Strategy&: Gaining a Competitive Edge in Africa

Worldwide, companies have begun to make expansion across Africa a priority, recognising that – despite many problems – the continent is amongst the fastest-growing regions in the world. Africa is poised for long-term economic growth: the continent has 600 million hectares of uncultivated arable land, 40% of the world’s gold, 90% of its platinum, 8% of its oil, besides an abundance of other resources. Since 2000, Africa has been growing consistently at about one percent above the global average. Its middle-class population has tripled over the last three decades to around 400 million people. Consequently, companies around the globe – in the US, Europe, China, Japan, and even Africa itself – are looking to build powerful Pan-African enterprises.

However, it is not that simple. Africa’s markets tend to be too diverse for any one business model to be successful everywhere. Companies don’t always have an understanding of local market dynamics and the skills required for success. As a result, many of these companies have destroyed value instead of benefitting from growth opportunities. Part of the problem is that many companies often embark on their expansion plans without first looking inward, examining what they can bring to these markets.

We approach strategy the other way round with an approach that we call a capabilities-driven strategy. A firm’s first priority when setting strategy should be to understand its own differentiating capabilities and how they work together.

In this article we analyse what is meant by a capabilities-driven strategy (CDS) and its value.

A capability is the combination of people (knowledge, skills, and behaviours), processes, organisation, and tools and systems which allow you to do something of value. Capabilities tend to work together in systems of three to six mutually reinforcing, distinctive elements that are organised to support and drive a company’s strategy. To generate growth, the CDS-aware firm looks to generate as much business as possible in markets where its existing capabilities are relevant and differentiating. It also looks for ways to enhance its capabilities system to address attractive new markets.

Capabilities in Africa Expansion:  Study Methodology

82 deals of significant value (>10% of buyer market cap). Acquirers listed on Johannesburg, Nairobi or Lagos stock exchange. Deals closed between 2007 and 2013:

• Capability Leverage (46%): Acquirer takes advantage of its current capabilities system by applying it to incoming products and services.

• Capability Enhancement (22%): Acquirer adds new capabilities to fill in gaps in its system or respond to new market requirements.

• Limited Capability Fit (32%): Transaction does not improve or apply the acquirer’s capabilities system.

In many of our discussions with the executives leading expansion activities at major African companies, we were pleased to find a number of companies across a broad range of industries that were already using a kind of capabilities-based thinking to great effect in the planning and execution of their expansion.

Capabilities to Outperform Benchmarks

The value of adopting this capabilities-driven approach was demonstrated in an analysis of major expansion deals across Africa between 2007 and 2013. Of the mergers and acquisitions (M&A) made by companies listed on the Johannesburg, Lagos, and Nairobi exchanges, a total of 82 suitable expansion deals were studied.

Deals were divided into three categories:

• Leverage: The acquirer applied its current capabilities system to incoming products and services.
• Enhancement: The acquirer added new capabilities to fill in gaps or respond to market changes.
• Limited fit: The acquirer largely ignored capabilities, doing the deal for other reasons, including diversification and control of attractive assets.

According to the results of the analysis, capability deals far outperform limited fit deals and also often outperform market benchmarks. Top quartile capability enhancement deals outperformed benchmark by 6.9% and capability leverage deals outperform it by 5.5%, while limited fit deals underperformed the benchmark by 3.7%.

The analysis also provides some interesting comparisons between Africa and industrialised economies. The most compelling is that of the US where leverage deals outperform enhancement deals on average. It seems the value of improving capabilities is even stronger in Africa than it is elsewhere. African markets are so diverse that enhancements to the existing capabilities system are often necessary to survive and thrive in a new geography.

Companies are usually faced with much difficulty in deciding which markets they should enter and the capabilities they will require to ensure success. This is a complex question which can be overwhelming, especially when faced with the world’s second-largest and second-most populated continent.

