Market Entry & Expansion Strategies for Africa: Factors for Consideration

Market Entry & Expansion Strategies for Africa:Factors for Consideration Eugene Nizeyimana January 2013 Sub-Saharan Consulting Group

Sub-Saharan Consulting Group (SSCG)A global management consulting firm that provides research intelligence,corporate services, business management solutions and advisory toorganisations in the UK and Sub-Saharan Africa. SSCG provide expertknowledge, networks, advice and support to organisations wishing toengage in business activities in Africa with subsidiaries in Nigeria, Zambia,Kenya, Uganda and Malawi.Leveraging on innovation, entrepreneurship and market intelligence, SSCGprovide advice on barriers, disseminate knowledge on the most pressingissues that affect businesses, investors, public organisations andentrepreneurs today, identify and present investment opportunities toinvestors to enhance sustainable economic and business growth both inthe UK and African region.SSCG aims are to meet the needs of UK organisations or entrepreneursseeking to engage in commercial activities in frontier market and emergingeconomies such as Africa. SSCG

Contents1. Africa market overview2. Market Entry Strategies: Unlocking Africa’s potential3. Key Market Entry Steps4. Factors to consider when choosing foreign partners5. Management issues with market entry strategies6. Key success factors for market entry strategy7. Main reasons of establishing local operation8. Choosing a country9. Deciding the right market10. Benefits for UK companies to invest overseas: Africa11. How can we help you?12. Conclusion13. Contact Us SSCG

Understanding MarketOpportunities in Africa SSCG

African Market Overview• UK companies searching for new emerging market growth opportunities should not overlook Africa. While the continent’s sheer size would merit attention, Africa offers much more than resources alone: Since 2000, Sub-Saharan Africa has experienced consumer spending growth of 4% per year, which propelled it to $600 billion in 2010.• Sub-Saharan Africa is home to 6 of the 10 fastest growing markets in the world.• Economic growth in the region is predicted to be strong – between 5 and 8% in 2013 and coming years.• And – most importantly – millions of Africans are finding a path from poverty to greater opportunities and prosperity.• Africa is the second-most-populated continent, with around 1 billion people, which is so far underserved.• Rapidly improving income levels, infrastructure, and business environments promise to drive continued growth in Africa’s consumer markets. In fact, consumer spending is expected to reach nearly $1 trillion in 2020, according to a 2011 Euromonitor report.• Africa contain 60% of the world resources.• Huge development needs and opportunities. SSCG

Market Entry Strategies: UnlockingAfrica’s potentialA company’s market entry strategic plan must clearly reflect the roleAfrica will play in its broader corporate strategy, and focuson which countries it makes sense to enter at the right timing.There are numerous market entry strategies that a business can adopt when settingup a business or expanding into the African market.Each has differing levels of risks, legal obligations, advantages and disadvantages. SSCG

Key Market Entry StepsThe main key market entry steps that an organisation can adopt when expandinginto the African market include: Understanding the market opportunities Developing the right value proposition for consumers Devising a feasible market entry strategy Developing effective supply chain Optimizing marketing channels Establishing local presence Identify and develop strong local partnership SSCG

1. Local OfficeEstablishing local presence in Africa through a representative or branchoffice, renting an office space and hire local staffs.Advantages:• Greater control of marketing and distribution• Direct contact with customers• Improved credibility in market place with customers• Access to local information and venture capitalDisadvantages:• Cost of establishing an office is higher than using an agent and/or distributor• Do not have a local partner with contacts and expertise as in a joint venture SSCG

2. Strategic Alliances (SA)Developing partnership with highly established organisations orgovernment institutions in Africa.Strategic alliance partners can be identified through bankers, accountants,business consultants, industry associations and networks, meetings andgovernment contacts. SSCG

3. Joint Venture (JV)Developing a partnership with a local or other global establishedorganisations in Africa to form a new incorporated company.Both parties provide equity and resources to the JV and share in themanagement, profits and losses. SSCG

