Author: OP EXCELLENCE

“A crisis is a terrible thing to waste”- Paul Romer

The COVID-19 pandemic has caused unprecedented disruptions for Nigerian MSMEs. This has led to a myriad of strategies and recommendations on how MSMEs can survive. As these are being implemented by MSMEs, a new normal and the probability of an economic recession have forced MSMEs to focus on thriving and not just surviving. To do this, MSMEs have to be proactive to face the ‘new normal’ by reshaping their business models to recognize and adapt to changing customer demands. To describe how MSMEs can thrive, we adopt a business model approach that describes how a business creates and delivers value propositions to its customers. Through this approach, we can assess how the pandemic affects MSME customers, value proposition, financial viability and infrastructure (channels, partnerships and key activities). 

A critical review of the Impact of COVID-19 on MSMEs in Nigeria 

A critical approach to analysing the impact of the COVID-19 crisis on MSMEs can be done on two levels. 

The first level of analysis is to focus on the immediate impact of the lockdown on MSMEs. According to research carried out by the Pan Atlantic University-Enterprise Development Centre (PAU-EDC), most MSMEs (~93%) reported a decline in income due to the lockdown, with 88% of them re-thinking their business models. The study revealed that some of the biggest challenges most MSMEs faced were associated with their sales, cash flow position, production activities and logistics.

The second level looks at the post-lockdown impact. Existing evidence from preliminary research on the impact of COVID-19 on customer demand revealed that the potential increase in job losses and reduced wages have affected people’s finances. As a result, a good number of people may have lesser income available to cater to their needs. This will result in most customers limiting their consumption to essentials (e.g. food and medicine). Thus, MSMEs that predominantly offer non-essential goods and services may face diminished patronage which could have long-term negative effects.

As regards value propositions, evidence from existing research on the impact of a crisis on value propositions showed that, due to tighter finances, a vast majority of customers become more price-conscious and look for offerings that represent the best value for money. Thus, MSMEs with brands or value offerings that are quality focused (e.g. premium brands) may struggle more than MSMEs with value-centric brands.

Concerning financial viability, evidence from a study by Deloitte showed that MSMEs with huge variable costs are more likely to be negatively affected, primarily as anticipated reduction of demand lowers revenue. In addition to this, MSMEs with a single revenue stream may face challenges as customer demand changes or reduces. 

Re-inventing MSMEs to thrive not survive during a crisis 

To thrive during a crisis, MSMEs must look to introduce strategies and pathways to mitigate the impact of changes that emerge during such a crisis. Recommendations of action plans that can be implemented to ensure this include: 

• Identify and Retain key customer segments: MSMEs are defined by their customers. This statement is as true during good times as it is during a crisis. MSMEs must ensure that they have a steady stream of customers. Most MSMEs tend to cater to multiple customer segments. However, there is always one segment that contributes the most to revenue. MSMEs must be able to identify what that key customer segment is! It is essential to assess how this segment has been affected by the crisis and how such an effect may influence their consumption patterns. Being able to address the changing consumption/demand patterns of this particular segment represents the first step toward a thriving MSME. 
• Amend value proposition to align with changing demands of key customer segment: As consumption patterns of the key customer segment change, the previous value propositions of most MSMEs are unsuitable to consider as competitive advantage. Even in situations where there is a slight/negligible change in demand, customers may be tempted to look elsewhere due to other MSMEs providing a more attractive value proposition. As a result, MSMEs must be willing and proactive enough to make it difficult for their key customers to switch over to other competitors. Recommended strategies include increasing value-based offerings (such as discount or bundle packages for price-conscious customer segments), introducing convenience options (such as domestic delivery options for existing customers), etc.
• Review and Re-strategize on activities and customer channels to improve customer satisfaction: If an MSME wants to improve their customer satisfaction during this period, they can improve the efficiency of their key production activities, localise their partnerships to reduce the risk of disruption to supply chains and create new channels that enable them to reach their customers easily. Some strategies that have been proposed to achieve these include: leveraging digital channels to reach customers faster, introducing process improvements (such as reducing the number of human hand-offs in their business processes), and increasing the number of local suppliers
• Create additional revenue streams to harness potential opportunities that may arise as a result of the crisis: While the previous points focused on key customer segments, it is equally important for MSMEs to be aware of the new opportunities that may emerge due to the crisis. As a result, MSMEs must continuously scan for new opportunities worth exploring to enable them to create a new product that can serve as an additional revenue source. 

