Strategy in Targeting Africa for Expanding Foreign Companies

May 15, 2015Africaby Jeremy Riro

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Companies around the globe have Africa as an investment target.

A recent survey done by The Economist Group on 217 companies from 45 different countries revealed that about 65% of them; intend to expand to Africa in the next one decade.  Growth potential in most African economies coupled with the peace dividend from democratization of most governments drive the renewed focus on Africa. However, as many companies seek to set shop here, they are missing out on the fundamentals that will assure them of sustained growth within the continent.

At a high level, growth in Africa can be attributed to a set of positive change gaining momentum steadily across most of the countries. The peace dividend and good governance rank highest. These are supported by demographics with 50% of Africa’s population aged below 20 years; and about 40% of the total population living in urban areas.  Analysts project that the middle class will continue to bulge in Africa within the next decade; hence the growing consumerism which ultimately increases demand.

Intra-trade within the continent is growing rapidly with heads of states lobbying for more trade integration amongst the various regional trading blocks in Africa. Rise in technology is also pulling more investors to Africa; the continent had about 600 million mobile phone users by 2013. In addition, there is a wave of infrastructure development across the continent; with most governments allocating huge amounts in their budgets to roads and railways development.

All odds have it that Africa is one continent that every long-term investor would love to focus on now; before it becomes too expensive to buy-in. However, not everyone is getting it right when they are venturing into this part of the emerging markets.

In their October 2014 report entitled “When the growing gets tough”, Boston Consulting Group (BCG) recommends a shift of approach for executives who want to win over the emerging markets. According to the report, most countries in the emerging markets are transitioning from the super-high growth phase; and tapping major new revenue sources in the future will become harder than before. To deal with this growing challenge, BCG recommends that companies should build new capabilities, adjust their business models and improve their execution.

Companies intending to expand to Africa should first focus on refining their emerging markets footprint. Instead of thinking of approaching each country individually, they should cluster them and target the regions. This not only provides a wide target market but also helps in identifying synergies that can be derived from the regional blocks. However, this approach does not overrule country specific due diligence since each country has its own comparative advantages.

Quality is becoming the differentiator between the successful brands expanding to Africa and those that are failing. In the past companies from both the West and East could export substandard products to Africa tailor made to suit the small budgets for many African consumers. However, the tide is changing and consumers are now more informed on the exact quality they want in products they buy. Focusing on quality products and especially for the middle income bracket will give your company leverage over the rest in the growing African market.

Competition from local high growth companies is another factor foreign companies expanding to Africa have to keep in mind. Ignoring the companies in the emerging markets with significant market shares could lead to deluding forecasts, marking the beginning of your downfall.

Partnerships with local companies have changed too, with local investors in the emerging markets demanding for a significant shareholding and control in the mergers. Having locals have a seat at the board gives you a local resource person who understands the dynamics in the market much better. In addition, recruiting and retaining local talent is the pillar to your growth in the African market. The continent has great talent in all fields and tapping into their expertise and wide knowledge of the business environment in Africa can be one of the best investments you’ll ever make.

In a nutshell, African markets are not a hard nut to crack. However, a well thought out regional approach with focus on quality products and utilization of local talent will be the key determinant of who succeeds in the long run.