July – December 2020

Will technology take my job away?

Will the Fourth Industrial Revolution lead to large-scale unemployment?

The Steinhoff Saga Management review - University of Stellenbosch Business School

June – December 2020

Will technology take my job away?

Will the Fourth Industrial Revolution lead to large-scale unemployment?

By Prof Martin Butler and Bertus Buys

  • DEC 2020

15 minutes to read

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When the impact of modern technologies like artificial intelligence, machine learning and robotics are discussed in a business or social context the conversation inevitably turns to the impact on employment. There are justifiable concerns that technology will lead to widespread unemployment or, at the very least, a workforce not ready for the types of opportunities provided. When technology changes the structure of economic activities some employment opportunities will be lost. This raises the question: Will this only be those jobs that are repetitive and rather simplistic, or will it have a zero net effect on formal employment?

If anything, the Fourth Industrial Revolution’s significant impact on policy and strategy is intensifying the level of conversation that, up to now, has mostly been based on anecdotal evidence or historical reference. However, there are always lessons to learn from the past. In addition, we need explorative technological forecasting based on extrapolations from the past to make sense of the future.

There are justifiable concerns that technology will lead to widespread unemployment or, at the very least, a workforce not ready for the types of opportunities provided.

Therefore, this study looked at the impact of technological innovation on employment over the long term to obtain a better picture of what the future might hold. The technological unemployment debate has split the academic world into technology pessimists and technology optimists. The pessimistic view is that innovation destroys jobs; it creates structural changes in the economy that drive unemployment in the unskilled labour market, while increasing employment in the skilled market. The optimistic view is that innovation creates a myriad of possibilities in the form of new employment, and also positively influences multiple support industries and sectors that already exist, with a net positive effect.

Technological innovation and unemployment
The media and management literature warn about the perils of technological unemployment. To move beyond the sensation-seeking statistics, it is necessary to obtain a better understanding of the types of jobs gained and lost as a result of technological innovation.

Four aspects are important when looking at the effect of technological innovation on employment. Firstly, any study about economic impact could be done at product/process level, firm level and industry level. It is of course also possible to extrapolate industry level to country or larger geographical levels. Secondly, we need to take cognisance of the multiple dimensions of innovation. Thirdly, we need a long-term lens to look at high-level correlations between technological developments and economic cycles. Finally, the types of unemployment need to be analysed to try and isolate technology induced unemployment from other large employment trends that could influence the data.

The type of unemployment depends on where the economic system finds itself on the economic supercycle, also called the K-wave pattern or Kondratieff long wave.

The literature indicates four main types of unemployment:

  • Structural unemployment: This is defined as the disparity between the jobs available in the market and the skills of the workforce.
  • Frictional unemployment: This is defined as the short-term unemployment experienced while people are looking for jobs.
  • Cyclical unemployment: This is defined as loss of work due to economic downturns.
  • Seasonal unemployment: This refers to unemployment as a result of seasonal productive activities – like those typically found in the agricultural industry.

According to early 20th century Austrian political economist Joseph Schumpeter, all types of unemployment could be ascribed to the creative destruction process. He explained that unemployment is mainly frictional; unemployment as a result of technology adoption was temporary and of a cyclical nature. In contrast, the Italian economist Pasinetti believed that structural changes in the economic system generated a technology-induced loss of employment. A global analysis of the 2008 recession indicated that job polarisation – referring to a structural change from low-skilled or unskilled labour to skilled labour – was typically concentrated during recessions which coincided with technological changes.

One of the mostly widely used theories to investigate the interdependency between technological transformation and economic activity is the Kondratieff waves introduced by Russian economist Nikolai Kondratieff in his 1925 book The major economic cycles.  The type of unemployment depends on where the economic system finds itself on the economic supercycle, also called the K-wave pattern or Kondratieff long wave.

Kondratieff Wave

During the initiation of the upswing (recovery phase), the type of unemployment should be deemed structural as there was a mismatch between the skills required and the proficiency of the labour force. When the economic system entered the prosperity phase, unemployment was reduced, leaving predominantly frictional and voluntary unemployment. As the prosperity phase progressed, the type of unemployment became technological owing to the development of process improvement innovations. At the peak of the wave, the technological innovations reached their full maturity and, in conjunction with the start of the development of new inventions, initiated the recession. In the recession phase and throughout the depression phase, the main type of unemployment is cyclical.

Technologically induced loss of employment usually arose in the later stages of recessions. Fears of such losses stemmed from the labour-saving goal of most technological innovations and were typically sparked in periods characterised by radical technological innovation.

Both pessimists and optimists agree that short-term unemployment follows in the wake of technological innovation. However, the debate about the long-term impact of technological innovation on employment continues.

Empirical studies have been conducted to determine the effects of technological innovation on unemployment. Unfortunately, most studies were undertaken at individual firm level and do not take into consideration the creation of new industries and markets brought about by radical technological innovation.

Both pessimists and optimists agree that short-term unemployment follows in the wake of technological innovation. However, the debate about the long-term impact of technological innovation on employment continues.

Taking a closer look at technological innovation
Technological innovations have an impact on society, the economy and unemployment. The innovation continuum ranges from radical to incremental. Radical technological innovation typically creates new industries and markets while incremental technological innovation improves what already exists and is usually labour-saving in nature. Radical or revolutionary technological innovation has a far more significant impact on economic activity, and therefore employment, than its incremental counterpart.

Radical or revolutionary technological innovation has a far more significant impact on economic activity, and therefore employment, than its incremental counterpart.

We also need to distinguish between product innovation and process innovation. Process innovation improves the efficiency of the production process, or processes supporting the production process. Product innovation improves existing products or creates new products for the market. In general, process innovation is deemed a driver of unemployment because it can replace human workers in the course of optimisation practices. Product innovation, on the other hand, leads to employment growth owing to a growth in the market, at the firm level.

