Reviewing of strategies

SA business urged to review strategies before expanding into Africa

Michelle Sprackett, Partner at PSP Icon

With its abundance of natural resources, influx of foreign investment, as well as a young and fast-growing population, Africa is increasingly being touted as the next frontier for many South African-based businesses looking to expand.

Michelle Sprackett, Partner at PSP Icon, a leading national management consultancy, says that expanding into Africa can be lucrative, but it is crucial that local businesses understand the importance of implementing effective Africa expansion strategies in order to ensure success.

“From the outset you need to conduct sufficient market research, as what appeals in SA and what appeals elsewhere on the continent are not necessarily the same. Africa is not one country and there is no ‘one size fits all’ approach.

“Also, never underestimate the customer. The days of Africa being the dumping ground for poor quality goods is past. The growing African middle class is well informed and expects quality, which presents significant opportunities to companies serving the consumer market,” says Sprackett.

According to the International Monetary Fund’s (IMF)six African economies were in the top 10 fastest growing economies between 2001 and 2010. “The IMF also found that economic activity on the continent is projected to expand by about 5% in 2012 and 2013, a similar pace to that observed in 2010 to 2011.”

Sprackett explains that in order to gear a business strategy to take advantage of increased economic activity, it is crucial to gain an understanding of the challenges that exist on the continent. “There is almost unanimous agreement that political risk associated with political instability and corruption are some of the major challenges to greater business confidence in Africa.

“The policy environment in many African countries does not always provide the stability and guarantees that SA businesses require to make strategic long-term commitments. For these reasons - it is advisable to consider cover for risk against currency fluctuations and not getting paid, as well as considering political risk insurance.”

Sprackett recommends spending a significant portion of time in a country targeted for possible entry. “This allows you to gain first-hand experience of the environment, establish stronger relationships and a credible network with key role players in a specific country.

“If you are thinking about trying to run your African business from the comfort of your own country your chances of success are greatly diminished.”

On building a reliable work force, she advises hiring locally, as the more local employees contracted, the better chance a business has in integrating into African society and the more highly it will be regarded by the authorities, as well as potential clients.

According to Sprackett risks hindering expansion into Africa include currency fluctuations, poor infrastructure, a small skilled workforce and shortage of finance. “High import tariffs, lack of investment incentives and a lack of security of assets also contribute to the expense of doing business in Africa.”

She says that despite these challenges there are SA companies that are successfully exporting their local strategies throughout Africa.  “For example, from a retail perspective, Shoprite currently operates in 17 African countries outside of South Africa and has opened 20 stores in several African countries since November last year.”

A recent study by Rand Merchant Bank (RMB) reveals SA companies are active in all of Africa’s 54 countries, with 40 or more operating in 13 countries, up from the same number in only six countries in 2006.

“Clearly there are opportunities and successes to be had with the right kind of preparation and expansion strategy. Also, remember to always take a long-term view as things do not happen quickly in Africa,” concludes Sprackett.

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