Case Study on Ethiopia: An Emerging Market Opportunity Answer following questions: 1. Does Ethiopi Ethiopiaa represent represent an attracti attractive ve investme investment nt opportunity opportunity?? actors !olitical environment " #ndustrial !olicy
Ease of doing *usiness
0ar)et opportunity
0ar)et access 1
!ros Cons Political stability since early Single state party an limite 1$$%&s under rule of E'D( political freeom required with relatively low country caution from companies doing ris). *usiness and are accustomed to Efforts at market more open environment. liberalization *y the govt of State control of economy Ethiopia including openness to remains significant with )ey foreign investment and sectors off limits to foreign privati+ation of state owned investors. State o!ne or party *usiness. Significant investment in affiliate *usiness may en,oy public infrastructure to *uild unfair advantage. Significant purchasing foundation for long term controlle by government growth. and pu*lic sector corruption Favorable tax an customs regime for *usiness that match for tenders may e-ist ran)ed criteria for govt growth low *y transparency priorities. international/ Ease of oing business Ease of oing business relatively good for su* Saharan remains poor *y glo*al Africa "onstruction an standards. #nvestor protection ( Cross property registration *order trade among areas relatively easier than it is in where performance is other SSA countries. relatively poor. More than $% million people . &'P per capita remains lo! . 'an)ed th among African 3elow most comparison countries for mar)et countries. opportunity *y Ernst and Possible limits to aressable 2oung. market due to income Fast gro!ing economy in inequality and low Africa over the last decade. ur*ani+ation rate. Fast gro!th &'P per capita increasing the purchasing power. Supplier opportunity through Fragmente istribution
Ethiopia: An Emerging Market Opportunity
lower costs and access to potential growing mar)et.
Competitive position
)imite competition due to legacy of state controlled economy creating opportunities for new entrants.
4uman resources
)o! !ages can create significant cost advantage for la*or intensive *usiness.
5ther costs
limits addressa*le mar)et and drives up costs. (holesale an retail business reserved for Ethiopian *usiness only. )ocal kno!lege* +elationships an customs are paramount and may require reliance on local partners. &lobal bran strength may *e mitigates in environment where foreign influence has *een limited and small upstarts are on level playing field. Protection of the intellectual property may *e costly and difficult. "ross cultural management may *e difficult for foreign firms( leading to preference for hiring costly Ethiopian diaspora #nfrastructure challenges for transport( power( and telecommunications can drive up costs of doing *usiness.
6. 7hat )ey success factors will mater most in Ethiopia? #f you were deciding whether to enter Ethiopia( what would you need to )now?
2
actors
E-amples of success factor
!olitical environment " #ndustrial !olicy
3usiness model that mitigates or minimi+es e-posure to govt and or state controlled sectorse.g. telecom/ A*ility to navigate govt relations.
E-ample of question and consideration 7hat is our e-posure to government decision ma)ing or policy? Do we have adequate understanding of this govt&s process( influencers( policies or the right local partners and guides to help navigate these matters?
Ethiopia: An Emerging Market Opportunity
0ar)et opportunity
0ar)et access
Competitive position
4uman resources
5ther costs
3
Addressa*le mar)et of adequate si+e or sufficient growth rate in addressa*le mar)et A*ility to overcome distri*ution challenges and our a*ility to control or create distri*ution channels
Do we understand mar)et si+e and dynamics in a granular( segmented way?
7hat are the *arriers to reaching our mar)et( e.g. logistics( relationships? Does our *usiness model ena*le us to overcome mar)et access challenges( or do we have the right partners to do so? Do we have the a*ility and opportunity to create our own mar)et access solution or8888 7hat are the implications to our economics? 'elevant and unique value #s our proposition truly relevant proposition vs. competition. to the local mar)et? air competition free of Do we )now how ti communicate collusion and or mar)et our value proposition in a distortions favoring local relevant way? Can we protect our advantage firms. e.g. *rand( #!( )now8how/? 7ill we *e competing on a level playing field? 9uality of country general 7hat attri*utes will a successful manager. country manager have? 0anagers with prior 4ow important are a manager&s success and e-perience in adapta*ility and tolerance for the country e-pansion. am*iguity? 4ow 3usiness model that *enefits from low cost la*or. 'o*ust economics that can #s our *usiness plan sufficiently a*sor* high and or ro*ust to accommodate un*udgeted costs. downside; challenges( such as 'o*ust systems or unanticipated costs? processes that can overcome infrastructure challenges e.g. *ac)up power/
Ethiopia: An Emerging Market Opportunity
<. Evaluate each company&s proposed entry to Ethiopia *ased on these factors of success: a, -o! !oul you evaluate each company.s proposal/ •
•
•
•
•
•
4
=he companies CareCo( ShoeCo and 0edCo propose to enter Ethiopia for their respective products. "are"o: #ts way to enter the mar)et *y a su*sidiary is different from the traditional way of entering through local distri*utor. =he new way they try out for entering Ethiopia is already carried out *y them *ut not in any new country. =hey have tried this in the same place where they used their traditional method to esta*lish themselves. =he new method of su*sidiary though *y planning could cross an average gross margin of up to >%( *ut has never seen any result yet. So without getting the e-pected results in the previous place they tried getting a su*sidiary( could go wrong in the new country they try Ethiopia. Shoe"o: As per the previous esta*lishments the ShoeCo entered the mar)et *y use of third part importers and local mar)eting. 3ut if appropriate conditions are found for local manufacturing then they could esta*lish the manufacturing facility either wholly owned or as a ,oint venture. =hey already tried entering the Ethiopian mar)et *y a local distri*utor( which is growing at a rate of 1% per annum. So they have a rough idea a*out how the mar)et is and how much it is important to ma)e a local unit capa*le in all aspects as that in other countries. Me"o: b, (hat o you think is the payback perio of each company/ =he !ay*ac) period is the length of time required for an investment to recover its initial outlay in terms of profits or savings.
