Go Upstream — a Business lesson from Dangote.
This article was inspired by the book on Dangote as written by Prof Ndubuisi Ekekwe.
Dangote is a household name in Africa and beyond. I doubt that there is anyone that is unfamiliar with the brand or even the name. He is a role model to some while others (critics) have accused him of monopolizing the market in which he operates. Now, the talk on monopoly is another topic on its own and this article may not address that.
Anyways, Like him or hate him, he is the richest man in Africa.
Dangote plays upstream.
Dangote started out as a trader late 1970s. He bought and sold agricultural produce in the earlier part of his business. In other words, Dangote was a retailer for about 20 years. This means that he depended on the producers for goods and was therefore subject to disintermediation risk.
Manufacture, don’t just trade. There is money in manufacturing even though it is capital intensive. To achieve a big breakthrough, I had to start manufacturing the same product I was trading on; which is commodities. — Aliko Dangote
Although he enjoyed great profit margins, Dangote did not settle with buying and selling. Around 1997, he diversified into production. He built plants for flour, salt, and sugar production. He eventually diversified into cement production (About 80% of his revenue is from his cement production). These decisions, I believe moved Dangote from being just a wealthy Nigerian man to being the richest man in Africa.
The retail (buying and selling) industry for Dangote was the downstream sector.
Downstream and Upstream
Upstreams and Downstream are usually associated with petroleum industries.
The downstream sector focuses more on turning crude into materials that are usable and marketable. Your retail filling stations by the roadside (Obinna and Sons limited) fall under this category. This is the side of the petroleum industry that is more visible to the general public. In fact, some people think that is all there is to oil and gas.
The Upstream sector describes the exploration and production sectors of the industry. This means that companies that operate upstream actively explore the underground in search of crude oil.
The upstream sector uses sophisticated equipment that requires a high level of skill and expertise. Simply put the upstream is reserved for the ‘big players’. It is highly capital intensive but that is where the money is. That is where you can build your competitive advantage or moat as an industry or a business.
Although the terms Downstream and Upstream are usually used in the Oil and Gas industry, the term can also be used to describe activities in other industries.
Even though you may be doing relatively well in the downstream sector of businesses, you have so many competitions. Everyone seems to be doing the same things or similar things. It is almost hard to differentiate your business at this level. You are at the mercy of the market or your competitors and can be displaced at any time T.
However, if you are looking to build a lasting business at Dangote’s scale, you would have to move upstream. At the upstream of your industry, you possess the technical skill that cannot be easily acquired by those who play downstream.
MOVING FROM DOWNSTREAM TO UPSTREAM
Companies can move from downstream to upstream by accumulating capabilities. In his book, The Dangote System, Prof Ndubuisi mentions the accumulation of capability as one of the five phases of building great companies. Capabilities can also be referred to as companies’ core competence or capacity.
When companies acquire capabilities, they operate in domains that generate high-end value. An increase in capabilities leads to an increase in market share which eventually results in an increase in revenue.
Accumulation of capabilities can come in the form of intellectual properties, patents, investing in heavy assets (like Dangote), network effect (Google) and massive technology (such as artificial intelligence).
There are several ways in which your company can acquire capabilities. This include:
- Investment in research and development. It involves expanding your knowledge base as a founder or even as a company. Go for relevant knowledge. It could be as simple as attending seminars or workshops.
- A Great Team: When you have a team that has high-end technical skills, and an understanding of the industry trends, visionary managers would definitely move companies from low stream to upstream.
- Partnerships, Acquisitions, and Mergers: Forming strategic partnerships and buying companies that have accumulated capabilities are some of the ways companies can acquire capabilities. This is actually the fastest way to gain moat. Established companies tend to opt for this.
Other Examples
Elon Musk has acquired capabilities and built a very high competitive advantage or a moat with what he has done with SpaceX and Tesla. By July 2020, Elon Musk was named the fifth richest person in the world according to Forbes and we have seen Tesla stock surge even during the pandemic. It took him a while to get here but the investment was worth it eventually.
As a pharmacist, when I think of acquiring capabilities in the health sector, I think of companies moving from Telemedicine (downstream) to developing AI-driven healthcare solutions (Upstream). For example, Retina-AI health, led by Stephen Odaibo, raised 5.2million Series A for their work in the AI detection of diabetic retinopathy.
In Conclusion
Although operating in upstreams of industries could be highly capital intensive, the value generated in the long run serves as a moat. It sets companies apart from their competitors. Companies that invest in upstreams of industries play a long term game.
Therefore, no matter where you are in your business, think long term. Even if you do not have so much money to build a plan like Dangote, start by getting relevant knowledge and associating with the people who matter.
It took Dangote over 20 years but I think with the latest advancement in technology, companies can acquire capabilities faster.
