How to start larger companies in Kenya
Thursday, January 28, 2021
BY EDWARD MUNGAI
- Ongoing product research and development as well as the creation of strategic partnerships will lead to the transition.
- Innovation and risk-taking are another factor on the growth path.
- Safaricom originally started as a telecommunications company and has since grown into an e-commerce giant and home internet provider over the past decade.
Safaricom #ticker: SCOM, Kenya’s largest and most profitable company, accounts for more than half of the country’s stock market assets and dwarfs the valuation of many other companies.
While the company, whose growth strategy is embedded in innovation and technology, should be lauded as a native case study, its dominance in generating income and wealth should be an example of how large corporations could prove to be beneficial in the long run.
Many underlying factors may have contributed to the state of Safaricom, but there is one lesson that this article focuses on in particular. We need to turn more SMEs into big companies. What exactly is hindering the creation of larger companies and what is the next step?
I’ll use a brief business anecdote to put this into context. About 20 years ago, in 2001, the South African group Naspers, the parent company of MultiChoice, made an investment decision that was considered extremely unpopular at the time.
The company, which started as a simple newspaper publisher before it later diversified, invested $ 32 million in a little-known Chinese startup. Beyond all expectations, the startup would grow into an e-commerce giant now known as Tencent. Today that stake is worth more than $ 120 billion, more than the combined GDP of Kenya and Rwanda.
However, this success came with a number of challenges. First, this led to an unsustainable valuation gap. Naspers’ stake in Tencent far outperformed the company’s valuation. The tail wagged the dog.
Second, the overall valuation of Naspers holdings naturally made the company overly dominant in the South African stock market due to the runaway valuation of its equity stake. To solve the dual challenges, the company established a new holding company, Prosus, in 2019, to which the stake was spun off and listed in Europe.
From this anecdote, we can infer various factors that are required to build a large company. For starters, strategic and visionary leadership is the key to envisioning new growth paths. Nasper’s investment in Tencent, for example, was led by its then-CEO Koos Bekker, a master dealmaker. Safaricom’s runaway success may be due in part to its founding boss Michael Joseph, who, alongside his successor, the late Bob Collymore, kept looking for potential opportunities and setting the framework for creating a rich ecosystem around M- Pesa urged.
Ongoing product research and development, as well as creating strategic partnerships, are another factor that will lead to the transition.
Innovation and risk-taking are another factor on the growth path. Safaricom originally started as a telecommunications company and has since grown into an e-commerce giant and home internet provider over the past decade. This is some kind of blue ocean strategy that requires steadfastness. The same applies to Naspers, whose transformation was exemplary.
There are many economic benefits to building larger businesses and the government needs to create an environment that enables growth. Large companies are important growth drivers, create productive jobs and pursue comprehensive solutions to societal challenges. In addition, larger companies tend to be more productive and have better market intelligence: they can reduce production costs while making high quality investments and reaching the markets they need to succeed.
They are more innovative, more likely to export or expand into new markets and more likely to adopt international quality standards. As a result, they can generate significant benefits for other businesses by creating demand in their supply chains, growing markets, and spreading expertise in a way that benefits other businesses of all sizes.
In addition, they typically pay higher wages and provide more secure employment than small businesses. According to a recent study by the International Finance Corporation (IFC), employees in large companies – defined as companies with more than 100 employees – earn on average 22 percent more than in small and medium-sized companies.
However, in small, low-income countries, there is very little conversion from SMEs to large, competitive firms – and the scenario is a hindrance to economic progress.
Governments must work relentlessly to create conducive climate and policies to encourage the creation of larger businesses while protecting monopolies that could distort and fail markets.
Commercial banks and development finance institutions can also play a critical role in funding and implementing capacity-building activities to support the growth of high-potential SMEs.
More directly, large companies enjoy several advantages over smaller companies, such as: B. Access to capital and relatively low costs due to economies of scale that make them more resilient. Clearly, this is why we should focus on growing SMEs into large corporations in order to fuel the progress of our economies.