Most studies on technological unemployment have used a microeconomic framework to determine its impact on firm level. The firm-level research and development expenditure, which serves as a proxy for technological innovation, can easily be related to a firm’s employment trends. However, a firm-level analysis limits the ability to determine the net effect of radical technological innovation on, for example, another firm in another industry, since it affects multiple levels of the economy.

Seeing the bigger picture
Part of the reason why the impact of technological innovation on employment is still unclear is the fragmentation of the studies that have been undertaken. These studies cover different geographies, levels of investigation (firm, industry, sector, or country) and time frames.

In general, process innovation is deemed a driver of unemployment because it can replace human workers in the course of optimisation practices. Product innovation, on the other hand, leads to employment growth owing to a growth in the market, at the firm level.

Very few studies are performed on a macroeconomic level, partly because it is challenging to find a suitable proxy for technological innovation and to control for co-deterministic macroeconomic factors.

This is where a systematic literature review, as an academic research method, is well suited because it can integrate the results from a large number of empirical studies. This study used a longitudinal dataset – 213 data sets from 24 primary studies – to analyse the effect of technological innovation on employment. The analysis is thus done on a larger dataset gathered by multiple researchers, across various firms and industries, and in different sections of the K-wave.

While the meta-analysis did not render significant results at a macro level, analyses at firm, process, and product levels delivered significant effect sizes with interesting results.

What did the study find?
Technological innovation creates employment at firm level. This study supports a positive correlation between technological innovation and employment, but only at firm level. It provides robust scientific evidence to counter some of the negative narratives about technological unemployment. The data required to explore the question on a macro level, and over a significantly longer period, is unfortunately still lacking.

Technological innovation creates employment at firm level.

It was also found that product innovation has a generally higher positive impact on employment than process innovation. Both product and process technology innovation lead to increased employment at firm level. Despite process innovation having a small effect size, this counters the prevailing belief that technological innovation destroys jobs.

Interestingly, the negative impact of process innovation prevalent in the current discourse is not supported by the data. Arguments that this could be unique to the Fourth Industrial Revolution due to automation do not hold true. Previous large-scale technological innovations have also led to process automation, just using different technological innovations.

At a firm level, product-based technological innovation enables not only additional employment capabilities but also strategic market benefits. Having the ability to keep up, or even outpace competitors, allows for better overall performance.

It is important to invest in the training and education of employees in order for the firm to leverage new product development without having to employ external people.

It is imperative to manage the transition of the workforce. It is important to invest in the training and education of employees in order for the firm to leverage new product development without having to employ external people. It is recommended that policymakers in countries where unemployment is a concern should consider developing supportive initiatives that could help firms to expand or establish long-term product and process innovation abilities. This includes initiatives to facilitate the transition of the workforce – from an educational and skills development perspective – to coincide with shifts in technology. The combination of these two initiatives would require the collective effort of policymakers, major industry players, and academia.

Overall, the key take-outs from this study are:

  • Technology does not destroy jobs; it shifts employment opportunities.
  • Technological development leads to various types of innovation during macro-economic cycles.
  • Process innovation does NOT lead to job losses as generally believed. In fact, the data shows it small positive effect size on job creation.
  • Unemployment is also the result of the failure to upskill people for new types of employment opportunities.

Will the robots take over your job? Not likely. But you will need to acquire new skills to stay in demand in a digital world.

  • This article is based on the MBA research assignment of Bertus Buys, with Prof Martin Butler as his research supervisor. The title of the research assignment is The robot ate my job: A longitudinal literature review of the impact of technology on employment in the last 200 years.
  • Prof Butler lectures in Digital Enterprise Management and Technology Futures at USB. He is also head of Teaching and Learning at USB.

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The Steinhoff scandal: Why due diligence alerts matter

The Steinhoff scandal: Why due diligence alerts matter

The Steinhoff Saga Management review - University of Stellenbosch Business School

June – December 2020

The Steinhoff scandal: Why due diligence alerts matter

The Steinhoff scandal: Why due diligence alerts matter

By Prof Daniel Malan

  • DEC 2020

12 minutes to read

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Due diligence reviews are there for a reason
All major frauds and financial scandals in the world come with warning signs that are “hard to miss”. So says forensic accountant and financial analyst Howard Schilit (2010).

Why, then, did nobody see the warning signs leading to the Steinhoff debacle, South Africa’s largest accounting scandal? Where was the due diligence?

Due diligence is an important part of investment decision making. Yet, there are no clear guidelines or rules on how to carry out a due diligence check. This raises the question: Could the Steinhoff scandal have been avoided if due diligence screening guidelines and follow-up procedures were applied using well-established fraud models and ratios?

Applying due diligence screening to Steinhoff
Management representations of a company’s financial state seem to be the lowest forms of evidence while an independent expert’s own analysis is one of the highest forms of evidence.

Management representations of a company’s financial state seem to be the lowest forms of evidence while an independent expert’s own analysis is one of the highest forms of evidence.

Various fraud models and red flag ratios are available for those who need to predict fraud, point out operating, liquidity and solvency problems, or carry out due diligence screenings. It is typically people like financial analysts, investment bankers, investment managers, auditors, forensic accountants, risk managers, board directors and government regulators who should be aware of these due diligence methodologies and tools.

Recently, these screening guidelines were applied to a number of cases in the USA and China where fraudulent companies had lost trillions of dollars in market capitalisation. The outcome was clear: Weak corporate governance was one of the key reasons for financial accounting fraud in these companies.

