January - June 2020

Are online stokvels the answer

Accelerating financial inclusion in South Africa: Are online stokvels the answer?

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

Are online stokvels the answer

Accelerating financial inclusion in South Africa: Are online stokvels the answer?

By Nobantu Mkhwanazi

  • AUG 2020

15 minutes to read

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Why are stokvels so popular?

According to the World Bank, financial inclusion refers to a population’s access to useful and affordable financial services. Financial inclusion enables people to transfer funds, build up and manage savings, access loans or credit, and acquire insurance cover – irrespective of their socioeconomic status, income level or geographical location. A low level of financial inclusion in a country (which is often the result of limited financial knowledge) exacerbates poverty and is an impediment to growth and job creation. It also fuels a shadow economy in which many economic activities go unrecorded.

In South Africa, about 70% of the population is considered financially included, using the basic measure of whether or not they have a bank account, although less than 30% of formal bank accounts are classified as active. Yet the concept of financial inclusion extends well beyond traditional banking facilities. A large number of people in South Africa make use of stokvels as an alternative to formal financial services. A stokvel is a group of people who make contributions at fixed intervals (usually monthly) to a common fund for an agreed period. The contributions are then distributed to each member according to an agreed rotation schedule ‒ sometimes with interest, depending on how the money is invested. Some stokvels also extend micro loans to their members and/or non-members at a specific rate of interest.

A low level of financial inclusion in a country … exacerbates poverty and is an impediment to growth and job creation.

A stokvel is South Africa’s equivalent of what is known internationally as a Rotating Savings and Credit Association (ROSCA) or an Accumulating Savings and Credit Association (ASCA). There are subtle differences between ROSCAs and ASCAs (the lending rules of the latter are more flexible) but in South Africa the activities of these two types of association are both catered for by a stokvel. People join stokvels to cover short-term expenditure requirements (such as groceries, household appliances, school fees, weddings, burials and business start-ups) or to put money away for saving or investment purposes. The National Stokvel Association of South Africa (NASASA) has 810,000 registered stokvel groups, covering a total of 11.5 million members. Clearly, stokvels have an important role to play in mobilising and managing funds. Given South Africa’s well-established banking industry, why have stokvels become popular?

Banks are often perceived to have high fees, too much paperwork and slow response times. As a result, many people do not trust banks or they find them inaccessible, preferring to conduct business informally. A stokvel has a trust-based business model, giving many people peace of mind when it comes to saving and accessing funds because they are part of an established community with known credentials. Each participant feels socially pressured to honour their commitments and remain accountable. Although most stokvels have bank accounts, they generally do not regard these as useful savings vehicles. Compared with banks, stokvels have easier terms and lower transaction costs.

Banks are often perceived to have high fees, too much paperwork and slow response times. As a result, many people do not trust banks or they find them inaccessible, preferring to conduct business informally.

Those in low-income households depend on stokvels for credit or micro loans because often they do not qualify for such facilities from formal financial institutions like banks whose credit application criteria are comparatively onerous. Such criteria typically include having an identity document, proof of residence, permanent or fixed-term employment, a minimum basic salary and a bank account. Stokvels, on the other hand, do not require proof of an applicant’s residence, income or credit history. They often base their decision about someone’s eligibility for credit or a loan on trust, either directly or through a stokvel member who vouches for the applicant. Besides constituting a convenient financing or savings vehicle, stokvels can be a source of moral support and group identity, especially for women who are particularly vulnerable in poor communities.

Can online stokvels help to accelerate financial inclusion in South Africa?

Advances in fintech (financial technology) – notably online banking ‒ have brought many benefits to the banking industry in recent years, including lower costs, increased security, heightened speed and business agility, an expanded customer base, and greater autonomy and privacy for clients. In addition, fintech helps to link rural and other excluded communities to financial services where geographical remoteness would otherwise be a barrier. One should ask: Could the use of technology in the stokvel system deliver similar benefits? Do stokvels lend themselves to an online format?

Fintech helps to link rural and other excluded communities to financial services where geographical remoteness would otherwise be a barrier.

Internationally, there are a number of ROSCAs and ASCAs that operate online, such as Puddle (used in the US) and Winkomun (used in Spain, Italy, Indonesia and Venezuela). Online stokvels are slowly gaining traction in South Africa as well. For example, the mobile app StokFella offers deposit and payment-tracking facilities, while the CFB3 app enables stokvels to interact with and fund start-ups in return for profit sharing. Naturally, these apps require users to have smartphones. A 2018 study revealed that smartphone penetration in sub-Saharan Africa stood at only 33% ‒ the lowest rate of all major world regions. Even South Africa had a less-than-stellar penetration rate of 51%. However, as mobile devices and applications multiply, and as regulatory reforms are introduced, smartphone penetration rates in Africa are predicted to rise steeply over the next few years.

Several studies have revealed how technology has broadened the scope of financial services, making transactions easier and less expensive, and helping to fuel e-commerce. However, little research has been conducted on how the use of technology (particularly mobile telephony) can enhance stokvels’ efficiency and effectiveness. The study on which this article is based set out to investigate ‒ through a literature review followed by an empirical study ‒ the viability of hosting stokvels online and whether these are likely to improve financial inclusion in South Africa.

The growth of mobile money services in Africa (such as M-Pesa) is an excellent example of how fintech has helped to boost financial inclusion among previously unbanked or under-banked people. Likewise, online stokvels have the potential to forge greater financial inclusion by dissolving the traditional geographical and administrative constraints to expanded membership and efficient service delivery.

However, the success of such an online system is heavily dependent on mobile phone ownership as well as accessible and affordable internet connectivity. Furthermore, a country’s regulatory environment should balance the need for state control with the need for innovation and fair competition. It should not stifle creativity or demand. Importantly, too, introducing online alternatives to conventional stokvel systems requires more than digital hardware and software; it calls for psychological acceptance by stokvel members and borrowers.

Internal drivers of technology adoption

According to Davis’ Theory of Technology Acceptance Model (TAM), a consumer’s decision to use a certain type of technology is influenced by its perceived usefulness (PU) and its perceived ease of use (PEOU). A weakness of this theory is that it has a workplace focus only and disregards social or cultural factors impacting technology adoption. Another study points to the adoption of technology-enabled financial services in South Africa being influenced by five variables: self-efficacy (relating to people’s perceptions and personal beliefs), task-related (what is involved in achieving an intended outcome); hedonistic (the fun in performing a task), social (how individuals perceive themselves and are perceived in a social context), and trust (people’s uncertainty about or perceived risk in performing a task).

Besides constituting a convenient financing or savings vehicle, stokvels can be a source of moral support and group identity, especially for women who are particularly vulnerable in poor communities.

Trust is a particularly important construct in the financial services domain and a key factor influencing people’s decision to use a financial institution or technology. Attitude, in turn, informs people’s perceptions of the benefits of the technology in question. Understanding consumers’ perceptions of technology and what influences their usage thereof can go a long way towards ensuring that financial service offerings are useful and consumer-friendly.

Key findings from the empirical study

The empirical study probed a sample group’s impressions of and/or personal experiences with offline and online stokvels. The participant sample comprised five subgroups: 10 offline Stokvel members, 2 online stokvel members, 3 stokvel borrowers, 5 owners of online platforms, and 42 people who had had no experience of stokvels. Information was collected in face-to-face and telephonic interviews.

The collective findings are summarised as follows.

  • Views of offline stokvel members. With a couple of exceptions, most participants in this subgroup reported a similar approach to the management of their stokvels – i.e. each member contributed monthly (usually R1000), one of the members acted as the fund administrator, and loans were provided to clients (charging interest of 15% to 20%). When asked whether they were receptive to the idea of converting to an online stokvel, they gave mixed responses. Some could see the merit of going online because it would simplify administration, but they stressed that it would need to be affordable and accessible and also guarantee members’ privacy. Others likened online stokvels to pyramid schemes and said they could not be trusted. Also, the formalisation of stokvels could be off-putting to some of their less digitally savvy clients who preferred personal contact in their financial dealings.
  • Views of online stokvel members. The members of the online stokvels were geographically dispersed, which was a factor in their decision to go online. Both stokvels reported that online hosting of their stokvel had brought greater transparency, reduced the administrative burden, facilitated growth in membership (because geographical location did not present a barrier) and simplified financial management through a single group bank account. However, one of the stokvels named high transaction fees as a drawback.
  • Views of stokvel borrowers. The participants in this subgroup indicated that stokvels were a valuable source of funds because of their simple loan criteria and the fact that money was immediately available. However, while two participants were quite receptive to the idea of their stokvel moving online, the other participant believed that online stokvels were no better than Ponzi schemes, designed to relieve people of their savings in an unscrupulous fashion.
  • Views of online platform owners. Among the online stokvel platform owners interviewed were StokFella, Yethu and Participants in this subgroup reported that the benefits of having a stokvel hosted by an online platform include greater transparency and transactional security for members, a lower administrative burden and a favourable savings/investment environment. Challenges include people’s suspicions about online stokvels and the low level of technology adoption in some communities due to connectivity problems, the high cost of data and a lack of digital knowledge.
  • Views of non-stokvel members or users. 67% of this subgroup said that they would join a stokvel and 62% said that they would join an online stokvel.

The benefits of having a stokvel hosted by an online platform include greater transparency and transactional security for members, a lower administrative burden and a favourable savings/investment environment.

The way ahead

Online stokvels clearly have potential in South Africa, judging from the study’s findings. Strong and compelling marketing campaigns by online platform owners, underpinned by a thorough knowledge of the market they are serving, will go a long way towards building trust in the online stokvel model. However, many people’s exclusion from the digital economy will, if not addressed, be a stumbling block to the expansion of this sector. Priority should be given to addressing inadequate (and expensive) connectivity in various parts of the country and creating opportunities for poor people to confidently access stokvel services online as a stepping stone towards greater financial inclusion.

