Expansion into Africa: Challenges and Success Factors Revealed

For many South African businesses, geographic expansion is an attractive way to penetrate new markets and deliver the growth they seek on the journey to high performance. There are notable advantages to participation in the already large African market: it is set to grow strongly and it is close by. In addition, African culture and the realities of its infrastructure are not unfamiliar to South Africans, thus making expansion within the continent less daunting for South African companies than for overseas businesses. But be warnedSouth Africans will be in tough competition with global players and incumbents for a slice of the pie.
While the perennial attraction of Africas resources sector continues to drive growth, other sectors are beginning to grab the attention of investors from South Africa, Portugal, France, China and India among others. Telecommunications and financial services are of particular interest, but retail is also proving to be attractive. South African companies have an inbuilt advantage in this new scramble for Africa. South African companies are more familiar with the terrain physical, regulatory and social than businesses from other parts of the world. The ability of South African companies to act as a bridge into Africa is widely recognized. The recent acquisition by Chinas ICBC Bank of a 20 percent stake in Standard Bank and the negotiations between local cell phone operator MTN and Indias Bharti Airtel are just two high-profile examples.

4% 2% 0%

Brazil Russia India

China Africa

G7

Source: World Bank Africa Development Indicators 2008/09

Drivers of African growth

Africas growth is being driven by four trends, which any company looking to expand into the continent must understand. These trends are:

1200 1000 800

Strong gross domestic product (GDP) growth and intra-regional trade agreements
Income growth is, not surprisingly, mirrored by strong growth in GDP. As a whole, Africas GDP growth6 percent in 2007is within the range of the emerging market darlings of Brazil, Russia, India and China (see Fig.2)4 and is growing at almost three times the rate of G7 countries.5 Africa has a population in the same range as India and China. According to Deutsche Bank, sub-Saharan Africa is one of the few areas expected to produce positive growth rates in 2009. Africa has made good progress in creating regional frameworks for trading, with eight trade agreements already signed. Trade between these regional blocs showed a compound annual growth rate of 10 percent since the 1990s. Fig.2: GDP annual growth (2007 %)
14% 12% 10% 8% 6% 4% 2% 0%

600 Rise in foreign direct investment 400 Investment into Africa grew at a compound annual growth rate of 27 percent between 200 2000 and 2007. (see Fig.3).8 It continues 0 to be2000 2001 resourcesan area in which driven by 2002 2003 2004 2005 2006 Income per capita Expenditure per capita the Chinese are leading. In fact, so heavy Source: World Bank Africa Development Indicators 2008/09 is Chinese investment that there appears now to be a correlation between GDP growth rates in China and Africa.9

The growth of a large and aspiring African consumer market with increasing discretionary income
Africa's annual per capita income grew by 8.2 percent annually from $689 in 2000 to $1 107 in 2006, with the expenditure rate growing more slowlyfrom $560 to $806 over the same period (see Fig.1).1 The current literature bears testimony to the extent and potential of the African market with one commentator saying: With more than 900 million consumers, Africa is one of the worlds fastest growing markets. Africa is a continent with massive needs and surprising buying power.2 Another commentator, CK Prahalad, makes the important point that, like other such markets, this massive emerging market needs products and services that are tailored to its particular circumstances. Prahalad writes:

Fig.3: Net foreign direct investment (USD Millions 2000-2007)

60000 50000 40000 30000 20000 10000 0 2000 2005 2006 2007

CAGR: +27%

The new US administration has already signalled its belief in Africas strategic importance, which may foretell increased investments by the United States. For the moment, however, Africas main trading partner is Europe, but Asias share is growing.10
1 World Bank Africa Development Indicators

2008-2009.
2 Vijay Mahajan, Africa rising (New Jersey:

" A myth is that emerging consumers resist new products and services, when in truth emerging consumers are rarely offered products designed for their lifestyles and 14% 12% circumstances, leaving them unable 10% to interact with the global economy. 8% The emerging consumer is 6% becoming aware of many products 4% and services and is aspiring to 2% share the benefits."3 0%
Brazil Russia India China Africa G7
Source: World Bank Africa Development Indicators 2008/09 Fig.1: Annual income 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 Income per capita Expenditure per capita

Brazil Russia India

China Africa

G7

Source: World Bank Africa Development Indicators 2008/09

Low ease Wharton School Publishing; 2008). Medium ease 3 CK Prahalad, Fortune at the bottom of the High ease pyramid (New Jersey: Wharton School Publishing, 2004).
4 World Bank Africa Development Indicators

Developing infrastructure and growing participation by the 1000 labour force 800
1200