Grove, Clouse and Malan – in their 2019 paper titled Applying due diligence guidelines and procedures to Steinhoff International Holdings: Could South Africa’s largest accounting scandal have been avoided? – applied 16 well-known fraud models and red flag ratios to Steinhoff International Holdings’ business for the four years 2013 to 2016. This period also covers the investigation of accounting fraud which was initiated by German authorities in September 2015. Steinhoff stock was listed on both the German and South African stock exchanges. The German prosecutors were looking for, among others, overstated and possibly phony revenues from contracts that appeared to have been conducted with third parties but may have involved units within the company itself.

Steinhoff CEO Markus Jooste resigned in December 2017 while Steinhoff CFO Ben Le Grange resigned in January 2018. The CFO’s resignation was seen as a major red flag for fraud since CFOs specifically know “how the books have been cooked”.

Various fraud models and red flag ratios are available for those who need to predict fraud, point out operating, liquidity and solvency problems, or carry out due diligence screenings.

Here is a summary of the due diligence screening guidelines and follow-up procedures used to gauge Steinhoff’s financial standing.

The seven due diligence screening guidelines
Dan Sierra, Chief Investment Officer of American billionaire businessman John Malone, developed seven due diligence screening guidelines to help determine the financial health of a company. The guidelines were applied to Steinhoff International during the critical fraud period 2013 to 2016. These were the models that were used to pick up on alerts:

The CFO’s resignation was seen as a major red flag for fraud since CFOs specifically know “how the books have been cooked”.

  • Dechow et al.’s New Fraud Model was applied to determine whether there were any predictions of fraudulent financial reporting. For the four reporting periods in this case study, this model predicted fraud 50% of the time.
  • The Beneish Old Fraud Model was applied to check whether the New Fraud Model’s predictions were consistent. The results were somewhat similar.
  • The Schilit Quality of Revenues ratio was calculated since revenue recognition is the starting point for cash flow generation by business operations and is usually the number one manipulator in fraudulent financial statements. This ratio showed red flags 100% of the time for the four Steinhoff reporting periods.
  • The Schilit Quality of Earnings ratio was calculated to determine if cash was being generated from business operations. This ratio showed red flags only 25% of the time for the four reporting periods.
  • The Sales Growth Index (SGI) and the Days Sales Receivable Index (DSRI) were calculated because of the red flags for quality of revenue. The SGI showed definite and possible red flags 75% of the time. The DSRI did not show any red flags.
  • The Altman Bankruptcy Model was applied to determine if sufficient cash was being generated by the company to survive. This index strongly predicted bankruptcy over all four years.
  • The Sloan Accrual ratio and other traditional ratios were applied to detect red flags for fraud and operating problems. The Sloan Accrual emerged as a huge red flag in 2016 and 2014. The total liabilities to stockholder equity ratio indicated solvency red flags for all four years.
  • The cash conversion cycle was taken into account. The cash conversion cycle in days is recommended to be near zero. However, in all four years, red flags were shown, indicating a dangerous reliance on vendors to help finance Steinhoff’s working capital.

Competitive analyses of profitability: “If a story is too good to be true …”

Over the four years, 64 possible red flags were identified. When sufficient red flags exist, professional scepticism and analysis need to be expanded and follow-up procedures provided.

Follow-up procedures for due diligence
Five due diligence follow-up procedures were developed from these screening guidelines. These procedures, which relied heavily on the work of financial analysts and others who blew the whistle on company fraud, were:

  • Competitive analyses of profitability: “If a story is too good to be true …”
  • Competitive analyses of liquidity and solvency: “Management can overcome every major business problem, except … running out of cash.”
  • Additional revenue work: This includes looking for “massaged revenue recognition”.
  • Site visits and online visits: This is to determine, among others, if third-party contractors are not simply different subsidiaries of the company being investigated – i.e. if phantom accounts have not been created.
  • Corporate governance and ethics: This includes looking at the ethics of top management, toxic company culture, and board independence.

Corporate governance and ethics … looking at the ethics of top management, toxic company culture, and board independence.

What are the lessons in all of this?
In the case of Steinhoff, the due diligence screening guidelines led to the identification of serious red flags over the reporting period. These red flags should have led to the investigative follow-up procedures. But it did not happen in Steinhoff’s case. Sophisticated international banks such as JP Morgan Chase, Citigroup, Bank of America and HSBC lost millions of dollars in loans to Steinhoff.

The take-out? There are due diligence steps that board directors can follow to strengthen their corporate governance role as gatekeepers for their companies’ investors, and to avoid large investment losses. Financial statement users could increase their understanding of organisational risk and better meet their fiduciary responsibilities as board members, investment bankers, investment managers, auditors, and governmental regulators. It is important for board directors to heed alerts by both the new and the old fraud models as directors should not be in a position where they are surprised by fraud in their organisations.

It is important for board directors to heed alerts by both the new and the old fraud models as directors should not be in a position where they are surprised by fraud in their organisations.

  • Find the journal article here: Grove, H., Clouse, M., & Malan, D. P. (2019). Applying due diligence guidelines and procedures to Steinhoff International Holdings: Could South Africa’s largest accounting scandal have been avoided? Oil, Gas and Energy Quarterly, 70(1), 101-12.
  • Prof Malan is an expert in corporate governance. He was the head of the Centre for Corporate Governance in Africa at USB at the time of writing this paper.

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Equal pay for equal work: How does South Africa measure up?

Equal pay for equal work: How does South Africa measure up?

The Steinhoff Saga Management review - University of Stellenbosch Business School

June – December 2020

Equal pay for equal work: How does South Africa measure up?

Equal pay for equal work: How does South Africa measure up?

