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Analysis of Ethiopia for Business Opportunities

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1. Introduction

1.1 The Country

Ethiopia is almost five times bigger in the size of the United Kingdom and 27 times in the size of the Netherlands, is geographically located in the east of Africa with border line Somalia(1626 km) from east , Eritrea(912km) on north ,Sudan(1606 km) from the west and Kenya (830 km from the south. Ethiopia has geographically importance due to easy access to reach the Middle East and Europe, increase its importance in international trade. Geographically having an area of approximately 1.12 million square kilometers (444,000 square miles) out of which land is on 1,119 million square kilometers and water is on 7444 square meters.

Ethiopia is high plateau with central mountain ranges almost over the country is divided by Great Rift Valley. The major rivers in Ethiopia are Blue Nile, Awash, Baro, Omo, Tekezie and Wabe Shebele. Ethiopia has also small amount of natural resources with small reserves of platinum, gold, potash, copper, hydropower and natural gas.

1.2 The People

Ethiopia is country with around 80 million people, and in comparison to other country it comes on 14th rank in world. Almost more than 80 percent of the population still lives in the rural areas. The age structure in Ethiopia is 0-14 years are (46.1%),15-64 years are (51.2%) and 65 years and over are (2.7%).Ethiopia has average birth rate of 2.7%.

In Ethiopia is total freedom of religious practice, and the Christianity and Islam are the two main religions in Ethiopia with other religions which are in very number most of them are located in south side.

Almost two-third of the population used the three main languages Amharic, Oromiffa and Tigrigna the official language of the Ethiopian government is Amharic. In schools, colleges and university teaching and medium of instruction are in English, also used mostly in the banking, insurance and business transactions, Arabic and Italian languages are also widely used in Ethiopia.

Almost the 42.7 % of over 15 years old people can read and write mean having basic literacy rate. The Ethiopian government is spending almost 5.5 percent of their GDP in education programs.

1.3 The Government

Ethiopia is conventional short form of name, and conventional long form of name is Federal Democratic Republic of Ethiopia. The first time election was held in 1995 and country adopted a new constitution and the government there is known as the federal republic government. The government involves in the foreign policy and relations, defense system and common interest & benefits.

The Federal State divisions are in nine ethnically based states vested with powers for self administration. The FDRE represent the common peoples interest and peoples of the states, the federal government is structured as a lines of bicameral parliament, with the Council of Peoples' representatives being the highest authority of the Federal Government the representative of Councils Members are elected democratically for six year term.

1.4 Cities and Towns

Addis Ababa, the largest city and capital of the Ethiopia, also is the seat of the Federal Government of Ethiopia. The capital city was founded in 1887 and population of around about 3 million. Addis Ababa is the host city for Organization for African Unity and the United Nations Economic Commission for Africa; also there is more international organization with their headquarters and branch offices. Addis Ababa I also centre point for business, commerce and industries. In Addis can find different manufacturing plants located in and around the city.

There are lots of entertainment and sport facilities in the city, with national parks. The main centre of point are resort centers with hot springs and lake, all of them are easily accessible through road.

The other important and big cities in term of trade and industries having potential of expansion are Awassa, Dire Dawa, Gondar, Dessie, Nazareth, Jimma, Harar, Bahir Dar, Mekele, Debre Markos and Nekemte. All of them are interconnected with Addis through road,most of them have their historical importance with good infrastructure facilities.

1.5 THE ECONOMY

The Ethiopian economy is totally dependable on agriculture which has 45% of the Gross Domestic Product (GDP), 65 % of total exports and 85% of employment. Coffee is the main export product and its alone having a share of over 85 % of total agricultural exports. In Ethiopia different crops in different area of the country cultivated but the main crops are cereals, pulses, coffee, cotton, tobacco, fruits, sugarcane and oil seeds.

The industrial sector plays also big role in economy and having almost 11% of share in total GDP, which provides their product to local and global markets. The most important products in term of local market and export are textiles, foodstuffs, tiles, paper, beverages, cement, semi- processed leather, finished leather products and non-metallic products.

In Ethiopia even it is small reserve amount of natural resources and it contribute only 1% to the total GDP, but still there are lots of opportunities in mining to explore and contribute in Ethiopian economy.

Communications

There is total monopoly of Ethiopian Telecommunications corporations over the telephonic services open-wire, microwave radio relay; radio communication in the HF, VHF, and UHF frequencies; 2 domestic satellites provide the national trunk service.

Ethiopia has only 1 public TV broadcast station which broadcasting it nationally and only 1 public radio broadcaster with stations in each state, there are some commercial and dozens of community radio stations.

