3b Template for Solving Ethiopia Case Study SOLVED

Ethiopia: An Emerging Market Opportunity

Case Study on Ethiopia: An Emerging Market Opportunity Answer following questions: 1. Does Ethiopia represent an attractive investment opportunity? Factors Political environment + Industrial Policy

Ease of doing business

Market opportunity

Market access 1

Pros Political stability since early 1990’s under rule of EFRDF, with relatively low country risk. Efforts at market liberalization by the govt of Ethiopia including openness to foreign investment and privatization of state owned business. Significant investment in public infrastructure to build foundation for long term growth. Favorable tax and customs regime for business that match criteria for govt growth priorities. Ease of doing business relatively good for sub Saharan Africa Construction and property registration relatively easier than it is in other SSA countries. More than 90 million people. Ranked 6th among African countries for market opportunity by Ernst and Young. Fast growing economy in Africa over the last decade. Fast growth GDP per capita increasing the purchasing power. Supplier opportunity through

Cons Single state party and limited political freedom required caution from companies doing business and are accustomed to more open environment. State control of economy remains significant with key sectors off limits to foreign investors. State owned or party affiliated business may enjoy unfair advantage. Significant purchasing controlled by government and public sector corruption for tenders may exist (ranked low by transparency international) Ease of doing business remains poor by global standards. Investor protection, Cross border trade among areas where performance is relatively poor. GDP per capita remains low. Below most comparison countries. Possible limits to addressable market due to income inequality and low urbanization rate.

Fragmented distribution

Ethiopia: An Emerging Market Opportunity

lower costs and access to potential growing market.

Competitive position

Limited competition due to legacy of state controlled economy creating opportunities for new entrants.

Human resources

Low wages can create significant cost advantage for labor intensive business.

Other costs

limits addressable market and drives up costs. Wholesale and retail business reserved for Ethiopian business only. Local knowledge, Relationships and customs are paramount and may require reliance on local partners. Global brand strength may be mitigates in environment where foreign influence has been limited and small upstarts are on level playing field. Protection of the intellectual property may be costly and difficult. Cross cultural management may be difficult for foreign firms, leading to preference for hiring costly Ethiopian diaspora Infrastructure challenges for transport, power, and telecommunications can drive up costs of doing business.

2. What key success factors will mater most in Ethiopia? If you were deciding whether to enter Ethiopia, what would you need to know?

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Factors

Examples of success factor

Political environment + Industrial Policy

Business model that mitigates or minimizes exposure to govt and or state controlled sectors(e.g. telecom) Ability to navigate govt relations.

Example of question and consideration What is our exposure to government decision making 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

Market opportunity

Market access

Competitive position

Human resources

Other costs

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Addressable market of adequate size or sufficient growth rate in addressable market Ability to overcome distribution challenges and our ability to control or create distribution channels

Do we understand market size and dynamics in a granular, segmented way?

What are the barriers to reaching our market, e.g. logistics, relationships? Does our business model enable us to overcome market access challenges, or do we have the right partners to do so? Do we have the ability and opportunity to create our own market access solution or---What are the implications to our economics? Relevant and unique value Is our proposition truly relevant proposition vs. competition. to the local market? Fair competition free of Do we know how ti communicate collusion and or market our value proposition in a distortions favoring local relevant way? Can we protect our advantage firms. (e.g. brand, IP, know-how)? Will we be competing on a level playing field? Quality of country general What attributes will a successful manager. country manager have? Managers with prior How important are a manager’s success and experience in adaptability and tolerance for the country expansion. ambiguity? How Business model that benefits from low cost labor. Robust economics that can Is our business plan sufficiently absorb high and or robust to accommodate unbudgeted costs. “downside” challenges, such as Robust systems or unanticipated costs? processes that can overcome infrastructure challenges (e.g. backup power)

Ethiopia: An Emerging Market Opportunity

3. Evaluate each company’s proposed entry to Ethiopia based on these factors of success: a. How would you evaluate each company’s proposal? 