By Prof Anita Bosch and Shimon Barit

  • DEC 2020

16 minutes to read

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Mind the gap
The International Labour Organization (ILO) has had conventions for equal remuneration and non-discriminatory employment practices in place for over 60 years. Despite this, there is still a gender pay gap in industrialised countries, and an even greater one in developing countries.

South Africa has various pieces of legislation aimed at preventing gender discrimination in the workplace. Yet, the country has a stagnant median gender pay gap of between 23% and 35%. According to the ILO, the average global gap is about 20%.

South Africa has various pieces of legislation aimed at preventing gender discrimination in the workplace. Yet, the country has a stagnant median gender pay gap of between 23% and 35%.

The gender pay gap – or the difference in wages between men and women for the same type of work or work of equal value – is therefore a stumbling block in achieving gender equality in South Africa. It seems to affect women in the middle and upper wage bands the most.

This is where pay transparency – making gender differences in wages known to employees, government and the public – can force employers to remunerate fairly and equally.

The gender pay gap – or the difference in wages between men and women for the same type of work or work of equal value … seems to affect women in the middle and upper wage bands the most.

How can we increase transparency in gender pay in South Africa? What do legislators, activists, board members, trade unions, academics, and organisational leaders need to know about transparency mechanisms to support efforts in this regard? What are other countries doing about this?

This article – based on the journal article titled Gender pay transparency mechanisms: Future directions for South Africa by Prof Anita Bosch and Shimon Barit – provides guidelines that can help.

The South African pay gap picture
In Africa, South Africa is ranked first on the Africa Gender Equality Index. Globally, South Africa is ranked 19 among 149 countries on the Gender Gap Index. But the details tell a different story: South African women’s economic empowerment is troubling. When we look at household composition, we start to understand why the country’s gender wage gap deserves attention as a factor in gender equality issues.

This is where pay transparency – making gender differences in wages known to employees, government and the public – can force employers to remunerate fairly and equally.

In South Africa, around 38% of households are headed by women. Female-headed households are approximately 40% poorer than those headed by men. Also, 48% of female-headed households support extended family members compared to 23% of male-headed households doing the same. In addition, women have to handle the following: supporting children, earning less than men, coping with domestic violence (which is alarmingly high in South Africa), and struggling with access to resources to improve their lives. This means power relations are skewed in favour of men.

In South Africa, the private sector labour market is largely market-driven. When there is greater reliance on the market, the impact of pay distortions may be increased as the role of transparent criteria, as enforced through regulatory rules, is reduced.

How do other countries measure up?
To find out what the bigger picture looks like in terms of wage transparency, this study started off with internet searches for ‘gender pay gap public reporting’ and ‘gender pay gap transparency’. Additional searches were also done, and various databases were consulted.

In South Africa, around 38% of households are headed by women. Female-headed households are approximately 40% poorer than those headed by men.

Over and above South Africa, 16 countries were selected to form part of this study. Employers in these 16 countries have to adhere to some form of legislated gender wage transparency. The countries are: Canada, Australia, the Scandinavian countries, the United Kingdom (UK), and countries identified by the European Commission (EC) of the European Union. Interestingly, the USA was not included in the study as no reporting mechanism has been introduced by the Trump administration.

In these countries, the implementation of the reporting mechanisms followed one of two routes: Blanket implementation by all qualifying companies, regardless of size, from the date imposed by law, or a phased implementation.

The selection of qualifying employers determines the scope of the implementation of gender pay enforcement mechanisms. This means the nature of the selection determines how much of the workforce is included in the mechanism’s ambit. This study looked at the size of the workforce (i.e. number of employees), whether it was a private or public company (most countries do not differentiate between public and private employers), and whether the company published an annual report or not

Reporting as a transparency mechanism
Wage transparency constitutes what is known to others about wages, beyond what is known to the employer. But policies and measures to reduce gender pay gaps need to be monitored and reported on so that the world has benchmarks for comparisons and proposing a way forward.

Wage transparency constitutes what is to others about wages, beyond what is known to the employer. But policies and measures to reduce gender pay gaps need to be monitored and reported on so that the world has benchmarks for comparisons and proposing a way forward.

In this study, gender pay reports were compared in terms of reporting (report, survey, audit, etc.), the reporting period, and the report’s intended audience. For example:

  • What is being reported? In France, employers only have to publish information on the size of the gender pay gap on their website. In Denmark, reporting takes the form of information submitted to Statistics Denmark; the data is then gender-segregated and returned to the employer, and employees also have access to this information. In India, companies are mandated to compile a register of employee data, including the number of men and women employed, their remuneration, and a breakdown of the components of remuneration, but there is no obligation to report this information.
  • What is the frequency of reporting? Most companies were required to provide annual reports.
  • Who was the reporting aimed at? The study also looked at the target audience of the reporting mechanism – was it meant for an internal audience (employees) or an external audience (the company website, trade unions, regulatory bodies and/or the public)? In six of the 16 countries the reporting was public facing. In four countries, it was only available to local union representatives, while in other countries it just had to be available for inspection by government authorities.
  • What indicators or measures were used? What is actually reported on is crucial to understand the nature of the gender wage gap in a particular country. The gap may be present in only certain occupational levels or industries, or within different components of a remuneration package. One common measure reported on is the employer’s gender pay equity objectives and policies. In some countries employers have to report on the actual remuneration and bonuses paid to male and female employees, as performance bonuses and variable pay may contribute to the gender wage gap to a greater extent than base pay.
  • What happens in case of non-compliance? Non-compliance can refer to not reporting or to non-compliance with the obligation to pay women the same as men for work of equal value. Penalties in the countries studied ranged from public naming and shaming to fines.

