Post on 17-Aug-2015
STRUCTURE-CONDUCT AND PERFORMANCE OF THE INFORMAL METAL
MANUFACTURING INDUSTRY IN ZIMBABWE: IMPLICATIONS TO
STAKEHOLDERS IN THE AGRICULTURAL SECTOR
by
MAKATE CLIFTON
A thesis submitted in partial fulfilment of the requirements for the Master of Science in
Agricultural and Applied Economics
Department of Agricultural Economics and Extension
Faculty of Agriculture
University of Zimbabwe
June 2013
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CERTIFICATION OF DISSERTATION
The undersigned certify that they have read, and recommend to the Department of Agricultural
Economics and Extension for acceptance, the thesis entitled:
Structure-Conduct & Performance of the informal metal manufacturing industry in
Zimbabwe: Implications to stakeholders in the Agricultural sector
Submitted by Clifton Makate in partial fulfilment of the requirements for the degree of Master
of Science in Agricultural and Applied Economics (MAAE)
Approved:
Major supervisor Co-supervisor
Dr S. Siziba Mr.B.T. Hanyani-Mlambo
Signed.......................... Signed………………..
Date……/……./……… Date……/……./……...
Associate supervisor
Dr. W. Sadomba
Head of Department (Dr J. Mutambara)
Signed……………….
Date……./……./……
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DEDICATION
To Mom and Dad
iii
ABSTRACT
There is proliferation of informal activities especially in developing countries yet they still
remain unrecognised and not integrated into national economic development plans. The informal
activities are playing a very crucial role in terms of contribution to GDP and the transformation
of the economy. Of importance to the study is the proliferation of the informal metal fabrication
activities that are contributing to the supply of agricultural technologies (equipment, implements,
and tools) in Zimbabwe. There is a shortage of intermediate technologies by the new crop of
poor resource endowed farmers (smallholder farmers) following a new agrarian reform that
replaced large-scale commercial farmers with smaller family run farms. Also the collapse of the
formal industry that traditionally supported large scale farmers with farming equipment and
implements worsened the shortages. The main objective of the study was therefore to assess the
efficiency of the informal metal manufacturing industry and drawing implications for
stakeholders in the agricultural sector. As suggested in economic theory the study used the
Structure, Conduct and Performance (S-C-P) framework to assess efficiency of the industry and
also in drawing implications of results to smallholder farmers. The study is based on data from
200 micro and small to medium informal metal manufacturing enterprises gathered through
surveys in five major cities Harare, Bulawayo, Mutare, Rusape and Chitungwiza and secondary
data from the ministry of Small to Medium Enterprises’. Results of the survey show that the
informal metal industry is competitive. The industry is not highly concentrated i.e. firms in the
industry lack market power. Products in the industry are standardized and there is discipline in
the market in general. In terms of behaviour in markets, firms practice close to marginal cost
pricing, collusive behaviour in production and marketing is minimal. Moreover, the industry is
succeeding in generating benefits for consumers. This is so because firms in the industry are
profitable, prices in the industry are lower compared to prices on same products by formal
competitors, customer satisfaction is high and there is no consumer exploitation in the market.
Also, the industry was found to have great potential as indicated by the profitability of firms.
Both firm behavioural factors and firm specific factors were found to influence performance in
the industry. The conclusion was that the informal metal industry is making a positive and
efficient contribution in the supply chain of agricultural materials to smallholder agriculture.
Farmers being major customers in the industry are better off in sourcing agricultural materials
from the industry because of the good and guaranteed customer services, lower prices amongst
others services. As recommendations the researcher suggests government should integrate
informal metal fabrication activities in national economic development plans in order to enhance
benefits from the sector to the rest of the economy. Owners of the metal fabrication enterprises
should work on improving operations in their businesses, i.e. keeping records, and improve on
general management. They should focus more on their pricing methods, type of products they
produce, and they should stay in business for longer periods so as to influence their performance
positively.
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ACKNOWLEDGEMENTS
A lot of people have contributed greatly towards the success of this thesis. Firstly, I would like
to express my sincere gratitude to my dear supervisors Dr S Siziba and Mr H.Mlambo within the
department of Agricultural Economics and Dr W. Sadomba within the Centre for Applied Social
Science department who have always had great confidence in me and my work and provided me
guidance and support without reservation throughout the writing process. I would not have made
it without their tremendous effort, knowledge and wisdom. Thank you very much.
Secondly, I would also want to thank the Centre of Applied Social Science (CASS) for their
research project that led to the Collection of Data for carrying out this study. To my colleagues,
the quality of this work would have been compromised if it was not for the sense of competition
and purposefulness that you have always shown throughout, thank you.
Thirdly, I would also want to thank the Germany Academic Exchange Services (DAAD) for
their financial support during the time of my study, thank you.
Last but not least I would like to thank my family for their unconditional love and support
throughout the period of my study. Without you, I would not have completed this challenging
task and long journey. Thank you!
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CONTENTS
DEDICATION ...................................................................................................................................... ii
ABSTRACT ......................................................................................................................................... iii
ACKNOWLEDGEMENTS ................................................................................................................ iv
CONTENTS ........................................................................................................................................... v
LIST OF TABLES ............................................................................................................................ viii
LIST OF FIGURES ............................................................................................................................ ix
LIST OF ACRONYMS ......................................................................................................................... x
CHAPTER ONE: INTRODUCTION.................................................................................................. 1
1.1 BACKGROUND ............................................................................................................................. 1
1.2 RESEARCH PROBLEM ................................................................................................................ 6
1.3 RESEARCH QUESTIONS ............................................................................................................. 8
1.4 RESEARCH OBJECTIVES ............................................................................................................ 8
1.5 RESEARCH HYPOTHESES .......................................................................................................... 9
1.6 JUSTIFICATION OF STUDY ....................................................................................................... 9
1.7 ORGANISATION OF STUDY .................................................................................................... 10
CHAPTER TWO: LITERATURE REVIEW .................................................................................. 11
2.1 INTRODUCTION ......................................................................................................................... 11
2.2 DEFINITION OF KEY TERMS ................................................................................................... 11
2.3 STUDY CONCEPTUAL FRAMEWORK ................................................................................... 14
2.4 STRUCTURE CONDUCT AND PERFORMANCE (S-C-P): AN OVERVIEW ........................ 16
2.4.1 Literature on the overview...................................................................................................... 16
2.4.2 Problems of the s-c-p approach in estimation ........................................................................ 20
2.4.3 Criticism of the approach ....................................................................................................... 22
2.5 STRUCTURE-CONDUCT-PERFORMANCE: EMPIRICAL STUDIES AND EXAMPLES .... 24
2.5.1Examples of S-C-P of industries ............................................................................................. 24
2.5.2 Previous studies on structure conduct and performance of industries .................................... 25
2.6 FACTORS AFFECTING SMALL ENTERPRISE’S PERFORMANCE. .................................... 29
2.7 INSIGHTS FROM THE LITERATURE ...................................................................................... 31
CHAPTER THREE: RESEARCH METHODS............................................................................... 33
3.1 INTRODUCTION ......................................................................................................................... 33
3.2 DATA SOURCES ......................................................................................................................... 33
3.3 SAMPLING .................................................................................................................................. 33
3.4 METHODS AND TOOLS FOR DATA COLLECTION ............................................................. 34
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3.5 DATA, PROCESSING AND ANALYSIS ................................................................................... 35
CHAPTER FOUR: OVERVIEW OF THE INFORMAL METAL INDUSTRY .......................... 40
4.1 INTRODUCTION ......................................................................................................................... 40
4.2 OVERVIEW OF INFORMAL SECTOR SITES CHARACTERISTICS .................................... 40
4.3 SOCIO-ECONOMIC PROFILES OF FIRM OWNERS .............................................................. 40
4.4 FIRMS’ CHARACTERISTICS AND OTHER ATTRIBUTES ................................................... 43
4.5 GOODS MANUFACTURED IN THE INDUSTRY .................................................................... 48
4.6 CUSTOMERS IN THE INDUSTRY’S MARKET ...................................................................... 51
4.7 CONSTRAINTS ........................................................................................................................... 52
4.8 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS ............................................... 53
CHAPTER FIVE: STRUCTURE, CONDUCT AND PERFORMANCE OF FIRMS IN THE
INFORMAL METAL INDUSTRY ................................................................................................... 55
5.1 INTRODUCTION ......................................................................................................................... 55
5.2 COMPETITIVENESS OF THE INDUSTRY............................................................................... 55
5.2.1 Market Concentration ............................................................................................................. 55
5.2.2 Nature of conditions of entry into the industry ...................................................................... 56
5.3 BEHAVIOUR OF FIRMS IN THE INDUSTRY ......................................................................... 58
5.3.1 Price discovery methods, price setting behaviours and other tactics in pricing ..................... 58
5.3.2 Selling practices and Marketing ............................................................................................. 60
5.3.3 Grading, Advertising, Research and Development ................................................................ 63
5.3.4 Information and Communication Technologies (ICT’s) used in business ............................. 66
5.3.5 Other conduct ......................................................................................................................... 67
5.4 SUCCESS OF THE INDUSTRY IN PRODUCING BENEFITS FOR CONSUMERS .............. 67
5.4.1 Prices as compared to formal competitors and producers’ share of the price ........................ 68
5.4.2 Profitability of firms in the informal metal manufacturing industry ...................................... 70
5.4.3 Expected future performance of informal metal manufacturing firms ................................... 72
5.4.4 Customer satisfaction in the industry ..................................................................................... 73
5.5 FACTORS INFLUENCING PERFORMANCE OF FIRMS IN THE INFORMAL METAL
INDUSTRY ......................................................................................................................................... 74
5.5.1 Descriptive statistics of the sample on variables in regression .............................................. 74
5.5.2 Multiple regression results ..................................................................................................... 76
5.6 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS ............................................... 78
CHAPTER SIX: IMPLICATIONS AND RECOMMENDATIONS .............................................. 82
6.1 INTRODUCTION ......................................................................................................................... 82
6.2 IMPLICATIONS ........................................................................................................................... 82
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6.2.1Implications of Informal industry Structure on smallholder farmers ...................................... 82
6.2.2 Implications of Conduct (behaviour of firms) on smallholder farmers .................................. 83
6.2.3 Implications of Performance of the industry on smallholder farmers .................................... 84
6.3 RECOMMENDATIONS .............................................................................................................. 85
6.3.1Recommendations to policy makers ........................................................................................ 85
6.3.2 Recommendations to owners of informal sector enterprises .................................................. 86
6.3.3 Recommendations to farmers ................................................................................................. 87
6.4 AREAS OF FURTHER RESEARCH ........................................................................................... 87
LIST OF REFERENCES ................................................................................................................. 89
LIST OF APPENDICES ..................................................................................................................... 97
Appendix 1: Firm Owners’ Questionnaire .......................................................................................... 97
Appendix 2: Consumer Interview Guide ........................................................................................... 101
Appendix 3: Observation Guide ........................................................................................................ 102
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LIST OF TABLES
Table 1.1 Members in the formal agricultural implements and equipment supply chain ......... 2
Table 3.1 Major areas included in the study ............................................................................ 34
Table 3.2 Sample distribution and composition ...................................................................... 34
Table 3.3 Classification of industry based on market concentration ....................................... 36
Table 3.4 Variables and measurement ..................................................................................... 39
Table 4.1 Summary statistics of the firm owners’ socio-economic attributes ........................ 41
Table 4.2 Firm age statistics .................................................................................................... 43
Table 4.3 Firm employment statistics 2010-2013 ................................................................... 46
Table 4.4 Values of additional investments made to the firms in USD$ ................................ 47
Table 4.5 Type of products produced in the informal metal industry ..................................... 49
Table 4.6 Agricultural product categories in the informal metal industry .............................. 50
Table 5.1 Summary statistics on total capital costs of starting the firm .................................. 56
Table 5.2 Summary statistics on Grading, Advertising and Research and Development ....... 63
Table 5.3 Comparison of formal and informal prices on selected products ............................ 68
Table 5.4 Producer’s share of the price statistics .................................................................... 69
Table 5.5 Descriptive statistics on net profits from 2010-2012 .............................................. 70
Table 5.6 Descriptive statistics on the Tobin’s q ratio calculations ........................................ 73
Table 5.7 Descriptive statistics on regression variables .......................................................... 75
Table 5.8 Multiple regression results on factors influencing performance ............................. 76
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LIST OF FIGURES
Figure 2.1 Illustration of the Conceptual framework .............................................................. 16
Figure 2.2 Inter-linkages between Public policy and S-C-P elements .................................... 24
Figure 4.1 Experience of firm owner when firm was started .................................................. 42
Figure 4.2 Age distribution of firms in the informal metal industry ....................................... 44
Figure 4.3 Sources of capital to start the firm ......................................................................... 45
Figure 4.4 Firm ownership types in the informal metal industry ............................................ 45
Figure 4.5 Employment by gender from 2010-2013 ............................................................... 47
Figure 4.6 Types of goods manufactured ................................................................................ 49
Figure 4.7 Customers in the informal metal industry’s market ............................................... 52
Figure 5.1 Distribution of worth of capital used to start firm ................................................. 57
Figure 5.2 Price discovery methods ........................................................................................ 59
Figure 5.3 Price setting behaviours in the informal industry .................................................. 59
Figure 5.4 Ways of selling products ........................................................................................ 61
Figure 5.5 Marketing strategies employed by firms in the industry ........................................ 62
Figure 5.6 Criteria used for grading products ......................................................................... 64
Figure 5.7 Modes of advertising used ..................................................................................... 65
Figure 5.8 ICT’s used in business ........................................................................................... 66
Figure 5.9 Product returns by customers ................................................................................. 67
Figure 5.10 Reasons for charging lower prices than those of formal competitors .................. 68
Figure 5.11 Distribution of profits in the year 2010 ................................................................ 70
Figure 5.12 Distributions of profits in 2011 ............................................................................ 71
Figure 5.13 Distributions of profits in 2012 ............................................................................ 71
Figure 5.14 Distributions of profit margins of firms in the informal metal industry .............. 72
x
LIST OF ACRONYMS
ADMA: Agricultural Dealers and Manufactures Association
CR Concentration Ratio
CZI Confederation of Zimbabwe Industries
FTLR Fast Track Land Reform
GDP Gross Domestic Product
GNU Government of National Unity
HHI Herfindal-Hirshchan Index
ICT Information and Communication Technology
MDG’s Millennium Development Goals
MIS Management Information Systems
MR Marginal Revenue
NGO Non-Governmental Organisation
OECD Organisation for Economic Cooperation and Development
OLS Ordinary Least Squares
POTRAZ Postal and Telecommunications Regulatory Authority of Zimbabwe
ROA Return On Assets
SCP Structure Conduct Performance
SME’s Small to Medium Enterprises
SSA Sub-Saharan Africa
TC Total Cost
TR Total Revenue
USD United States Dollars
ZIMSTATS Zimbabwe Statistical Agency
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CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND
The unstable economic environment that has prevailed for the past decade or so has had a
devastating effect on much of the economic activities in Zimbabwe. Dating back to the year 2000
when Zimbabwe embarked on the fast track land reform programme up to the period just before
the introduction of the multi-currency system1, serious changes have been felt in the country as
a whole. The period up to 2008 saw increasing quasi-fiscal activities by the Reserve bank of
Zimbabwe. A lot of stakeholders strongly believe that these quasi-fiscal activities contributed
greatly to the further decline in economic activity. It is within the same period and for the first
time the country experienced hyperinflation2. Official macroeconomic statistics as reported by
the Zimbabwe National Statistics Agency (ZIMSTATS) show inflation figures between the
years 2000 and 2008 as follows: 55.2% in year 2000,112.22% in 2001,198.93% in 2002,
598.75% in 2003, 132.75% in 2004, 585.84% in 2005, 1281,11% in 2006, 66212,3% in 2007
and 2310000000% in 2008. The harsh hyper-inflationary environment that prevailed during this
time forced lots of companies in both manufacturing and service industries to operate below their
normal capacities with many of them shutting down completely. The effects of the inflationary
environment were however worse in the 2006 to 2008 period. In addition, the combination of
inflation and a fixed exchange rate regime that was in place is believed to have led to the
resurgence of the black market3, a decline in capacity utilisation within the informal
manufacturing sector and a landslide fall in production. As a result there were shortages of
almost all goods and services. However, it is important to note that with the birth of the
1 The system in which Zimbabwe officially abandoned its own currency in favor of foreign currencies like the U.S.
dollar, South African rand, British pound, Botswana pula among other recognized currencies. 2 Hyperinflation is when the general prices of goods and services in the economy rises at a rate of 50% or more per
month as a result of the near total collapse of a country’s monetary system, and thus rendering its currency almost
worthless. 3 A black market or underground economy is the market in which illegal goods and services are traded.
