Business Risk for an American Retail Company Expanding to South Africa, an Emerging Market - Example

Report on Business Risk for an American Retail Company Expanding to South Africa, an Emerging Market 0 Introduction This is a report that providesa consultancy report and advise to an American retail business that seeks to expand to South Africa, an emerging market outside Europe and North America. South Africa is considered a developing country and an emerging market. This means that it has significant political, economic and social structures that are very different from the system the client is accustomed to in the United States and other European markets that it operates within. The report would examine the business risk that the American retailer would face in the South African markets. It would examine the country risks inherent in South Africa and provide recommendations of how to balance the risks and rewards in the country. 2.0 Business Risk “Business Risk is the uncertainty inherent in prospects of future returns either on assets or equity” (De Bruyn and Bain, 2011: p42). Business risk is about the risk or uncertainty that might stand in the way of a business that seeks to attain a certain level of returns on their investments. It includes the variability of a firms operating income over time (Reilly and Brown, 2009). Another angle from which business risk can be identified is in the context of finance risk which includes the risk of fraud and error which might stand in the way of retaining funds and reporting the right figures to shareholders (Wiersema, 2011). In the retail industry of South Africa, the business risk is fundamentally related to the volatility of sales and how demand might inflate over time. Business risk also relates to the expertise and skills of the people who would be tasked with management in a retail business in South Africa. The ability of the managers and staff in projecting sales and formulating an appropriate strategy is important. How a firm mixes its costing systems and attain the best results possible would make a difference to how business risk would be embraced. Also, the systems and structures that would detect and prevent fraudi in purchases, sales and payroll is significant in preventing business risks (Wiersema, 2011). 2.1 Demand and Market Conditions South Africa has a growing middle class and this has continued to increase since the end of Apartheid in South Africa (De Bruyn and Bain, 2011). The Black people have had an average income increase of 1000% since 1994 and this is due to the fact that the country is now an all-inclusive nation (De Bruyn and Bain, 2011). This means that the country has gone through a major transition and the market and demand is quite large since there has been a growth in income distribution and the economy has generally improved. This means that there is an improvement in potential demand in South Africa. Aside the increase in earning capacity of people in South Africa, there is also an improvement in the ways and means that things are done. The supply systems of South Africa has gone through a tremendous improvement and increase. Farmers are generally world-class in South Africa, when compared to other African countries and other emerging economies (Mansvelt, 2011). Also, the manufacturing sector of South Africa is strong. Many modern intermediaries like bank operate efficiently in South Africa Importing to South Africa is fairly straightforward. The country has treaties with many countries around the world including the United States (Sachs, 2008). This makes it easy for the import of machines, materials and products to the country without issues. 2.2 Human Resource Conditions South Africa has a major system for the training of professionals and managers (Nkosi, 2012). The country has embarked on an accelerated training system and structure which has allowed many South Africans to attain major levels in education and training. This has led to the creation of a strong and trusted management sector. Also, there is the abundance of cheap labour which stems from the fact that there is a large pool of migrants from neighbouring and other African countries who provide cheap labour (Nkosi, 2012). Outsourcing is common and there is the presence of the major global accounting and management firms in the country (Mansvelt,. 2011). These outsourcing entities can provide important services to a firm that needs their contribution. 2.3 Competitor Environment The retail industry is highly choked in South Africa. There are many competitors in the industry and this makes it difficult for any firm to thrive easily in the country (Nkosi, 2012). There are many traditional markets and traditional corner shops that provide alternative services to consumers around the country. Secondly, there many substitutes for products and this varies according to the social systems a person lives within. Black Africans purchase from African shops whilst Arabs purchase from Hallal shops and Jews purchase from Kosher shops. This forms a very segmented society that reflects the diversity. In the area of supermarkets, there are many supermarket chains like Spar, Pick N Pay, Checkers and Shoprite which provides services in the malls and other parts of the country (Nkosi, 2012). This provide a very competitive environment that would impact on the quest to capture market share. 3.0Country Risk South Africa comes with its inherent elements and features as a nation and this provides a framework for the assessment of business risk and help in positioning of a retail firm. 3.1 Political The African National Congress Government which took power in 1994 has maintained an all-inclusive government system. They are in support of business tax cuts to promote economic growth and attract investors (Waters, 2012). However, it is pervasively reported that the South African public sector is inefficient and this makes it difficult to do business in South Africa (Reymish et al, 2011). 3.2 Economic South Africas economy is a fast growing one. The country has had an upward growth of its earnings and production system after Apartheid ended. Figure 1: World Bank Data on GDP Growth of South Africa since 1960 According to the World Bank, South Africas GDP stands at over $400 billion. This brings a GNP per head of about $6,900 in 2013. This is higher than most countries in the developing world and makes South Africa a very successful and rich nation. Income distribution is still an issue because the rick who benefited from Apartheid continue to hold a lot of resources and assets in the country (Strydom. 