Masterclass: Driving Business Growth

Steven J. Anderson: And when you design the intervention, you need to design and make sure it’s strong. And by strong, I mean, do you actually think this is a hammer that can pound the nail that you want in terms of impact? Do you want sales to go up 20 percent? How big of a hammer do you need when you design it?

Darius Teter: There are plenty of programs focused on small business growth in emerging markets, but we rarely know if they actually work — until now.

Steven J. Anderson: Even if you do that, the part that people miss is: While someone’s there hammering, are you monitoring it to make sure the nail actually goes into the wood? Almost no one does that, almost no one does that, so why are we surprised these programs fail?

Darius Teter: Welcome to the second season of Grit & Growth from Stanford Seed, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs with insights from Stanford faculty on how to tackle challenges and grow your business.

Imagine this: You run a small business in a developing economy.

Maybe you’ve got five or 10 employees. Business is fine, there’s enough money to go around, but you’re not growing. In the back of your mind, you have the sense that there’s more there, more customers, more revenues, more profits, if only you tried something different. But it’s a full-time job just to keep the place up and running.

You don’t have the time and money to risk on a plan that might fail. So what’s the most reliable way to grow your business? This question has stumped many, including a lot of generous donor and development agencies who have money and a mandate to support small businesses and yet few proven strategies. But there’s been some exciting research on this front in recent years.

We now have hard evidence that measures, in small business interventions in emerging markets, which ones are effective, how effective they are, and whether they’re worth the investment. So on this episode, we’re going to discuss small business support programs that have been proven to work. And when I say proven, I mean in the most rigorous way possible.

We’ll explore three studies that have been conducted on the ground with African entrepreneurs over the past five years. Each study covers a separate small business intervention: remote coaching, classroom learning, and key function delegation. We’ll see how these studies are constructed, the problem each intervention solves, and how you can apply the findings to your own business. Our guest today is the perfect person to discuss these studies because he designed them.

Steven J. Anderson: So, Steve Anderson, great to meet y’all, and appreciate having the chance to talk about some of this work.

Darius Teter: Professionally, Steve goes by his full name: Steven J. Anderson.

Darius Teter: But he is pretty impressive in his own right.

Steven J. Anderson: So currently I’m at UT (University of Texas at) Austin at the McCombs School of Business. Previously I was at the Stanford GSB. And throughout that time, I’ve also worked closely with the World Bank as an economist on different projects around firm growth, some in East Africa, some in southern Latin America, as well as Eastern Europe.

Darius Teter: Steve’s work in developing economies is driven by his own experience growing up poor in Canada. But poverty alleviation wasn’t his focus until a transformative event in graduate school.

Steven J. Anderson: I was doing this research that was around CEOs of large Fortune 500 companies. And during that transition period, my mom passed away suddenly. I grew up in the projects, living on government welfare and social support all the way. Even until recently, going home, my family would still be getting our Christmas turkeys that way from the food hamper.

When my mom passed — I don’t know my biological father, I grew up just with my mom and sisters — it sort of hit me. And I was transitioning to London and I just thought, “I want to do more with my life than just study how CEOs of big Fortune 500 companies can grow or get paid more.”

And so it was sort of that transition to London after my mom passed suddenly in this tragic accident. I said, “I got to do something else.” And so I was at London Business School trying to think about what I could do that might, not give back more, but have a bigger, wider impact to more people’s lives.

And so I pivoted. I started taking some development economics courses at the London School of Economics. And there was this professor, Oriana Bandiera, who did experiments within firms. And I was taking her sequence and she was showing us some of the latest research she was doing that was also in Africa and looking at experiments with firms or businesses.

Right? So not directly poverty alleviation through medical or education interventions, but through business interventions. And I remember running across Regent’s Park after a class and slamming open my adviser’s door and saying, “Marketing training, marketing skills. What about business education and marketing? What about that as an area I could go into for my dissertation?”

Darius Teter: Steve is humble about his research — he is Canadian, after all. But his work has incredible potential to help entrepreneurs, both on the individual level and at scale. Having spent almost my entire career in the international development space, you know — the hundreds of millions of dollars spent on unproven interventions justified by a couple of nice stories, but make everyone feel good, but no one actually knows whether there’s an attributable effect of that program. I mean, it’s just mind-boggling.

