Part 7 – Turning BEE into long-term strategic advantage

Long term investment

The story so far:

  • B-BBEE is a set of policies designed to achieve political stability by incentivising the participation of black people in the SA economy.
  • Each company gets a BEE score, measured against a BEE scorecard specific to the company size and industry.
  • The SA government awards contracts based on a combination of quality/price and BEE score.
  • The BEE scores of the big companies that supply government depend on the BEE scores of their smaller suppliers, and so on.
  • In this way the govt uses its’ massive spending power to push BEE onto the economy, without it ever being compulsory.
  • The South African economy is under pressure and barely growing.
  • This means that for a business to grow its SA revenues, it must increase market share. i.e. it’s a zero-sum game.
  • A strong BEE score can become a source of long-term competitive advantage.
  • The question is how best to achieve this, which we discuss below.

Long-term strategic advantage:

Companies that build a “moat” around their earnings become far more valuable over time than their competitors because they earn more with greater predictability and lower risk. They win and their competitors lose.

Typical sources of long-term strategic advantage can be:

  • Intellectual property e.g. patents
  • Long-term contracts with customers/distributors
  • Locking in supply of a rare material/component
  • Restructuring a balance sheet to get cheaper capital
  • Hiring and retaining A-team employees
  • Being awarded an exclusive license e.g. area franchise
  • Reducing the cost of a key input e.g. through using better technology

There are many other examples, but all of these types of advantage can offer a real, long-term source of barrier to competition that puts a business in a far better position than its competitors.

Can BEE be a long-term strategic advantage?

What if we offered you the opportunity for your business to make an investment into infrastructure that would increase the value of your shares in your business by 20%, or maybe even 50%? What if investing in that layer of infrastructure could save you money that you’re already spending on other pieces of infrastructure to do the same job, so you’d have no extra monthly outlay? What if that infrastructure would put you in a more attractive position with clients and be very hard for your competitors to replicate?

For most companies, this would be something very, very interesting.

If it was an IT system, a new sales tool, distribution channel or process improvement then it would be a no-brainer (assuming the cash flows and ROI calcs all stacked up). But what if it was BEE? and specifically BEE ownership?

If you can get past the ideology of BEE (see our earlier articles as to why BEE exists and why it’s not going away) then you can start to treat BEE as any other investment business could make.

Making BEE into an investment decision:

Any investment involves time and money upfront in anticipation of a return at some future date that more than compensates you for the risk involved. If not, don’t make that investment.

It’s exactly the same for BEE: you need to know if sorting how your BEE will improve your prospects. However, there are some important caveats:

  • In a slow-growth economy, BEE is a zero-sum game. Those that have BEE will gain from those that haven’t. The flip side to this is that if you’re the one without BEE then most likely your business is facing a downward trend. If you then sort out your BEE will things go up? or less down than before? or maybe they’ll flatten out at current levels. In many ways, this will be determined by how early you have moved, but how sensitive your clients are to your BEE scorecard, and how quickly your competitors move too.
  • Not all BEE is created equally. Most of the scorecard can be solved by spending money on BEE, but ownership requires changing who owns and controls the business. The ‘spending money’ approach requires continual management of where the funds are spent and making sure the suppliers actually deliver so that you get your points. However, since your customers are highly incentivised to procure from companies with 51% ownership you may find that you can spend all you like on the other scorecard elements but still not get the business.
  • Ownership can lead to substantial savings: EME’s and QSE’s who get to 51% flow-through ownership can also qualify as Level 2 without needing to spend a cent on the rest of the scorecard, until they get to the Generic level (and even then, their clients can treat them as if they still QSE’s for up to another 5 years)!

Understanding whether BEE is an investment decision worth making comes down to understand the likely returns, the likely costs, and the risks/benefits. How to do this is the subject of our next article.

Continue to Part 8 – BEE Customer research.

 

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