The companies CareCo, ShoeCo and MedCo propose to enter Ethiopia for their respective products.  CareCo: Its way to enter the market by a subsidiary is different from the traditional way of entering through local distributor. The new way they try out for entering Ethiopia is already carried out by them but not in any new country. They have tried this in the same place where they used their traditional method to establish themselves.  The new method of subsidiary though by planning could cross an average gross margin of up to 70%, but has never seen any result yet.  So without getting the expected results in the previous place they tried getting a subsidiary, could go wrong in the new country they try Ethiopia.    ShoeCo: As per the previous establishments the ShoeCo entered the market by use of third part importers and local marketing. But if appropriate conditions are found for local manufacturing then they could establish the manufacturing facility either wholly owned or as a joint venture.  They already tried entering the Ethiopian market by a local distributor, which is growing at a rate of 10% per annum. So they have a rough idea about how the market is and how much it is important to make a local unit capable in all aspects as that in other countries.    MedCo: 

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b. What do you think is the payback period of each company? The Payback 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 available data the payback period for CareCo is 6.3 years, ShoeCo is 2 years, MedCo is 5 years.

c. What recommendations would you make to each company?    CareCo: CareCo’s director Axel Kazuo states that if they do not move decisively into the competition then Ethiopia will also be a difficult country to catch up with the marketing. So they wanted to enter into the Ethiopian market as soon as possible. But the strategy they plan is to establish a local manufacturing subsidiary. The subsidiary could help achieving an average gross margin up to 70%. The brand as it is planning for a great start should concentrate more on the quality than the profit. If it could build up the trust in the consumer with the quality then it would be very easy for the CareCo to sustain in the market as Ethiopia has an emerging market and making a good stand in the quality can help them in sustaining in the market.    ShoeCo: ShoeCo’s vice president of sales, Beatrice Chen, focused on tax incentives and the low cost of inputs. The idea of setting up a local manufacturing unit in an economic zone outside Addis Ababa will give an exemption of 5 years from the corporate taxes. This would save the cost of manufacturing as well as the transport charges for marketing the goods to the sub-distributors. With the capital equipment imported duty free, the new unit will also give work to 2000 local workers. Also their labor costs will be considerably low than the other factories of ShoeCo. But the major challenge in the local unit setup will be the skilled labor. Native Ethiopians who worked in foreign countries are efficient but are really scarce and costly. The workers majorly available in the market would not be much trained or skilled. The main challenge is to train them about their process and make a unit which is equally good in terms of quality.    MedCo: MedCo’s chief operating officer Yousef Al-Abbar is very confident that the time is now favorable to build a facility. And they can be operational within twelve months of breaking ground. Also they trust that they can build a strong base from which to capitalize on the fast growing spending on health care. d. Which key success factors matter most for each company?    CareCo: for CareCo it is important to maintain the quality of the product.    ShoeCo: for ShoeCo it is important to make such a local subsidiary unit which would maintain the quality of the product.    MedCo: e. What are the most important concerns and / or unanswered questions in each company’s proposal?

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Ethiopia: An Emerging Market Opportunity

CareCo Analysis Factors Political environment + Industrial Policy Market opportunity

Market access

Competitive position

Human resources

Other costs

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Importance of success factor Business is not politically sensitive or subject to govt procurement. LOW. Success depends on true size and growth of addressable market of consumers for CareCo products. HIGH Success is dependent on CareCo’s ability to manage fragmented distribution channels to reach consumers. HIGH Moving too slowly mat=y hurt CareCo’s ability to gain share in long term MEDIUM Some local hires likely required for the manufacturing and sales. MEDIUM Local manufacturing Vs imports key to business

Strength of proposal Tax policy for local manufacture appears favorable for CareCo. HIGH Success depends on the fast growth of addressable market. LOW

Success required aggressive share gain, which

Some penetration from local and foreign competitors, but market is in early stages. MEDIUM Unclear but CareCo appears to have strong team available for global expansion. HIGH Local manufacturing will reduce cost of goods Vs imports, but the

Ethiopia: An Emerging Market Opportunity

economics- former has fixed costs but can reduce product price(if sales volume materialize); later has low fixed costs, but duties may drive up product price. HIGH

economics sales volumes materialize. MODERATE

Calculation of payback period Assumption s

Management case (High end)

Low case (example)

Assumption s

$55MN upfront capital expenditure. 20% market growth pa. 5% market share increasing to 20% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 5.7 years

$55MN upfront capital expenditure. 15% market growth pa. 5% market share increasing to 25% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 6.3 years

Payback In years

Alternate case (import-only strategy) $3MN upfront capital expenditure. 20% market growth pa. 2.5% market share increasing to 20% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 3.5 years

ShoeCo Analysis Factors Political environment + Industrial Policy Market opportunity Market access Competitive position Human resources Other costs Calculation of payback period 7

Importance of success factor

Strength of proposal

Ethiopia: An Emerging Market Opportunity

Assumption s Payback In years

Management case (High end) 3.2 years

Low case (example) 3.5 years

MedCo Analysis Factors

Importance of success factor

Political environment + Industrial Policy Market opportunity Market access Competitive position Human resources Other costs Calculation of payback period Assumption s Payback In years

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Management case (High end) 5.0

Low case (example) 5.0

Strength of proposal