  • This article is based on the MPhil in Development Finance research assignment of USB alumnus Nobantu Mkhwanazi. The title of her assignment is “Online Stokvels for Financial Inclusion in South Africa: Adoption and Challenges”.
  • Her study leader was Dr Nthabiseng Moleko, Senior Lecturer in Managerial Economics and Statistics at USB.

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procrastinating

How a smartphone app can help employees beat procrastinating

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

procrastinating

How a smartphone app can help employees beat procrastinating

By Sam Orton

  • AUG 2020

20 minutes to read

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Wasted time is wasted money

Up to one in four adults think of themselves as procrastinators. Despite the increasing prevalence of procrastination in the workplace, current interventions aimed at reducing procrastination are mostly based on traditional approaches like cognitive behaviour therapy which includes time management, learned industriousness, modelling and goal setting.

A significant amount of research has been done on the use of games in psychotherapy. As more and more people use their smartphones as gaming devices, why not explore a smartphone-based app to help people manage their procrastination habits? This is exactly what this study set out to do.

Up to one in four adults think of themselves as procrastinators.

Taking a closer look at procrastination

Procrastination is a complex phenomenon. It affects 45% of adults at some point in their lives. It is even higher among students. In one study, approximately 50% of college students regarded themselves as chronic procrastinators, while 75% considered themselves typical procrastinators, and 80% to 95% of students admitted that they procrastinate to some extent. Procrastination is also a significant indicator of ADHD.

For companies, procrastination means the loss of money due to non-productive and poor performing employees. For employees, it leads to stress, anxiety and reduced employability.

Definitions of procrastination touch on the psychological distress as a result of postponing or failing to complete a task or activity, even while knowing there would be negative consequences. This delay is voluntary or intentional and yet irrational. The reasons for procrastination include task aversion, learned helplessness, irrational beliefs, low self-efficacy, lack of persistence, and fear of failure.

There is a strong correlation between poor work performance and procrastination in those people who miss deadlines more often than non-procrastinators, make more mistakes, and work slower. This negates the misconception that procrastinators work best under pressure.

As more and more people use their smartphones as gaming devices, why not explore a smartphone-based app to help people manage their procrastination habits?

Procrastination in the workplace

Very few studies have explored procrastination in the work environment. One reason for this could be the lack of an instrument designed for dealing with procrastination in the modern-day workplace.

Different types of jobs are associated with different levels of procrastination. A variety of studies found that high-status workers experience an increased prevalence of procrastination. Self-employed professionals, like lawyers and doctors, were found to procrastinate more than white-collar workers. White-collar workers procrastinate more than blue-collar workers. Tightly supervised workers in constrained environments reported higher levels of procrastination. However, when employees perceive their jobs as meaningful they tend to procrastinate less.

Procrastination in the workplace typically leads to two types of behaviours, namely soldiering and cyberslacking. Soldiering occurs when employees avoid work-related duties to indulge in more pleasurable activities like extended coffee breaks. Avoiding work-related duties leads to low self-efficacy, which in turn results in a destructive pattern of substandard work performance. When employees are cyberslacking, they may appear to be working on their desktops, laptops or mobile devices, when they are actually checking their social media, playing games or doing online shopping.

For companies, procrastination means the loss of money due to non-productive and poor performing employees. For employees, it leads to stress, anxiety and reduced employability.

Why do people procrastinate?

Here are some of the reasons why people procrastinate in the workplace:

  • Abstract goals: People tend to procrastinate when goals are not clearly defined. For example, a goal like ‘start living healthier’ is vague, while a goal like ‘exercise on Tuesday, Thursday and Saturday, between 5 pm and 6 pm’ will more likely to lead to action
  • Rewards that are far in the future: People often procrastinate on tasks with rewards that will only materialise in the future. This phenomenon is known as temporal discounting. The award becomes less significant the further it is in the future.
  • A disconnect from our future self: People often fail to see the connection between their present and future self – a phenomenon called temporal disjunction. So they delay starting the healthy diet because they see it as their future self’s problem.
  • Optimism about the future: People procrastinate because they are confident that they will be able to complete a task sometime in the future. However, they often underestimate the amount of time it will take to complete the task. This is known as planning fallacy.
  • Indecisiveness: People often postpone tasks because they cannot prioritise or make a final decision. So they over-think the situation – a phenomenon called choice paralysis or analysis paralysis. This happens when there are too many options or when the options are too similar. The greater the impact of the decision, the harder it becomes to decide.
  • Feeling overwhelmed: People often procrastinate when they feel overwhelmed by a task. This usually happens when the task is too big or too complex.
  • Anxiety: When people feel anxious about a specific task, they tend to procrastinate. For example, people who are anxious about their finances may postpone drawing up a budget, even though the postponement will not solve their financial woes.
  • Task aversion: An example of this is when a person keep on postponing an important business call because they do not enjoy speaking to the particular individual.
  • Perfectionism: Wanting to produce high-quality work is not unreasonable. However, problems arise when people fail to complete tasks because they strive for perfection.
  • Fear of negative feedback: Sometimes people procrastinate because they are scared of being evaluated. This fear is often irrational or unjustified. At the same time, fear of negative feedback can motivate people to finish on time.
  • Fear of failure: The more important the task, the bigger the risk that it could get postponed. Low self-esteem or a lack of confidence can aggravate the fear of failure and result in continued procrastination. Yet, fear of failure can also motivate people to work harder.
  • Low self-efficacy: People who do not believe in their innate ability to complete a task successfully or to reach a goal often procrastinate.
  • Lack of control: Many people procrastinate because they cannot control the outcome of an event. People also use delay tactics when believe they will receive criticism no matter how much effort they put into a task. Individuals who are internally orientated are more inclined to complete tasks while externally orientated individuals are more inclined to procrastinate.
  • Motivation: Procratinators usually lack motivation. Lack of motivation is often a problem where motivation is extrinsic (like working for money) rather than intrinsic (feeling a sense of pride in doing a good job).
  • Laziness: Idleness refers to a basic unwillingness to make the effort to complete a task, even though a person may be fully capable of doing do.
  • Prioritising of short-term satisfaction: People often procrastinate because they prioritise their emotions and do things to feel better at that moment. This kind of procrastination is known as short-term mood repair. Students neglect assignments by watching TV, playing video games or checking their social media because it is more pleasant in the short term.

When employees perceive their jobs as meaningful they tend to procrastinate less.

The use of games in psychotherapy

The use of games in psychotherapy is well researched. Also, the popularity of smartphones as gaming devices has grown exponentially. So, why not use gamification principles to improve the outcome of smartphone-based interventions aimed at treating procrastination?

Today, gamification has come to mean “the use of game design elements in non-game contexts”. When people play games, they experience enjoyment, competence, mastery, engagement and flow – all elements of intrinsic motivation in human behaviour. The fundamental concept of gamification is to use this motivational ability of games for different reasons – not only for entertainment purposes.

In gamification, games have explicit rules. The player needs to stick to the rules to achieve a specific outcome. It is not free-form playing. Gamified applications typically include game elements such as feedback, narrative, reputation, rank, competition, explicit rules, avatars, three-dimensional environments, a marketplace and economies, teams, and time pressure.

Using games to motivate people

The motivational use of gamification is underpinned by self-determination theory (SDT). SDT explains the motivational pull of gamification, and distinguishes between two forms of motivation, namely extrinsic and intrinsic behaviour. People are extrinsically motivated when they do something for an external reward like praise or money. People are intrinsically motivated when they do an activity because it is enjoyable or exciting. Although both encourage increased performance, intrinsic motivation is also linked to better mental health, increased creativity and increased effort.

Today, gamification has come to mean “the use of game design elements in non-game contexts”. When people play games, they experience enjoyment, competence, mastery, engagement and flow – all elements of intrinsic motivation in human behaviour.

Cognitive evaluation theory (CET) is a sub-theory of SDT that explains how external stimuli affects intrinsic motivation. In terms of CET, people have three basic psychological needs – autonomy, competence and social relatedness – when performing tasks or activities. When these needs are satisfied, they promote intrinsic motivation. Autonomy refers to the psychological aspect of choice and volition to choose how and when to fulfil tasks. Psychological freedom relates to the alignment of decision making with one’s interests and values, whereas volition refers to the sense of performing a task without pressure from external sources. Competence is based on perceived effectiveness and the achievement of results. Social relatedness is the need to belong, to be cared for and to be attached to another person or to a group.

It therefore follows that intrinsic motivation will flourish when the environment encourages competence, autonomy and relatedness. Gamification can modify the work environment through the addition of game elements that promote these fundamental needs, thereby encouraging intrinsic motivation.

Goal-setting theory can also help to explain the motivational power of gamification. Goal setting emphasises the entire journey of finishing a goal as opposed to focusing only on the results. Games with goals can therefore help to reduce procrastination.

What this research set out to do

This study evaluated the relationship between gamification and procrastination by determining to what extent the integration of the motivational constructs of self-determination theory, which explains the motivational pull behind gamification, can reduce procrastination.

The study was conducted in two phases. During the initial quantitative phase, retail business unit managers were asked to complete a questionnaire to determine their procrastination levels at work. The 12 managers who showed the highest propensity to procrastinate, continued to the second qualitative phase of the study. The 12 participants were asked to use the gamified productivity app Habitica on their smartphones for four weeks. After the four weeks, semi-structured interviews were conducted to find out whether the use of app reduced their procrastination.

What did the study find?

The study confirmed the link between intrinsic motivation and procrastination. The four themes that emerged from the interviews explain the impact of game elements introduced through gamification on each of the psychological needs within the self-determination and goal-setting theories.

Theme 1: Gamification and procrastination

According to the participants, they procrastinated at work because of task aversion, lack of autonomy and the absence of motivation as they were “not allowed to deviate from their daily routine”. Examples were also given of vague goals, a lack of guidance, and the inability to prioritise.

