Top 10 Reasons Why Businesses Fail in Africa
Starting and running a business is not for the faint of heart; entrepreneurship is inherently risky, yet it is something that has to be done. Often, it is the only choice. In Africa, the role of business cannot be understated. Businesses in Africa play a vital role in the reduction of poverty levels, as well as being the engine of economic growth and often the only source of job creation.
But the risks are there for all to see. The average start-up failure rate in Africa was 54 percent in 2020. Businesses started up in Africa between 2010-2018 had a 54% chance of failing. That’s close to 1 in 2 businesses that have been launched on the continent, ending up failing. While this figure is better than the global average, it’s still worryingly high and doesn’t take into account failure rates across individual African countries, with some showing high rates while others show lower. In Ethiopia and Rwanda for instance, three-quarters of start-ups failed in the first year, while Kenyan start-ups failed 24 percent of the time.
The top 10 African countries that experienced the highest business shutdown rates among start-ups are detailed below;
- Ethiopia (75%)
- Rwanda (75%)
- Ghana (73.91%)
- Zimbabwe (66.7%)
- The Democratic Republic of the Congo (66.7%)
- Tanzania (62.50%)
- Nigeria (61.05%)
- Senegal (58.3%)
- Somalia (60.0%)
- Kenya (58.7%)
Top 10 Reasons why Businesses Fail in Africa
So, why do so many businesses in Africa fail? Below are the most common reasons why many businesses in Africa fail;
1. Failure to conduct conclusive market research
A failure to conduct conclusive market research is the number one reason why 1 in 2 businesses in Africa fail. This isn’t surprising because market research is really about getting vital information about customers’ wants and preferences. In fact, the very definition of market research is ‘the action or activity of acquiring information about consumers' wants and preferences'.
Yes. Most businesses in Africa don’t bother to try and understand the wants and preferences of the very people they want to get money from! And then wonder why so many African businesses end up failing.
If an entrepreneur can’t even invest a little effort, time and money to try and understand what the customer wants, perhaps they deserve to fail. And unfortunately, many are failing. It is simple cause and effect.
Nevertheless, market research is an important aspect of every successful business development endeavor, whether you're working on a startup, introducing a new product, or rebranding.
Lack of proper market research is one of the most critical problems faced by businesses in Africa. Many businesses in Africa have failed to grasp the importance of capturing accurate research on their markets, consumers or competitors, which is critical in preventing over-optimistic forecasts.
Market research is essential especially when launching start-ups because it aids in the development of effective plans, be it a marketing, financial or sales planning. If you look at the top 20 reasons why new business ventures fail globally, at number 1 is - NO MARKET NEED. Investigating market needs for products or services is a core tenet of market research.
Understanding everything about your market is one of the reasons why market research is critical for businesses seeking to make well-informed decisions. If business conducts research before venturing into a market, its chances of survival rise by more than 30 percentage points compared to one that hasn’t carried out the research.
Market research is all about helping business owners to plan. You cannot write an effective business plan without incorporating market research. This is because business planning can help you as an entrepreneur to define which products and services will be well accepted by the consumers, finding out the choices and preferences of your target audience.
When market research is carried out effectively, you get essential information about your competitors, their product or service offer and get crucial market intelligence that can prove invaluable about your product versus the competition, assisting you in concentrating resources where they'll be most useful, often even before you launch. This way, effective market research can thus reduce your product offer risks, helping you to select product features, prices, and promotions that will work, early on.
Why is understanding competitors a critical component in business success?
- Competitor analysis is a process of identifying businesses in your market that offer similar products or services to yours. A good competitor analysis will help you and your business to gain insights into how the business can improve on its services or products based on studying what your rivals offer.
- A competitor analysis focuses mainly on identifying businesses that are in the market and are carrying out the same thing as you do and you can learn from their operational strengths, substantive weaknesses, product offerings, market dominance, missed opportunities, and also the gaps in the marketplace.
- A competition study can disclose important details regarding market saturation, business possibilities, and best practices in the industry that are key success factors.