Steven J. Anderson: In the development sector over the years, someone says, “I have this great program. It makes this big difference.” And then you even go in person on the ground and they show you the one or two or three successful cherry-picked best cases of those businesses that did really well from whatever program was offered.

And that’s very anecdotal or descriptive evidence. And instead there’s been this shift for more rigorous evidence, which you could say hopefully gets more towards causality, right? Did this program or intervention really lead to that increase in firm sales and profits? And in order to do that, I can’t just cherry-pick or look at anecdotally a few case studies of the businesses that do well.

Darius Teter: But if there’s all this money for programs, why isn’t there more rigorous research? Well, one reason is the sheer complexity. Randomized control trials are the gold standard for studying the effectiveness of an intervention. Essentially you need two very similar groups.

One gets the treatment and the other, the control group, doesn’t. In theory, this shows the effect of the intervention versus the effect of no intervention. But in the real world, nothing is clean-cut and no two businesses are alike. One might be bigger, one’s smaller, they might be in different industries or in different cities.

There might be unrelated external circumstances that mask or exaggerate the effect of the treatment. So how can you tell which changes are due to the intervention and which are not? To rise above the noise you need a lot of businesses, and I mean a lot.

Steven J. Anderson: We probably approached, we estimated, over 20,000 businesses in a three-month period.

Darius Teter: Wow.

Wait a minute, wait a minute, wait a minute. So you had 10 field research supporters, Ugandans, presumably, they knocked on 20,000 doors?

Steven J. Anderson: Over a three-and-a-half-month period, yeah. So we slowly went from 20,000 to 4,000 completing and recruiting a registration survey; 1,500 get audited, 1,200 complete that. And then the partner only approved 930 for the study. So we had 930 small businesses who went through all of these stages and it’s that group that we then randomly assigned to a treatment: 530 would get this international sort of remote coaching and 400 did not, they served as a control group.

Darius Teter: This study of 930 Ugandan small businesses tested the first intervention that we’re going to talk about: remote coaching. I want you to set up this study for me because I think it’s absolutely fascinating. What was the question you were trying to answer?

Steven J. Anderson: Basically, the intervention, the program that we offered small-scale entrepreneurs across Uganda, was connecting them, an emerging market entrepreneur, to a coach, who was located remotely in a more developing or advanced economy. So that was the simplest way of thinking about the intervention. And the goal is simple.

The question you want to ask is: Could business professionals with 10, 15, 20 years’ business experience, some coming from finance accounting backgrounds, some coming from marketing sales backgrounds, could these coaches who could be located in Silicon Valley, could be located in Chicago, London, could they, if they volunteered their time for a few hours a week for six months, help a Ugandan entrepreneur to grow their business? And by “grow their business,” I just mean increase sales, profits, employment.

Darius Teter: First of all, describe for me: Who were these companies? Is this a family business, 10 employees, a hundred thousand revenue? Describe the sort of average participant in this pool of company leaders?

Steven J. Anderson: So they’re micro, small size, anywhere from two or three to 10 employees. They have a physical location or physical structure out of which they operate.

Darius Teter: Within the group of 530 businesses that received coaching, the coaches were randomly assigned. Some were marketing experts, some were consultants, some were former entrepreneurs themselves. But regardless of the coaches’ background, they had a remarkable impact.

Steven J. Anderson: We’re looking at, say, just one piece, which is the mentoring-coaching aspect, and getting that for six months. And what happens? Well, the businesses that were in the treatment group and got this virtual collaboration, this coaching, they increased sales, they increased profits, they increased employment and even total assets.

So they grew the business. And that leaves you with a treatment effect that says, those who got this remote or international coaching for six months increase on average sales anywhere from 30 to 40, 50 percent depending on the size of the business or how exactly you measure it.

Darius Teter: Wow, wait a minute — 50 percent increase in sales for those that got the coaching?

Steven J. Anderson: For some of the … If we look at just those who are matched with marketers. But if we look at the overall effect on average, we’re looking at around 25 percent increase in sales across all 530, profits around 15, 20 percent increase, in monthly profit or monthly sales.