A/Disadvantages of JV & SAPartnership working provide greater opportunities and advantages fororganisations especially in the African market but have to be managedeffectively.Advantages:• Acquire competencies or skills not available in-house• When market needs to be penetrated quickly, eg. when competitive entry is imminent or technological change is very rapid• Spread the risks of a large project over more than one firm• Enable faster entry and payback• Often forced into JV by government regulation or pressure• Avoid tariff barriers and satisfy local content requirementsDisadvantages:• Partners do not have full control of management• May be impossible to recover capital invested• Disagreement on new export markets• Partners may have different views on expected benefits SSCG

Factors to Consider WhenChoosing Foreign PartnersThe 4Cs sum up some of the most important factors to think about whenselecting partners in Africa:• Complementary skills & experience• Cooperative cultures• Compatible goals• Commensurate risks SSCG

4. Merger/AcquisitionA merger with a domestic company in the target market to creates a newentity.Under an acquisition, the exporting company will take over a domesticcompany in the target market.The domestic company may still trade under its own company name withownership and direction controlled by the exporting company. SSCG

Mergers/Acquisition Advantages: • Decreased time to access and penetrate target market as the existing company already has a product line to be exploited and a distribution network • Prevents an increase in the number of competitors in the market • Overcome entry barriers including restrictions on skills, technology, materials supply and patents Disadvantages: • Increased risks – may be a large financial commitment but faces political and market risks • Poor or slow post-merger integration • Target too large or too small • Overly optimistic appraisal of synergies • Overestimation of market potential • Inadequate due diligence • Incompatible corporate cultures SSCG

5. FranchisingDeveloping an on-going business relationship in Africa where one party(the franchisor) grants to another (the franchisee) the right to distributegoods or services using the franchisor’s brand and system in exchange fora fee.More sophisticated franchise arrangements specify a precise businessformat under which the franchisee is expected to carry on business andensuring a common customer experience throughout the network.Franchising enables you rapid market expansion using the intellectualproperty of the franchisor, and the capital and enthusiasm of a network ofowner operators. SSCG

6. Contracting & LicensingOrganisations may decide to enter African market by contracting servicesor the manufacture of its product in the target market.This will ensure products or services are tailored to the conditions andspecific requirements of the local market.Market entry through licensing where (the licensor) agreeing to permitanother organisation (the licensee) to use the manufacturing, processing,trademark, know-how or some other skill provided by the licensor for a fee. SSCG

Management Issues with MarketEntry Strategies  Uniqueness of products or services  International experience and knowledge of cultural issues  Barriers to entry  Designing a good business model  Is it cheaper to produce locally overseas or to export?  Is it better to license to infiltrate more markets faster?  Have you insured against non-payment?  How to address legal issues or conflicts with partners  Have you got a plan for a currency increase? SSCG

Key Success Factors for MarketEntry Strategy• long-term commitment – (local office, training, promotional activities)• Relationship development (distributors, local government, JV partners)• Patience (government, culture, realistic time frames and budgets)• Prove the concept in Africa first – Strong domestic client base to leverage (especially if internationally recognised)• Uniqueness of products and services (Value proposition)• Strong reputation/confidence in ability• Prior international experience or recruit internally experienced people in market presence – closeness to customer• Good interpersonal skills of staff/cultural understanding• Keep website up-to-date and informative to boost credibility

Main Reasons of Establishing LocalOperation To establish a global brand locally effectively A physical presence is necessary Buyers want a local contact point To enable access more customers To improve customer service levels To enable just-in-time delivery To gain local knowledge of competitors and consumers To establish better relationships with suppliers, buyers and end users To gain access to local media for promotion To encourage diversity and innovation in the company SSCG

Choosing a CountryA useful starting point in considering the country of any foreign directinvestment is to take a wider view of distance than simply the distance fromhome measured in kilometres.For example: Cultural distance - language, ethnicity, religion Administrative distance - institutional weaknesses, government policies, political hostility Geographic distance - lack of common border, physical remoteness, size of country Economic distance - differences in consumer incomes, cost differences SSCG

