Driving the performance of African businesses

In a GreenTec Capital Africa Foundation and WeeTracker Media report based on data between 2010 and 2018, the average failure rate of African start-ups is 54.20%. Ethiopia tops the league with a 75% failure rate. Behind Ethiopia are Rwanda, Ghana, Zimbabwe, the Democratic Republic of the Congo, Tanzania and Nigeria with failure rates of 75%, 74%, 67%, 67%, 62% and 61% respectively. South Africa with 41.94% shutdown rate tops other African countries in this metric. Nigerian (32.76%), Egypt (29.41%), and Kenya (24.32%) were run-ups in that order. These disappointing figures point to two crucial factors. First, is the strong entrepreneurial drive on the continent. The second is that the environment of business is not fair on the longevity of enterprises in the continent. Consequently, wasted entrepreneurial energy abound.

The unemployment rate in the region remains quite high. As of 2018, youth unemployment in southern Africa was as high as 45.2% and 31.4% in northern Africa. West Africa had an average youth unemployment rate of 12.1%. These statistics show how desperately the continent needs these jobs and the survival of these dying businesses. This unpleasant situation only lays the foundation for future anarchy.

Much of that is evident in the nature and intensity of migration from the continent. Despite the diaspora remittances, which stands as a considerable benefit from the exodus, is the more significant economic losses to the continent through brain drain. For instance, unofficial estimates put the number of Nigerian medical doctors that are currently practising in the United States at more than 6,500. Extrapolating the statistics for all African countries, various professions and all possible destinations across the globe will present a sadder picture of the extent of human resources loss. Yet, at home, we lack qualified medical practitioners. UNCTAD publication on Migration for Structural Transformation showed that in 2010 the share of South African emigrants in highly skilled occupations in the destination countries was 29.9%. For Zimbabwe (2015) it was 14.7%. Ethiopia (2014) was 11.9%.

These unwanted trends can be reversed or considerably minimized if the governments of African countries can concertedly fight against three dreadful and interconnected monsters that are the culprits. The first is reducing the costs of doing business. The second is strategically and sensibly swallowing the neoliberal pills of liberalization and globalization. The third is elevating the levels of performance management, in public and private sectors of their economies.

Africa is below the global average in the ease of doing business. In 2020, sub-Saharan Africa scored an average of 51.8 against the worldwide average of 63. The OECD high-income economy, on the other hand, scored an average of 78.4. Doing business in Africa is unarguably tough. In some sense, it is an appropriate crucible measuring the apparent resilience of the African entrepreneur who against all the odds, continues to survive. Nevertheless, the numerous reform improvements achieved by African countries in the ease of doing business testify further to the rising commitment to change that status quo. In the 2020 ease of doing business ranking, many African countries recorded tremendous improvements relative to their previous positions in the preceding years.

The prosperity of African businesses is mostly hurt by constrained access to finance as well as electricity. These are the leading cost drivers. Fund providers and business people hold shared mistrust for each other. The former has reservations about the willingness and capability of the latter to fulfil the promises of repaying borrowed funds. Sometimes they are also apprehensive of the latter operating the businesses in line with the terms of the accessed finance. These apprehensions eventually feed into the cost of the funds and the demand for challenging collateralization conditions.

Again, Africa’s apparent economic dependency on other economies is traceable to the globalization and liberalization pills their leaders swallow without questioning. The African entrepreneur suffers as a consequence. The comparative advantage theory, which currently underscores international trade and exchanges can only guarantee the perpetuation of the continent in the production and export of primary products leaving those sophisticated consumables that we badly need for foreign countries only. Unfortunately, because it is the factories in those countries that demand our primary products, they also determine the prices that they will pay for it. So we are stuck unless we shake away that blindfolding theory and systematically engage with the rest of the world in terms that will guarantee maximum benefits to us. For instance, after four decades of blind and wholesale acceptance of the economic globalization and liberalization agenda, the African continent which the Economist Intelligence Unit, reported having contributed more than 3% of global manufacturing output in the 1970s finds it problematic to accomplish 1% of that share. It partly explains the reason for the paucity of big multinational organizations owned by Africans and capable of employing hundreds of thousands of jobseekers.

