Africa and Innovation

Home to 1.2 of the world’s seven billion people, Africa has long captured the imagination of both business and political leaders because of its massive growth potential. Until now, however, this growth has been more of a promise than reality, borne out by the fact that several of the world’s leading companies–including Coca Cola, Nestle, Barclays, and many others–have significantly scaled back or altogether withdrawn from doing business in Africa. But, according to a recent article in the Harvard Business Review written by Clayton M. Christensen, Efosa Ojomo, and Derek van Bever, new innovations may help bring the promise of Africa’s spectacular growth to fruition.

In most developing economies, investors and entrepreneurs chase after growing middle classes as the target market for their goods and services. Many leaders hoped that this would prove true in Africa and that the continent would provide a repeat of the Asian “tiger economies” of the late twentieth century, but as the authors point out, Africa’s middle class never really developed. As a result, large multinational corporations seeking to do business in Africa pinned their hopes on a demographic that simply wasn’t there, thus setting them up for inevitable losses. Aside from an anemic middle class, the authors also noted that corruption, skills shortages, and a lack of reliable infrastructure constituted other barriers to growth.

However, rather than wait for a middle class to arrive, business can succeed in Africa by looking to the needs of the “aspiring poor.” The idea that multinational corporations should practice an “inclusive capitalism” that focuses on aspiring poor communities in emerging markets rather than middle classes in established markets first appeared in C.K. Prahalad and Stuart Hart’s 2002 article, “The Fortune at the Bottom of the Pyramid.” Christensen, Ojomo, and van Bever invoke these ideas in their discussion of Africa to point out that business can focus on catering to the needs of the continent’s aspiring poor in order to create new markets instead of pursuing non-existent middle classes.

As a case study for this proposition, Christensen, Ojomo, and van Bever focus on Tolaram, an Indonesian conglomerate that operates in Nigeria and sells the wildly popular Indomie brand of instant noodles. Tolaram opted to market a product toward Nigeria’s aspiring poor through their line of low-cost noodles that are affordable, easy to make, and nutritious. In order to keep costs low, the company “internalizes the risks” of doing business in an emerging market, such as incorporating electricity and water production into its operations, buying a fleet of trucks to transport its product, and more. Today, Tolaram and its Indomie noodles are ubiquitous in Nigeria, indicating that foreign corporations can enjoy success in African markets if they introduce innovative, adaptable strategies for growth.

Of course, investment in Africa will not come without its share of costs and challenges. But as companies like Tolaram prove, for foreign entrepreneurs who are willing to focus their attention on Africa’s aspiring poor, growth and success on the continent are possible.

The Importance of Strategic Edge in Private Equity

The private equity (PE) asset class has prospered in recent years, but as Bain & Company notes in its 2016 Global Private Equity Report, this may not be the case for long. In light of decreasing GDP growth around the world as well as other factors, investors anticipate that the double-digit gains that have become familiar over the course of the last four years may become a thing of the past. In fact, Bain predicts that the industry will settle at a “new normal” marked by positive cash flows but returns that are less stellar than those of the recent past.

If these claims are true and the industry is about to return to a resting point, then PE firms need to devote renewed attention to strategy. Fund managers should develop ways that their firm can remain successful and competitive in the changing PE landscape, Bain argues, by emphasizing their ambitions and strengths to create a “repeatable model” for strong investment. And since it takes time to implement a successful strategy, PE firms need to start now.

According to Bain, PE strategy should begin with a firm’s stated ambitions or visions of future successes. The next layer of strategy is to develop concrete goals and action items that allow firms to realize their ambitions. Lastly, a firm should look to hire a talented team of professionals to put this strategy in motion. In the report, Bain suggests three areas where a firm can hone its strategic investments: taking advantage of its “investment sweet spot,” identifying thematic insights, and mobilizing talent and resources.

Bain also asserts that PE firms’ strategies should emphasize repeatable results. As the PE environment continues to change in response to new trends, such as a preference for larger firms by investors, strategies need to be able to adapt and ensure steady, consistent returns even as the market evolves. Firms will need to be able to communicate the repeatable nature of their strategy to potential investors, so in addition to being ambition-oriented and repeatable, PE firms’ strategies should also be easy to articulate to clients.

To read Bain’s full report, click here.