The Laguna Small and Medium Enterprise Service Center: a Case Study of a Nonprofit Supplier of Information and Communications Services in the Philippines

The Laguna Small and Medium Enterprise Service Center:

A Case Study of a Nonprofit Supplier of Information and Communications Services in the Philippines The Laguna Small and Medium Enterprise Service Center: A Case Study of a Nonprofit Supplier of Information and Communications Services in the Philippines

Ronald T. Chua

with Contributions by Alexandra Overy Miehlbradt

Development Alternatives, Inc.

June 1999

This work was supported by the U.S. Agency for International Development, Bureau for Global Programs, Center for Economic Growth and Agricultural Development, Office of Microenterprise Development, through funding to the Microenterprise Best Practices (MBP) Project, contract number PCE-0406-C-00-96-6004-00. Ronald T. Chua is a professor of the Asian Institute of Management (AIM), an international graduate management school based in Manila, Philippines. Prof. Chua teaches entrepreneurship in AIM’s Master in Business Management Degree Program. He also offers various courses in microfinance and social entrepreneurship. Building on his field-based research, he regularly conducts public courses in microfinance for practitioners. He leads the Philippine training team under the Consultative Group to Assist the Poorest's (CGAP) Asian microfinance capability building initiative. Prof. Chua's research includes work on Philippine microenterprises, microfinance institution performance, and impact. He is co-author of “Transaction Costs of Lending to the Poor,” published by the Foundation for Development Cooperation in Australia. He has conducted studies for the Asian Development Bank, Australian Agency for International Development, the International Labour Organization, and the German Agency for Technical Cooperation. Prof. Chua has provided consultancy in post-employment entrepreneurship development programs for big private corporations undergoing organizational restructuring in the Philippines.

Alexandra Overy Miehlbradt is a consultant in microenterprise development currently based in Colombo, Sri Lanka. She has over five years of field-based experience in the design, management, technical development and evaluation of business development services programs for microentrepreneurs, principally in South East Asia. Prior to becoming a consultant she spent four years with Save the Children as a technical advisor based in the Philippines. In this role, she helped the organization develop its global BDS strategy focused on women microentrepreneurs. Ms. Miehlbradt has a Master’s Degree in Public Policy from the Kennedy School at Harvard University, a B.S. in Management from the Wharton School of Business and a B.A. in International Development from the University of Pennsylvania. i

ACKNOWLEDGMENTS

The authors of this series of reports would like to extend many thanks to Marshall Bear for his work, guidance, and encouragement throughout the conception, implementation, analysis, writing, and editing of the study. Together with Clifton Barton, Mr. Bear was the driving force behind the study and helped us every step of the way. The authors also owe a debt of gratitude to Dr. Ned Roberto from the Asian Institute of Management, the marketing specialist for the study, who guided the marketing research aspects of the study from start to finish. Thanks also are due to AV Research, which carried out the survey and tabulation for its work and patience during the many phases of the survey. Acknowledgments are due to Manolita Gonzales, Luzviminda Villanueva, and Maurino Bolante who provided research assistance for the Laguna SeCen and Internet models case studies. The authors are also very grateful to all the representatives from MSEs who gave their time to answer the survey questionnaires.

Thanks to the managers and staff of the RCPI/Bayantel Public Calling Office in Southern Mindanao for their time and help with the survey. Particular thanks are also due to the RCPI/Bayantel national management of the PCOs for agreeing to serve as a case study and for its support of the information gathering. Thanks to the management and staff of the Laguna Small and Medium Enterprise Service Center, the leadership of the Laguna Chamber of Commerce and Industry, the heads of the Chamber sectoral associations, and SwissContact for their time and help in the Laguna SeCen case study. Thanks to the management of ASSIST, the Philippine Chamber of Commerce and Industry, the Philippine Export Board, and the APEC Center for Technology Exchange and Training for SMEs for their time in providing the information used in the Internet models case. Thanks to the cellular phone company managers and the staff of the Department of Trade and Industry in Southern Mindanao for their help in gathering information. Thanks also to Hunter Consulting for its work in quantifying the opportunities for MSEs in the telecommunications industry.

The authors gratefully acknowledge the suggestions and support from Robin Young of Development Alternatives Inc. (DAI), and Kate McKee and Anicca Jansen of the U.S. Agency for International Development. Thanks to MBP staffers Nhu-An Tran for the help with editing and formatting the papers and Matt Buzby for his administrative support for the study.

Lastly, thanks to our families who patiently and enthusiastically supported us throughout the work on this study.

Although there was help and guidance from these sources, the authors accept responsibility for the design, implementation, and analysis of the study as well as any shortcomings or errors therein.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ix

CHAPTER ONE OVERVIEW OF THE STUDY 1 MBP STUDY HYPOTHESIS...... 1 Key Research Questions ...... 2 Research Design...... 3 GUIDE TO THE PAPERS...... 5 Synthesis Paper...... 5 Case Studies of Bayantel PCOs and the Laguna SME Service Center ...... 6 Internet-Based Information Services ...... 7 METHODOLOGY ...... 7

CHAPTER TWO OVERVIEW OF THE LAGUNA SECEN 9 BACKGROUND ...... 9 SERVICES...... 10 Communication Services ...... 10 Information Services...... 11 Business Registration...... 11 Administrative Services...... 12 Marketing Assistance...... 12 Financial Assistance ...... 12 Training...... 13 COMPETITION ...... 13

CHAPTER THREE CLIENTS 15 CURRENT CLIENTS ...... 15 POTENTIAL CLIENTS—MSES OF CALAMBA...... 17 Ownership and Awareness of ICT Equipment...... 19 Awareness, Usage, and Image of Selected Business Development Services...... 19 Perceived Impact of Services on Profit ...... 22 Potential New Services ...... 23 COMPARISON OF CURRENT AND POTENTIAL CLIENTS...... 24

CHAPTER FOUR FINANCIAL AND OPERATIONAL INFORMATION 25 REVENUE AND COST ANALYSIS...... 25 OPERATIONAL INFORMATION ...... 27 iv

CHAPTER FIVE CONCLUSIONS 29 SWOT ANALYSIS OF THE BUSINESS MODEL...... 29 Strengths ...... 29 Weaknesses ...... 30 Opportunities...... 30 Threats ...... 30 THE FUTURE OF THE LAGUNA SECEN ...... 31 Prospects for Basic Telecommunication Services...... 31 Prospects for Modern ICT-Based Services...... 32 Recommendations for SeCen Service Mix and Strategy...... 33

APPENDIX A: BRIEF DESCRIPTION OF THE CALAMBA CONSUMER SURVEY A-1

APPENDIX B: HISTORY OF THE LCCI AND LAGUNA SeCen B-1

APPENDIX C: CALCULATION OF POTENTIAL INITIAL MARKET SIZE AND REVENUE MAXIMIZING PRICE C-1 v

LIST OF FIGURES AND TABLES

Figure

1 Awareness, Usage and Perception of Need for Communications Services...... 20

2 Awareness, Usage and Perception of Need for Business Development Services...... 20

3 The SeCen as an Information Broker ...... 33

Table

1 Laguna SeCen’s Competition and Its Relative Strength and Weaknesses...... 14

2 Profile of Surveyed Calamba MSEs...... 17

3 Calamba MSEs—Information and Telecommunications Equipment Ownership ...... 19

4 Calamba MSEs—Service Purchase Location and Reason for Nonpurchase...... 22

5 MSEs Perceived Impact on Profit of Services ...... 23

6 Estimated Revenues by Type of Activity for Five Months ...... 25

7 Revenue Projections for 1998 by Type of Activity...... 26

8 Budget and Level of Swisscontact Support ...... 27

9 SWOT Analysis of the Laguna SeCen ...... 29

10 Demand and Competitive Situation for Business Services...... 34

11 Summary of Laguna SeCen Business Model...... 35

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LIST OF ACRONYMS

BDS Business Development Services DLD Domestic Long Distance (phone calling) DTI Department of Trade and Industry ICT Information and Communication Technology LCCI Laguna Chamber of Commerce and Industry MBP Microenterprise Best Practices Project MSEs Micro and Small Enterprises MSMEs Micro, Small, and Medium-Sized Enterprises NGO Nongovernmental Organization PCO Public Calling Office PilTel Philippine Telephone Company PLDT Philippine Long Distance Telephone Company PT&T Philippine Telephone and Telegraph Company SeCen Service Center SMEs Small and Medium-Sized Enterprises SWOT Strengths, Weaknesses, Opportunities, and Threats USAID United States Agency for International Development ZDH Zentralverband des Deutschen Handwerks (German Confederation of Small Business and Skilled Crafts)

Executive Summary

EXECUTIVE SUMMARY

BACKGROUND ON MBP RESEARCH

New information and communication technologies (ICTs) are rapidly transforming business practices in many parts of the world. In industrialized countries, new ICT developments are altering internal operations of companies, as well as external relationships with buyers, suppliers, and customers. They are producing fundamental changes in the ways in which marketing and distribution networks function. They also are giving rise to new types of business services and changing the ways in which firms access and use existing services.

This case study on the Laguna Small and Medium Enterprise Service Center (Laguna SeCen) is one of a series of papers published by the Microenterprise Best Practices (MBP) Project on ICT. There are two key reasons for MBP’s research initiative on the provision of ICT services to micro and small enterprises (MSEs):

1. ICT services could be a critical and crosscutting tool for MSE development. The hypothesis here is that communications, like microfinance, is a basic commodity service that is needed and demanded by a broad range of MSEs, and thus can be delivered at the same level of scale and outreach as microfinance.

2. Examining the provision of ICT services to MSEs could provide lessons to the BDS field on how to commercialize other business services.

This case study and its companion case study on the Bayantel Public Calling Offices (PCO) seek to examine whether telecommunications services are a critical need for MSEs and how to promote the delivery of such services in a commercially viable manner. This case study examines the prospects for ICT-based services in the SeCen’s service mix in the context of a nonprofit provider attempting to become more demand led and sustainable. The findings contrast the demand for various business services from the SeCen’s current customer base with that from its potential customer pool for the expansion of ICT services.

OVERVIEW OF THE LAGUNA SECEN

The Laguna Chamber of Commerce and Industry (LCCI) established the Laguna SeCen as the primary arm for service delivery to micro and small enterprises (MSEs) in July 1997. A major impetus for this move was to test whether a service center for MSEs could become a self-sustaining proposition. Swisscontact, a Swiss nongovernmental organization, supports the SeCen through the provision of financial support, technical advice, and human resource development. x

The SeCen embodies the “one-stop shop” business concept, offering the following services:

§ Communication services (phone, fax, and copying services); § Information services (trade events, policy issues, etc.); § Business registration; § Administrative services (bookkeeping, accounting, secretarial); § Marketing assistance (trade fairs, subcontracting); § Financial assistance (credit facilitation and financial advice); and § Training (management and technical training, consultancy).

Although services are designed to meet a wide array of business needs, the SeCen’s focus is on higher value-adding services—those services that help clients grow and develop. Basic services, such as communications and administration, are offered more to complete the organization’s one-stop shop concept rather than to be a profit center on their own.

Clients

The SeCen’s target clientele are micro, small, and medium-sized enterprises (MSMEs) in Laguna and nearby towns consisting of light industries, fruit and vegetable growers, and swine and fowl raisers. Its clientele also includes cooperatives that are direct members of LCCI and sectoral member associations of the chamber.

In interviews conducted by the authors, the heads of the sectoral association articulated the needs and priorities of the associations and their members. In general, association members demand services that will help them expand and develop their businesses. One common theme among the associations was demand for information on the latest technology and on potential markets both in the Philippines and abroad. All sectoral associations heads interviewed said that there is not much need for communication support facilities.