They were excited about gamification as a possible solution to their procrastination behaviour. They experienced gamification as useful in combatting procrastination and even suggested adding mini-games to improve engagement. One participant explained that the simple act of ticking off tasks and gaining levels in the gamified environment served as sufficient distraction to make her feel less overwhelmed. The gamified system increased the participants’ perceived autonomy and enabled them to move beyond indecisiveness. After the four weeks, when participants were asked if they would continue to use the app to reduce procrastination, 75% said they would.

Theme 2: Gamification helps to reduce procrastination by increasing a sense of autonomy

The self-determination theory says autonomy is one of the basic psychological needs that underlie motivation in the workplace. Understanding how gamification can create autonomy in the workplace can lead to more effective ways to create intrinsic motivation. Higher intrinsic motivation can then be leveraged to promote engagement, task enjoyment and improved performance.

It was clear that the participants valued autonomy. Yet, they felt restricted by their companies’ systems, policies and procedures – including an online diary system that maps out their daily routines.

Gamification enhances the perception of free choice by introducing autonomy-supportive game elements that allow users to customise the particular aspect of the gamified environment or to make decisions about aesthetics or activities. Of the participants, 92% believed that the gamification of their current work systems would make them more motivated and productive.

… intrinsic motivation will flourish when the environment encourages competence, autonomy and relatedness. Gamification can modify the work environment through the addition of game elements that promote these fundamental needs.

Theme 3: Gamification promotes competence, stimulates productivity and helps with goal setting

Competence in the context of the self-determination theory refers to people’s need to feel competent within their environment. Approximately 75% of the participants indicated that the introduction of gamification elements made them feel more competent.

Leaderboards, points and levels have become synonymous with gamification. As individuals finish real-world tasks and tick off the corresponding items in the app, they earn experience points that enable them to level up within the gamified environment. The participants mentioned that earning rewards and gaining experience motivated them and made them feel more competent, regardless of working in a controlled environment. This would suggest that the autonomy-supportive elements of the game are pivotal in the work environment to ensure that competency-supportive elements yield the necessary results to promote intrinsic motivation.

The participants also commented that earning points and gaining levels made them change the way they prioritise their day. Some of the participants indicated that they normally start their day with easier tasks, which often means procrastinating on the more challenging tasks. Now the app has motivated them to start with the more challenging tasks first.

Theme 4: Gamification promotes relatedness and reduces procrastination

The final component of the self-determination theory is the need for relatedness. In the workplace, the need for relatedness is satisfied when employees feel that they are respected, valued for their contribution, and are included at all levels.

The participants indicated that they often felt isolated in their jobs because they had to maintain a professional distance between them and their subordinates. This made it difficult to develop close relationships in the work context. The gaming app allowed the participants to chat with other users in a virtual chat room, join challenges or create their own challenges. Some 58% of the participants confirmed this aspect. The participants also created a WhatsApp group among them.

The participants said that they felt social pressure to perform along with other members of the chat group, alluding to the motivational power of relatedness. The more productive they became, the less they procrastinated.

Key take-outs from the study

The findings show that gamification can indeed tame procrastination by satisfying the following psychological needs identified in the self-determination theory:

  • Autonomy: Companies often restrict autonomy through their systems, policies and procedures. Gamification provides elements like avatars and customisation options to employees that create the perception of autonomy and mitigate the lack of workplace autonomy. The study found that most of the participants felt a greater sense of autonomy despite working in non-autonomous environments. Satisfying the need for autonomy promotes intrinsic motivation and makes tasks more meaningful, which could reduce procrastination in tasks perceived as meaningless or of less value.
  • Competence: Gaming elements like levels and rewards satisfy the need for competency by providing constant positive feedback, something that is often lacking in the workplace. Gamification motivated participants by providing visual confirmation of their competence which in turn reduced procrastination. Task aversion, fear of failure, low self-efficacy and feeling overwhelmed are all causes of procrastination that can be mitigated by satisfying the need for competency.
  • Relatedness: The gamification app increased the participants’ sense of relatedness. The app allowed them to connect to peers through virtual channels. Social pressure among peers to perform well resulted in increased productivity and reduced procrastination. The hierarchical structure in the retail sector places even more emphasis on the need for relatedness and the potential usefulness of gamification. The app illustrated that the need for relatedness can be satisfied through a game.

Goal setting emphasises the entire journey of finishing a goal as opposed to focusing only on the results. Games with goals can therefore help to reduce procrastination.

The study set out to determine to what extent the integration of self-determination and goal-setting theories with a smartphone-based gamified app can reduce procrastination in the workplace. Gamification can indeed modify the work environment through the addition of game elements that encourage intrinsic motivation. This is worth exploring as a viable solution to the costly and complex problem of procrastination.

  • This article is based on the MBA research assignment of USB alumnus Samuel Joseph Charles Orton. The title of his assignment is “The relationship between procrastination and gamification”.
  • His study leader was Prof Mias de Klerk who is head of Research at USB. Prof De Klerk is a professor in Leadership and Organisational Behaviour at USB, and Director of USB’s Centre for Responsible Leadership Studies (Africa).

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Financing to support developing farmers in SA

Financing developing farmers of South Africa: How collaborative partnerships can help

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

Financing developing farmers of South Africa: How collaborative partnerships can help

By Dr Langelihle Simela and Dr Nyankomo Marwa

  • AUG 2020

30 minutes to read

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The challenge to make partnerships work

Companies partner because they have key complementarities that they want to leverage. One example of this is a partnership between a state agency and a commercial bank to provide financing to developing farmers.

However, up to 70% of such partnerships fail. This is despite the fact that there is ample guidance on how to establish such partnerships. These guidelines typically cover drawing up a business plan, seeking common ground, establishing formal structures for alliance management, and defining metrics to measure the value of the partnership. However, these basics alone will not enable partners to leverage their complementary strengths and assets and so it is necessary to know the critical success factors (CSFs) for such collaborative partnerships to succeed.

It is generally accepted that effective financing of developing farmers can be best achieved through partnerships, particularly between government and private sector institutions. Although various institutions offer finance to developing farmers, not many of them are partnerships committed to the equitable sharing of costs, risks and rewards.

The Small Enterprise Finance Agency (Sefa) is a government agency that was established to work in strategic alliances and partnerships to finance the developing sector, which includes emerging farmers. However, Sefa has experienced a poor uptake of some of its products.r. This implies that some critical success factors may have been overlooked when partnerships between Sefa and the commercial financiers were established.

Companies partner because they have key complementarities that they want to leverage … However, up to 70% of such partnerships fail.

This leads to the following question: What are the critical success factors that a financing agency such as Sefa and commercial banks should consider as they enter into partnerships to support developing farmers?

Financing the developing agricultural sector

Evidence suggests that collaboration between the public and private sectors is the way forward in terms of financing agricultural transformation in South Africa. Sefa wants to achieve this by offering financial products in partnership with commercial banks. The agency’s products aimed at de-risking lending to developing farmers therefore includes:

  • Khula Credit Guarantee Scheme: The scheme issues credit guarantee products to lenders (commercial banks and other financial institutions) for SMME borrowers who do not have the collateral required by lenders.
  • Land Reform Empowerment Facility (LREF): The LREF is a wholesale financing facility through which Sefa lends money to commercial banks and other reputable agricultural lenders for on-lending to land reform beneficiaries. It is capitalised by the former Department of Rural Development and Land Reform and supported by the European Union. Sefa assists beneficiaries with training and skills development by means of a training grant.
  • Post Loan Business Support and Institutional Strengthening: This product provides non-financial support to SMME businesses via intermediaries and also directly to the intermediaries. To provide these services, Sefa leverages the resources of government agencies such as SEDA and Productivity SA.

Sefa would like to strengthen alliances and partnerships in order to enhance the uptake of its products. This study investigated the critical success factors (CSFs) for collaborative partnerships between Sefa and commercial banks in order to finance developing farmers.

Why developing farmers need financing

During the apartheid era in South Africa, institutions such as the Land Bank, control boards and cooperatives provided farmers with easy access to finance, production information and marketing information. This credit environment nurtured the development of the commercial farming sector.

After the deregulation of the agricultural sector in 1996, financing concessions to the agricultural sector were phased out and direct support to agriculture, including equipment subsidies, drought relief, financing of agricultural research, was discontinued or scaled down. Financing agriculture became highly risky. Uncompetitive farmers fell by the wayside and were bought out by astute ones who expanded. The number of commercial farmers dropped significantly.

Prior to the democratic dispensation in South Africa, black farmers did not have access to comprehensive support to enable them to enter mainstream agriculture. Many entered mainstream agriculture from the early 1990s as beneficiaries of the land reform programmes, which provided subsidies to purchase land. However, these programmes did not provide enough working capital to achieve optimal production and generate recurrent income. Also, developing farmers cannot raise working capital from commercial financiers as land tenure restrictions do not permit land reform beneficiaries to use the land as collateral.

Various regulations prevent reckless lending by commercial financing institutions. This means financing will only be provided to clients who can prove repayment ability, provide security and are experienced producers, given the high risks associated with lending to agriculture. From a review of the commercial banks’ lending to the developing agricultural sector, it is clear that the banks can only effectively address these risks through multi-stakeholder collaborations.

It is generally accepted that effective financing of developing farmers can be best achieved through partnerships, particularly between government and private sector institutions.

Sources of finance for developing farmers in South Africa

In the developing world, lending to developing farmers by commercial banks is low. South African developing farmers have access to grants, concessional loans and commercial funding from various government and private sector institutions. At national level, the government has a number of programmes to support developing farmers to access land and to procure agricultural assets and working capital. The Land Bank offers a low interest rate facility for short-term credit to farmers. At provincial level, various development finance institutions offer finance to the agriculture sector. Sadly, there is limited coordination among role players involved in financing developing farmers.