Deciding The Right MarketThe main factors that influences market entry decision is the size of themarket. Exposure to a broader range of large and small markets increasesthe geographical base for revenue generation.Other factors given as important to the market decision include: Political stability - political history, fiscal and monetary policy Economic stability - growth rates, incomes, costs, resources, interest rates and inflation Geographic borders - remoteness, size of country, population and climate Infrastructure for transportation and communication Business ethics - language, ethnicity and culture Competitors and industry structure Tax policy, tariffs and other trade barriers, incentives offered by government Labour costs Quality of potential local partners Availability of local suppliers SSCG

Benefits for UK Companies toInvest Overseas: AfricaInvesting overseas will generate the following multiple advantages for theUK companies and economy: Increased demand for home-sourced capital equipment and services Increased sales and profits Increased taxation income for the UK Government Improved profile and competitiveness of UK in the global marketplace especially Africa Capitalise market untapped opportunities and market SSCG

How Can We Help You?Leveraging on our international and local expertise, knowledge, connection andunderstanding, we can support your organisation with: Market research – Market intelligence analysis and tailored client database Consult on market entry strategic approaches and planning. Location advice - information on what to take into account when deciding where to locate your business. Research and consult on labour practices and costs. This includes identify local employment practices to cover both legal and cultural issues. Identify the incentives available both at the international, national, state, and/or city level. Referrals to local experts. Introductions to networks and partner searches - Introduce you to the relevant industry bodies , identify, research and verify appropriate people in the market such as agents or joint venture partners. SSCG

ConclusionAs the African market and opportunities continue to grow more attractive, FDI inward flowincreasing, companies needs to devise innovative ways to gather market intelligence anddevelop in-depth insights they need in order to device compelling consumer valueproposition offering and delivery strategies that can both meet the needs of Africanconsumers and generate sustainable robust revenue and profits.Market data, experience and customer feedbacks indicates that current successfulinternational organisations in Africa employ a structured approach to understand and dobusiness in Africa. By focusing on the distinctive and niche needs, industry, andpreferences of consumer segments and by applying a systematic approach to marketentry, promotion, strategic partnership development and on-going success, firms cancapture the African opportunities on their own terms, in the process ensuring sustainablelong-term growth. SSCG

Reference• UN Population Division, 2010: http://www.un.org/esa/population/• Maxim Pinkovskiy, Massachusetts Institute of Technology Xavier Salai-Martin, Columbia University and NBER, 2010• Source: “No whitewash: Unilever’s drive to dominate Africa,” Jasson Nissa, April 2003• Source: “African group brews new customers,” http://www.ft.com/cms/s/0/c55f7318-f957-11de-80dc- 00144feab49a.html#axzz1En8JK3ob• Source: “Noodles War: Indomie and the competitions,” stocknewsline, December 2009• Source: “Distribution is the name of the game,” Mats Thoren, Ericson Business Review, February 2007• Source: EABL Annual Report, 2010• Africa Market Entry: Strategies for consideration, by Grant Hatch, Pieter Becker and Michelle van Zyl, http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Africa-Market-Entry.pdf• Source: Standard Bank Group—Kenya SME Pilot. www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/cid/el/gem- 2010/presentations/Standard_Bank_Group_SME_Pilot.pdf SSCG

Contact Us7200 The QuorumOxford Business ParkOX4 2JZT: + (44) 01865 589022E: info@s-scg.comW: www.s-scg.comNigeria: nigeria@s-scg.comKenya: kenya@s-scg.comMalawi: malawi@s-scg.comZambia: zambia@s-scg.comUganda: uganda@s-scg.com SSCG

Market Entry & Expansion Strategies for Africa: Factors for Consideration

by SUB SAHARAN CONSULTING GROUP on Jan 17, 2013

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Market Entry & Expansion Strategies for Africa: Factors for Consideration Presentation Transcript