There are marked contrasts between the SeCen’s current customer base and its potential customers for ICT services in Calamba. The results of a survey of MSEs in Calamba show that these MSEs have a high level of awareness and usage of services that help them conduct daily business, such as telephone and courier services. The sectoral association members, on the other hand, do not need these “transaction facilitation” services since they generally own their own basic communications equipment.

In contrast to the sectoral associations, the level of awareness of information and business development services among MSEs in Calamba is low. Those who were aware of the services considered their needs for those services to be low. This may be because these MSEs xi

are focused mainly on business survival rather than on growth. Consequently, a prospective business development services supplier would have to spend considerable effort in communicating the benefits of these services to increase demand.

Financial and Operational Systems

Laguna SeCen expects to generate most of its revenue from marketing assistance activities for SMEs and from training seminars. This is consistent with the center’s belief that it is SMEs’ ability to sell their products profitably that fuels demand for services. Currently, the cost structure allows the SeCen to generate proportionally more profit from business support services, particularly business registration. However, the SeCen has kept the price for marketing assistance low so that it can build its client base. The SeCen expects both gross and net revenues from marketing to increase when it starts charging a percentage of sales from trade fairs and other marketing activities.

Swisscontact provided the financial subsidy to establish the SeCen. Three types of time- bound financial support were provided in this case:

§ A one-time subsidy to cover 50 percent of the center’s incremental investments in office improvement, equipment, and furniture;

§ An incentive tied to the gross or net revenue (depending on the service) generated by the center; and

§ A subsidy to partially cover operational costs to be phased out over a period of three years.

KEY FINDINGS AND CONCLUSIONS

A strengths, weaknesses, opportunities, and threats (SWOT) analysis of the Laguna SeCen shows where the organization will need to focus in the future so that it can build its customer base and begin to show profits. The following summarizes the analysis:

Strengths

§ Use of financial analysis in decision making. Financial statements are regularly used to inform changes in service mix and pricing.

§ Close relationship with customers. The membership-based structure enables management to receive frequent feedback and suggestions from customers.

§ Low fixed costs. Limited staff keeps overhead costs to a minimum. xii

§ Wide network of on-call suppliers. The linkage to LCCI gives SeCen access to a pool of resource persons needed for various services.

Weaknesses

§ Lack of market assessment. The SeCen’s system for determining its service mix is still ad hoc and is based as much on donor demands as consumer demand.

§ Lack of focus. Services are not defined by a single, clear customer benefit.

§ Poor location for basic services. The SeCen’s location is inappropriate for attracting customers for basic services.

§ Limited geographical reach. The SeCen is limited by a lack of physical presence in other areas that would enable staff to respond better to their customers.

Opportunities

§ New services for growing SMEs. Modern ICT provides the opportunity to develop new services for the SeCen’s market of growth-oriented SMEs.

Threats

§ Subsidized services from other suppliers. The distorted market makes it difficult for the SeCen to charge prices that will lead to financial sustainability.

§ Established, specialized suppliers. Specialized suppliers focused on a limited range of services are often more efficient and better at marketing their services than the SeCen.

The SeCen should continue to focus on marketing and training services to capitalize on its strengths and existing customer base. This specialization would provide the SeCen’s clients with a single clear benefit—reaching new markets through both improved products and increased exposure to potential customers. By adding an information service, the SeCen could offer its customers an additional service that provides the same business benefit. If all transaction facilitation services (phone, fax, and copying) were dropped, the SeCen would be able to focus on higher value-adding services. With this clearer client benefit and niche market, the SeCen could then hone its internal capacity, service features, and marketing strategy to meet the demand of this market. 1

CHAPTER ONE OVERVIEW OF THE STUDY

“Revolutions in communication have often been at the center of changes in society.”1

In many developing countries, ICTs are beginning to open up a range of new possibilities for supporting business development efforts, including those geared to the needs of micro and small enterprises (MSEs).2 ICT developments are giving rise to new types and combinations of business services that appear to be both effective, from the customers’ point of view, and financially viable, from the suppliers’ perspective.

MBP STUDY HYPOTHESIS

The Microenterprise Best Practices (MBP) Project3 decided to study the provision of ICT services for MSEs for two key reasons:

1. Researchers hypothesized that ICT services could be a critical and crosscutting tool for MSE development.

In the last several years, many practitioners have been designing custom business development services for different types and subsectors of MSEs. The hypothesis of this study was that ICT services, like microfinance services, are both needed and demanded by a broad range of MSEs. The development of appropriate ICT services could function as an effective tool for MSE promotion in a variety of circumstances for a wide range of MSEs. There are several parallels between microfinance and ICT that point toward this possibility:

1 World Bank, World Development Report, 1998, p. 56. 2 In the study, MSEs were defined as those enterprises employing 25 or fewer workers, including family members. The number of workers was used as an indicator of business size because of the expected difficulty in estimating business assets, particularly for micro and small enterprises. 3 Microenterprise Best Practices (MBP) is a USAID-funded global research project managed by Development Alternatives, Inc. (DAI), Bethesda, Maryland.

Chapter One—Overview of the Study 2

§ Communications, like microfinance, is a commodity service with multiple users and end uses. All businesses small and large must communicate with suppliers and customers. Communications, like microfinance, also has a range of uses for individuals. Growth in delivering customer-oriented microfinancial services increased when providers pursued a mass market appeal. This also appears to be the case for ICT services.

§ Microfinance institutions provide a basic service that customers are willing to pay for. Like microfinance, communications is a basic service; the benefits of increased access and availability are dependent on the end user. Communications may lend itself to the levels of outreach and commercialization that microfinance enjoys.

§ Like finance, ICT tended to reach populations and markets that were more profitable, while more remote, poorer areas were not getting access. Recently, technology developments have driven the costs of delivering ICT services down substantially, and many governments have deregulated ICT markets, which has increased competition. This study aims to determine whether these developments could open up access to ICT services for more MSEs.

2. Researchers expected that looking at the provision of ICT services to MSEs could provide lessons to the business development services (BDS) field on how to commercialize other business services.

Increasingly, donors and practitioners are looking toward commercialization of BDS and the development of BDS markets as key strategies for sustainably reaching large numbers of MSEs with the business services they want. There are cases of some types of ICT services being successfully provided to MSEs on a large scale and on a commercially sustainable basis, particularly in the private sector. These cases can provide lessons for how to sustainably reach MSEs with other business services. Most businesses cannot generate sufficient revenues from a single service, so they offer a mix of services. By analyzing how private sector and NGO suppliers determine their service mix and adjust it over time, we can learn how suppliers survive and grow in changing markets. By looking at a service in demand and learning how ICT suppliers stimulate demand for additional, related services, we can learn how the private sector builds demand for services.

Key Research Questions

This series of papers seeks to address the above two issues by examining the Philippine experience in the provision of basic and higher value-adding ICT-based business services to MSEs. The study examined the access, uses, and benefits of ICT-based business services delivered to MSEs by both private and not-for-profit service providers through a series of institutional case studies and accompanying consumer research.

Microenterprise Best Practices Development Alternatives, Inc. 3

Three key questions guided the case study research efforts:

§ How does telecommunications access affect the business operations of MSEs? The aim of this question was to determine if telecommunications services are a critical need for MSEs. Knowing the impact of telecommunications access to MSEs can help donors determine if these services should be a priority in MSE development programs.

§ What are viable business models for delivering ICT services to MSEs? The aim of this question was to determine how to promote the delivery of ICT services to MSEs on a commercially viable basis. The answers to this question provide donors and practitioners with lessons not only on how to deliver ICT services to MSEs but also how to commercialize other business services as well.

§ What are the emerging Internet-based models in use by business support institutions? The aim of this question was to determine if and how modern ICTs, specifically the Internet, can help practitioners to more effectively and sustainably deliver business services that MSEs demand. This information can help donors and practitioners determine if modern ICTs are a priority for MSE programs and how they might be used.

The ICT sectors in many developing countries are changing rapidly as governments attempt to leapfrog into the Information Age with modern systems. According to International Telecommunications Union estimates,4 the total value of telecommunication privatization between 1984 and 1996 was $158.5 billion, of which 53 percent, or $86 billion, was invested in the Asia Pacific region. Given the dynamic growth of this sector, this study also posed the question: What are the emerging business opportunities for MSEs as suppliers or supporters of basic communications and information services? The analysis of business opportunities for MSEs explains if and how the ICT industry in the Philippines is an investment opportunity for MSEs. This information can help donors and practitioners understand how MSEs can profit from the ICT revolution, not only as customers but also as providers.

Research Design

The first two questions above are answered in the institutional case studies of two telecommunications service providers, Bayantel Public Calling Offices (PCOs) and the Laguna Small and Medium Enterprise Service Center (Laguna SeCen). The cases contrast Bayantel, a diversified private sector telecommunications company providing, among other services, basic telecommunications access through storefront “phone shops,” with the Laguna SeCen, a subsidized, technically supported, multiservice business center offering telecommunications and administrative services alongside a wide range of business development services for micro, small, and medium-sized enterprises (MSMEs).

The Bayantel PCOs were chosen for study because they are profitably providing basic telecommunications and related services to low-income people, including MSEs, throughout

4 ITU World Telecommunication Development Report, 1996/97.

Chapter One—Overview of the Study 4 the Philippines. This business model is reaching a large number of customers and is financially viable. An examination of the company shows why it has been successful in these two key business elements. Choosing a private sector model also offered the opportunity to learn more about providing services to MSEs when profit is the bottom line.

The Laguna SeCen was chosen for study because it embodies the “one-stop shop” model for MSE service provision. Studying the SeCen provided insights as to how the appropriate mix of services for this type of business model can be determined and how ICT services might fit within that mix. Having designated the SeCen as a profit center less than two years before the study, this organization is at a common point for nongovernmental organizations (NGOs) in the provision of BDS: early in a drive to become more demand-led and sustainable. The study of this model enabled researchers to analyze common hurdles that NGOs face when they try to commercialize business services.

In the case studies, researchers assessed both the demand for and the supply of ICT services from these institutions. The demand analysis looked at current and potential customers’ awareness, use, satisfaction and benefits from a range of ICT services. The supply analysis consisted of a detailed examination of the two institutions: their business strategies, strengths, and weaknesses. Looking at demand and supply in the context of the overall market, the authors recommend a future direction for each of the institutions studied in delivering ICT services to MSEs.

These case studies are instructive for BDS practitioners or donors interested either in providing ICT services to MSEs specifically or in commercializing business services in general. Bayantel PCOs and the Laguna SeCen are facing the same issues as other business service providers around the world:

§ Who should be my target customers?

§ What should be my service mix?

§ What service features do MSEs want and how do I know?

§ How do I make my services more attractive than the competition?

§ How do I build my customer base?

§ How do I tailor my organization to sustainably, and even profitably, meet MSE demand for business services?

The case studies illustrate how each institution is answering these questions in a dynamic and changing market. The consumer research provides insights into how well each institution is succeeding and what changes they could make to be both more profitable and more effective in reaching their target MSE customers. The contrast between the two institutions provides

Microenterprise Best Practices Development Alternatives, Inc. 5 insights into how the private sector and NGOs often approach these questions differently. Donors or practitioners interested in developing BDS markets can find lessons in these different approaches on how to improve the effectiveness of both the private sector and NGOs in meeting MSE demand for services.