Transportation

Till 2010 in Ethiopia there 61 airports, out of which 17 airports are with paved runways and 44 airports are unpaved. The railway is under joint control of Ethiopia and Djibouti, but most of it is inoperable and need lots of improvement and expansion to improve the transportation. The conditions of Ethiopian roads are also not in very good conditions out of 36469 km long road only 6980 k are in better conditions other are unpaved around about 29849 km. Ethiopia has 9 merchant marine 8 cargo and 1 roll on/ roll off, they are landlocked and uses the ports Djibouti in Djibouti and Berbera in Somalia. In Ethiopia transportation is a big problem and effects also in the business. Ethiopian government takes this problem very seriously and many projects are on progress for improvement and modernization of Ethiopian transportation system.

1 .6 Banking Systems

1.6.1 Introduction

In Ethiopia banking system was introduced in 1905 with the coordination of Bank of Egypt and the first name of bank was Bank of Abyssinia which is controlled by private company in Ethiopia. Later in 1931 it was replaced by the Bank of Ethiopia.

During the Italian invasion period and subsequent British occupation Ethiopia become one of the important places for East Africa Currency Board. Later again it is renamed as State bank of Ethiopia having two active departments involves in the process of separate function of issuing banks and commercial bank. In 1963 the bank is divided into two parts two new bank national Bank of Ethiopia involves in the process of centralizing and issuing bank and the second one the commercial bank of Ethiopia.

In 1974 there was merging of maximum of financial institutes available tat time including state owned also some of them are

  • The Agricultural and Industrial Development Bank
  • The Savings and Mortgage Corporation of Ethiopia
  • The Imperial Savings and Home Ownership Public Association
  • The Addis Ababa Bank
  • The Banco di Napoli
  • The Banco di Roma

In 1975 change in government policy and change into Marxist government bring again lots of changes in banking system like nationalization of private financial institutes and insurance companies. The big and important commercial bank of Ethiopia is now known as Addis Ababa bank and the total control of all banks and financial institutes are under supervision of National Bank of Ethiopia. The Ethiopian Insurances corporation take all power and control for the all insurance companies and for the home loan and renovation loan is provide by the new Housing and savings bank.

1.6.2 Current Conditions

The whole banking system condition is still undeveloped and need lots of improvement and development. In Ethiopia there is also no stock exchange and foreign bank as the banking system is still not globalized, while higher government authorities are afraid of losing control over the economy because of globalizing the banking system. That's why they have full control over the banking system even they decide the interest rate as per the high inflation rate. Below provided table to have a look on the condition of ease of doing business in Ethiopia.

Table 1 Business Climate of Ethiopia

As National Bank of Ethiopia is Ethiopian central bank and the state owned Commercial Bank is one of the biggest and largest bank in Ethiopia having approx. control of more than 75% of total banking assets in Ethiopia, tables 2 tried to explain the banking system in Ethiopia.

Table 2 Value of Ethiopian Bank Assets

Insurance companies and other financial institutions

In Ethiopia the Ethiopia Insurance Corporation controls 10 insurance companies performing business in more than 200 branches all over the country Below in the table the number of branches and their capital are explained figures available are from 2007 and till then only nine insurance companies are in business the 10th company (Lion Insurance Company) comes in business after 2007 that's why it is not mention in table.

Table 3: Branches and Capital of Insurance Companies in Ethiopia (Capital in Millions of Birr)

Stock Market

No stock exchange exists

Other Types of Finance/Financial Market

Micro finance

After the establishment of the government in 1994/1995. It started also and supporting for the development of microfinance industry, the purpose of Ethiopian government to developed the microfinance industry to help poor people in both rural and urban area. According to the 2005 microfinance industry report in Ethiopia that there are 23 microfinance industries and around about more than 1 million peoples are connected directly to the industry.

As from above it is cleared that government had totally prohibited any kind of foreign company involved in the process of financial or banking services in country. In Ethiopia microfinance industry can be opened by people having Ethiopian nationality and having full 100% share in company or by those organization which are totally settled and have their registration under the law and having their head office in Ethiopia. As in country most of the microfinance initial capital comes from the foreign investors and which leads to the not clear transparency of microfinance industry, normally person investing in the microfinance industry local or foreigner must enlist as a shareholder.

As government authorized high authorities decided interest rate according to the high inflation rate, and in microfinance industry there is no fixed interest rate on credit according to law minimum interest on credit is 3%, which is a loss for those people wants to open microfinance industry in rural areas because of added administrative cost in capital of investment.

