Entering the Sub-Saharan African Market: The Main Challenges and Ways to Overcome Them

Sub-Saharan Africa (SSA) is increasingly an attractive destination for foreign companies seeking ways in which to grow. Between 2005 and 2010, the region recorded an average annual gross domestic product (GDP) growth of 5.0 per cent (global average: 2.3 per cent; European Union: 0.9 per cent). Over the same period, foreign direct investment inflows grew from $19.5 billion to $26.1 billion1. Despite this, expansion into SSA remains a complex decision to make and execute for foreign companies. Doing business in the region presents major challenges that must be carefully considered.

For foreign companies, conducting business in SSA is challenging or at least different to what they are used to seeing in other regions. Rules and behaviour are different: from organising operations to dealing with business partners; from knowing customers to defining the best way to satisfy them; from understanding the macro environment to defining the approach to fit in. To succeed, new entrants usually adapt or constantly readjust their business approach throughout the process.

Cradlefin Consultants has conducted several consulting projects and developed research services in SSA for leading international players in various industries. These engagements have led us to identify the main challenges in entering the region. Learning can be organised around three areas that are complementary and closely interlinked.

Operational Challenges

Operational challenges are all elements that can directly impact the company value chain: both at primary and support activities levels. Where to source? How to produce? How to distribute? These are the top operational concerns. It is very challenging for many companies to find the right business partners along the value chain.

Finding a reliable partner with an appropriate mix of product-quality and professionalism in business is not always easy. In addition to the competency level, which is perceived as ‘low’, contract enforcement efficiency is a major restraint. Across the region, it costs, on an average, 50 per cent of the claim to cover the attorney, court, and enforcement costs (vs. 20 per cent in average for OECD).

On the distribution side, almost half of the total population is very difficult to access, as they live in rural areas where basic infrastructure is inexistent. Finding skilled workers is another pressing issue. While SSA is a highly populated region, education levels remain low. Basic jobs that do not require a high level of skills are easy to fill, but it is less straightforward for highly technical or management positions. Educated people with relevant academic backgrounds are limited by their lack of practical experience. Companies often rely on expatriates or increasingly on African Diasporas in developed countries to fill that gap, but this comes with a cost that is not negligible.

Access to local funding is another major constraint. If your business approach relies on local partners, it might include helping those partners to access local sources of capital. There have been many cases where the lack of availability of local funding has hugely slowed the business expansion, particularly at the distribution level when the company operates with an external network of independent dealers.

Market Challenges

There are two common mistakes that foreign companies make when starting business in SSA: the first is to try to implement identical products or models that succeed in the developed world; the second is to take a one-size-fits-all approach to reach African customers.

Across SSA, varied beliefs and behaviour exist among countries, and large income disparities exist within countries. This leads to very different spending and media consumption habits. Understanding consumer needs and behaviours and consequently adapting your value proposition can be very challenging as a result. In addition to the two traditional indicators used to assess customers (average income and average spend), other critical points to consider include the following:

- Share of rural population: 60 per cent of the population in SSA live in rural areas. Their shopping patterns strongly differ from those in urban areas. They tend to make day-to-day decisions and focus on basic needs, as they have very low and unstable income.

- Lack of reliable data: The prevalence of the informal market and cash transactions in SSA are hurdles that prevent companies from capturing relevant insights that help understand and segment customers in other markets.

- Media exposure: An important point to bear in mind when assessing SSA customer habits. Traditional media, namely television and radio, does not always reach all market segments, as they are limited by weak infrastructure (e.g., access to electricity). Other forms of media with higher penetration (like mobile phones) should be considered.

Environmental Challenges

Environmental challenges include all factors that influence the business environment at a macro/country level. In politically unstable countries, political risk can be a strong restraint to foreign investments. Oil and mining companies are especially concerned by the instability of their contracts in case of political changes, given the huge amount of investment usually required in these industries. However, as most of the previous authoritarian regimes are now emerging democracies, this challenge is expected to lose importance rapidly.