Mechanisms currently used in South Africa
Guidance on fair remuneration is provided in the Constitution, the Promotion of Equality and Prevention of Unfair Discrimination Act (PEPUDA – promoting ‘equal pay for equal work’, saying the state has a duty to intervene in the case of unfair practices), and the Employment Equity Act (EEA). There is also the King IV Report on Good Governance, which says a company’s board must approve reports on and the implementation of its remuneration policy, which should reflect that ‘the organisation remunerates fairly, responsibly and transparently’. The King Report is mandatory for  JSE-listed companies.

A way forward
The authors of this article made a number of recommendations for South Africa to find a way forward in terms of fair pay for all genders:

In some countries employers have to report on the actual remuneration and bonuses paid to male and female employees, as performance bonuses and variable pay may contribute to the gender wage gap to a greater extent than base pay.

Firstly, make it legal. Pass laws at regional and national level that place a duty on employers to give men and women equal remuneration for the same or similar work, or work of equal value. South Africa achieved this requirement with the implementation of Section 6(4) of the Employment Equity Act. Including both public and private organisations in mandatory reporting helps to identify patterns in gender wage gaps, and can be used to formulate policies aimed at closing the gap. However, the EEA addresses mainly pay discrimination at the individual job level.

While the EEA’s Income Differential Statement (IDS) serves as a preliminary mechanism to flag inconsistencies regarding a number of intersectional wage differentials at aggregated level, the format of the data only enables national comparison in certain occupational categories. Legislation specifying the duties of employers and penalties for non-compliance, as seen in Belgium and Sweden, is the preferred method to promote pay transparency and equality. This is an area in which South Africa can improve.

Secondly, penalise non-compliant employers. Penalties for non-compliance with stipulations serve as another effective transparency mechanism. It is recommended that a financial penalty be levied for unjustifiable and stagnant gender pay gaps among the employees of the same employer – one that is sufficient to act as a deterrent to non-compliance.

Penalties in the study countries ranged from public naming and shaming to fines.

The EU’s European Commission provided a benchmark of four mechanisms that South Africa could employ:

  • Make annual pay reports available: Refine the annual reporting obligation on gender-segregated average remuneration for medium and large companies already targeted by the EEA. Reporting that is too generic, as is presently the case with the IDS in South Africa, conceals structural inequalities, leaving policymakers to apply a one-size-fits-all approach instead of targeted solutions. Gender-specific reporting covering the main infliction points in the wage distribution could inform policies to close the gap in listed companies. Acknowledge an employee’s right to query another employee’s pay: The European Commission recommended that employers regularly communicate pay report information to employees or trade unions or other representatives. This is absent in South African legislation, and should be considered. Also, employees should be educated in remuneration principles and practices in order to limit misinformed queries and ungrounded discontent and disputes. A pay report that specifically provides gender-segregated pay information could be used as a precursor to an employee’s right to request pay information. However, an employee’s right to query another employee’s pay, could be problematic in South Africa due to a person’s right to privacy and confidentiality.

Implement pay audits at the level of the employer: The key differentiator between an audit and a pay report is the analysis of pay gaps found in the former. Such analyses can help to pinpoint problems and help with the development of targeted countermeasures. Ensure that companies discuss equal gender pay during collective bargaining: It is recommended that companies discuss equal gender pay, including pay audits, during collective bargaining. The effectiveness of this measure depends on the development of collective bargaining in a specific sector. The more developed the collective bargaining structures are and the more unionised the workforce is, the easier it will be to implement this measure.

… employees should be educated in remuneration principles and practices in order to limit misinformed queries and ungrounded discontent and disputes.

Conclusion
The authors found that South Africa could strengthen legislated transparency mechanisms, especially with regard to pay reporting and pay audits. Reigniting the debate on improving the country’s legislation and interpretation of existing governance codes in relation to the implementation, monitoring and enforcement of gender pay transparency mechanisms could provide the impetus to demonstrate that South Africa sees gender equality as an achievable reality, not an improbable ideology.

  • Find the journal article here: Bosch, A., & Barit, S. (2020). Gender pay transparency mechanisms: Future directions for South Africa. South African Journal of Science, 116(3-4), Art. #6772, 6 pages.
  • Prof Anita Bosch holds the Women at Work Research Chair at the business school.

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Research Alcoholic-beverage-suppliers

Alcoholic beverage suppliers: Why service matters in a crowded market place

The Steinhoff Saga Management review - University of Stellenbosch Business School

June – December 2020

Research Alcoholic-beverage-suppliers

Alcoholic beverage suppliers: Why service matters in a crowded market place

By Ernst Gouws and Tasneem Motala

  • DEC 2020

13 minutes to read

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The importance of service quality when choosing alcoholic beverage suppliers
The alcoholic beverage industry (incorporating manufacturing, wholesaling and retailing) is a significant economic player in South Africa, contributing as much as R96.5 billion to GDP in 2015. Several international alcoholic beverage businesses have a presence in South Africa, including Heineken, Pernod Ricard and Anheuser-Busch InBev (the largest beer brewer in the world), who view the country as an important launching pad into the rest of the continent.

In a highly competitive environment, where there are several alternative suppliers to choose from, service quality really matters. Put another way, the more alternatives that alcoholic beverage resellers have, the less they will be prepared to tolerate poor service. As far as South Africa’s hospitality industry is concerned, anecdotal evidence suggests that there is often a gap between the quality of service that resellers, such as restaurants and bars, expect from their suppliers and the actual level of service that they receive. This gap  could, in turn, affect the service which the resellers deliver to their patrons (that is, end consumers).

In a highly competitive environment, where there are several alternative suppliers to choose from, service quality really matters.