2
Government of National Unity (GNU) that saw the introduction of the multicurrency system, the
formerly unstable macroeconomic environment stabilized. Most notably is the stabilization of
prices and the significant decline in underground economic activity. The multicurrency system
meant the official use of foreign currencies like the United States (U.S) dollar, the South African
(S.A) rand, and the Botswana pula among other currencies which were formally illegal in
Zimbabwe. This forced much if not all of the underground activity in foreign currency to
disappear. There is not much evidence however of an improvement in activity in the
manufacturing sector as most companies are still closed with few of them operating below
capacity. The trends in the macroeconomic environment as highlighted above gives us enough
evidence and justification to strongly believe that our hypothesis as to why there is a very low
level of activity in the formal industries even up to this date. Of particular interest in this study
is the diminished role of formal players in the agricultural equipment and implements supply
chain. In Zimbabwe, the main players in this supply chain of agricultural equipment and
implements are members of the Agricultural Dealers and Manufacturers’ Association (ADMA)
and the Irrigation Institute of Zimbabwe. In table 1.1 below, we give a list of the members and
the products they supply:
Table 1.1 Members in the formal agricultural implements and equipment supply chain
ADMA MEMBERS IRRIGATION INSTITUTE MEMBERS
Company Products Company Products
Hastt Zimbabwe Animal drawn ploughs Tube and pipe
industries
Irrigation piping and fitting,
borehole casings
Sabata Holdings Combine harvesters,
tractors
Turnall fibre cement Pressure pipes
Zimplow Animal drawn ploughs Dore and Pitt Pipes, and fittings, pumps,
borehole drilling equipment
William Bain and
Co
Tractors and
spares,trailers,water carts
Irrig8 Irrigation equipment and
design
AgVenture Crop protection equipment Moving water
industries
Irrigation pipes
Brown
engineering
Tobacco curing equipment,
fans,trailers
Wright rain Filtration pumps,sprinklers
Precision grinders Land preparation equipment
e.g. ploughs and disc
harrows+ crop processing
equipment
Waterflo engineering Borehole pumps,borehole
drilling equipment
3
Mounted tractors Tractors, spares Conchrane pumps Centrifugal pumps for
irrigation
Farmec Tractors Almin metal industries Aluminium irrigation tubes
Source (Mafu, 2011)
The roles of the major players given in the table above have declined mainly due to the economic
downturn (Mafu, 2011). The current operating capacities of players mentioned above are given
in the 40% to 50 % region. Some of the direct challenges that the above players are currently
facing include the following: loss of market share due to competition from cheap imported
equipment, reduced demand for products due to unaffordability by customers, lack of access to
long-term financing by farmers which affects their purchasing power, Shortage of skilled labour
due to skills flight, low productivity due to lack of working capital, dilapidated and antiquated
machinery due to inability to recapitalise, lack of export incentives causing uneven playing field
on the export market as competitors like South Africa have packages of those incentives, high
costs of raw materials e.g. steel and , high costs of transport to regional markets
The above mentioned challenges still hamper operations in production and marketing activities
by the major players in the agricultural equipment and implements supply chain. As a result,
there is evidence of shortages of some essential equipment and implements demanded by the
small holder farmers in the formal market. In addition, some of the equipment and implements
found on the formal market are not affordable to the farmers due to higher prices and lack of
long-term financing by the smallholder farmers. The birth of the Fast Track Land Reform
(FTLR) program of 2000 also led to an increase in the number of the smallholder farmers. This
resulted in an increased demand for the equipment and implements as the newly resettled farmers
lack these essential inputs to carry out their farming activities. This poses problems for the
Zimbabwean agriculture particularly to the resettled and or the rest of small holder farmer since
the implements and equipment constitute/are essential inputs for a successful farmer.
4
One of the questions an individual may ask will be, why the emphasis on the smallholder
agriculture sector? This sector plays an essential role in ensuring food security, economic growth
and employment creation (Made, 2010). It is characterized by diversified farming of crops and
livestock production. Food crops are grown right alongside cash crops, for example maize,
cotton and vegetables. The crops grown by these smallholder farmers can be grouped as follows:
plantation crops (sugar cane, coffee, tea), horticultural crops (fruits and vegetables), and general
field crops (maize, wheat, cotton, sunflower, millets, groundnuts, sugar beans). Livestock is
categorized into three major areas of production: beef, dairy and small livestock (e.g., poultry,
goats, sheep, and pigs).
The short description given above shows that the smallholder sector is an equally vital sector to
Zimbabwean agriculture as evidenced by a balanced set of activities that include essential crop
(cereal and cash crops) and livestock activities. Moreover, due to the multitudes of functions
involved, the smallholder sector also offers the greatest potential for reviving agricultural and
economic development in Zimbabwe. This sector is however, faced with a number of challenges
that limit production and even marketing of agricultural produce. Chief amongst the problems
is the lack of adequate equipment, implements and other essential tools to use in their production
activities as mentioned earlier. The reduced role played by the dealers in the supply chain of
farm equipment and implements is to blame for the shortage in supply of the essential input.
Another question a lot of stakeholders may still want to ask is; Why the emphasis on Agriculture?
In brief: Agriculture still remains a major sector to the economy of Zimbabwe as it is the main
source of livelihoods and one of the major employers. Year 1998 Statistics show that agriculture
contributed about 15% of Gross Domestic Product (GDP) and 60% of raw materials. In addition;
the sector provided 70% of employment + livelihoods and 40% of merchandise exports with
tobacco being the most important in the same year Mudimu et al, (1999). In 2011, agriculture
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contributed about 20.4% to GDP with the service sector and industry contributing about 54.9%
and 24.6% respectively GDF, (2012).
The researchers believe that the diminished roles of players in the agricultural equipment and
implements supply chain have greatly affected Zimbabwean agriculture. We know that capital
equipment is one of the potential factors that can raise productivity. It therefore means that we
can safely blame the low activity by the dealers in the supply chain to the dwindling levels of
productivity experienced by the small holder farmers. Considering the fact that agriculture has
very strong linkages with almost every sector within the economy as we mentioned earlier,
problems hindering growth of the sector therefore affects the rest of the economy.
However, there is ample evidence worldwide of the growth of the underground economy also
known as the informal economy especially in developing economies Zimbabwe included. In
theory it is believed that there is a strong positive relationship between the economic downturn
of a country and the growth of the informal sector in that country and this has been found true
for Zimbabwe as well (Chidoko et al, 2011). Several other studies have been done for Zimbabwe
giving evidence of the growth of the informal activities. (See Chidoko and Makuyana, 2012)
By definition, the informal sector refers to the market-based production of goods and services,
whether legal or illegal that escapes detection in the official estimates of GDP Smith, (1994). Of
importance in Zimbabwe is the growth of the informal metal manufacturing and service sector
that the researcher believes is contributing to the agricultural equipment and implements supply
in Zimbabwe. The informal metal manufacturing sector by definition becomes now those micro
and small to medium unregistered firms and business operations that focus on metal fabrication
activities that escape detection in the official estimates of GDP. The sector however, produces a
variety of other metal products besides agricultural equipment and implements which include
building materials, industrial tools, equipment, machinery and much other household equipment.
6
We strongly believe that this sector is helping a lot in closing the gap that is left in the market
by the contraction in operation by formal players in the supply chain. Moreso, we further believe
that this underground market is also serving as a cheaper alternative source of implements and
equipment for the smallholder farming community in the country. Adding to the above, we
further hypothesize that the informal metal fabrication activities are playing a very important
role in the agricultural implements and equipment supply chain.
1.2 RESEARCH PROBLEM
Evidence from literature indicates that smallholder farmers in Zimbabwe are facing numerous
challenges in their production activities. One of the problems is the lack of adequate farming
equipment, implements and tools to boost their production. The lack of well-functioning
agricultural equipment and implements supply chain for the small holder farmers is contributing
and worsening the problem. Food and Agricultural Organisation (FAO) studies have also
provided some evidence to confirm this problem. One of the studies by FAO contends that
despite some decades of developmental efforts in Sub-Saharan-Africa (SSA), the lack of a proper
functioning input supply chain for small to medium sized farms has resulted in acute farm power
shortages (FAO, 2009). Consequently, this negatively impact on agricultural production and
rural livelihoods. Chief amongst the causes of lack of a proper functioning supply chain of farm
equipment is the diminished role of the major dealers in the supply chain as discussed above.
It is also important to note that the problems of acute power shortages are also a result of lack of
adequate finance to meet the costs of acquiring the equipment and implements from the formal
dealers in the supply chain i.e. Farmec, Zimplow, Hastt Zimbabwe, Dore and Pitt just to mention
a few (FAO,2005). In addition, it is worth mentioning also that the pricing of most of the
equipment and implements in the formal market is worsening the shortages as the prices are not
affordable to the resource poor farmers. The problem is mainly affecting the smallholder farmers
7
particularly the newly resettled farmers that are known to be resource poor. Both crop production
and livestock production have been affected as a result. Investigations into the impact of farm
power shortages have shown that it is a key component of inadequate livelihoods. A reduced
availability of this vital input into agricultural production systems is a source of poverty in Sub-
Saharan Africa (FAO, 2005). Attempts have been made at national level to solve the problem.
Availing finance to the farmers has been one of them but attempts have been less successful
because of other problems.
However, with evidence of growth of informal metal fabrication activities in Zimbabwe since
independence the researcher believes that the sector might be playing an important role in the
supply chain of agricultural equipment and implements amongst many other roles. The
developmental problem would therefore be to predict the growth pattern and path of the informal
sector especially the metal fabrication sector. This has a bearing on meeting the technology i.e.
equipment, tools and implements need of the smallholder farming sector and in turn productivity
growth of the sector. As a result growth within the smallholder sector may improve prospects of
meeting Millennium Development Goals (MDG’s) i.e. improvement in food supply and thus a
reduction in hunger.
The corresponding research problem is to assess the growth prospects of the informal metal
industry. To do this, microeconomic theory suggests verifying /assessing the structure, conduct
and performance of the industry.
The major contribution of this study is to assess the structure, conduct and performance of the
metal informal industry. The results of the SCP have important implications on the production
and supply of farm equipment, implements and tools as well as other metal products for the
smallholder farming community. The study results provide policy design material. To the best
8
of my knowledge, no such study has been done before and this was the justification for carrying
out this research.
1.3 RESEARCH QUESTIONS
The research will be guided by the following questions
i. How is the informal metal industry structured?
ii. How is business conducted in the informal metal industry?
iii. How successful are firms in the informal metal industry in producing benefits for
consumers?
iv. What are some of the factors that influence performance of small to medium firms in the
informal metal industry?
1.4 RESEARCH OBJECTIVES
Broadly the study seeks to determine the structure-conduct and performance of small to medium
firms in the informal metal industry in Zimbabwe and draw implications to the production and
supply of agricultural equipment and implements and various other metal products.
The research will have the following as the specific objectives:
i. To determine the structure of the informal metal industry i.e. the factors that determine
the competitiveness of the industry.
ii. To identify the patterns of behaviour adopted the by small to medium firms in the
informal metal industry to adjust to the markets in which they sell.
iii. To determine the performance of the informal metal industry i.e. the success of the
industry in producing benefits for consumers.
iv. To determine some of the factors that influence performance of firms in the informal
metal industry.
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1.5 RESEARCH HYPOTHESES
The study will have the following research hypotheses:
i. The informal metal industry is perfectly competitive. I.e. there are very low barriers to
entry and exit, there are many micro-and small to medium firms, no product
differentiation and the costs of starting businesses are very low.
ii. Conduct in the informal metal industry takes the form primarily of price based
competition. Advertising, research and innovation, product differentiation are not
common practices.
iii. Firms in the informal metal industry are successful in producing benefits to customers
i.e. they set prices lower prices than those of formal competitors and are making profits
at the same time.
iv. Firm performance is determined/influenced by the conduct and structure of the market.
I.e. structure and conduct factors significantly influence firm’s performance.
1.6 JUSTIFICATION OF STUDY
An understanding of the structure, ways of conducting business and the general performance of
the informal metal industry will be very important. The understanding is vital in the assessment
of the importance of the informal metal industry in production and supply of agricultural
equipment and implements and various other products. The analysis is vital to various
stakeholders i.e. the smallholder farmers, owners of the micro and small to medium enterprises
in the informal sector and policy makers. To the farmers the analysis will help them in decision
making. From the analysis smallholder farmers can get well informed on whether to rely on the
informal metal industry as their source of agricultural equipment, tools and implements and other
metal products. Issues like pricing, quality of produce and variety of products, customer service
etc. will be vital in making the decision. The farmers can usefully make the conclusions from
10
the analysis to their benefit in making the input procurement decisions from the informal sector.
The analysis will be also of importance to the owners of the enterprises themselves. An
understanding of the structure of the informal metal industry, the conduct and the performance
of the informal metal industry will help them in decision making also. Owners of the micro
enterprises can use findings to adjust their ways of doing business and improve profitability.
Firm owners can work on various elements in their businesses i.e. research and development,
pricing, advertising etc. to improve their performance. In addition, the analysis will also be
important to policy makers. Results from the analysis provide policy design material. The
Ministry of Small to Medium Enterprises’ (SME’s) for example can use the results of the
analysis to intervene in the informal metal industry in trying to enhance benefits from the sector
to the rest of the economy. Furthermore, because of the strong linkages agriculture has with the
rest of the sectors of the economy, results from this study will be crucial in steering the economy
in the right direction in terms of employment, GDP growth and better standards of living.
1.7 ORGANISATION OF STUDY
The rest of the study is organized as follows; chapter 2 gives a review of the relevant literature,
chapter 3 discusses the research methods used in the study. Characterization i.e. an overview of
the informal metal industry follows in chapter 4. Chapter 5 details the structure-conduct-
performance of the informal metal manufacturing industry as well as give the factors influencing
firm performance in the industry. Lastly, chapter 6 gives an important discussion about the
implications of the S-C-P results to stakeholders in the agricultural sector, policy
recommendations as well as some areas for further study.
11
CHAPTER TWO: LITERATURE REVIEW
2.1 INTRODUCTION
In this section, we provide a review of the relevant literature on the subject matter. The chapter
begins by defining some key terms used in the study followed by a general overview of the
analytical approach (Structure-Conduct and Performance) adopted by the study. The overview
covers things like the origins of the analytical approach, applicability of the approach to
industrial organisation, the linkages amongst industry structure-conduct and performance, the
use of econometric modelling and regression analysis in figuring out correlations amongst
variables in a Structure-Conduct-Performance(S-C-P) framework, the problems of the approach
and its major critics, and ways of dealing with some of the problems with the approach. The
chapter again gives a review on studies in industrial organisation in which the Structure-
Conduct-Performance approach have been applied in studying various industries. After the
empirical studies on structure conduct and performance the chapter also gives a review of the
factors that affect performance of small to medium sized firms in a structure- conduct and
performance framework. A conceptual framework for the study is also given in the literature
review section. The conceptual framework will provide a general guide to the study. Insights
drawn from the literature will round-up the literature review chapter.
2.2 DEFINITION OF KEY TERMS
The informal sector
There is no universally agreed definition of an informal sector, but generally it is defined in
terms of its characteristics. According to Nattrass (1987) cited by Mahadea (2001), the informal
sector comprises ‘of all people outside formal wage employment in the officially recognised and
regulated sector, as well as all enterprises which function outside government rules and
regulations and which operate on a small scale using labour-intensive technology’. In Africa, the
12
informal sector provides 44% of the Gross National Product, in Middle and Eastern Europe about
20% and in OECD countries about 12% (Gerxhani, 2003). In this study, the informal sector will
be defined as comprising mostly people who are self-employed and operating outside
government rules and regulations. The terms informal economy, informal work, informal sector,
informal economic activity, informal industry, informal firms will be used interchangeably.
Informal businesses are businesses that are not formally registered or at least violate one or more
regulations (licensing, minimum wage, tax evasion and sanitation among others) of the central
or local authorities (Jerkins, 1997). Harper (1984) mentions that informal businesses in
developing countries are notoriously difficult to count let alone to measure individually.
On the other hand Musabayana (1996) observed that most informal businesses are small, mobile
and labour intensive. He observed further, that most of them employ traditional methods of
production, occupy temporary or mobile facilities and are small in size. Jerkins further argued
that owing to these characteristics, informal business operators are less likely to enjoy credit
from formal lending institutions. This therefore means that they cannot extend credit to their
own customers. Santos (1989) observed the following characteristics of formal and informal
business operators: Informal businesses are family based while large scale businesses are capital
intensive and bureaucratic, and that customer relations are personal in the informal while it is
impersonal in the formal enterprises.
Thomas (1992) and Schneider and Enste (2000) pointed out that the nature and characteristic of
informal businesses are dynamic and the concept of informal business sector is still in debate.
They highlighted that the most difficult thing in debate is to make an agreement in setting definite
boundaries between informal and formal sector. Peatie (1987) and Bromley (1990) argue that
informal businesses are characterised by being individualistic in nature. Bromley (1990) refers
to them as family self-employment. He pointed out that the nature of informal sector is a
13
necessary survival strategy in countries that lack social safety nets such as unemployment
insurance or where wages especially in the public sector and pensions are low and such is the
case with Zimbabwe.
There are no clearly stated figures on the unregulated sector. Intensive fabrication also takes
place under this sector. Players in the sector comprise of flea markets operators, carpenters,
manufacturers and suppliers of agricultural produce, food traders etc. no matter what economic
activity takes place in the formal sector has its corresponding activity in the informal sector.
Informal entrepreneur can be found in both rural and urban centres, including growth points
Metal fabrication- is the building of metal structures by cutting, bending, and assembling
processes or simply the manipulation of metal from one state to another.
Structure-Conduct-Performance(S-C-P) - is an analytical approach that is used to study how
the structure of the market and the behaviour of sellers of different commodities and services
affect the performance of markets, and consequently the welfare of the country as a whole.
Structure in this model refers to the environment of the industry in which the firm is operating
i.e. how producers or sellers interact with other producers, with buyers and also with potential
entrants. The structure also defined the product in terms of the potential number of variants in
which the product can be produced. The major elements of the structure describe the ways in
which markets depart from the conditions that describe perfect competition. The elements
include number of competing firms in the industry, homogeneity of products, costs of starting
the business, barriers to entry, vertical integration, diversification and other factors.
Conduct referred to the set of strategies that the firms implement to gain competitive advantage
over its rivals or in simple terms the behaviour/actions of the firms in the market or industry.
Conduct also includes the decision the firms make and the ways in which the decisions are taken.
14
Significant aspects and elements of conduct in the model included the following: pricing and
price setting behaviour, advertising and product development, research and development, Plant
investment, Legal practice, mergers, cartels, collusion etc.
Performance in the model referred to the success of the industry in producing benefits to
consumers. The essential question was whether firms’ operations enhance economic welfare.
The firms’ outcomes ought to be efficient avoiding wasteful usage of scarce resources in
satisfying consumer demands. On the other hand performance in the model had two dimensions
performance of the individual firms and performance of the metal industry as a whole. Important
aspects of performance include profitability, market growth, price levels, product quality,
technical progress etc.
Firms and industries-individual business units involved in metal fabrication activities in the
informal sector will be taken as firms and a group of those business units will make the industry.
The industry will be defined in terms of the metal products and the producers of the metal
products will be considered as members of the industry.
2.3 STUDY CONCEPTUAL FRAMEWORK
The structure-conduct-performance approach was developed by Mason and Bain in the 1930’s
based on the neoclassical theory of the firm. It was designed to understand the correlations
among a firm’s structure/environment, behaviour and performance. The framework since then
is known as the Structure-Conduct-Performance(S-C-P) Model. Bain decomposed a market into
three main categories namely; structure, conduct and -performance. The paradigm argues that
industry performance (the success of the industry in producing benefits to consumers) depends
on the conduct (behaviour of sellers in the market) which in turn depends on the structure (factors
that determine the competitiveness of the market) of the relevant industry.