Top ten reasons to do business in Ethiopia

  • Political and social stability;
  • Macro-economic stability and growing economy;
  • Adequate guarantees and protections;
  • Transparent laws and streamlined procedures;
  • Ample investment opportunities;
  • Abundant and trainable labor force;
  • Wide domestic, regional and international market opportunity;
  • Competitive investment incentive packages ;
  • Welcoming attitude of the people to FDI; and
  • Pleasant climate and fertile soils.

2. Foreign Market Entry Strategy

2.1 Introduction

2.1.1 Strategy

Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.

2.1.2 Strategic Decisions

  • Strategic decisions are likely to be complex in nature. This complexity is a defining feature of strategy and strategic decisions and is especially so in organizations with wide geographical scope, such as multinational firms, or wide ranges of products or services.
  • Strategic decisions may also have to be made in situations of uncertainty about the future.
  • Strategic decisions are likely to affect operational decisions: for example, an increased emphasis on consumer electronics would trigger off a whole series of new operational activities, such as finding new suppliers and building strong new brands. This link between overall strategy and operational aspects of the organization is important for two other reasons. First, if the operational aspects of the organization are not in line with the strategy, then, no matter how well considered the strategy is, it will not succeed. Second, it is at the operational level that real strategic advantage can be achieved. Indeed, competence in particular operational activities might determine which strategic developments might make most sense.
  • Strategic decisions are also likely to demand an integrated approach to managing the organization. Managers have to cross functional and operational boundaries to deal with strategic problems and come to agreements with other managers who, inevitably, have different interests and perhaps different priorities.
  • Managers may also have to sustain relationships and networks outside the organization, for example with suppliers, distributors and customers.
  • Strategic decisions usually involve change in organizations which may prove difficult because of the heritage of resources and because of culture. These cultural issues are heightened following mergers as two very different cultures need to be brought closer together - or at least learn how to tolerate each other. Indeed, this often proves difficult to achieve - a large percentage of mergers fail to deliver their ‘promise' for these reasons.

2.1.3 Levels of Strategy

Corporate-level strategy: Itis concerned with the overall purpose and scope of an organization and how value will be added to the different parts (business units) of the organization.

Business-level strategy: It is about how to compete successfully in particular markets.

Operational strategies: These are concerned with how the component parts of an organization deliver effectively the corporate and business-level strategies in terms of resources, processes and people.

2.1.4 Strategic Management

Strategic management includes understanding the strategic position of an organization, strategic choices for the future and turning strategy into action.

  • The strategic position is concerned with the impact on strategy of the external environment, an organization's strategic capability (resources and competences) and the expectations and influence of stakeholders.
  • Strategic choices involve understanding the underlying bases for future strategy at both the business unit and corporate levels and the options for developing strategy in terms of both the directions and methods of development.
  • Strategy into action is concerned with ensuring that strategies are working in practice.
  • Strategy development processes are the ways in which strategy develops in organizations.

2.2 Environment

The most general ‘layer' of the environment is often referred to as the macro environment. This consists of broad environmental factors that impact to a greater or lesser extent on almost all organizations. It is important to build up an understanding of how changes in the macro-environment are likely to impact on individual organizations. A starting point can be provided by the PESTEL framework which can be used to identify how future trends in the political, economic, social, technological, environmental and legal environments might impinge on organizations. This provides the broad ‘data' from which the key drivers of change can be identified. These will differ from sector to sector and from country to country. Therefore they will have a different impact on one organization from another. If the future environment is likely to be very different from the past it is helpful to construct scenarios of possible futures. This helps managers consider how strategies might need to change depending on the different ways in which the business environment might change.

Within this broad general environment the next ‘layer' is called an industry or a sector. This is a group of organizations producing the same products or services. The five forces framework and the concept of cycles of competition can be useful in understanding how the competitive dynamics within and around an industry are changing.

The most immediate layer of the environment consists of competitors and markets. Within most industries or sectors there will be many different organizations with different characteristics and competing on different bases. The concept of strategic groups can help with the identification of both direct and indirect competitors. Similarly customers' expectations are not all the same. They have a range of different requirements the importance of which can be understood through the concepts of market segments and critical success factors.

2.2.1 Key driver of change

Key drivers of change are forces likely to affect the structure of an industry, sector or market.