Darius Teter: Steve’s findings opened the door to another question. How did remote coaching lead to such significant growth?

Steven J. Anderson: The ones that seemed to grow, tended to pivot the business model or have a shift in their strategy, marketing strategy. And so going in, we hypothesized this program would work, would lead to these increases in sales and profits. But why or what would drive that?

Well, it wouldn’t be about training the entrepreneurs in particular skills, because they’re doing it thousands of miles away over Skype remotely. So they’re not necessarily sitting there in a classroom teaching them how to enter numbers into a balance sheet correctly, right? But more, they could help them think a lot about the business model and pivot that or shift it.

One key area is the value proposition, and that is: What am I offering? Who am I offering it to? And why should they buy from me? All three of those, you could move around and the coach could help them think about any of those three things or all of them. And that value proposition, that aspect of the business model, that’s where the coaching really seemed to have the biggest effect.

Darius Teter: So mentorship helped the Ugandan entrepreneurs rethink fundamental aspects of their business such as their value proposition. But like a Russian doll, these questions have more questions nested inside. Because why did strategic change lead to growth? And how did the coaches facilitate that change? To understand, consider these two instructive examples.

Steven J. Anderson: You have different ways that you could pivot a business model or, in our case, shift the marketing strategy. And one would be bringing a new offering to market. So you do some market analysis, right? A short market research survey that the coach recommends. And this example was a woman of a ladies’ boutique.

And after doing the market research, what she discovers is that her customers don’t really have a need so much for buying secondhand or different kinds of clothes because everyone in the strip mall is selling clothes. What they really want is her consultancy on the fashion trends, right? And not necessarily on the traditional clothes she sells.

So she starts switching the business model to a new offering, and now she’s offering consulting for events, for special activities, where she’s, “Yes, I’ll sell you the clothes, but I’m also actually going to consult on the clothes, the styles, the colors for different functions, events, festivals.”

And so she pivots or shifts the strategy in terms of her value proposition. Right? And we would call that a new offering type of marketing strategy shift or a pivot in the business model. Typically, another way to pivot or another way to shift the business model that people don’t think about is actually to do less.

So one of the businesses, they narrowed the offering, they narrowed the product portfolio, and this was an auto mechanic shop that was doing a broad mix of repairs. They do the analysis, they do the market research, and find out the margins are really low, they’re not profitable with all of these repairs or everything they’re offering.

And the coach gets them to analyze which of the services are the most popular, which also are the services that make the most money. And they realize actually tire rotations and oil changes, they’re done quickly. And this is the thing that the largest number of customers in that marketplace want.

So he narrows the focus of the business, cuts out a whole bunch of the offerings that weren’t profitable or weren’t highly in demand, and only focus on those that would make him the most money, right? And that’s also counterintuitive to the broader audience out here. Sometimes you need to strip out features or functions of your offering and focus on those that most appeal to this largest target market that you can make money on.

Darius Teter: These examples give a blueprint for an effective strategic pivot. It all starts with market research to understand your customers and the competition. Then you interpret the market data and formulate a new strategy based on that analysis.

Steven J. Anderson: And that’s what we saw, is that it wasn’t just general advice. All of the pivots, all of the strategic shifts that led to increased sales and profits for these businesses, when they shifted, it was deliberate, it was purposeful. They went out and did market research first.

Now once we have that research, let’s analyze it together. What are the insights? And then you can’t pivot or change the business model unless you make changes. So we measure the extent to which they stopped focusing or investing in certain activities that they were doing before.

So they had to stop certain activities or focus in terms of time. They had to start in terms of new activities, new focus in terms of the business model. And they had to spend time, money, people, resources on that new strategic area. And the coach would help them, but the business owner, the leader, is the one who had to go out and implement.

Darius Teter: These stories illustrate why mentorship was so valuable. Coaches helped entrepreneurs to think about the big picture, to reassess the foundations of their business and formulate an actual strategy.

Steven J. Anderson: If I think about the Uganda study, what it sort of helped us to show is that mentoring and coaching helped them test out and shift the business model and just realizing how valuable that coaching was.

And I think that’s what the Uganda piece is about. It’s high-level. Think about your business model, think about the strategic shifts that you might have to make in the value proposition. And coaching or access to coaching can help you do that.