Commercial financiers are increasingly playing a role in financing developing farmers, especially to comply with the Financial Sector Code’s sub-element of black agriculture financing. To minimise the risks associated with lending to developing farmers, commercial banks partner with other stakeholders who provide de-risking or risk-sharing financial instruments such as credit guarantees, insurance, concessional loans, training and mentorship as well as offtake agreements. Sefa offers at least three such products, and hence it is important to understand how its collaboration with commercial financiers can be be improved.

Very few studies have been conducted on collaborative partnerships aimed at financing agriculture particularly. It therefore makes sense to look at the critical success factors of these financing partnership models. The approach of this study was to determine the critical success factors (CSFs) for such partnerships and then to identify those that would be beneficial for Sefa/bank partnerships.

Prior to the democratic dispensation in South Africa, black farmers did not have access to comprehensive support to enable them to enter mainstream agriculture.

Partnership-related critical success factors

Firms enter into partnerships because they expect to reap certain benefits, such as risk and cost sharing, cost reduction, resource and knowledge acquisition, product and service development, speed-to-market, flexibility, collective lobbying and countering competition.

The quality of the relationship between the parties in a collaborative partnership is important. There must be trust, good communication, strong cooperation, interdependence and an acknowledgement of power positions in the relationship. The role players should believe that every action that each company takes should be for the benefit of both. When problems arise, they should find solutions together.

The maintenance and growth of the relationship is often a function of how well the firms receive the benefits in comparison to their expectations. The relationship is likely to grow as long as both firms keep realising benefits not otherwise attainable outside the partnership. For the partnership to flourish, firms should lower barriers and work together towards a common goal.

In this context, Sefa partners with commercial banks with the strategic intent to benefit from the mutual goal of providing affordable finance to developing farmers. This presupposes a high level of interdependence between the institutions given that Sefa does not have the capacity to provide and manage credit to the extent that banks do while the banks cannot provide cheaper funding nor de-risk lending to the extent that Sefa can. The two organisations therefore need to work together to share costs, risks and rewards.

Task-related critical success factors

Task-related CSFs refer to the specific tasks that a partnership has to undertake – such as sharing resources to gain synergy and advantage, acquiring more specialisation and new capabilities, and increasing the speed with which the partners can accomplish their tasks. It is essential that the partners agree on their respective task-related CSFs.

Having a common goal is not enough to make the partnership work. What the one party brings to the table might not be significant in scope or be supported by policies that translate potential opportunities into real ones for the partners. The transactional costs – such as drawing up legal documents, monitoring a partner’s activities and enforcing its obligations – may be too high. Also, public entities tend to be protective of their scarce resources. There are also concerns that private partners could divert resources from development priorities, generate exorbitant transaction costs or compromise the public partner’s  mandate.

Product-related critical success factors

Worldwide, the focus has shifted from aid to the use of blended finance and PPPs to attract private sector finance for development initiatives. This means using scarce public sector finance to attract private sector finance to help eradicate poverty, reduce inequality and realise human rights. Blended finance products that would be relevant for financing developing agriculture include funding for technical assistance, gurantee funds, concessional loans and grants to address demand and supply side constraints, as and well as progressive partnerships to enable holistic support to the developing farmers.

From a review of the commercial banks’ lending to the developing agricultural sector, it is clear that the banks can only effectively address these risks through multi-stakeholder collaborations.

How was the study conducted?

First, a total of 41 critical success factors were identified from an extensive review of literature on partnerships for financing. These CSFs addressed three main partnership issues, namely partnership design, task execution, and products and services.

The Delphi technique was used to develop a list of prioritised critical success factors for Sefa/commercial bank collaborative partnerships to finance developing farmers. This research method facilitates decision-making among experts where there is lack of empirical evidence. The method involves identifying a panel of experts to deliberate on the issue at hand in two to three rounds until they reach convergence. After each round of questions, the panel is given feedback from the responses in the previous round and asked to re-evaluate their responses in light of the feedback. In this study, high-level decision-makers in the agri-financing industry with experience of working in financing partnerships with developing farmers were targeted. A total of 18 panellists participated in the first-round Delphi survey while 12 participated in the second-round survey.

Based on the data gathered from the two rounds of surveys, average rating, criticality and significance indices were calculated for each CSF and the tests for convergence were performed. Key themes and patterns were identified in a process of data reduction and meaning making. Inductive reasoning from the comments made by the panellists was used to explain the design-phase CSFs for collaborative partnerships between Sefa and commercial banks aimed at financing developing farmers.

The net effect of the financing environment post deregulation was the elimination of earlier support to agriculture and the growing role of commercial banks in financing agriculture.

Based on the Pareto principle, CSFs should be the 20% key areas in which things must go right when establishing the partnership to ensure an 80% success rate for the partnership. If these CSFs are not adequately addressed then the partnership would fail. The CSFs would therefore consist of those factors that, if addressed when the partnership between the banks and Sefa is being formed, would lead to improved transparency, shared objectives and increased trust to enable impactful lending to otherwise financially excluded SMEs.

Let us take a closer look at the recommended critical success factors.

 

Partnership design critical success factors

 

Partnership design issue (i.e. problem being solved) Proposed critical success factor (i.e. a single, implementable idea)
Partnership brokerage 1. Using external brokers to facilitate the establishment of the partnership, OR

2. Using internal brokers from within Sefa and commercial bank to facilitate the establishment of the partnership

Defining the strategic intent and created value of the partnership 3. Reaching mutual understanding and acceptance of the strategic intent of the partnership

4. Reaching agreement on the created value for each of the partners

5. Reaching mutual understanding and acceptance of the contribution of each partner to the created value of the partnership

Ensuring strategic and organisational fit 6. Co-creating a partnering agreement that sets out clear roles and responsibilities in line with partnership objectives and a governance/decision-making structure that ensures proper accountability and efficient delivery

7. Ensuring buy-in from principals and key decision-makers of both institutions

8. Involving right from the start those individuals and teams that should drive the partnership. Adequate support and empowerment should be provided by the principals of the partnering institutions to carry out the tasks assigned to them.

Embedding the partnership 9. Allowing banks to be the lead organisation in the partnership, which should reduce points of interaction and potential conflict arising from partner differences

10. Starting small and phasing in the partnership so that the partners can learn about each other, develop effective relationships, build trust, and test and adjust the partnership’s operational and governance arrangements before moving to more ambitious plans

Boundary management 11. Using external or internal brokers to facilitate the establishment of the partnership as well as to provide support through research, monitoring, reviewing and evaluating the partnership over time
Communication 12. Participating in joint planning and goal setting

13. Sharing relevant, adequate, accurate and credible information

Trust 14. See 10 above

15. Developing appropriate metrics that are pegged on partnership goals as well as partnership progress, and systematically working to achieve them

16. Building an ongoing review, including ‘health checks’, to assess the partnership, and to determine and implement changes to improve its effectiveness

17. Avoiding fault finding in the partnership by emphasising inquiry rather than judgement, acknowledging that in interdependent relationships, difficulties usually result from the actions (or inaction) of both sides

18. Providing an exit strategy in the contract, in case the partnership proves unsuccessful or the objectives are ultimately achieved

Partnership experience 19. See 10 above

20. Acquiring partnership management capability by articulating, sharing and internalising partnership knowledge in the form of best practices

 

Task-related critical success factors

 

Partnership management capability 21. See 20 above

22. Using a dedicated partnership management function with expertise to embed partnership capability and culture across the organisation

Expertise and technological capabilities 23. Using personnel with appropriate expertise to manage the partnership (see 22 above).

24. Using appropriate fin-techs to reduce transaction costs, provide a cost-effective and secure method for financial transactions, and generate the required reports

Accountability 25. Adhering to standards that the partners have adopted and documented (compliance)

26. Sharing information on decisions and actions that have been taken as well as the performance and outcomes thereof (transparency)

27. Taking into account the other partner’s considerations in decision-making and showing how that affected the ultimate decisions and subsequent actions (responsiveness)

Appropriate financial products See under critical success factors for products and services below.
Established customer base 28. Encouraging banks to collaborate with farmer organisations, use agents and leverage group lending to distribute loans and collect repayments, and leveraging structured agricultural value chains for developing farmers
Industry attractiveness 29. Developing a funding mix for the South African agri-sector that is tailored to developing farmers, includes innovative ways to access private-sector finance and links the farmers to input supplies and agro-processing.

30. Encouraging banks to contribute to agri-policy development

 

Product and service-related critical success factors

 

Guarantee funds 31. Providing guarantee funds that are reasonably priced to reflect expected losses

32. Doing research to generate information on what reasonable pricing entails and what a successful guarantee scheme constitutes

33. Building the credit histories and understand the developing farmers’ credit worthiness (credit scoring), which will help to reduce reliance on guarantees for groups of farmers who score highly

Concessional loans 34. Offering concessional loans that target pro-reform enterprises and have a limited duration

35. Channelling concessional loans through commercial financial institutions, allocating the loans to economically viable farmers, and curbing opportunities for corruption

36. Using subsidies for support services and infrastructure that would de-risk lending to agriculture, and enabling the private sector to provide credit at market rates

Grant funding to address supply-side constraints 37. Seeking and securing grants to spend on long-term, strategic market-building activities, which will enable the private sector to lend to developing farmers. These activities include the development of innovative new lending models for developing farmers.
Demand-side technical support 38. Providing comprehensive and well-co-ordinated technical support for developing farmers, which includes financial literacy, regulatory and quality standard compliance, and governance
Progressive partnerships 39. Bringing other risk-sharing and technical support partners to the Sefa/banks partnership in order to lower the cost of service, reduce information asymmetry and promote a long-term view of the sector. These partners can include value chain actors, insurance companies and fin-tech providers.
Data 40. Developing and enabling the use of appropriate fin-tech products and solutions to enhance the credit scoring capabilities of financing institutions (see 37 above).

41. Mining available data to better understand farmer behaviour in terms of credit usage

Collaborative partnerships can drive investment in agriculture to help feed the world’s growing population.

