There is a group of small businesses, which many people would not call businesses at all, but which are nevertheless in most countries a far more important source of employment and incomes, for far more people, than large or small formal businesses. These are the enterprises belonging to what is sometimes known loosely as the “informal sector”, or “micro-enterprises”; that is, the vast numbers of very small-scale income-generating activities through which millions of people attempt to make their living and survive, particularly in the developing countries.

Everyone is aware of these micro-enterprises, although they may not think of them as potential clients for management consulting. They are crowded along the pavements and in the slums of big cities, as well as in the official and unofficial marketplaces. They are a major source of income in rural areas, where many people own no land at all and those who do own land have little to gain by spending more hours of labour on their tiny holdings. They include vendors, tailors, snack-food processors, roadside cycle and car mechanics, blacksmiths, cobblers and almost everything else. Although they are often perceived as a nuisance by those who can afford to purchase what they need from more formal and sophisticated sources, these micro-entrepreneurs provide essential goods and services at a place, time and price that are convenient not only for other poor people like themselves, but also for customers from other social groups and larger businesses.

25.1 What is different about micro-enterprises?

The importance of informal-sector entrepreneurs as employers and suppliers does not in itself mean that management consultants can help them in any way. It is important to recognize that they are a very different client group – if indeed they can be clients at all – from large or even small formal businesses, such as were dealt with in Chapter 24.

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Heterogeneity of the group

To provide guidance that is of any practical use, it is important to acknowledge the heterogeneity of micro-enterprises and their needs for assistance. It is useful to think of them in two major categories.

First, there are the very small, home-based, informal enterprises, typically with one to three employees including the owner, using basic skills and technology, with small assets, supplying a limited local market, and often having a limited life expectancy. Perhaps 99 per cent of these enterprises will never be in a position to consider using the services of private consulting firms, and paying a full charge for these services – although there is some evidence that they do obtain such services from informal consultants who work on the same “financial scale” as the micro-enterprises themselves. They are businesses, however, and have to be managed. They can benefit from technical advice as can any other enterprises. Sound advice can help them to survive, adjust to changes in their environment, improve quality, product diversity and earnings, and even lay down foundations for growth.

We focus here on the specific needs of this category of the smallest and least sophisticated micro-enterprises (see box 25.1). As pointed out in section 1.1, management consulting is not only a separate professional service that can be purchased from independent firms on commercial terms, but is also a method of providing advice and assistance aimed at improving management and business. This chapter will discuss mainly the second side of consulting. It will show that the consulting method can be applied by a wide range of organizations interested in assisting the informal sector, either separately, or in conjunction with other business transactions or social services (the term “embodied consulting services” has also been used). Consultants and others seeking to render a socially useful and productive service to these entrepreneurs will have to combine technical know-how and aptitude with considerable social skills. In many cases they will have to engage in personal counselling (see sections 3.7 and 24.4) rather than strictly technical advice.

The second large category of micro-enterprises comprises those that have already reached a higher level of sophistication and size than the first group. Typically they employ up to nine workers, use some motorized equipment on permanent premises, take part in subcontracting arrangements, and so on. The owners, especially the younger ones, may have acquired a basic education in a local language and some formal technical training. They still operate as informal-sector units with all the advantages and constraints involved. In several respects, this second group is on the borderline between the traditional informal sector and the modern small enterprise (see Chapter 24). Some of them will “graduate” from the informal sector; others remain in this sector for various reasons. Consulting services for this category exhibit some characteristics of assistance to the informal sector, but most of the methods and approaches to small-business consulting described in Chapter 24 will also be applicable.

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Box 25.1 Consulting in the informal sector – a mini case study

Laxmi is one of a large number of women in a village in northern India who earn their living embroidering the uppers of traditional slippers which are then sewn to the soles of the shoes, and sold in the neighbouring community, in Delhi and elsewhere.

Laxmi buys the ready-cut uppers and the thread from a supplier in the village; if she has enough cash, she can choose from a number of different suppliers and then sell the embroidered part to one of several local businesses which assemble the complete slippers. If, as is more often the case, she has to buy on credit, she is restricted to one supplier and she must also sell the embroidered upper back to him; in this case, she earns about half the amount per day she can earn when she is free to pick her own suppliers and customers.

Laxmi’s two younger sisters, and her invalid mother, help in piercing the holes and other simple tasks; she does not pay them, or herself, any regular wage. Her brother drives a rickshaw in New Delhi and occasionally brings home money, and other members of the family sometimes earn a few rupees from casual work on neighbouring farms, while Laxmi makes up the necessary sums to feed and clothe the family as and when this is necessary.

A field worker from a local nongovernmental organization that was trying to assist the leather workers in this community called on Laxmi one day. Laxmi had heard about this organization, and after some brief introductions she was quite happy to tell the field worker all about her business. The field worker took careful notes on a simple form which she had been trained to use by her employers. She also looked carefully round the hut where Laxmi and her family lived, and asked a few questions about what she saw, including a fairly large pile of dusty but apparently completed embroidered uppers which were half hidden under a blanket in one corner.