In the face of fierce competition, suppliers cannot afford to concentrate only on the inherent characteristics of their product offerings; the quality of the accompanying service is often the deciding factor for buyers. Service quality can be described as the relative distance between a customer’s expectation of how the service should be performed and their perception of how it was in fact performed. Service quality is crucial for a company’s standing in the market, competitiveness and financial performance, but it is difficult to measure. A service is, after all, largely intangible and the quality thereof is often in the eye of the beholder.

A number of researchers have proposed models aimed at assessing service quality according to standardised criteria, with the Gap Model being among the most highly regarded. The Gap Model recognises that service quality lies on a perceived quality continuum, where the perceived quality is a function of the discrepancy between the expected service and the perceived service. The size of the gap, or gaps, can be quantified using the SERVQUAL instrument, which measures whether a discrepancy exists on the customer’s “expectation‒perception continuum of service quality” (ranging from unacceptable quality to ideal quality), assessed according to five different dimensions: reliability, assurance, tangibles, empathy and responsiveness (RATER dimensions). The combination of the Gap Model and the SERVQUAL instrument has won much support from researchers who are interested in measuring service quality.

Service quality is crucial for a company’s standing in the market, competitiveness and financial performance, but it is difficult to measure.

While service quality has been put under the microscope in several industry-based studies, little research has been conducted on service quality in the South African alcoholic beverage industry. This article discusses a study whose main aim was to investigate whether there is a discrepancy between reselling customers’ expectations and perceptions of the service quality delivered by alcoholic beverage suppliers in South Africa.  A secondary aim of the study was to explore the different dimensions of service quality and what customers’ actual expectations and perceptions were.

Service quality in the alcoholic beverage supply chain
Because of the multiple links in the alcoholic beverage supply chain, perceptions of quality can differ up and down the chain as needs and expectations vary. This in turn can give rise to discrepancies or gaps in perceived service quality at different points in the chain. For resellers of alcoholic beverages, service quality is a bi-directional concept – that is, the service-related expectations that they have of their suppliers are somewhat influenced by the expectations of their own end consumers who frequent their establishments. For example, if a restaurant is unable to obtain a consignment from its supplier at short notice due to an unanticipated stock-out situation, its patrons will be left disappointed.

The South African hospitality industry, perhaps more than any other industry, is designed to create happiness among consumers. Therefore, those who visit restaurants, bars, nightclubs and other hospitality-type venues often expect more from these service providers than from others.

While service quality has been put under the microscope in several industry-based studies, little research has been conducted on service quality in the South African alcoholic beverage industry.

How the study was conducted
For the empirical study, the survey method was chosen. Surveys are known for their ability to capture large amounts of data, particularly if administered online, as they can be distributed to large numbers of respondents. As the target population for the study (businesses that purchased alcoholic beverages from suppliers and resold them to patrons for on-premises consumption) was dispersed throughout South Africa, the researchers felt that an online survey would be a more efficient and practical option than interviews or focus group sessions.

A two-part SERVQUAL questionnaire was used for the survey, which compared customers’ service expectations and service perceptions. Respondents were required to rate a series of statements presented in the questionnaire relating to the five RATER dimensions (reliability, assurance, tangibles, empathy and responsiveness) on a Likert scale of opinion, ranging from Strongly Disagree (1) to Strongly Agree (5). The researchers also solicited qualitative comments from respondents. This was to acquire insights into the unique service quality issues impacting the supply of alcoholic beverages in South Africa.

Results of the study

Empirical results: Interestingly, the 60 survey respondents had varying expectations regarding service quality. Across all five dimensions, though, respondents’ expectations of service quality were higher than the perceived service quality that they received from their suppliers – clearly an undesirable state of affairs. The greatest gap between expected and perceived service quality was in the reliability dimension.

Because of the multiple links in the alcoholic beverage supply chain, perceptions of quality can differ up and down the chain as needs and expectations vary.

Qualitative results: Many respondents mentioned that their suppliers did not take the time and trouble to develop and nurture relationships with them, and that they were not sufficiently caring. Some spoke about a lack of follow-through after deals were concluded via the sales reps, infrequent or no meetings to discuss how things were going and/or areas for improvement, and even uncertainty as to who the key contact people were at the supplier. Some respondents implied that suppliers’ lack of interest in their customers’ needs and expectations stemmed from arrogance and the knowledge that they (their customers) relied on them so heavily. Respondents called for better product information and training from their suppliers, which they believed would enhance their marketing efforts and boost sales to end consumers.

When asked what would influence their choice of alcoholic beverage supplier, respondents mentioned several factors: great customer service, an interest in their brand, open communication channels, skilled and professional staff, product availability, timeous deliveries, the ability to supply urgent orders and fair pricing. The general emphasis in the responses on service, delivery and flexibility highlighted the importance of reliability when it comes to supplier choice.

No place for weak links
This study has helped to lend both structure and texture to the service quality expectation‒perception dynamic in the supply of alcoholic beverages in South Africa. With these insights, suppliers will become aware of the concerns of their customers and will be in a better position to address these concerns in practical ways. Resellers, in turn, will be able to approach their suppliers from a more informed base, with a view to negotiating a more productive and cooperative business relationship.

The study also described a useful mechanism whereby suppliers can evaluate the service quality of their own suppliers further upstream. This should make suppliers more responsive to the needs of their immediate customers, while also positively impacting the efficiency and effectiveness of the supply chain as a whole.

In a business environment that is becoming increasingly crowded with similar product offerings and competing brands, superior and innovative service is fast becoming firms’ main competitive advantage.

In a business environment that is becoming increasingly crowded with similar product offerings and competing brands, superior and innovative service is fast becoming firms’ main competitive advantage. This is very evident in the case of fast-moving consumer goods ‒ and alcoholic beverages in particular. However, in their haste to keep pace with the competition and cater to the highly coveted consumer market, firms should not overlook the critical role played by other members of the supply chain. In the competitive race, there can be no weak links.