The third question above on Internet-based services is answered in a case study that profiles four Internet-based information service providers and analyzes the potential of these models to provide information services to MSEs. Although the study concludes that none of these providers is yet reaching MSEs on a significant scale or a sustainable basis, the analysis of their strengths and weaknesses shows why MSEs are not interested in their services and highlights some common mistakes that organizations make when offering modern ICT services to MSEs. The contrast of these organizations’ supply of Internet-based information services with the demand from MSEs for information services suggests ways that donors and practitioners could experiment with sustainable, demand-led, Internet-based information services for MSEs. This case study will be of particular interest to donors and practitioners interested in using modern ICTs in the delivery of business services to MSEs.

The question on investment opportunities for MSEs in the ICT industry is answered through an analysis of current MSE participation in the sector in one area of the Philippines, complemented by national level research on the ICT industry, its growth, and the emerging opportunities for MSEs. The analysis describes the various MSE business models currently operating in the ICT sector and estimates the number of MSEs nationally who currently operate each type of business. This information will be particularly useful to MSE programs interested in promoting business start-ups.

GUIDE TO THE PAPERS

Synthesis Paper

The synthesis paper presents an overview of the study findings. Chapter Two describes the context of the case studies. This enables the reader to understand the macroeconomic situation affecting consumers and the case study institutions and allows for comparison to other countries. Chapter Three summarizes the opportunities for MSEs in the ICT industry.

Chapters Four, Five, and Six address the key issues that guided the study. Chapter Four presents the highlights of the institutional case studies. It contrasts the two institutions’ strategies for building a customer base by comparing their clients, competitive situations, and marketing strategies. The chapter concludes with an overview strengths, weaknesses, opportunities, and threats (SWOT) analysis of each business model and recommendations for how new ICTs could contribute to each institution’s customer-building strategy.

Chapter Five answers the question, “What can the business models studied teach us about good practice in the commercialization of business development services?” The author outlines suggestions for how BDS providers, in either the private or NGO sectors, can assess demand for BDS from MSEs, choose an appropriate mix of services, determine a target

Chapter One—Overview of the Study 6 market, and tailor their organizations to meet demand. This chapter includes data from the study on the relative importance of different types of business services to MSEs. These data are particularly relevant to donors or practitioners starting new MSE programs.

Chapter Six addresses the question, “What should be the service mix and delivery mechanisms for the provision of ICT services to MSEs in the future?” The chapter suggests if and how both basic telecommunications services and higher value-adding ICT services can sustainably be offered to MSEs on a large scale. The chapter summarizes findings on the benefits to MSEs of telecommunications services and the demand for higher value-adding ICT services. In the chapter, the author proposes appropriate mixes of ICT services for providers and suggests what roles NGOs and donors could play in the promotion of ICT services for MSEs.

Case Studies of Bayantel PCOs and the Laguna SME Service Center

The case studies on the Bayantel Public Calling Offices and on the Laguna Small and Medium Enterprise Service Center provide details on each institution’s business strategy and customers. Each case study describes the institution’s background, services, customers, competition, business strategy, operational systems, and financial information.

This case study examines SeCen, a nonprofit provider attempting to become more demand led and sustainable, and its prospects for adding ICT-based services to its service mix. Key issues addressed are the nature of MSE demand for ICT services, the types and range of ICT services that the Laguna SeCen should offer, the market or clientele that it should offer these services to, and the appropriate marketing responses that may be called for. The case includes the results of in depth interviews with some of the SeCen’s customers and a survey of 100 MSEs in the surrounding town that represent potential ICT service customers. The findings contrast the demand for various business services from the SeCen’s current customer base with that from its potential customer pool for the expansion of ICT services.

The Bayantel PCO case includes the results of the consumer research from a survey of 100 MSE Bayantel PCO customers. The results show the kind of MSEs that are using PCOs, details of the MSEs’ awareness and usage of services in the PCOs as well as ICT services from other suppliers, MSEs’ satisfaction with services from the PCOs, and MSEs’ perceived benefits from using telecommunications services.

Each institutional case study also includes results from consumer research on the potential demand for more modern ICT services, such as e-mail and Internet access. Based on a comparison of customer demand and the institutions’ supply of ICT services, the authors analyze each business model’s strengths, weaknesses, opportunities, and threats within the context of the market. Each case study concludes with recommendations for changes that would help the organizations expand their services.

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Internet-Based Information Services

The study of Internet-based information service provision focuses on analyzing the market for Internet-based information services from MSEs in the Philippines. The paper describes the nature of demand for Internet-based information services from MSEs based on the results of the consumer research surveys. The authors give an overview of the use of the Internet by MSE support organizations and the provision of Internet-based information services in the Philippines.

Four organizations that provide Internet-based information services are profiled in more detail: the Agricultural Statistics and Marketing Information Services Project (ASSIST), the Philippine Chamber of Commerce and Industry, the Philippine Exporters Confederation, and the Asia Pacific Economic Cooperation (APEC) Center for Technology Exchange and Training for SMEs. The paper contrasts the features of information services supplied by these organizations with what MSEs demand, based on the results of the consumer surveys. The authors conclude that none of the four business models is appropriate for delivering Internet- based information services to MSEs, and they propose an alternate model.

METHODOLOGY

Demand for and benefits from ICT services were assessed using private sector consumer research tools. A survey of MSEs modeled on a marketing Usage, Attitude, and Image study was conducted to assess MSEs usage, behavior, and satisfaction with a range of ICT services and the impact of those services on their businesses. The survey included product concept tests for modern ICT services for which usage is currently low so that potential demand for these services could be gauged. Using private sector marketing research tools, the product concept tests introduced MSEs to the services and gathered feedback on their interest in purchasing them.5 Three hundred MSEs were surveyed, 100 from each of the case studies and 100 MSE cellular phone users.

The supply analysis was conducted through the two institutional case studies. Information was gathered through site visits, interviews with management at different levels, interviews with franchise owners in the case of the PCOs, interviews with other key persons, inspections of the competition, and examination of the organizations’ records to the extent possible. The models for the delivery of Internet-based information services were examined by interviewing the management of four business support organizations that use the Internet to provide services to businesses.

To determine the potential for MSEs as suppliers or supporters of ICT services, the study drew on information gathered from the Bayantel Public Calling Office case study and interviews with cellular phone company executives. A private sector market research firm

5 For more information on these consumer research tools see the MBP publication “Technical Note: Using Market Research Tools for the Design and Improvement of Business Development Services” by Alexandra Overy Miehlbradt.

Chapter One—Overview of the Study 8 that focuses on the telecommunications industry conducted complementary macro data research on business opportunities for MSEs.

To understand the context of the telecommunications industry, researchers relied on interviews with key informants in the industry and on various government and private publications. Interviews with representatives from key government agencies were conducted to understand the situation of MSEs in the Philippines. The interviews were supplemented with a review of government and private publications on MSEs in the Philippines.

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CHAPTER TWO OVERVIEW OF THE LAGUNA SECEN

BACKGROUND

The Laguna SeCen provides a broad range of business services to enterprises in the Laguna area. 6 Its origins date back to the establishment of the Laguna Chamber of Commerce and Industry (LCCI) in 1975. LCCI is a private association of small, medium, and large enterprises in Laguna province.7 It has counterparts in other provinces, which coordinate through a national body, the Philippine Chamber of Commerce and Industries.

LCCI is a “voluntary partnership of businessmen and professional people working together to build a healthy economy and ultimately improve the quality of life in the different communities of the province of Laguna, thus making them better places in which to live and work.” LCCI’s objectives are to:

§ Serve as a vehicle for the exchange of information that benefits individual members and companies;

§ Represent members before local and provincial governments for solutions to problems needing government help or intervention; and

§ Provide business support services to members.

As of October 1998, LCCI had 107 regular members, 98 small and medium-sized enterprises (SME) direct members, and 7 sectoral association members with a membership base of more than 600 enterprises. An estimated 85 percent of total membership are SMEs, notably in the embroidery, woodcraft, food processing, footwear manufacturing, and metal craft subsectors. The membership fee structure is graded based on business size. Regular members pay the most, direct SMEs members less, and sectoral association members a much smaller membership fee.

LCCI established the Laguna SeCen in July 1997 as the culmination of strategic shifts, beginning in 1993, that increased the focus on SMEs and on business development services. LCCI established the SeCen as the primary arm for service delivery to SMEs. A major

6 This MBP case study focused on ICT-based services to satisfy existing and create demand for SeCen business services. Readers who wish to learn more about the Swisscontact business center model—and the experience in the Philippines and Indonesia—should visit the website on the Committee of Donor Agencies for Small Enterprise Development: http://www.ilo.org/public/english/65entrep/isep/bds/donor/index.htm. The site contains case studies that were presented at the committee’s recently sponsored conference in Rio de Janeiro on “Building a Modern and Effective Development Services Industry for Small Enterprises” including the paper, “Swisscontact: The Business Centre Approach in Indonesia and the Philippines,” by Rob Hitchins and Alan Gibson. 7 Laguna is a province south of and adjacent to Metro Manila. It is part of Calabarzon, a region of five provinces around Metro Manila earmarked as a growth center of the Philippines.

Chapter Two—Overview of the Laguna SeCen 10 impetus for the separation was to test out whether a service center for SMEs could become a self-sustaining proposition. Consequently, LCCI decided to treat the SeCen as a profit center. Swisscontact, a Swiss nongovernmental organization (NGO), supports the SeCen through the provision of financial support, technical advice, and human resource development. (See Appendix B for a history of the Laguna SeCen and LCCI.)

With its establishment as a distinct entity under LCCI, the Laguna SeCen articulated its own vision, mission, and objectives. Laguna SeCen adopted the following vision: “Assistance given to cottage, small, and medium-sized enterprises in Laguna will result in increased productivity and enhancement of products and services for global competitiveness and thereby economic growth.” The SeCen’s mission is to “provide demand-driven services at reasonable cost for sustainability in order that the sector’s need is continually served.” This mission is premised on the belief that cottage, small, and medium-sized enterprises can greatly help the economic growth of the area.

SERVICES

The SeCen embodies the one-stop shop business concept. Its services are designed to meet a wide array of business needs. However, the SeCen’s focus is on its higher value-adding services—those services that help clients grow and develop.8 Basic services, such as communications and administration, are offered more to complete the organization’s one- stop shop concept rather than to be a profit center on their own. The SeCen’s focus comes from the management’s belief that helping SMEs sell their products profitably will fuel the demand for business services. The SeCen’s services are not limited to LCCI members only. The SeCen management hopes that offering services to nonmembers will encourage them to join LCCI by showing them the benefits they can get from membership. The range of services is described below.

Communication Services

Basic and more modern telecommunications services make up part of a group of administrative and business support services. The SeCen provides local and direct domestic long-distance calling, fax, and copying services. It plans to offer Internet access through its own computers. In 1997, assistance from Swisscontact made possible the installation and upgrading of communication facilities.

Center staff estimated the following usage per facility:

§ Phone calls (domestic only)—three clients per day; § Photocopying—15 to 30 clients per day; and § Fax messages—five messages per week.

8 Looking at the revenues and costs for various services, included in Chapter Four, provides insight into why and how the SeCen has operationalized this focus.

Microenterprise Best Practices Development Alternatives, Inc. 11

The center’s executive director considers these as incidental services rather than a main focus of service provision. He added that servicing internal requirements alone (e.g., photocopying of training materials) already provided sufficient volume to justify the investment in the equipment. Thus, such facilities are now being used more in support of other services rather than as a business in and of itself.