Darius Teter: Uganda study was all about informal remote coaching and big strategic pivots. The next intervention we’re going to discuss is almost completely the opposite.

Steven J. Anderson: If I go back to the South Africa study, now that’s about in-classroom training. If I get in a classroom environment where I’m learning from an instructor, this is in person, not remote, this is 20 students or 18 students to one instructor, they’re networking with each other, they’re applying the business content, they’re sharing their experiences in class. Can that help and be successful?

Darius Teter: Beyond simply testing the effectiveness of classroom training, the South Africa study poses several interesting questions. Does peer-to-peer engagement help entrepreneurs? What do they get from the networks they create? There’s also the content. In contrast with the previous study, there was a fixed curriculum focused on more technical business aptitudes.

Steven J. Anderson: Does classroom training help improve the actual tactical skills? So not the big strategic change in the business model, but go down to the narrow level of the kinds of marketing tactics, pricing, promotions. Or if it’s on the financial side, I think about using an income statement, setting a budget, etc. for the business.

Again, large-scale randomized control trial. But there we had three groups. One group got access to finance and accounting training for 10 weeks. Another group randomly got access to marketing and sales training for 10 weeks. And then another group was the comparison. The control group, they got nothing during this 18-month study period.

And in both cases, whether I went in and got the marketing training for 10 weeks or the finance training, on average, the small firms in both cases increased their monthly profits by about 25 to 30 percent, depending on the model and the specification of paper. So both types of training — classroom training, networking with other entrepreneurs in a business school environment — led to increases in profits.

But how did that occur? And this is sort of why you do the research. The marketing training led to increases in bottom-line profits. But how? Through a growth mindset, right? They increased sales. They implemented more practices related to sales tactics. They added more employees who were sales staff.

Darius Teter: So again, tactical, not strategic?

Steven J. Anderson: Correct. It was about learning skills and marketing, applying these tactical changes in the business. Change the price of one product, use a different kind of advertising tactic, or train a customer sales person. More tactical things you might change in the business that are focused on marketing. Or if it was in finance accounting, that training would lead to a lot more record-keeping, many different tactical practices in that regard.

And so both groups, right? Both sets of businesses increased their profits, but through sort of different mechanisms with the marketers having increased by more of a growth mindset. Whereas the finance group, they implemented more finance accounting practices and, lo and behold, what else happens? They become more efficient, their costs go down, they achieve greater output with fewer inputs in terms of working capital, stock, etc.

Darius Teter: The results of the study also speak to the benefits of peer-to-peer networks, something that’s hard to replicate in the age of remote learning.

Steven J. Anderson: We’re still social beings. We still want to network. We still want to … It’s not just the networking aspect. Sometimes it’s about, “I learn a concept, I take it out to my business, I come back a week later, I’m going to share what worked and what didn’t work in that trial and error when I applied that change.”

But I’m also going to hear from 10 or 15 other entrepreneurs who are going to share. And so I’m going to learn the theory from whatever the instructor’s telling me, but I’m also going to learn practically from others. And I think that’s super-valuable. And I don’t think it comes across that experiential learning is as effective through an online or digital platform, but I’ve never tested it.

Darius Teter: Well, I couldn’t agree more. And I mean, this is for us, pure learning, experiential learning, networking. We believe it’s extremely important so we invest a huge amount of energy in keeping our alumni connected and providing not only continuous learning opportunities for them as alumni, but also ways in which they can interact with each other.

It’s something I would love to test because I think it’s harder to nail down, but I think it’s extremely important. The first two studies tested the benefits of external advice, coaching, and structured classroom training with peers. The last one we’re going to talk about, which was conducted in Nigeria, was about bringing expertise in-house to help you grow.

Steven J. Anderson: In the Nigeria paper, it goes a step further and there we think about, well, you’re this entrepreneur. Maybe you’ve got part A right. You’ve figured out your strategy and your business model and the value proposition. You’ve got the parts of part B in place.

You’ve at least have some foundation in terms of business tactics and the kind of business practices and systems in your business. And now you want to scale. And maybe you’re sitting at five or 10 employees and you’re the entrepreneur of this small firm that you think has this high growth potential ahead of you.