15
An important addition to the structure-conduct-paradigm is the idea of an industry’s basic
conditions Aleksandrova and Lubys, (2004). In this case the paradigm becomes the Basic
conditions-Structure-Conduct-Performance paradigm. The basic conditions shape the market
and the industry structure. These are however, exogenous and they operate on two fronts that are
both on supply and demand side of the market. On the supply side the basic conditions covers
issues like location and ownership of raw materials, nature of the technology, degree of labour
unionisation, product durability, legal framework, scale economies, scope economies etc. on the
demand side the basic conditions are basically the price elasticity of demand, availability of
substitutes, the rate of growth, purchase methods, market characteristics of the product, cyclical
and seasonal character of demand (viability over time).
The framework can be well understood when outlined in the form of a diagram showing all the
elements in the S-C-P framework and the correlations as shown in figure 2.1 below:
16
Source Aleksandrova and Lubys (2004)
conceptual framework will guide the whole study.
2.4 STRUCTURE CONDUCT AND PERFORMANCE (S-C-P): AN OVERVIEW
2.4.1 Literature on the overview
A lot of literature on the general overview of the structure, conduct and performance framework
is provided by Sawyer, 1985, Ferguson, 1993, Schmalansee and Willig, 1989. Most of the ideas
given in this overview refer to the work of the above mentioned authors. The overview refers
much to the structure conduct and performance as a framework used to study the economics of
industries and firms.
S-C-P is a framework widely used in industrial economics (Sawyer, 1985). Industrial economics
is defined as the application of microeconomic theory to the analysis of firms, markets and
industries (Ferguson, 1988). The Structure-Conduct-Performance is therefore an approach used
to study industrial economics/organisation. The approach is descriptive and it provides an
overview of the entire field of industrial economics. In this approach key to understanding and
Basic Conditions Supply-Technology, raw materials, product
characteristics, business attitudes Demand-Price elasticity, substitutes, rate of growth, cyclical & seasonal characteristics
Policy Subsidies, SME policies, international trade rules,
regulation
Performance Production & allocative efficiency, technological progress, full employment, equity, profitability,
productivity
Conduct Pricing behaviour, product strategy&
advertising, research & innovation, investment
Market structure Number of sellers & buyers, product
differentiation, barriers to entry, cost structures, vertical integration, diversification
Figure 2.1 Illustration of the Conceptual framework
17
assessing the performance of an industry in terms of growth profitability and or efficiency for
example is found in the structure of the industry. The structure of the industry includes features
like ease of entry and exit, the size and number of firms , the elasticity of demand for the output
of that industry etc. the conduct of firms cover things like price setting behaviour, attitudes to
rivals and the various ways firms conduct their business activities. The conduct of firm, which
is expected to be heavily conditioned by the structure of their industry, generates the performance
for the industry. The notion that the structure of an industry largely conditions the activities of
the firms involved and thereby the performance of the industry means that emphasis is placed
on the nature of the industry rather than on the nature of the firms in the industry.
A possible starting point in deriving the structure-conduct-performance approach is the theories
of markets i.e. theories of perfect competition and monopoly. The structural features of perfect
competition are a large number of firms of roughly equal size with free entry and exit into the
industry. Under perfect competition in the long run equilibrium price equals marginal cost and
also equals average cost, and profits are at a normal level. On the other extreme end under a
Monopoly, the industrial structure is one firm with high barriers to entry and the general outcome
is that marginal cost (MC) is equated to marginal revenue (MR), price is above marginal cost
(MC) and there are supernormal profits for the monopolist. These two market models provide a
description of the extreme cases i.e. an infinite number of firms versus one firm and free entry
and exit versus blockaded entry. The position of any industry can be located along the same
spectrum by looking at the structure of that industry in terms of the number of firms, ease of
entry etc. and from that the performance of that industry predicted, particularly in respect of
profitability. It is postulated that as we move from industries with a large number of firms to
industries with only a few firms, profitability will rise from the normal level towards the super-
normal level of monopoly (Sawyer, 1985).
18
The general idea above can be formulated by taking the Cournot model of Oligopoly, under the
Cournot model it is assumed that each firm makes output decision in the belief that its rivals will
keep their output constant (Daughety, 1988). Taking the simple case of a linear demand function,
so that price 𝜌 = 𝑎 + 𝑏𝑄 (1)
, where Q is the output of the industry, which is assumed to be a homogenous product, p is the
price and d, b, are coefficients. There are n firms of equal size in the industry. For firm i with
output qi, profit 𝜋 = 𝑝. 𝑞𝑖 − 𝑑. 𝑞𝑖 (2)
Where d is the constant unit cost of production. The maximisation of profits yields a first order
condition 𝑑𝑑𝑞𝑖
⁄ = 𝑏. [𝑑𝑄
𝑑𝑞𝑖⁄ ] . 𝑞𝑖 + 𝑎 + 𝑏𝑄 − 𝑑 = 0 and the Cournot assumption that each
firm believes that other firms hold their output constant gives 𝑑𝑄
𝑑𝑞𝑖⁄ = 1. summing over all n
firms gives𝑄 = 𝑛[𝑑 − 𝑎]
[𝑛 + 1]𝑏⁄ , and then 𝑝 =[𝑎 + 𝑛𝑑]
[𝑛 + 1]⁄ under conditions of perfect
competition price equals marginal cost , so 𝑝 = 𝑑, and then 𝑄 = 𝑑 = 𝑎, under monopoly, in the
above 𝑛 = 1, and then 𝑝 =[𝑎 + 𝑑]
2⁄ and 𝑄 =[𝑑 − 𝑎]
2𝑏⁄ , this analysis indicates that as the
structure of an industry moves from perfect competition to monopoly, that is from n at infinity
through to, 𝑛 = 1, so price and output change from perfectly competitive level to the monopoly
level. The use of more general models does not alter this basic conclusion but draws out the
importance of other factors. Schmalansee pointed out that the use of more general models retains
the assumptions of firms producing a homogenous product, but the assumption of heterogeneous
goods would not change the basic results but complicate the analysis (Schmalansee, 1989).
The two extreme markets, perfect competition and monopoly differ in two major dimensions of
structure i.e. number and relative size of firms and also the extent of barriers to entry into the
industry. Barriers to entry into an industry for example comprise all the factors which lead to
new entrants into the industry being at a disadvantage as compared to the existing firms. One
19
factor is the existence of economies of scale which means that a new entrant would have to
produce on a relatively large scale, increasing supply by a significant amount and thereby
depressing price by a significant amount. Another factor is the ability of existing firms to produce
and distribute at lower costs than the new entrants for example through access to cheaper raw
materials, accumulated knowledge of that particular industry etc. the extent of product
differentiation and advertising is also another factor. New entrants have to incur costs to
overcome the loyalty of consumers to existing products.
The linkage of structure to performance runs through the conduct of the firms in the industry.
The conduct of firms can be considered in terms of their objectives. The motivation assumed for
firms under both monopoly and perfect competition is short-run profit maximisation and
generally retained for the analysis of Oligopoly. If the industrial structure determines or has a
bearing on performance, then governments concerned with the aspects of industrial performance
particularly aspects of price changes, technical progress, productivity and maybe employment
levels would seem to have a potentially powerful instrument of policy at their disposal. The route
through which industrial performance could be changed will be through making changes to the
industrial structure. If on the other hand, structure has little influence on performance, then there
would be little economic purpose in seeking to change industrial structure.
It is important to note also that most though not all, econometric estimation in industrial
economics relates to a single equation of the form:
𝑦𝑖 = 𝑎0 + 𝑎𝑖𝑥1𝑖 + 𝑎2𝑥2𝑖 + ⋯ + 𝑎𝑛𝑥𝑛𝑖 + 𝑢𝑖 (3)
Where y is the variable which is being explained and x1, x2…, xn the variables which are believed
to determine y and u is a random variable. The subscript i refers to either industry, market or
firm i so that for example, yi is the observed value of y for industry, market, firm i. the presence
of the random variable can arise mainly due to the fact that a relevant variable can be omitted or
20
inexact measurement of the variables involved may occur. Ordinary least squares estimation is
mainly applied to figure out the relationships between structural variables and performance for
the industry/market and various firms. It is however important to note that the use of ordinary
least squares estimation of a single equation poses a number of problems in the context of
industrial economics (Sawyer, 1985).
2.4.2 Problems of the s-c-p approach in estimation
According to Sawyer, (1985), Schmalansee,(1989) and Ferguson, (1993), the following are the
problems of the SCP approach in estimation:
Unavailability of data-The problem is that many of those variables which theory indicates
should be included are excluded because of lack of data or the impossibility of measuring the
variables. In structure profitability relationships, for example variables such as elasticity of
demand and effective competition are relevant but difficult to measure. When a potential
explanatory variable is omitted for example, then the degree of explanation achieved in terms of
R2 is thereby reduced. The crucial problem with omission is that it may affect the coefficient and
apparent statistical significance of the other variables.
Use of proxy variables-The use of proxy variables in an attempt to measure a relevant variable
is another problem noted. For example, if product differentiation has been considered a relevant
variable to be included in the determination of profitability the precise measurement of product
differentiation has so far been proved impossible and a number of attempts have been made to
allow for it in the estimated equations (sawyer, 1985). One attempt that has been made by
researchers has been to argue that the level of product differentiation across industries is
associated with the ratio of advertising to sales, and that advertising to sales ratio can be used as
proxy for the degree of product differentiation (Schmalensee, 1989). This has proved to have
some problems though, firstly there is unlikely to be an exact relationship between product
21
differentiation and the advertising-sales ratio and secondly interpretation of estimated
coefficients in regression maybe made difficult since advertising may have a direct effect on
profitability. Another approach that can be used is the use of subjective judgement combined
with dummy variables. The use of subjective judgement poses problems Sawyer, (1985).
Predictions-Another potential problem is the fact that the theory makes predictions about
equilibrium outcomes, but there is no guarantee that the actual observations relate to a situation
of equilibrium. Disequilibrium may occur in some industries/markets. In terms of structure-
profitability relationship, this would mean that some industries would be earning profits at the
equilibrium level and others would have profits below the equilibrium level. However
disequilibrium may be more likely to occur in some types of industries than others. One can
claim for example that high concentration industries adjust to equilibrium more rapidly than low
concentration industries, and hence the departure from equilibrium may be more pronounced in
low concentration industries than high concentration industries (Sawyer, 1985). The situation in
this example leads to the dispersion of random terms being larger for low concentration
industries than in high concentration industries and this situation is known as heteroscedasticity
Sawyer, (1985).
Relationships-Another problem noted was that of describing whether relationships are
continuous or discontinuous. The idea that the relationship is discontinuous could arise
from a classification of industries as either basically competitive or basically monopolistic,
with their profitability determined accordingly. Thus although industries vary in their level
of concentration and barriers to entry they can be assigned to one or other of the two
polar cases. In contrast the idea that the relationship is a continuous one would mean that
as industrial structure varies between the competitive through to monopoly, so profitability
gradually changes (Schmalensee,1989)
22
Terminology-Another prominent problem noted in the literature is that, in terms of the
terminology used in expressing econometric relationships i.e. x variable (independent variables)
influencing y variables (dependent); the dependent variable may in turn influence some of the
dependent variables. This kind of causality leads to what is also known as the endogeneity
problem. In the structure –profitability relationships it is argued that, for example, that whilst
advertising intensity influences profitability, profitability also influences advertising intensity
(Sawyer, 1985).
The various problems discussed above indicate that econometric testing of theories in the sphere
of industrial economics is not a straightforward matter. Even when theories are well specified,
there are numerous problems to be overcome before a satisfactory econometric test can be
applied to theory.
2.4.3 Criticism of the approach
The structure-conduct and performance paradigm is a useful approach that has been used by
many to study firms, markets and industries. It however, faces some criticism Church and Ware,
(2000). Sawyer, (1985), Church and Ware, (2000) and Ferguson, (1988) gave the following
critics on the structure-conduct and performance approach:
The S-C-P approach is too simple; it ignores many linkages which exist between the elements
of structure, conduct, and performance. It is also argued that the simple one way causation from
S-C-P is not the only relationship that exists or may exist between or amongst the variables. For
example, it was argued by some economists that conduct is very often not entirely determined
by structure. The argument is that firms have a wide level or degree of discretion over their
conduct and the decisions they make have an effect on the conduct of the industry and indeed
the basic conditions. Strategic behavior by firms makes it difficult to rely on the SCP paradigm.
Through merger and acquisition decisions firms can change the market structure. Mergers and
23
acquisitions reduce the number of firms and increase the size. Advertising and branding change
consumer attitudes and hence can act upon the elasticity of demand of the basic conditions.
Advertising may also increase barriers to entry. Not only does concentration affect advertising
in an industry but a reverse effect may also apply. Technical progress induced by research and
innovation has feedback effects on cost and demand conditions. Research into new product can
also serve to build an entry barrier. Predatory pricing techniques may drive out firms altering the
structure as well. Thus one response by industrial economists has been to re-write the S-C-P
Paradigm to acknowledge these complex links between Structures, Conduct and Performance
that were missing earlier. Some economists have questioned the predictive power of the SCP
Paradigm on the grounds that the feedback affecting structure is stronger than the influences
running from Structure-Conduct-Performance for example in huge profit industries Performance
influence Conduct as profits will be used for research and developments and advertising. Profits
may also attract entry which may affect structure. Top performers tend to gain market power at
the expense of rivals.
In addition the structure-conduct-performance paradigm has been greatly criticized as the role
of public policy is not explicitly included. In certain circumstances markets fail to satisfy
consumer needs. Government in response to the failure may then intervene and attempt to
improve the market performance. The measures taken can affect basic conditions, market
structure, conduct and performance. For example, Government through POTRAZ can affect the
number of sellers in the industry and firms may also influence the Government to achieve higher
profits. Public policy-taxes, price controls also affects basic conditions, performance, structure
and even conduct of firms. The inter-linkages can be well understood diagrammatically as shown
in figure 2.2 below:
24
Figure 2.2 Inter-linkages between Public policy and S-C-P elements
Source (Church and Ware, 2000)
2.5 STRUCTURE-CONDUCT-PERFORMANCE: EMPIRICAL STUDIES AND EXAMPLES
This section of literature reviews some studies that applied the S-C-P approach in studying
industries, markets and firms. The review gives an overview of the research methods, the
analysis and findings of the various studies. Some examples in terms of structure conduct and
performance of different industries are also given in this section.
2.5.1Examples of S-C-P of industries
The Structure–Conduct-Performance approach to analysing the performance of firms and
industry has been applied in several studies. Some general examples of the S-C-P mentioned in
the industrial organisation literature by Schmalansee and Willig, (1989) include: the construction
industry. In the construction industry the basic conditions include technology which is largely
simple and there are few economies of scale and on the demand side, demand is sensitive to
economic cycles. On the structure, entry into construction is relatively simple and hence a larger
number of small enterprises/firms. In terms of conduct there is little scope for product
differentiation, a firm would simply build to specifications. Conduct takes the form primarily of
price based competition. In terms of performance the construction industry shows fluctuating
Basic
Conditions
Market Structure Conduct Performance
Public Policy
Taxes, subsidies, international
trade, price controls, antitrust
25
profits combined with a relatively limited rate of investment and technological development
compared with other industries.
Another example is the beer industry. In the beer industry large plants are cost effective and thus
have economies of scale. There are economies of scale in advertising and marketing beer. There
are barriers to entry into the retailing of beer which require licensing. Economies of scale in the
beer industry mean that the firms are large so that the industry is oligopolistic. Licenses are said
to compel breweries to integrate forward and own their own pubs so as to ensure sales outlets.
Integration in the beer industry creates another barrier to entry because it means that the
wholesale market for beer is very limited in size since the most beer would by-pass the wholesale
market and thus make it becomes difficult for a new product to find customers. In terms of
conduct the beer industry is characterized by price competition, vigorous competition in terms
of the development of new products, brand promotion and entertainment and various other ways.
In terms of performance the beer industry shows good profits generally partly because of
advertising and marketing efforts and very low competition.
2.5.2 Previous studies on structure conduct and performance of industries
Several studies have applied the S-C-P approach. The procedures have been carried out for
several industries, products and commodities. The objective of the studies was to investigate the
factors that influence structure conduct performance of specific industries and the
interrelationships between the structural and conduct variables within the firms and the overall
performance. The studies provided background information to the analysis carried out in this
study.
Kizito (2011) applied the structure conduct and performance approach to study the Agricultural
Market Information Systems (MIS) firms in sub-Saharan Africa. The study focused on three
main questions: the first question was: what evidence is there that supports the premises that
26
second-generation agricultural (MIS) models are likely to meet user needs and become
financially sustainable relative to first generation models? The second question was: how have
different MIS models tried to address the design issues of any MIS and what are the relative
advantages of different models of MIS in addressing the challenges? The third question was on
what factors affect the reception of improved agricultural market information amongst
smallholder farmers in Mozambique and how does the reception of improved market information
affect their marketing behavior? The key findings to the study were that: there is heterogeneity
among MIS in terms of their structure and conduct design issues and also whether or not an MIS
is government based explains very little in terms of its performance. It was found that what
matters are the mandate, financial and managerial autonomy, funding strategy, quality control
methods, and feedback methods of the MIS. All MIS types were found to be heavily depended
on donor funding for sustainability. It was found that there is a rapidly evolving market
environment in terms of market actors and Information and Communication Technologies (ICT)
availability and usage. Findings also indicated that it is difficult to analyze the key design issues
of MIS independent of overall environment in which they operate. The econometric analysis
used a two-year panel household data set for four provinces in Mozambique, and the results
indicated that the generic factors that influence the reception of improved agricultural market
information include involvement in the growing of marketable staples, access to alternative
information and communication technologies, and access to market and extension services.
Specific factors include: growing of maize, large and small groundnuts, owning a radio, presence
of a cellphone network in the village, proximity to a road with public transport, membership to
farmer associations, access to extension services, level of education, the agro ecological zone of
households, and distance to village administrative post. Holding other factors constant, reception
of market information was found to increase profitability of market participation by 34%
27
Chia-Chi Lee (2010) studied on the causal correlations among market structure, conduct, and
performance of the Certified Public Accountancy (CPA) industry using data from Zhong zheng
district in Taiwan, Republic of China. The study used the structure-conduct-performance theory
to explore the causal correlations among the market structure of the certified public accountant
industry, the conduct and the operation performance of accounting firms. The study used
stepwise regression analysis to find out the important factors of these three dimensions. The
empirical findings confirmed that there exist causal correlations among market structure,
conduct, and operation performance of accounting firms, not just a single direction relationship.