Information Services

Information is delivered mainly through LCCI’s Quarterly Bulletin, which is circulated to members and non-members. The newsletter features announcements of trade events, issues affecting business enterprises in Laguna (such as traffic, power supply, and tax measures), and LCCI activities (such as training workshops, conventions, and sports events).

In July 1998, LCCI signed a memorandum of agreement with the Canadian Private Enterprise Accelerated Resource Linkage for a comprehensive database on business information in Laguna. Once finished, the database is expected to provide local and foreign investors with updated, easily accessible information on all Laguna-based firms.

Business Registration

Facilitating business registration is part of the group of administrative and business support services that the SeCen offers. Business registration is the service most in demand in terms of number of customers. Business registration is required by law, although enforcement varies widely. The government of Laguna has stepped up enforcement, fueling demand for this service.

In May 1997, the Laguna SeCen was authorized by the Department of Trade and Industry (DTI)–Laguna and the Bureau of Trade Regulation and Consumer Protection to process business name applications for new and renewal applicants. The collaboration is an experiment to test the delegation of certain government functions to the private sector.

Customers apply for their business registration at the Laguna SeCen office, which is more conveniently located than the DTI office for many Laguna business people. Another value- adding feature is that staff assist applicants in filling out their forms, which eliminates the risk of applications being returned because papers are missing or forms are incorrectly filled out. The applications are then forwarded to the DTI head office in Metro Manila for approval and entry into DTI’s database. The estimated processing time is three weeks.

Processing fees are P121 (US$3.03) plus a service charge of P99 (US$2.48) for single proprietorship, partnership, corporations, cooperatives, federations, and associations. Initially, the center handled 37 registrations per month. This has since increased to 70 to 80 per month. As of February 1998, the SeCen had processed 398 applications since the arrangement with DTI began.

Chapter Two—Overview of the Laguna SeCen 12

Administrative Services

The SeCen provides bookkeeping, accounting, and secretarial services, including typing and other clerical work. The SeCen considers these services as part of the administrative group, which includes communications and business registration. They are not a major focus for the SeCen.

Marketing Assistance

The SeCen’s marketing services are delivered primarily through trade fairs and the facilitation of subcontracting agreements between big companies and SMEs. The SeCen also offers marketing consultancy on a limited basis.

MSMEs are invited to display and sell their products during the trade fairs, which the SeCen organizes once or twice a year. Participating establishments pay registration fees. In the future, the SeCen also plans to charge participants a percentage of total sales generated from trade fair participation. SeCen is limiting fees now so that a client base can be built.

The SeCen receives a fee for facilitating subcontracting agreements. In the first quarter of 1998, the SeCen sponsored seminars on the subcontracting business and on how to close a subcontracting deal. The SeCen is in a good position to do business matching because of its network of enterprises, particularly through its chamber members. LCCI has actively expanded its network through agreements with other chambers in the Philippines and abroad.

Financial Assistance

The SeCen provides lending services, credit facilitation, and financial advice to SMEs. Funds for microcredit come primarily from the provincial government of Laguna and DTI–Laguna. Loans are made available to SMEs that are members of the chamber or members of sectoral associations. The minimum loanable amount is P10,000 (US$250) and the maximum, P20,000 (US$500), payable within 12 months. Borrowers are charged an interest rate of 10 percent per annum plus a processing fee of 2 percent. A committee of three—composed of LCCI’s president, a director or board officer, and LCCI’s executive director—screens loan applications. With the onset of the financial crisis, the LCCI board suspended lending operations to avoid losses.

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Training

The SeCen provides management and technical training programs and consulting both for small and large companies. Training workshops and seminars have covered such topics as the value-added tax, import–export, entrepreneurship for SMEs, effective business communication, quality control, accounting, analysis of financial statements, and basic supervision.

Training fees have recently been raised to professional standards. Previously, LCCI offered subsidized seminars as part of its membership benefits, but the SeCen management found this practice unsustainable. In most training programs, the SeCen’s role is that of organizer. To keep overhead costs low, the SeCen relies on a pool of on-call rather than in-house trainers.

In addition to its own training workshops, the SeCen has received contracts from government agencies to provide subsidized training to SMEs. The contracts have enabled the SeCen to improve its capacity to develop and deliver in-house training programs. When the demand for training seminars increased, the SeCen opened its own conference room, which can be rented for meetings, seminars, workshops, and other company functions.

COMPETITION

As shown in Table 1, the Laguna SeCen faces a different competitive environment for each service it offers.

The SeCen faces a difficult competitive environment for basic telecommunications and administrative services because it cannot compete effectively against private sector suppliers in the Calamba area. These specialized suppliers often are able to offer a lower price because they are frequently franchisees, they are efficient, and they do a large volume of transactions for a broad market. Franchises of major telecommunications companies pay a lower fee than other phone owners to their phone company, enabling them to offer customers a lower price as well. Franchises also benefit from the advertising of their parent companies.

However, possibly the most significant weakness of the SeCen in its telecommunications and administrative services is its location—inside the Luzon Development Bank compound. This area does not have high pedestrian traffic, and it is not easily visible from the street. For more traditional business development services (training, marketing assistance, and market information), the SeCen’s greatest asset is its network. However, the SeCen must compete against both subsidized and specialized providers for these services.

Chapter Two—Overview of the Laguna SeCen 14

Table 1: Laguna SeCen’s Competition and Its Relative Strengths and Weaknesses

Existing Service Laguna SeCen Service Suppliers Strength Weakness Basic Public calling offices Has access and Not a franchisee telecommunication Informal providers equipment Poor location services Public phones Basic business support Specialized private Has equipment Poor location and administrative providers like copy services (photocopying, centers, computer rental computer rental, stores, accounting accounting, etc.) agencies, etc. Technical information Specialized government Not technically services institutions like the equipped University of the Staff generalists Philippines in Los Banos, International Institute of Rural Reconstruction, etc. Market information Center for International Chamber Not specialized sources/marketing Trade Expositions and network—local and assistance Markets, DTI, NGOs international Training Other NGOs and Good facilities and Higher priced than government agencies access to trainers; subsidized better quality competitors Financial services Other NGOs, informal and Not equipped to do formal sources, lending lending operations investors, banks effectively and efficiently; small funding and ad-hoc systems

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CHAPTER THREE CLIENTS

One reason that LCCI first began offering services to its members was to increase the appeal of membership, particularly to SMEs. As a new service provider, the SeCen needs to build its customer base. Therefore, the study took a broad look at the demand for business services in Calamba, the area where the SeCen is located. The study investigated the SeCen’s current MSME clients and LCCI’s sectoral association members through in-depth interviews with the heads of the associations. The study also investigated the SeCen’s potential MSE clients, the MSEs of the Calamba area, particularly the telecommunications and administrative services, because of their proximity to the center. The survey gathered information about MSEs’ knowledge and use of telecommunications services so that recommendations could be made on the mix of services that the Laguna SeCen should pursue in the future.

The information on current clients, the sectoral association members of LCCI, and the type of businesses services that interested them was compared with that of MSEs in Calamba in general. The comparison helps show which services and clients the Laguna SeCen has a competitive edge in serving.

CURRENT CLIENTS

Although the Laguna SeCen offers services to big and small enterprises, both for members and non-members, priority is given to its target clientele: MSMEs in Laguna and nearby towns. Such SMEs are usually classified as light industries, including agri-based industries such as cut flowers, fruit and vegetable growers, and swine and fowl raisers. Cooperatives that are direct members of the chamber are considered target clients; these include the Dila Multi-Purpose Cooperative (cut flowers), Lamot II Primary Multi-Purpose Cooperative (agri- based), Liliw Footwear Multi-Purpose Cooperative, and the Masilayan and Matalatala Multi- Purpose Cooperatives (agri-based). The target clientele also includes LCCI’s seven sectoral member associations:

§ Association of Novelty Producers of Laguna. Most members of this association are microenterprises, with assets below P1.5 million (US$37,500). Membership grew from 15 in 1993 to about 25 to 30 in 1998. Association members produce a wide array of items—paper boxes, wedding giveaways, Christmas decorations, baskets, wooden furniture, clay fashion accessories, paper mâche products, handmade paper, tin and wire products, garments, and crocheted items.

§ Kalipunan ng mga Gawaan ng Sapin sa Paa sa Laguna. The footwear association has approximately 300 members that are all micro and small enterprises. It joined LCCI two years ago.

Chapter Three—Clients 16

§ Laguna Agro-Industrial Machinery Manufacturers Association. Although the association lists 16 members, these in fact include technical people who provide advice to the member enterprises. Capitalization often falls below one-half million pesos (US$12,500).

§ Laguna Federation of Floricultural Associations. The cut flower sector has four cut flower associations and four cut flower cooperatives as members. All together, individual members of these organizations number more than 300. Most of them run small backyard operations. The biggest flower farm covers an area of less than one hectare.

§ Laguna Food Processors and Exporters Association. There are approximately 20 active members of the processed food association, all micro and small enterprises. This organization joined LCCI in 1997.

§ San Pedro Garment Manufacturers Cooperative. This garments cooperative joined LCCI two years ago. It has approximately 68 members, all micro and small enterprises. However, the cooperative is currently experiencing some organizational difficulties.

§ San Pedro Chamber of Commerce and Industry. The 70 members of the chamber represent a cross-section of big, medium, and small enterprises as well as varied industry lines, from manufacturing and trading to insurance and travel agencies. Small enterprises include bakeshops, groceries, trading, and general merchandising firms.

In interviews, the heads of the sectoral associations articulated what they considered to be the needs and priorities of the associations and their members. They believe that the most urgent need now is to develop the production capacity of small enterprises and to upgrade skills, technology, and quality. This would enable small enterprises to grow. They would then have the capacity to land bigger contracts and go into franchising, subcontracting, and exporting. They also mentioned that members need access to capital and referrals to agencies with different services.

One common theme among the stated needs of the sectoral associations was access to information on the latest technology and on potential markets both in the Philippines and abroad. Sectoral heads believe that if this information is available, sectoral association members will be able to improve their businesses. The association heads also emphasized the type of information they need, rather than the type of technology needed. Important information for them includes potential markets for their products, especially for entrepreneurs who want to venture into exports, new technologies (for the metal and cut flower sectors), and product development and quality control for the novelty sector.

Currently, few associations have research and development units. In the sectoral associations interviewed, most members gather information on their own and at their own initiative. One exception is the cut flower association, which secures information on the latest developments for their members through association-sponsored seminars and field trips. Other sectoral associations rely on government or private institutions to provide information on technology. The metal and cut flower sectors rely mainly on University of the Philippines in Los Banos.

Microenterprise Best Practices Development Alternatives, Inc. 17

The novelty association contacts the Center for International Trade Expositions and Markets, Philippine Exporters Confederation (an association of Philippine exporters), and the Design Center of the Philippines for information on product design and development, quality control, and market trends. The different associations also are negotiating with the Philippine Chamber of Commerce and Industries to refer them to potential buyers abroad via the Internet.

All sectoral association presidents interviewed said that there is not much need for communication support facilities. Most members have their own telephones, fax machines, and e-mail, either in their offices or at home. Members without such facilities can easily make use of nearby commercial business centers.

POTENTIAL CLIENTS—MSES OF CALAMBA

The study surveyed 100 randomly chosen, registered MSEs in Calamba. Basic information on the profile of enterprises and respondents surveyed is summarized in Table 2.