There is an increasing trend to market globalization for a variety of reasons. In some markets, customer needs and preferences are becoming more similar. For example, there is increasing homogeneity of consumer tastes in goods such as soft drinks, jeans, electrical items (e.g. audio equipment) and personal computers. The opening of McDonald's outlets in most countries of the world signaled similar tendencies in fast food. As some markets globalize, those operating in such markets become global customers and may search for suppliers who can operate on a global basis. For example, the global clients of the major accountancy firms may expect the accountancy firms to provide global services. The development of global communication and distribution channels may drive globalization - the obvious example being the impact of the internet. In turn, this may provide opportunities for transference of marketing (e.g. global brands) across countries. Marketing policies, brand names and identities, and advertising may all be developed globally. This further generates global demand and expectations from customers, and may also provide marketing cost advantages for global operators. Nor is the public sector immune from such forces. Universities are subject to similar trends influenced by changing delivery technologies through the internet. This means, for example, that there is developing a genuinely global market for MBA students - particularly where the majority of ‘tuition' is done online.

Cost globalization may give potential for competitive advantage since some organizations will have greater access to and/or be more aware of these advantages than others. This is especially the case in industries in which large volume; standardized production is required for optimum economies of scale, as in many components for the electronics industry. There might also be cost advantages from the experience built through wider-scale operations. Other cost advantages might be achieved by central sourcing efficiencies from lowest-cost suppliers across the world. Country-specific costs, such as labor or exchange rates, encourage businesses to search globally for low cost in these respects as ways of matching the costs of competitors that have such advantages because of their location. For example, given increased reliability of communication and cost differentials of labor, software companies and call centers are being located in India, where there is highly skilled but low-cost staff. Other businesses face high costs of product development and may see advantages in operating globally with fewer products rather than incurring the costs of wide ranges of products on a more limited geographical scale.

The activities and policies of governments have also tended to drive the globalization

of industry. Political changes in the 1990s meant that almost all trading nations function with market-based economies and their trade policies have tended to encourage free markets between nations. Globalization has been further encouraged by technical standardization between countries of many products, such as in the automobile, aerospace and computing industries. It may also be that particular host governments actively seek to encourage global operators to base themselves in their countries. However, it is worth noting that in many industries country-specific regulations still persists and reduces the extent to which global strategies are possible. Also, the early 2000s have seen a rise in citizen activism about the impact of globalization on developing countries - most notably at meetings of the World Trade Organization

Changes in the macro-environment are increasing global competition which, in turn, encourages further globalization. If the levels of exports and imports between countries are high, it increases interaction between competitors on a more global scale. If a business is competing globally, it also tends to place globalization pressures on competitors, especially if customers are also operating on a global basis. It may also be that the interdependence of a company's operations across the world encourages the globalization of its competitors. For example, if a company has sought out low-cost production sites in different countries, these low costs may be used to subsidize competitive activity in high-cost areas against local competitors, thus encouraging them to follow similar strategies.

2.2.2 Industries and sectors

The macro-environment might influence the success or failure of an organization's strategies. But the impact of these general factors tends to surface in the more immediate environment

through changes in the competitive forces on organizations. An important aspect of this for most organizations will be competition within their industry or sector. Economic theory defines an industry as ‘a group of firms producing the same principal product or, more broadly, ‘a group of firms producing products that are close substitutes for each other. This concept of an industry can be extended into the public services through the idea of a sector. Social services, health care or educations also have many producers of the same kinds of services. From a strategic management perspective it is useful for managers in any organization to understand the competitive forces acting on and between organizations in the

same industry or sector since this will determine the attractiveness of that industry and the way in which individual organizations might choose to compete. It may inform important decisions about product/market strategy and whether to leave or enter industries or sectors.

It is important to remember that the boundaries of an industry may be changing - for example, by convergence of previously separate ‘industries' such as between computing, telecommunications and entertainment. Convergence is where previously separate industries begin to overlap in terms of activities, technologies, products and customers. There are two sets of ‘forces' that might drive convergence. First, convergence might be supply-led - where organizations start to behave as though there are linkages between the separate industries or sectors.

This is very common in the public services where sectors seem to be constantly bundled and un-bundled into ministries with ever-changing names (‘Education', ‘Education and Science', ‘Education and Employment', ‘Education and Skills' etc.). This type of convergence may be driven by external factors in the business environment. For example, governments can help or hinder convergence through regulation or deregulation - a major factor in the financial services sector in many countries. The boundaries of an industry might also be destroyed

by other forces in the macro-environment. For example, e-commerce is destroying the boundary of traditional retailing by offering manufacturers new or complementary ways to trade - what are now being called new ‘business models'12 - such as websites or e-auctions. But the real test of these types of changes is the extent to which consumers see benefit to them in any of this supply-side convergence. So, secondly, convergence may also occur through demand-side (market) forces - where consumers start to behave as though industries have converged. For example, they start to substitute one product with another (e.g. TVs and PCs). Or they start to see links between complementary products that they want to have ‘bundled'. The package holiday is an example of bundling air travel, hotels and entertainment to form a new market segment in the travel industry.

