According to a new study released by Strategy&, executives that follow a capabilities-driven strategy will make their companies more coherent and gain a competitive advantage in the African markets where they have decided to expand their operations. The right strategy can transform a company and its industry, delivering substantially superior shareholder returns in the long-term. These are some of the highlights of a new study, ‘creating value in Africa’ released by Strategy&, PwC’s strategy consulting capability based in Africa.
Jorge Camarate, Strategy& Partner, said: “Worldwide, multinational companies are including plans to expand across Africa in their growth strategies. CEOs throughout Africa have unanimously confirmed that they see high growth potential on the continent, according to research conducted by PwC.
“This confidence is an indication of the positive long-term trajectory we have seen in general economic prospects, availability of finance, and the increasing presence of potential local and international partners attracted by the African continent’s potential.”
Traditionally, firms formulate a strategy by looking for market opportunities, but all too often it does not work, particularly in the African context. The problem is that such strategies rarely acknowledge the capabilities a company needs to capture those opportunities. As a result, many of these companies have destroyed value in the process instead of benefitting from growth opportunities, Camarate commented: “We approach strategy the other way round with an approach that we call a ‘capabilities-driven strategy’.”
What is a capabilities-driven strategy (CDS)?
A firm’s first priority when setting strategy should be to understand its own differentiating capabilities and how they work together. In simple terms, a capability is the combination of people (knowledge, skills, and behaviours), process, 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 capabilities that are organised to support and drive the company’s strategy.
“In 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 Africa expansions,” added Camarate.
The value of adopting a capabilities-driven approach to African expansion 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.
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 percent and capability leverage deals outperform it by 5.5 percent, while limited fit deals underperformed the benchmark by 3.7 percent.
This analysis also provides interesting comparisons between Africa and industrialised economies, in particular the US. In the US, leverage deals outperform enhancement deals on average. However, in Africa, enhancement deals perform best. African markets are so diverse that enhancements to the existing capabilities system are often necessary to thrive in a new geography.
Entering new markets
“Companies are faced with a complex dilemma when determining which markets they should enter, and the capabilities required in each market to ensure success,” explained Peter Hoijtink, Strategy& Associate Director. “Although detailed on-the-ground study of each market is ultimately necessary, our experience suggests that a good way to start is by 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 countries fall into six market types: high, medium and low income, with either strong or weak institutions. Each of these types requires companies to have different capabilities to succeed.
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 might find these markets rewarding include those whose capabilities include world-class innovation, technology, and branding.
But then there are high-income countries that have weak institutions. These markets require a host of country-specific capabilities to ensure success, and might 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.
Although some low-income countries have relatively strong institutions, all suffer from weak infrastructure. This means that companies must have strong capabilities in building and operating every component of their business independent of external support.
Expansion into Africa
Once a company has identified the African markets most suited to its capabilities and the additional capabilities it will need for those markets, it can turn to execution. A number of deployment approaches are required. These include developing local talent, forming local partnerships and balancing central control with local entrepreneurialism.
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 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.
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. It is critical to invest the time in working out what you want from a partner and carefully selecting the right one.
Companies should not burden local subsidiaries with ill-suited control policies and processes. But in the process they should also ensure that do not expose firms to any violations of ethics of breaches of law or policy. To accomplish this, they will have to ensure local accountability while overseeing major risks at a regional level.
“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,” concluded Camarate.