To conclude, the concept of a new normal is frightening for all stakeholders but history has shown that every crisis brings forth opportunities. The most successful companies are the ones that recognize those opportunities and act upon them. 

“Conformity is the jailer of freedom and the enemy of growth – John F. Kennedy”

In 2019, the Nigerian Bureau of Statistics (NBS) released the third edition of its Nationwide survey of MSMEs in Nigeria. The report revealed that there are about 41.5 million enterprises in Nigeria, a 12% increase from the figure reported in the previous survey in 2013. The survey however revealed that the number of medium-sized enterprises (businesses that employ between 50 – 199 people and have assets over ₦1 billion) reduced in the years between the 2nd and 3rd editions of the survey. 

The number of medium-sized enterprises declined by 62% to 1,793 enterprises in relation to the figures reported in the previous MSME survey. According to the report, not only did most formal small enterprises fail to scale up in the last 4 years, but also many medium-sized enterprises contracted in size. Interestingly, recent research shows that micro and small enterprises are no more being considered primary drivers of employment. Medium-sized enterprises are increasingly considered the primary creators of better-paying jobs and increased productivity in a growing society. Given these current realities, this article seeks to discuss the existence of a “missing middle of medium-sized enterprises in Nigeria”, and proffers possible solutions to this developing issue.

What is the missing middle and why is it important to discuss it?

The concept of the missing middle has existed for a while. In Nigeria, it means the absence/reduction of vibrant medium-sized companies that can bring dynamic and competitive pressure to expand the number of productive and well-paying jobs in the country. Given the necessity of their products and services, having a large population of medium-sized enterprises is crucial to building an economy’s self-sufficiency and reducing the dependence on costly imports. Medium-sized enterprises also create a significant demand for products produced by small enterprises, utilising them as inputs into their production activities. Additionally, they also stimulate the development of a middle-class population who drive consumer purchases and local demand

Why is there a missing middle of enterprises in Nigeria? 

There are various reasons why the missing middle currently exists in Nigeria. One reason, which will resonate with many policymakers, has to do with the negative impact that the recent economic recession had on the Nigerian economy. The slowdown in economic activity and unemployment rates that accompanied the recession made it difficult for many medium-sized enterprises to thrive. Another identified reason relates to the constraints on doing business in Nigeria. Challenges such as the difficulty in accessing finance, an unfavourable business and regulatory environment, and infrastructural issues are typical reasons why some medium and small-sized enterprises may experience decline or lack of growth respectively.

A third reason may simply be linked to the type of entrepreneurs that are present in Nigeria. Evidence from available research shows that entrepreneurs in developing countries (such as Nigeria) usually produce and sell products or services similar to their peers with no distinct value proposition to differentiate them. This stifles competition and makes growth difficult. In developed countries, entrepreneurs place a premium on their businesses by having a unique value proposition as a way to grow the business. 

How then do we address the challenge of the missing middle in Nigeria? 

Realistic efforts to address this challenge in Nigeria must recognise the long-standing issues (e.g. infrastructure, and access to finance) that plague the Nigerian business environment. In an increasingly competitive environment, entrepreneurs must begin to place a premium on selling differentiated products and services and focus on value addition. This is important as enterprises with a unique value proposition (e.g. quality, efficiency, speed, and customer service) are better equipped to compete both locally and internationally. These types of enterprises are also less susceptible to the effect of external shocks and thus, thrive better. 

Secondly, entrepreneurs must start to develop innovative solutions not limited by traditional business models. One solution worth considering is the adoption of business model innovation (BMI) by enterprises. Introducing new business models that limit the influence of constraints faced by entrepreneurs, whilst also accentuating their ability to achieve their goals, has been argued as a practical way for enterprises to thrive in difficult environments.