Gu-Shin Tung et-al (2010) applied the structure, conduct performance framework to the hotel
industry. The paper presented a SCP model to approximate causes and effects among the tourist
hotel industry in Taiwan. Previous literature and studies could not confirm the causality of the
hotel industry, and therefore the paper developed a comprehensive model based on realistic data
of hotels in Taiwan which allowed the analysis of the system through three simultaneous
equations, market share, advertising, and profitability. Using a sample of 360 Taiwanese
international tourist hotels, from 1995-2006, three stage least squares results showed that: two-
way causes and effects exists between the market structure and strategic behavior, which was
detected from the incentive pattern of the SCP model, a brand positive effect showed on the
market share and, firm’s profitability was found to influence market share significantly.
Byeongyong and Weiss (2005) tested the traditional structure conduct-performance model and
the efficiency structure hypothesis to examine the relationship among the market structure and
performance in property-liability insurance companies. The efficiency terms in the analysis were
estimated using the stochastic frontier analysis and the analysis supported the efficiency structure
hypothesis. Results of the study found that the efficient firms charged lower prices than
competitors thereby causing them to capture larger market shares leading to increased market
concentration
28
Edwards et-al (2005) used the Market Structure Conduct Performance (SCP) approach using
stochastic frontier analysis. In this study use of efficiency measures as proxy for performance to
test the market structure-conduct-performance hypothesis were explored. They utilized Battese
and Coelli specification, to estimate frontier production function and Structure Conduct
Performance equations with efficiency and output measures as dependent variables. Results of
the study disclosed that average haul, average load and market concentration significantly
influenced efficiency of firms with two to eight years within each firm.
The overall objective of the study by Allen, Shaik,Myles, and Muhammad (2005) was to
approximate whether the structure of the market , market share plus profits of the food products,
truck carriers were based on the Structure Conduct Performance hypothesis or the modern
efficient structure hypothesis? The results of the study supported the modern efficient structure
hypothesis and did not match the Structure Conduct Performance hypothesis. Therefore the
results from the analysis were found to be useful to all stakeholders in the trucking industry in
finding economic forces that influence profitability of the firms that make up the industry at the
conduct level. Other firm managers and or firm owners could also use the results of the analysis
in formulating strategies so as to take advantage of weaknesses of competitors. The results of
the study therefore provided users with information that can be used to take advantage of
opportunities in the trucking industry to meet the needs of the shippers.
Maudos (1998) assessed the correlations between market structure and performance in the
banking industry of the Spanish. In the study three different measures of efficiency were used.
The three different measures were: half normal, normal-truncated and exponential. Results
obtained from the analysis revealed that market share is an insufficient proxy for efficiency.
Alley (1993) had a hypothesis that Japanese banking performance was a result of efficiency and
that it should be identified by the modern efficiency structure hypothesis as opposed to the
29
structure conduct performance hypothesis. In the model the researcher estimated the degree of
collusion in the Japanese banking industry and found that there was a significant degree of
collusion. The overall findings in the analysis comply with the structure performance hypothesis
as a superior ways of describing the Japanese banking sector
Another study by Smirlock and others in 1984 tested the structure performance hypothesis using
Ordinary Least Squares (OLS) regression of the firm’s profitability as opposed to the structure
conduct performance hypothesis with a proxy variable for efficiency. Firm’s profitability was
measured by the Tobin’s q which is the firm’s market value divided by replacement value of
assets. The variables used in this analysis to represent the traditional SCP hypothesis were market
concentration, entry barriers and growth rates. The proxy variable used in the analysis for relative
efficiency was the firm’s market share. Results of the analysis by Smirlock and others also
supported the efficient structure hypothesis.
2.6 FACTORS AFFECTING SMALL ENTERPRISE’S PERFORMANCE.
Understanding performance and factors affecting performance is one of the key areas discussed
in business economics literature (Audretsch, 2000; Kimura, 2002). The identification of small
to medium firm’s performance is meaningful in that, it gives knowledge on present features of
the small to medium firms’ performance, and that firms will use the knowledge to verify
priorities, track their positions and improve on performance Neely, (1998). Knowledge on
SME’s performance can also be used by the SME’s to formulate strategies, communicating
goals, make decisions and motivate employees (Schmitz and Platts, 2003). This knowledge is
increasingly important to the metal informal manufacturers also as competition posed by formal
players is growing by day.
Factors that determine firm performance are diverse in literature. There is no generally accepted
list of factors in explaining the firm’s performance that is business success or failure Lussier,
30
(1995). Historically, arguments that explain factors that determine firm performance lie in the
structure-conduct and performance framework. The framework argues that the performance of
firms is determined by conduct of firms in the market, which then is influenced by the structure
of the market. Within the structure–conduct-performance framework Rodgers, (2000) postulates
that higher levels of industry concentration and a firm’s market share, corresponds to higher
profitability or vice versa. Many factors however have been identified to relate to firm
performance.
Previous studies on factors affecting micro and small to medium firm’s performance
A study by Wengel and Rodriguez (2006) on the export performance of Indonesian SME’s, used
firm size, age and foreign share in capital structure of the firm as predictor variables. Another
author by the name Sarder et al, (1997) studied performance of SME’s in Bangladesh and used
firm age, management experience, initial investment, competition, industry sector, and time
passed after getting financial support as independent variables. Wynarczyk (et al 2005) used
employment size, age, ownership, supply chain characteristics, and partnership of firms as
independent variables.
Strategic management studies argue that firm-specific factors are more important as compared
to any other factors in influencing firm performance (McGahan and Porter, 1997). Ownership
structure was found to strongly influence performance. In addition Dourma et al., (2003) found
that companies with foreign corporate shareholdings are endowed with superior advantages in
various dimensions, including technological, marketing, and marketing and managerial skills,
and hence, would give a positive impact on firm performance. A study of British medium sized
firms in 1992 by Brooks bank and others revealed that firms which give a higher priority to
marketing as compared to other business functions achieve higher performance.
31
In addition a study by Muchabaiwa et al.,(2011) on the determinants of small and medium sized
firms failures in Zimbabwe revealed that lack of general knowledge on business management,
unavailability of credit, import competition and high costs of raw materials are the major causes
of SME’s failure in Zimbabwe.
Garrigos Simon et al., (2005) in their study on Spanish hospitality firms used two indicators of
performance, which are (return on assets, return on investment and return on sales) and growth
(in sales, market share, and wealth creation), and also two intangible performance measures, that
include competitive position and stakeholder satisfaction. McNamee et al., (1999) in their study
on Irish small businesses used growth (in sales volume and employment) and profitability (return
on assets, return on sales, and profit per employee) as measures of firm performance.
2.7 INSIGHTS FROM THE LITERATURE
The chapter provided an overview of the application of the structure-conduct and performance
framework in studying firms, industry and or markets. The model applies microeconomic theory.
From the review the approach is highly descriptive and provides an overview of the entire field
of industrial economics. The review has tackled most of the aspects in the S-C-P model from the
variables to the methodologies and the conclusions drawn from the studies. The review has
shown that the S-C-P framework can be applied to any market, firm or industry regardless of
size, formality or informality. The approach can therefore be used to understand micro and small
to medium sized firms in the metal industry.
There is also some evidence from the review that no research has particularly focused on
application of the SCP to study informal metal industries in Zimbabwe. There is therefore need
to apply the concept to study informal metal fabrication industry in Zimbabwe. This will be
important in assessing the industry in its provision of services to the general public. Of much
32
importance will be the implications of the results to stakeholders in the agricultural sector. The
research will fill this information gap.
33
CHAPTER THREE: RESEARCH METHODS
3.1 INTRODUCTION
There are several steps to identify the structure, conduct, and performance of the metal informal
manufacturing industry, such as: sampling the target population, Collecting data, Processing
data, and analysing the result from processing data and this is going to constitute the bulk of this
chapter.
3.2 DATA SOURCES
The analysis relied on both primary and secondary data. Secondary data sources were used for
reference purposes in the study, as benchmarks against which the findings of the study were to
be tested and also as the sole source of information in testing some hypotheses. Primary data
was used together with some secondary data to test some hypotheses in the study.
3.3 SAMPLING
Multi-stage sampling method was used in the survey. Major cities including Harare,
Chitungwiza, Rusape, Bulawayo and Mutare were selected as the main clusters. Purposive
sampling was used in identifying areas dominated by informal metal manufacturing activities
within the clusters. Study units within the selected areas were selected by simple random means.
The study was based on a sample of 200 informal metal manufacturing firms. The sample of the
informal metal manufactures used for this analysis was homogenous. The firms were almost of
the same size and were involved in the same metal fabrication activities. The focus on one firm
category was done to minimise bias.
The tables 3.1 and 3.2 show the areas that were covered in the survey and the percentage of
respondents from each area.
34
Table 3.1 Major areas included in the study
City Areas covered
Harare Mbare (Magaba),Gazaland,Mbudzi
Mutare Green market, Dangamvura
Rusape Mabvazuva, Rusape musika area,Vengere
Bulawayo Makokoba, Renkini industrial area
Chitungwiza Makoni
Source, (survey results, 2013)
Table 3.2 Sample distribution and composition
City Frequency Percentage (%)
Harare and Chitungwiza 100 50
Bulawayo 40 20
Mutare 40 20
Rusape 20 10
Total 200 100.0
Source, (survey results, 2013)
From table 3.2 above, Fifty percent (50%), twenty percent (20%), twenty percent (20%) and ten
percent (10%) of the respondents were from Harare and Chitungwiza, Bulawayo, Mutare and
Rusape respectively. Specific areas researched within the clusters (cities) are as shown in the
table 3.1 above.
3.4 METHODS AND TOOLS FOR DATA COLLECTION
Methods of collecting data included both formal and informal surveys, rapid assessments, direct
observation, formal and informal meetings and personal visits to the target groups under study.
The survey method was however the main method used for gathering data for the study. This
particular method was chosen due to resource constraints. The structured questionnaire was used
as the main technique of capturing the quantitative data needed for the study. All the relevant
firms in the analysis were surveyed using a structured questionnaire. The questionnaire was the
main tool used here in capturing quantitative data because of its strength in capturing empirical
data Kothari (1990). The questionnaire was divided into two main sections. The first section
consisted firm and firm owner demography and the second section consisted of questions
pertinent to firm structure, conduct and performance
35
However, for the qualitative data requirements the main methods used were direct observation,
and interviews. Face to face interviews were conducted with key informants. Interviews were
used as a supplementary source of information for the research. Moreover, interviewing is very
useful for collecting a wide range of data from factual demographic data to highly personal and
intimate information relating to person’s opinions, attitudes, values, beliefs past experiences and
future intentions Dekeba, (2012). In addition, when qualitative information is required or
probing is necessary to draw out fully then interviewing is required. Interviewing was therefore
used because of its strengths as mentioned above. Observation guide and the interview guide
were used as the instruments for qualitative data collection.
The instruments were pre-tested and corrected for errors before the survey which took place in
February and March 2013.
3.5 DATA, PROCESSING AND ANALYSIS
Data used for the analysis was collected from 200 informal metal manufacturing firms across
the country. Data collected was checked for errors, edited and coded prior to analysis. Data was
transcribed into computer software prior to analysis. SPSS version 20 and EXCEL for windows
were mainly used for analysing data from the questionnaire. Descriptive statistics and regression
analysis were performed in this study. Descriptive statistics constituted the bulk of the analysis.
Cross tabulations, frequencies, percentages made the bulk of the descriptive analysis. For the
descriptive analysis, histograms, bar charts, pie charts, line graphs and several other presentation
forms were used. Regression analysis was used to identify some of the important factors that
influence individual firm’s performance in the informal metal industry. Some specific elements
in the study were measured or estimated as follows:
36
Concentration measures
In order to classify the market of the informal metal industry market concentration ratios and the
Herfindahl-Hirschman index (HHI) were used. Concentration was used as it is helpful in
understanding how much market share is concentrated in the hands of a small number of firms
and also because of its limited data requirements Porter, (1998). The HHI index was used to
complement the CR ratios since it is considered better in the sense that it gives more weight to
large sized firms and it reflects the distribution of market shares of firms Hause, (1997).
Concentration ratio is simply the percentage of industry output that a specific number of the k
largest firms have. Concentration for k largest firms was calculated by adding up the market
shares of the k firms. This can be represented as
CRK=S1 + S2 +S3 +S4+……+SK, (4)
Where Si is the market share of the ith firm, alternatively, it can be expressed in a more compact
form as follows;
𝑪𝑹𝒌 = ∑ 𝑺𝒊𝒌𝒊=𝟏 (5)
Where CRK is the K firm concentration ratio, and Si is the percentage market share of the ith firm,
CR2, CR4, and CR8 were calculated for this study. Sales volumes per year were used as a proxy
for market shares for the firms and were also used to calculate the concentration ratios for firms
in the industry. Year 2012 figures were used. Classification of the industry based on the market
concentration ratios was as follows:
Table 3.3 Classification of industry based on market concentration
CR4 Interpretation of market structure
CR4=0 Perfect competition
0<CR4<40 Effective competition or Monopolistic Competition
40CR4<60 Loose oligopoly or Monopolistic competition
60CR4 Loose oligopoly or dominant firm with a competitive fringe
90CR1 Effective monopoly(near monopoly) or dominant firm with a competitive fringe
Source, Gwin, (2001)
37
In this study three concentration ratios were calculated CR2, CR4 and CR8 in order to classify
the industry. If CR2, CR4 and CR8 were found to be closer to or equal to zero it would mean
there is perfect competition or the industry is close to perfect competition i.e. very small sized
firms without market power. If ratios CR2, CR4, CR8 were to fall between 0 and 40% it would
mean effective competition or monopolistic competition implying that there will be many small
sized firms with slight competitive edge on the market. Again if ratios fall in the range of 40-
60% it would mean a market with monopolistic competition or loose oligopoly. If ratios are
greater than 60% it would mean a loose oligopoly or a dominant firm with a competitive fringe.
On the far extreme if CRI (market share for a single firm) is greater than 90% it would mean a
near monopoly.
Calculation of the HHI index was done by summing the squares of individual market shares of
all the firms in the industry. This is represented as:
𝐻𝐻𝐼 = ∑ 𝑆𝑖2𝑁
𝑖=1 (6)
Where 𝑆𝑖2=the square of the market share of the ith firm measured as that firms’ output divided
by total output and 𝑁=the number of firms in the market. A variant measure of the HHI squares
the percentage share of the market in deriving the indices. The study used the general method of
just summing the squared market shares for the firms in the industry. Interpretation of the results
using the HHI index are as follows: if the value of the sum of squared firm market shares are
close to zero it means there are large number of small sized firms and if its equal to one there
will be a monopoly.
Measurement of profits
Profits were measured as the difference between sales revenue (TR) and total costs (TC) of
production i.e. 𝜋 = 𝑇𝑅 − 𝑇𝐶 (7)
38
Where 𝜋 = 𝑝𝑟𝑜𝑓𝑖𝑡 and TR and TC are total sales revenue and Total cost respectively. Firms
were to be considered as doing well if they had positive profits and doing badly when having
negative profits (losses).
Calculation of profit margins
Profit margins were calculated as the ratio of profit to sales revenue multiplied by 100. i.e.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =𝑃𝑟𝑜𝑓𝑖𝑡
𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒× 100 (8)
Year 2012 figures for profit and sales revenue were used to calculate the profit margins of firms
in the industry. The profit margins were calculated to see how much of every dollar of sales
firms in the informal metal industry retains in earnings.
Calculation of Tobin’s q ratio
The Tobin’s q was calculated as the rate of market value of assets of the firm to the replacement
value of the assets. i.e.
𝑇𝑜𝑏𝑖𝑛′𝑠 𝑞 =𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 (9)
The ratio was calculated so as to predict the potential of the firms in the industry and the industry
itself at large. If the ratio was found to be less than 1 it would mean a bad result for the industry
i.e. firms lack potential, if the ratio was equal to 1 it would mean equilibrium, and if the ratio
was greater than 1 it would mean excessive potential of the firm.
Factors affecting SME performance
To identify the factors that affect SME performance in the informal metal manufacturing
industry the researcher used multiple regression analysis. The regression model was made up of
nine independent variables and a dependent variable. Profit was the proxy variable for firm
performance. The variables were specified as follows:
39
Table 3.4 Variables and measurement
Variable Definition Measurement
Profit PROFIT Profits of firm as proxy for performance (2012 profits)
Age of firm Agefirm Number of years of the firm from the start-up year to
2013
Experience of owner Exp Years of experience of owner when he/she started firm
Education Edu Level of education of firm owner 1-atleast secondary
education, 0= Otherwise
Gender of owner Gender Sex of firm owner 1=Male , 0= Female
Price determination Pdm Method of determining prices 1= bargaining with
customers, 0= Otherwise
Grading Grd Grading of output, 1=Yes, 0= No
Contracting with clients Contrct Contracting with clients by the firm 1=Yes, 0=No
Collective action Collctactn Collective action by firms in business 1= Yes, 0=No
Type of products Typpdct 1=Agricultural, 0 ,Otherwise
Model specification
Performance =F (age, experience, education, gender, price determination, grading, contracting
with clients, collective action in business and type of products produced).
𝑃𝑅𝑂𝐹𝐼𝑇 = 𝛽0 + 𝛽1𝐴𝑔𝑒𝑓𝑖𝑟𝑚 + 𝛽1𝐸𝑥𝑝 + 𝛽2𝐸𝑑𝑢 + 𝛽3𝐺𝑒𝑛𝑑𝑒𝑟 + 𝛽4𝑃𝑑𝑚 + 𝛽5𝐺𝑟 +
𝛽6𝐶𝑜𝑛𝑡𝑟𝑐𝑡 + 𝛽7𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑣𝑎𝑐𝑡𝑛 + 𝛽8𝑇𝑦𝑝𝑝𝑑𝑐𝑡 + 𝜖 (10)
40
CHAPTER FOUR: OVERVIEW OF THE INFORMAL METAL INDUSTRY
4.1 INTRODUCTION
To gain insight into the informal metal industry, a number of aspects were examined. This
chapter presents some of the aspects examined in the informal metal industry in Zimbabwe. The
results are presented in six main subsections: General overview of informal sector sites, socio-
economic profiles of the firm owners, firm characteristics and other attributes, goods
manufactured in the industry, the major customers and constraints. The seventh subsection
provides a summary of the findings.
