Applied Strategic Management at Ethiopian Market - Assignment Example

ETHIOPIA: AN EMERGING MARKET OPPORTUNITY?

Pros

Ethiopian market is an emerging opportunity for foreign companies willing to enter new markets and expand into the African continent. While identifying the main pros of Ethiopia as potential market for international expansion, it is possible to mention the following key issues: population growth supplemented with GDP growth, geographic location, open trade policies and favourable political environment, limited competition, low labor costs,

Growing population supported with economic growth

The population of Ethiopia has grown by 30% over the period from 2003 to 2013. In addition to population growth, the economy of the country also has been improved. The GDP growth over this period was impressive - from $8.6 billion to $47.5 billion (Quelch and Yong, 2). Thus, increasing population supported with continuous economic growth and increasing average incomes will more likely represent great market opportunities for foreign players.

Favourable geographic position

The country is located in favourable location in East Africa, bordered by Sudan and South Sudan to the west, Djibouti and Somalia to the east, Eritrea to the north, and Kenya to the south (Quelch and Yong, 1). This location allows the foreign companies to enter the African continent and later expand through it, gaining access to low cost labor and valuable natural resources.

Favourable political and legal environment

Ethiopian government has adopted various reforms and initiatives, making the business investment climate in Ethiopia more attractive to foreign companies. Income-tax exemptions for investors, establishing enterprises in agro-processing, production of agricultural products and manufacturing also added value to potential investors seeking for business opportunities in Sub-Saharan continent (Quelch and Yong, 2). Custom exemptions for selected capital goods also was one of the pros of Ethiopian business investment climate.

Infrastructure development

Moreover, improved transportation, telecommunications and power infrastructure also drives economic growth and make the Ethiopian market more attractive for business development. There were build new rail and road corridors to seaports in Djibouti. This aspect is especially important for foreign companies, willing to export their products to Ethiopia.

Low labor costs

Another important pros of Ethiopian market for foreign investors is associated with relatively low labor costs. The country has sufficient supply of highly skilled and affordable employees (Quelch and Yong, 3).

Limited competition

Ethiopia as an emerging market is characterized by numerous industries and sectors that are underdeveloped. Foreign companies willing to enter this market will benefit from limited competition on the market, gaining premium shares of the market/niche market.

Cons

There are also some important cons that might pose difficulties for foreign investors while entering and operating in Ethiopia. These cons include: state monopoly over strategic industries, corruption, limited infrastructure, fragmented distribution channels in rural areas, and cross-cultural differences.

State monopoly over selected industries

The government of Ethiopia retained state monopoly over such industries and sectors: power, telecommunication, air transport, financial services and shipping. State monopoly in such sectors as financial services and shipping/air transport burdened by bureaucracy and corruption may be a significant challenge for foreign companies. Overall, the country is ranked relatively low in terms of ease of doing business in Ethiopia, which also undermines its position as one of the prospective markets for foreign investors.

Weak intellectual property legislation

Another cons of doing business in Ethiopia is associated with weak intellectual property rights. As Ethiopia has not yet signed key international intellectual-property treaties, there is a high risk associated with violation of IP rights of foreign firms (Quelch and Yong, 3). Piracy and counterfeit risks pose significant challenges for companies, especially those operating in knowledge-based industries with know-how.

Corruption

Corruption is another essential pros of doing business in Ethiopia. Corruption common at state-level decision making will not allow firms to compete on equal rights and conditions.

Limited infrastructure

One more cons is related to dependence on the port of Djibouti for surface shipments (Quelch and Yong, 3). Still one-third of population lives far from large cities in suburb areas, which makes a significant portion of potential customers hard to reach because of infrastructural limitations.

Cross-cultural differences

Moreover, due to significant cross-cultural differences between the Ethiopians and other nations, investors might face with the problems of miscommunication, misunderstanding, conflicts, etc.

Fragmented distribution channels

Fragmented distribution channels is one of the important cons of the Ethiopian market. Taking into consideration the fact that more than 75% of Ethiopians live in rural areas and that infrastructure is still underdeveloped in this field, international companies will face with logistics and distribution difficulties (Quelch and Yong, 4). However, the foreign firms still may develop relationships with local partners in order to set up and with mutual efforts develop the distribution channels.

