Companies that adopt a capabilities-driven strategy will gain a competitive edge in African markets - Study

Executives that follow a capabilities - driven strategy will make their companies more coherent and gain a competitive advantage in the African markets where they have decided to expand their operations.

The right strategy can transform a company and its industry, delivering substantially superior shareholder returns in the long-term. These are some of the highlights of a new study, ‘Creating value in Africa’, released yesterday by Strategy&, PwC’s strategy consulting capability based in Africa.

Jorge Camarate, Strategy& Partner, says: “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 conducted 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 formulate a strategy by looking for market opportunities, but all too often it does not work, particularly in the African context. The problem is that such strategies rarely acknowledge the capabilities a company needs to capture those opportunities. As a result, many of these companies have destroyed value in the process instead of benefitting from growth opportunities, comments Camarate. “We approach strategy the other way round with an approach that we call a ‘capabilities-driven strategy’”.


A capabilities-driven strategy (CDS)

A firm’s first priority when setting strategy should be to understand its own differentiating capabilities and how they work together. In simple terms, a capability is the combination of people (knowledge, skills, and behaviours), process, organisation and tools and systems which allow you to do something of value. Capabilities tend to work together in systems of three to six mutually reinforcing, distinctive capabilities that are organised to support and drive the company’s strategy.

“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 that were already using a kind of capabilities-based thinking to great effect in the planning and execution of their Africa expansions,” adds Camarate.

The value of adopting a CDS strategy

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 (M&A) made by companies listed on the Johannesburg, Lagos, and Nairobi exchanges, a total of 82 suitable expansion deals were studied.

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 outperform limited fit deals and also often outperform market benchmarks. Top quartile capability enhancement deals outperformed benchmark by 6.9% and capability leverage deals outperform it by 5.5%, while limited fit deals underperformed the benchmark by 3.7%.

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.