2008-2009.
5 World Bank Africa Development Indicators Source: World Bank Ease of Doing Business Rating 2008

Access to water, sanitation and electricity 600 is steadily improving, and 50 percent of 400 Africas roads are now rated good. Given the importance of communications to 200 commerce, it is particularly significant that 0 2000 2001 2002 2006 access to telephones2003 grown by more has 2004 2005 capita Income per capita Expenditure per than 320 percent since the 1990s.6 Source: World Bank Africa Development Indicators 2008/09 Importantly, participation by the labour force in the economy has grown by 17 percent since 2000. In addition, literacy has improved, with governments spending 4.7 percent of GDP on 60000 education in line with the continents CAGR: 50000 commitment to the Millennium +27% 40000 Development Goals.7
30000 20000 10000 0

2008-2009.
6 All figures from Sub-Saharan Africa Transport

Policy Program: African Infrastructure Country Diagnostic 2007 and World Bank: Africa Development Indicators 2008-2009. Telephone availability has grown from 21 to 90 per 1 000 people.
7 The Millennium Development Goals were signed

in September 2000, see http://www.mdgmonitor. org/ for more information.

8 World Bank Africa Development Indicators

2008-2009.
9 Benefiting from Chinas new scramble

for Africa, Business Day (18 August 2009), http://www.businessday.co.za/Articles/Content. aspx?id=78789.

10 Lisa Auret, Emerging markets help pull Africa

Source: World Bank Africa Development Indicators 2008/09

up, CNBC (21 Aug 2009), http://www.cnbc.com/ id/32506114.

It is particularly noteworthy that companies outside of the resources sector are also investing in Africa. Aside from South African giants like MTN, Shoprite, Standard Bank, Absa, Naspers and Massmart, multinationals like Unilever, Cisco and HP already have strong African presences. In short, Africa is a market that is attracting global interestand it is one in which South African companies have natural advantages. Geographic proximity can simplify logistics, allowing for easier access to remote bases of operations. And many South African companies are acquainted with African business culture, and can thus more readily adapt to local market conditions than overseas competitors. These advantages should not be squandered and, in particular, South African companies must be fully alive to the challenges that Africa presentsand the critical success factors for doing business there successfully.

This unreliable cash flow appears to drive two distinct buying approaches which, in turn, affect packaging strategy. Some consumers tend to purchase in smaller quantities, while others prefer to purchase in extra-large sizes when they have the money, thus also avoiding costly travel to the retail outlet. In addition, innovative payment mechanisms might need to be developed to accommodate such consumers. A related point is that many consumers in African countries lack knowledge of financial services productsand therefore tend not to trust them.

A rather different consideration is that most African markets do not have the seasonal differentiation of South Africa. 14% From a retail point of view, this means 12% that some South African winter 10% product lines are inappropriate for 8% export to the rest of Africa. 6%
4% 2% Aligning with local governance 0% requirements India China Africa G7 Brazil Russia

Finding the right talent

While African countries have abundant labour, much of it is unskilled. That said, highly educated resources are available but they tend to lack practical management experience. Scarcity of jobs means that the sheer press of applicants can make identifying the right people difficult. Employing expatriates is not necessarily the solution, as living conditions can be tough for them and importing skills slows the process of transferring skills to local talent. Language barriers are a further, and not insignificant, challenge. For example, Woolworths provides its African franchisees with systems, process and training support, but it reports that sourcing trainers who speak the relevant local languages has been costly and time consuming.

must inform themselves about local requirements, since it cannot be assumed 1000 goods that meet South Africas that 800 quality standards will automatically meet the regulatory requirements of other 600 African countries. In addition, companies 400 entering African markets must be aware 200 that corruption and bribery are common and may affect 2002 2003confidence. investor 2004 2005 0 2000 2001
1200

Would-be entrants to African markets Source: World Bank Africa Development Indicators 2008/09

Source: World Bank Africa Development Indicators 2008/09

Accessing capital

Income per capita

2006 Expenditure per capita

Challenges of doing business in Africa

Conducting business in most of Africas 53 countries is challenging, with the World Bank rating the vast bulk of the continent as difficult to do business in, across a range of criteria (see Fig 4)11. Eight countries are rated medium ease when it comes to doing business, and only South Africa, Namibia and Botswana are considered easy to do business in. Accenture conducted research locally, supplemented by international research, to identify the challenges of doing business in Africa. Based on this research, we identified six challenges that companies must recognise and respond to:

The question here is access to capital sources in African countries. If your business strategy relies on a local partner in any substantial measure, it might include helping 60000 that partner access local sources of capital. AccenturesCAGR: research indicates 50000 +27% that many South African companies 40000 are missing an opportunity by 30000 not accessing local funding, as 20000 it is an opportunity to share risk 10000 and enhance growth prospects by 0 2000 2005 2006 2007 effectively enlisting investors as local advocates and business advisors.
Fig. 4: Ease of doing business in Africa

Locating the right physical resources

For retailers, finding suitable office space, particularly retail space, can be difficultparticularly outside of the main centres. In addition, utility and municipal services can be unreliable. Most of the companies Accenture interviewed said the fact that they were obliged to supply primary or back-up infrastructure (such as electricity generators) was a major distraction from their core business and a significant added expense.