CareCo

CareCo being a manufacturer of personal-care products with a long history and strong brand recognition might be very successful in the Ethiopian market. The entry strategy through an independent local distributor enables the company to manage the gap of cross-cultural communication and to leverage the knowledge and capabilities of local partners to penetrate the market. However, taking into consideration custom duties of 35%, this entry strategy seems to be less efficient in terms of costs and profitability. Therefore, the strategy of establishing a local manufacturing subsidy might be more strategically adequate decision. The company will benefit from tax exemptions, greater control over manufacturing, marketing and distribution, etc. Lower prices will enable the firm to capture wider audience and thus to develop more extensive sales across the country. However, while choosing wholly-owned enterprise as the market entry strategy, CareCo will face with the challenges of cross-cultural communication with employees, suppliers, customers and other stakeholders. Lack of local knowledge and understanding of the specific market might result in firm’s failure to position its brand and develop extensive customer base. On the other hand, CareCo’s brands already have high recognition among the Ethiopian customers, which means that it will be easier for the foreign brand to penetrate the market. The company has a great opportunity to develop the segment of rural consumers, who comprise 75% of Ethiopian population. Furthermore, own manufacturing in Ethiopia will be especially beneficial in terms of company’s competitive pricing and cost position, ensuring product quality, and managing marketing and distribution. However, underdeveloped infrastructure in rural areas may pose some significant barriers and challenges for establishing CareCo’s nationwide presence in Ethiopia. Overall, the firm will more likely succeed by deciding to enter the country through stablishing own manufacturing facilities.

ShoeCo

ShoeCo is a footwear manufacturer based in China (Quelch and Yong, 5). The company already has some experience of exporting shoes to Ethiopia and thus has some knowledge and understanding of local business environment and consumer preferences. ShoeCo considers developing further its presence throughout the region by establishing manufacturing in Ethiopia. Taking into consideration favourable geographic location and low labor costs, ShoeCo will gain the opportunity to expand its business and leverage the emerging opportunities in the region. Low cost of inputs, tax incentives, and exemption for five years from taxes are important benefit for the company. This strategy might be more effective if the company would form a joint venture with a local partner. Thus, ShoeCo would gain local support, local connections with suppliers and distributors and better understanding of the local consumers, their needs and preferences. If the company will be able to achieve economies of scale in Ethiopia and use its shoe manufacturing factory for supplying shoes throughout the whole region, it might be quite an effective strategic business solution.

MedCo

MedCo is the UAE-based pharmaceutical company, which manufactures and sells generic pharmaceuticals and over-the-counter drugs (Quelch and Yong, 5). The company offers generic products, which target broad range of mass consumers. Moreover, attractive pricing due to lean, agile manufacturing and operational efficiency allows the company to offer competitive prices. These strengths will definitely play an important role in firm’s positioning and marketing. Taking into consideration the growth potential of healthcare sector in Ethiopia, MedCo might develop its wholly owned subsidiary in new market quite successfully. However, in addition to financial prospects, there are some serious pitfalls that might threaten firm’s success. The company has operational know-how, which means that by entering the foreign market such as Ethiopia it faces with the threat of intellectual property rights violation. Wholly-owned subsidiary will enable the company to protect its know-how and intellectual property compared the case of establishing joint venture with local partner. However, the company’s cost advantage and operational efficiency still might be stolen by irresponsible employees or unethical competitors. Furthermore, taking into consideration that the pharmaceutical industry is highly fragmented in Ethiopia, it would be better for the company to work through large wholesalers. The company plans to target the Ministry of Health as the main customer who meanwhile procures the whole public health care system. However, taking into consideration high rates of corruption in the country, MedCo is more likely to fail to achieve agreement with the government structures relying only on quality and best pricing strategies.

Most likely to succeed

In my personal opinion, CareCo has the best chance for success as the company’s brand is already recognized on the market and consumers are more loyal to the brand. The competition is limited in this sector, and the company has a great opportunity to develop exclusive partnership with key distributors throughout the country. In case of MedCo there are high risks associated with intellectual property rights, competitive positioning along with pharmaceuticals from China and India, and high corruption level at state level. In case of ShoeCo, the chances are fifty-fifty. The company might succeed in establishing its manufacturing, but in long-term perspective it is not clear how it will be able to develop business throughout the region and compete with low-cost manufacturers from Asia-Pacific region.