2.2.3 Competitors and market

An industry or sector may be a too-general level to provide for a detailed understanding of competition. For example, Ford and Morgan Cars are in the same industry (automobiles) but are they competitors? The former is a publicly quoted multinational business; the latter is owned by a British family, produces about 500 cars a year and concentrates on a specialist market niche where customers want hand-built cars and are prepared to wait up to four years for one. In a given industry there may be many companies each of which has different capabilities and which compete on different bases. This is the concept of strategic groups. But competition occurs in markets which are not confined to the boundaries of an industry and there will almost certainly be important differences in the expectations of different customer groups. This is the concept of market segments. What links these two issues is an understanding of what customer's value.

Strategic groups are organizations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. These characteristics are different from those in other strategic groups in the same industry or sector. For example, in grocery retailing, supermarkets, convenience stores and corner shops are three of the strategic groups. There may be many different characteristics that distinguish between strategic groups but these can be grouped into two major categories .First, the scope of an organization's activities (such as product range, geographical coverage and range of distribution channels used). Second, the resource commitment (such as brands, marketing spend and extent of vertical integration). Which of these characteristics are especially relevant in terms of a given industry needs to be understood in terms of the history and development of that industry and the forces at work in the environment. 2.

Market segments

The concept of strategic groups discussed above helps with understanding the similarities and differences in the characteristics of ‘producers' - those organizations that are actual or potential competitors. However, the success or failure of organizations is also concerned with how well they understand customer needs and are able to meet those needs. So an understanding of markets is crucial. In most markets there is a wide diversity of customers' needs, so the concept of market segments can be useful in identifying similarities and differences between groups of customers or users. A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the

Market

2.2.4 Opportunities and threat

The critical issue is the implications that are drawn from this understanding in guiding strategic decisions and choices. There is usually a need to understand in a more detailed way how this collection of environmental factors might influence strategic success or failure. This can be done in more than one way. This identification of opportunities and threats can be extremely valuable when thinking about strategic choices for the future.

A strategic gap is an opportunity in the competitive environment that is not being fully exploited by competitors. By using some of the frameworks described in this chapter, managers can begin to identify opportunities to gain competitive advantage in this way:

Opportunities in substitute industries

Organizations face competition from industries that are producing substitutes. But substitution also provides opportunities. In order to identify gaps a realistic assessment has to be made of the relative merits of the products/technologies (incumbent and potential substitutes) in the eyes of the customer. An example would be software companies substituting electronic versions of reference books and atlases for the traditional paper versions. The paper versions have more advantages than meet the eye: no hardware requirement (hence greater portability) and the ability to browse are two important benefits. This means that software producers need to design features to counter the strengths of the paper versions; for example, the search features in the software. Of course, as computer hardware develops into a new generation of portable handheld devices, this particular shortcoming of electronic versions might be rectified.

Opportunities in other strategic groups or strategic spaces

It is also possible to identify opportunities by looking across strategic groups - particularly if changes in the macro-environment make new market spaces economically viable. For example, deregulation of markets (say in electricity generation and distribution) and advances in IT (say with educational study programs) could both create new market gaps. In the first case, the locally based smaller-scale generation of electricity becomes viable - possibly linked to waste incineration plants. In the latter case, geography can be ‘shrunk' and educational

programs delivered across continents through the internet and teleconferencing (together with local tutorial support). New strategic groups emerge in these industries/sectors.

Opportunities in the chain of buyers

It was noted that this can be confusing, as there may be several people involved in the overall purchase decision. The user is one party but they may not buy the product themselves. There may be other influencers on the purchase decision too. Importantly, each of these parties may value different aspects of the product or service. These distinctions are often quite marked in business-to-business transactions, say with the purchase of capital equipment. The purchasing department may be looking for low prices and financial stability of suppliers. The user department (production) may place emphasis on special product features. Others - such as the marketing department - may be concerned with whether the equipment will speed throughput and reduce delivery times. By considering who is the ‘most profitable buyer' an organization may shift its view of the market and aim its promotion and selling at those ‘buyers' with the intention of creating new strategic customers.

Opportunities for complementary products and services

This involves a consideration of the potential value of complementary products and services. For example, in book retailing the overall ‘book-buying experience' is much more than just stocking the right books. It also includes an ambience conducive to browsing (such as reading areas or coffee bars) and opening hours to suit busy customers. Crucially it could also be concerned with employing staff who are themselves ‘book oriented' and can provide a book recommendation service.