Table 2: Profile of Surveyed Calamba MSEs

§ 52% trading Type § 47% services § 1% manufacturing § 32% three or fewer years (18% less than one year) Age of business § 29% three to five years § 39% more than five years § 33% male Ownership § 19% female § 48% family/joint § 47% less than P300,000 (US$7,500) § 18% P300,001-P900,000 Estimated annual sales* (US$7,500-22,500) § 25% more than P900,000 (US$22,500) § 89% 10 or fewer No. of employees § 11% 11 to 25 § 25% high school or less Education of owner § 75% at least some college § 35% P15,000 or less (US$375) § 33% P15,001-40,000 Monthly family income* (US$375-1,000) § 12% more than P40,000 (US$1,000) * Remainder did not know or refused to answer. Source: Calamba MSE survey.

By type of business, Calamba MSEs surveyed were about equally divided between sales and services, with only one in manufacturing. In comparison, total registered establishments in Calamba consisted of 3,671 establishments, with 95 percent commercial (sales and service) and 5 percent manufacturing. The smaller proportion of manufacturing in the sample may be accounted for by the exclusion of larger manufacturing enterprises that are present in the four

Chapter Three—Clients 18

industrial estates in Calamba. The type of establishments reported in the survey reflects Calamba’s role as a center for trade and commerce for Districts 1 and 2 of Laguna.

Most of the enterprises seem to be fairly well established, as indicated by the number of years in business. Joint ownership (by husband and wife) was the most common form of reported enterprise ownership, accounting for 48 percent of respondents. Most of the enterprises had annual sales of less than P300,000 (US$7,500), although 25 percent reported annual sales of more than P900,000 (US$22,500). Enterprises surveyed consisted predominantly (89 percent) of those that had 10 or fewer workers. Educational attainment of respondents is relatively high: 75 percent reported having at least some college education.

Only 13 percent of the respondents reported household incomes below the poverty threshold. This compares with the poverty incidence of 25.7 percent in 1997 for Region IV (of which Laguna is part).

A comparison of the profile of the survey respondents in the areas of educational attainment, enterprise sales, household income, and enterprise ownership with other previous surveys of microenterprises indicates that they represent the higher end spectrum of microenterprises. 9 Previous surveys of the urban informal sector and microenterprises showed lower levels of educational attainment, higher proportions with lower incomes, and a predominance of female-owned enterprises, which seems to be more common among subsistence enterprises. The fact that the sample consisted of registered enterprises also meant that their operations were on a larger scale than those of average MSEs.

A comparison of the location of buyers and suppliers reveals that most enterprises in the survey do most of their business in the local economy. Most of the businesses interviewed had locally based customers, with 86 percent having customers within different barangays10 within the municipality. About 60 percent reported having customers outside of Calamba. Only 35 percent reported having customers outside of Laguna, while only 3 percent had customers in a different country.

In terms of suppliers, however, more businesses relied on suppliers outside the province than within the province. A higher proportion of enterprises engaged in sales or trading had suppliers that were outside of the province. This is consistent with the nature of their businesses, which dealt with manufactured consumer goods such as garments and general merchandise including grocery and corner store items.

9 Alonzo, Ruperto P., and Abrera-Mangahas, Maria Alcestis. “The Informal Sector in Metro Manila: Findings from a Recent Survey.” Geneva: International Labor Organization. 1990. Chua, Ronald T. “Impact of Access to Credit on the Poor: Research Design and Baseline Survey for a Longitudinal Study,” Study prepared for the Australian Agency for International Development. Brisbane: The Foundation for Development Cooperation. 1998. 10 A barangay is the smallest political unit in the Philippines. A municipality is divided into barangays. Analogous to a large neighborhood, it has a minimum of 5,000 people.

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Ownership and Awareness of ICT Equipment

Part of the hypothesis of the study was that the demand for common or public communication services would decrease as enterprises gained access to equipment ownership. The survey thus inquired about telecommunication equipment ownership among respondents.

Survey results indicated that 71 percent of MSEs owned a landline. Another 12 percent stated that they were waiting for their phones to be installed. Only 17 percent did not have a landline connection. This is consistent with the relatively higher phone-line density in Calamba relative to other provinces. Ownership of other types of equipment was significantly lower when compared with landline phone service (see Table 3). Thirty-six percent reported having or owning a cellular phone. Another 2 percent were waiting for their connection. Interestingly, 19 percent of respondents reported owning computers, with another 9 percent waiting for their units to be delivered.

Table 3: Calamba MSEs—Information and Telecommunications Equipment Ownership

Cellular Internet Ownership Phone Fax Pager Computer Phone Dial-Up Owned 71% 11% 36% 5% 19% 3% To be installed 12% 5% 2% 0 9% 2% Not owned 17% 84% 62% 95% 72% 95% Source: Calamba MSE Survey.

Except for Internet dial-up and fax machines, there was a 100 percent awareness of the equipment mentioned. Twenty-four percent of total respondents were unaware of the fax machine. Eighty-three percent were unaware of Internet dial-up.

Except for cellular phones, the most common reason cited for not owning equipment was that it is not needed by their businesses. The most common reason for not owning cellular phones was that they are expensive or entailed additional expense. For the cellular phone and pager, the second most frequently cited reason for not owning was the availability of substitutes or other services. For the fax, computer, and pager, the second most frequently cited reason was that this equipment entails additional expenses or is too expensive for their businesses.

Awareness, Usage, and Image of Selected Business Development Services

An important issue that business development services suppliers face is the range of services to offer MSEs. The survey asked Calamba MSEs whether they knew about selected communication, information, and business development services, whether they need these services, and whether they have used or purchased them.11 Respondents were asked if they “must have” a service without specifying where they wanted to get the service. In contrast,

11 This technique for analyzing consumers’ awareness and usage of services is from Dr. Ned Roberto, User- Friendly Marketing Research, Life Cycle Press (Asia), 1996.

Chapter Three—Clients 20 respondents were asked if they had used a service only in a common service facility. These services are listed in Figures 1 and 2.

Figure 1: Awareness, Usage and Perception of Need for Communication Services

100 80 60 40 20

% of MSEs 0 Pagers E-mail Local Call Local Fax Service Distance Fax Connection Internet Dial-Up Distance Call International Call International Fax Domestic Long Domestic Long Computer Rentals Messenger/Courier

% Aware Must Have as % of Aware Ever Used as % of Aware

Figure 2: Awareness, Usage and Perception of Need for Business Development Services

100 80 60 40 MSEs

of 20

% 0 Usage Internet Credit Training Technical Marketing Business Product Assistance Business Training Information Savings and Registration Consultancy Management Development

% Aware Must Have as % of Aware Ever Used as % of Aware

Microenterprise Best Practices Development Alternatives, Inc. 21

Calamba MSE respondents’ level of awareness of basic telecommunications services, such as phone, fax, and paging services, is relatively high. There is a decreasing level of awareness from local calls to domestic long distance to international calls. The trend also holds true for fax service. The awareness level of messenger services also is high. Awareness of business registration services and messenger/courier services is relatively high. However, the awareness level of Internet-related services is low. The survey also revealed a low level of awareness about business development services and information services among Calamba MSEs.

Despite the high awareness, MSEs do not see most services as essential: only local call service and business registration have more than 70 percent of aware MSEs classifying them as services that they must have. All other services have “must have” proportions that are lower than 50 percent. Actual paid usage of various services also is low.12

This matches the respondents’ assessment of the need to have the services. Only savings and credit and business registration have usage rates of more than 50 percent.13

For local calls, the main reason for not purchasing is the availability of landlines or access to substitutes. Only 21 percent stated that they do not need the service. For domestic long- distance calls, the reasons for not using are roughly split between having their own landline or substitutes and not needing the service. For business registration, those who do not pay for such services either do it themselves or are not registered. The most common reason for not purchasing for the other services is that they do not need it because their businesses are small.

As can be seen in Table 4, most of the Calamba MSEs that paid for phone services outside of their place of business use public calling offices. They also use stores in their neighborhood, pay phones, and shopping centers.

12 This is actual paid usage in common service facilities. It does not take into account MSEs who use their own equipment or have in-house capability. Some MSEs may have reported that they “must have” a service but do not use the service from a common service facility because they have their own equipment, particularly for phone and fax. For business development services, some MSEs may have reported that they “must have” a service but do not purchase it either because of a lack of budget or lack of access. See Table 3 for more information on the reasons for not purchasing various services. 13 The low awareness of credit and savings service may be because respondents interpreted the question as financial services from formal institutions such as government, NGOs, and banks rather than including informal sources of credit. Anecdotal evidence shows that most MSEs in the Philippines are aware of informal sources of credit.

Chapter Three—Clients 22

Table 4: Calamba MSEs—Service Purchase Location and Reason for Nonpurchase

Service Where Service Purchased Main Reason for Not Purchasing (for users) Public Service (% of non-buyers) Local call Public calling offices 63% Own land line (or neighbors do) 74% Neighborhood 17% Not needed 23% Shopping centers 10% Pay phones 10% Domestic long- Public calling offices 80% Own land line (or neighbors do) 46% distance call Pay phones 10% Not needed 51% Neighborhood 5% Others 5% Business DTI/govt. office 92% Do it personally; c/o others 53% registration Not registered 45% Services providing Shopping malls 3* Small business—do not need information Neighborhood 1* service 15* DTI/govt. offices 1* Use substitutes 3* Technical training No data Small business—do not need service 69% Free advice 21% No budget 5% Not available 5% Management No data Small business—do not need training service 73% Free advice 8% No budget 14% Not available 5% * Actual number due to small sample base. Source: Calamba MSE Survey.

In summary, except for basic telecommunication services, respondents’ level of awareness of information and business development services is low. Among those who were aware of the services, their assessment of their own need to have such services is also low. The low “need to have” rating also translated into a low usage rate. One possible explanation for this is that Calamba MSEs are survival-oriented businesses engaged primarily in trade and services and do not see the need for business development services. What this means for a prospective business development services provider is that a lot of effort will have to go into communicating the benefits of these services to increase demand. Another possibility is to promote trial usage of such services so that potential clients come to appreciate the value of such services.

Perceived Impact of Services on Profit

Overall, the pattern of MSE perception of positive impact on enterprise profits from business services followed those of the level of awareness and their assessment of importance and “need to have.” All respondents were asked if access to the services in Table 5 has increased their profits. Communication services as a whole were perceived to have the greatest impact on profit, with 40 percent of respondents stating that access to communication services definitely increased their profits. This is followed by administrative services at 23 percent and information services at 16 percent.

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Table 5: MSE Perceived Impact on Profit of Services

Administrative Information N = 100 Communication* Services** Services*** Definitely increase 40 23 16 Probably increase 25 28 35 Maybe increase 24 24 35 No increase 11 25 14 * Phone calls, fax, pager, e-mail, messenger/courier. ** Message-taking service, business registration, computer rental. *** Internet usage; Internet dial-up; information on markets, customers, etc. Source: Calamba MSE Survey.

Potential New Services

To test the potential of the Laguna SeCen’s adding more services using modern ICT, the survey conducted two product concept tests on Internet access and Web page development and hosting.14 The Internet was described as a tool for gathering information—for example, on prices, production technology, and suppliers. Of the MSEs surveyed, 8.5 percent showed a definite interest in purchasing Internet access services. This represents a potential initial market size of 224 enterprises in Calamba alone.15 Price sensitivity tests, among those definitely or probably interested, show that MSEs are not aware of current prices for Internet access: 49 percent of those surveyed are willing to pay P195 (US$4.88) per hour, even though the current price from private providers is only approximately P60 (US$1.50) per hour.16 Based on interviews with sectoral association members, it is the information on the Internet, rather than access to the Internet, in which MSEs are interested.