What did the study find in terms of CSFs for partnership design?

Defining the strategic intent and created value of the partnership: This CSF emerged as the most critical for partnership design. Hence, there should be deliberate effort at senior management level to define the strategic intent and explain the created value of the partnership, given that Sefa is the main risk-sharing partner for SMME financing in South Africa. This highlights the importance of strategic fit or partner complementarity between state-owned enterprises and the private sector. Thus, while the state and private sector may express willingness to collaborate, effective models that benefit the farmers and align with both state and private sector objectives are yet to be designed.

Trust: Interestingly, while lack of trust is usually a key reason for poor collaboration between the state-owned and private sector entities, trust factors did not feature among the top-tier factors in this study. This corresponds with research that says partners should start with clearly defined and mutually-agreed objectives and responsibilities, then take a risk and implement the partnership with the aim of building trust through the collaboration. Building trust can help to reduce transaction costs, induce desirable behaviour, reduce the extent of contracting and facilitate dispute resolution.

Communication: Communication ranked highly in this study. This was implicit in the panellists’ use of phrases like “alignment of processes”, “understanding”, “outline intentions upfront”, “reach agreement”, and “have a clear view” in their comments. Two communication aspects that were not captured in the literature review but came through from the panellists were safeguarding confidential information and conflict resolution.

The relationship is likely to grow as long as both firms keep realising benefits not otherwise attainable outside the partnership.

Conflict management: This must be incorporated in the partnership design. Various researchers found that having a common goal and quality communication increased the chances of a successful partnership. Similarly, where there was trust, partnership problems seemed temporary and could be resolved. The findings confirm the importance of defining strategic intent and setting common goals as a way to minimise the likelihood of conflict.

Embedding the partnership: Embedding the partnership can only happen once the partnership goals have been defined and the structures, processes and programmes have been accepted by the partners. Hence, CSFs related to embedding the partnership ranked lower than those for partnership design. It is important that the partners know how to handle potential setbacks and how to accumulate interaction value. Building interaction value is an ongoing process that culminates in partnership capabilities. Internal partnership brokerage was strongly supported among the partnership-embedding CSFs. This makes sense given that in large institutions, institutional memory of how things are done is soon lost with labour migration. A partnership management function within the institutions can help to ensure that partnership information and learnings are used to build partnership capability.

Partnership experience: It was asked why, after more than 10 years of Sefa’s existence, the agency and commercial banks had not developed a workable partnership model for Sefa’s products. This may imply that as much as Sefa and the banks have been collaborating, they have not done so well enough to develop partnership capability in order to provide finance to developing farmers. Knowledge of alliance capability is pertinent for the Sefa/commercial banks partnerships given the lack of information about the management of such relationships.

Having a common goal is not enough to make the partnership work.

What did the study find in terms of CSFs for partnership tasks?

Developing a funding mix: The task-related factors either facilitate or inhibit the successful completion of desired partnership objectives. Given that the main task at hand is the financing of developing farmers, it is not surprising that developing a funding mix is ranked highly. The South African agri-sector is currently exploring ways to narrow the gap between developing farmers’ financing needs and the funding that is available to them through the establishment of an agri-development agency.

Lending to developing farmers: There seems to be a lack of understanding developing farmers’ appetite for bank credit in South Africa, coupled with minimal lending to them. There are indications that commercial banks are the lenders of last resort to developing farmers after grant funding and other softer loans. Hence, there is a strong need to understand the farmers’ needs and the products that would suit them.

Transparency and compliance: Partner-to-partner accountability ranked highly in this study. Transparency implies accounting for decisions and actions taken whereas compliance implies being held responsible for the same. Another component of accountability, namely responsiveness, which refers to inclusiveness, assurances, reflection, listening and flexibility, was not as highly rated. The acknowledged differences between state-owned and private sector institutions as well as the history of the slow uptake of Sefa’s products by financial institutions suggest that such accountability issues are critical for the Sefa/commercial bank relationship. Interestingly, there is far less literature on partner-to-partner accountability compared to other partnership issues.

Industry attractiveness: Safeguarding industry attractiveness by advocating for a policy environment that is conducive for economic growth ranked highly among the enablers of Sefa/commercial bank partnerships. This is important given the direct relationship between the level of confidence in the sector and the level of investment in the sector. Advocacy for progressive policies and programmes that promote effective partnership models to encourage inclusive financing is therefore essential.

Worldwide, the focus has shifted from aid to the use of blended finance and PPPs to attract private sector finance for development initiatives.

What did the study find in terms of CSFs for partnership products and services?

Progressive partnerships: Partnerships for enabling technical support and other services that de-risk lending to developing farmers were seen as quite critical. This has led to a strong focus on blended finance models and progressive partnerships to manage risks, reduce transaction costs, improve transparency and use limited public sector finance to leverage private sector investments into agriculture. However, partnerships for inclusive financing of agriculture still need to mature.

Technical support: Technical support includes advice, assistance and/or training for the developing farmers. This support can help to reduce transaction costs and operational risks, and increase developmental impact. Digital tools and platforms have the potential to generate new networks and forms of cooperation, and help to overcome information asymmetry. However, the farmers’ access to digital platforms and digital inclusion still have a long way to go.

Guarantee funds: The panellists supported the use of credit guarantees but were concerned that Sefa might not have enough funding for its guarantee scheme. Guarantee funds are important for developing farmers who have limited conventional security. Yet the state seems to ignore this in many of its farmer financing schemes. Instead, the government prefers direct lending or grant funding to beneficiaries, despite the fact that it is weak at screening loan applications. Also, direct lending and grants tend to distort credit markets, and may lead to the collapse of agricultural credit and reduce the appetite for commercial loans as the farmers await grants and cheaper credit from the state. Furthermore, guarantee repayments constituted less than 8% of the total running cost of the fund, implying high overhead costs with low direct expenditure on the fund’s primary objective. Political interference in the management of the fund is a possibility. While noting the advantages of government-provided guarantee schemes, there is a call to carefully evaluate the use of public funds for such schemes and to ensure that their performance is aligned with developmental goals.

Based on the Pareto principle, CSFs should be the 20% key areas in which things must go right when establishing the partnership to ensure an 80% success rate for the partnership.

Concessional loans and grants: The panellists agreed that concessional loans for developing farmers should be provided, with long tenor, allowing them to build up equity. Generally, the government is reluctant to offer concessional loans through commercial banks for fear of subsidising the banks’ earnings – hence the preference for direct funding of farmers through equity grants and direct lending. The downside is that the state is not set up for credit assessment and the provision of loans. Therefore, concessional loans to farmers should rather be disbursed through commercial banks. The banks should be allowed to recover the cost of lending in a fair and transparent manner. The efficacy of commercial banks to handle concessional loans is exemplified in the success of Sefa’s LREF. Over the years, the South African government has provided grants to farmers through various programmes. However, not many of these collaborative partnerships have been successful. Given the poor success rate and diminishing government funds, there is now a keener interest in blended finance models to provide developing farmers with access to affordable finance and to reduce their reliance on grants.

Funding for supply-side constraints: Funding to address supply-side constraints has not gained much traction. To address supply-side constraints, donors should have transparent long-term strategies and collaborate to build sustainable smallholder finance markets. This would include easier access for grantees to grants from multiple donors, access to other sources of private capital and long-term government subsidies, and better reporting. It is said that donors should provide grants for advocacy and policy liaison, knowledge base development, the support of progressive partnerships and priming markets for investment in order to create an environment that allows smallholder finance to scale up quickly and inclusively. Donors should also consider providing grants and concessional capital to individual financial service providers and lenders to offset the costs of developing innovative financing models.

Closing remarks

The findings indicated that defining the strategic intent and created value of the partnership was critical for successful Sefa/commercial bank partnerships. Strategic and organisational fit, which enable partners to align and collaborate, was also deemed highly critical. This was followed by transparency and compliance with partnership rules.

… direct lending and grants tend to distort credit markets, and may lead to the collapse of agricultural credit and reduce the appetite for commercial loans as the farmers await grants and cheaper credit from the state.

The main service that the Sefa/commercial banks partnerships should provide is demand-side support, including a funding mix, to raise the productivity of developing farmers in collaboration with relevant sector partners. The principal product would be guarantee funds to de-risk lending to such farmers. Guarantee funds have been used extensively in the developed and developing world to improve the performance of financial intermediation in the SME sector. It is therefore suggested that government should direct more funding to guarantee funds.

Interestingly, trust, partnership experience and partnership brokerage did not rank as highly as they are positioned in other studies. There was strong support for using internal as opposed to external brokers when formalising such partnerships, with a view of retaining much of the partnership building capability within the institutions.

These critical success factors will be useful for the national policy framework for collaborative financing of developing farmers that is currently being developed in South Africa.

  • This article is based on the MPhil in Development Finance research assignment of USB alumnus Dr Langelihle Simela. The title of her assignment is “Critical success factors for collaborative partnerships between sefa and commercial banks for financing developing farmers of South Africa”.
  • Her study leader was Dr Nyankomo Marwa, Senior Lecturer in Econometrics and Development Finance at USB.

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How coaching aligns the psychological contract

How coaching can strengthen the relationship between millennials and employers

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

How coaching aligns the psychological contract

How coaching can strengthen the relationship between millennials and employers

By Chantelle Solomon and Prof Salomé Van Coller-Peter

  • AUG 2020

15 minutes to read

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Millennials: changing the face and pace of work

Every new generation of workers brings fresh perspectives and skill sets to organisations. This infusion of new blood can be energising, but it can also present challenges – particularly when looking for a comfortable fit between older and younger workers whose life experiences, attitudes and professional expectations differ.