Opportunities in new market segments

Looking for new market segments may provide opportunities but product/service features may need to change. If the emphasis is on selling emotional appeal, the alternative may be to provide a no-frills model that costs less and would appeal to another potential market. For example, the Body Shop, operating in the highly emotional cosmetics industry, challenged the accepted viewpoint. This was achieved by the production of purely functional products, noted for their lack of elaborate packaging or heavy advertising. This created new market space by attracting the consumer who wanted quality skin-care products without the added frills. In contrast, the Starbucks coffee-shop chain created new market space by transforming drinking coffee into an emotional experience rather than merely functional. A special atmosphere was created within the coffee bars.

Opportunities over time

When predicting the impact of changes in the macro- or competitive environments it is important to consider how they are going to affect the consumer. Organizations can gain first-mover advantages that way. Cisco Systems realized that the future was going to create a significant need for high-speed data exchange and was at the forefront of producing equipment to address this future need. It identified new market space because no one else had assessed the likely implications of the internet boom. This meant that it could offer specially designed products well ahead of its rivals, giving it an important competitive edge.

2.2.5 International Diversity and International Strategy

Reasons for International diversity

There are many reasons for organizations to follow a strategy of internationalization. First, there may be market-based reasons:

  • The globalization of markets and competition can be seen as both cause and consequence of the internationalization of individual organizations. There is evidence of homogenization in some markets; for example, the international success of consumer products such as the Sony PlayStation and the worldwide reach of sports-clothing manufacturers such as Nike and Adidas-Solomon. Globalization thereby relates not only to contextual factors such as worldwide homogenization of consumer demand but also to the adoption of global strategies in which activities are tightly integrated and coordinated on a cross national basis and the whole world is seen as a potential area of operation . Companies such as Boeing not only offer their products on a global basis but are ready and able to exploit the unique advantages associated with particular countries and locations on a worldwide basis.
  • Firms acting as suppliers to industrial companies may follow their customers when these internationalize their operations. When BMW set up a manufacturing site in Spartanburg, South Carolina, USA, for example, it continued purchasing transmission systems from its established German suppliers. Similarly, it may be necessary for organizations to have a presence in the home market of global customers (i.e. organizations with a global reach such as Boeing) to gain access to, or credibility with, their global divisions or subsidiaries.
  • By expanding its markets internationally a firm can bypass limitations in its home market. An example of such market seeking international expansion is the French Bank BNP Paribas that accelerated the search for possible acquisitions in the USA after considering the French banking sector close to consolidation. Often it is those organizations with small home markets which lead internationalization (as can be seen in the chapter-end case example in Chapter 3 about the European brewing industry - where Heineken (The Netherlands), Carlsberg (Denmark) and Guinness (Ireland) are the most internationalized companies.

Strategies of internationalization

It may also be pursued to build on and take advantage of strategic capabilities:

    • By internationalizing companies are able to broaden the size of the market so as to exploit strategic capabilities. For example, the American online retailer Amazon.com and coffee retailer Starbucks were able rapidly to gain strong competitive positions in countries such as the United Kingdom by leveraging their existing strategic capabilities in this new market.
    • The internationalization of value-adding activities allows an organization to access and develop resources and capabilities in ways not possible in its ‘home' country thereby enhancing its competitive advantage and competitive position. In order to improve its cost efficiency General Electric, for example, employs a workforce of more than 11,000 in India who conduct back-office activities such as analyzing credit risks and analyzing insurance claims, for services provided in other countries around the globe.
    • Companies may also seek to enhance their knowledge base by entering markets that are strategically important as a source of industry innovation - for example, the USA for computer software, Germany for industrial control equipment, or the UK for popular music.

There may also be economic benefits in strategies of internationalization:

  • International diversification allows firms to reap economies of scale by expanding the size of the market they serve. The opportunity for exploiting economies of scale is likely to be highest in markets characterized by cross-nationally homogenous consumer tastes and needs. In such markets products can be developed and produced in centralized manufacturing operations without need for substantial adaptation to local demand.
  • Stabilization of earnings across markets: for example, in the automobile industry, the presence of Toyota in all three of the major ‘arenas' (North America, Europe and Asia Pacific) allows it to balance reduced sales in one arena due to stagnating economic conditions by sales in an arena with more positive economic growth rates. And the recovery in the Asian markets in the early years of this century allowed firms such as Canon, Sony and Matsushita Electric to expand production of mobile phones, digital cameras and flat-screen televisions despite continued stagnation in Europe.

