“Know thyself,” the ancients instruct us. Building on that, Shakespeare wrote, “To thine own self be true.” This, for an enterprise, is the essence of a business blueprint.

A successful MSME is a result of a few right turns and even more unmissed opportunities; certainly a blend of science and art.

Most of the challenges facing MSMEs can be controlled and navigated with better understanding of the relevant industry including trends, market share, and applicable metrics. These define industry activity as well as specific business dynamics and a clear understanding of the company’s target position within the sector.

Recent experiences of many MSMEs I have come across serve as important lessons in terms of understanding, positioning, and predicting market trends.

Let us take a look at Tiger Brands’ (a South African FMCG company) foray into Nigeria’s Flour milling industry to reiterate how important it is to understand business dynamics.

In 2012, Tiger Brands sought to diversify its revenue base and increase the contribution of foreign sales to 30% of its total sales over a 5-10 year period. Thus, the company decided to acquire a 63.5% interest in Dangote Flour Mills (DFM) to take advantage of opportunities in the Nigerian milling sector and related food categories.  Thus Nigeria, with its attractive demography and its position as the second largest economy in 2012 became essential to the Company’s strategic growth on the continent. At the time, DFM had a good market share in both the flour and pasta market segment with strong brand, production and distribution capabilities and Tiger Brands’ intention was to further develop and grow DFM by bringing in its competence in milling and other links in the flour sector value chain.

So what went wrong?

Dangote Flour Mills, pre-Tiger Brands acquisition thrived on good business relationships with buyers from the Northern region which was more informal, and allowed for easy recoverability of credit sales. Also, DFM leveraged on synergy with other group subsidiaries, offering customers good deals on other Dangote products for purchase of any DFM products, both of which significantly supported revenue growth. However, the company faced a significant bottleneck to profitability, owing to its high exposure to finance charges arising from import loan facilities (dollar denominated) obtained to increase capacity and working capital for the business.

However, Tiger Brands, post-acquisition, introduced a formal structure, which properly segmented each business activity; thus reducing synergies across operations. This also severely severed most of the relationship benefits hitherto enjoyed by DFM. This new structure was also largely cash-based, which replaced the previous credit-based structure, and compelled consumers to seek alternative sources of required products, usually from competing firms which offered credit sales.

In the last full financial year before being acquired (2011), DFM reported turnover of N68bn with profit after tax of N1.96bn. That profit represented the company’s peak earnings and is thus far the last record of profitable operations, as DFM has since run a loss-making venture with an initial loss of NGN104.8mn recorded in the first quarter of 2012.

In the first five (5) months of its operations as DFM in Nigeria, Tiger’s earnings were diluted due to challenging and competitive market dynamics (related to stiff competition, rising costs), internal operational inefficiencies, as well as expensive debt funding carried over from pre-acquisition operations.

Tiger Brands described the Nigerian market as one with significant overcapacity and blamed aggressive pricing by competitors in the Nigerian flour market. At what point did it discover this significant overcapacity? How thorough was its understanding of the domestic industry dynamics?

Does Nigerian Flour milling industry offer great prospect in the long term? The answer is Yes, but Tiger Brands failed due to little understanding or “desktop” understanding of the business.

Thus, it is important to understand industry and business dynamics, and create a business model that can work perfectly around this. A model that articulates the logic and provides data and other evidence that demonstrates how your business creates and delivers value to customers. This should also outline the architecture of revenues, costs, and profits associated with the business delivering that value.

To get this perfectly right, you need to create the 5 key Business Model Components:

Revenue
In a nutshell, this is your strategy to generate revenue. What you plan to sell, and what will convince people to buy. Value propositions, positioning, effective messaging, product/market fit.

Gross Margin
It is important for you to know how much of the pie you get to keep from each sale. Do you know your piece of the pie? For example, Shoprite and Spar know they run low gross margins. Their value game is one of low pricing, so they can’t mark up their products by an exorbitant amount and still play the value card.

Operating margin
For a business like PEP store, its slash and burn the expenses; no thrills, no frills. However, if you’re in the hospitality and luxury car business, it’s all about high style and lavish surroundings. Operators in both sectors operate and make decisions based on the knowledge of their operating model. Do you have a clear understanding of yours?

Working Capital
Indeed, ‘cash is king’. Do you understand your cash flow requirements? As you may or may not know, cash flow is significantly different from ‘revenue’. For example, if you operate a retail store, you experience first-hand the need for cash. You must spend cash to fill your store with products so they can be available when a customer walks in ready to buy. Thus, inventory consumes the most significant part of your working capital.

Financing (or Investment)
Number one roadblock I hear business owners complain about is lack of capital. Yes it sometimes does take money to make money. But not always. So to understand the difference is key. We understand the importance of this factor and therefore provide investment and financing solutions to suit your business requirements.

Culled from: Bella Naija

Written by: Kayode Omosebi

Kayode is an Economist and Investment Banker with experience in investment research, corporate finance and investment banking.

Leave a comment

Your email address will not be published. Required fields are marked *