you don’t already have clients or at least a clear indication that clients are waiting in the wings. That is a precarious business strategy.
From an international development perspective, it’s not that straightforward. It gets especially tangled if you are trying to do a 2-for-1 thing where you’re engaged in economic development on one hand AND are going for an unrelated social good/purpose on the other. One example may be a condom manufacturing plant for HIV/AIDS prevention in a population that has heretofore shown no interest in condom use. In that case, you might be willing to take a hit for a spell while you generate demand for a product that you know to be incredibly necessary for your target population. You may be considering the positive ancilary benefits of your expenditures.
I’d say that our experience with the micro-hydroelectric project at the Communidad Nueva Alianza is analagous to the story of the 25000 unit order experienced by the women of Shipibo-Conibo. It was a huge opportunity for a young company like XelaTeco. While requiring a massive increase in capacity, it also proved the numbleness and adaptibility of the staff and the business.
My goodness. Listen to me, the accidental capitalist.
Via Pienso.
