Turning African National Corporations into Global Brands

Following the dramatic failure of major state backed companies in Africa and more recently in Kenya such as Kenya Airways, Mumias Sugar, Kenya Railways etc there has been raging debate whether state backed companies can really succeed.

In this article we are going to map out what it takes for a state owned organization from not only being a national champion but becoming a global brand.
It is possible for state backed companies to succeed and there are success stories such as Airbus, Michelin, Samsung, Singapore Airlines, Volkswagen and LG all of which started as national champions, companies supported by state governments at a time when their home countries were emerging or recovering from the economic ravages of war.

Despite their ubiquity, many national champions have historically, from a financial perspective, performed poorly.

What we must realize is that for every success, there are always multiple failures. Most of these state owned companies tend to succeed in quasi-monopolistic industries like energy and utilities, but rarely in hypercompetitive business to consumer industries such as consumer electronics or packaged goods. Beyond financial failure, most national champions fall short on brand-building.

Various experts have called the policy of bolstering national champions “a boulevard of broken dreams”, but we take a divergent view.

We believe that a state can successfully incubate national champions into global brands in consumer markets, provided that the government leaders consider these three conditions: community, competition and company.

A). Community

The state can play a positive role in the business community, such that it helps to launch healthy national champions that develop global capabilities. Here are the necessary traits.

1-       Competent, not corrupt

State capitalism works well only when directed by a competent state, and not by one mired in corruption.

Competency simply means a state that operates consistently and predictably, that is, with openness, accountability and honesty in decision-making and action-taking, and manned by highly educated bureaucrats who have to pass rigorous exams.

East-Asian countries have a decided advantage over other emerging markets on this front because of their strong mandarin culture and long history of a reasonably well-organised, highly educated state bureaucracy.

This is a stark contrast to African economies which have neither a comparable cultural tradition nor a history of impartial courts and the rule of law to counter the arbitrariness of the state.

2-      Supportive, not directive

The state should support rather than direct business activities. The state should set up economic and knowledge infrastructures in which national champions can seed and flourish.

Economic infrastructure basically means a market mechanism that protects national champions for a short time against foreign encroachment, subsidies R&D, and finances state purchases.

Knowledge infrastructure means a rigorous primary and secondary education system for all citizens, both vocational and university options, and ongoing job training programmes.

For national champions to compete globally on quality rather than price, the state must cultivate scientists, technologists and engineers to conduct first-rate R&D.

EXAMPLE Brazil recently took the initiative to improve its knowledge infrastructure. By the end of 2015, it will have sent more than 100,000 Brazilians, half of them undergraduates, half graduate students, abroad for a year to study such subjects as biotechnology, ocean science and petroleum engineering that the government regards as essential for the nation’s future as a manufacturing power. The initiative will cost $1.65 billion, a quarter of which will come from business and the rest from the state.

3-      Minority, not majority, shareholder

If the state hold shares in the national champion, it should hold few.

The minority-shareholder model, pioneered in Brazil, has been called, by The Economist, “one of the sharpest new tools in the statecapitalist toolbox”. It limits the state’s ability to use national champions for rewarding clients or pursuing social policies.

Private shareholders have just enough power to insist on greater fiscal and operational efficiency and managerial effectiveness.

4-      Temporary and conditional, not permanent and unlimited, protection

State support must be short term and conditional on market performance.

Without clear limits on the duration and the nature of state support, the company will never learn to compete. Market-based performance metrics force the company to focus on its customers as well as its bureaucratic owners.

Any company supported by the state through bail outs and strong protection will show high market share, good return on investment etc.
A more useful metric is customer satisfaction, for which validated measurement instruments exist. If the state applies such market-based measures, it will spot the national champion’s failure to deliver desirable goods and services much earlier. After all, satisfying customers in the home market is a conditio sine qua non to compete for consumers in the global arena.

B-Competition

Just like football teams in any national League improve by playing each week against strong rivals, firms sharpen their skills by competing both in their home market and abroad.

1-      Home-market rivalry, not quasi-monopoly

If the national champion enjoys a quasi-monopoly in the home market, it does not learn to stand on its merits.

Monopolies breed complacency and stifle innovation. Given its protected position, the company lacks incentive to develop innovative capabilities or to listen to the voice of the consumer. Such companies stand little chance outside their home market.

The national champion must face competition from other firms, including cutting-edge international firms on its home turf. And this competition should be fierce, not token, relegated to a niche.

The government should encourage foreign competitors to put the national champion on edge. In the short term, the absence of competition may make the industry more attractive; but in the long run, more rivalry in one’s home market puts pressure on national champions to innovate, improve and move beyond basic advantages that the home country may enjoy, such as low factor costs. After cutting their teeth at home, national champions should take their brands abroad.

2-       Foreign, not just domestic, markets

The trend toward globalisation is very powerful, if not unstoppable. Industry boundaries no longer stop at national borders, and competition intensifies in industry after industry.

Even national champions can no longer hide behind high tariff walls that work in the short run but hobble the champion in the longer run. They must go global, and the earlier the national champion faces the rigours of global competition, the sooner it will adapt its operations and adopt a customer-based brand-building approach.

C-Company

The successful national champion should possess certain key characteristics to build strong consumer brands. Three traits stand out.

1-      Market, not product/political, orientation

Too often, national champions focus on output (product-orientation) or on the government political orientation).

Many experts are of the opinion that it is very difficult for a government to run any service sector business. For government employees, they are the kings; the customer is never the king.

That’s ingrained.” While this focus may serve a company without global ambitions, it is a handicap to the development of successful global brands and world-class service.

The primary, if not sole, orientation of the B2C Company should be toward the needs of the consumer. Which segment should we target? How can our brand serve this segment effectively using our marketing mix — our brand positioning, product assortment, pricing and promotion strategy, and distribution channels?

If market orientation does not guide the company’s thinking, developing a brand will be difficult, because configuring the marketing mix depends on the needs and characteristics of the target segment. After all, strong brands originate in the minds of the consumer.

Consumers love strong brands because they fulfill important needs: functional needs (what does it do for me or help me to do?), emotional needs (how does it make me feel?) and self-expressive needs (what does it say about me?). Numerous studies have shown that strong brands command higher consumer loyalty, reduced price sensitivity, higher advertising effectiveness and greater trade leverage. But these benefits accrue to the firm only because the brand stands for something and delivers something that the target consumer group values.

2-       Business executives, not political appointments

While it is unavoidable that there are ties between the national champion and the government, this can easily result in the C-suite being filled by political appointments, bureaucrats rather than businessmen and entrepreneurs.

It should be noted that enterprise senior executives enter the government for policies and resources, while governmental officials enter enterprises to materialise their economic profits earned while in the position.

Government officials have little incentive to develop their companies’ brands despite having access to vast resources and political pull, since their career is tied to the state, not to the vagaries of the marketplace.

The politics of patronage often dictate the appointments of top managers in state-controlled or quasi state companies with inevitable disturbing results.

3-      Worldwide learning, not home market, knows best

To succeed in developed markets, national champions must develop an organisational capacity for worldwide learning, rather than adopting a home-centric view of the world.