Why do multinationals struggle to take on local firms in Africa?

International companies hoping for success in the African market must be prepared to be invested for the long haul.

While Africa will remain a volatile region, for the time being, multinationals must have the longevity to stay the course, rather than being opportunistic and only investing when times are good. Persistence and patience will be handsomely rewarded, Adam Ikdal, managing partner of the Boston Consulting Groups South Africa bureau, told a recent Gordon Institute of Business Science forum.

Discussing the many challenges multinational companies face when entering African markets, Ikdal said that in the current volatile economic environment, companies with the persistence to withstand short-term challenges would eventually win ground and market share.

Africa was firmly on the agenda of multinational firms looking for returns, partner and managing director at Boston Consulting Group, Euvin Naidoo, explained. However, Africa was no longer decoupled from the global economy and was experiencing the same volatility and sense of crisis.

Nobody knows how long the cycle is going to last, and the related political instability, budget issues and social crises, he said.

But even in a crisis, the continent held up well, Ikdal said, as its fundamental drivers remained. These included a growing middle class, increasing political stability, improved governance, the availability of skilled labour and increasing demand.

Africa is and will continue to be one of the worlds fastest-growing economic hubs, he said.

Many international firms operating on the continent find that although they are growing their businesses, their brands are struggling to dominate African markets. The challenge posed by local players is the primary reason multinational players find it difficult to take market share because strong local firms are far more effective at securing business and already have established positions in many of their home markets and across the continent.

Ikdal named firms such as Nigerian manufacturing conglomerate Dangote, low-cost food retailer Shoprite, information technology services group Dimension Data, financial services firm Discovery and global brewer SABMiller as some of these African lions whom multinationals consider as a major threat to their operations. These local firms outperform multinationals in Africa due largely to their focus and flexibility.

As emerging markets are these companies core markets, they tend to allocate their resources and investment capacity accordingly. By being present in the field and understanding the ecosystem they operate in, they are able to make decisions at a local level and offerings are tailored to the home context. Flexibility means local firms are alert to changes and can adapt their processes. Ikdal explained that many multinationals still tend to think of Africa as one place and as a result, dont respect regional and local differences.

Multinationals underestimate the size of local markets due to the poor quality of their data and outdated information, he said. The notion of Africa as a single entity still remains, Naidoo said. Operating in emerging markets needs an astute mind as the local context is very important. Professor Lyal White, director of the Centre for Dynamic Markets at Gibs said many firms looking to set up operations in Africa had expected rapid gains. Investing in Africa is a long game. You need to become part of the community and more than just another multinational.

In order to do this and to compete with local giants, multinational firms need to leverage off their unique strengths and find other ways of differentiating themselves, Ikdal said. One of their distinctive strengths is strong brand positions, both with consumers and in capital markets. Multinationals can leverage this position and also use it to create local partnerships, he suggested.

Other tactics include opening regional offices in Africa that report directly to global headquarters. Ikdal said that this, along with hiring local people and giving them increased independence and decision-making power, has the effect of elevating the importance and dignity of the continent.

Those companies who will perform best under current market conditions are those who are able to utilise the softer cultural aspects of management, Ikdal concluded, by simplifying their organisations working across silos and trusting people to make decisions by giving them autonomy.

Source: City Press (2016) Why do multinationals struggle to take on local firms in Africa? [online]. Available from: https://www.news24.com/citypress/Business/why-do-multinationals-struggle-to-take-on-local-firms-in-africa-20160318 [Accessed on: 28 March 2022]

Question 1 The case study states several risks. Answer the questions below. Response should not exceed 2 pages 1.1 Propose and discuss at least 5 major risks and their respective categories for the multinationals who want to invest in South Africa? (15 marks) 1.2 What will be your recommendations to the multinationals for each of the risks identified? (10 marks)