In the 1990s, Chrysler forged the concept of the “extended enterprise”: a company in which different management poles are interdependent, but with multiple and distinct structures. The interaction between an electricity supplier and a manufacturer would be a typical example of this kind of enterprise, at least in the United States or Europe. In Africa, the extended enterprise needs to be rethought. This is explained by Vimal Shah:

“There are all these companies investing in Africa. They are so interested in us. The problem is that most non-African players don’t know how to work here. Why? Because here, a manager running a business needs to know about water, energy, workers, housing, security, etc. If I were working in the United States, all of this would be taken for granted. Where will the workers live?

It’s easy. Electricity? It’s never cut off. Water supply? It’s constant. Security, there’s no need to worry about it: it’s the government’s problem, not mine. Here, you are forced to do all these things. Your structural capabilities have to be different in Africa.”

Building one’s own infrastructure may seem like an insurmountable obstacle to profitability. Indeed, it entails risks and costs that are rare in more developed markets. Mo Ibrahim describes the difficulties but also the opportunities associated with building one’s own infrastructure and being the first entrant in a growing market:

“We often had to build telecom centers to be properly connected, our own radio networks, satellite bases, generators, etc. It was tough because it meant we had to invest a lot. Our initial capital expenditure was high compared to the industry standard. But it was offset by the market potential, and we were able to do it step by step, starting with the capital and then moving away from it. Moreover, owning these infrastructure elements became profitable in the long run because not only were we not renting them from the government, but in the end, it was us who leased the lines and bandwidth to other players. In the end, it turned out to be far from a bad investment.”

No one is perhaps as supportive of rethinking the extended enterprise, nor illustrates its success better than Vimal Shah of Bidco, the manufacturer of edible oils. The history of vertical integration in this company gives an idea of the reasons for its success. From the outset, Bidco’s management had in mind to go “from the ground to the pan,” even though it could not implement this vision in the early years because the company was small and access to raw materials was difficult. Vimal explains:

“If you only focus on the consumer, you make your profit on the brand and preparations. This can work if the top of the economic pyramid is wide. Here, the top is very, very small. It will widen, but it will happen slowly; the middle class has started to grow, and it will accelerate. We became interested in it and found that by selling to this middle class, we could get a 10% margin from our brand. This meant that the rest of the value had to come from other parts of the chain. So that’s what we turned to. We started by processing soybeans, sunflower, and maize, which are locally produced by small farmers. But it’s not profitable to have a soybean or sunflower plantation, so we built a processing plant for these seeds and ensured 5,000 farmers had outlets and the money needed to grow more.”

Building on this experience, Bidco’s management wanted to move further upstream in the value chain by cultivating, and also by expanding its activities to a major product: palm oil. Since the palm tree is a plantation crop, this meant…

This text is an excerpt from the book “These successful businesses in Africa“, written by Jonathan Berman.

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BUILDING WHAT WE NEED