2011). There is also a problem of unemployment which stands at 25% now. 3.3 Social There is a trend of growing consumerism in South Africa now (Theron et al, 2012). This is very propitious for the retail industry since it has direct impacts on the growth in consumerism and spending. Also, the usage of technology in South Africa is increasing. Finally, it is stated that there are diverse tastes in a highly diverse South African society (Theron et al, 2012). Due to this, it is necessary to segment a business well to deal with the needs of all different peoples in the country. 3.4 Technology There has been an increase in the level of technology and the number of Internet usage in South Africa over the past ten years (Simpson, 2012). This is because of the different national policies and there are also diverse technological routes that are used for the sharing of information (Simpson, 2012). 3.5 Environmental South Africas national structures are fast embracing environmental advances that are common in developed countries (Theron et al, 2012). There are many different arrangements to make the country more recycling-friendly and consumers are made to pay for the environmental degradation of things like plastic bags. 3.6 Legal South Africa embraces an all-inclusive constitution which recognizes all the different sections of the country (Sachs, 2008). Also, the South African constitution acknowledges the issues and problems of the past and this makes it imperative for a business to be sensitive to things that happened in the past. 4.0 Risk Analysis: Balance of Risks and Rewards The South African business environment is positive in general for retail. There is potential demand and there are good suppliers and intermediaries including banks and other entities. Also, there are trained staff members who can help in providing management and labour. However, the downside of South Africas business environment is that there is a major problem with numerous retailers which makes it very competitive to survive and thrive. A critical SWOT analysis below provides important information and directions of the main pointers that are relevant to the risk and rewards for the American retail company. 5.0 SWOT Analysis Strength Weaknesses - Potential demand due to growing middle class - Commitment to the development of the economy and tax cuts - Cheap labour - Skilled and well trained managerial and technical staff - Strong intermediaries like suppliers and banks - Technological advancement and increase in internet users - Environmental concerns growing - Inefficient public sector - Presence of many competitors in the industry - Income disparity - Crime and unemployment - Massive diversity and need for segmentation Opportunities Threats - The growing trend on consumerism and potential demand indicates that the business is like to succeed and get effective demand from consumers - Business environment improvement and tax cuts makes the economy a positive place and the company can position itself in a way that would make the best use of the opportunities. - Cheap labour provides an avenue for low costs of production in South Africa - Skilled managers provide an assurance against high business risks - Technological Advancement provides the impetus for the development of e-commerce and online business for the American retail company. - Environmental campaigns and Corporate Social Responsibility drives can make the company better recognized. - Poor public sector means the retail company could run into issues and problems in accessing utility and related services. - Competitor dominance means that the American retail firm would face so much difficulties in capturing and holding market share - Pervasive crime implies that the assets and stocks of the American retail firm in South Africa would be at risk. - Massive diversity means more time and money must be invested into segmentation. Recommendations. From the research, it is apparent that there is a fair balance of opportunities and threats. However, it seems that the retail firm would have a lot of positives if it goes into the South African market. In order to succeed, the following recommendations are desirable: 1. An independent critique of the South African market to identify ways of converting potential demand to effective demand. 2. The company must attract the best workers and managers by employing from qualified and experienced people in the industry. 3. The American retail firm must also focus on doing business online and forming delivery services in addition to the normal sales channels. This would give it a competitive advantage over competitors. 4. The firm can also brand itself as a corporate social responsibility giant and gain the confidence of South Africans. 5. The use of outsourced consultants and private and efficient service providers can be a viable option against the inefficient public sector. 6. The American retail firm must work hard to form an effective and efficient business intelligence unit that would monitor consumer tastes and preferences as well as competitor action. This would provide real time information for change. 7. Private security is important and the company must form a long-term relationship with a trusted security service producer in the country. 8. The country needs to contract a good legal and social consulting entity to review and audit the firms operation to ensure that all social and cultural groups are given a good and fair treatment by the firm. References Badescu, C. (2011) Case Studies in Management Issues Bucharest: Editura Mica Valahie De Bruyn, P. and Bain, K. (2011) Frommers South Africa London: Wiley Mansvelt, J. (2011) Green Consumerism: An A – Z Guide London: SAGE Nkosi, P. (2012) The New South Africa Cape Town: Juta Publishing. Reilly, F. K. and Browk, K. (2009) Investment Analysis and Portfolio Management Mason, OH: Cengage Reymish, K., Tseane, P. and Ivanovic, D. (2011) Fresh Perspectives – South Africa Johannesburg: Pearson Education Sachs, A. (2008) South African Law Cape Town: Juta Publishing Simpson, P. R. (2012) E-Commere – South African Edition Cape Town: Juta Publishing. Strydom, A. (2011) Introduction to Marketing Cape Town: Juta Publishing. Theron, R., Moerdryk, A. and Schechter, A. (2012) Industrial Psychology Johannesburg: Pearson SA Waters, D. (2012) Operations Strategy Mason, OH: Cengage Wiersema, W. (2011) Manufacturing Distribution and Retail Guide London: CCH World Bank (2013) Data – South Africa [Online] Available at: http://data.worldbank.org/country/south-africa Accessed: 15th April, 2013 Read More