4.2 OVERVIEW OF INFORMAL SECTOR SITES CHARACTERISTICS
Informal metal manufacturing enterprises were found to dominate in urban centres. This was
probably due to proximity to major raw material sources and probably high demand of products
in urban areas. In the urban centres the informal sector sites were found to be located in insecure
contested open spaces that lack well-constructed facilities. Most of the infrastructures were poor
and looked very old. Most of the facilities were not appealing at the time of the survey. The
conditions were almost the same in the towns surveyed. Moreover, within the sites informal
metal manufacturing activities were crowded and it was evident that space was a challenge. The
problem of space was however, greatest in Harare and Mutare whilst in Bulawayo and Rusape
space was not a big problem.
4.3 SOCIO-ECONOMIC PROFILES OF FIRM OWNERS
The summary statistics for the sample are presented in the table 4.1 below. Results show that the
majority of the firm owners interviewed were predominantly male (98%). Only 2% of the
respondents were female. In areas like Bulawayo Rusape and Mutare 100% of the respondents
were male. However, in Harare and Chitungwiza 4% of the respondents were female firm
owners. In-terms of marital status, results show that 80% of the respondents were married, 17%
were still single at the time of the survey, 2% were widowed and 1% of the respondents were
41
divorced. This implies that most of the people in the informal sector are family men and women
with huge responsibilities of raising their families. Mean age of the firm owners was about 33
years of age. Minimum age of firm owners in the metal industry recorded was 19 years and the
maximum age recorded was 69 years. Most respondents i.e. 84% of the firm owners were found
to be less than 40 years of age. Only 16% of the respondents were above 40 years of age. The
survey results show that much of the firm owners in the informal metal industry are young and
economically active with only 3% being over fifty years of age. The table below summarises
most of the characteristics of the respondents included in the survey.
Table 4.1 Summary statistics of the firm owners’ socio-economic attributes
Gender of operator(N=200)
Male (%) 98
Female (%) 2
Marital status(N=200) Percent (%)
Single never married 17
Married 80
Divorced 1
Widowed 2
Age of operator and experience(N=200)
Mean age of operator 32.91 years
Minimum age 19 years
Maximum age 69 years
Age distribution (%)(N=200)
19-30 years 46%
31-40 years 38%
41-50 years 13%
50 years+ 3%
Mean number of years of experience when firm was started 2.3645 years
Highest level of formal education attained(N=200) Percent (%)
None 0
Primary school 4
Secondary school 75
Vocational training 18
University education 3
Skills and training(N=200)
Sources of skills Percent (%)
Government vocational training centres 18
Private vocational centres 6
NGOs 0.5
Other informal operators(on-job training) 70.5
Other 5
Source, (survey results, 2013)
42
Age of respondents and experience
Survey results also show that firm owners in the informal metal industry started their businesses
with at least 2.4 years of experience on average. However, the majority (52%) of the firm owners
started their firms with less than 2 years of experience and only a few (10%) started their firms
with at least 6 years of experience in the metal industry. Results imply that a lot of people without
experience of metal fabrication can start their own businesses in the metal fabrication industry.
The distribution in terms of years of experience of owners when they started their businesses is
shown in figure 4.1 below:
Figure 4.1 Experience of firm owner when firm was started
Educational attainment and sources of skill acquisition
The firm owners’ level of education was generally high, with 75% having attained secondary
school education, and 18 % having attained vocational training. Only 4% of the survey
respondents had only primary school level education. Moreover, the sample was composed of
(3%) respondents with university education. The majority (70.5%) of the firm owners obtained
their work related skills from other informal operators. Only about 18% of the firm owners got
0%
10%
20%
30%
40%
50%
60%
0-1.9years 2-3.9years 4-5.9years 6+ years
Percent(%) 52% 25% 13% 10%
Pe
rce
nta
ge(%
)
Experience of firm owner when he/she started the firm
43
their work related skills from government vocational training centres. Other respondents (6%)
pointed out private vocational centres were their source of skill acquisition, and 0.5% pointed
out Non-Governmental Organisations (NGO’s) as their source of work related skill acquisition.
Results on educational attainment in general imply that literacy levels of firm owners which are
the metal fabricators are extremely high within the industry.
4.4 FIRMS’ CHARACTERISTICS AND OTHER ATTRIBUTES
Age of firms
The mean age of firms in the informal metal industry was found to be 6.1 years. This implies
that most of the firms in the informal metal industry were started in the period 2007 to 2008.
This implies that most of the firms in the industry are generally still young. This again
corresponds to the earlier thinking that growth of informal sector operations is positively
correlated to harsh economic environments. The result confirms the earlier thinking since during
the mentioned period the Zimbabwean economy was facing serious macroeconomic challenges.
In terms of the distribution, 49% of the firms had less than five years of age, 31% of the firms
fell between 5 and 10 years of age, 10% fell within 15 and 20 years of age and only 3% were
older than 20 years of age. The table 4.2 below show some of the statistics.
Table 4.2 Firm age statistics in years
N Mean Mode Max Min Range Std.Dev.
200 6.11 3 25 0.6 24.4 5.06
Source, (survey results, 2013)
From table 4.2, the statistics confirm the fact that most of the firms in the informal metal industry
were found to be relatively young with mean age of 6.1 years. The standard deviation from the
mean was large (5.06) indicating that data points were not so clustered around the mean.
Minimum age of firms in the metal industry recorded was 0.6 years (about 7 months). On the
other extreme maximum age of firms in the metal industry recorded was 25 years. Nearly half
44
of the firms (49%) were less than five years of age, on the other extreme only 3% of the firms
were greater than 20 years of age. The distribution of firm age is shown in figure 4.2 below
Figure 4.2 Age distribution of firms in the informal metal industry
Sources of capital to start firm
Capital sources in the informal metal industry were found to be as shown in figure 4.3 below.
The majority (59%) of the informal business owners in the metal industry started their businesses
using their own savings. Of the 200 respondents 32% of them used loans from friends and family
to start their businesses. Results also show that bank loans, government loans, loans from money
lender and loans from donor agencies are not common sources of funding in the informal
industry. This is indicated by the low percentages of respondents who noted the sources as their
sources of capital when they started their businesses. The results imply that informal firm
operators usually rely with their own savings as sources of funding. The use of borrowed funds
is not a common practice. Figure 4.3 below summarises the findings on sources of capital for the
informal metal fabricators when they started their small to medium businesses.
45
Figure 4.3 Sources of capital to start the firm
Types of firm ownership in the informal metal industry
Survey results showed that most (74%) of the firms in the informal metal industry were private
firms. This implies that most of the firms in the informal industry have a single owner. However,
18% of the firms were found to fall under partnership and 8% of the firms were household
enterprises. Results imply that most of the people in the informal metal industry are indigenous
people operating their own small businesses. The figure below gives a summary of the findings
in terms of the type of ownership of the firms
Figure 4.4 Firm ownership types in the informal metal industry
Own savings59%
Bank loan2%
Loan from friends/family
32%
Government loan2%
Loan from donor agency
1%
Loan from money lender
4%
Source of Capital to start the firm
74%
18%8%
Type of firm ownership in the informal metal industry
Private Patnership Household enterprise
46
Firms’ employment
Number of employees per firm (employment) of micro and small to medium firms in the
informal metal industry was found to be low. On average current (year 2013) employment was
found to be about three (3) employees per firm. The trend of employment since year 2010
showed almost the same result. In 2010 on average each firm employed about three (3)
employees, in 2011 and 2012 the average was about two (2) employees per firm. The standard
deviation from the mean was approximately one (1) employee throughout the years. The
minimum number of employees recorded per firm was one person per firm in all the three years
from 2010 up to 2013. The single employee per firm implied that the owner of the enterprise
was the only employee at a particular firm. The maximum number of employees per firm was
found to be seven (7) in 2013, and six (6) in 2010, 2011, and 2012. The table 4.3 below
summarises the statistics.
Table 4.3 Firm employment statistics 2010-2013 Year N(Firms) N(Labour) %(female) %(male) Mean Std Dev. Min Max
2011 154 378 11 89 2.45 1.401 1 6
2011 184 430 10.2 89.8 2.34 1.234 1 6
2012 200 488 9 91 2.44 1.373 1 6
2013 200 492 7.7 92.3 2.46 1.452 1 7
Source, (survey results, 2013)
Gender and employment
The majority of the employees in the informal metal industry were found to be men. This was
evidenced by larger percentages of male employees from 2010 to 2013. In the year 2010, 89%
of the total employees from the 154 firms were male with only 11% being female employees. In
the year 2011 there was a slight increase in the percentage of male employees to 89.8% and a
slight fall in the percentage of female employees to 10.2%. The number of firms that gave
statistics for the year 2011 also rose to 184. The same trend applied for the year 2012 and 2013
with male employees dominating in the informal metal industry. In general male labourers are
on the increase in the industry and female worker are gradually falling. The figure below
summarises the trend.
47
Figure 4.5 Employment by gender from 2010-2013
Investment
Data were collected on the value of additional investments made to the firms in the past three
years. The data specifically captured values of additional investments in buildings, vehicles and
capital investments. From the analysis it was found that most of the firms rarely invested in
buildings. Of the firms that had spent on additional investments to the firms above 80% of them
spent on additional capital investments. In general, the levels of additional investments made to
the firms in the industry were found to be very low. The table below show the descriptive
statistics on value of additional investments made by the firms for the three years 2010, 2011
and 2012.
Table 4.4 Values of additional investments made to the firms in USD$ N Min Max Sum Mean Std Dev.
2010 Buildings 158 0 5.000.00 55.400.00 350.63 1.063.12
Vehicles 158 0 5.000.00 122.800.00 777.22 1.530.29
Capital 158 0 1.200.00 33.600.00 212.66 276.59
Total 211.800.00 1340.51
2011 Buildings 180 0 8.000.00 97.000.00 538.89 1.652.76
Vehicles 182 0 4.000.00 37.600.00 206.59 714.11
Capital 182 0 2.000.00 34.980.00 192.2 368.63
Total 169.580.00 942.10
2012 Buildings 198 0 15.000.00 152.800.00 771.72 2.099.32
Vehicles 200 0 4.000.00 78.000.00 390.00 1.011.70
Capital 200 0 2.500.00 32.800.00 164.00 344.14
Total 263.600.00 1.331.30
Source, (survey results, 2013)
89.00% 89.80% 91% 92.30%
11% 10.20% 9% 7.70%
2010 2011 2012 2013
Employment by gender percent male percent female
48
From the table it is shown that values of spending by firms towards additional investments for
their firms were low. On average, firms spent close to 1.340.00 USD$, 942.00 USD$ and USD$
1.331.30 per year in 2010, 2012 and 2013 respectively towards additional investment to their
firms. Investments in buildings were mainly in the form of temporary shelters built at the firms.
No permanent buildings were allowed in most of the firm location sites throughout the country.
Firms rarely invested in vehicles as shown by the low average spending figures towards vehicles.
Capital investments were the most common form of investment made to firms but again the
averages spending figures were low as shown in the table above. Capital investments were more
common due to the frequent repairs of equipment and replacement of faulty machinery at their
firms. In general, a lot of the firms in the industry rarely added investments to their businesses.
The main reason for not adding much to investments is the fear to raise costs of production.
4.5 GOODS MANUFACTURED IN THE INDUSTRY
The results of the survey indicate that most of the firms manufacture building material and
agricultural materials. Of the 200 firms 75% of them manufactured building materials. The bulk
of building materials were door and window frames. The results also show that 71% of the firms
included in the survey produced agricultural materials. The agricultural materials produced
included agricultural equipment, implements, tools and some agricultural machinery. Other
manufactured goods included household equipment, industrial equipment and other general
tools. In addition 42% of the firms produced household equipment, 45% produced industrial
equipment and machinery and 42,5% produced general tools. Important to note is however, the
fact that most of the firms produced a combination of products. Within the combination of
products produced by the firms building materials and agricultural materials constituted the bulk
of the products produced. The table 4.9 and figure 4.8 below presents the major types of products
produced in the informal industry.
49
Table 4.5 Type of products produced in the informal metal industry
Goods Manufactured Do you
manufacture?
No Yes Total
Building Materials Count 50 150 200
% of Total 25 75 100
Agricultural Equipment, implements, tools and or Machinery Count 58 142 200
% of Total 29 71 100
Industrial Equipment and Machinery Count 110 90 200
% of Total 55 45 100
Household equipment Count 116 84 200
% of Total 58 42 100
Tools Count 115 85 200
% of Total 57.5 42.5 100
Source, (survey results, 2013)
The information in table 4.9 above was used to construct the figure 4.8 below showing the
proportions of the goods manufactured. As noted in the text above agricultural materials and
building materials constitute the bulk of the goods produced though over 90% of the firms
produce a combination of products.
Figure 4.6 Types of goods manufactured
Agricultural products produced in the industry
Of interest to the study of the informal industry is the production of metal products relevant for
smallholder agriculture in Zimbabwe. This therefore led the researcher to have a bias on
75%71%
45% 42% 42.50%
Building Materials AgriculturalEquipment,
implements, toolsand or Machinery
IndustrialEquipment and
Machinery
Householdequipment
Tools
50
agricultural products produced in the industry despite the various other metal products produced.
As a result the researcher through the whole process of research identified and categorised some
of the main agricultural products from the sector. The table is not exhaustive but highlight some
of the common agricultural materials produced in the industry. The identified materials were
classified according to use as in the table 4.6 below:
Table 4.6 Agricultural product categories in the informal metal industry
Uses Type of equipment/product
A. Land preparation
equipment
Mouldboard ploughs animal and tractor drawn harrows,
ridgers, rippers and tillers, disc harrows, hoes, picks, spades
and other simple garden tools
B. Planting equipment Fertiliser spreaders, planters, seeders
C. Fertilising equipment Cultivators with topdressing units
D. Harvesting equipment Grain threshers, diggers i.e. potato diggers
E. Transport equipment Scotch carts, tractor trailers, wheel barrows
F. Packaging equipment Tobacco bailers
G. Livestock feeding
equipment
Feeding troughs for small livestock and chickens
H. Irrigation equipment Irrigation pipes, hydrant valves, irrigation pumps, sprinklers,
watering cans, water tanks, borehole equipment etc.
I. Processing equipment Grinding mills, tobacco curing equipment, potato peelers,
beef masters (butchery equipment)
J Other Sickles, gates, etc.
K. Spares Bolt and nuts, washers, chains, mouldboard share etc.
Source, (survey results, 2013)
The equipment classified in the table include both animal and tractor drawn equipment. It is
important to note that the bulk of the equipment is animal drawn. Animal drawn equipment are
the equipment that are drawn using oxen or donkey draught power and includes mouldboard
ploughs, harrows, cultivators, planters and scotch carts among others. Tractor drawn implements
and equipment are also produced but they are less common. Tractor drawn equipment is the
equipment and or implements drawn using the tractor as draught power and includes disc
harrows trailers to name just a few.
51
Other equipment produced in the sector include processing equipment (i.e. tobacco curing
equipment, grinding mills, butchery equipment), irrigation equipment, livestock feeding
equipment, spares and other hand implements including sickles as indicated in the table.
4.6 CUSTOMERS IN THE INDUSTRY’S MARKET
Most of the firm owners pointed out farmers as their main customers. Farmers were pointed out
as regular customers in the industry mainly due to the fact that larger volumes of sales in the
industry coincides with harvesting periods of major crops like tobacco, cotton, tea, potatoes and
maize. Forty-five (45) percent of the customers in the industry’s market were found to be
farmers. Tobacco farmers were pointed out as the major customers in Harare and Chitungwiza
areas which was exactly what we expected since all the tobacco auction floors are in Harare. In
Mutare and Rusape cotton farmers, tea, potato and some horticultural farmers were noted as
major customers. The case for Bulawayo was different, ordinary individuals and some formal
enterprises were the major customers noted.
Approximately thirty (30) percent of the customers were found to be other individuals not
necessarily farmers. Other customers identified were enterprises in the formal sector (13%),
informal enterprises (6%) and other e.g. cooperatives and or NGO’s. figure 4.9 give a summary
of the different customers in the market. It was interesting to find out that there are some formal
players who get manufactured products from the informal metal industry for resale on the formal
market.
52
Figure 4.7 Customers in the informal metal industry’s market
In line with customers, it was found that customers have products they usually buy from the
informal metal industry. Firm owners confirmed that consumers usually buy agricultural
materials (48%), building materials (36%) and household equipment (11%).
Consumers were reported also to have access to market information in the market and the main
sources of market information were: word of mouth (76%), printing flyers (51%), newspapers
and magazine adverts (27%), radio and television adverts (3%) and internet (1.4%)
4.7 CONSTRAINTS
The study revealed that lack of credit, power cuts, expensive raw materials and high interest
rates on borrowed funds were the main problems faced by the informal metal manufacturing
enterprises. Statistics however, show that the main problem was that of lack of finance with 48%
of the enterprises noting it as their major problem. Power cuts was also a major problem as 32%
of the firms noted power-cuts as a major hindrance to progress in their manufacturing activities.
High costs of raw materials and high interest rates on borrowed funds were also some of the
problems noted though a few respondents highlighted them as problems with 11% and 9% noting
them as major problems respectively.
farmers45%
formal enterprises
13%
informal enterprises
6%
other individuals(not
farmers)30%
other(e.g cooperatives,NG
O's etc)6%
Customers
53
4.8 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS
From the general overview of the informal metal industry in Zimbabwe the study reveals that
informal metal manufacturing activities are dominant in urban centres and the areas lack well-
constructed facilities interms of infrastructure, males dominate the industry from being major
firm owners (98% male owners) and major employees (>89% male employees). The industry is
again dominated by economically active population (15-65years of age) with the average age
being 32.9 years and over 90% of the population in the industry between 19 and 65 years of age.