2.3 Foreign market selection and entry mode

The process of market entry requires an organization to select attractive and profitable national markets and to identify the appropriate entry mode. The selection of national markets involves considerations at the macro level and in terms of competitive and market conditions.

Some factors that require particular attention in comparing the attractiveness of international markets are these:

  • Macro-economic conditions reflected in indicators such as the GDP and levels of disposable income which help in the estimation of the potential size of the market. Companies must also be aware of the stability of a country's currency which may affect its income stream.
  • Thepolitical environment may create significant opportunities for organizations. It is common for regional development agencies in the United Kingdom to provide investment incentives to foreign investors. For example, Scottish Enterprise provided a subsidy in order to attract the 2003 MTV music awards to the Scottish capital Edinburgh, while political and regulatory changes can create opportunities for international expansion as with Deutsche Post.
  • The infrastructure of international markets will also be an important factor in assessing the attractiveness of national markets for entry, in particular:
    • - Existing transport and communication infrastructure;
    • - Availability of necessary local resources such as appropriately skilled labor;

2.1 Market analysis of industry level

Market development is often affected by Industrial growth. Concept of industry life cycle, the characteristic of an industry can be concluded. These are some factors very important for the company who wants to enter into a new market. Industry life cycle concept is discussed in the following paragraphs,

2.1.1 Industry life cycle

Overview

Different market conditions and strategic options can be expected at different stages. Every industry varies differently in terms of strategies, objectives, functions, and value-creating activities.

Firms depend on their research and development (R&D) activities in the introduction stage of life cycle. Later, during the mature stage, the function of product managers plays a greater emphasis on production efficiencies and processes in order to lower manufacturing costs. As the industry life cycle pass from one stage to another, the historical competitive strategies normally become ineffective. There are many key factors change as industry cycle moves into new stage. For example the success is related with innovation timing and low cost. When growth begins to decrease, the differentiated product, market and anticipation of needs often affect the success. Just like human-being products and services also has their life cycle. i.e.Introduction, Growth, Maturity, Decline.Maturity stages of an industry can be ‘Transformed' or followed by a stage of rapid growth if consumer tastes change, technologic innovations take place, or new development occur in the general environment. Take China's dairy industry as an example. While the improving of people's living condition, the tastes of Chinese people had been influenced, and the demand of different dairy products have increased.

Introduction stage

When a new product is introduced in the market it is unfamiliar to the customers. During this stage operating losses would be high, sales will be low,rapid changes in technology would required. It also important to have large chunk of cash to finance the operations. Due to few market players and much growth, competition tends to be limited. There are some challenges during introduction stage:

  1. Creating a user friendly product and introducing it in the market in such a way that it directly appeals to the customers.
  2. Generating enough exposure so the product emerges as the ‘standard' by which all other competitors' products are evaluated.

However, some of the firms entering during early stages of the industry life cycle may not succeed in producing the dominant design and therefore might have to exit already before the industry mature.

Growth Stage

Growth as the second stage of industry life cycle is characterized by strong increase in sales.

During growth stage it is important to build brand image by achieving consumer preferences. This requires strong brand recognition, differentiated product, and the financial resource to support a variety of value‐chain activities such as marketing and sales, customer service, and research and development.

Revenues in growth stage moves at an accelerating rate because:

  1. New consumers are trying the product.
  2. A growing proportion of satisfied consumers are marking repeat purchases.

In general, as a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases. The emergence of a dominant model is very important to industry evolution because these models generate opportunities to achieve economies of scope.

Maturity Stage

At maturity stage market becomes saturated and there are few opportunities to find new buyers. It's no longer possible to ‘grow around' the competition, so direct competition becomes predominate. With few attractive prospects, marginal competitors begin to exit the market. At the same time, rivalry among existing competitors intensifies because there is often close price competition & at the same time that expenses associated with attracting new buyers will also rise. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customer become more price sensitive. Companies must strive to emphasize the key functional areas during of the fourth stage and to attain a level of parity in all functional areas and value creating activities. Therefore, even though controlling production cost may be a primary concern during the maturity stage, managers should not totally ignore other functions such as marketing and R&D. Otherwise, the company become so focused on lowering cost that could lose market trend.

Decline Stage

The decline stage occurs when industry sales and profits begin to fall. In this stage, customers become more and more sensitive to price, and the price decreases over time. During the later stage of the industry life cycle the major type of competition is price competition. As competition becomes a zero‐sum game rivalry may heat up considerably.