Low ease Medium ease High ease

Understanding local consumers

Companies must take the time to understand the values, needs and behaviour patterns of local consumers. For example, our research indicates that low-income markets, typically found in Africa, have unreliable sources of income.

Source: World Bank Ease of Doing Business Rating 2008

Overcoming planning and logistics bottlenecks

It is a fact of business that border posts are inefficient throughout Africa.

11 World Bank Ease of Doing Business Rating

2008. These criteria are: Starting a business, dealing with licences, employing workers, registering property, getting credit, protecting investors, paying taxes, enforcing contracts and closing a business.

Making it in Africathree critical success factors

Having identified the challenges, Accenture sought to understand what factors underlie the undeniable success of several companies. This process is analogous to the Accenture High Performance Business research initiative, which seeks to uncover the common characteristics of businesses that are successful over sustained periods of time, in order to help our clients achieve comparable results. In another initiative, Standard Chartered, a banking group with operations in 13 sub-Saharan countries, has launched several financial literacy programmes for its customers. Its thinking is that better educated consumers buy more banking services and products.12 Another potential source of value lies in offering alternatives to cheap, unstructured shopping at local flea-markets. The introduction of Western-style shopping by Massmart and Shoprite to various African countries gives shoppers the chance to weigh up the cheaper flea market deals against the quality and guarantees offered by Western retailers. Finding fresh sources of value can mean thinking about new ways to segment markets. For example, African middleincome markets may actually be more akin to South Africas low-income markets. And African definitions of concepts like family differ markedly from the Western notions often used in South African marketing. Such variations necessitate different marketing strategieswhich in turn could be fruitfully applied to untapped market segments in South Africa. Finding talent is one of the great battlefields for companies in the emerging global order. Africa holds great reservoirs of talent, including previously overlooked sectors like women and country-dwellers, all of which should be investigated. Creating geographic options can mean taking bold action to create missing infrastructure. SABMiller is well known for putting in the infrastructure it needs to penetrate new markets, even going as far as paving the roads that link its distributors with its plants.13 When entering new markets, collaboration with other interested parties can help. In a recent initiative, Massmart and Shoprite are working together to set up shopping centres in certain African markets. The collaboration made the process of setting up the appropriate retail space for each party more affordable. One could argue that greater collaboration between non-competing South African companies could help to overcome more than infrastructure challenges, and ultimately enable them to compete more effectively with the Indian, Chinese and other multinationals that are moving into Africa.

Be authentically local
In Africa, as in any other market, integrating into the local business milieu is essential for several reasons. It gives the new entrant the ability to identify new opportunities more effectively, and makes complying with local legislative requirements simpler. In any event, investment in local infrastructure and skills will benefit everybody over the medium to long term. Integration into the local business environment also helps deflect potential resentment of foreign companies that may in some ways appear to replicate exploitative colonial relationships. A key part of gaining recognition as a local company is to build local capability by investing in skills. Multichoice has moved from relying on expatriates to sourcing and

Our investigations revealed three critical factors for success in Africa. They are:

Create geographic options

Successful companies are skilled at deriving new sources of value from African markets. For example, some consumer goods companies like AVI are considering sourcing raw materials locally. New markets can also represent opportunities to reach out to new consumer groups. Nokia Research Africa, for example, is working with nongovernmental organisations and universities in Kenya, Uganda and South Africa to understand consumer needs in Africa better. One such initiative, in partnership with Grameen Foundation and Siemens, is helping pioneer a business model that effectively reduces the cost of mobile phone ownership to approximately $3 per month.

