The 4Ls of success: Lessons from the fall of giants

“We are like dwarfs sitting on the shoulders of giants. We see more, and things that are more distant, than they did, not because our sight is superior or because we are taller than they, but because they raise us up, and by their great stature add to ours.”

– John of Salisbury

March 3, 2016 is a date burned into John Wekesa’s memory. It is the day his dream died. He was strapped for cash, and a business he had sunk nearly four years of his life into, as well as hundreds of thousands of shillings, was forced to close its doors.

John used to work for an exporter of agricultural produce when he decided he’d had enough of helping someone else build up their business. He wanted to venture out on his own and give entrepreneurship a shot.

“I enjoyed being in the agricultural field, and knew it was something I wanted to continue doing. I had friends who’d tried their hand at farming, but it never worked out because they were doing it as a side hustle, and weren’t able to oversee the greenhouses or farms they’d invested in. I decided to set up a business that would help them out,” he says.

In August 2012, John set up his business, Wakestar Farm Management Services. In the beginning, things worked out well. He took care of people’s farms and took a 15 per cent cut on the produce he sold.

He was able to leverage on the contacts he’d developed while employed to link his clients to markets, so he soon got a steady stream of clients signing up for his services. Within a year’s time, he had clients in 13 of the country’s counties.

“As the business grew, I knew I couldn’t handle the workload on my own, so I set out to hire people to help me out. That’s when things fell apart. Save for two or three farmhands, most of my employees were lazy, dishonest or not adequately skilled. Clients were unhappy, many pulled out of contracts we had with them, and by early 2015, I was struggling to meet my financial obligations.”

Then the weather turned unfavourable for the clients he was left with.

If they weren’t feeling the effects of drought, they were seeing their crop destroyed by hailstones. After several months of working with little to show for it, John accepted that Wakestar had lost direction and he needed to figure out what to do next. He couldn’t hold on to the clients he had when he – and they – weren’t making any money, so last year, he shut down the business.

“It was one of the hardest things I’ve ever had to do. I felt like a failure, and in the time since then, I haven’t quite found a business that I’m passionate about. I’ll hear of an opportunity, try to monetise it, but then a few months later, the taps run dry and I’m back to square one,” John says.

Not unique

Sad as it may be, his struggle isn’t unique. Small businesses in Kenya are grappling with low probabilities of success.

A report on micro, small and medium enterprises (MSMEs) that was done by the Kenya National Bureau of Statistics found than in the five years to 2016, 2.2 million business shut down.

This works out to an average of 440,000 business a year – or just over 1,200 MSMEs every day.

And it’s not just small businesses suffering.

Despite official reassurances that it’s now easier to do business in Kenya, with the country moving up to position 92 in the World Bank’s Doing Business index, this is the year that  yet another homegrown company, Nakumatt, was brought to its knees.

In the last five years alone, manufacturing heavyweights, such as Eveready East Africa, Cadbury Kenya and Sameer Africa have closed their manufacturing plants, opting instead to import from cheaper industrial hubs, such as Egypt and India.

Local beverage manufacturer Softa Bottling Company also threw in the towel in 2016 after two decades of taking on the soft drink multinational Coca-Cola. The proprietor, Peter Kuguru, now plans to sell the Softa beverages business.

In the same year, Kenchic, Kenya’s premier fast-food restaurant, announced it would close its franchise outlets, Kenchic Inn, to focus on its core business of chicken processing.

Thousands of people have also lost their jobs as formal sector businesses announce round after round of layoffs as the business environment gets tougher.

Factors such as high energy costs – Kenya’s  industrial power costs are said to be three times that of Egypt – inadequate infrastructure, counterfeits and cheap imports have stifled industrialisation efforts in the country, bringing businesses to the brink of closure.

So, as a small business owner who’s lucky enough to still be weathering the storms, you must be wondering, if the giants are falling, what chance do you have of survival? While it doesn’t inspire much confidence to see brands opting out of the market or closing shop, there are lessons to learn from them.

After all, isn’t it an entrepreneurship maxim that there’s a lesson in every failure. Call it the Ls of business survival.

1. Leadership

Or more accurately, it seems these days, the lack of it. Kenya’s companies seem to go to a lot of trouble to hire ineffective management, only to inevitably fail and then end up hiring turn-around managers.

Mumias Sugar Ltd, for instance, one supplied more than 60 per cent of the sugar in the Kenyan market. It was the ideal case study of a locally grown firm that had matured from private holding into a publicly listed company. 

However, when in 2012 the company started reporting losses, the blame was heaped on a hostile market environment, low sugar prices and cheap imports, among other things.

While it was true that the cost of producing sugar locally was high and that the market was flooded with cheap imports from neighbouring countries, underneath all that, the real ailment boiled down to poor leadership.

