Perspective
Perspective
Innocent Bagumira
Beyond Growth: Rethinking Value Creation In East African Business
As competition intensifies and capital becomes more demanding, East African companies need to shift their attention from growth alone to productivity, competitive advantage and returns on invested capital.
East Africa ' s next business challenge
For much of the past two decades, the investment case for East Africa has been framed around growth. The underlying arguments remain compelling: a young and expanding population, rapid urbanisation, improving infrastructure, increasing digital adoption, deeper regional integration and significant unmet demand across consumer, industrial and service sectors.
These conditions have helped create businesses of considerable scale and attracted both domestic and international capital. Yet they can also obscure an important distinction. Economic growth creates opportunity; it does not guarantee that individual companies will create economic value. That distinction is becoming increasingly important.
Across the region, companies are confronting a more demanding competitive environment. Imported products are improving in quality while remaining highly competitive on price. Consumers have more choices and, under pressure from inflation and household costs, are increasingly sensitive to value. Technology is reducing traditional barriers to entry. Capital providers are placing greater emphasis on cash generation and credible pathways to profitability. Regional expansion remains attractive, but differences in regulation, taxation, logistics and market structure complicate the economics.
At the same time, many locally owned businesses are reaching the point at which entrepreneurial energy needs to be complemented by stronger governance, professional management and institutional systems.
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I have had the unusual opportunity to observe this evolution from several positions over nearly three decades: from the factory floor and frontline sales, through senior commercial roles in large multinational and regional businesses, to running a private-equity-backed company, and more recently advising founders, boards, management teams and investors.
The vantage points are very different, but one lesson has remained remarkably consistent. Growth is easier to see than value creation.
A busy factory can destroy value. A rapidly expanding sales force can destroy value. A successful-looking regional expansion can destroy value. And a business can report impressive revenue growth while quietly consuming working capital and weakening shareholder returns.
The central strategic question for East African business is therefore changing. For many years, that question was primarily: Where will growth come from? Increasingly, boards and executives must now ask: What quality of growth are we creating, how much capital does it consume, and what return does that capital generate? This is more than a finance question. It goes to the heart of strategy.
Growth and value creation are not the same thing
Revenue remains one of the most visible measures of corporate progress. It is also one of the easiest measures to misunderstand.
A company can increase sales substantially while simultaneously weakening its economics. New customers may require longer credit periods. Geographic expansion may add warehouses, management overhead and inventory faster than it adds contribution. Price reductions may generate volume but dilute gross margin. A new
plant may increase theoretical capacity while leaving a large portion of the asset underutilised. None of these outcomes is necessarily visible in the headline revenue number.
I encountered this distinction particularly clearly while leading a distribution business through a major scale-up and professionalisation phase. Growing an enterprise several times over is exhilarating, but increasing turnover is only part of the job. As scale increases, inventory, receivables, people, systems, warehousing, credit exposure and management complexity all grow with it. Unless operating discipline develops at a comparable rate, yesterday ' s growth engine can become tomorrow ' s cash-flow problem.
This is why the more useful analysis begins below revenue. Boards should understand what is happening to gross margin, operating leverage, working capital, cash conversion and asset utilisation as the business grows. They should also examine the return generated by each additional unit of capital committed to expansion.
This is where return on invested capital, or ROIC, becomes particularly important. A company creates economic value when the return it earns on the capital employed in the business exceeds the appropriate cost of that capital over time. Where the opposite is true, additional growth can magnify rather than solve the underlying problem.
This principle is well established in corporate finance, but its practical implications are sometimes underappreciated in growth markets. An expanding economy can allow inefficient businesses to grow for surprisingly long periods before weak economics become apparent.
For East African companies, therefore, the objective should not be to replace growth with caution. It should be to distinguish between growth that compounds value and growth that merely increases organisational size.