The Good Strategy, Bad Strategy Dilemma: Navigating the Challenges for SMEs in Africa

By Prof. Dr. Kasolo Hassan, Regional Director of Peakford -Eastern Africa and Founder of HasKas Consulting.

Small and medium enterprises (SMEs) are the lifeblood of African economies, contributing significantly to employment, innovation, and GDP. In sub-Saharan Africa alone, SMEs account for approximately 95% of registered businesses and 50% of GDP, while providing up to 80% of jobs across the continent. Despite their critical role, SMEs in Africa face a high failure rate, with up to 80% collapsing within their first five years, according to a 2022 Nigeria MSME report. This alarming statistic underscores a pervasive challenge: the good strategy, bad strategy dilemma. Many African SMEs craft ambitious strategies to drive growth and sustainability, but flawed execution, resource constraints, and external barriers often lead to poor outcomes.

Let me share some insights in a good strategy, bad strategy dilemma for African SMEs, its root causes, and actionable solutions to help these enterprises thrive.

Understanding the Good Strategy, Bad Strategy Dilemma

The concept of the good strategy, bad strategy dilemma, inspired by Richard Rumelt’s work, highlights the difference between a well-crafted strategy that addresses core challenges and a poorly designed or executed one that fails to deliver results. A good strategy is clear, focused, and leverages a company’s strengths to tackle specific obstacles, while a bad strategy is vague, overly ambitious, or misaligned with realities, often ignoring critical constraints. For African SMEs, this dilemma manifests in the gap between their aspirations for growth and the systemic barriers that undermine execution.

Characteristics of a Good Strategy

A good strategy for an African SME should:

• Diagnose the Problem: Identify specific challenges, such as limited access to finance or market competition.
• Set Clear Objectives: Define achievable goals, like increasing market share or adopting digital tools.
• Leverage Resources: Utilize available assets, such as local networks or technology, to create a competitive edge.
• Adapt to Context: Account for local realities, including infrastructure limitations and regulatory environments.

Characteristics of a Bad Strategy

Conversely, a bad strategy often:

• Lacks Focus: Pursues too many goals without prioritization, diluting efforts.
• Ignores Constraints: Fails to address critical barriers like funding shortages or poor infrastructure.
• Mimics Others: Blindly adopts strategies from larger firms or different markets without customization.
• Neglects Execution: Overemphasizes planning while underinvesting in implementation and evaluation.

The African SME Context: Why Strategies Fail

African SMEs operate in a uniquely challenging environment, where systemic issues amplify the risk of bad strategies. Key factors contributing to the dilemma include:

1. Limited Access to Finance: Approximately 40% of SMEs in developing countries, including Africa, face significant credit constraints, with a financing gap estimated at $5.2 trillion annually. This restricts their ability to invest in growth, technology, or skilled labor, forcing reliance on internal funds or informal sources like family and friends.
2. Inadequate Infrastructure: Poor physical and digital infrastructure isolates SMEs from markets and opportunities, increasing operational costs and limiting scalability. For instance, unreliable power supply and limited internet access hinder digital transformation, a critical growth driver.
3. Regulatory and Bureaucratic Hurdles: Cumbersome onboarding procedures, high compliance costs, and inconsistent regulations create barriers for SMEs. In many African countries, the lack of supportive policies for sustainable practices or innovation further stifles growth.
4. Weak Strategic Management: Many SMEs lack robust strategic decision-making (SDM) processes tailored to their context. Research in South Africa highlights that while SMEs engage in SDM, they often fail to implement and evaluate strategies effectively, leading to missed opportunities for competitive advantage.
5. High Failure Rates and Market Pressures: The competitive landscape, coupled with economic crises and shifting consumer preferences, increases SME vulnerability. For example, the COVID-19 pandemic severely impacted 37 million microenterprises and 28,000 SMEs in sub-Saharan Africa, exacerbating financial and operational challenges.
6. Lack of Differentiation: Many African SMEs operate in commoditized markets with minimal differentiation, making them susceptible to price competition and margin erosion. This lack of unique value propositions undermines their ability to stand out.

Case Study: The Nigerian SME Experience

In Nigeria, SMEs contribute significantly to employment but face persistent challenges. A 2022 study found that while most SMEs adopt strategic management practices like environmental scanning and strategy formulation, poor implementation and evaluation hinder performance. For instance, a small agribusiness in Lagos might develop a strategy to expand into export markets but fail due to inadequate funding, lack of digital tools for market research, or bureaucratic export regulations. This misalignment between ambition and execution epitomizes the bad strategy trap.

Overcoming the Dilemma: Pathways to Good Strategies

To navigate the good strategy, bad strategy dilemma, African SMEs must adopt tailored, resilient approaches that address their unique challenges. Here are actionable solutions:

1. Leverage Blended Finance: SMEs can benefit from blended finance models, where development finance institutions (DFIs) and donors use grants, loans, or guarantees to de-risk investments and attract private capital. For example, the planned USADF-DFC partnership in Africa aims to strengthen SME financing by combining grants with lending capabilities. SMEs should seek such opportunities to bridge the financing gap.
2. Embrace Digital Transformation: Digital tools, such as mobile apps and e-commerce platforms, can enhance resilience and market access. In Kenya, digital lenders like M-Shwari and Tala have expanded financial inclusion for SMEs through swift, short-term loans. SMEs should invest in affordable digital solutions to streamline operations and reach broader markets.
3. Strengthen Strategic Decision-Making: SMEs must adopt structured SDM processes, including analyzing financial and non-financial data, developing alternatives, and reviewing outcomes. Research in South Africa suggests that clear communication and stakeholder buy-in are critical for effective SDM. Training programs can help SME owners build these skills.
4. Differentiate and Innovate: To avoid commoditization, SMEs should focus on unique value propositions. For instance, adopting sustainable practices, like those supported by the Ghana Enterprise Agency’s kaizen principles, can enhance efficiency and appeal to eco-conscious consumers. Innovation in products or processes can create a competitive edge.
5. Build Collaborative Networks: Partnerships with technology providers, educational institutions, and other SMEs can provide access to skills, resources, and markets. Cross-sector collaboration can also help SMEs navigate regulatory complexities and adopt best practices in data management and cybersecurity.
6. Restructure and Recapitalize Strategically: SMEs facing financial distress should consider restructuring operations to cut costs (e.g., closing unprofitable units) and recapitalizing through debt-for-equity swaps or equity issuance to improve liquidity. These strategies, when aligned with market realities, can stabilize finances and support growth.

Real-World Success Story: M-Pesa in Kenya

M-Pesa, a mobile money platform, illustrates how a good strategy can transform SMEs. By providing accessible financial services, M-Pesa enabled Kenyan SMEs to conduct transactions, access credit, and expand their customer base. Its success lies in addressing a core SME challenge—financial inclusion—through a focused, technology-driven strategy tailored to the African context. SMEs can draw inspiration from such models to craft strategies that leverage local strengths.

Conclusion

The good strategy, bad strategy dilemma poses a significant challenge for African SMEs, but it is not insurmountable. By diagnosing specific barriers, setting clear objectives, leveraging digital tools, and building collaborative networks, SMEs can craft and execute strategies that drive sustainable growth. Governments, financial institutions, and development partners must also play a role by providing supportive policies, affordable financing, and infrastructure investments. For African SMEs, the path to success lies in aligning ambition with actionable, context-specific strategies that turn potential into performance. By avoiding the pitfalls of bad strategies, these enterprises can fulfil their role as engines of economic development and resilience across the continent.

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