Within this context, small enterprises may look to target previously underserved segments of the market. These segments can provide an opportunity for small enterprises to acquire the scale and cost advantages needed to scale up. It can also provide medium enterprises with the advantages needed to thrive. 

To address these difficulties, stakeholders (both public and private institutions) have begun to introduce initiatives that address some of the challenges faced by small and medium-sized businesses. 

From the provision of physical interventions such as industrial parks to ease some of the infrastructural challenges; to incubation centres and tech hubs where start-ups can access subject-matter expertise on technology trends, knowledge transfer, strategic innovation management, and industry-specific insights. 

Lastly, several institutions now sponsor SME business and technical skills workshops, SME trade fairs, etc. which also enable these businesses to network and market their goods and services as well as exchange ideas. It is hoped that these initiatives will ease some of these challenges and grow the missing middle-sized enterprises in the country.

“While I believe firmly in open markets and free trade, I also believe an open market needs a level playing field.” – Philip Hammond 

On 21st March 2018, 44 African Heads of State gathered in Kigali, Rwanda, to sign the African Continental Free Trade Agreement (AfCFTA), a landmark treaty whose primary aim is to liberalise trade across Africa. AfCFTA is the African Union’s (AU’s) first step in implementing Agenda 2063, its vision for an integrated, prosperous, and peaceful Africa. 11 countries, however, did not sign the agreement, Nigeria was one of the more conspicuous holdouts. President Buhari cited the need for further consultations before committing Nigeria to an agreement that would have significant ramifications for its economy. 

The President’s last-minute withdrawal followed vocal opposition from trade union groups and private sector organisations to creating a single market over fears of job losses following trade liberalisation. Critics of the AfCFTA note that Nigeria’s infrastructural deficits and the uncertainty that characterises the country’s business environment already hinder Nigerian manufacturers, who cannot compete on even terms with manufacturers in other countries. A continent-wide consolidated market would make Nigeria a prime candidate for dumping goods.

The AfCFTA is expected to lead to the unification of the African community; following in the steps of the European Union, the AU aims to create a single continental market for goods and services by reducing (or possibly eliminating) trade barriers like tariffs and import duties. 

As a flagship Agenda 2063 project, the AfCFTA will administer a market economy of 1.2 billion people across 55 member states, with a combined GDP of $2.5 trillion. the treaty aims to boost regional business, integration, and growth by creating a “Single Africa Air Transport Market”. This involves a common currency, and free movement of goods, services, and people between member states. Businesses currently face higher tariffs (averaging 6.1%) for exports within Africa than for exports outside the continent. To facilitate continental trade for African businesses, the treaty will progressively eliminate tariffs on 90% of goods (with the last 10% of “sensitive items” to be accommodated later), thereby minimising delays at borders and liberalising trade. Proponents of implementing the AfCFTA cite important benefits, including boosting industrial exports and SME growth, driving income generation, and promoting job creation, especially for youth.  Assessing the impact of the AfCFTA on any one nation, however, is dependent on an understanding of the economic realities of that nation. 

Consequently, any analysis of the AfCFTA’s impact on Nigeria must consider how it aids the achievement of goals defined in the country’s Economic Recovery and Growth Plan (ERGP). In theory, the shared focus of the AfCFTA and ERGP on promoting industrialisation, encouraging export orientation, and fostering economic competitiveness demonstrates harmony between both plans. However, this congruence is not seamless in practice and requires certain conditions for Nigeria to fully maximise the benefits of ratifying the AfCFTA. Nigeria has seen historical success in fuel export and primary agricultural production; However, the nation’s path to becoming a continental trading power has been hindered by gaping infrastructural deficits, an unpredictable business environment, weak institutional mechanisms, etc. This has contributed to high production costs and limited competitiveness of national exports. While implementation of the AfCFTA would lead to cheaper inputs for enterprises that would otherwise pay import duties and taxes on these inputs, it would also lead to unfettered competition from imported cheaper finished goods. This would certainly weaken local value-adding sectors.  Hence, while the implementation of the AfCFTA has its advantages, it must be tempered with careful strategies and initiatives that guarantee that Nigeria’s developmental objectives are not lost in a sea of trade receipts. 