Millennials (born between the early 1980s and the late 1990s), also known as Generation Y, will soon outnumber their Generation X predecessors (born between 1965 and 1980) in the global workforce. In fact, it is predicted that Gen Y will make up 75% of the global workforce by 2025. Once referred to as the leaders of tomorrow, millennials have become the leaders of today. Organisations are under pressure to find ways to productively meld younger, millennial mind-sets with more traditional corporate values and work methods.

Organisations are under pressure to find ways to productively meld younger, millennial mind-sets with more traditional corporate values and work methods.

During millennials’ formative years, the world was more prosperous than it is today. Also, the internet was coming into its own, which explains the ease with which millennials adapt to the latest digital devices and technologies. While often viewed as innovative, adaptable and confident, millennials have also been labelled entitled, demanding and emotionally shallow. It has been suggested that over-protective parenting and the pressure to measure up to unrealistic standards of success (often inspired by social media) have left many millennials with underlying anxieties and an inability to cope with stress or failure. Millennials expected to get “good” jobs and live a good life. Parents and teachers set the expectation for millennials that if you work hard, then you will be successful when you grow up. Additionally, they pushed education. That is why millennials are the most educated generation yet, which further elevates their expectations when they start working.

It has even been postulated that millennials have lower self-esteem than earlier generations and require constant reassurance. Influenced by the power and speed of technology, they also tend to be impatient and in need of instant gratification. Easy access to real-time information via YouTube, Facebook and Twitter, for example, helps to feed this need. As a result, millennials are often considered ‘tough to manage’.

Millennials are known for their technological shrewdness and ability to use technology to enhance their efficiency and productivity in the workplace.

Common characteristics of millennials

Millennials constitute the largest segment of the global workforce today. Although one should not generalise too much, millennials tend to have some common characteristics.

  • Millennials are smart when it comes to technology. Having grown up with the internet, millennials are more comfortable with technology than many of their older peers. This generation could not conceive of life without digital devices and online services. Millennials are known for their technological shrewdness and ability to use technology to enhance their efficiency and productivity in the workplace. The downside of millennials’ technological proficiency is that they prefer to communicate electronically rather than face to face, often at the expense of personal relationships.
  • Millennials are used to disruption and change. Although millennials grew up in a comparatively prosperous era, they have nevertheless experienced periods of disruption and uncertainty, including the fall of the Berlin Wall, the bursting of the dot-com bubble in the early 2000s, the bombing of New York’s Twin Towers in 2001 and the subsequent war on terror, and the global financial crisis in 2008-2009 and its lingering aftereffects. They have also witnessed the collapse of major corporations (such as Enron, Arthur Andersen and Barings Bank) in the wake of unethical leadership, which has robbed scores of hard-working people of their jobs and livelihoods. In many ways, these events have taught millennials to anticipate and accept change, and to be adaptable. However, they have also made them less trusting of, and less loyal towards, their organisations.
  • Millennials are ambitious and achievement-oriented. Millennials are known to value meaningful, challenging and varied work. They expect their superiors to set high standards and to provide clear direction, but they also want the flexibility to do some things their own way and to learn by trial and error. Millennials seek self-actualisation and a progressive career path, supported by appropriate training and development. They take responsibility for managing their own careers and building skills that will enhance their employability.

Millennials understand the value of a healthy work‒life balance. One could say that they work to live, not live to work.

  • Millennials need support and recognition at work. Despite their assertiveness, millennials need their superiors to provide guidance and regular feedback, as well as recognition for good work. Some would say that they require constant reassurance, which could reflect a cosseted upbringing. They also thrive in teams, where colleagues support and cooperate with one another. Like previous generations, millennials view their salary package as an important indicator of their perceived worth, but they also prize assorted perks and bonuses.
  • Millennials are prone to job-hopping. Millennials have a reputation for hopping from one job to the next, particularly in emerging markets. They often decide to move on after working for an organisation for only a few years, seeking new professional challenges and more attractive remuneration packages. A short tenure can be disruptive and costly to an organisation, particularly if large sums have been spent on employees’ training and development. Currently, the Covid-19 pandemic has a significant impact on young workers as they struggle to find jobs and to pay for their accommodation, healthcare, education and childcare.
  • Millennials value a good work-life balance. Millennials understand the value of a healthy work-life balance. One could say that they work to live, not live to work. They often prioritise family over work and value flexible work schedules that allow them to balance their professional and personal commitments. Such an attitude might be mistaken for a lack of commitment or loyalty towards the organisation. Yet, it might actually encourage better results from the employees in question, and longer tenures.

Can coaching help to forge greater alignment in the psychological contract?

The expectations of employers and employees regarding their reciprocal obligations in the employment relationship form the core of their ‘psychological contract’. For example, employees are expected to perform to a high standard and manage their time efficiently; in return, employers are expected to provide employees with support, fair remuneration and opportunities for personal advancement. In short, there should be mutually beneficial outcomes for the parties.

A psychological contract in the work environment is more likely to be successful if there is alignment between an employer’s and employee’s expectations regarding job scope and content, quality of outputs, professional development, rewards and job security. The greater the alignment in their psychological contract, the more harmonious and productive their relationship is likely to be, to the benefit of the individuals concerned and the organisation as a whole. Conversely, a lack of alignment or mutual fulfilment could disrupt the working relationship and negatively affect an employee’s performance.

Achieving mutuality in psychological contracts can be difficult, particularly when employees’ and employers’ world views are shaped by different forms of upbringing and life experiences.

Achieving mutuality in psychological contracts can be difficult, particularly when employees’ and employers’ world views are shaped by different forms of upbringing and life experiences. Professional coaching could play an important role here. Coaching helps people to recognise their particular strengths, weaknesses and latent talents that need nurturing. It also teaches people to acknowledge the importance of diverse views and capabilities, and how employees can find their particular niche in an organisational context.

Although extensive research has been conducted on the consequences of breaches of psychological contracts, much less attention has been given to how psychological contracts are established and maintained over time, while almost no research has been done on the benefits (or otherwise) of coaching millennials. The study on which this article is based sets out to address this research gap by investigating how coaching might help to align the psychological contract between young millennial professionals (YMPs) and the organisations for which they work.

The study sample comprised a selection of YMPs who had undergone coaching in their organisations (‘coachee participants’) and individuals who had been their coaches (‘coach participants’). The coachee participants were all under the age of 30 and had either just entered corporate life or were already building their careers in various organisations. Most of the coach participants were professionals with their own consultancies. Interviews were conducted with the coachee and coach participants to establish whether and/or to what extent the coaching experience had contributed to a better alignment in the psychological contract between the coachee participants and their organisations.

What the study revealed

The coachee participants reported that they had benefited from the coaching in three key respects:

  • Enhanced awareness. They said they had acquired deeper self-awareness, a greater sense of personal responsibility and accountability, and a more realistic sense of the value they brought to their organisations. They came to recognise both their strengths and the areas needing improvement, how their behaviour influenced their personal interactions at work, and what they wanted from their lives and careers. The coaching imbued in them a clearer sense of purpose which, they said, would help them plan their careers with greater precision. One coachee participant came to the realisation that the organisation (and the world, for that matter) did not owe them anything; rather, they themselves had to demonstrate their worth and add value.
  • Improved confidence. They also said they had become more confident, which made it easier to ask for help or to challenge decisions or instructions. Their new-found confidence also enabled them to speak up about what they expected of the organisation in terms of their immediate working environment and longer-term career prospects.

Coaching has the potential to positively influence millennials’ perceptions of themselves, their value to the organisation and their prospects of professional success.

  • Enhanced ability and motivation to engage in tough conversation. Engaging in conversations to establish or review an employer‒employee psychological contract can be challenging as it might reveal the parties’ conflicting aspirations and expectations. Yet it is for this reason that such conversations are crucial. The coaching had helped some coachee participants approach tough conversations with greater confidence and conviction, which in turn had led to more mutually beneficial outcomes. Regular communication was seen to be useful in defusing potentially contentious encounters between coachee participants and their superiors.

A win-win for millennials and their organisations

Coaching has the potential to positively influence millennials’ perceptions of themselves, their value to the organisation and their prospects of professional success. Such revelations might persuade them to stay longer in their jobs and to strive for stronger and more enduring partnerships with peers and superiors alike.

Importantly, the study has shown that coaching helps today’s employees and their employers find themselves and each other, and that generation gaps can be bridged more easily than many would think.

  • Find the original article here: Solomon, C. & Van Coller-Peter, S. (2019). How coaching aligns the psychological contract between the young millennial professional and the organisation. SA Journal of Human Resource Management/SA Tydskrif vir Menslikehulpbronbestuur, 17(0), a1146. https://doi.org/10.4102/sajhrm.v17i0.1146
  • Prof Salomé van Coller-Peter lectures in Management Coaching and Managing Transformation at USB.
  • Chantelle Solomon is an MPhil in Management Coaching alumnus of USB.

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The AI race - China’s AI landscape

Artificial intelligence: Can China dominate this landscape by 2030?

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

The AI race - China’s AI landscape

Artificial intelligence: Can China dominate this landscape by 2030?

By Chunming Shi

  • AUG 2020

17 minutes to read

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AI: An awakening giant

Once spoken about as something belonging to the future, artificial intelligence (AI) is becoming an increasingly common feature of modern life, thanks to major advances in computing speed, big data, algorithms and deep learning. While already disrupting industry sectors and traditional employment patterns, AI has the potential to completely transform economies and societies as we know them, and even shift the geopolitical power balance. Russian President Vladimir Putin recently said that whoever becomes the leader in the AI domain will be able to design the new world order.

In a nutshell, AI is software that enables machines to simulate humans’ thoughts and actions, or even exceed them. AI is generally algorithm-based, requiring a physical interface (like a robot) to carry out its functions. The link between AI and robots is analogous to that between the human brain and limbs. The former oversees the thinking, storage of information and issuing of instructions, while the latter acts on those instructions. Although AI can function independently as software only (such as the Siri function on an iPhone), it still relies on hardware like servers and supercomputers.

