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EXECUTIVES who follow a “capabilities-driven strategy” make their companies more coherent and gain competitive advantage in African markets where they decide to expand operations, according to a recent research report by audit and accounting firm, PwC.
In simple terms, the concept of capability-driven strategy entails that external market positioning or internal capabilities are not enough to create a company’s right to win.
But a coherent strategy that aligns them at every level is essential. Only a coherent company — one that pursues a clear strategic direction, builds a system of differentiating capabilities consistent with that direction, and sells products and services that thrive within that system — can reliably and sustainably outpace competitors.
According to the report titled “Creating Value in Africa”, the right strategy can transform a company while delivering substantially superior shareholder returns in the long-term.
“In our discussions with the executives leading expansion activities at major African companies, we were pleased to find a number of companies across a broad range of industries were already using a kind of capabilities-based thinking to great effect in the planning and execution of their Africa expansions,” Mr Jorge Camarate, partner at PwC said.
“Worldwide, multinational companies are including plans to expand across Africa in their growth strategies. CEOs throughout Africa have unanimously confirmed that they see high growth potential on the continent, according to research by PwC.
“This confidence is an indication of the positive long-term trajectory we have seen in general economic prospects, availability of finance, and the increasing presence of potential local and international partners attracted by the African continent’s potential.”
Traditionally, firms would formulate a strategy by looking for market opportunities, but all too often have failed to work, particularly, in the African context. The problem is that such strategies rarely acknowledge the capabilities a company needs to capture.
As a result, many of these companies have destroyed value in the process instead of benefitting from growth opportunities, said Mr Camarate.
“We approach strategy the other way round with an approach that we call a ‘capabilities-driven strategy’.”
The report said the value of adopting a capabilities-driven approach to African expansion was demonstrated in an analysis of major expansion deals across Africa between 2007 and 2013. Of the mergers and acquisitions made by companies listed on Johannesburg, Lagos, and Nairobi exchanges, a total of 82 suitable expansion deals were studied.
The deals were divided into three categories:
Leverage: The acquirer applied its current capabilities system to the products and services it purchased.
Enhancement: The acquirer added new capabilities to fill in gaps or respond to market changes.
Limited fit: The acquirer largely ignored capabilities, doing the deal for other reasons, including diversification and control of attractive assets.
According to the results of the analysis, capability deals far outperformed limited fit deals and also often outperformed market benchmarks. Top quartile capability enhancement deals outperformed benchmark by 6,9 percent and capability leverage deals outperformed it by 5,5 percent. Limited fit deals underperformed the benchmark by 3,7 percent.
This analysis also provides interesting comparisons between Africa and industrialised economies, in particular the US. In the US, leverage deals outperform enhancement deals on average. However, in Africa, enhancement deals perform best.
African markets are so diverse that enhancements to the existing capabilities system are often necessary to thrive in a new geography.
“Companies are faced with a complex dilemma when determining which markets they should enter, and the capabilities required in each market to ensure success,” Mr Peter Hoijtink, PwC Strategy and Associate Director said.
“Although detailed on-the-ground study of each market is ultimately necessary, our experience suggests that a good way to start is by studying a market’s wealth (measured by GDP per capita) and institutional quality (measured by the World Bank Doing Business Index).
Based on these criteria and how the two are combined, African countries fall into six market types: high, medium and low income, with either strong or weak institutions. Each of these types requires companies to have different capabilities to succeed.
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