Starting Point

A number of factors will have to be considered and due diligence needs to be observed. However, our experience shows that a good starting point is usually studying a market’s wealth (measured by GDP per capita) and institutional quality (measured by the World Bank Doing Business Index). Based on these criteria, and how the two are combined, African companies fall into six market types: high, medium, and low income, with either strong or weak institutions.

Some of the wealthiest African markets have built strong governmental and civil institutions. They have reliable ports, roads, judiciary, police, and educational resources to draw on. Companies that may find these markets rewarding include those with world-class innovation, technology, and branding capabilities.

But then there are high-income countries that have weak institutions. These markets require a host of country-specific capabilities to ensure success, and may be good places for a company with strong capabilities in managing relationships with government and other stakeholders, managing security challenges and crises, and creating supply chain resilience to ensure consistent service.

In middle-income countries with strong institutions, aspirational customers demand premium products and services but need them to be delivered at a lower cost point. Middle-income countries with weaker institutions face significantly more challenges to achieve an affordable cost-to-serve, given limited infrastructure and weaker human capital. To overcome these hurdles, relationship and crisis management skills are essential.

Although some low-income countries, like Mozambique and Liberia, have relatively strong institutions, all suffer from weak infrastructure. This means that successful businesses, whether exporters or serving local demand, must have strong capabilities in building and operating every component of their business independent of external support.

Beware of Complacency

Strong institutions and a stable environment make it easier to do business everywhere. In institutionally strong countries across the income spectrum, from Ethiopia to South Africa, companies can focus on competing in the market, in much the same way as they would in developed Western markets. Conversely, companies can never be too complacent about their ability to move capabilities from one country to a neighbouring state.

Once a company has identified the African market most suited to its capabilities and the additional capabilities it will need for those markets, it can turn to execution – in particular, how to replicate home-market capabilities in other environments, add the new capabilities required, and manage a Pan-African business. A number of deployment approaches are required. These include:

• Developing local talent: Capabilities are put in action by people on the ground. Since relying heavily on expatriates is not financially sustainable or positively viewed by African governments, local human capital is essential. Africa’s labour markets usually lack people with the necessary technical skills and relevant industry experience, meaning that companies must develop their own talent. Companies will need to embed a team of home-country experts. They will need to deploy their own home-country staff as expatriates, but only for a limited period of time. In addition, companies will need to invest heavily in training and development. They will also have to focus their efforts on retaining talent. Successful companies that invest in training must find ways to prevent competitors from poaching their talent.
• Forming partnerships with locals: Forming relationships and partnerships with locals is usually the fastest and least capital-intensive way to enhance capabilities for local conditions. A partnering relationship could take the form of a merger, a joint venture, or a simple supply arrangement. In Africa, enduring partnerships are founded on aligned interests and personal connections, more than on legal contracts. However, companies will need to exercise caution when selecting a local partner.
• Balance central control with local entrepreneurialism: Companies should not burden local subsidiaries with ill-suited control policies and processes. But in the process companies should also ensure that they do not expose firms to any violations of ethics of breaches of law or policy. To accomplish this, they will have to oversee risk and manage it.

Companies need to pick markets carefully to fit their capabilities, and know what capabilities they need to add for success in each place. If they can navigate all of the challenges, they will have an enviable position: an architect of one of the first Pan-African powerhouses, something shareholders have been dreaming of.

About the Author

Jorge Camarate is a Partner in PwC Africa’s Financial Services practice, specialising in business strategy and operating model design for wealth management, life insurance and retail banking. With over 10 years of experience with Strategy&, Jorge has advised clients in the UK, South Africa, Continental Europe, Latin America and Australia. Jorge joined Strategy in 2005 and prior to joining the firm, spent time as a business analyst in McKinsey and Company in Portugal.

Jorge has an MBA from the London Business School and a BS in Business Administration from the Instituto Superior de Ciencias do Trabalho e da Empresa. Jorge also co-authored the 2013 Strategy& report ‘Affluent but forgotten: The demographic opportunity for wealth management in the UK’.

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