The main capabilities of AI are: (i) perception (e.g. facial recognition and translation of verbal speech into other languages); (ii) prediction (e.g. forecasting of changes in traffic patterns and anticipation of natural disasters); (iii) prescription (e.g. medical diagnostics and transport planning); and (iv) integrated solutions (e.g. voice recognition and self-driving vehicles). It will take time for AI-powered goods and services to see wide-scale commercialisation, but life will be very different when AI goes mainstream and its enormous potential is more fully exploited.

Once spoken about as something belonging to the future, artificial intelligence (AI) is becoming an increasingly common feature of modern life, thanks to major advances in computing speed, big data, algorithms and deep learning.

One of the major concerns about AI is that it will deprive large numbers of people of their jobs as work becomes increasingly automated. Jobs requiring few social tasks and low dexterity, such as a truck driver or radiologist, are destined to be replaced quite quickly by AI. Jobs that require creativity and flexibility, such as a mechanic or financial analyst, are less at risk. Of course, AI should also create opportunities for new forms of human-centred work, requiring technological optimisation and problem-solving. Another area of concern is how to design a legal and regulatory framework that is suited to a high-tech, often virtual (and thus jurisdiction-free) environment.

A few years ago, the AI gaming program, AlphaGo, famously defeated one of the world’s best players of the Go board game. The fact that a machine can outwit a highly intelligent human being is intriguing but also somewhat disconcerting. In ancient China, the Go game was one of the four basic art forms that Chinese scholars were expected to master. It was thought that proficiency in the game would imbue in its players Zen-like intellectual refinement and wisdom. For thousands of years, the Chinese had led the world as Go masters, only to be defeated ultimately by a machine. Somewhat ironically, AlphaGo was the creation of Alphabet (Google’s parent company). To some observers, AlphaGo’s victory represented not just the triumph of machine over man but also that of Western tech over the rest of the world.

The dethroning of the top Go player by AlphaGo was a defining moment for China, providing the impetus for the crafting of an ambitious plan to elevate AI to the centre of the country’s national strategy to drive public and private investment, manufacturing and human capital development. The ultimate goal, said Prime Minister Li Keqiang in 2017, was “to become the global innovation centre in AI by 2030”. China sees AI having the power to reduce bottlenecks in the country’s development: an ageing population (AI could render assistance to or replace humans), rising labour costs (machines could dramatically boost productivity) and an industrial sector in need of upgrading (AI could help China reposition itself as a technology-driven economy). AI is the focus of a range of policy documents and an AI-specific national development plan has been mooted.

A strong AI drive on the part of China will influence its relationships with other countries ‒ including the USA, China’s most formidable geopolitical and technological rival. Trade disputes between the two superpowers in recent years can be traced to the Trump Administration’s concerns about China’s quest for greater competitiveness, much of which centres on innovation and technology. While the USA is the global leader in cutting-edge research and development on AI, focusing on algorithms, machine learning and deep learning, China conducts more AI research than the USA (according to numbers of published articles and patent registrations).

What will China’s AI landscape look like by 2030? And who will win the AI race between China and the USA? These questions were the focus of an MPhil Futures Studies research assignment, on which this article is based.

The link between AI and robots is analogous to that between the human brain and limbs. The former oversees the thinking, storage of information and issuing of instructions, while the latter acts on those instructions.

Broad trends in artificial intelligence

Some regions will gain more from advances in AI than others. It has estimated that some 70% of the global economic impact of AI will be concentrated in China and North America. The acknowledged top tech leaders in the world today are the USA’s Google, Facebook, Amazon and Microsoft, and China’s Baidu (similar to Google), Tencent (similar to Facebook) and Alibaba (similar to Amazon). While Europe is making strides on the AI front, regions such as South America and Africa are not yet ready to leverage the benefits of AI on a large scale.

China has huge public and private sector investment capacity and a long-term strategic outlook. The top three sectors attracting AI investment in China are transportation, healthcare and finance – well ahead of sectors such as education, logistics and manufacturing. Public funding focuses on long-term, high-risk and basic AI R&D, such as supercomputers, high-end chip manufacturing and basic algorithms. Private funding focuses on major capital investment and medium-term AI commercialisation, such as facial recognition, voice recognition, smart cities and self-driving vehicles.

It is predicted that China will be the world leader in the areas of facial and voice recognition, not only because it has large numbers of smartphone users, but also because it has mature internet infrastructure and the largest cashless payment market in the world. It is also less concerned about privacy than many other countries. Furthermore, China is almost certain to lead the autonomous drone market, with Shenzhen being home to the world’s premier drone maker, DJI. DJI, which already has about 50% of the North American drone market, makes drones for personal and industrial applications, such as crop spraying, fire-fighting, parcel delivery and search-and-rescue operations. Shenzhen is also host to the factories of leading smartphone brands (including Apple, Samsung and Huawei), self-driving vehicles (such as Momenta and UISEE) and chip manufacturers (such as Foxconn and TSMC).

China’s political system is very different from that of most other countries. Its one-party, highly centralised system of governance and lack of political transparency strongly influence the country’s economic structure and performance, and will impact its AI development trajectory in the future. Because of its centralised system of governance, China lacks spontaneous, ‘bottom-up’ innovation from individuals and private-sector entities. Nevertheless, AI is one of the most in-demand and highest paid sectors in China. In this regard, Chinese universities’ strong computer science and mathematics programmes have enabled large cohorts of engineering graduates to enter the job market each year, thereby adding to the country’s AI talent pool.

Jobs requiring few social tasks and low dexterity, such as a truck driver or radiologist, are destined to be replaced quite quickly by AI. Jobs that require creativity and flexibility, such as a mechanic or financial analyst, are less at risk.

Using quantitative methods to probe the AI potential of China and the USA

Most studies focus on past and current developments; very few look critically at what the future holds. Furthermore, most of the literature on AI is the work of Western authors whose views of China invariably have an ideological bias. In addition, comparative country studies of AI development are not common and where they have been conducted, they have rarely incorporated any form of quantitative analysis.

As a supplement to the literature review, this study used four quantitative methods to predict which of the two countries (the USA or China) is most likely to win the AI race (in other words, profitably gain the most) by 2030, based on an internal and external environmental assessment. The four methods were:

  • Trend impact analysis. This involves studying past developments and historical changes to project future outcomes.
  • Black swan identification. A black swan event has a low possibility of occurrence, but if it does occur it will have a considerable impact.
  • Scenario method. Scenarios simulate what might happen as a result of specific choices and strategies. This is one of the most frequently used methods in foresight as it allows flexibility in long-term planning.
  • SWOT analysis. This helps to reveal aspects that should be capitalised on (strengths), rapidly improved (weaknesses), further exploited (opportunities) and prepared for/adapted to (threats).

It is predicted that China will be the world leader in the areas of facial and voice recognition, not only because it has large numbers of smartphone users, but also because it has mature internet infrastructure and the largest cashless payment market in the world.

Key findings from the quantitative analysis

In the AI contest between the USA and China, black swan events might include escalating trade tensions between the two countries, the possible reunification of mainland China and Taiwan, and a possible political transformation in China (spurred by internal democratic movements and pressure from the West).

Three possible future scenarios for China are: (i) co-lead, in which China and the USA collaborate to their mutual advantage and jointly dominate the global AI landscape; (ii) stagnation, in which the USA leads the way and uses containment tactics to head off a competitive threat from China, despite the latter’s efforts to improve transparency and ethics; and (iii) cold war pattern, in which both countries adopt a zero-sum attitude, keeping their resources and technologies to themselves, and aggressively blocking the other’s attempts to get ahead in the AI game.

In terms of AI strengths, China has a vast ‘data sea’, which refers to the range of information that allows AI programs to learn independently and become smarter. Smartphones (facilitating location-based services, online payments and search engine usage) feed this data sea. The country also has a strong AI commercial footprint, with particularly high potential in the self-driving vehicle market (China is the world’s largest vehicle manufacturer and consumer). Moreover, the government is highly supportive of AI developments. In terms of AI weaknesses, China trails the USA when it comes to cutting-edge AI developments (notably algorithms and data structures), and has poor intellectual property rights protection, a reputation for dubious ethics in business and comparatively limited chip manufacturing capabilities, with the USA still set to dominate the chip market by 2030.

Notwithstanding the myriad risks and uncertainties that grip the world today, China is poised to make a significant leap into the future and adopt a leadership position in the sphere of AI.

Opportunities include China’s steady transition towards a more high-tech and capital-intensive economic structure, the expanded market and commercial linkages provided by the New Silk Road Plan, and the possibility of leveraging Taiwan’s supremacy in the chip manufacturing sector. In contrast, one of the most ominous threats to China’s AI development is the prospect of an ongoing economic and political power struggle between the USA and China. In addition, rising nationalism and protectionism in various parts of the world could well intensify, making it difficult for China to expand its AI footprint.

Conclusions

In the final analysis, the USA is predicted to dominate in the area of basic AI R&D by 2030, helped by tech giants like Google, Amazon and Facebook, which will retain the best AI brains. The USA will also lead in terms of chip manufacturing as well as the so-called ‘second wave’ of AI developments (or ‘Business AI’), covering the banking, healthcare and insurance sectors, among others.

China, in turn, is predicted to lead the so-called ‘third wave’ of AI developments (or ‘Perception AI’), covering innovations like facial and voice recognition and autonomous stores. It will likely co-lead, with the USA, the so-called ‘first wave’ (or ‘Internet AI’), covering search engines, e-commerce and social media, and the ‘fourth wave’ (or ‘Autonomous AI’), covering innovations such as unmanned warehouses, civil drones and self-driving vehicles. The latter are the epitome of AI-inspired innovation, making use of cloud data and intricate algorithms to choose routes and navigate around other moving vehicles, pedestrians and buildings.