  • Find the original article here: Gouws, E. & Motala, T. (2019). Quality of service delivered by alcoholic beverage suppliers to customers in the South African hospitality industry. African Journal of Hospitality, Tourism and Leisure, 8(3). https://www.ajhtl.com/uploads/7/1/6/3/7163688/article_8_vol_8_3__2019.pdf
  • Tasneem Motala is a senior lecturer in Operations Management at USB.

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Sierra Leone: Does today’s private sector help or hinder?

Sierra Leone: Does today’s private sector help or hinder?

The Steinhoff Saga Management review - University of Stellenbosch Business School

June – December 2020

Sierra Leone: Does today’s private sector help or hinder?

Sierra Leone: Does today’s private sector help or hinder?

By Prof Brian Ganson and Herbert M’cleod

  • DEC 2020

16 minutes to read

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Was Sierra Leone’s approach to private sector development the answer to its fragility?
When Sierra Leone emerged from its protracted civil war in 2002, a strategy of private sector development, supported by business-enabling reforms, was implemented to entice investors and, arguably, to accelerate human development and reduce fragility. Although Sierra Leone saw an initial improvement in some key indicators (notably GDP) and was hailed by the International Monetary Fund (IMF) in 2016 as being on the path to ‘stronger and more inclusive growth’, it has remained a profoundly fragile state.

For example, since the end of the armed conflict, the country has continued to fare badly, compared to the rest of the continent, in terms of health standards, housing and access to electricity. Despite private sector-led economic growth from 2002 to 2014, there was still widespread under-employment, a failure to diversify the economy away from continued dependence on extractives, and a marked decline in the value of the local currency. There were also compelling evidence of impropriety in the reporting and use of public funds. The Ebola outbreak in 2014 threw into sharp relief the incapacity of the state, which avoided collapse only through foreign entities providing financial and technical assistance. There may be some signals of improvement, such as in anti-corruption efforts; yet these do not seem to be having widespread impact on how citizen’s experience the state.

There is plenty of qualitative evidence of heightened private sector investment and activity exacerbating economic divisions in fragile, conflict-prone states and clearing the way for renewed conflict.

It is common to premise a country’s exit from fragility on robust private sector development; any number of World Bank Group and other global and national schemes are pursued on this basis. Yet, despite all the rhetoric, the private sector remains one of the vectors of persistent poverty, and growing inequality and instability, in Sierra Leone. Sierra Leone’s experience is not unique. There is plenty of qualitative evidence of heightened private sector investment and activity exacerbating economic divisions in fragile, conflict-prone states, laying a foundation for renewed socio-political conflict, often violent.

If private sector development is to play a meaningful role in helping Sierra Leone and other fragile and conflict-prone states transition towards peace, stability and economic well-being, the shortcomings in the current approach to private sector development and state-business relations need to be probed. This study aimed to do just that.

How the study was conducted
The study used four sources of data to inform its analysis:

  • A literature review of research on private sector development in Sierra Leone, focusing on the period 2002 (when the civil war ended) until 2014 (when the Ebola crisis erupted).
  • Semi-structured interviews with government officials and community and private sector actors with direct experience of the impact of private sector development on conflict and fragility, as well as country experts, policymakers and researchers.
  • A working paper, which was specially written to capture preliminary insights from the literature review and the interviews, with commentary thereon and further insights provided in a consultative session in Freetown, Sierra Leone with selected academics, economic actors, civil society representatives and government officials.
  • A study of the accumulated insights obtained through the above data-collection techniques in the light of existing peace-building and state-building frameworks. This informed the development of a model, with both empirical and theoretical foundations, showing the negative interactions between private sector investment and the core manifestations of fragility.

The rationale for this methodology was to investigate if, where and how theory meets practice in order to better understand the impact of private sector development on fragile states.

It is clear that private sector interests provided some of the fuel that stoked Sierra Leone’s lengthy civil war, which has been described as ‘a struggle between two rival groups supported by businessmen intent on gaining control of mineral wealth’.

Key findings from the study

  • Private interests meddling in the affairs of state: It is clear that private sector interests provided some of the fuel that stoked Sierra Leone’s lengthy civil war, which has been described as ‘a struggle between two rival groups supported by businessmen intent on gaining control of mineral wealth’. The conflict between commodity-hungry multinational corporations (including De Beers) that fueled the violence between combatants on the ground, however, was found to be just the culmination of a cycle of corporate malfeasance that had plagued the country since its founding.
  • An economy for the connected few: In Sierra Leone, a “public-private partnership” has generally meant elites across sectors plundering the country’s assets, notably in the minerals sector. In the post-war period as in the past, the minerals sector was highly capital-intensive and provided a spawning ground for rent-seeking, with beneficiaries including government officials managing the sector. In mining and plantation agriculture, the government knowingly disrupted the livelihoods of farming communities, thereby entrenching poverty and inequality. Many of these inefficient mining and farming operations failed spectacularly when commodity prices fell.
  • Policy incoherence: Both before and after the war, the policy landscape in Sierra Leone was characterised by strong patronage networks that favoured the well-connected in government and business. As the government would not follow through on structural reforms needed to overhaul a moribund economy at the expense of parochial interests, most existing businesses failed to grow, and widespread unemployment and poverty persisted. Aid, foreign direct investment and tax revenues were used to reward government officials or were earmarked for government supporters, thus helping to entrench societal divisions and ethnic tensions.
  • Failures in the rule of law: A failure to uphold the rule of law has long characterised day-to-day life in Sierra Leone, both before and after the war. A police force and judiciary in the pockets of the political elite and the politically connected (including influential private sector concerns) stirred up a great deal of mistrust and fear among the generally downtrodden population, whose rights were continuously abused. With the legal system and security structures manipulated to support members of the elite, inclusive growth and development remained compromised.
  • Mounting social frustrations and upheavals: Before the civil war, most of Sierra Leone’s population had not experienced the benefits that had been promised to them in the struggle for independence. Widespread frustrations bubbled over into strikes, riots and election violence. Perversely, in the post war period, a free press and a few institutions (such as the Human Rights Commission and Auditor General) that reported on government abuses exacerbated tensions in the face of a still-unresponsive government. The period 2009‒2014 was a particularly torrid time, with social media helping to fan the flames of discontent across the country, especially on campuses. In an attempt to quell the violence, the state resorted to the use of force against its own citizens.
  • Repeating the mistakes of the past? Taking all of these findings into account, it appears that the emphasis on “post-conflict recovery” and “rebuilding the country” following Sierra Leone’s civil war —without sufficient reflection on exactly what was being rebuilt—led to a repeating the mistakes of the past. For example, the IMF’s and World Bank’s open-market and austerity measures that added to Sierra Leone’s lack of distributive justice and yawning wealth gap before the civil war was largely replicated in the post-war period. Perpetuating the earlier political and economic order allowed patronage and corruption to flourish once again. Today, the suppression of citizen protests against mining and farming company excesses shows few signs of abating, and Sierra Leone is performing abysmally in terms of socio-economic indicators such as child mortality, hunger, educational achievement and poverty. The country also remains highly dependent on commodities as the economy has seen little diversification.