Cases of conflicts of interest among top management, poor investment strategies and unauthorised investments were rife. By the time auditors unearthed evidence of mismanagement, billions of shillings had been already been misappropriated.

Unfortunately, even with ongoing talks of a financial bailout, Mumias still finds itself in the middle of political blame game.

The takeaway: The lesson that a small business owner can learn from this is that failure to invest in qualified top management can kill your dream – and it doesn’t matter what heights of success your company reaches.

Contrary to popular belief that entrepreneurship is for any person with an idea and start-up capital, research has shown that not everyone can successfully run a business.

Therefore, it’s crucial for you as a small business owner to appraise your managerial capital. Once you find that you lack key managerial aspects, it might be time to step down and bring in a strategic manager into your business. Growing a one-person outfit into a medium-sized enterprise requires detailed understanding of financial, supply chain and network management.

As John C Maxwell says, “Everything rises and falls on leadership”.

2. Liquidity

Even before Nakumatt announced it was closing down its stores in Uganda and Tanzania, its empty shelves had signalled to customers that something was amiss. Today, it’s an open secret that the family-owned retailer is reeling under mounting supplier debt and rent arrears.

Many would argue that its cash-flow problems stem from its rapid expansion strategy – the retailer opened 16 stores in the last two years, expanding into Uganda, Tanzania and Rwanda. And then there was the introduction of the Blue Label brand, which introduced products priced significantly lower than what its suppliers sold.

The takeaway: As we wait to see how the recent talk of a merger deal between Nakumatt and another family-owned retailer, Tuskys, plays out, small business owners should learn that diverting business returns to other uses could contribute to low liquidity.

Companies might tie up their cash flow by sinking money into areas that are non-core to their business. As a small business owner, understand what your flagship brand is and how to defend it because it is ultimately your cash cow.

3. Liability

You’ve heard the saying, Kukopa ni harusi, kulipa ni matanga. Before the law capping interest rates came into force last year, the lending market in Kenya was booming. Lenders were aggressively selling loans, and it was common to see adverts on how easy it was to buy that shamba, machinery or upgrade your business using credit.

While borrowers were quick to jump into the debt wagon, the cost of servicing these loans was not as rosy. Just ask the national carrier, Kenya Airways, which has become a poster child for Government bailouts.

In June this year, Parliament approved yet another bailout to the besieged airline, a Sh77 billion guarantee by the Treasury of long-term loans owed by Kenya Airways. Its net borrowings as at March 31 this year total Sh142 billion.

Furthermore, in an unprecedented move, a restructuring deal will not only see the Government’s existing Sh4 billion loan to KQ converted to equity, a move that makes the Government a major shareholder, but 11 banks are also said to have agreed to convert their Sh25 billion in loans to shares.

Judging from past experience, however, the financial bailout is likely to only be a band aid – KQ’s real problems can be traced back to mismanagement, poor investment decisions, unprofitable routes and uncompetitive pricing.

The takeaway: As a small business owner, how do you know when you’ve taken on too much debt?

While debt is not necessarily a bad thing, keep in mind that loans are costly and should not be undertaken lightly or without a clear strategy. Keep track of your debt-to-asset ratio, and leverage your business only when viable cash inflows are projected.

The most crucial questions are: What am I borrowing for; and how will I repay the loan? Short-term cash flow problems can be solved by overdrafts or supplier credit. 

4. Localise

When South African brewer SABMiller entered the Kenyan market with its Castle brand in 1998, local manufacturer EABL engaged its competitor in one of the most epic turf wars witnessed in the manufacturing industry. 

From marketing campaigns that centred on nationalism (my country, my beer), back and forth accusations of vandalism of billboards, and a monopolisation of the distribution network, the war raged on until SABMiller opted out of Kenya in 2002 and sold its manufacturing plant to EABL.

However, while Castle and Tusker were engaged in beer wars, another local alcohol manufacturer, Keroche Industries, was quietly creeping into the market.

Its product? Hard liquor. You see, although Kenya has a strong drinking culture, at the time, only about 15 per cent were beer drinkers – today the rate of beer drinkers has shot up to 56 per cent.

Beer is considered more expensive and less intoxicating, and traditional brews made from fermented local ingredients are more popular among lower income groups. Keroche Breweries saw the opportunity to sell to this market segment by producing and selling liquor in low-unit sachets, such as 25 grammes and 50 grammes.

After a ban on sachets, however, the company upgraded its packaging to bottles but retained low-quantity units. Today, Keroche has managed to excel where one of the largest brewers in the world, SABMiller, failed to.

The takeaway: Do you know your target market? Have you done market research to find out what, how and when your consumers buy? Understanding the buying habits of your consumers will ensure that your business has staying power.

If you have a presence in multiple markets, be careful not to adopt a homogenous strategy for all of them. Think global, but act local. Some markets may display higher price elasticity than others. If necessary, create your own distribution chain that ensures your product gets to your consumer.?