Notwithstanding the myriad risks and uncertainties that grip the world today, China is poised to make a significant leap into the future and adopt a leadership position in the sphere of AI. Much depends on the effective implementation of its AI plans and strategies, especially in the areas of capital investment and human capital development. Moreover, if the USA loses its technological edge because it lacks a long-term AI strategy and because of its waning appetite for international collaboration, China could inch closer to AI supremacy by 2030.

  • This article is based on the MPhil in Futures Studies research assignment of USB alumnus Chunming Shi. The title of his assignment is “The AI race: China’s artificial intelligence landscape by 2030”.
  • His study leader was Prof André Roux, Senior Lecturer in Futures Studies at USB and head of the business school’s portfolio of Futures Studies programmes.

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multisided pure-play platforms

Multisided pure-play platforms in emerging markets: Making the most of trust, familiarity and risk

The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

multisided pure-play platforms

Multisided pure-play platforms in emerging markets: Making the most of trust, familiarity and risk

By Marelise Carstens, Prof Marius Ungerer and Prof Gert Human

  • AUG 2020

15 minutes to read

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Why multisided pure-play platforms receive mixed reviews

For many people, the internet has become an indispensable business tool – both as a source of information on products and services and as a vehicle for e-commerce. Given the vast potential of online trading, ‘multisided pure-play platforms’ have sprung up in various parts of the world. A pure-play is a business entity that does not have a conventional bricks-and-mortar presence in a specific location. Instead, it sells products or services only via the internet. A multisided platform (MSP), such as eBay, Alibaba, Uber and Gumtree, is a form of pure-play that facilitates interactions between two or more client bases. The owner of the platform does not sell the goods or services that are for sale; it only facilitates linkages between buyers and sellers.

Starting up an MSP can be challenging. First of all, an MSP needs sellers and buyers at the outset because sellers will not offer their products for sale via the platform if they are not convinced that they have a viable market. This creates the proverbial chicken-and-egg dilemma. In addition, some buyers will simply avoid a new MSP, especially if a particular supplier only offers its product via the MSP in question, which limits buyers’ freedom to shop around for the product. MSPs are also complex businesses to run because they are technologically demanding and involve juggling relationships, i.e. individual and/or corporate buyers and sellers and the platform itself.

A multisided platform (MSP), such as eBay, Alibaba, Uber and Gumtree, is a form of pure-play that facilitates interactions between two or more client bases.

Needless to say, the online commercial environment has become extremely competitive, with MSPs under pressure to lure customers with attractive product/service features and pricing, strong credentials and exemplary service. Despite the convenience of doing business online, it is often perceived to be risky. Unable to browse the inside of a store or mingle with sales staff, online buyers need other forms of assurance that they will be making sensible purchases and dealing with people with integrity.

If MSPs wish to create a competitive advantage for themselves in a crowded online market place, they need to understand what drives consumers’ buying decisions ‒ specifically, what consumers perceive to be the risks associated with online trading and the extent to which they trust the MSP to deliver on its promises.

The interplay between risk, trust and familiarity in online purchasing behaviour

According to many authors, the two main limitations of MSP-driven e-commerce are the perceived risk of online purchasing and the low level of trust in MSPs’ ability to successfully execute online orders. In a commercial context, risk and trust are intertwined. Risk (actually perceived risk) is a function of uncertainty and the seriousness of a particular outcome. It relates to people’s perceptions about their susceptibility to various threats. Trust, on the other hand, is the extent to which one party is willing to enter into a transaction with another party, considering the apparent benefits and risks involved. Where an MSP is the online facilitator, trust would manifest in the buyer expecting or believing that both the MSP service provider and the seller will fulfil their respective obligations.

A number of studies have been conducted to understand and measure the perceptions of risk and trust in MSP-driven e-commerce. Research to date confirms that where the risk is perceived to be high, a buyer will be less likely to purchase a product or service. However, little formal research has gone into studying the relationship between perceived risk and trust in relation to MSP-driven e-commerce in emerging markets, thereby leaving a research gap. The study on which this article is based set out to close that gap. The study was particularly timely because MSPs have gained in popularity in a number of emerging markets, including South Africa, where purely online businesses that supply products or services directly to customers have not gained much traction.

Unable to browse the inside of a store or mingle with sales staff, online buyers need other forms of assurance that they will be making sensible purchases and dealing with people with integrity.

What the literature says

  • Trust. Unlike in bricks-and-mortar stores where trust is largely derived from personal, face-to-face interactions, in an online environment it is primarily linked to the transactional process, which is heavily laced with technology. Everyone approaches a purchasing opportunity from a different knowledge base and frame of reference, which in turn influences their level of trust in the opportunity presented. Personality and people’s general propensity to trust also play an important part in this.The literature provides many examples of factors that influence people’s trust in an e-commerce website. These include: ease of access to, and functionality of, the website; the quality and aesthetics of the website; a well-known brand name; certificates and third-party logos; a privacy statement regarding client information usage; and credible security features.
  • Risk. Like trust, (perceived) risk is also multidimensional and has attracted considerable research attention. Much has been written about the different dimensions of risk within a commercial context, which can be applied both in online and offline contexts. These include: performance risk (the possibility of a purchased product malfunctioning); time risk (the possibility of consumers spending too much time researching different product options or learning how a purchased product works); physical risk (the possibility of a purchased product causing harm to the user); financial risk (the possibility of a high cost being incurred in purchasing and subsequently maintaining a product); and security or privacy risk (the possibility of consumers’ personal details being used without their knowledge or consent).A comparison between the factors influencing trust and the various dimensions of perceived risk suggests that trust and risk are strongly interrelated. For example, an MSP’s failure to adhere to privacy rules would diminish consumers’ trust in that MSP and its cohort of suppliers. Other actions or occurrences that would erode a user’s trust in an e-commerce website include: unwanted/spam e-mails; unreliable information on the website; inappropriate advertising; credit card fraud; and poor quality or non-arrival of purchased products.
  • Familiarity. It has been said that familiarity is a precondition of trust. As people gain a better understanding of their environment through personal experience, their feelings of certainty decline and they have comparatively safe expectations about the future. In an online environment, some view familiarity not only as a precondition of trust but also as an ongoing contributor to consumers’ trust levels as time goes by.

The evident interlinkages among trust, risk and familiarity lend themselves to three hypotheses:

  • H1: Users’ familiarity with an MSP positively influences their trust in the MSP.
  • H2: The perceived risk associated with an MSP negatively influences users’ trust in the MSP.
  • H3: The relationship between users’ familiarity with an MSP and their trust in that MSP is moderated by the perceived risk associated with the MSP.

Interestingly, research has shown that the relationship between familiarity and trust, and the moderating effect of perceived risk on that relationship, differ significantly across different demographic groups (such as men and women, and older and younger people). Culture also impacts consumers’ risk perceptions and levels of trust.

What the empirical study revealed

The empirical study involved an online survey being conducted among a sample of 380 people (all aged 18+) who had purchased a physical product online in the previous 12 months from selected South African MSPs, namely Gumtree, Junk Mail, Bid or Buy, OLX and Locanto. Participants were asked to respond to statements relating to each of these MSPs, using a five-point Likert-type scale.

If MSPs wish to create a competitive advantage for themselves in a crowded online market place, they need to understand what drives consumers’ buying decisions.

The findings from the study confirmed:

  • The hypothetical link between users’ familiarity with an MSP and their trust in the MSP (HI).
  • The hypothetical link between the perceived risk associated with an MSP and users’ trust in the MSP (H2).
  • The hypothetical moderating influence of perceived risk on users’ familiarity with and level of trust in the MSP (H3).

Interestingly, the study revealed statistically significant differences between men and women in terms of the association between familiarity and trust. In contrast, no significant differences in this regard were revealed between younger and older users. This was surprising as it was assumed that younger users would be more familiar with, and thus more trusting of, MSPs. This warrants more in-depth research.

Unlike in bricks-and-mortar stores where trust is largely derived from personal, face-to-face interactions, in an online environment it is primarily linked to the transactional process, which is heavily laced with technology.

Strategic implications of the study

The researchers’ empirical study and the work of other authors highlight that the elements of risk, trust and familiarity all play a role in whether or not users will gravitate towards and indeed continue to use various MSPs. However, how these elements relate to and influence one another can vary from one online experience to the next. This can be challenging for MSPs that are intent on consolidating their position in the market.

What is clear, though, is that users will not trust an MSP with which they are not familiar. A key task of management, therefore, is to ensure greater familiarity through an effective marketing strategy aimed at attracting and retaining clients. Another task for management is to continually manage the trust-risk dynamic. While risk can never be completely eradicated from an online business, a good dose of trust (and familiarity) can be an effective antidote. Trust is more likely to develop if an MSP offers an easy-to-navigate website, trouble-free interactivity and reliable security features. A strong brand and reputation in the market are also important.

While risk can never be completely eradicated from an online business, a good dose of trust (and familiarity) can be an effective antidote.

Building a loyal online following takes time and often considerable investment. Taking the trouble to thoroughly understand the platform’s user base is a critical success factor, one that could give an MSP an all-important competitive edge over its competitors.

  • Find the original article here: Carstens, M., Ungerer, M. & Human, G. (2019). Perceived risk, trust and familiarity of online multisided pure-play platforms selling physical offerings in an emerging market. Southern African Business Review, 23(1). https://www.ajol.info/index.php/sabr/article/view/191155
  • Prof Marius Ungerer teaches strategic management, leadership and change management on programmes such as the MBA, the MPhil in Management Coaching and the PGDip in Leadership Development at USB. He is also an annual Visiting Professor at the NUCB Graduate School, International MBA Program, Nagoya, Japan, and a visiting faculty member of the University of Johannesburg.
  • Marelise Carstens is an MBA alumnus of USB. This study formed part of her research assignment.
  • Gert Human is professor in Entrepreneurship, Innovation & Strategic Management at Stellenbosch University, Department of Business Management, Faculty Economic and Management Sciences.

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