Other environmental challenges include dealing with tax and legal regulations and overcoming the lack of basic infrastructure like public roads, access to electricity, access to clean water, and information and communications technology (ICT). The World Bank announced in its study, Africa’s

Infrastructure: A Time for Transformation (2009), that the poor state of infrastructure in SSA cuts national economic growth by two percentage points every year and reduces productivity by as much as 40 per cent.

How We Made it in Sub-Saharan Africa: Three Moves to Overcome the Region’s Challenges

We have identified some smart moves to overcome these challenges. Our analysis is backed by our research services and growth consulting engagements in Sub-Saharan Africa. We have illustrated each recommendation with strong success stories picked from a diversified industry spectrum. From our analysis, three main recommendations emerge:

Be Creative and Flexible in Your Business Approach

Involve All Stakeholders and Ensure Equitable Rewards to Mitigate Your Risk SSA has always been considered as a region in which it is very difficult to do business. In many cases, our experience shows that people’s perception is worse than the reality in the field. Benchmarking with BRIC countries where the highest share of world foreign direct investments are currently concentrated, we noticed that many SSA countries have a comparable or better business environment than BRIC countries. In the ‘IFC - Doing Business’ report, eight countries in particular emerge, among which four are large markets: Nigeria (population: 167 million), South Africa (50million), Tanzania (43 million) and Kenya (42 million).

Furthermore, over recent years, the business environment has significantly improved in the region. Only eight years ago, relatively little attention was paid to the regulatory environment, but between June 2010 and May 2011, regulatory reforms making it easier to do business were implemented in 36 of 46 economies. That represents 78 per cent of economies in the region, compared with an average of 56 per cent over the previous six years.

The most effective way to minimise environmental challenges – especially for large-scale projects – is to identify all project stakeholders and assess their respective interests. In addition to contractual counterparties and investors, these stakeholders also include governments (both the host and local governments in case they are different), local community groups, opinion leaders, and wellestablished associations or NGOs. Ensuring the active involvement of - and a fair reward for - each of these parties will lead to the smooth development of the project. A good example of effective economic action pursued to mitigate environmental risk was the voluntary move by ArcelorMittal in Liberia in 2007 when the company accepted to re-negotiate its initial 25-year concession for iron ore extraction.

Speaking at the Fortune/Time/CNN Global Forum in Cape Town, the President of Coca-Cola’s South Africa Business Unit, William Egbe, argued that multinationals cannot succeed in Africa without ensuring that the communities in which they do business benefit from and have a significant stake in those businesses. According to Egbe, “You have a much more viable business system when you have partners along the value chain who have a vested interest in the long-term survival of your business because they derive a living from your business system”. He added that engaging the local population helps a business survive through difficult periods.

Ways to Address SSA Challenges

  • Be creative and flexible in your business approach

  • Adapt to Local patterns without losing your DNA

  • Involve all stakeholders and ensure equitable rewards

Operational Challenges

  • Source, produce, and distribute efficiently

  • Find skilled workers

  • Find local funding

Market Challenges

  • Understand customers’ needs and behaviours

  • Adapt your value proposition

  • Sustain your growth

  • Environmental Challenges

  • Compose with fiscal and legal regulations

  • Overcome infrastructure restraints

  • Mitigate political risks

  • Leverage on expatriates

  • Diasporas to develop local competencies

  • Support local partners through training, equipment, or financing

  • Enable employee exchange programmes within the region to catalyse cross-office collaboration and integration

  • Partner with local finance institutions like Microfinance

  • Consider building your own research capabilities/ market intelligence

  • Leverage on mobile phone penetration

  • Avoid “one-size-fits-all” approach

  • Consider new service models and new packaging

  • Go beyond your initial value proposition to satisfy your client

  • Learn from regional success stories

Product affordability is key

  • Consider the option to invest in public infrastructures

  • Involve NGOs, local communities, and opinion leaders whenever possible

  • Work with governments and invest in public relations

  • Consider distribution partnership with well established players

Article by Franck Olivier Sime; Loic Cesbron Lavau and Dr A.P Sikireta 

Contact our team for more information.

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