This article is about a transaction in which BlueBiz Consultoria’s mandate was to prepare a business plan to support the acquisition of a sugar cane plantation in Mozambique.
The client wanted to take command and control of the new corporate vehicle to be created using mechanisms other than these: i) majority of share capital; ii) majority of voting rights; iii) the right to appoint a representative to the board of directors or supervisory board; iv) the right to dismiss members of the board of directors or supervisory board; v) the right to qualified shareholdings or special rights.
In this article, I challenge my readers to answer the following question: what other private¹ Corporate Command & Control (CCE) mechanisms can be used?
In this article, we’ll look at these in turn:
- What a private ECC mechanism is.
- The following ECC mechanisms:
- Control by financing.
- Control of the market and/or the distribution network.
- Control by infrastructure dependency.
Given the length of this topic, I will divide it into parts that will be published in a subsequent article.
We will analyse these mechanisms in the five different phases of a company’s life cycle: embryo, growth, maturity, turbulence and decline.
1. What is a private Corporate Command & Control mechanism?
In my opinion, a private ECC mechanism is:
- A set of strategies, methods and tools,
- that a private entity, or individual(s)
- uses to exercise power²
- in the forms of influence, direction, generating dependence, governance,
- over a market, an organisation, or part of it,
- to ensure and control that strategic objectives are achieved, operations are efficient, and stakeholder interests are protected.
2. Control by Financing
a) What is it?
Control is exercised through the granting of loans, investments, credit lines or other financial instruments, which make the company dependent on the financier (e.g. the parent company , a partner, a bank) for its operations and growth.
b) Practical example
Dangote Cement, one of Africa’s largest cement companies, is a notable example of control by financing. Aliko Dangote, the company’s founder and owner, used external financing extensively to expand his operations in Africa. The company has obtained significant funding from international financial institutions such as the World Bank and the African Development Bank (AfDB).
c) How does it work?
Embryo: in the beginning, Dangote Cement used funding from Nigerian banks to establish its basic cement production operations.
Growth: to expand its operations in Africa, the company obtained funding from major international financial institutions. These financiers imposed certain conditions, such as environmental and social standards, which Dangote Cement had to fulfil in order to continue receiving financial support.
Maturity: in the maturity phase, the company continued to use financing to modernise its plants and expand its production capacity. Lenders have a significant influence on the company’s strategic decisions, such as expansion into new markets.
Turbulence: during periods of economic instability, such as the recession in Nigeria, Dangote Cement relied on external financing to maintain its operations and implement risk mitigation strategies.
Decline: so far, Dangote Cement has not faced a significant decline, but it continues to rely on financing to maintain its infrastructure and explore new market opportunities.
d) Pros and cons
Pros:
Strategic influence: allows the financier to influence decisions and ensure that resources are used effectively.
Risk sharing: financing can be structured to share risks between the financier and the entity.
Cons:
Financial dependence: can create an over-dependence of the entity on the funder.
Conflicts of interest: there may be conflicts between the objectives of the financier and those of the company’s management.
3. Control of the Market and/or Distribution Network
a) What is it?
Control is exercised through the ownership or management of essential distribution networks for another entity. This mechanism allows a company to control the flow of products or services, directly influencing market access and the competitive presence of entities dependent on that network.
b) Practical example
Shoprite Holdings, Africa’s largest food retailer, exemplifies the control of the distribution network to dominate the market. Based in South Africa, Shoprite has expanded its operations to more than 15 African countries, securing a leading position in the retail sector.
c) How does it work?
Embryo: in the beginning, Shoprite established an efficient distribution network in South Africa, building strategic distribution centres that facilitated the supply of its shops.
Growth: as Shoprite expanded its operations to other African countries, it invested heavily in logistics infrastructure, including regional warehouses and a transport fleet. This ensured that products were delivered efficiently and consistently to all shops, regardless of location.
Maturity: in this phase, Shoprite optimised its distribution network to reduce operating costs and improve efficiency. The company also implemented advanced inventory management systems to ensure that products were always available on the shelves.
Turbulence: during periods of economic instability or crises (e.g. covid-19 pandemic), Shoprite utilised its robust distribution network to maintain continuous operation. The ability to quickly adjust logistics allowed the company to respond to changes in consumer demand and disruptions in the supply chain.
Decline: although Shoprite has not yet faced a significant decline, the company is prepared to use its distribution network as a strategic advantage, exploiting new market opportunities and maintaining its dominant position.
In the period of crisis, Shoprite utilised its distribution network to maintain operations
d) Pros and cons
Pros:
Control over the market: direct access to the market and control over the flow of products.
Operational efficiency: optimisation of costs and logistics processes.
Cons:
High initial costs: significant investment in network infrastructure and maintenance.
Regulatory risks: possible legal challenges related to anti-competitive practices.
4. Infrastructure Dependency Control
a) What is it?
Control is exercised through dependence on essential infrastructure, such as telecommunications networks, production facilities or transport systems that are critical to an entity’s operations.
b) Practical example
Kenya Airways, Kenya’s main airline, exemplifies control through dependence on infrastructure by dominating the country’s aviation infrastructure. The airline, in partnership with Jomo Kenyatta International Airport (Nairobi), controls a significant proportion of air traffic in East Africa.
c) How does it work?
Embryo: initially, Kenya Airways established crucial domestic and regional routes, utilising the infrastructure of Kenya’s main airport. This included building terminals, hangars and maintenance facilities.
Growth: as demand for air travel increased, Kenya Airways expanded its international routes and modernised its fleet and airport facilities. Significant investments were made in aviation infrastructure to ensure the safety and efficiency of operations.
Maturity: in this phase, Kenya Airways optimised its operations using the advanced infrastructure of Jomo Kenyatta International Airport as its main hub. The reliance on this infrastructure ensured that the airline maintained a dominant position in the African aviation market.
Turbulence: during periods of turbulence, such as the covid-19 pandemic, reliance on airport infrastructure was crucial to recovery. Kenya Airways utilised its established facilities and routes to manage repatriation and cargo flights, maintaining operations during the crisis.
Decline: in times of decline, reliance on aviation infrastructure allows Kenya Airways to explore new market opportunities, such as expanding cargo services and exploring new strategic partnerships to sustain its operations.
d) Pros and cons
Pros:
Stability: provides a solid and reliable base for continued operations.
Efficiency: improves operational efficiency and reduces costs in the long term.
Cons:
High cost: requires substantial investment in acquiring, maintaining and upgrading infrastructure.
Over-dependence: can create an over-dependence on a specific infrastructure, limiting flexibility.
This article will continue, and only due to editorial space limits is it interrupted here. I look forward to seeing you in the next edition.
¹ We will not be discussing public corporate command and control mechanisms in this article.
² For more on this subject: GREENE, Robert ‘48 Laws of Power’; MONKS, Robert ‘Corporate Governance’; DIXIT, Avinash ‘The Art of Strategy: A Game Theorist`s Guide to Success in Business and Life’.