Five percent of those surveyed expressed definite interest in having a Web page as a means of advertising to new markets. Those definitely or probably interested (38 percent) were asked about price. The price sensitivity test showed that the revenue maximizing price for Web page development based on the survey is P1,950 (US$48.75) per page as compared with the current industry standard of approximately P1,500 (US$37.50).17 From the survey, the revenue-maximizing price for hosting a Web page was P2,800 (US$70) per month, compared with the current industry standard of approximately P2,000 (US$50) per month. The product concept tests indicate some potential for these modern ICT services, most likely because they assist MSEs in receiving information and reaching new buyers. The tests show not only that an initial market exists for these products among MSEs but also that MSEs are willing to pay prices which will allow a provider to make a profit.

14 A product concept test introduces respondents to a product or service with which they are not familiar by describing the product and its benefits. Respondents are then asked questions about their interest in buying the product. This technique is used frequently by private sector companies to assess potential consumer acceptance of new products. 15 See Appendix C for the calculation of the initial market size. 16 This technique for testing consumers’ price sensitivity and determining the revenue maximizing price is from Dr. Ned Roberto, User-Friendly Marketing Research, Life Cycle Press (Asia), 1996. 17 See Appendix C for the calculation of the revenue-maximizing price.

Chapter Three—Clients 24

COMPARISON OF CURRENT AND POTENTIAL CLIENTS

There are marked contrasts between the SeCen’s current customer base and its potential customers for ICT services in Calamba. MSEs in Calamba have very aware of and use services that help them conduct daily business, such as telephone and courier service. They are currently purchasing these services from private businesses in Calamba. The sectoral association members do not need these “transaction facilitation” services as much because they generally own their own basic communications equipment, such as a landline and a fax machine.

The SeCen’s current customers want higher value-adding services that will help them grow and develop their businesses. The MSEs in Calamba generally have a low awareness and perception of need for business development services such as training, information, and marketing assistance. This may be because these MSEs are focused mainly on business survival, rather than on growth. The sectoral associations have a higher level of awareness and perception of need for business development services. A possible explanation is that most sectoral association members are engaged in the production and trade of goods, and they target markets within a wider geographical radius than the Calamba MSEs, which are primarily focused on trade and services. In fact, a number of sectoral association members are exporting. The sectoral association members’ interest in larger markets, better technology, and higher productivity indicates that they are more growth oriented. These growth-oriented businesses show more interest in business development services than the survival-oriented MSEs of Calamba.

If the SeCen were to serve both groups, it would have to offer them different services that need different internal capacities to provide profitably. This is beyond the capacity of the SeCen. Instead, it chose to focus on a smaller set of customers with similar needs.

Microenterprise Best Practices Development Alternatives, Inc. 25

CHAPTER FOUR FINANCIAL AND OPERATIONAL INFORMATION

REVENUE AND COST ANALYSIS

According to the Laguna SeCen’s business plan, the SeCen expected to generate most of its revenue for 1997 and 1998 from marketing assistance activities for SMEs and from training seminars. (See Tables 6 and 7.) This is consistent with the center’s belief that it is the ability of SMEs to sell their products profitably that fuels demand for services. It supports their decision to focus on higher value-adding services that help SMEs develop their businesses: this is where the SeCen can make substantial revenues over time.

Currently, the cost structure allows the SeCen to generate proportionally more profit from business support services, particularly business registration. However, the SeCen has kept the price for marketing assistance low so that it can build its client base. It expects both gross and net revenues from marketing to increase when it starts charging a percentage of sales from trade fairs and other marketing activities. Despite the 26 percent of net revenues projected to come from business support services in 1998, the SeCen does not see the same potential for increasing gross revenues from business registration, administrative and secretarial services, and communications services. It is not keeping these prices artificially low and does not think it can raise the price much in the future or increase volume significantly.

Table 6: Estimated Revenues by Type of Activity for Five Months (August to December 1997)

Net Revenues % of Total Direct % of Total Net Revenues U.S. Revenues Costs Pesos Revenues Dollars Business training P14,000 3% P26,000 (12,000) $(300) (5%) Business consultation P20,000 5% 0 20,000 $500 9% Business registration P12,000 3% 0 12,000 $300 6% Bookkeeping/accounting P5,000 1% 0 5,000 $125 2% Secretarial services P10,000 2% P5,000 5,000 $125 2% Relending P8,000 2% P3,000 5,000 $125 2% Credit facilitation P10,000 2% 0 10,000 $250 5% Financial advice P5,000 1% 0 5,000 $125 2% Trade fairs/exhibits P260,000 57% P150,000 110,000 $2,750 50% Subcontracting fairs P100,000 22% P50,000 50,000 $1,250 23% Marketing advice P10,000 2% 0 10,000 $250 4% Total revenues P454,000 100% P234,000 P220,000 US$5,500 100% Annual equivalent P1,089,600 P561,600 P528,000 US$13,200 Source: Swisscontact.

Chapter Four—Financial and Operational Information 26

Table 7: Revenue Projections for 1998 by Type of Activity

% of Total Net % of Total Gross Costs Revenues Pesos U.S. Dollars Net Revenue Sales and display P12,000 <1% 0 12,000 $300 3% Trade fairs and P1,500,000 45% P1,350,000 150,000 $3,750 34% exhibitions Marketing linkage/ P500,000 15% P450,000 50,000 $1,250 11% subcontracting Training/consulting P1,070,000 32% P977,000 93,000 $2,325 20% Financial services P25,000 1% 0 25,000 $625 5% Business support P248,000 7% P137,000 111,000 $2,775 26% services* Subtotal P3,355,000 100% P2,914,000 441,000 $11,025 100% Personnel P431,000 Operating costs P148,000 Total P3,355,000 P3,493,000 P(138,000) US$(3,450) *Includes business registration, administrative and secretarial services, and communications services. Source: Swisscontact, Laguna SeCen.

Financial data to date show that the SeCen will not reach its revenue targets in 1998. The Asian financial crisis has seriously dampened demand for business development services. In addition, the projections appear to be overly optimistic in terms of the growth in revenues over the SeCen’s 1997 performance.

Swisscontact provided the financial subsidy necessary to establish the SeCen. The Swisscontact approach for assisting SME service centers in becoming financially and operationally sustainable consists of three main components: technical advice, human resource development, and financial support. In the case of the Laguna SeCen, Swisscontact provided three types of time-bound financial support. The first is a one-time subsidy that covered 50 percent of the center’s estimated incremental investments for office improvement, additional office equipment (phone, fax, and printer), and furniture. The second consists of an incentive that is tied to the gross or net revenues (depending on the service) that the service center actually generates from the provision of services. With the exception of training, which is based on gross revenue, the incentive is equivalent to 100 percent of actual net revenues generated on mutually agreed services or a ceiling amount, whichever is lower. Finally, Swisscontact also provides a subsidy to cover part of the SeCen’s operational costs. This subsidy is to be gradually phased out over a period of three years (see Table 8).

Microenterprise Best Practices Development Alternatives, Inc. 27

Table 8: Budget and Level of Swisscontact Support

August-December 1997 1998 Pesos US$ Pesos US$ Laguna SeCen Financial Basis for Support Estimated investment in equipment P101,000 US$2,525 - - Estimated net revenues P220,000 US$5,500 P441,000 US$11,025 Estimated personnel and other operating P274,070 US$6,852 P599,000 US$14,975 costs Net surplus/(loss) P(54,070) US$(1,352) P(158,000) US$(3,950) Swisscontact Support Investment in equipment P50,500 US$1,375 - - Support/investment 50% 50% - - Swisscontact revenue-based incentive P136,000 US$3,400 P180,000 US$4,500 incentive/net revenue 62% 62% 41% 41% Swisscontact operating cost subsidy P130,000 US$3,250 P315,000 US$7,875 Subsidy/operating costs 47% 47% 53% 53% Source: Swisscontact.

OPERATIONAL INFORMATION

Structure. LCCI is a membership-based organization headed by an elected board of 11 directors. Officers and directors of the chamber are business and industry leaders recognized by both government and private officials. The SeCen is under the LCCI board.

Human Resources. Staffing for the SeCen is kept lean: a center manager, a marketing officer, one support staff, and a utility person. Swisscontact currently supports all staff training.

Budgeting. Projected income statements are generated annually in consultation with Swisscontact and other donors.

Pricing. The SeCen determines prices based on a review of the prices of similar services from other institutions or private companies.

Product development. LCCI’s approach to deciding the range of services for SMEs has so far been informal and opportunistic. Ideas and projects come from various sources: members, other chambers, donors, and opportunities for collaboration with other organizations. Indications of demand are gathered through interaction with LCCI members during various meetings and forums that the chamber or the SeCen conduct. One major source of input was a province-wide SME conference held in August 1998. Demand is assessed through test marketing. Services are offered, then actual demand for such services is reviewed and future plans are revised accordingly. This approach is possible because of the SeCen’s close relationship with its client base.

Chapter Four—Financial and Operational Information

CHAPTER FIVE CONCLUSIONS

SWOT ANALYSIS OF THE BUSINESS MODEL

As a business center, the Laguna SeCen is still in transition. Because it was established as a profit center less than two years ago, management is still learning how to act like a business. Nevertheless, the organization has made progress toward good business practices.

Table 9: SWOT Analysis of the Laguna SeCen

Strengths Weaknesses § Use of financial analysis § Lack of market assessment § Close relationship with customers § Lack of focus § Professional staff and accountability § Poor location for basic services § Low fixed costs § Limited geographical reach § Wide network of on-call suppliers § Track record in training Opportunities Threats § New services for growing SMEs § Subsidized services from other suppliers § Established, specialized suppliers

Strengths

Use of financial analysis in decision making. Although the SeCen is not financially sustainable yet, regular financial statements are produced, and the management uses these in decision making. This analysis is informing changes in service mix and pricing.

Close relationship with customers. Because the SeCen is under a membership-based structure, management gets frequent feedback and suggestions from customers. This frequent contact helps the SeCen adjust its service mix and features.

Professional staff and accountability structure. The commitment of organizational resources to have professional staff has allowed the Laguna SeCen to function and grow. The separation of the SeCen from LCCI makes the organization accountable to cover costs and gives the center’s manager effective control over resources and operations.

Low fixed costs. The Laguna SeCen has a small staff and keeps overhead costs to a minimum. Most of the costs for higher value-adding services are variable, which lets the SeCen lower its risks.

Wide network of on-call suppliers. The Laguna SeCen, by virtue of its attachment to LCCI, is linked to a wide network of businesses. The network gives it access to a pool of resource

Chapter Five—Conclusions 30 persons needed for various services. The fact that the resource people often come from other businesses is one of the SeCen’s key selling points.

Track record in administering training programs. The Laguna SeCen has been reasonably successful in organizing and administering various training programs. Its past performance in managing training contracts for government agencies and other organizations has given it a good reputation not only among government and donors but also among clients.

Weaknesses

Lack of market assessment. The SeCen’s system for determining its service mix is still ad hoc and based as much on donor demands as on consumer demand. Market assessment is informal and not sufficiently systematic.

Lack of focus. The SeCen service mix is very broad. The services are not defined by a single, clear, and demonstrable customer benefit. The SeCen is starting to address this weakness by focusing on a narrower set of services.

Poor location for basic services. One of the keys to selling communications and administrative services is a visible location in a busy pedestrian traffic area. The SeCen is located off the street in a bank compound. Thus, it fails to attract many new customers for its basic services, particularly because there is ample competition from private sector suppliers in better locations around Calamba.

