When the team at TFHZPC sat down to look at all the reviews of the 20+ companies on LUSE, the thing that stood out from most companies is the techniques they used in sustaining their operations. It is very clear that many of these companies have a clear focus on how they perceive their operations at the moment and in the future. Any company that has ambitions of being in existence for the long term must understand the role its operations component plays in the bigger picture of creating value. To understand this, Professors Hayes and Wheelwright of Harvard University, developed a four-stage model which can be used to evaluate the role and contribution of the operations function (every company has one, if it does not, disaster is eminent). Their model essentially evaluates a company’s intent regarding its internal and external outlook. On the lower end, the model views the company’s operations function as negative which tries to evolve into a positive force that has sustainable competitive advantage on the higher end. The former approach is what leads many companies to believe that the pricing of their products is the only thing that matters. Far from it!
Many Zambian startup companies are on the lower end of the Hayes and Wheelwright model. We infer this from the statistics from PACRA that show many companies continuously underperforming or seeking dissolution after a few years of existence. The thing about being on level 1 is the negative perception regarding competition and the persistent firefighting just to remain relevant. When the business idea is coined by the entrepreneur, very little thought is given to the sustainability of the operations. There is nothing wrong with perusing the idea as a primary focus however, once you are up and running, reality dawns in and the business soon realizes that it is unable to fend off new entrants into the attractive market they have entered. Furthermore, they also discover that their value preposition is one that can be easily replicated leading to many copy cats entering the market. Before we know it, the blood bath of competition ensues and the constant firefighting leads to destruction of value.
However, adopting external neutrality (assessing the competitive forces and finding that blue ocean) is the first step of entering into level 2 of the Hayes and Wheelwright model. Questions that are answered when one is in this level include: Is my product better delivered compared to my competitor?, What differentiates my ubiquitous product from everyone else is?
For the premier companies we have reviewed, signals are ubiquitous in how they are able to achieve level 2 (external neutrality) and level 3 (Internally supportive). A recent example of this is in CDC’s recent investment in Zambeef. CDC is development finance institution from the UK which invests in promising businesses in Africa and South Asia with aim of supporting economic development to create jobs. The deal saw CDC gain a 17.5% stake in Zambeef. This was done by Zambeef offering ordinary shares and convertible redeemable preferential shares to CDC allowing it to raise $65M. This investment essentially now allows Zambeef to close off any outstanding deals from M&As (mergers and acquisitions. Notably RCL Foods), liquidate any long term debt and aid in the aggressive rollout of the companies micro outlet stores across the country (its latest value creating gem) and settle finance costs to partners that facilitated the transaction such as Pangaea Securities Limited. The deal clearly shows that Zambeef understands its operations and views the operations function as providing the foundation for its competitive success.
We believe that the key for the Zambian SME to breakthrough lies in understanding these four stages. At the heart of it is owning the operating activities of the firm. We are very sentimental about operating cash flow and debt because we understand that demise or success of many companies lies with these two figures.