People participating in the industry are mainly married people with 80% of the people being
married. Firm owners in the industry are educated with 96% of them having attained at least
secondary education. Informal firm operators started their businesses within the industry without
much experience of metal manufacturing. The main source of skills acquisition by the firm
operators are other informal operators already in the business. The survey show that 70.5% of
current operators obtained their skills from other informal metal manufactures. In addition the
main sources of funding for firms in the industry when they started operations was own savings
and loans from friends and family. Firms in the industry are generally young with average
number of years for firm being 6.1 years. The majority (74%) of the firms are private firms with
a few household enterprises and partnerships. Firm employment is low with average
employment per firm being 2 employees. Lack of credit/finance, power-cuts, high interests on
borrowing funds and high costs of raw materials are the main problems faced by informal metal
manufacturing enterprises. Level of investment is low possibly due to the informality nature of
the business and possibility of risks. In terms of production the categories of products to expect
from the industry are: building materials, agricultural materials, industrial equipment and
machinery and household equipment. Of all the manufactured goods/products building materials
and agricultural materials are dominant. Estimates from the survey indicate about 75% of the
firms produced building materials and 71% agricultural materials amongst other products they
54
produced. The agricultural materials produced fall in the following categories: land preparation
equipment, planting equipment, and fertilising equipment, transport equipment, livestock
feeding equipment, agro processing equipment, irrigation equipment and packaging equipment.
Farmers are the dominant customer in the market of the metal products. Survey results show that
45% of the customers nationwide were farmers. Other customers were found to be the general
public not necessarily farmers, other informal firms and formal firms in the same line of business.
In addition consumers have access to market information about prices.
55
CHAPTER FIVE: STRUCTURE, CONDUCT AND PERFORMANCE OF FIRMS IN THE
INFORMAL METAL INDUSTRY
5.1 INTRODUCTION
The chapter presents findings of the study on four aspects: The competitiveness of industry, the
behaviour of firms in the industry’s market, the performance of firms in the industry and the
performance of the industry as a whole in producing benefits to consumers and also on the
factors influencing firm performance in the informal metal industry.
5.2 COMPETITIVENESS OF THE INDUSTRY
To carry out an assessment on the competitiveness of the informal industry’s market
concentration measures were used as indicated in chapter three. A two-firm concentration ratio
(CR2), a four-firm concentration (CR4) and an eight-firm concentration ratio (CR8) including
the Herfindahl-Hirschman index (HHI) were calculated. An assessment of the barriers to entry
was done also though not much emphasis was put on them since barriers to entry and exit are
difficult to measure from cross sectional data (Porter, 1998). Below is a presentation on the
findings of the study on competitiveness of the industry:
5.2.1 Market Concentration
Computation of the concentration ratios CR2, CR4 and CR8 gave the following results: 𝐶𝑅2 =
∑ 𝑆22𝑖=1 =0.0615, 𝐶𝑅4 = ∑ 𝑆4
4𝑖=1 = 0.1107, 𝐶𝑅8 = ∑ 𝑆8
8𝑖=8 =0.182. The concentration ratio for
the two largest firms (CR2) was found to be 0.0615, implying that of the 200 firms only 6.15%
of the market share was in the hands of two largest firms. Concentration ratio for 4 largest firms
(CR4) was 0.1107 implying that about 11.07% of the market share was in the hands of four
largest firms. Again CR8 was found to be 0.182 meaning that about 18% of the market share
was owned by eight largest firms in the industry. The results show that the concentration is very
low in the industry.
56
An alternative measure the (HHI) index gave almost the same result. HHI was found to be equal
to 0.01077 which is again close to zero. The results of the Concentration ratios and the HHI
index are consistent confirming that there are a large number of small sized firms in the informal
metal industry. This is so since CR2, CR4 and CR4 for the industry were found to be less than
40% and HHI index was 0.01077 which is close to zero. The results imply close to perfect
competitive model of the informal metal industry.
5.2.2 Nature of conditions of entry into the industry
Capital costs of entry
The costs of entry in the industry are generally low. Statistics on the initial capital requirements
for the firms already in the industry were found to be very low. The statistics in the table5.1
show that on average the initial capital requirements were worth USD$473,00. The modal cost
was found to be USD$250, minimum capital requirements cost recorded was zero and the
maximum was USD$2000.
Table 5.1 Summary statistics on total capital costs of starting the firm in Usd
N=200 Statistics
Mean Mode Minimum Maximum Range Std.Deviation Std. Error of Mean
473.34 250 0 2000 2000 417.596 41.76
Source, (survey results, 2013)
The distribution of costs of capital requirements show that the majority of firms in the informal
metal industry started their firms using less than USD$500. About 70% of firm owners
confirmed they incurred low capital costs to start their firms.
57
Figure 5.1 Distribution of worth of capital used to start firm
The distribution also show that only 24% of the firm owners incurred capital costs between
USD$500 and USD$1000. Moreover, only 6% incurred capital costs above USD$1000. The
results imply that capital requirements are not a barrier for potential entrants in the industry.
Licensing requirements in the industry
Survey results show that the majority of the firms did not pay any high licence fees before they
started operating their enterprises. From the survey 95% did not pay licence fees to enter into
the industry. Only 5% of the respondents paid licences at entry and those were the ones who
worked in council designated areas. However, all the firms (100%) of the firms were not
registered with the registrar of companies. The results also give a reflection on the ease of entry
in the industry. No licence fees are needed for new entrants to start their own enterprises in the
informal metal industry.
Entry barriers against women
Despite the absence of high licence fees payments at entry, absence of practices that limits
participation of other informal manufacturers in the industry and the low capital costs of entry,
participation of women in the industry is very low. After carrying out an assessment it was found
that there exist some cultural practices that limit participation of women in the industry. The
nature of production itself, the working conditions and environment including the nature of work
0%
20%
40%
60%
80%
0-500$ 501-1000$ 1000+$
Pe
rce
nta
ge(%
) o
f re
spo
nd
en
ts
Amount in USD$
Total cost of starting the firm in USD$
Percent(%)
58
which is considered too physical are the main barriers against women participation. The job was
named “job for men” by a few women who were interviewed for some comments.
5.3 BEHAVIOUR OF FIRMS IN THE INDUSTRY
This section presents the practices performed by firms in the industry in order to implement their
competitive strategies and to create competitive advantage. The analysis looked at things like
price determination(discovery) in the industry, price setting behaviours, coordination in
business, selling practices e.g. marketing strategies, levels of advertising and also research and
innovation in the industry. Results from the analysis are presented below:
5.3.1 Price discovery methods, price setting behaviours and other tactics in pricing
Survey results show that firms in the industry relied primarily on three price discovery methods.
Price discovery methods found common were: after bargaining with customers, fixing a constant
percentage mark-up on cost and, determining prices according to what competitors charge in the
industry. The most common method of price discovery however was that of fixing a constant
percentage mark-up on cost of production. Fifty two (52) percent of the firms use this method in
determining prices in the informal industry’s market. Informal haggling (bargaining) between
seller and buyer is the second most widely used method of price discovery. Thirty eight (38%)
percent of the traders in the informal market used bargaining as their price discovery method.
Only 10% of the firms determined prices according to what other competitors in the same
industry paid. The firms who used competitors’ prices arrived at selling prices of their products
through active consultations among other traders of similar products. The method was however,
complemented with some other cost-plus mark-up computations fine- tuned by some
assessments of the market situation. The figure below shows the results from the survey on price
discovery methods.
59
Figure 5.2 Price discovery methods
In general the behaviour of setting prices in the informal industry’ market is open market. Supply
and demand influence prices in the industry’s market. Cases of collusion in determining prices
for their goods were not common. Interviews carried out during the survey confirmed that only
7% of the firms practised the behaviour of colliding in order to set prices. In addition price
discrimination is again a less common practice in the industry. Only 2% of the firms were found
to discriminate prices. The figure 5.3 below shows the price setting behaviours in the informal
industry.
Figure 5.3 Price setting behaviours in the informal industry
In addition to the price setting behaviours and the price discovery methods survey results show
that some of the firms in the informal metal industry use aggressive tactics such as exclusionary
after bargaining with customers
by fixing a contant percentage on cost
according to competitors prices
38%
52%
10%
Price determination methods
open marketcollide with otherfirms/producers
descriminateprices
Price setting behaviour 91% 7% 2%
0%
20%
40%
60%
80%
100%
Pe
rce
nt
Price setting behaviours
60
pricing and predatory pricing in trying to gain competitive edge on the market. Fourteen percent
(14%) of the firms in the sample used predatory and or exclusionary pricing4.Such practices are
performed by some informal metal manufactures though very few firms practice the tactics.
5.3.2 Selling practices and Marketing
Group marketing of output was found to be a less common practice. Most of the firms were
found to be independent in making marketing decisions. The results of the survey show that 71%
of the firms do not market their products as groups with other producers. Only 29% of the firms
were found to make joint decisions with other informal players in the industry when it comes to
marketing of their products. The result also confirms that levels of collusion in the informal
market are limited. In conjunction with selling practices the study also found that at least three
channels were followed in selling produce by informal metal manufacturers. Selling through a
sales person, selling through export, and, selling products directly at the firm were the three
channels followed. The majority of the firms however, sell their products directly at the firm
(91%). Selling directly at the firm was reported to be cost saving since no transport cost were
needed to move products to other market places. Only a few firms employed sales persons as a
way of selling products. In most of the cases rewards to the sales person were made on
commission bases. From the survey only 22% of the firms employed salespersons as one of their
ways of selling products. Exportation of products as a way of selling products is not a common
practice within the industry. Only a small portion of the firms (2%) exported their products.
Export destinations noted for some of the metal products from the industry were South Africa
and Mozambique. The figure 5.4 below presents some of the ways of selling products noted in
the informal industry.
4 Exclusionary and predatory pricing are temporary practices by firms of selling their products below survival or
market prices to undermine or eliminate existing competition
61
Figure 5.4 Ways of selling products
In addition to the selling practices by informal firms it was also found that some of the firms
have contracts with some of their clients. Thirty one percent (31%) of the firms in the informal
metal industry were found to have contracts with some of their clients. Contracting with clients
was mainly done by informal firms who relied on formal enterprises as their customers. The
majority (61%) however, were found not to have contracts with their clients. Contracting with
clients was not a common practice as it was noted that securing contracts with some prospective
clients needed proof of firm registration. In the case of many informal firms securing contracts
with some prospective clients was impossible as the firms are not registered.
Marketing strategies
In conjunction with marketing of products an examination of strategies used in marketing was
carried out and several strategies were found. The following marketing strategies are used by
players in the industry:
Sell directly at firm
Sell through export
Sell through sales person
91%
2%
22%
9%
98%
78%
Ways of selling productsYes No
62
Figure 5.5 Marketing strategies employed by firms in the industry
From the figure 5.5 above the most common marketing strategy in the industry is Displaying.
Most of the firms display their products at the firm; statistics show that 97% of the firms use the
strategy. Displaying products at the firm is most common mainly because the strategy is
convenient as it integrates roles at the firm. The strategy was reported to save time, labour and
costs as one person could perform multiple tasks i.e. welding (production) and selling
successfully at the firm. In addition quite a number of the firms (40%) use after sales service as
their marketing strategy. On after sales service firms offer periodic or as required maintenance
and repair of equipment they supplied to clients. The strategy is found to be effective by the
firms since it attracts more customers for the firms.
Pricing, advertising, promotion and branding are also common strategies used though lower
proportion of firms use them. Only 22% of the firms use pricing as their marketing strategy, 20%
use advertising, 7% use promotion, 1% use branding and none of the firms use packaging as a
marketing strategy. Pricing as a strategy is a less common practice, firms use prices through
making some adjustments to increase sales and gain competitive advantage. Twenty percent of
firms use advertising as one of their marketing strategies. The strategy was not very common in
the industry probably because of the additional costs associated with the strategy. Promotions
were found not to be a common strategy again with only 7% of the firms employing the strategy
on the market. This could be because most of the firms in the industry are still young and growing
1% 0%20% 22%
97%
7%
40%
99% 100%80% 78%
3%
93%
60%
Branding Packaging Advertising Pricing Displaying Promotion After salesservice
Marketing strategies Yes NO
63
and therefore carrying out promotions will stand as a threat for business survival as they incurred
additional costs. Packaging was found not to be employed as well as a strategy possibly because
of the nature of products the industry produces. Branding also was a less common strategy due
to the same reasons of incurring additional costs.
5.3.3 Grading, Advertising, Research and Development
The table below shows some statistics on grading premiums, spending on advertising and
spending on research and development to be discussed later in text.
Table 5.2 Summary statistics on Grading, Advertising and Research and Development
N Max Min Mean Std dev.
Premiums from grading (%) 200 50 2 18.05 11.591
Spending on advertising(USD) 40 1200 60 645.00 345.81
Spending on research and
development (USD)
44 2400 100 718.18 627.65
Source, (survey results, 2013)
Grading and premiums for grading
Grading of produce was seen as a common practice in the industry. Survey results show that
63% of the firms have grades for their products. A smaller percentage of the firms (37%)
however, didn’t have any grades for their products. For those firms who grade their products the
following criteria are used: Size of product (33%), Material used to make product (79%),
Combination of the two methods (25%).
The figure 5.6 below presents the proportions on the criteria for grading used by firms in the
informal metal industry
64
Figure 5.6 Criteria used for grading products
The figure shows that grading is mainly done based on the material used to make product.
Seventy nine percent (79.4%) of the firms use the criterion to grade their products. Only 33% of
firms who have grades for their products used size of the manufactured product and 25% of the
firms used both methods in coming up with grades for their products. The results imply that
quality of the metal products is mainly determined by two factors which are, type of material
used to make product and the size of the manufactured good.
Respondents representing firms were further asked if they got premiums from grading. The
results show that firms get some marginal premiums from having grades for their products.
Results show that on average a premium of 18.05% is obtained by producing higher grade
products. From the table 5.2 above statistics show that minimum percentage premium for
producing higher grades was 2% and the maximum was 50%. The standard deviation was 11.591
which indicate slightly higher variations of scores from the average. The statistics however,
imply that firms in the informal metal industry have some incentives for grading since producing
higher grade products attracts positive returns.
Advertising
Level of advertising was generally low as indicated by a small percentage (20%) of the firms
who used advertising as a marketing strategy. The research went on to assess the levels of
33.30%
79.4%
25%
66.70%
20.60%
75%
Size of product Material used to make product Both
Criteria used for gradingYes No
65
spending towards advertising of firms that used advertising as their marketing strategy. On
average it was found that firms used USD$645.00 per year towards advertising expenditure.
Statistics on advertising expenditure per year are shown in table 5.2
It is shown in the table 5.2 that spending towards advertising is generally low as indicated by
some firms who spent only USD$60.00 per year. The maximum spending per year recorded was
USD$1.200.00 per year (which is about USD$100.00 per month) which again show that levels
of spending towards advertising expenditure are low. Advertising in the industry is done in
various forms. Advertising is done through local newspaper adverts, by word of mouth, through
flyers, business cards and posters. The following figure presents on the modes of advertising
used in the industry:
Figure 5.7 Modes of advertising used
From the figure above distribution of flyers (70%) and word of mouth (60%) are the frequently
used modes of advertising by firms. Some firms use posters (42.5%), some distribute business
cards (20%) and some firms use newspaper adverts for advertising. 27.5% of the firms use the
newspaper for advertising.
Research and development
Research and innovation like advertising is again not a very common practice in the metal
informal industry. Survey results show that only 22% of the firms in the industry spend on
newspapers word of mouth flyers business cards posters
no 72.50% 40% 30% 80% 58.50%
yes 27.50% 60% 70% 20% 42.50%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
pe
rce
nta
ge(%
)
Modes of advertising
66
research and development. Spending on research and development however, was found to be
slightly higher as compared to spending on advertising. On average firms spend about USD$718
per year towards research and development. Statistics on Research and development spending
are as in the table 5.2
The statistics in the table show that research and development spending is low with maximum
spending per year recorded being USD$2.400.00 (USD$200.00 per month). Minimum recorded
expenditure was USD$100.00 Spending on research and development is however, higher than
on advertising. The results imply that firms in the informal industry do not dwell much on
research and development probably due to resource limitations and the nature of their businesses
activities. Since, most of the firms operate in illegal places and are not licenced spending heavily
on research and development remains low since owners are afraid of the uncertain future of their
enterprises.
5.3.4 Information and Communication Technologies (ICT’s) used in business
Information and communication technologies used in the industry include mobile phones,
internet and computers. Almost all (98%) firms in the industry use mobile phone technology in
business. Only 24% used internet technology and 8% use computers in their businesses.
Figure 5.8 ICT’s used in business
computers mobile phones internet
no 92% 2% 76%
yes 8% 98% 24%
0%
20%
40%
60%
80%
100%
120%
Axi
s Ti
tle
ICT's use in business
67
The figure 5.8 above presents the ICT’s used in business. Mobile phone technology is the main
mode of communication used with customers, clients and any other stakeholders to their
businesses. Internet is also used in communication though less frequently. Social networks like
Facebook, whatsapp and the use of emails are other ways of communication. The use of
computers is still very low in the industry though.
5.3.5 Other conduct
Figure 5.9 Product returns by customers
As indicated in the figure 5.9 above, return of defective or faulty products by customers is
welcome in the industry as 91% of the firms pointed that product returns are welcome to their
firms. Only a few firms (9%) indicated that product returns are not welcome. The results imply
that customer service in the sector is quite good and consumers are guaranteed of quality on
products.
5.4 SUCCESS OF THE INDUSTRY IN PRODUCING BENEFITS FOR CONSUMERS
Performance of the industry in producing benefits to consumers was measured in various ways.
Some of the ways recommended in literature are price levels, producer share of the price,
profitability, profit margins, customer satisfaction, etc. The study focused on profits, prices,
customer satisfaction, profit margins, and producer share of the price to assess the performance
of the industry. This sub-section presents the results on the success of the industry in producing
benefits to consumers
yes91%
no9%
Product returns by customers allowed
68
5.4.1 Prices as compared to formal competitors and producers’ share of the price
Study findings reveal that prices in the informal industry are lower when compared with those
of main competitors in the formal sector selling the same products. A comparison of formal and
informal prices of some of the products produced in the industry revealed that prices in the
informal industry were generally lower. Comparison was done using average prices obtained
from the respective industries formal and informal on three products as shown in the table below.