- A competition study can help you understand the products that are currently accessible to your target market and those which are being overlooked.
- A competitor analysis will reveal which area of your business needs improvement, and once you get to know the loopholes, you can then work towards fulfilling that gap to satisfy your customers.
- Competitor research helps to establish benchmarks. Establishing benchmarks is the process of building points of reference to measure future growth. The continuous analysis will reveal market trends to keep track of and new emerging businesses to be aware of. It will also help reveal who your current competitors are throughout every stage of business.
Therefore, without effective market research, your business may not be able to survive. And it is why many businesses in Africa rarely survive beyond their first 3years and if they do, majority stay micro-small operations barely surviving.
This is why it is imperative for a serious entrepreneur to stop using outdated decision tools and start utilizing real market research processes such as competitor analysis, trend analysis, or market sizing, etc. These market research processes are used by the biggest and most successful enterprises because they play a vital role in helping business leaders and entrepreneurs get crucial data to make informed decisions.
But what role does data collection play in market research?
The importance of data collection as part of market research
Data collection is defined as the process of collecting data to help you in making decisions and observations and to answer open-ended questions.
- Data collection is carried out by so many businesses because it aids them in getting a better understanding of the way customers behave to improve their overall experience.
- Data collection is the key to almost any marketing and business strategy. Data enables an entrepreneur to make informed decisions, spot problems, and backup arguments, discover trends and patterns and understand your customers. Our research experts at Researchtec make sure that you get your market research insights based on sound data.
- Data collection enables the business to make better decisions. Data-driven decision-making enables businesses to create real-time insights and projections to improve their performance. Enhance customer service, find new clients. The more data you have on your hand, the better decisions you will be able to make. Through the data collected, businesses will modify their products or services to suit that which is desirable by society.
- Data helps one in solving complex problems. Businesses may use the data collected to help them identify the inefficiencies that are taking place in the business as well as identify the issues and errors and how they are to be rectified over time. Over time, data analysis can be used by business owners to look further into the causes of these bottlenecks to boost revenues and improve sales and marketing strategies.
2. Lack of capital
A second reason why many businesses in Africa fail is due to lack of capital or funding.
For any business to start, capital must be available to purchase assets and maintain its operations. Therefore, for any business to start up without enough capital, the chances of survival are extremely low, because capital is the lifeblood of a business. Without it, business cannot carry out various activities and operations critical to basic survival including buying stock, paying employees etc.
The business world, not just in Africa, is littered with profitable businesses that went bankrupt due to a lack of capital.
3. Political instability
Economists consider political instability to be a major ailment that harms economic performance. Political instability in Africa affects businesses in a way that they cannot be as productive as they would have been had the political environment been stable. Political instability may affect a business through not just the tax system but also the general business environment that can retard economic growth in general.
Foreign investors, who are critical for a company's innovativeness, are difficult to attract in a politically unstable country thus development is limited in such circumstances. Shoprite, a South African retailer, closed its businesses in Uganda and Madagascar due to an unstable political environment that has led to currency depreciation, high commodity prices, and high inflation which in turn affected local household incomes thus company revenues.
4. Cashflow problems
The most important aspect of building a business is a healthy cash flow. Cash flow is the amount of cash that is going in and out of a business. How capital is used in a business impacts cashflow.
A business with cash flow problems is likely to face financial failure sooner rather than later unless it is facilitated by capital, an issue that’s just as potent for many African businesses. Running out of capital is thus the 4th biggest reason why 1 in 2 businesses in Africa end up failing.
5. Unfavorable government policy
A government is tasked with the obligation of establishing regulations and policies that guide businesses within a country, such as minimum wage, tax policy, trade regulation etc. For instance, the government has the authority to tax businesses. Any increase in taxes will deter investment, particularly among entrepreneurs who take on the risks of founding and operating businesses. Unfavorable government policies can create an unsuitable macro business environment characterised by high transaction costs, poor infrastructure, small markets etc. Such factors can in turn limit the success of start-ups as well established businesses by creating an environment thats not conducive to doing profitable business. Africell, a major telecom company operating in Uganda left the market in 2021 citing high transaction costs after the Ugandan government hiked taxes on local internet data, Africell's main core market.
