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How Middle East companies can succeed in Africa

This was originally published here

Africa is a tempting opportunity for many Middle East companies seeking growth opportunities. The continent has rapid economic growth and a 400 million strong middle class. Yet firms can stumble because they do not grasp what is happening in these markets nor do they possess the skills needed for success. This is because African countries are varied – no one business model will work across the continent. Moreover, firms often expand into Africa without first asking themselves what capabilities they already possess that are relevant in these markets.

Instead, to go into Africa, companies should look inward first. Only then, when they have a sense of what they have to bring to African markets, should Middle East companies choose which markets are best for their expansion ambitions.

Approaching new markets from the perspective of a company’s own capabilities has been behind the success of major expansion deals in Africa in recent years. Examining 82 such deals on the Johannesburg, Lagos, and Nairobi exchanges from 2007 to 2013, we found that best performing acquisitions were those in which the acquiring company leveraged or enhanced its existing capabilities. An example of capabilities enhancement, in which a firm adds to or improves its capabilities to respond to the challenges of new markets, is Clover, the South African dairy producer. The Johannesburg-based company has a differentiated product portfolio and manufacturing capabilities. Its acquisitions allow it to gain new distribution capabilities in other markets. By contrast, the worst performers were those in which the acquirer largely neglected whether there was a good fit on capabilities.

To build from their own strengths, companies need to focus on the business where they have a distinct advantage, rather than spreading themselves thin. This allows them to deliberately use the capabilities that looked after them in the home markets and then to elaborate them to meet the needs of their customers and clients in the new markets.

Successful companies generally have three to six mutually reinforcing, distinctive capabilities that support and drive their strategy. These capabilities integrate people, processes, and technology to produce value for customers. When a company has insight into its own capabilities, it can focus its investment, management, and organisational effort on those areas that will create the maximum customer value.

For example, Sanlam, a longstanding South African financial services group, possessed world-class technical insurance capabilities because of its many decades in the wealthy and sophisticated South Africa. These included pricing, risk management, claims management, reinsurance, and capital management. Although potential competitors in other African markets lacked these capabilities, Sanlam knew that was not enough. Instead, Sanlam acquired African Life Insurance Company, thereby adding the kind of low-cost product offerings and mass-market distribution it did not offer at home. The combination of existing and new capabilities allowed the company to enter 11 markets in Africa, and India and Malaysia.

Knowledge of its own capabilities allows a company to better choose and prioritise suitable markets. It raises unavoidable leverage and enhancement questions. The leverage question is: which markets will provide the most value from current capabilities? The enhancement question is: which new capabilities are need to succeed? A firm’s understanding of its own capabilities does not limit its choice of markets, but it does steer them away from the most unsuitable ones and identifies which capabilities it must add.

The best way to understand which capabilities are needed is by comparing markets’ gross domestic product per capita (‘high’, ‘middle’, and ‘low’) and institutional quality (‘strong’ or ‘weak’ based on the World Bank’s Doing Business index). Companies can compete in institutionally strong countries, whatever the income level, as if they were in developed markets. By contrast, in low income markets, irrespective of their institutional strength, infrastructure is underdeveloped. This demands capabilities to create and run all aspects of the local business without outside help. The pan-African retailer Shoprite, for example, now has real estate development capabilities so that it can build entire shopping malls in which it can place its outlets.

After having decided which countries are the best targets, a company should set about executing its strategy. This involves deciding how it will copy its winning home market capabilities in the new markets, how it will develop new capabilities, and how it will run a pan-African enterprise. Each of these three execution steps requires that the company develop local human capital and have a plan to retain newly trained local staff, foster enduring and quality partnerships with local organisations and companies, strike a balance between central control and local enterprise, and consider geographic diversification to manage risk.

So as Middle East companies embark on their Africa expansion, they should start with their strengths. They should deliberately use the capabilities that have worked for them at home and then add to them in Africa to meet the needs of their new consumers and businesses.

Jorge Camarate is a partner with PwC South Africa and Peter Hoijtink is a director with PwC Netherlands

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