But in order to get that hockey stick growth — again, I’m Canadian, so let’s think about ice hockey, right? In order to have that really steep hockey stick growth, you need to scale and scale quickly after you have the first two parts figured out. And what’s your biggest constraint, Darius, to you running Seed, what is your biggest constraint? Can you run every single aspect in function and department within Seed yourself?

Darius Teter: No. I think what we see over and over again in the businesses we work with is the lack of a strong team that you can delegate functions to.

Steven J. Anderson: Exactly. And that’s what the Nigeria project tries to test, is the limits of the entrepreneur’s time. Yes, we all think about the financial constraints of a business. We can hopefully raise money from investors or from our own cash flow. But in order to scale up, you need a strong team around you.

You need to be able to trust, you need to be able to delegate. You also need expertise. So you want to surround yourself with a strong team who also has expertise in areas you might not have, but you need to grow. And time and time again, entrepreneurs don’t do that. They try to do everything themselves.

They can’t let go. And it’s harder to scale and grow that way. And simply put, what we do in Nigeria is try to test the entrepreneurial boundary, the boundary of these constraints on my time and resources as an entrepreneur. And so if I was the business leader and I needed to, “Hey, I need someone to come in and help me with marketing,” one of the biggest issues, I don’t even know where to start.

How do I go? And rather than hiring someone, a friend or a family member, how do I find someone to come in and bring in that expertise? Well, we set them up. And by “we,” the program paid for them to meet with an HR provider, a human resources provider or exec search company who they then supplied all of the workers or the talent into the businesses.

So this could be someone with a marketing sales background and they come in as an employee into the firm. Or instead of bringing them into the firm as a permanent employee, you outsource it to an agency who you contract to work with you once a week.

But either way, you’re getting the expertise you need. And what we find, in this randomized control trial with hundreds of businesses over a two-year period, is that providing entrepreneurs with access to the expertise they need, that they can in-source or outsource, grows the team, the managing team, and eventually grows the sales and profits of those firms.

Darius Teter: So if you can show a founder that, you know, you can actually bring somebody from outside and entrust them with this business function and your life is going to improve, your business is going to improve. And that may actually change the trajectory of their own thinking about delegation, about entrusting more people under the management team to take on more critical roles in the business. It makes sense that plugging a professional into an area of need would help a small business.

Although plenty of entrepreneurs could stand to hear that again. But there’s another key takeaway from this intervention. The barrier to finding and contracting talent is not as high as entrepreneurs think. I think the key thing here was that the World Bank covered the cost of these HR providers providing this supply of experts into the marketplace. Right?

And that might be a real hurdle for somebody that has a small business, even if it’s projected to have hockey stick growth with the right team and the right expertise. I wonder, in the absence of a World Bank-funded marketplace, would those executive search or HR firms even bother chasing that SME (small and medium-size enterprises] business? And on the other side of the equation, would those SME founders go out and invest that money in an executive search firm to help them get the right expertise?

Steven J. Anderson: Actually, I was surprised, the costs are not as high as you’d think. So it’s typically linked to the contract size. So it’s usually, for an HR provider, it might be one month’s salary. So if you’re hiring a junior person to come in and help you with digital marketing, that salary might be fairly low. And it might be a one month’s salary that you have to pay as part of the contract with the HR provider.

And then you can even negotiate that, whether you’re paying it all up front versus over time as that employee’s successful. But what we did see is that in majority of the cases, even though the nine-month period ended, the SME owners, they were already realizing value in terms of increased sales from having this new worker in-sourced into the business, and they continued to keep them on

Darius Teter: A well-qualified hire will quickly pay for themself — unlike, say, your cousin.

Steven J. Anderson: To the broader audience of entrepreneurs and entrepreneurial teams or management teams of SMEs here in emerging markets, I think one problem is that people want to hire, or bring on their team, family, friends, people they like to work with.

Often it’s not, “I need a professional sales manager, I need someone who’s going to come in, and their job, day in and day out, is to be responsible for top-line growth so that I can go and work with the operational team or investors or whatever.”

So I would urge you, instead of bringing in a friend or family member next time, to think about, “How can I professionalize the sales force? How can I professionalize the marketing sales function to drive growth?” Because it’s going to be a lot easier to pay those people if you have new revenue coming in. But that’s often not what comes to mind first.

