In crafting corporate strategies most companies often carry out and review a lot of research data on the business landscape which inform them on best courses of action to pursue and monitor. The strategies crafted become the guiding compass in navigating the fluid business landscape which has been classified as VUCAH (Volatile Uncertain Complex Ambiguous and Hostile). One area often left out or not adequately covered is the impact of the informal sector on corporate business strategies. With Zimbabwe having the second highest per capita informal sector on earth (second after Bolivia), every business can therefore only ignore the sector at its own peril.
It is estimated that between 80 to 90 percent of Zimbabweans are engaged in informal economic activities, and that the sector, which is also linked into supply chains and the formal economy, accounts for 40 percent of Zimbabwe’s GDP.
The informal sector is often viewed with different lenses; firstly, in a positive way as a safety net, provider of employment, a key driver of economic development and innovation. A stimulator of private ownership and entrepreneurial skills. Secondly; viewed more negatively as a whole segment of society that escapes regulation and therefore as a vast area of backwardness, poverty and unsanitary working conditions. The sector also plagued by criminal practices such as smuggling and tax evasion practices.
Lessons for the corporate sector
One of the biggest problems from a monetary policy perspective is financial exclusion of the informal sector. An estimated US$ 1,5 billion circulates in the informal economy and this comes at a huge opportunity cost to the overall economy. This is a significant amount with risks of continued expansion unless concerted efforts are taken to incentivise financial inclusion.
There are also some industries where the informal sector now has absolute dominance after crowding out the formal sector. According to the Reserve Bank of Zimbabwe the 2021 gold mining output shows that artisanal miners officially provided 18,4 tonnes, whilst official channels provided 11,1 tonnes. The figures exclude massive smuggling of gold as revealed by Home Affairs and Cultural Heritage Minister Kazembe Kazembe. It is therefore official that most of our gold is coming from the informal sector! There are other sectors of the economy where the informal sector has a significant share such as the clothing sector. It is also important to note that when big monopolies fell such as ZUPCO, ZISCOSTEEL and CSC, the informal sector filled the gap.
Small businesses are also market developers especially in new areas where big brands take time to enter and therefore short run monopoly profits for small businesses before retail behemoths pounce on the markets. The growth of peri-urban areas in Greater Harare such as Domboshava, Goromonzi, Seke and others has spurred the rise in small businesses that are enjoying first mover benefits before big brothers follow the profits trail. In neighbouring countries, Zimbabwean products are being pushed by cross border traders into countries such as Botswana, Mozambique, South Africa and Zambia. This creates room for big corporate companies to explore regional market expansion potential as follow on movers.
Apart from dominating certain industries, small businesses also pose serious competition to established big brands. Some are even getting tenders ahead of industry market leaders. Whilst the local manufacturing output shot up sharply in 2021 due to a number of factors such as forex auction system funds access and also to a large extent due to border closures. The honey moon maybe slowly coming to an end as more imports floods the market. The competitive advantage the informal sector possesses is sensitivity to consumer needs and flexibility in addressing them. There is no much time lost in boardroom brainstorming and related bureaucracy in responding to market dynamics. As for new foreign businesses, they may need to study how Pep Stores quickly retraced its footsteps back to South Africa a few years back.
Most value chains incorporate the informal sector in one way or the other posing risks and opportunities. Some incorporate them directly and therefore creating linkage opportunities for B2E (Business to Business). We have case studies such as Delta through small liquor shops and Innscor which partners with tuckshops in bread supplies. Old Mutual also provides formal space for small businesses.
It is interesting to note that in some cases what big corporate companies may ordinarily classify as consumers are in some cases small tier businesses that come in between their businesses and final consumers. Opportunities for big corporate are also emanating from efforts from several development partners working on income and livelihoods projects. The development partners are employing strategies of formal linkages between established retail brands and small businesses in order to facilitate markets access.
The informal sector is collectively still behind in standards and complexity but there are emerging pockets of excellence. The sector is benefiting from absorption of a lot of college graduates and also seasoned experts who are either retrenched or retired from formal employment. Some diasporas with access to advanced technologies are also engaging in the sector allowing technological knowledge and skills transfer such as small scale crypto currencies trading.
Despite a plethora of challenges such as dwindling consumer purchasing power, lack of working capital and intense competition; Zimbabwe’s informal sector has been resilient. The COVID-19 pandemic however increased its vulnerability and more recently the Russia/Ukraine conflict which has pushed up prices through imported inflation. Control measures such as waging a crackdown on informal street vendors, criminalising their activities and tearing down their stalls have not helped either. Studies have shown that only 1 out of 5 businesses survive beyond 5 years reflecting the tough survival environment of small businesses.
In conclusion we can draw lessons from across Limpopo where the corporate sector has not ignored developments in the informal sector but has resorted to meeting some of its needs. The emergence of informal savings clubs, stokvels and burial societies has seen some financial houses and retail shops coming up with tailor made packages to cater for the growing sector. Big retail shops such as Shoprite has also entered the Plazas Industry through partnerships with small business owners and in the process helping to formalize targeted business operators. SPAR partners with small scale out growers who supply them with agricultural products.
For Zimbabwe, the informal sector is here to stay and is set to expand as more involuntarily join it. By not renewing the work permits of 200,000 Zimbabweans, the South African government by default signed transfer letters for the affected workers to the local informal sector.
It is therefore imperative for the corporate sector to incorporate informal sector researches, insights and dynamics into their corporate strategies. They need to look at the evidence based data with opportunity and risks lenses. Opportunity lenses in markets development, value chain linkages and reaping the financial inclusion dividend. Risk lenses in terms of competition, smuggling of goods and tax evasion—the more the informal avoids tax payments, the heavier the taxes the corporate sector has to shoulder. An informal sector insights and analytics dashboard is therefore of critical importance in business planning and reviews.