After about one hour’s discussion, the field worker felt able to advise Laxmi on what was clearly her main problem, namely her lack of working capital. She did not tell Laxmi what she should do, but through discussion led her to suggest that she should try to accumulate her own working capital by restricting her own drawings to a fixed amount every month. Laxmi saw that she could raise a small sum by disposing of the stock of finished components which she had unfortunately embroidered in a slightly outdated pattern; she agreed that it would not be difficult to find a shoemaker who would be willing to buy them, and that it would be better to accept a low price rather than to keep her money tied up in this way.

The field worker also told Laxmi about the savings and credit groups which her organization was helping the local people to establish; this would enable her to save more regularly, and perhaps eventually to borrow from the accumulated fund if the group so desired.

Laxmi was very happy with the discussion; when the field worker returned a month later she had disposed of the surplus stocks and had joined the savings group. She was not sure whether she could restrict and control her monthly drawings as they had agreed at their earlier meeting, but she was already making regular weekly savings of a small sum with the savings group.

Author: Malcolm Harper.

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Some specific sectoral characteristics

We have seen that small businesses are usually managed by only one or two people, who have to deal with all the different functions that are entrusted to specialists in larger firms. In micro-enterprises there is no separate management function as such; the owner, who is usually the sole worker as well, is primarily a cobbler, a tailor or a vendor. She or he (and in most countries it is more likely to be “she”) makes the same sort of decisions about prices, products, finance, and so on as any other manager, but management is not conceived as a separate activity and decisions are made on an ad hoc basis.

The owners of formal small businesses are often criticized for not separating their business finances from their personal affairs, and consultants often have to help them to set up systems to do this. Because most micro-enterprises are a means of economic survival for the owners and their families, it is often impossible – and it may be wrong – to try to make the separation; the time and resources devoted to the enterprise, and the earnings from it, have to be related to the economics of the whole household. It may even be appropriate for the enterprise to operate only on a seasonal basis, since there are more profitable opportunities at some times of year. This is clearly very different from the situation of formal businesses.

Small businesses generally have little written data with which a consultant can undertake an analysis, but most micro-enterprises in the informal sector have no written records at all, except perhaps some note of amounts owed to them by customers who have bought on credit. Women in particular, who dominate the smallest end of the informal sector, often have little or no education; not only do they have no records of activities and commercial and financial transactions, but they lack the basic knowledge to keep or use them.

The people who own and work in these micro-enterprises also differ in other ways from the entrepreneurs who have established more formal businesses. Very few of them are likely to have started their enterprises by choice. Most would prefer to have even a very modest job in a formal enterprise, or perhaps to work on the land; they are micro-entrepreneurs not by choice, but because there was no alternative. They are often people from the economic and possibly also the social margins of society, such as unemployed youth, refugees, migrants, widows or the disabled, for whom jobs in the formal business sector are not available. This obviously has important implications for the ways in which they view the future of their enterprises.

Many of the skills needed for survival in the informal sector are very different from those required in larger enterprises, and they are certainly not the type of skills in which most management consultants are themselves experts. Successful micro-entrepreneurs are above all “streetwise”: they have the right contacts, they know when and where the hand of the law is likely to fall and how it should be avoided, and they are adept at improvisation. Those of us who are used to operating in a more structured and sheltered environment can probably learn a great deal from these people.

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25.2Management problems of informal-sector entrepreneurs

Suboptimal use of scarce resources

In spite of the many differences, as outlined above, the owners of microenterprises make many of the same mistakes as formal business managers, and they need similar advice. Shortage of finance is often their main constraint, and they may have to pay exorbitant rates of interest for loans, since banks and other formal financial institutions are not usually willing to lend money to people with no fixed business address, little or no formal education, and no tangible assets beyond a temporary stall, a push-cart or a few hand tools. It is therefore vital that they deploy their funds in an optimal way, but they often fail to do this, investing disproportionately in credit, in stocks, or in other assets.

Similarly, raw materials are often an important constraint. Many carpenters, tailors and others fail to calculate the profitability of each product, using their scarce materials suboptimally and producing a product mix that is less profitable than it could be. It is particularly important for an outsider to find out exactly why the business owners are behaving in this way, since there may be sociocultural reasons which mean that apparently mistaken policies are in fact the best course. Some petty traders, for instance, invest all their earnings in what appear to be excessive stocks, rather than saving money for new capital items which they admit they need; their reason, however, may be that they are all too aware that the members of their extended family will lay claim to any cash resources for personal expenses such as school fees, hospital charges or even food and clothing, and it is easier to retain money that is tied up in stock.

Poor record-keeping

It is important not to assume that somebody who is not keeping records in the normally accepted way is not keeping them at all. Even illiterate business people usually have some system for recording sales on credit, and most people who work with money have some idea of what figures mean even if they cannot read or write words. Illiterate people are often able to remember far more information than those of us who are fortunate enough to have been taught to read and write, and some illiterate business owners have ingenious systems for controlling stocks and cash. A formal education is certainly not a necessary condition for business success on any scale; after all, there are quite a few illiterate millionaires in Europe and the United States, and even more in countries where illiteracy is more common.

The owners of informal enterprises can often benefit from keeping and using better recording systems. However, they usually have not had many years of formal education and many find it very difficult to apply what they are taught in a training course to the particular situation of their own business. New recording

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