Zambian Industry Analysis
Lafarge, Retail

The Financial Times of Zambia is proud of the work it is engaged in. We have observed that many non-premier companies (of the SME flavor) in Zambia enter markets without understanding some of the factors that influence a firm’s profit potential. This can only be determined by assessing each industries profit potential because the profitability of various industries differs systematically and predictably in ad continuum. Sadly, entrepreneurs will be lucky to find resources that give indications to this fact because there has never really been an incentive for companies to invest resources into such endeavors (FinInsight’s dark strategy).

In order to achieve industry analysis in Zambia, the factors that affect the degree of actual and potential competition must be understood.In their 2013 third installment of Business Analysis and Valuation, Krishna Palepu et al. provide a frame work which we encourage companies in Zambia to follow in order to better understand the sources of competition in local industries. Their framework identifies rivalry between existing firms as the first source of competition. The second source is the threat of entry of new firms in the market. The last source is threat of substitute products or services. In an earlier blog, we presented the Porters 5 forces model. Palepu and her colleagues use the same principals albeit adding context to the thesis.

To put things in perspective, we applied these theories to some of the industries that our beloved premier companies belong to. Here are our findings of one of the 3 contexts (another installment is coming, we do not like to bore you).

Rivalry among existing firms

In our 2016 analysis of the construction industry, premier company Lafarge entered a price war with other players in their industry. The industry’s growth rate was exponential at the time player Dangote enter the game. With a high growth rate, there industry became so attractive it was hard to ignore the profit potential. Any player with an economies of scale strategy entering this market would want to tap into this growth. In addition, the concentration of cement manufacturers was below 5 at the time (oligopoly) makingthe industry prime for perfect competition. Perfect competition however often leads to margin cost being equal to cost production. Hence, the inevitable price fall which eroded value.

The other dimension was that player Dangote entered the market with excess capacity. Therefore, their capacity was larger than customer demand making it imperative for them to cut the market price in order to grow their market share. For incumbents in the game, the dilemma is that for an industry such as this one, the capital investment is so large making it costly to exit when competition rises. Furthermore, if switching costs between one cement maker and another are low, customers will go for it. Conversely, we commended the Lafarge response of differentiation. Recall, we mentioned in ourearlier blog that they pursed product differentiation by introducing a plethora of products ranging from roadcrete to other “cretes”.

Ultimately, scale and learning economies become one of the alternatives for survival. Lafarge has had a large footprint in Zambia giving it economies of scale. Size in this industry matters when it comes to survival. We have seen smaller players wither away like cement dust blowing in the wind. However, the ratio of fixed and variable costs is low therefore, for Lafarge, reduction of prices does not given them any incentive in installed capacity. Therefore, when premier companies compete, it would be better if they did it on quality as higher quality can attract higher premiums (if people are willing to pay) which equate to more value (profit). Sadly, in this industry companies chose to compete on price. Consequences are clear. Ultimately,price wars hurt value. We are looking forward to analyzing their 2016 annual report.

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