The one question African CEOs want an answer to - CNBC Africa

The one question African CEOs want an answer to

Financial

by Chris Rolfe, YPO member and director at Christopher Rolfe Advisory 0

Photo: Wikipedia

From Daru to Durban, I often get asked the same questions by African CEOs. “How can I grow my business by 30 per cent year-on-year?” “How do we build a strategy that creates long-term value for shareholders?” In thinking about these questions, I often get the sense that these executives are looking for an answer as short as the question. The answer however is more detailed and complex, and requires time to explain. 

In developing the foundation of the strategy, you need to think about the range of risks that you are prepared to take to achieve this growth strategy outcome. One framework for understanding these risks centers around the core areas of products, customers and markets (markets can either be a geographic market or a new sector). Selling the same product to a new customer, in the same market is typically the least risky strategy to pursue. Since African markets are now growing in commercial terms, and looking to new markets makes sense as the current local advantage plays out to embedded African companies.

Next, you should consider the risks around selling your same product to the same customer, but again in a new market. In doing this analysis, this framework should be unpacked from least risky to most risky strategies and should ideally result in a quantified and qualified set of answers for each strategic option. The most risky strategy for a company to pursue is selling a new product, to a new customer, in a new market. Include diverse teams from within the company; be creative; look at competitor products; review other sectors for ideas.

Let’s assume that you’ve done the analysis using the products/markets/customers framework, and you were unable to come up with a strategy that would result in the desired 30 percent annual growth rates based on moving in new countries and products. What then? This is where further strategic options such as investing in acquisitions, joint ventures, licensing, franchising or investing in innovation need to be considered. Again, be creative and think outside the proverbial box. For example, when looking at joint ventures in Africa, try to identify synergies with other African companies that may even be slightly outside of your orbit as they could assist you deliver your product based on skills they have and you do not. Once you think you’ve got the strategy, test it both internally and externally to get unbiased feedback; don’t set time limits on the process.

Assuming that you have now found the strategy that meets the risk/return profile for the company and has a high probability of success, the next area for consideration is how to finance this new strategy. The simple answer, and one that is often hastily suggested, is to consider current operational cash flows or cash reserves. This approach however, might not be the optimal financing solution for that specific strategy and may negatively impact other areas such as current dividend policies or current interest obligations to bondholders.

The dropdown menu for financing solutions should look something like this, not in any specific order: Raising new equity, raising new debt, supply chain financing (SCF), or existing cash/future cash flows from operations. The only one that has some challenges in the African context is the SCF, as many markets have yet to implement this option.

In doing this quantitative analysis it is important to measure each possible financing solution in actual terms and to run sensitivity analysis against them – using variable rates of interest, actual costs of capital and all fees related to supply chain financing if that’s an option your target market. Do the full range of analysis and do it thoroughly! This will often have a material impact of how the operational strategy plays out and if you are able to build the long-term, sustainable growth strategy for your business that you are looking for. Don’t use a financing model that you have used before as a default – be opened minded; assume higher costs and lower sales initially.

The final area to consider when building out the growth strategy relates to the softer issues of people, culture and management. If your company has been focused in one market segment and one customer type with one product type for ten years, it is often difficult for staff to now think differently beyond these institutionalised norms. Don’t just assume that they will be able to adjust to the new goals, new employees, additional workload and new operational requirements that you are putting on them. Proactively assess the skills they have, and the skills they will require in order to meet the strategic plans.Include human capital specialists in this process; understand your culture; use it as a unique tool.

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