Widespread frustration over the government’s preoccupation with rent-seeking and its neglect of the needs of the general population bubbled over into strikes, riots and elections that were often laced with violence.

Time for a new understanding of private sector impacts to tackle fragility?
The above findings paint a disturbing picture of a country in an apparently interminable state of fragility. This is in strong contrast to assertions made by the Sierra Leone government, donors and international institutions that the country has shed its fragile status and is now on a positive development path. In the researchers’ view, it also highlights flaws in the widely accepted theory surrounding the impact of policy interventions intended to help countries to escape conflict and fragility through private sector development.

The dominant model assumes that policy and aid interventions as well as private sector initiatives shape economic growth opportunities and private sector development in ways that ameliorate key factors of conflict and fragility – as captured by the World Bank focus on private sector contributions to “security, justice and jobs”.

Some authors have suggested that a contributing factor in Sierra Leone’s inability to escape its dire socio-economic circumstances is an apparent paradoxical insistence on repeating the mistakes of the past.

Yet this linear model fails to explain how, in Sierra Leone and many other cases, austerity measures have been used to eliminate political opponents, infrastructure projects have extended the scope for corruption, and an over-reliance on a few strategic export products has marginalised local businesses, increased economic insecurity, and dashed the country’s hopes for inclusive growth and development. These realities, however, do not seem to deter the international community who in many cases continue to portray the policies pursued to promote the kind of private sector development Sierra Leone has experienced as the key to the country’s economic recovery and prosperity.

Drawing on advances in peace- and state-building theory, the researchers propose an alternative model, which contextualises private sector development as part of a complex system in which the outcomes of policy interventions and private sector initiatives are themselves shaped by key factors of conflict and fragility, including most notably inter-group conflict. The authors argue that this dynamic systems model better explains how the private sector may help advance a fragile state towards peaceful and inclusive development, or, as in the case of Sierra Leone, become a key factor in reinforcing the conflict system and impeding positive socio-political change.

The model emphasises that  a significant injection of private sector resources into a fragile state will – unless specifically managed – inevitably deepen existing social and political divisions. If reform efforts and investments tend to further concentrate power and resources with the allies of the government in power; if they attract or enable private sector actors indifferent to issues of social and environmental justice in economic development; or they reinforce experiences of exclusion from the benefits of private sector development and thus grievance among the broader population, the intended recovery project will  predictably fail.

The authors underline, however, that in the model is also a positive message. A more robust set of metrics—whether for research, for policy and institution actors on the international stage, for constructive national actors, or for an individual enterprise attempting not only to “do no harm” but contribute to peaceful development—may not be so difficult to conceptualize. Policies and investments that manage the dominant systems dynamics to create a more open economic order, that prioritize positive impact on the informal sector, and that bring civil society and opposition voices to the table in decision-making roles, for example, are far more likely to move a country away from fragility.

One of the key conclusions from the study is that a significant injection of private sector resources into a fragile state will – unless specifically managed – inevitably deepen existing political and socio-economic divisions, and the intended recovery project will fail.

The model is, thus, a modest step towards an empirically rigorous and theoretically sound description of the policies and practices that might make more real the promises—so far unfulfilled in Sierra Leone and many other places—of private sector development in service of inclusive growth, resilience, and peaceful development in fragile contexts.

  • Find the original article here: Ganson, B. & M’cleod, H. (2019). Private sector development and the persistence of fragility in Sierra Leone. Business and Politics, 21(4), 602‒631. https://www.researchgate.net/publication/337635126_Private_sector_development_and_the_persistence_of_fragility_in_Sierra_Leone
  • Brian Ganson is a Professor at the University of Stellenbosch Business School and Head of its Africa Centre for Dispute Settlement. He works at the intersection of the private sector, conflict, and development in peacebuilding and other fragile contexts. He engages with human rights advocates, peacebuilders, governments, community advocates, companies, and other international actors as a researcher, consultant, educator, evaluator, and mediator.
  • Herbert Mcleod is the Country Director for IGC Sierra Leone and Liberia. He has been an advisor to the government of Sierra Leone in its transition from post-conflict to normal development and at the forefront of efforts to ensure the application of human rights in the operations of the extractive industry. His prior career spans 35 years of development work in fragile countries for the United Nations Development Program.

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