Limited geographical reach. The Laguna SeCen has minimal geographic reach outside of Calamba. Its client base is located throughout the Laguna province. The SeCen is limited by a lack of physical presence in other areas that would enable it to respond better to its customers.

Opportunities

New services for growing SMEs. The Laguna SeCen is establishing a good customer base of growing SMEs that want services to help them improve products and penetrate new markets. Modern information and communication technologies provide the opportunity to develop new services for this market.

Threats

Subsidized services from other suppliers. The SeCen’s training services compete with subsidized training courses from the government and other NGOs. The distorted market makes it difficult for the SeCen to charge prices that will lead to financial sustainability.

Microenterprise Best Practices Development Alternatives, Inc. 31

Established, specialized suppliers. Established specialized suppliers, many of them private sector companies, offer the same services that the SeCen provides. These specialized suppliers are focused on providing a limited range of high-quality services. They are often more efficient and better at marketing their services than the SeCen. The SeCen is trying to compete as a one-stop shop that is responsive to a range of business services needs. However, this is not always sufficient motivation for customers to change from their current suppliers for business services.

THE FUTURE OF THE LAGUNA SECEN

The Laguna SeCen is focusing increasingly on marketing assistance and training. Although it initially planned to provide communication services (telephone, fax, e-mail, Internet access, and photocopying) as well as administrative services on a more significant scale and on a commercially viable basis, these services have since been relegated to the background as a range of supportive and incidental services. The SeCen is focusing on higher value-adding services to build its customer base. Its executive director believes that those services which help MSEs grow their businesses through improving internal operations and gaining access to new markets are most likely to create loyal clients and attract new customers. The ability of SMEs to sell their products or services profitably also is key to sustaining SMEs’ demand and ability to pay for business services. The analysis below of the SeCen’s competitive position vis-à-vis various types of services and customers bears out the wisdom of its executive director’s decisions.

Prospects for Basic Telecommunication Services

Although awareness of and need for basic phone services are high, does this represent an opportunity for a business development services provider like the Laguna SeCen? The SeCen’s current SME clients do not need basic telecommunications services because they have access to their own equipment. The SeCen’s potential MSE customers in the Calamba area are purchasing telecommunication services from private companies. The arguments below explain why the SeCen does not have a strong competitive advantage in basic telecommunications services.

Economics of the public calling office. If a business plans to rely on phone service as a significant source of revenue, it will not be able to compete effectively unless it becomes either a company-owned PCO or a franchisee. The main reason is that PCOs and franchisees earn a share of the toll charges on calls from their offices. Thus, to get the same return without being a franchisee, a prospective service provider would have to mark up the price of calls significantly above the regular toll charges, making the price uncompetitive. The Laguna SeCen did not think it was worth paying the franchise fee because communication services were not projected to provide sufficient revenue, and management does not consider telecommunication services as a focus of the center. If a phone service supplier is not a franchisee, costs must be extremely low so that the price mark-up is minimal. The service also must be offered in a convenient location that would make the premium worth the cost to

Chapter Five—Conclusions 32

the customers. The SeCen has neither. The center’s manager believes that it should focus its efforts on higher value-adding services and leave the provision of basic communication and administrative services to private entities and individuals who can operate more cost- efficiently because of lower overhead costs. For example, along the various main thoroughfares in Laguna, one can observe the proliferation of stores and households offering the use of cellular phones for a fee.

SeCen client base. The SeCen’s client base also suggests that it should focus on higher value-adding services. LCCI’s membership consists primarily of MSMEs in manufacturing, with few or no microenterprises in trade and services. Most members already have their own telephones and fax machines. Findings from several needs assessments indicated that members consider training, market assistance, and access to technology as being more important than other services. In addition, public calling offices must serve a broad area- based market, which includes entrepreneurs, families, students, and other types of customers, to generate a high volume. The SeCen, on the other hand, serves a geographically dispersed market niche: growing SMEs. This market niche fits better with higher value-adding business development services.

Revenue potential. For the SeCen, higher value-adding services have more potential to generate revenue. The SeCen has found that a trade fair can generate sales revenues of several million pesos, which is far more than can be generated from the provision of telephone, fax, and related services in a similar timeframe. Providing communication services is a high-volume, low-margin activity. This contrasts with what is perceived to be higher margin activities such as the conduct of training and commissions and fees from trade fairs and market linkage activities. Because the SeCen is pursuing a small market niche, low- volume, high-margin services offer more potential for generating revenue.

Prospects for Modern ICT-Based Services

Internet-based information services. The product concept test on the Internet and in-depth interviews with sectoral association members indicate that there is a market for information services for growth-oriented SMEs. Table 1, however, shows that the SeCen is less equipped to provide detailed technical or even market information than other more specialized agencies in the area. The SeCen does have an excellent network, through LCCI and its connections, and existing technology through which it could generate specific information needed by sectoral associations. Information services would fit well with the other services on which the SeCen is focusing because they would cater to growth-oriented businesses’ demand for assistance in diversifying products and markets. Therefore, there is an opportunity for the SeCen to be an information broker.

The main role of the information broker is not to be the source of specific information but to respond to requests for specific information by tapping into a network of specialized information sources. For the most part, the SeCen could now reach these sources quickly and efficiently via e-mail or the Internet. SeCen staff would need to acquire the knowledge and

Microenterprise Best Practices Development Alternatives, Inc. 33 skills to locate information quickly for customers through their network of specialized information suppliers on-line or through e-mail. The model is illustrated in Figure 3.18

Figure 3: The SeCen as an Information Broker

Specialized Sectoral Information Association Provider

Information Specialized Laguna Information Information Provider SeCen Sectoral Association

Specialized Information Provider Individual SME

Web page development and hosting. Web page development and hosting also may present an opportunity for the Laguna SeCen to use modern ICT to provide business services to its clients. Five percent of MSEs surveyed in Calamba expressed interest in developing a Web page. These MSEs were interested in the benefits of attracting new customers to their businesses through a new form of advertising. Although sectoral association members are very different from the businesses surveyed in Calamba, they also may be interested in this business benefit. Many sectoral association members are trying to penetrate new markets outside of Laguna. Having a web page may help them reach new customers. If it were to offer Web page development and hosting, through a connection to an Internet service provider, the Laguna SeCen would have an opportunity to offer its niche market—growth- oriented SMEs—another service that would help them build their businesses by reaching new markets. The SeCen should conduct a product concept test on Web page development and hosting with its current customers to learn if this is a good opportunity.

To provide this service, SeCen would need to invest in upgraded computer hardware and Web development software. It also would need to make a significant investment in upgrading its staff’s skills. If a feasibility study shows that the expected volume for this service is too low to justify the investment, the SeCen could instead refer clients to an established Web page developer and collect a referral fee.

Recommendations for SeCen Service Mix and Strategy

The previous discussion on the Laguna SeCen’s prospects for basic telecommunications and modern ICT-based services provides insights into the importance of differentiating between

18 For a more detailed discussion of this business model, see “Models for Internet-Based Information Services for Micro and Small Enterprises in the Philippines,” which is part of this series of papers.

Chapter Five—Conclusions 34 transaction facilitation services and business development services.19 Transaction facilitation services are those that help entrepreneurs conduct daily business. Business development services are those that help entrepreneurs improve and expand their businesses. The SeCen’s growth-oriented SME client base is looking for business development services. They generally no longer need basic transaction facilitation services through a common service facility. (See Table 10.) Similarly, the SeCen’s internal capacity is geared toward higher value-adding services that are delivered on a high-margin, low-volume basis.

Table 10: Demand and Competitive Situation for Business Services

Service Transaction Business Development Enterprise Type Facilitation Services Services Microenterprises, High awareness and Low awareness and need, but local economy based need, but commercial little competition because of low suppliers already exist demand and profitability in “profitable” locations Growth-oriented High awareness and High awareness and need, but MSEs need, but usually some competition from already have access to subsidized and/or specialized such services suppliers

Continuing the trend toward a focus on marketing and training would capitalize on the SeCen’s strengths and customer base. It would provide the SeCen’s clients with a single clear benefit—reaching new markets through both improved products and increased exposure to potential customers.

Dropping all transaction facilitation services, such as phone, fax, and photocopying, would allow the SeCen to focus on higher value-adding services. (This would not include dropping business registration services, which helps growth-oriented enterprises develop their businesses by joining the formal sector.) It also would be helpful for the SeCen to drop microfinance services. The SeCen has no competitive advantage in this type of services, and they do not fit with the benefits its clients are seeking. Instead, the SeCen could provide referrals to other microfinance providers.

With this clearer client benefit and niche market, the SeCen could then hone its internal capacity, service features, and marketing strategy to meet the demand of this market. (See Table 11.)

19 For a detailed discussion on these types of services, see MBP’s “Information and Communications Services for Micro and Small Enterprises in the Philippines: A Synthesis Paper,” the introduction to this series of papers.

Microenterprise Best Practices Development Alternatives, Inc. 35

Table 11: Summary of Laguna SeCen Business Model

Component Laguna SeCen—Business and Enterprise Skill Development MSE customer § Grow and develop businesses benefit § Long-term benefits § High value adding Customers § Businesses exclusively § 50+% SMEs, remainder larger businesses § Mainly manufacturers Service type § Business specific § Customized for groups of business clients (e.g., subsector specific) Current services § Training § Marketing assistance § Financial assistance § Business support (including transaction facilitation) Recommended § Drop transaction facilitation change in § Change to referral to financial services services § Add information provision and possibly Web page development Market type § Niche § Low volume § High margin § High unit price Market building § Increasing target clients’ awareness of service benefits strategy § Subsidy to induce trial § Building clients’ businesses to increase capacity to pay for services to build retention Ownership § Nonprofit association structure § Membership based Financial § Increasing demand from specific client group is key sustainability § Several year investment needed in development of customer base issues and services Internal capacity § Rapid adaptability to changing needs of relatively small client base needed § Showing value of services to customers § Knowledge is important § Highly skilled staff (or resource persons) for service delivery § Niche marketing to specific business customers

Chapter Five—Conclusions A-1

APPENDIX A

BRIEF DESCRIPTION OF THE CALAMBA CONSUMER SURVEY A-2 A-3

BRIEF DESCRIPTION OF THE CALAMBA CONSUMER SURVEY

The MSE survey makes use of tools from consumer-applied market research. In trying to understand the nature of MSE demand for ICT-based services in Calamba, the consumer research tried to determine the extent of information and communications equipment ownership. For some services, such as telephone calls, faxing and computer services, and Internet dial-up connections, it is expected that equipment ownership or service access will effectively decrease the potential demand for using common service facilities such as public calling offices or Internet cafés.

The research determined the MSEs’ level of awareness, the extent and manner of actual usage, the perception of importance, and the need to have various information, communication, and business development services. The survey also provides data that allow estimates of market size for particular services to be made. This information is useful in determining the relative attractiveness of a given service in terms of its revenue potential. The concept tests exposed MSEs to Internet access and Web page hosting and development to determine the potential market size as indicated by respondents’ willingness to use the service. The tests provided information on prospective consumers’ price sensitivity that is useful for deciding pricing for specific services.

SURVEY OBJECTIVES

1. Determine extent of information and telecommunications equipment ownership.

2. Assess awareness, usage, and importance of various information and communication technology and business development services as input to the service mix of the Laguna SeCen.

3. Conduct product concept tests on Internet access and Web page use to determine potential market for these modern ICT-based business services.

