Seven myths about doing business in sub-Saharan Africa

Lagos, Nigeria

Lagos, Nigeria

Despite sub-Saharan Africa being higher on the agenda for western executives, there remains many misconceptions about operating in the region. So argues Anna Rosenberg, head of Frontier Strategy Group’s Sub-Saharan Africa Research practice. In a recent webcast she discussed seven of the most powerful myths that skew companies’ perceptions of doing business in sub-Saharan Africa. Below are the main takeaways.

1. There is no competitive urgency to build a presence in sub-Saharan Africa

Many executives still believe they can secure first-mover advantage in African countries. This is incorrect, according to Rosenberg: “There is already very tough competition from western companies, as well as from emerging markets players and African companies.”

She says companies can’t afford to wait any longer with their expansion strategies. “Executives have to overcome corporate objections by educating their home offices on the opportunities within sub-Saharan Africa, and most importantly the long-term drivers of growth. And they have to emphasise the success stories of other international and local companies…”

2. Sub-Saharan Africa’s growth is all about consumers and commodities

Sub-Saharan Africa’s economic drivers are evolving and creating strong demand for new products and services across economic sectors. Rosenberg highlights consumer and government spending, foreign investment, infrastructure growth and technological advancements as some of the main drivers shaping the region’s economies.

“Every country is going to follow a different path… And what it means is that each country will have a different set of demands and needs. So for example, let’s look at Ethiopia. That country benefits from a lot of power and a very cheap labour force. So eventually that country is going to become a manufacturing hub and that means that industrial companies will probably be quite successful selling there.”

3. Fast economic growth equals quick returns

“What is often underestimated is that Africa’s growth story is a long term game, it stretches over many years… Generating immediate returns is difficult because of the costs of operating locally.”

Rosenberg advises companies to hire staff locally and have managers on the ground. And to eventually start manufacturing domestically to reduce costs and address supply chain issues.

She highlights General Electric as a company with a long-term investment horizon that is today reaping the rewards. “They advise governments at very early stages of development to shape their development strategies as these governments design master plans for infrastructure and healthcare. And this then leads to demand for their products. For example, they advise them on railway infrastructure – that then leads to demand for GE trains. They advise them on healthcare infrastructure – that leads to demand for medical devices. So that strategy has really already proven successful for the company, but of course it requires upfront investment.”

4. Sub-Saharan Africa is too volatile and unpredictable for my business

African countries are not necessarily less stable than other emerging markets, according to Rosenberg. There are also large variations between markets within the region – some are stable while others are more volatile. However, “it’s critical that companies differentiate between real and perceived risks – and don’t let perceived risks or short-term issues derail their long-term investment strategies”.

She urges companies to be less reactive to negative events (such as the Ebola crisis or terror attacks) that may not impact their business directly. There will always be instances of volatility and unpredictability, but instead of overhauling the company’s long-term strategies, management should rather adjust their short-term plans to deal with these disruptions.

5. A standard approach to market prioritisation will suffice in sub-Saharan Africa

Many types of industry-specific data don’t really exist in sub-Saharan Africa, making it difficult for companies to pick the right markets to invest in.

“Let’s assume you want to sell toothbrushes in a market. Even if you would have data that shows you how many toothbrushes are currently being sold… this data wouldn’t give you an indication of how many more people will start to use toothbrushes as consumers get more health aware and start to use toothbrushes more regularly,” explains Rosenberg.

“So the market size in sub-Saharan Africa is not only about what is currently being sold, but about the market potential that you can create for your business. So as a result it is critical that companies combine macroeconomic indicators with proxy data… and most importantly, and I can’t stress this enough, qualitative insights.”

6. Relying solely on distributors is a sustainable Africa strategy

For many executives it is common practice to first test the market potential through a distributor before committing significant resources. But the problem with this strategy, according to Rosenberg, is that it can only be effective for a short period because when it comes to opaque markets, local insights could make the difference between success and failure.

Companies need to have feet on the ground in their most critical African markets. Local representatives need to foster and manage close relationships with distributors, which can lead to better treatment of a company’s products and more effective service from them overall.

Another benefit from having local representatives is that it demonstrates market commitment, and as a result the company gains customer loyalty. Having local teams in sub-Saharan Africa also means companies can respond more rapidly to changing market realities.

7. South Africa is the natural hub from which to manage a sub-Saharan Africa business

Many multinationals base their African head office in South Africa. But Rosenberg says this is not always the best strategy as South Africa is relatively far from the most important markets in sub-Saharan Africa. In terms of kilometres, London is nearly as far away from Nigeria, as Nigeria is from South Africa.

She suggests, instead of defaulting to South Africa as a sub-Saharan business hub, companies must ask themselves: ‘Where do we need to be local’. “And generally companies need to be much closer to their priority markets if they want to sell locally. So if you want to sell into Nigeria, forget about South Africa, you need to be there. If you want to be in Kenya, you need to be there, you can’t do that via South Africa.”