12 Standard Chartered press release, http://ww2.

standardchartered.co.za/news/2007/pdf_za_ 12062007.pdf.
13 Staci Warden, Joining the fight against global

poverty: A menu for corporate engagement (The Center for Global Development), http:// www.cgdev.org/files/15004_file_corporate_ engagement_web.pdf.

training local talent, and Tata aims to use local labour for a range of projects including hotels, automotive plants and IT. Becoming local also helps in understanding local preferencesand then servicing them. An Egyptian product that clearly attests to the success of this approach is the McDonalds McArabia burger, which uses grilled kofta (lamb meatballs) on Arabic bread, instead of beef patties on buns. South African companies we spoke to are selecting appropriate products from their existing rangesbut we feel that customising products represents an untapped opportunity. When it comes to navigating each countys local governance environment, it is vital to find local partners who are familiar with both the legislation and market conditions. Woolworths commented that it finds legislation to be one of the major inhibitors to doing business in African countries. It has successfully used a franchise model to overcome many of these challenges. Selecting the correct business model for each market is clearly critical, but our research indicated that companies have a wide variety of approaches. While some prefer the franchising model to mitigate risk and gain better access to local market insight, others prefer the control that comes with going it alone.

Network the organisation

It pays to share ideas and skills across the continent. Such sharing should not be restricted to a one-way flow from headquarters to subsidiaries. Instead lessons from specific operations should be harvested and disseminated across the group. In one example, a South African financial services company is using lessons learned in other African countries to improve its previously unsuccessful microfinance operations in South Africa. Despite the challenges of connectivity in Mozambique, Game ensures that inventory and sales information is communicated to the South African office via satellite communication. SABMiller uses expatriates in its African markets, but they have a clearly defined responsibility to train replacements.14 In this way, the company is building a network of skills across the continent. Often the more mature home office can be used as a backbone for the provision of standardised data, systems and processes to the distributed organization throughout Africa. Foschini does all buying and sourcing from its South African head office, with local stores being responsible for sales and operations. It also undertakes regular training at head office. Coca-Cola has been remarkably successful by building strong relationships with individual franchisees, while providing managerial and technical assistance from head office. It also uses local brand ambassadors to build brand equity in local markets.15

Mobile phones are a key enabler of all three of the critical success factors. Africa has one of the fastest rates of subscriber growth, with 96 million mobile phone subscriptions activated during 2009 (a 32-percent increase on 2008).16 For companies doing business in Africa, this explosion of mobile connectivity offers four potential benefits: Access to new consumers and markets through mobile marketing. Improved market responsiveness through real-time data collection and analysis via mobile applications; for example, mobile phone surveys to understand consumer preferences. Increased productivity of operations in remote areas through access to telecommunications; for example, health care workers calling ahead to hospitals to ensure availability of beds and medicines. Development of new product offerings for consumers; for example, the M-Pesa mobile banking solution in Kenya, which allows money to be transferred from one user to another by mobile phone.

14 SAB M&A Case Study. M&G Ventures,

http://www.tradersafrica.com/articles. asp?articleid={7800009A-74EA-4938-B6D9B1E55B632A1A}.
15 Credibility: Africas ultimate currency,

Communication World, http://www.allbusiness. com/marketing-advertising/marketingadvertising-measures/11813922-1.html.

16 The Power of Mobile Money, The Economist,

September 26 2009.

The race is on
Africa represents a clear business opportunity for companies in search of new markets to power their drive to achieve high performance in todays tough economic conditions. To be sure, it presents some distinct challengesbut, as we have shown, many companies are already finding ways to overcome these challenges and mitigate the risks they face, thus turning the African market into their next frontier for growth. As the increasing flows of foreign direct investment indicate, this is an opportunity that has been identified by global players. There is a window of opportunity for first-mover pioneers to acquire market share but no-one knows how long it will last. Paul Nunes, executive research fellow at the Accenture Institute for High Performance, is of the opinion that businesses not planning and acting now will miss the boatas so many did in China. South African companies, with their experience of African business conditions and insight into African societies and markets, start with an advantage. They must act on that advantage now.

Researching the African opportunity

In order to understand the opportunity represented by Africa, our South African research team used three sources:

Desktop research
We consulted a wide range of published sources in the general and specialist media, research reports and statistics, and literature on Africa and African business.

results from a global survey of 420 companies, of which 45 were highperformance businesses. This survey was specifically designed to gather information about how companies are strategising for success in the multipolar worldthe emerging world economic order characterised by multiple centres of economic activity and power. This research was designed to test hypotheses about the effects of globalization on the achievement of high performance, and to gather new information about successful global strategies.

If you would like more information please contact Wayne Borchardt Senior Executive wayne.g.borchardt@accenture.com +27 21 408 1312

Accenture's global research

We leveraged Accenture High Performance Business research, an ongoing initiative that seeks to uncover the common characteristics of those companies that consistently outperform their peers across economic cycles. We also used

Local research
We spoke in-depth with 13 companies listed on the JSE Securities Exchange from the consumer goods, media, retail, banking and insurance industries. All are firms that provide products or services directly to consumers in Africa.

Copyright 2009 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.