Entrepreneurs in Africa have their fair share of the blame. It may be right to assume that 95% of African businesses do not benefit from an effective performance management framework. In the absence of a robust system of performance tracking, and disciplined monitoring of the implementation of sound business initiatives, the success of any business would be highly uncertain. Effective performance management ensures that the entrepreneur has a firm hold of the enterprise and effectively drives the performance. This apparent deficiency also partially explains the unacceptable rates of business failures in the continent. The government can, however, lead the pack by enforcing adequate performance management of its programs and projects. That action alone will significantly drop the incidences of government failures which substantially reduce the rates of extraneous factors that are beyond the control of entrepreneurs. Four areas of consideration stand out, namely the efficiency in the provision of public goods. The others are improved and systematic protection of some strategic industries that are pivotal for the growth and development of many other sectors. The third is the articulation and operationalization of home-grown models of growth that entirely takes into account the uniqueness of the African socio-economic environment as well as its phase in developmental evolution.

Robust national development project planning together with a virile legislature set the right foundation for managing the performance of government in the adequate provision of public goods. While the former ensures proper understanding and articulation of the gap in public goods provisioning covering both adequacy and quality, the latter ensures that budgeted funds are judiciously applied to achieve the targets set out in the plan document. It is also essential that such public goods that can best be managed by the private sector are left in their hands accordingly. Together with efficient pro-market policies, the scale of government failures may likely drop.

As should be expected, the national development plan should encompass robust programs to defend some industries that are strategic for the survival and growth of other sectors. African countries should identify those natural resources that are not only vastly in abundance but constitutes the critical ingredients for highly successful industries in other climes and protect them. Erecting highly prohibitive export tariffs may encourage investors in those foreign countries with “the highly successful industries” to develop those industries within Africa. Additionally, the leadership of the African financial system, as well as leading entrepreneurs in the continent, should be encouraged to orchestrate the development of such “successful” industries.

We should also gauge our performance in the design of models that are suitable for our environment. It is ludicrous that we run the economies of our continent based on theories formulated against the social-cultural and economic peculiarities of the Western world. Good examples of such new mind-colonizing approaches comprise the already discussed comparative advantage and market liberalization models. Businesses in Africa face some distinct characteristics that must inform any theoretical model that will deliver enduring positive results. There is no doubt that there are many sound performance management systems out there. However, it is also true that 98% of them do not consider the innate realities of the African business. Consider two of the popular ones, namely the balanced scorecard and the four disciplines of execution. First, both performance management system ignores the most pressing reality faced by enterprises in Africa, which is access to finance. A substantial number of firms in the continent fail not because they cannot implement every other aspect of the recommended steps in the framework, but because they cannot respond speedily to a short-term financing need. Even when they can do so, it might be at such a cost that the compounded effect results in an unmanageable collapse. Secondly, both performance management models fail to recognize the need for proofing or to accredit their concepts against the peculiar socio-economic environment of the African business. The lack of adaptation of some of these concepts and frameworks make it difficult to identify the needed adjustments that would make them serve African companies would better positive outcomes.

Performance management frameworks that will work and deliver the best results for African businesses must take into account five key elements that are at the heart of their survival. The first is the establishment of firm-level targets for easy and secure access to cheap finance. As already mentioned even big businesses in Africa crumble because of cash flow asphyxiation that a thirty-day bridging finance facility can conveniently resolve. The second is the setting of targets for continuous access to on-grid (publicly available) electricity supply or cheaper substitutes such as solar systems, inverters and other local fabrications that generate energy. The third is targets for cheaper raw material substitutes. From experience, it is easier to moderate the cost profile and enhance the competitiveness of many products with a constant review and substitution of the underlying raw material components with cheaper ones. The unrelenting search for affordable and readily available but high-quality raw material substitutes significantly drops the overall costs structure of the products and enhance its price competitiveness. Many performance management frameworks mostly lump together the second and third elements into cost management. Managing the performance of businesses in Africa does not require such lumping together. The fifth is the practical professionalization of enterprises. Tucked into this is both corporate governance targets as well as authentic corporatization of the business. What African companies therefore need is an indigenously developed framework that adequately takes into consideration the challenges of finance, human resources productivity, infrastructure inadequacy, intermediate-input cost management, and accreditation of cocreated strategies. Finally, it is important to stress that disciplined monitoring of the performance of these expected variables is key to the success of this indigenous framework.

Leave a comment