By Acha Leke, Director, McKinsey
This article was first published by the World Economic Forum
The ratification of the African Continental Free Trade Area (AfCFTA) on 7 July is a major milestone in the integration of Africa’s markets – and a big opportunity for business. Provided critical parts of the agreement are finalised in time, countries are due to commence trading under the AfCFTA on 1 July 2020. That will create new impetus for investment, trade and industrialisation across Africa.
The AfCFTA builds on years of effort by African governments to accelerate regional integration – and past progress provides an encouraging indicator of the opportunities ahead. For example, the six-member East African Community and the 15-member Southern African Development Community have both seen their intra-bloc trade grow at around 15% a year over the past decade.
How can companies capitalise on Africa’s economic integration to build successful regional or pan-African businesses? In our book, Africa’s Business Revolution: How to Succeed in the World’s Next Big Growth Market (Harvard Business Review Press, 2018), we point to four core tools to guide a company’s expansion in Africa.
First, set a clear aspiration to guide your expansion. The most successful pan-African firms have been deliberately bold. Consider the example of Saham Finances: in little over a decade, the Morocco-based company grew from a small local firm into a leading African insurance company operating in 23 countries across the continent. Saham’s strategy included buying stakes in existing insurance firms in countries ranging from Angola to Madagascar, then overhauling their management and rapidly growing their sales. In 2018, Saham merged with Sanlam, a long-established South African insurance company that had also made Africa its major growth focus and was operating in 34 countries.
Second, prioritise the markets that matter most. In a continent with such scale and geographic complexity, companies need to be clear in prioritising markets. Coca-Cola provides a compelling example. Even though it is present across the continent, it picked 10 countries as priorities for growth – and within each of those countries, it focused on the big cities that accounted for the lion’s share of GDP. In the other 44 African countries and thousands of smaller towns, the company offers a simpler portfolio of products and packaging. In constructing a successful pan-African portfolio like Coca-Cola’s, companies need to look not just at the spending power of countries today, but also at the fast-growing countries that will be home to tomorrow’s consumers.
Third, define how you’ll achieve scale and relevance. Companies need a clear plan for how they will achieve scale and customer loyalty in every territory they play in. One essential component is a company’s brand: Because African consumers must navigate greater uncertainty in their daily lives than their counterparts in developed markets do, they place great value on brands they can trust. A further step is to tailor your offering to Africa’s diverse consumers, country by country and city by city. Companies such as Coca-Cola have conducted careful customer segmentation exercises, then evolved their traditional products and created new ones to target each segment.
Fourth, shape the ecosystem you need to thrive. The guiding question here is: Who will we work with to win? A company’s ecosystem must be broad enough to provide all the elements it needs to run its business in Africa. These include reliable power and water supply, appropriately sited land, a robust supplier base for everything from raw materials to business services, and a distribution network that can get its product into towns and villages across the continent.
The integration of Africa’s economies – many of them rapidly growing – offers exciting opportunities for companies that craft bold yet wise geographic expansion strategies. It also opens up the potential for more large-scale African corporations to emerge. McKinsey’s research shows that Africa is already home to more than 400 companies with annual revenues of $1 billion or more, but this is just 60% of the number one would expect if Africa were on a par with peer regions.
We might think of big companies as the baobabs of the business landscape: Not only do they tower above the rest, they also have deeper roots and longer life spans. Known as the tree of life, the baobab produces highly nutritious fruit that sustains many communities. Business baobabs, too, enliven their local economies: They contribute disproportionately to higher wages and taxes, productivity improvement, innovation, and technology dissemination. Like baobabs, large firms create their own ecosystems, fostering small-business creation through their supply chains and distribution networks. They are also better able to attract capital, which means they are much more likely to compete on the global stage. We are confident that regional integration will help spur the growth of many more business baobabs across Africa.