Ethiopia: An Emerging Market Opportunity
•
As per the calculation made with the availa*le data the pay*ac) period for "are"o is .< years( Shoe"o is 6 years( Me"o is @ years. c, (hat recommenations !oul you make to each company/ "are"o: CareCo&s director A-el a+uo states that if they do not move decisively into the competition then Ethiopia will also *e a difficult country to catch up with the mar)eting. So they wanted to enter into the Ethiopian mar)et as soon as possi*le. 3ut the strategy they plan is to esta*lish a local manufacturing su*sidiary. =he su*sidiary could help achieving an average gross margin up to >%. =he *rand as it is planning for a great start should concentrate more on the quality than the profit. #f it could *uild up the trust in the consumer with the quality then it would *e very easy for the CareCo to sustain in the mar)et as Ethiopia has an emerging mar)et and ma)ing a good stand in the quality can help them in sustaining in the mar)et. Shoe"o: ShoeCo&s vice president of sales( 3eatrice Chen( focused on ta- incentives and the low cost of inputs. =he idea of setting up a local manufacturing unit in an economic +one outside Addis A*a*a will give an e-emption of @ years from the corporate ta-es. =his would save the cost of manufacturing as well as the transport charges for mar)eting the goods to the su*8distri*utors. 7ith the capital equipment imported duty free( the new unit will also give wor) to 6%%% local wor)ers. Also their la*or costs will *e considera*ly low than the other factories of ShoeCo. 3ut the ma,or challenge in the local unit setup will *e the s)illed la*or. Bative Ethiopians who wor)ed in foreign countries are efficient *ut are really scarce and costly. =he wor)ers ma,orly availa*le in the mar)et would not *e much trained or s)illed. =he main challenge is to train them a*out their process and ma)e a unit which is equally good in terms of quality. Me"o: 0edCo&s chief operating officer 2ousef Al8A**ar is very confident that the time is now favora*le to *uild a facility. And they can *e operational within twelve months of *rea)ing ground. Also they trust that they can *uild a strong *ase from which to capitali+e on the fast growing spending on health care. , (hich key success factors matter most for each company/ "are"o: for CareCo it is important to maintain the quality of the product. Shoe"o: for ShoeCo it is important to ma)e such a local su*sidiary unit which would maintain the quality of the product. Me"o: e, (hat are the most important concerns an 0 or unans!ere 1uestions in each company.s proposal/
#mportance of success factor 3usiness is not politically sensitive or su*,ect to govt procurement. 57. Success depends on true si+e and growth of addressa*le mar)et of consumers for CareCo products. 4#4 Success is dependent on CareCo&s a*ility to manage fragmented distri*ution channels to reach consumers. 4#4 0oving too slowly maty hurt CareCo&s a*ility to gain share in long term 0ED#F0 Some local hires li)ely required for the manufacturing and sales. 0ED#F0 ocal manufacturing Gs imports )ey to *usiness
Strength of proposal
=a- policy for local manufacture appears favora*le for CareCo. 4#4 Success depends on the fast growth of addressa*le mar)et. 57
Success required aggressive share gain( which
Some penetration from local and foreign competitors( *ut mar)et is in early stages. 0ED#F0 Fnclear *ut CareCo appears to have strong team availa*le for glo*al e-pansion. 4#4 ocal manufacturing will reduce cost of goods Gs imports( *ut the
Ethiopia: An Emerging Market Opportunity
economics8 former has fi-ed costs *ut can reduce product priceif sales volume materiali+e/H later has low fi-ed costs( *ut duties may drive up product price. 4#4
economics sales volumes materiali+e. 05DE'A=E
Calculation of pay*ac) period Assumption s Assumption s
!ay*ac) #n years
0anagement case 4igh end/
ow case e-ample/
Alternate case import8only strategy/ I@@0B upfront I@@0B upfront I<0B upfront capital e-penditure. capital e-penditure. capital e-penditure. 6% mar)et growth 1@ mar)et growth 6% mar)et growth pa. pa. pa. @ mar)et share @ mar)et share 6.@ mar)et share increasing to 6% increasing to 6@ increasing to 6% *y 6%66 *y 6%66 *y 6%66 % gross margin % gross margin % gross margin increasing to >% increasing to >% increasing to >% *y 6%66 *y 6%66 *y 6%66 I160B fi-ed costs I160B fi-ed costs I160B fi-ed costs growing to I1@0A growing to I1@0A growing to I1@0A *y 6%66 *y 6%66 *y 6%66 @.> years .< years <.@ years
Shoe"o Analysis
actors !olitical environment " #ndustrial !olicy 0ar)et opportunity 0ar)et access Competitive position 4uman resources 5ther costs Calculation of pay*ac) period 7
#mportance of success factor
Strength of proposal
Ethiopia: An Emerging Market Opportunity
Assumption s !ay*ac) #n years
0anagement case 4igh end/ <.6 years
ow case e-ample/ <.@ years
Me"o Analysis
actors
#mportance of success factor
!olitical environment " #ndustrial !olicy 0ar)et opportunity 0ar)et access Competitive position 4uman resources 5ther costs Calculation of pay*ac) period Assumption s !ay*ac) #n years
