Multinational Environment

In the last 10 years, several multinational organizations have attempted to penetrate the African market in search of growth. Kenya in particular, has been an attractive hub for a number of multinationals looking to operate in East Africa, the reasons often cited for this are the relative strength of its economy, advanced infrastructure and a strategic geographic location. A look at the performance of these entities over the last five years shows an occurrence of certain themes. Cost cutting due to increasing operational expenditure, restructuring to respond to market dynamics and over estimation of the size of the regions middle class.  Since 2014 to date, Nestle, Cadbury, Eveready, Tata Chemicals and Coca-Cola have retrenched more than 800 workers in East Africa to achieve their profit targets.

Perhaps, some of these reasons contribute to the limited success of multinationals in East Africa. However, such factors are related to the operating environment of these organizations. There are various internal factors that greatly contribute to the failure of multinationals, more than they would dare to admit. With our advisory work across the multinational landscape, we highlight three key internal factors: building new, locally relevant brand assets and competencies, creating a strategy to support structure and failure to harness local talent.

Building new, locally relevant brand assets and competencies

Multinationals tend to approach the East African market with pre-existing brands and competencies, which lead to establishing operations in a predetermined manner. In many instances, they miss the mark with this strategy and struggle to remain competitive. In 2015, a leading global manufacturer that restructured its operations by shutting down its Uganda and Rwanda operations and laying off approximately 50 workers in Kenya, had already incurred massive losses in product expiries in the entire region. This severely impacted its bottom line creating pressure to cut costs hence the restructuring, which in effect was only treating symptoms because to date, this organization has struggled to achieve its sales and profit goals.

Multinational organizations come with their brand names and products, value chain activities and mission and objectives. It would appear that there is no appreciation of the uniqueness of each of these markets and consumers -  in case this recognition is present, it is astoundingly disregarded by those responsible for making decisions. Any business venturing into unfamiliar territory must begin with careful analysis of the target market, taking time to understand buying patterns and behaviour whilst determining whether its value proposition is fitting.  When multinationals enter East Africa, they readily transfer an existing value proposition based on their judgement of what “has” worked, leading to dire consequences.

Hence, one ponders if multi-nationals are committed to growing their businesses in the region and if so, are they patient enough to approach the market from ground zero? Concurrently, will they salvage using what they have and get as much return as possible on investments in the region while they can ‘survive’?  These are organizations that have grown their businesses and brands over decades in their markets of origin and other markets across the globe. They have had considerable success in overseas markets because of their level of commitment to build robust and sustainable businesses based on the needs of those respective markets. This is the same level of commitment they need to exhibit to succeed in East Africa.

Operational Set-Up

The second success limiting factor is the failure to structure their businesses in a way that facilitates quick decision making by empowering local teams. Multinationals will mostly attempt to optimize their structure for the three East African markets, namely Kenya, Tanzania and Uganda.

A commonality is multinationals setting up headquarters in Nairobi, where all key functions sit to coordinate execution in these markets. For example, in Uganda and Tanzania, a small representative team or an individual will be attached to the distributor or marketing agency with a mandate to oversee execution of strategy.

Unfortunately, most of the times, this structure has fallen short of expectations. Agreed that the East African markets have considerable similarities, but are also unique and it may not be prudent to only tweak a few elements of the strategy in Kenya for replication in other markets.  A popular fast food chain operating through a franchisee in Kenya, Uganda, Tanzania has faced challenges in optimizing its menu for each market and balancing standardization with localization. The operation is set up to run the same way in each country, however the consumer in Kenya and the consumer in Uganda have totally different expectations and needs that the business must consistently meet to sustain growth in these respective markets.

Many a time, decision-making is lethargic, due to the existence of a layer of management above the head office which must sign off on some key decisions. When strategies don’t produce results, there is panic and confusion over who exactly is responsible as opposed to "why", which leads to quick-fix short term solutions like price cuts and promotions to achieve the committed sales numbers. In 2014, a Swiss based coffee manufacturer with regional headquarters in Nairobi attempted to take its coffee brand to the low-income segment by introducing a single serve pack for the East African market. This was a blanket decision adapted for Uganda, Tanzania and Kenya. With an extremely poor offtake of the pack, expiry losses worth millions were registered by the company’s distributors in all three markets.

Nurturing Local Talent

Thirdly, multinationals are traditionally diverse in work force and it is often the case that top management positions in East Africa are predominantly filled with expatriates. These are managers with a wealth of experience but seldom in East Africa. Furthermore, these individuals are given responsibility of building strong brands in the region, if at all this is the objective.

Expatriate managers use their prior experience in the company or similar market segment of a different location, as a basis of making decisions. This makes it unlikely for them to be drivers of constructive change in their organizations or view the business from a different perspective.  Recalling the comments of an expatriate CEO of a multinational that relieved close to 100 workers in 2015, “We thought this would be the next Asia, but we have realised the middle class here in the region is extremely small and it is not really growing as we expected.”  These are expectations that turn out to be the basis of their strategy and the reason for poor performance in innovation and sales growth.

More importantly, this will shape the organizational culture to conform to pre-set values and standards. The stage for local talent to shine is automatically dismantled, a system of ‘fit in’ is created for employees to oblige and retain jobs. This creates job dissatisfaction, frustration and at worse - kills innovation and productivity.

The Way Forward

A wide array of factors will determine success for multinationals in the East African region. However, to succeed, a business must build an internal capability of progressive learning of consumers, strategically structure their businesses with a long-term ambition to sustainably grow and harness local talent towards a clearly defined vision. A fluid business structure coupled with the “right” people providing market intelligence and understanding consumer behaviour, will ensure business longevity.