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.
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