Winning in Africa: From Trading Posts to Ecosystems

Embracing Africa

Mostly ignored since the 1980s, Africa is now gaining attention and investment from multinational companies. Growth rates on the continent are rising, some long-running wars and conflicts are progressively giving way to democracy and bureaucratic competence, and infrastructure and connectivity are improving. With competition for growth in Southeast Asia and Latin America intensifying, companies are setting their sights on Africa as the next frontier market.

But awareness of the Africa opportunity is one thing. Winning in Africa is another. Many companies that have operated there for decades have learned the hard lessons that await newcomers, who do not necessarily know how much to expect, where to start, or how to succeed. Implementing the right plan now to build their Africa capabilities by 2020 will help companies achieve success on the continent.

Economic Africa

In the 1980s and 1990s—the “lost decades” during which political and economic circumstances turned Africa into a marginal player in the global economy—multinationals that did not withdraw entirely from the continent treated it as a “trading post,” extracting metals, minerals, and natural resources and shipping finished goods to its large coastal cities. Their involvement with Africa was limited.

Even before the lost decades, Africa was a distant outpost that often did not receive adequate management attention, investment, or organizational support.

Africa has been on a steep growth trajectory since about 2000, however, with at least four factors besides rising commodity prices contributing to its success.

• Capital is returning to the continent. During the lost decades, about 1 percent of Africa’s GDP left Africa, but now about 11 percent of GDP flows into it, aided by improvements in the economic and political climate as well as the 1996 debt-relief plan for poor nations instituted by the International Monetary Fund and World Bank. Since 2007, annual inflows of foreign direct investment have reached at least $45 billion annually, up from less than $10 billion annually during 1980s and 1990s. And in 2010 African savings exceeded $170 billion, up from $109 billion in 2000.
• A demographic dividend is supplying Africa with a youthful, better-educated, and increasingly available workforce in a transition similar to that in Asia in the early 1980s. Shortly after 2030, more than 60 percent of Africans will be of working age. By 2040, Africa will have a larger working-age population than China or India, and by 2060 it will have a larger percentage of people of working age than any other continent.
• Improvements in physical and digital infrastructure are easing the challenges of doing business in Africa and helping to modernize national economies. Unshackled by legacy infrastructure or embedded commercial interests, these economies are leapfrogging their developed-market counterparts by taking advantage of the latest innovations, leveraging technology to address their most urgent development needs. Africa is the fastest-growing mobile phone market in the world. Internet usage is growing too, though more slowly. Plus, African transportation and utility networks are improving. Private-sector infrastructure investments nearly tripled between 2000 and 2010.
• In general, and despite several exceptions, political stability and governance have improved dramatically. Africa is a less risky and more predictable place to do business as more governments become more democratic, more competent, and more oriented toward the private sector.

Collectively, these developments have helped create not only higher demand and more diversified economies but also an emerging class of African consumers with discretionary income to spend.

Bring Africa into the Boardroom

Ninety percent of CEOs in the companies BCG surveyed visited Africa in 2013, as opposed to less than 10 percent before 2008. Africa is the final frontier—the last sizable area of untapped growth in the global economy. There are no other large emerging markets left to enter. To realize Africa’s potential, companies will need to ensure that their senior executives, board members, and headquarters staff are committed to the continent. They must create explicit, ambitious goals for their Africa business, or senior leaders will not pay attention, investments will not flow, top talent will not join, and local governments will not support them. A multinational’s Africa teams need active, sustained, and public support from the company’s senior leaders to ensure the attention a complex set of emerging markets requires.

Address Africa’s Diversity

To succeed in the new Africa, companies will need to actively engage with and commit to the continent by building ecosystems of suppliers, partners, communities, and public and private stakeholders. The continent is a collection of different markets. This raises challenging organizational and business-model questions. Companies cannot simply import a structure and way of doing business that work in other markets. They will need to create and empower local organizations close to the market and establish a regional structure that takes advantage of scale and provides consistency. In particular, companies will need to do the following.

• Prioritize their African  markets, focusing on those that offer the best combination of attractiveness and competitive advantage for their specific sector. For instance, though Nigeria’s large population and natural resources puts it onto lists of priority African markets, an active used-vehicle market makes the number of new car sales there relatively small. For this reason automakers have prioritized Algeria, which has more auto sales than its population or per capita GDP would suggest, over Nigeria.
• Organize for many Africas, leveraging hubs or regional clusters of countries. Many companies divide the continent into two or more regions in order to deal with its size and take advantage of linguistic, cultural, economic, and cultural linkages.
• Adjust their business model when the realities of Africa require different approaches.

Build 2020 Africa Capabilities Now

Africa is a demanding place to do business, asking more of companies than other markets. Talent, market knowledge, and risk are bottlenecks. To build 2020 Africa capabilities now, companies must invest aggressively in local African talent and human resources as well as in market intelligence, and they must embed risk management in the organization. Risk management extends beyond the geopolitical sphere to the infrastructure and services companies in other markets take for granted—for example, steady electrical service, smooth port operations, and reliable delivery options.

Meet the New African Customer

Africa’s growing economies and urbanization are increasing the number of Africans with discretionary income. BCG’s 2013 Africa Consumer Sentiment Survey shows a growing African consumer class. Along with a set of thriving African companies, it is starting to reach critical mass. To meet the needs of the new African customer, companies need to do the following.

• Create an African offering, balancing local preferences against the need to achieve scale and consistency. For instance, Bajaj Auto’s motorcycle, adapted to local uses and weather conditions, became the market leader in Nigeria in two years. It was priced 30 percent higher than Chinese models but below similar Japanese vehicles. Samsung’s appliances for the African market frequently have built-in surge protection. Its refrigerators often have extra insulation and its washing machines are energy efficient.
• Build and leverage their brands. Brands appear to be more important to African consumers than to consumers elsewhere. The challenge is to figure out how to strengthen brands in ways that are economical and measurable. The continent’s diversity will require companies to deploy several channels and platforms.
• Control distribution so as not to cede oversight of pricing, branding, channel management, and inventory. Distribution can be delegated, but it must be done right. This often will require novel approaches. In 2011 Nestlé doubled its number of sales outlets in South Africa by relying on a small army of distributors who travel by foot, bicycle, and car. Vodacom has created more than 100,000 points of sale in Africa through wholesalers and independent contractors.

Commit to Africa

An ambitious development agenda exists for Africa. African leaders are diligently working to improve the economic and social infrastructure of their nations. Consequently, companies should determine how they can help African countries achieve their development goals while also making a profit. This means that they must commit to Africa, which will require that they do the following.

• Pursue “Made in Africa” by establishing or investing in manufacturing facilities there, sourcing locally, or taking advantage of the U.S. African Growth and Opportunity Act, which allows Sub-Saharan nations to export certain goods into the U.S. duty-free if they can show progress in opening their economies, protecting human rights, and reducing corruption.
• Engage with their local stakeholders, working with governments, NGOs, and others that hold power or influence public opinion.
• Pursue business opportunities that align with Africa’s development agenda in support of local or regional manufacturing, job growth, and skills transfer. By helping governments achieve their development goals, companies will find it easier to do business and attain their own objectives.

Building an African Ecosystem for Winning

To succeed in Africa, companies must evaluate their performance and priorities on the continent, and executives should ask themselves and their organizations if they are ready to win there by moving quickly and building an ecosystem, rather than relying on the trading posts of the past.