Strategic planning and implementation are key elements to any business. Yet, many companies fail to achieve this for four basic reasons. Diversification into new markets is one of the biggest coping mechanisms that companies can focus on to achieve growth. Again, there are many examples of how this both succeeded and failed. Netflix was Blockbusters major competitor in the 1980s and 1990s, yet the company saw that the growth of the internet would disrupt their operating model, so they diversified into what we know they are today. Blockbuster missed the diversification boat completely to their detriment.
Planning a winning diversification strategy needs to be done carefully. Gavin Dalgleish, Group MD, Illovo Sugar Africa points out that many companies will be facing disruption and will be tempted to gravitate towards diversification. However, if not planned correctly, the route to ruin is a slippery slope.
Finding the sweet spot
Illovo views informed and deliberate diversification, whether in their product offering or customer acquisition strategy, as a foundation of ongoing growth. Dalgleish points out that Illovo understands the role of diversification in furthering its ambitions, but more importantly, Illovo understands that to diversify successfully, the company must always first find the market that makes it possible.
Another key consideration before a company leap into a new venture is to explore the regulatory environment, ensuring that there is both policy consistency and clarity around the sector the company hopes to serve. It is not worth making a large investment in something new if the political will to see it through is not supported by long-term, facilitative, regulatory frameworks.
Photo by: Eswatini Observer
“A good example is our business in Eswatini (formally Swaziland). Being forward-looking, the country prioritises renewable energy as part of its energy mix and has created both legislative and financial instruments aimed at kick-starting the sector. As a sugar producer, it was an automatic choice to become involved in supporting Eswatini’s energy security mandate as part of our shared value business diversification strategy. After all, the crushing of sugar cane and the generating of power are essential to the process of producing cane sugar. In fact, energy production is the closest value-add by-product we have as part of how we operate. In places like Brazil, sugar production is a significant power generator for the entire country – and mills often look more like power stations than sugar mills,” says Dalgleish.
He adds that, in Eswatini, Illovo saw the opportunity to install a 25mW co-generation plant as part of a R2.1 billion project to expand its sugar milling capacity. It made sense in terms of Illovo’s business and the developmental priorities in the country’s national agenda. In 2013, Ubombo Sugar was awarded an independent power producer (IPP) licence, which – through a commercial agreement with the Eswatini Electricity Company – enabled electrical cogeneration to better serve the nation. At the same time, it became a longer-term contributor to Illovo’s downstream business. Today, Ubombo produces about 165 gigawatt hours (GWh) of electricity annually, of which about 60 GWh is supplied to the Eswatini national grid. Around 35% of Ubombo’s annual profits now come from this diversification initiative.
Do your homework
The issue for many businesses looking to diversify, is that they often make the decision when they are under pressure or in distress. As a result, taking the time to thoughtfully deliberate about the opportunity, the rate-of-return, the potential competitor landscape, or even to develop a market-back strategy, falls away in the rush to secure advantage in a perceived gap. Our experience has shown us that it is critical to pinpoint strategic assets and apply a market led approach that identifies how diversification will add value to the business. Equally, it is really important to identify opportunities with different market characteristics. For example, while the world price of sugar remains volatile and below the cost of production, electricity markets are booming – particularly across Africa which is recognised globally as a power-insecure continent with a steep demand curve.
It is great to identify a new offering, especially if, as in our case, it is from a process that is already part of our operations – such as alcohol production and electricity cogeneration. The proximity, or sector adjacency, of the product to our core operations makes the addition of a new business easier to implement and operate successfully. With sector adjacency and existing organisational competency as key drivers, we took the learnings from our South African potable alcohol business to identify a potential customer base for potable alcohol in East Africa.
Photo By: Illovo
At the time, the group had already initiated a strategy to progress ethanol and molasses beneficiation opportunities across all operations with a market, a product and expertise already within our business, investment in a new potable alcohol distillery at our Kilombero sugar mill site in Tanzania in 2013, made good sense. Today, that same distillery has the capacity to produce around 12 million litres of ethanol annually – and at much higher quality than any of our other distilling operations within the group. Even better, it contributes a sizeable profit to the Kilombero business.
Even a small shift can make a big difference
Dalgleish points out that Illovo also explored diversification when it comes to the product offering in Illovo’s core business: producing sugar. Recognising the needs of regional domestic customers to access high quality sugar, but in reduced amounts tailored to shopping habits, Illovo introduced smaller pack sizes. This enhancement stayed true to the company’s original product-quality signature, but offered consumers smaller 220g and 500g quality prepacks, as well as 20kg mini-bulk packs.
“The time invested to understand the market requirement and diversify our product range to meet it, has seen us successfully consolidate our home market consumer footprint in Malawi, Zambia, and Tanzania. This small change in product packaging has opened up a wider regional opportunity for a target audience that until then, I believe, we had underserved. It is also a great example of how even a small diversification of our traditional go-to-market product proposition can deliver good returns, for both sales and brand,” says Dalgleish.
Illovo Sugar Africa has a track record of diversified product earnings, and the company feels that it understands what it takes to make it work. “Our most long-standing diversification initiative is at our Sezela mill on the South Coast, which is the most diversified single sugar mill in Southern Africa. Here, we not only produce sugar, but we do so at one of the best examples of biorefining in the world, where canefibre residue after sugar extraction (bagasse) is used to manufacture commercial grade furfural, furfuryl alcohol, and natural flavourings,” says Dalgleish.
An eye to the future
Dalgleish points out that, interestingly and excitingly, Illovo is also beginning to form an approach around the Fourth Industrial Revolution (4IR) that seeks to harness how physical and biological intersects with digital.
“We see this as an opportunity for furthering our carbon footprint reduction and water stewardship aspirations, where the adoption of precision agriculture will enhance our business and continue to drive down our cost base. While we recognise the potential within these emerging technologies, we believe in evaluating each opportunity on its individual merits, identifying the market it serves and the value we – and that opportunity – can add. This is part of a continuous and deliberate opportunity evaluation Illovo keeps constantly underway,” says Dalgleish.
As a business, Illovo looks at all possibilities to diversify its operations in sub-Saharan Africa and understands the critical success factors.
Key takeaways
As with most diversification strategies, there is a lot of information that one has to consider before making an informed decision.
Below are some of the key takeaways that turnaround professionals need to explore in depth before presenting any strategic plan to shareholders:
- explore the regulatory environment, ensuring that there is both policy consistency and clarity around the sector the company hopes to serve;
- the issue for many businesses looking to diversify, is that they often make the decision when they are under pressure or in distress. As a result, taking the time to thoughtfully deliberate about the opportunity, the rate-of-return, the potential competitor landscape, or even to develop a market-back strategy, falls away in the rush to secure advantage in a perceived gap. This is a major challenge that needs to be addressed;
- explore diversification when it comes to the product offering in your clients core business; and
- form an approach around the 4IR that seeks to harness how physical intersects with digital
The Mystery Practitioner is an industry commentator that focuses on the shifting dynamics and innovative thinking that BRPs and turnaround professionals will need to embrace in order to achieve success in their businesses.