4. Obtain MSEs’ assessment of impact of information and communication technology on businesses.

SURVEY SAMPLING CONSIDERATIONS

Choice of area. Calamba was chosen as the area for the survey for the following reasons:

§ Calamba is where the Laguna SeCen is located. Part of the objective was to find out whether opportunities exist for the Laguna SeCen to expand its range of services to enterprises in Calamba. A-4

§ Calamba is an urban municipality. It was expected that the results of the survey would provide an interesting basis for comparing the situations between urban and peri-urban areas (PCO and cellular phone surveys were conducted under the same study).

Sample size. The sample size of 100 gives a margin of error of plus or minus 10 percent and a confidence level of 95 percent, which provides a fairly reasonable level of accuracy and confidence level for most estimation purposes.

Respondents. Micro and small enterprises were defined as those registered businesses with 25 or fewer workers. Respondents were randomly chosen from a list of businesses registered with the Calamba municipal office, which differentiates this from the PCO survey, which is a survey of users. The Calamba survey is an area-based survey.

The use of registered businesses as the sampling frame also effectively excludes the informal sector (i.e., unregistered) enterprises, which fall in the lower spectrum of microenterprises in terms of scale of operations and employment. This exclusion is consistent with the study’s objectives to look at information, communications, and business development services that are hypothesized to be useful or appropriate to more growth-oriented enterprises in the micro and small enterprise spectrum.

Generalizability. Inasmuch as the sample was randomly chosen, the results of the survey can be generalized to the population of MSEs in Calamba as defined. B-1

APPENDIX B

HISTORY OF LCCI AND LAGUNA SECEN B-2 B-3

HISTORY OF LCCI AND LAGUNA SECEN

An understanding of LCCI and how it decided to create the Laguna SeCen provides a useful context for understanding the position of the SeCen now. Since its formation in 1975, LCCI has experienced major changes. Three key changes led to the separation of the Laguna SeCen: revisions in ownership structure, an increase in attention to SMEs, and an increase in the range of services offered to SMEs.

OWNERSHIP STRUCTURE

There was an increasing recognition of the need for the chamber to have a distinct organizational identity separate from whoever was acting as president. This was backed up by changes in the organizational structure. From 1975 to 1994, the chamber only had ad-hoc and voluntary staff attached to whoever was chamber president at the time. In 1993, the chamber decided to set up a distinct secretariat with a full-time officer in charge and with its own separate office. Additional staff were eventually added to the chamber secretariat. These changes were capped by the decision to spin off the Laguna SeCen as a distinct profit center in 1997, different and separate from the LCCI Secretariat. This last move also reflected the chamber’s increasing awareness of the need to be demand led and sustainable.

With the separation, the LCCI secretariat continued to take charge of the chamber’s financial and administrative affairs, membership maintenance and expansion, advocacy, and management of special projects. LCCI designed the Laguna SeCen as the chamber’s service delivery arm (see Figure B-1).

Figure B-1: LCCI Organizational Structure

LCCI

Secretariat Operations Laguna SME SeCen

¨ Advocacy ¨ Training/seminars ¨ Special projects ¨ Business support services ¨ Membership recruitment ¨ Financial assistance and retention ¨ Marketing assistance

Under the new structure, the SeCen has its own staff and budget and has to raise its own revenues entirely from fees for services rendered. Before the separation, business development services were partly subsidized by membership fees. B-4

The German Federation of Small Business and Skilled Crafts (ZDH) was instrumental in the move to have an independent secretariat for the chamber. An apex body of German small business sectors, ZDH extended grants for the purchase of office equipment and shouldered part of the secretariat staff’s salaries. It also helped to set up LCCI’s training arm, the Laguna Business Institute, in cooperation with the Dr. F. Limcaoco Foundation.

In 1997, LCCI started cooperation with Swisscontact, a Swiss NGO engaged in strengthening the provision of business support services for the development of SMEs. With support from Swisscontact, LCCI conducted a study on establishing a business center in the first half of 1997. The concept called for establishing a separate division within LCCI to be the primary service delivery arm to cottage, small, and medium-sized enterprises. A major impetus for separating the provision of business support services was to test whether a service center for SMEs could become self-sustaining. The LCCI board approved the proposal in July 1997. Swisscontact committed to support the business center by providing financial support, technical advice, and human resource development.

IMPORTANCE GIVEN TO SMES

An increasing awareness of the importance of SMEs prompted LCCI to encourage them to become chamber members. The chamber amended its constitution and bylaws in 1993 and added sectoral membership and direct SME membership as new membership categories. LCCI made the annual membership fees for direct SME and sectoral members lower than for regular members. Membership fees are P3,000 (US$75) per year for regular members, P1,000 (US$25) per year for direct SME members, and P1,500 (US$37.50) for sectoral members. A board position of Vice President for Sectoral Affairs also was created to represent the chamber’s sectoral members. As Table B-1 shows, these changes successfully increased SME membership.

Table B-1: LCCI Membership Growth

1995 1997 Oct. 1998 Regular members 75 92 107 Sectoral association members 6 7 7 Total sectoral member base 300 300 600 SME direct members - 42 98 Source: LCCI records.

Several factors led LCCI to give increased attention to SMEs. First, LCCI was influenced by ZDH’s strong thrust for SMEs. Second, the Department of Trade and Industries in Laguna was then looking for an organization that could help it address the needs of SMEs. DTI– Laguna contracted the chamber to perform some of its functions, such as organizing training seminars. Third, the number of SMEs in the province was growing because of a steady influx of commerce and industry to Laguna. This meant that the chamber needed to have SME members to be considered a legitimate representative of the business sector in Laguna. Finally, on a global and national scale, SMEs were being given renewed attention. For B-5 example, the Philippine government passed a law called the Magna Carta for Small and Medium Enterprises.

WIDER RANGE OF SERVICES

From 1975 to 1994, the chamber focused primarily on conducting symposia and advocating on issues of interest to members. From 1994 to 1997, the chamber expanded its range of activities and services to include membership recruitment, special projects, training seminars, credit, marketing services through trade fairs, subcontracting between big companies and SMEs, and business name registration.

The range of services was rationalized with the separation of the Laguna SeCen. The secretariat handled matters related to the functioning of the chamber, including finance and administrative affairs, advocacy, and membership maintenance and expansion. It also handled special projects. The Laguna SeCen absorbed all the business support and development services of the chamber.

LESSONS FROM THE EVOLUTION OF LCCI

The review of LCCI’s history clearly shows the roles that donor agencies, such as the ZDH and Swisscontact, played and continue to play in changing organizational perspectives and focus. The ZDH’s belief in using the business chamber as an economic development catalyst and the importance it placed on professional management were key values that guided its assistance program to LCCI. Swisscontact’s combination of subsidies, revenue-based incentives, and technical assistance also sought to increase the SeCen’s potential for viability and sustainability through demand-led services.

The movement of LCCI from informal secretariat to formal secretariat and eventually to independent business service center highlights the importance of assigning professional staff to the management of service provision. It was the appointment of a full-time executive director that provided the needed push to move LCCI forward in terms of its services to members and MSEs. The eventual separation of the Laguna SeCen as a separate profit center provided the appropriate push toward being more demand led.

LCCI started introducing new services when key staff were exposed to other institutions through site visits. This opportunity was a strong stimulus to introduce changes and improvements in LCCI and the Laguna SeCen.

The changes in LCCI were seldom limited to one area of the organization. For example, a change in membership focus was accompanied by changes in membership policy, structure, and services. These reorganizations helped LCCI remain internally and externally consistent.

The changes that LCCI went through are summarized in Table B-2. B-6

Table B-2: Evolution of the Laguna Chamber of Commerce and Industry

1975-1994 1994-1997 1997-present § Attached to § Set up distinct § Separated secretariat Structure chamber secretariat with full-time and service functions president officer in charge, with into two entities: LCCI § Voluntary or ad- own office secretariat and Laguna hoc support staff § Added board position of SeCen Vice President for § SeCen treated as profit Sectoral Affairs to center represent sectoral members § Set up Laguna Business Institute as training arm § Mostly larger § Introduced sectoral § Priority clients defined Membership Base companies membership as as cottage, small, and membership category medium-sized for associations enterprises in Laguna § More attention given to and nearby towns in SMEs through lowered Batangas (including membership fees for non-members) direct members and sectoral members § Symposia and Expanded range of Secretariat Services/ advocacy on services: § Financial and Activities issues of interest § Membership administrative affairs to members (e.g. development and § Advocacy taxation, recruitment regulation) § Membership § Advocacy maintenance and § Training expansion § Trade fairs § Special projects § Other business support Service Center services § Training § Phone service, fax, § Business support photocopying, typing, services secretarial § Financial services § Marketing assistance C-1

APPENDIX C

CALCULATION OF POTENTIAL INITIAL MARKET SIZE AND REVENUE MAXIMIZING PRICE C-2 C-3

CALCULATION OF POTENTIAL INITIAL MARKET SIZE AND REVENUE MAXIMIZING PRICE

Information to calculate the potential initial market size and the revenue maximizing price for a product is gathered during the product concept test.

POTENTIAL INITIAL MARKET SIZE

To determine the potential initial market size, the researcher determines respondents’ interest in purchasing a service. The respondents listen to a description of the service. After the description, they are asked for their comments. Then they are asked if they are:

§ Definitely interested in buying the service; § Probably interested in buying the service; § Probably not interested in buying the service; or § Definitely not interested in buying the service.

The proportion that respond that they are definitely interested in buying represents the proportion of MSEs that make up the potential initial market for the service. Multiplying the proportion of MSEs definitely interested in buying the service times the number of MSEs in the population covered by the service yields the potential initial market size. In this case:

% definitely interested in buying Internet access: 8.5% x number of registered enterprises in Calamba: 3,300 x % of registered enterprises in Calamba that are MSEs: 80% equals: 224 MSEs

REVENUE MAXIMIZING PRICE

The revenue maximizing price is calculated using a price sensitivity test. The key principle of this test is that people who want to buy a service will buy only if it costs up to a certain amount—the maximum they are willing to pay. If it costs more than this, they will do without the service.

To determine the maximum respondents are willing to pay, respondents who say they were definitely or probably interested in buying a service are shown a price scale: a piece of paper with a range of prices for the service on it. For Web page development, the scale looked like this:

P1,200 P1,350 P1,500 P1,650 P1,800 P1,950 P2,100 P2,250 P2,400 P2,550 P2,700 P2,850 P3,000 P3,150 P3,300 C-4

Then respondents are asked, “At what price would you no longer be interested in buying the service?” The answers yield a table, like Table C-1, which shows the percentage of respondents who are still willing to purchase the service at that price. For example, in this case, at P1,200, 42 percent are still interested in buying Web page development services. At P1,800, only 26 percent are still interested in buying. At P2,850, the number who are interested decreases even more to 13 percent.

Table C-1: Web Page Development Price Sensitivity Test

Price per Page % Still Willing to Revenue at Price (Pesos) Buy at Price (Pesos) 1,200 42% 504 1,350 37% 499.50 1,500 26% 390 1,650 26% 429 1,800 26% 468 1,950 26% 507 2,100 21% 441 2,250 16% 360 2,400 16% 384 2,550 13% 332 2,700 13% 351 2,850 13% 371 3,000 11% 330 3,150 11% 347 3,300 0% 0

The revenue is calculated as the percent willing to purchase times the price of purchase. This is shown in the last column of the table. The “revenue maximizing price” is the price at which the service earns the most revenue. In this case, it is P1,950 per page for Web page development.

Note that the price sensitivity test does not provide any information about the costs for the service or whether a provider can cover the costs. It only measures the potential revenue from provision of the service at various prices. It is possible that the revenue maximizing price is not enough for a provider to cover costs unless the provider is able to increase demand beyond what it was when the test was done.