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Ten ways that companies can mitigate risk in Africa

There are a number of potential issues and risks that could impact on companies doing, or planning to do, business in Africa. In a new report, professional services firm Ernst & Young, identified ten strategies that can help companies to mitigate these potential risks.

1. Source local partners to create efficient supply chains and distribution channels

An increasingly wealthy and urbanised African population is creating significant growth opportunities. However, poor infrastructure is an inhibitor of growth and a key risk to doing business successfully across Africa. The gap is particularly noticeable in terms of power generation capacity, the density of paved roads, and, to some extent, in communications technology.

This makes supply chain efficiency more challenging and can substantially increase the costs of doing business. To overcome these barriers, companies need to establish a cost-effective and stable supply chain that can help them to serve African consumers while maintaining profitability. They should look for sourcing partners who understand the preferences and issues of local markets and have strong community links. A good sales and distribution network can be created by leveraging a mixture of third party, wholesale and direct-distribution models.

2. Develop robust capabilities to manage regulatory compliance

Africa is a vast continent, comprising 54 sovereign states, each with different and often fragmented sets of regulations. And in many nations, these frameworks are still evolving. Thus, managing complex regulatory compliance across multiple countries in Africa can be difficult for businesses. However, as regulatory systems continue to evolve and mature, companies must also anticipate that regulations will inevitably become more comprehensive and complex and this should be factored into the risk-planning process.

Many organisations will need to develop robust capabilities in order to manage cross-border regulatory compliance at a relatively low cost. They will also benefit from the ability to influence the development of regulatory maturity in each country in which they operate.

3. Develop an effective cost management strategy

Because of low income levels, price remains the key consideration for the majority of African consumers. This creates increased pressure on companies in Africa to lower their operating costs so that products or services can be delivered to market at realistic prices for African consumers. This is a difficult task, as the cost of doing business in Africa can be high due to factors such as the regulatory environment, infrastructure challenges and human capital constraints. It is important to find innovative and disciplined ways, as, for instance, Grameen Bank did in Bangladesh, to bring products and services to market with fundamentally different cost structures. Process optimisation and embedding of controls, streamlining of product portfolio and optimisation of technologies are some strategies that companies can adopt while developing their cost management strategies.

4. Create a strong due diligence process to identify the right market entry strategies

Mitigating the risk of strategy errors, such as entering the wrong markets or making unwise investments, is crucial to long-term success. In African markets, pre-entry analysis and selection of an appropriate mode of entry into different markets is especially critical. While acquisitions are often a preferred route, viable acquisition opportunities can be scarce and investors will often need to consider multiple alternative approaches, such as strategic partnerships, joint ventures or public-private partnerships (PPPs). A robust due diligence process is essential, particularly for companies subject to legislation, such as the US Foreign Corrupt Practices Act or UK Bribery Act.

5. Create a localised manufacturing strategy

Africa offers significant manufacturing opportunities. Companies operating in the continent can capitalise on the vast labour and natural resources to scale up their manufacturing operations.

Africa’s diversified countries have different profiles – some with low costs but few skilled labourers and others with highly skilled workforces but higher costs to match. With relatively low labour costs and targeted policy support, Ethiopia has shown that it can be a globally competitive environment for “light manufacturing” in categories such as apparel, leather goods and garments. Similarly, a number of African countries could benefit from following the examples of other emerging markets, particularly China and its movement up the manufacturing value chain.

There are also several countries that have shown that they can succeed in the high-value-added categories of manufacturing, as South Africa and Morocco have done in the automotive sector. The right manufacturing strategy should be tailored to each company’s profile and context. To mitigate the risks arising from disruptions and ensure continued supply of natural resources, companies can introduce term contracts, invest in diversified geographical resources and make upstream acquisitions to lock in supply.

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