Table 5.3 Comparison of formal and informal prices on selected products
Products Formal rice(Average)
in USD$
Informal
price(Average)
in USD$
Informal prices
(%) lower
Scotch cart 650.00 500.00 23.1
Mouldboard
plough
140.00 105.00 25
Wheelbarrow 65.00 50.00 23.1
Source, (survey results, 2013)
From the table the prices collected for the three products showed that informal prices were
generally lower as compared to prices by formal competitors. By calculating the margins of
difference from the sample of product prices it was shown that informal prices were atleast 23%
lower. In addition all the survey respondents (100%) representing the firms pointed out that
prices they charge are lower than those of formal competitors producing the same products in
the formal industry. The main reasons that were given for charging lower prices are as shown in
the figure below:
Figure 5.10 Reasons for charging lower prices than those of formal competitors
16%
62.70%
16% 5.30%0%
20%
40%
60%
80%
i do not pay taxes my labour costs arelower
my customers are lessrich
quality of my productsis lower
Main reason for charging lower prices than those of formal competitors
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From the figure the major reason for charging lower prices was that the firms feel their costs of
production are lower as compared to formal players. Some of the reasons stated were that their
customers are poor (16%); they do not pay taxes (16%) and that the quality of their produce is
lower (5.3%). The results imply that firms in the industry are well informed of the world
surrounding them and they understand the situation and purchasing powers of their customers.
The reasons that were mentioned also show that informal firms consider an array of factors
before coming up with a price for their products. They try to suit their prices with the needs of
their customers and themselves.
Producers’ share of the price
Producers’ share of the price in the study was measured as the proportion of the price paid by
consumers that gets to the producer. On average producers were found to get 90% of the price
charged on a product. Statistics in the table below presents the results.
Table 5.4 Producer’s share of the price statistics
Statistics
Producer share
Min Max Mean Std.Deviation N
60% 100% 89.54 9.736 200
Source, (survey results, 2013)
As indicated in the table the minimum producer share of the price recorded was 60% and the
maximum was 100%. Producers’ share of the prices is large and the result is not surprising since
firms incur low marketing costs. The result gives a reflection on the costs associated with their
marketing in the industry. The firms mainly market their products at the point of manufacture
and therefore as a result not much of marketing costs are incurred. In addition middlemen and
salespersons have no big role to play in their marketing as results indicated earlier that most of
the firms sell their produce at farm gate.
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5.4.2 Profitability of firms in the informal metal manufacturing industry
The micro and small enterprises in the informal metal industry are profitable. Net profits
calculated for the years 2010, 2011 and 2013 from the survey data confirm the result. The
descriptive statistics for profits for the three years are as shown in the table 5.5 below:
Table 5.5 Descriptive statistics on net profits from 2010-2012
(USD) N Range Minimum Maximum Mean Std. Deviation
profits 2010 154 29900 100 30000 4111.818 5301.016
profits 2011 180 29850 150 30000 4286.222 5257.624
profits 2012 200 29850 150 30000 4051 4761.294
Source, (survey results, 2013)
Statistics in the table show that firms on average get at least USD$4.000.00 a year (about
USD$300.00 a month) as profit. Survey results show that average profit in year 2010 was
USD$4.111.80, USD$4.286.00 for year 2011 and USD$4.051.00 for year 2012. The standard
deviations are quite large implying that the means might not be a good reflection of the profits
across the whole industry. Distributions of the profits across the years might show a better
reflection of the situation. The figures below show the distribution of profits in 2010, 2011 and
2012.
Figure 5.11 Distribution of profits in the year 2010
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Figure 5.12 Distributions of profits in 2011
Figure 5.13 Distributions of profits in 2012
From the distributions it is shown that most of the firms earned profits that are less than
USD$5000 a year. Very few firms earned large profits i.e. profits greater than USD$20000 a
year. Distributions of profits in the graphs above also show that there was no much difference in
terms of profits earned by firms for the given years. Average profits earned and the general
distribution of firm profits in 2010, 2011 and 2012 were almost the same as shown in the graphs
above.
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In addition to the profits earned by firms profit margins for the firms included in the sample were
also calculated using year 2012 profits only. Profit margins measure how much out of every
dollar of sales a firm actually keeps in earnings. Profit margins were calculated as a ratio of profit
divided by sales revenue for a particular year multiplied by 100 as indicated in the research
methods section. Results of the calculation show that on average firms in the informal metal
industry keep at least 47 cents out of every dollar of sales. The figure below shows the
distributions of the profit margins in the industry.
Figure 5.14 Distributions of profit margins of firms in the informal metal industry
The distribution shows that most firms’ profit margins fall between 40% and 80% and this again
show that firms in the industry are profitable and they retain at least 40% of their sales’ values
as profits.
5.4.3 Expected future performance of informal metal manufacturing firms
Tobin’s Q ratio is a proxy measure of firms expected future performance. The ratio measures the
ratio of the current value of firm assets to the replacement value. Results from the calculation of
the Tobin’s q ratio show that the firms in the industry are not very far from equilibrium (q=1).
Calculations show that the average value for the ratio (q) is 0.98. It is less than one but since it
is very close equilibrium (q=1) we can conclude that the industry’s expected future performance
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seem to be good. This implies that firms in the industry are more likely to succeed in future and
investments in the industry will be meaningful since they are likely to generate the cost of assets
invested. The table below show statistics on the Tobin’s Q ratio.
Table 5.6 Descriptive statistics on the Tobin’s q ratio calculations
N Minimum Maximum Mean Std. Deviation
Tobin’s Q 200 .40 2.70 .9834 .28639
Source, (survey results, 2013)
From the table the minimum ratio is 0.4 and the maximum is 2.70. The standard deviation is
0.29 which is relatively low implying that the mean is a good reflection of the situation in the
industry in terms of the Tobin’s Q ratio.
5.4.4 Customer satisfaction in the industry
Firms in the informal metal industry feel that customers are satisfied with their products. When
firm representatives were asked whether they think customers are satisfied with their products
all firm representatives gave a yes response. The main reasons given were that customers keep
on coming to buy their products and that there are few cases where customers complain about
their products and services. In addition a few customers interviewed at the time of the survey
also said they are satisfied with products and services from the informal metal industry. Thirty
five (35) out of forty (40) customers interviewed (87.5%) said they are satisfied with the products
and services from the informal industry. Main reasons for their satisfaction given were that:
i. Products from the industry are cheap compared to formal competitors.
ii. Products from the sector are durable
iii. Firms in the informal industry offer after sales services for some of their equipment
iv. Consumers can influence design on specific products they want to buy from the informal
industry. For example consumers can specify dimensions for a scotch cart they want
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firms to produce for them. In addition consumers can bring their own material to make
some products.
v. There is room for returning defective products
The given reasons confirmed the fact that customer satisfaction is generally high in the industry.
5.5 FACTORS INFLUENCING PERFORMANCE OF FIRMS IN THE INFORMAL METAL
INDUSTRY
In addition to the examination of performance of the industry it was necessary to examine some
of the main drivers of performance amongst firms in the metal industry. Factors influencing
individual firms’ performance were considered mainly due to the reasons mentioned in the
literature review section. The study examined factors within the structure-conduct-performance
framework and also other firm specific factors in order to determine what influenced
performance of informal metal manufacturing enterprises. Multiple regression analysis was
applied with profit as the dependent variable and nine independent variables as shown in table
3.4 in chapter three. The intention was to test whether the hypothesis that the structure and
conduct variables significantly influence firm performance was true. The whole of this section
present the results of the multiple regression analysis.
5.5.1 Descriptive statistics of the sample on variables in regression
Table 5.7 below show the descriptive statistics of the sample on the dependent and independent
variables. By and large, the profits of the small to medium firms in the metal informal industry
were rather small with a mean of USD$4.051.00 per year, compared to formal industry mean
which is above half a million united states dollars a year (CZI statistics). Looking at the mean
age, we can conclude that most of the small to medium firms are new in the sector since mean
age of firm was 6 years. Firm owners started operations without much experience of the metal
manufacturing business. Mean experience was 2.4 which show that firm owners started
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operations in the metal manufacturing business without a lot of experience of the trade.
Collective action statistics indicate that collective action was not a common practice as indicated
by the mean collective action of 0.27. The statistics also indicate that most of the informal
enterprises produced agricultural products as mean type of product was 0.82. Gender wise it can
be concluded that the industry is dominated by male people i.e. (mean gender =0.98) very close
to 1 indicating that almost all of the participants in the industry are male. Almost all of the
enterprise owners had attained at least secondary education as mean education was 0.96. In
addition grading was seen as a common practice amongst firms in the in the informal metal
manufacturing industry i.e. mean grading was 0.63. Bargaining with customers was not a very
common practice in price determination as shown by mean price determination of 0.38 which is
close to zero. Lastly the statistics also show that contracting with clients was again not common
at the time of the study amongst the informal metal manufacturing firms. The descriptive
statistics in the table 5.7 are based on a sample of 200 informal metal manufacturing firms
included in the survey.
Table 5.7 Descriptive statistics on regression variables
Variables (N=200) Definition Mean Std dev. Min Max
Dependent variable
Profit Profits of firm in Usd 4051 4761 150 30000
Independent variables
Collective action(dummy) Collective action in
business1=yes,0 otherwise
.27 0.445 0 1
Gender of owner(dummy) 1=male,0 female .98 0.14 0 1
Education(dummy) 1=,attained at least secondary
education,0 otherwise
.96 .196 0 1
Contracting with clients(dummy) 1=yes, 0 otherwise .31 .464 0 1
Grading(dummy) 1=yes,0 otherwise .63 .484 0 1
Price determination(dummy) 1=bargaining with
customers,0 otherwise
.38 .487 0 1
Type of products(dummy) 1= agricultural, 0 otherwise .82 .385 0 1
Experience of owner Number of years of
experience
2.36 2.72 .00 12
Age of firm Age in years 6.1 5.05 .60 25
Source, (survey results, 2013)
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5.5.2 Multiple regression results
Correlation tests between variables were performed and at 5% level none of the independent
variables were correlated. The absence of correlation was a good result for multiple regression
analysis since it’s a proof that there was no problem of multi-collinearity. The table 5.8 below
shows the multiple regression results. The R-square value was 0.286%, implying that the
percentage of variation in profits explained by the collection of independent variables was about
29% when rounded to 2 decimal places. Based on the Adjusted R-square we can say that our
model accounted for 26% of the variation in the dependent variable. At 5% level of significance
it was evident that at least one of the independent variables explained variability in performance
measured by profits as the F-value was 9.56 and a p-value 0.000<0.05. The result confirms that
the model was useful.
Table 5.8 Multiple regression results on factors influencing performance
Variables Coefficients Std. Error t sig
(Constant) 5223.722 2693.896 1.939 (.054)
Collctactn(dummy) -1568.777 768.490 -2.041 (.043)
Gender(dummy) -3063.694 2137.382 -1.433 (.153)
Edu(dummy) 414.833 1572.595 .264 (.792)
Contrct (dummy) 2525.291 692.417 3.647 (.000)
Grd (dummy) -1460.175 691.305 -2.112 (.036)
Pdm(dummy) -2928.168 668.048 -4.383 (.000)
Typpdct (dummy) 1417.846 821.223 1.727 (.086)
Exp 375.893 114.294 3.289 (.001)
Agefirm 172.302 63.614 2.709 (.007)
F(p-value) 9.556(.000)
R-squared .286
Adjusted R-square .256
N 200 Significant at 1% level; Significant at 5% level; Significant at 10% level
Source, (survey results, 2013)
Based on the results age of firm, experience of owner when he/she started the business, price
determination method, and contracting with clients, were very significant as indicated by the p-
values <1%. Grading, and collective action were significant also though only at 5% level as
indicated by the p-values >1% but <5%. Type of products produced was just significant at 10%
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level as indicated by a p-value of (.086) > 0.05 but < (.10). Education and gender were not
significant.
The age of firm variable’s significance is consistent with the expectation that performance of the
small to medium firms tends to improve with age. Experience of owner when he/she started the
business was very significant as expected i.e. performance tends to increase with experience of
business operators. The more experienced the enterprise owner, the more likely it is that the firm
will do better. Bargaining with customers as a price determination method had a negative
significant influence on profits. This could be because with room for bargaining with customers,
firms tend to sell more products at lower prices due to negotiations by clients and hence they
tend to have lower profits in the end. Contracting with clients was also very significant and had
a positive influence on firm profits. This could be probably due to the fact that firms who secured
contracts with clients will have more secured market for their output and hence are likely to
perform better as compared with those with an uncertain market for their products. Collective
action in business does not help in business since the industry is perfectly competitive. Grading
was found to affect performance negatively. This could be because firms tend to focus on
producing higher grade products that fetch higher prices hence with the pool of poor customers
they tend to sell less. Type of product was just significant and had a positive influence on
performance. This could be because firms who produced agricultural products tend to sell more
due to the high demand of the products. Education and gender were not significant implying the
two did not explain variation in firm’s performance in the industry.
More interestingly, the coefficients of the significant variables except for grading, price
determination and collective action were large and had positive signs implying that the factors
positively impact on firm performance (to the tune of their respective coefficients as shown in
table 5.8 above) in the informal metal industry. For those with negative signs implied that the
factors negatively influenced on firm performance.
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5.6 SUMMARY OF CHAPTER FINDINGS AND CONCLUSIONS
Structure of the industry
Results of the concentration measures imply that the informal metal industry approaches the
purely competitive model. CR2, CR4, and CR8 were found to be less than 40% and the HHI
index was close to zero. The industry has a large number of small sized firms. In addition barriers
to entry in the industry are very low as indicated by low capital costs of entry and no high licence
fees payment requirements for new entrants. Moreover, products produced in the industry are
standardized i.e. products of one firm are indistinguishable from that of other firms in the
industry. The results of the structure of the industry also imply that customers always have
alternatives to a single firm’s product or service. Low barriers to entry also imply that there is a
limit to the price that a single firm can charge. There is discipline in the market in general due
to low entry barriers in the industry. The hypothesis that the industry is perfectly competitive
could not be rejected based on the results of the analysis.
Behaviour of firms in the industry (Conduct)
Fixing a percentage mark-up on cost used to make product was the main price discovery method.
Informal haggling (bargaining) with customers was found to be the second main price discovery
method in the industry, and determining prices according to what competitors charge was one of
the price discovery methods used. Prices in general were found to be a result of the market forces
of demand and supply. Aggressive tactics in pricing such as predatory pricing and or
exclusionary are not common practices. In terms of marketing most of the firms make
independent decisions when marketing their products. The marketing strategies mainly used by
firms include displaying, after-sales service, pricing, advertising, promotion and branding. It was
equally important to note that the most dominant marketing strategies used by most firms were
displaying after-sales service and pricing. Some of the marketing strategies mentioned were
found not to be commonly used by firms in the industry. Firms in the industry sell their products
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in three ways: 1-selling at the firm, 2-selling through export and 3-selling through sales persons
employed by the firm. However, almost all the firms sell their products at their firms. Exporting
and use of sales personnel were seen not to be common ways of selling their products.
Furthermore, contracting with clients was not found to be a common practice. Grading was found
to be a common practice by many firms and grades were mainly based on size of product,
material used to make product and a combination of both. It was also found that there are
premiums for grading in the industry. On average 18.05% premiums are obtained for producing
higher grades. Advertising, research and innovation are not common practices in the industry.
Less than 23% of the firms were found to spend on advertising and research and development
of the firm. Of the firms that dwell on the two it was found however, that spending towards the
two practices were very low. Moreso, mobile phone technology is the main information
communication technology used by the firms in business. The use of internet and computers are
less common ICT’s used in business. In terms of other conduct, firms in the industry welcome
product returns on defective products.
In summary the results implied that there is no collusive behaviour in price determination i.e.
prices are reflections of supply and demand. Firms practice close to marginal cost pricing. In
addition results imply that uncompetitive behaviours by firms in the industry are very low. The
hypothesis that firms in the industry do not dwell much on Advertising, research and
development could not be rejected.
Success of the industry in generating benefits for consumers
The industry seems to be on-track in bringing satisfaction to consumers. Prices in the industry
are lower as compared to prices of formal competitors producing the same products. Prices are
lower not because firms are exploiting consumers, but because firms in the industry generally
face lower costs of production. Raw material costs and labour costs are lower as compared to
formal players and players don’t pay taxes. The firms in the industry are profitable. This is
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evidenced by positive profits, high producer share of the price and high profit margins. Firms
retain at least 47cents for every dollar of sales as profit. Producer share of the price is high 89.5%
on average. In addition, Tobin’s q ratio was found to very close to 1(0.98) which again show
that the industry has the potential of doing even better. The ratio implies that the industry has
great potential. Future investments in the industry are likely to be meaningful since investments
will generate the costs of assets invested. In addition, success of the industry is evident in
customer satisfaction. Consumers are satisfied with products from the informal industry. Results
on performance of the industry are not surprising since the industry is close to the purely
competitive model. In perfect competition firms have no market power and are price takers. As
a result prices tend to be low, there are no economic profits and there will be efficiency. The
hypothesis that the firms are making positive profits and are succeeding in satisfying customers
could not be rejected based on the findings.
Factors influencing firm performance.
Both firm specific factors and factors within the structure conduct and performance framework
were found to significantly influence performance in the informal metal industry. Firm age,
experience of owner of metal manufacturing, type of products produced by firms, grading of
products, price determination methods and contracting with clients, collective action in business
and grading were found to influence profits in the industry. Price determination, grading and
collective action were found to influence performance negatively whilst all the other significant
factors had a positive influence. The hypothesis that factors within the structure-conduct and
performance influenced performance of small to medium firms could not be rejected at 5% level.
It was however, concluded that not only factors in the structure-conduct and performance
framework influenced performance, but also firm specific factors outside the structure, conduct
and performance paradigm like age and experience of firm owners when business was started.
The results of the analysis are consistent with some studies on the factors influencing small to
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medium enterprise performance. In Thailand, Chittithaworn et al (2010) on the study of factors
affecting business success of SME’s in the manufacturing sector in Thailand concluded that
SMEs characteristics, customer and market, ways of doing business, resources and finance and
the external environment significantly affect performance. In addition, a study by Rosli, (2011)
in Malaysia auto-parts making industry concluded that firm specific factors significantly
influences SMEs performance.
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CHAPTER SIX: IMPLICATIONS AND RECOMMENDATIONS
6.1 INTRODUCTION
The chapter presents the implications of the structure, conduct and performance of firms in the
informal metal manufacturing industry to stakeholders in the agricultural sector. Policy
recommendations drawn and areas for further study are also presented under this chapter. The
main stakeholders considered in drawing implications for the results in this study are the small
holder farmers. Implications are drawn based on the results of the structure, conduct and
performance of firms in the industry and also based on the factors influencing firm performance
in the informal metal industry.