6. Inadequate business management & entrepreneurial skills
Another major reason why many businesses in Africa fail is because of the lack of business acumen on the part of the business owner or management team. Even in cases where the business owner has the skills necessary to create and sell their product or service, if they lack the attributes of strong management or don’t have time to successfully manage other employees, certain aspects of the business can end up being mismanaged including finances, hiring or marketing. The smartest business owners often outsource those areas they are weak in or do not perform well in, including hiring a strong management team if the business is already established.
Solution: Honestly assess your skills and hire people who can complement areas you are inadequate in. Find people who have skills you don’t have.
7. Poor marketing
Another major reason 1 in 2 businesses launched in Africa end up failing is due to poor marketing. If customers don’t know about your business, they will not buy. Acquiring customers, getting known and creating a brand is not easy or cheap hence why its ignored by many entrepreneurs. But it is essential. If marketing isn’t your strength, hire professionals.
Researchtec analysts can create effective marketing strategies for your business through our data-centered research.
Solution: Even if you have a plan, for a better marketing strategy, you must carry out research so that you know the field you are venturing into. This is where our African market researchers can help gather the market research data you need for your marketing efforts, through the various research services offered.
8. Lack of planning
It has been stated that failing to plan is planning to fail. Business planning is one of the first things a person intending to start up a business should as a bare minimum. A business plan is a document containing all details on how you are to run the business. Business plans provide a roadmap of how the business owners want to administer their business. It helps business owners understand or know where to focus their marketing efforts when carrying out a business. Regardless of whether you’re a new business or you have been established for over ten years, any company worth its salt knows that success hinges on a solid plan.
Business owners who fail to address the needs of the business through a well-laid-out plan, before operations begin are setting up their companies for serious challenges. Even an established business that does not regularly review an initial business plan—or one that is not prepared to adapt to changes in the market or industry—meets potentially insurmountable obstacles throughout the course of its lifetime. Therefore, without planning, your business is likely to fail.
Solution: If you are thinking of starting a business, don’t rush to market without having a business plan. Even a simple 2-page plan is better than nothing at all. Success always comes to those that have disciple, patience and a plan. If planning isn’t your strength, hire professional business plan writers.
9. Lack of business knowledge
Many wannabe entrepreneurs lack business knowledge. Having knowledge of the business you are to start is of great importance because it provides you with the skills, experiences, capabilities, and insights which are to be relied on while you carry out your business. Once you have knowledge about what your business is all about, then you can avoid any sort of mistake or even you are capable of solving any problem that you may be faced with in the future. Once you start a business without any knowledge about it, the business is likely to fail.
Solution: You don’t need to be an expert to start a business but you do need knowledge of how your business will make money or your business model. Research and decide on how money is generated at the very least. If you don’t have the time, our business model analysts at Researchtec can help you come up with an appropriate business model for your product/service offer based on industry best practices/market gaps.
10. Unavailability of a market
Many businesses in Africa are failing because there is no ready market to purchase their products or services. This is because many businesses in Africa start without consulting or carrying out efficient market research so that they can get to know whether the product they are intending to produce will be welcomed in a friendly manner by the society.
Solution: If you want to start a business in Africa and have no idea where to begin, get expert help. Consult professional market researchers in Africa.
To avoid joining the failure list, it is imperative you first understand your market! Understanding your market simply means getting valuable information about everything that impacts your business, from your target audience, their purchasing habits, market size, competitors, your product positioning, business model etc., so you can avoid launching a product or service without a market need. This is where the importance of using professional market researchers in Africa comes into play.
So, Whether You are Looking for Professional Market Researchers in Uganda, Kenya, Nigeria, South Africa, Tanzania or Rwanda, Let Our Experts Give You the Information You Need. Whatever Your Market Research Needs are, We Can Help. Talk to Africa’s Expert Market Researchers Today.