Darius Teter: It’s exciting to think about how Steven’s findings could be applied at scale in programs that reach thousands of entrepreneurs. But just because the methods are proven to work, it doesn’t mean they’re easy to implement. It’s classic, right? Someone will say, “Well, look at this fascinating experiment that Steven Anderson did in South Africa.

Let’s take his seven-module curriculum, let’s throw $5 million at it and teach it in seven countries,” and just expect the magic to happen without all of that attention to detail. Are people showing up for class? Are they doing their work? Are they engaged? Are they getting feedback on their work? Are they being mentored? All the pieces that, which you can’t control it at a scale of $5 million or $10 million, because, like you said, it’s a third-party consulting firm or something doing all of that.

Steven J. Anderson: And that’s the downside. That’s the downside. And I will caveat that, no, I don’t think you take this one intervention and just magically scale it up. You’re not going to find enough participants, you’re not going to find a quality program. And I think the sweet spot is somewhere in between. Where can I take … I’ve described three or four different intervention programs today.

Could I take all three or four of those, put them together in a program and not scale it to thousands, but maybe scale it to a couple hundred a year and have a really strong program that works on strategic business model change, works on tactical business skills, looks at how I’m going to grow the team in a way that brings the right experts in, puts all of that together and deliver it to a couple hundred entrepreneurs really, really well, really, really strong?

And over time, a hundred entrepreneurs in East Africa hitting hockey stick growth, a hundred entrepreneurs doing that a year, I think, is going to have bigger impact than spending that money trying to do a thousand a year and none of them are that successful.

Darius Teter: No matter the scale, this work is hard. There’s not a lot of fame and glory and research, but that’s not what drives Steve.

Steven J. Anderson: I think qualitatively, it’s the inspiration. In the majority of entrepreneurs that you meet, once it takes hold and it makes a difference, you just feel the energy, you feel the excitement, you feel how — whether you want to call it ambition or you call it motivation or desire to do better for themselves, their family, their workers — it’s just the most inspiring thing. That’s what, I don’t know, motivates me, gets me inspired, gives me more energy to think of, “Okay, what’s another intervention? What’s another project we can do? How can we put these pieces together to learn more and to build better programs?”

Darius Teter: Small business owners want ways to grow, but they don’t have a lot of time and money to risk on unproven strategies. Steve’s research demonstrates that some interventions — remote coaching, classroom training, expert hiring — can pay off. More importantly, his studies explain why each intervention worked.

Hopefully they will be the basis for more effective small business programs across the world. And this research can also be the foundation for your own interventions. A 10-week course on accounting fundamentals can pay huge dividends for your bottom line. A remote coach can help you reassess your business model. An HR provider facilitates the hiring of the skills you need to scale.

These are tangible, achievable ways to improve your business. Nothing in entrepreneurship is a guarantee, but armed with Steve’s research, you can be confident that you’re making a wise investment in your business and yourself. Generally, this is where we thank our guest, but research is a team effort and Steve had some thank-yous of his own.

Steven J. Anderson: Can I say one thing because I don’t want to take credit, Darius? There’s Janine Tittle, who was the intervention field manager in my early studies for South Africa, East Africa; Steven Kigerra, who’s in East Africa on the research management field team side; and Christie Luziki. Those three were at the core of all of these early studies and I can sit here, but I can’t take credit for it. It’s all them.

Darius Teter: So thank you to Janine Tittle, Steven Kigerra, Christie Luziki, and, of course, Steven J. Anderson. This has been Grit & Growth with the Stanford Graduate School of Business. And I’m your host, Darius Teter. If you like this episode, leave us a review on your podcast app.

It really helps us to share the stories of these incredible entrepreneurs with as many people as possible. To learn how Stanford Graduate School of Business is partnering with entrepreneurs in Africa and Asia, head over to the Stanford Seed website at seed.stanford.edu/podcast.

Grit & Growth is a podcast by Stanford Seed. Erika Amoako-Agyei and VeAnne Virgin researched and developed content for this episode. Kendra Gladych is our production coordinator. And our executive producer is Tiffany Steeves, with writing and production from Andrew Ganem and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.