6.2 IMPLICATIONS
6.2.1Implications of Informal industry Structure on smallholder farmers
The informal metal industry in Zimbabwe is characterised by low concentration of sellers of
metal products(i.e. CR2,CR4,CR8 were found to be close to zero and less than 0.4 and HHI close
to zero), low barriers to entry and exit. In other words the results imply that the industry is very
close to the purely competitive model. The classification further implies that there could be
discipline in the market as new entrants can enter anytime without much difficulties, therefore
increasing competition. As a result of competition, efficiency is encouraged amongst market
participants and the outcome is more likely to be lower prices for consumers and good customer
satisfaction. Considering that farmers especially smallholder farmers are amongst major
customers in the industry, they have big advantages in sourcing some of their agricultural
materials from the informal industry since they enjoy benefits of perfect competition. Lower
prices and good customer satisfaction are the more likely benefits. By further considering that
smallholder farmers in Zimbabwe are known to be resource poor the lower prices charged on
agricultural products in the informal industry due to competition are a favourable outcome for
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them also. Farmers can afford to buy more products with their limited incomes in the informal
industry’s market due to the lower prices.
6.2.2 Implications of Conduct (behaviour of firms) on smallholder farmers
Results reflect that prices in the informal industry’s market are a result of interaction of buyers
and sellers. The industry’s structure also confirms that there are a large number of small sized
firms in the industry. This implies that if one firm tries to increase his/her product prices, he or
she sells almost nothing. This means that smallholder farmers buy or can buy agricultural
equipment, implements and other general tools from the informal metal industry’s market at
prices that are close to marginal costs of production.
Firms in the industry lack market power i.e. besides low market concentration it was also found
that the firms do not engage in group marketing and other collusive behaviours in business. This
again confirms that stakeholders in the agricultural sector (the smallholder farmers) can rely on
the informal metal industry as they are more likely to get value for their money. Low market
power implies that firms cannot overcharge customers as they are price takers.
It was also found that consumers can return goods that are damaged or goods that are below
standard. This reflects the level of customer care in the industry and this implies that farmers
sourcing their agricultural materials from the informal metal industry are guaranteed high quality
goods and services.
It was unfortunate to find out that prices in the industry are not displayed. There is a possibility
that firms can charge different prices to different consumers for the same commodity. This
subjects some customers in this case farmers to high costs and less purchases. However, given
that customers have access to market information this is not a major worry for Zimbabwean
smallholder farmers. Farmers can carry out consultations with other firms of the prices of
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products before purchasing since the firms in the informal sector are many and found in specific
areas.
6.2.3 Implications of Performance of the industry on smallholder farmers
In terms of performance it was found that firms earn positive but not excessive profits, profit
margins earned by firms are high, there is customer satisfaction and that most of their products
are always in stock.
Having most of their products always in stock in the industry all other things held constant
implies that smallholder farmers sourcing agricultural materials from the informal industry face
regular and predictable availability of products. Besides products being available always, it was
also found that farmers have an option of putting orders of products they want firms to
manufacture in the industry. In addition farmers like any other customers can influence the
design of the product they want to buy from the industry. Some of the services are not common
in the formal market and therefore an advantage for farmers to use the informal market as their
source of agricultural materials ceteris paribus.
Positive but not excessive profits for the firms and low prices charged again indicate that farmers
are not overcharged in the industry and thus can buy more metal products from the industry
given their fixed incomes. In addition, the high profit margins and positive profits indicate that
the firms can still remain in business and offer the services they are offering to customers in the
long run.
In summary the informal metal industry in Zimbabwe has great potential and is playing a vital
role in the economic transformation of the country through aiding agricultural development.
Supplying vital agricultural technologies efficiently to farmers is a big plus in the prospects of
raising national output, productivity and bringing national development. From this we can draw
policy recommendations that are likely to extent and exaggerate benefits to the farmers and the
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rest of the economy. The section below draws some recommendations that are likely to improve
benefits from the informal industry to stakeholders in the agricultural sector and other
stakeholders.
6.3 RECOMMENDATIONS
As noted in chapter four section 4.2, informal metal manufacturing firms in Zimbabwe were
found to operate in insecure contested spaces mostly in urban centres. Examples of places where
informal firms, included in this survey were found are: in Harare, (Mbare Magaba area, Mbudzi,
and Gazaland, in Mutare (main green market, and Dangamvura green market), in Bulawayo
(renkini msika area, Makokoba), in Chitungwiza (Makoni area), in Rusape (Mabvazuva,
Vengere and Msika areas). Besides being insecure the areas lack adequate infrastructure, general
appeal and well-constructed facilities and often are inadequate to accommodate the bulk of
activities by informal operators. As a result of the lack of appealing and well-constructed
facilities some customers look at the places and structures and see them as a nuisance and choose
not to be associated with them. This is a drawback to informal enterprises as it prohibits them
from reaping maximum economic benefits and also a drawback in their success in producing
benefits for consumers. The challenges therefore affect almost every stakeholder benefiting from
informal sector activities including smallholder farmers. With this in mind the researcher give
the following as recommendations
6.3.1Recommendations to policy makers
The researcher recommends the government through relevant ministries (i.e. the ministry of
SME’s, local government), financial institutions and the private sector community to weigh
possibilities of accommodating informal metal manufacturing enterprises into the country’s
development agenda. Integrating the industry into the national development agenda will enhance
orderly utilisation of urban space; improve the aesthetic appeal of the informal sector sites, and
86
even improve business viability and operations. Integrating the industry however, does not entail
complete formalisation of activities as this will deprive the informal enterprises of their current
benefits e.g. low costs and increase chances of closure/failure of the micro to small and medium
firms. In line with incorporating the informal sector enterprises into national agenda there is need
also by government to promote competition within the industry. There is need for government
to keep barriers to entry and exit in the industry low so as to draw concentration of sellers very
close to zero and increase competition. Drawing and keeping the industry very close to perfect
competition will encourage firms to be innovative, encourage improvements to the quality of
service for consumers, create better information for consumers allowing farmers to make more
informed choices, be very efficient in production and therefore a general improvement in
economic welfare. The farming community (farmers) and the rest of stakeholders are more likely
to reap maximum benefits if the industry is perfectly competitive.
6.3.2 Recommendations to owners of informal sector enterprises
To the informal enterprise owners the researcher recommends them to work on improving their
operations. In addition, the researcher further recommends the informal operators to work on
registration of their enterprises as there is a possibility of attracting a big clientele base. There is
need also by the informal firm owners to work on improving their skills in business i.e.
sharpening personal skills and selling skills and know their limitations. Above all the researcher
also urges the informal enterprise operators to dwell on competitive practices in business.
Moreso, the researcher recommends firm operators to use obtained knowledge from the factors
that influence firm performance to track their positions in business, communicate goals as well
as verify priorities. They need as well to use the obtained knowledge to improve their
performance. For example since contracting with clients and type of products produced
positively influence profits, firms can work on the two to improve their earnings. In addition
firm owners need to realize that the more they stay in business the better since firm age
87
significantly influenced profitability. Since price determination, grading and collective action in
business were found to have a significant negative influence on profitability, firms can consider
avoiding collective action in business, firms can do away with grading and rather produce
standard products, and also they can choose other methods of price determination as opposed to
bargaining with customers to avoid the negative influence.
In addition, knowledge obtained from the analysis of factors affecting SMEs performance can
be used by the SMEs to formulate strategies, motivate employees and mostly in decision making
also. The researcher again strongly recommends firm owners/operators to use the knowledge
obtained for the benefit of their businesses.
6.3.3 Recommendations to farmers
Basing on the findings of the study, farmers benefit from using the informal metal industry as
their source of agricultural materials (implements, equipment and other general tools). The
industry is performing well and is offering competitive services to customers. Hence farmers are
guaranteed of lower prices, greater variety of products, and good quality of services from the
industry. The researcher strongly recommends farmers to feel comfortable in buying agricultural
materials and any other metal products from the informal sector. Farmers need not to be misled
by the ugly-looking structures that are poorly serviced, aesthetically unfriendly and
environmentally unstable as there is a lot to benefit from informal industry activities. Farmers
are further recommended to consider the informal metal industry when procuring their inputs
(agricultural implements, equipment, and or tools) for their farming activities.
6.4 AREAS OF FURTHER RESEARCH
The emphasis in this study has mainly been on the supply side. More research focusing on the
demand side of the story is needed to complement this study. We focused much on the supply
side where an understanding of the industry was used to draw conclusions on the success of the
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industry in producing benefits for consumers. Little focus was given to the demand side of the
story. Consumers i.e. farmers need to be included in the analysis as their views will complement
judgement of the success of the industry. Farmers are the ones who can comment on things like
the appropriateness of technologies from the industry, durability, affordability and other
attributes of products from the industry.
In addition, there is also need to collect time series data in order, to review the interlink-ages
amongst the structure, conduct and performance of the industry. Factors that influence the
performance of firms are better predicted using time series data than cross-sectional data.
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LIST OF APPENDICES
Appendix 1: Firm Owners’ Questionnaire
Micro and small metal manufacturing sector questionnaire
Firm owners’ questionnaire
Purpose of the survey
The aim of the survey is to carry out an assessment of the informal metal manufacturing industry sub-sector
performance with particular focus on the micro and small enterprises. The information that you are going to provide
is confidential and will be used only for the purposes of this research project. The ultimate goal of this research
project is to influence policy making with a view to develop capacity and promote industrialisation from the grass
roots.
Questionnaire number……………………………………………..
Enumerator………………………………………………………..
Respondent designation at firm…………………………………..
Firm name………………………………………………………..
Location………………………………………………………….
Date of interview………………………………………………….
A. FIRM AND OWNERS’ DEMOGRAPHIC CHARACTERISTICS
1. Age of firm owner………………….years
2. Gender of firm owner 1= male, 2=female
3. Marital status of respondent 1=married, 2=single, 3=widowed, 4=divorced
4. What is your highest level of education?
1. No education 2. Primary school 3. Secondary school 4.vocational training 5. University
education 6. Other (specify)…………..
5. Age of the firm……………………………………..years/months/days
6. How much experience did you have when you started the firm?
(………………………years/months/weeks)
7. What was your source of skill acquisition for your current job at this firm?
1. Government vocational training 2. Private vocational centres 3.NGO’s 4.other informal operators
5.other (specify)…………
8. What was the total cost of starting the firm? USD$........................................................
9. What was the source of your capital to start the firm? (multiple response allowed)
1. Own savings 2. Bank loan 3. Loan from friends/family 4. Government loan 5. Loan from
donor agency 6. Loan from money lender 7. Other(specify)
10. What is the current value of your capital equipment? USD$.....................................
11. What is the replacement value of your capital equipment? USD$..................
12. What type of firm is this?
1. Private 2. Partnership 3. Cooperative 4. Household enterprise
B. FIRM EMPLOYMENT
1. How many of the persons working in your firm are…..
Category Male Female
Owners
98
Family members
Employees
total
2. How many persons working in your firm were?........
Year Gender Category
Owners Family
members
Employees Total
2010 Male
Female
2011 Male
Female
2012 Male
female
C. STRUCTURE OF THE INFORMAL FIRMS
Barriers to entry and exit
1. Are there cultural practices that discriminate against women in controlling and accessing credit and capit
al markets in a way that limits market participation? 1=Yes 2=No
2. If yes what are they?
………………………………………………………………………………………………
3. Are there some cultural practices that limit the participation (or lead to the marginalization) of some man
ufacturers or a section of the population (e.g. women) in the industry? 1=Yes 2=No
4. If yes what are they?
……………………………………………………………………………
5. Are there manufactures, which produce large quantities that can serve a large share or the entire informal
metal industry? 1=Yes 2=No
6. If yes how many are they?
1. Very few 2. Few 3. Almost half 4. Above half 5. Almost everyone
7. Are manufactures required to pay high license fees before they start operating?1=Yes 2=No
8. Do you pay any form of taxes? Export, import, etc. 1=Yes 2=No
Coordination/integration
1. Are you engaged in any form of collective action such as cooperatives or production groups? 1=Yes 2=No
2. If yes where do you usually practice such cooperative action?
1. When acquiring raw materials 2. In production 3. When selling the products 4. Other specify
3. How do you sell your products?
1. Through sales persons 2. Sell directly at the firm 3.other specify
4. Do you have contracts with your clients? 1=Yes 2=No
Product characteristics/ differentiation
1. Do you have grades for your products? 1=Yes 2=No
2. If yes what is the criterion for you grading?
1. Size of product 2. Material used to make product 3. Other specify
D. CONDUCT OF THE INFORMAL FIRMS
Price setting behaviour
1. How are prices determined?
1. After bargaining with customers 2. By fixing a constant percentage on cost
99
3. according to competitors prices 4. Following prices fixed by producer association
5. other (specify)
2. What is the price setting behaviour?
1. Open market 2. Collusion with other producers/firms
3.Discriminate prices
3. Are prices based on grades? 1=Yes 2=No
4. If yes, what percentage premiums do you get for producing higher grade products...%
5. Do you engage in aggressive tactics such as predatory or exclusionary pricing? 1=Yes 2=No
6. How are your prices compared with those of your main competitors in the formal sector that are selling
the same products?
1. Higher 2. Average 3. Lower
7. (If firm prices are higher) why are your prices higher?
1. My equipment is less productive 2. I do not have enough customers
3. I do not have access to credit 4. Quality of my product is better
5. Cost of my supplier is high 6. Other(specify)
8. (If prices are lower) why are they lower?
1. I do not pay taxes 2. My labour costs are lower 3. My customers are less rich
4. Quality of my products is lower 5. Other (specify)
Selling practices, marketing
1. Are prices displayed? 1=Yes 2=No
2. Do you engage in group marketing of your products with other producers? 1=Yes 2=No
3. What is your marketing strategy? (tick as many)
1. Branding 2. Packaging 3. Advertising 4. Pricing 5. Displaying 6. Promotion 7. After sales service
8.Other (specify)
4. Are your products always in stock?
1. Always 2. Sometimes 3. Scarcely
5. Who is your main customer? (tick one)
1. Farmers 2. Formal enterprises 3. Informal enterprises 4. Direct exportation 5. Other
individuals (not farmers) 6. Private sector
6. Do you advertise? 1=Yes 2=No
7. If you advertise how much do you spend on advertising?$USD............per month/year
8. What are your modes of advertising? (circle as many)
1=newspapers, 2=word of mouth, 3=business cards/flyers/posters 4=other(specify)
9. Which of your products do the consumers usually buy?
1. Agricultural implements and equipment 2. Building materials 3. Industrial equipment and
machinery 4. Household equipment and tools 5. Other (specify)
10. Do you think customers are satisfied with your products?
1. Yes 2. No 3.Dont know
11. Can consumers return products/goods that are found defective? 1=Yes 2=No
12. Which of the following ICTs do you use for your marketing?(tick as many)
1. Computers 2. Internet 3. Mobile phones 4. None 5.other (specify)…………
13. Do you spend on research and development in your firm? 1=Yes 2=No
14. If yes how much do you spend per year/month? $USD...................................
E. PERFORMANCE
1. Fill the table below regarding your firm operations in the last three years
Year Value of production sales Total costs of production Cost of raw materials
2010
2011
100
2012
2. Fill in the table the value of additional investments made to the firm in the last three years
Year Buildings vehicles Capital equipment Other
2010
2011
2012
3. What is the profit margin on average from trading per month/year in your firm?...............(calculate from
table find average profit/year)
4. What is the most important thing you do with your profits? (Tick most important use for household needs)
1. Re-invest in this business 2. Re-invest in another business 3.put into savings
4. Give to family in the rural area 5. Use for entertainment 6. School fees
7. Other(specify)
5. What risks do you face in this area?
1. Legal risks 2.production risks 3.labour risks 4. Financial risks 5.other(specify)
Producer share
1. What proportion of price that is paid by consumers gets to the producer.....%
Volumes (quantity) and variety
1. What kind of products do you produce? (circle as many)
1. Agricultural (equipment, implements, tools) 2. Building materials 3. Household equipment 4.
Industrial materials 5. Other (specify)……
2. What proportions of your products are agricultural (implements, equipment, tools
etc.)?……………………%
3. Is there a limit on the amount of commodities consumers can buy from you? 1=Yes 2=No
4. If Yes what is the limit?.................................
5. What is the perception of the population about the quality of your products on the market?
1. Good quality 2. Average quality 3. Poor quality 4. Don’t know
6. Do consumers and traders have access to market information including prices, quantities, grades and
standards of your products that are sold on the market? 1=Yes 2=No 3=Don’t know
7. If yes what are the sources of information?
1. Word of mouth 2.radio and television 3.internet 4. Newspapers/magazines 5.
Other(specify)
101
Appendix 2: Consumer Interview Guide
(Identify a customer on site and ask the following questions)
What products have you bought from this place?
Why do you buy from this particular place?
1=Cheap 2= well stocked 3= high product quality 4=good personal 5=relationship
6=convenient 7=good customer care 8=other (tick as many as possible)
Which suppliers do you prefer to buy from in order of
importance?………………………………………………………………………………………………………
……………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………
………………………………………………………………………………………………
What factors do you consider when buying metal products from this industry?
1=Quality of goods 2= convenience 3=well stocked 4=customer care 5= other (SPECIFY)
How frequent do you purchase goods here
…………………………………………………..
What can you say are the major advantages if any of products purchase from this industry?
102
Appendix 3: Observation Guide
Observation guide for unstructured observations
Informal metal manufacturing enterprises’ evaluation
Location…………………………………………………………….
Date………………………………………………………………….
{Instructions to observer: write down short notes on what you see and comments on what you
hear under the following headings}
1. Sites (location and appeal)
……………………………………………………………………………………………
……………………………………………………………………………………………
…………………………………………………………………………………….
2. Infrastructure e.g. storage facilities, sheds, buildings etc.
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………
3. Utilities e.g. water availability, electricity use and availability also check on potential
hazards from say Electricity
……………………………………………………………………………………………
……………………………………………………………………………………………
…………………………………………………………………………………….
4. Spacing adequacy within the sites (check crowding of enterprises within sites)
……………………………………………………………………………………………
……………………………………………………………………………………………
……………………………………………………………………………………