International Business & African SME’s

Whenever most people hear of the term International business, companies such as Coca Cola, KFC, Pepsi ,Toyota, Eco Bank etc comes to mind.

Very few startup companies or SME’S in Africa ever consciously  develop an international business strategy in their business model, some enter international markets accidentally or some do not even realize they are in that market space.

The rule of thumb is that a company has to grow organically in-country for some time before they can explore other markets.

The question an entrepreneur needs to ask is,“ what would happen when a company from another country whom I did not consider my competition sets up shop in my home country?’’.

It is said that attack is the best defense. It goes without saying that Africa is the next business frontier and so many companies are eyeing Africa for business expansion. What is to happen to indigenous companies who are ill prepared for the onslaught? Well fear not. Let us briefly understand what international business is all about.

In the past complex international transactions were the domain of diplomats and international policy and business experts. Today a converging set of powerful economic, technological, demographic and geopolitical trends will demand that all citizens not just the elite have that kind of global fluency. Knowledge of the world is no longer a luxury but a necessity.

Let us debunk a few terms

International Business-This is basically a business whose activities are carried out across national borders.

Multi Domestic Company (MDC) – An organization with multicountry affiliates, each of which formulates its own business strategy based on perceived market differences.

Global Company-An organization that attempts to standardize and integrate operations worldwide in most or all functional areas

Globalization-Tendency towards an international integration of goods, technology, information, labor and capital or the process of making this integration happen

Wait a minute, what are the main Drivers of Globalization if I may ask?

Politics

Notice there is a trend toward the unification and socialization of the global community e.g. PTA, EU, EAC that group several nations into a single market have presented companies with significant market opportunities

Technology

Advances in IT are permitting an increased flow of ideas and information across borders enabling customers to learn about foreign goods
Market

As companies globalize they also become global customers as suppliers follow them

Cost

Global companies are moving their operations to jurisdiction where there is cheap labor, raw materials and low tax.
Competition

As we said earlier attack is the best defense as companies are moving to new markets to distract others from coming to home market.

Now that we have an understanding of what international business entails let us explore avenues SME’s in Africa can explore to cope with globalization and international business.

There are basically four strategies of going abroad:

• Import/Export
• License agreements/licensing
• Joint Ventures
• Direct Investment

Let us look at each and see their advantage and disadvantage. The idea here is for entrepreneurs to evaluate each option and decide based on their capability which one to explore either singly or jointly.

Import/Export

Importing is the buying of goods and services for use by a foreign company while exporting is selling of goods and services to customers in a foreign country. Many SME’s in Africa trade using this model and has caused great completion to foreign companies although little value is gained.

It is worth noting that over the last century; most African organizations have been exporting raw materials (Which are very cheap compared to the final processed product) and importing finished products (which are very expensive) leading to the perennial negative balance of trade to African countries.

SME’s urgently need to address this issue by ensuring that Raw materials of any nature be it tea, coffee, hide are processed in-county and sold as branded finished products.

Let us look into the major advantages of exporting;

It requires less investment to a company, It is the quickest way of going abroad, involves very little risk due to the existence of experienced and knowledgeable middle men.

Similarly exporting has its disadvantages;

The company is always at the mercy of the middle men (exporter) who make the decision to market a product, the company does not get exclusive goodwill or loyalty as the middlemen deal with many producers and in case of any goodwill the beneficiary is usually the middlemen and finally it can be costly due to the taxes involved such as duty.

Licensing

A license is a right granted by one company to another to use its brand name and products specifications on the same of goods and services.

A license agreement is a commercial contract whereby the licensor gives something of value to a licensee in exchange for certain performance and payments

What are its advantages?

It requires little investment; it is a means of introducing a product or service quickly to many countries, it enables entry into markets that would otherwise be difficult to enter due to tariffs, government attitude and policies.

Similarly it has its disadvantages such as;

Revenues from licenses are generally low, legal frameworks in most African countries are to weak to enforce licenses in case of disputes and finally there is always the danger of that you may be establishing a future competitor.

Joint Venture

This is an agreement between two or more often competing companies join forces for the manufacturing, financing and marketing purposes. Each of them has a share in the management and equity of the business forming the joint venture.

Licensing, franchising and contract manufacturing are a loose form of joint venture.

This great alternative for companies that seek to buy or build a wholly owned manufacturing operation and offer a significant advantage.

It is therefore very important that African SME’s take advantage of globalization through a well planned international business strategy.