To ensure that a positive balance of payments translates to a more competitive economy, strategies that cater to the current realities of the Nigerian environment, as well as its future possibilities, must accompany and complement AfCFTA implementation.

Important strategies that will help safeguard Nigeria’s achievement of AfCFTA objectives include the clear operationalisation of short and long-term growth and developmental targets, a short-term trade approach that allows the country to leverage its comparative advantages, and a long-term trade strategy that is dependent on the conversion of such comparative advantages into competitive advantages. By implementing these strategies alongside concerted efforts to improve institutional and business environments and infrastructure, Nigeria may succeed in levelling the playing field for local enterprises.

“The globalisation of services provides alternative opportunities for developing countries to find niches beyond manufacturing where they can specialise, scale up and achieve explosive growth” – Ejaz Ghani 

We live in an era where globalisation, increasing customer sophistication, and advanced factor advantages are critical determinants to attaining global competitive advantage and economic Transformation. This makes it necessary for countries to take a critical look at their developmental plans and assess how it helps them map out a path to Economic Development. 

Economic transformation in Nigeria is placed upon the Nigerian Industrial Revolution Plan (NIRP) and the Economic Recovery and Growth Plan (ERGP), which identify the competition and the manufacturing sector as the key drivers of development in the country. These plans leveraged largely on the manufacturing-centric economic transformation framework used by China and other developed economies.

Ever since the industrial revolution, manufacturing has been the key driver of rapid economic transformation. The countries that caught up with and eventually surpassed Britain, such as Germany and the USA did so by building up their manufacturing industries. China, which has emerged as the archetype of this growth strategy since the 1970s, travelled a similar path.

In Africa, the success of the manufacturing sector in driving improved competition has been gradual. A new realisation has begun to emerge that developing countries will need to keep reviewing and updating their development model, to continuously reflect emerging economic realities and opportunities. Despite the long-established notion and emphasis on industrialisation as the main driver for structural change in the economy, recent evidence suggests the services sector’s ever-increasing role in economic transformation and development. Services currently account for more than 70% of yearly outputs in advanced economies and more than half in most developing countries.

Manufacturing today is not what it used to be.  It has become much more capital-intensive & skill-intensive, with greatly diminished potential to absorb large amounts of unskilled & semiskilled labour.  Consequently, this has affected job and productivity growth, especially in developing countries. It has also led to these countries looking elsewhere for ways to drive job growth, reduce poverty and ensure economic transformation. Recently, a case has been made for the service industry as a key driver of economic transformation in developing countries. Buoyed by the success of the industry playing a huge role in driving economic transformation in South Asian countries (e.g. India, Nepal, etc.), there is a developing argument that the adoption of a service-centric model may also be successful in Africa.

Given the current realities of the Nigerian environment, is there a role for the services sector to play in the Economic transformation narrative?

The services sector in Nigeria ─ includes areas such as ICT, Trade, Financial Services etc. ─ has been tagged as the engine for future economic growth. It is the largest sector in the economy, with its contribution to Gross Domestic Product (GDP) hovering around 50% on average. 

According to research by PwC, the sector is also purported to account for the largest proportion of employment at 57.4%. These values only tell part of the story as a huge part of the sector’s contribution to employment & GDP comes from less productive sub-sectors, such as transport and trade, rather than higher productive ones, such as financial services, real estate & professional services. The sector has been a key contributor to Nigeria’s growth but its influence on the development and transformation narrative has not been emphasized as much. However, with obvious challenges attributed to the slow pace of economic transformation in the manufacturing sector, and an increasingly growing youth population that is more inclined to service provision than goods production, an argument can be made that the reality for Nigeria’s transformation and development may rest on an increased focus on services.

Given these current realities, there is an urgent need for collective action by all stakeholders of development in Nigeria ─ Government, developmental agencies (including the Bank of Industry) and the private sector ─ to enhance key enablers for the service sector to thrive. The development of high-quality and efficient services can support productivity growth and competitiveness in other sectors, while also having important direct effects on growth, job creation and revenue generation.