Expansion Strategies: What Does it Take to Succeed in Africa?

Thursday, 21. January 2016

Africa is widely recognized as one of the most dynamic growth regions in the world. Despite challenging global market conditions, Sub-Saharan economies are expected to continue to grow with above-average rates. Key growth drivers are the wealth of raw materials, the great potential for agricultural production, the rapidly growing middle class, and the young, creative, and increasingly well-educated population. The mobile sector is boosting the economy as well–bringing innovations even to rural areas. Digital services are already widespread in many industries, such as banking, commerce, health, and education, forming the basis for further growth.

Accordingly, foreign direct investments in Sub-Saharan Africa have increased significantly in recent years. The most important player remains China which recently closed another six billion Euro investment deal with South Africa. But also American, British, French, and Japanese companies have been very active on the continent for many years. In comparison, German firms are less engaged in African markets. According to the Federal Statistical Office, Germany’s foreign trade with Africa makes up for only 2-3% of the total German foreign trade. There is a lot of unexploited potential here, especially in the fields of high-quality machinery and electrical equipment required for the expansion of local production which offers great opportunities for the German export industry.

However, the gold rush mood should not obscure the risks associated with entering African markets. Poverty, poor infrastructure, widespread corruption, political instability, legal and tax uncertainties, a burgeoning and often arbitrary bureaucracy, currency fluctuations, and shortage of skilled labor continue to pose great challenges to foreign investors. In the ease of doing business index of the World Bank, African economies generally rank very poorly with Rwanda surprisingly being the top among them taking place 62. On the last place, less surprisingly, is Eritrea, one of the poorest countries in the world.

All this underscores the need to consider and plan investments in Africa wisely and strategically. To do so, businesses should keep the following success factors in mind:

  • Differentiated perspective
    Africa is not a homogeneous market, but consists of many individual markets. Countries and regions vary greatly in size, population, level of development, political and economic structure, culture, religion, and language. Foreign investors should carefully analyze the risks and opportunities associated with each market. The currently most attractive markets for German investors are considered to be South Africa, Nigeria, Ghana, Angola, Mozambique, and Tanzania. But also Ethiopia, Ivory Coast, Kenya, and Namibia have developed quite dynamically in the recent past (BMWi).

  • Capabilities-driven strategy approach
    The decision in which market to invest, however, should not only depend on external conditions and hard data, such as number of consumers or household consumption per capita. In two recent studies, the management consultancies Strategy& and EY advise businesses to base their African expansion strategies on their own distinct capabilities and unique value propositions. Companies should ask themselves: What are our core capabilities and unique value proposition? How can we leverage them into new markets? And which new capabilities do we need to add in each market to ensure success?

  • Customized product, brand, and sales strategy
    Another important success factor is the development of a product, brand, and sales strategy that is adjusted to the particularities and realities of the local markets. Most promising are products that are designed specifically for the African market. Some key aspects to consider here include price, energy and resource requirements, climatic conditions, urbanization, culture, language, and religion. A good example of the development of customized products for African consumers is Unilever. Among other things, the Anglo-Dutch consumer goods company has developed a water-saving laundry detergent, care products suited for the special needs of African skin and hair, as well as affordable foods enriched with vitamins and minerals to combat widespread nutritional deficiencies.

  • Cooperations and outside help
    In order to keep market entry risks as low as possible, it is advisable to cooperate with local companies. Their expertise regarding local competition, industry trends, production conditions, customer needs and behavior, and bureaucracy is a major advantage. In addition, investors may seek external assistance from trade associations, export credit insurances, German and African government agencies, or consulting firms. Companies that wish to take part in tenders for large-scale projects should consider forming a bidding consortium with other German or international investors, as tenders issued by African organizations tend to be rather broad, for instance, including the construction, financing, equipping, and operation of entire production facilities (BMWi).

  • Patience
    Finally, it takes a lot of patience and commitment to succeed in Africa in the long-term. Markets often need to be developed first, or even newly created. Therefore, investments are not likely to pay back overnight. A positive attitude, focusing on opportunities rather than risks, maintaining close personal relationships with local business partners, sensitivity for cultural differences, and the willingness to compromise are the key to success.

Read also: Expansion Strategies: What Does it Take to Succeed in China?