The presence of economies of scale tends to result in larger firms, higher capital intensity, and a more concentrated industry structure. Inefficient firms may diversify out of the industry and may seek to consolidate through mergers with former rivals. In a summary, a firm's strategic options in decline stage become dependent on the actions of rivals. The basic strategies that are available in the decline phase are:

  1. Maintain
  2. Harvesting
  3. Exiting
  4. Consolidating

2.1.2 Summary

Industrial life cycle concept gives comprehensive overview of a given industry by separating the life cycle into different stages. The characteristics of each stage namely introduction, growth, maturity, and decline often have different effects for market entry strategy.

2.2 Market analysis of market level

The market analysis of industry level has provided general information of external environment. An overview at market level is also essential for the market development.

The two analysis of Market level from different perspectives are as follows:

  1. The concept of strategic group analysis, which is from researcher point of view, explains the understanding of similarities and differences in the characteristics of ‘producers'‐ those organizations that are potential or actual competitors.
  2. And the concept of market segmentation, which is from manager point of view, is used in understanding similarities and differences between groups of customer. In following paragraphs, these two concepts are discussed in detail.

2.2.1 Strategic group

Overview

Strategic group refer to meaningful collections of firms or substructures within an industry. This concept is often used to examine different aspects of competitive strategy. The concept of strategic group analysis allows firms to make more sense of competition in analyzing complex industries, in defining firms' competitors, in illustrating the competitive positions available within an industry. In this part, the reason to apply strategic group and the approach to indentify the strategic group are reviewed.

Reasons to apply strategic group analysis

First, strategic grouping assists a firm identify barriers to mobility that protects a group from attacks by others. Mobility barriers are factors that deter the movement firms from one strategic position to another. For example, in dairy industry, the major barriers protecting the quality oriented group are technology, brand image, and established distribution channels.

The second value of strategic grouping is that it assists a firm to identify groups whose competitive position many be marginal or tenuous. The firm may anticipate that these competitors may try to move into another group or to quit the industry.

Third, strategic groupings assists chart the future directions of firms' strategies. If all strategic groups are moving in a similar direction, this could indicate a high degree of intensity of competition. For example, the competition in functional milk segments has intensified in recent years as many firms have entered those product segments.

Fourth, strategic group are useful in thinking through the implication of each industry trend for strategic group as a whole. Is the trend increasing or decreasing entry barriers in a given group? Will the trend decreasing the viability of a group? If so, in what direction should the strategic group move? Such analysis can help in making predication about industry evolution.

Identifying strategic groups

The natural way to assign firms to strategic group is by reference to the characteristics of their strategies with group members displaying similar strategies. However, firms within a group resemble one another closely and recognize their mutual dependence most sensitively.

Combined with different characteristics that distinguish between strategic groups two major categories can be concluded.

The first category is the scope of organization's activities, such as product range, area covered and channels of distribution

Second category is the commitment to resources, such as amount spent on brands, marketing and extent of vertical integration.

2.2.2 Market segments

Overview

Market segmentation refers to segmentation of market based on similar needs ,tastes and preferences. An understanding of how consumers differ by market segment would be extremely valuable to participants in the food marketing system. Food producers, processors, and retailers require a deeper and more detailed understanding of consumer preferences with regards to their socioeconomic characteristics in order to develop products and marketing strategies that effectively target individual consumer needs. The approach assists dairy companies to develop differentiated products that better meet the needs of the consumers. It also enables consumers to make purchase decisions which result in a greater degree of consumer satisfaction.

Customer needs

There may be variety of reasons for varied customers needs. Theoretically, any of these reasons could be used to identify market segments. For example, in a particular market segmentation can be based on in terms of age group. Particular product can be served for particular age group. This helps in understanding the dynamics of market.

Globalization involves selling of products and services across the countries which affects consumers' behavior and attitude. Globalization helps in creating the greater acceptance of product in the global market among consumers specially in case of as consumer electronics, cars, fashion, home appliances, food products, and beverages.

Relative market share

The share in relation to that of competitors within a market segment is an important consideration. Companies that have built up most experience in servicing a particular market segment should not only have lower costs in so doing, but also have built relationships which may be difficult for others to break down. For example, a small local dairy company competing against the big company on the basis of its low prices underpinned by low costs of distribution and marketing is confined to that segment of the local market that values low price.

How to identify and serve the market segments

Improving of living conditions in developing countries and the consumer ability of pursuing diverse and innovative products combined with increased productivity of dairy industry allow segmentation to be indentified differently. There are many approaches to study market segments. The means‐end chain model consists of three levels:

  1. Attributes
  2. Benefits
  3. Values.

Attributes stand for the relatively concrete and tangible characteristics of the food product. Based on the attributes of the product consumers can satisfy their end needs. One of the key advantages of this approach is that it links explicitly physical attributes of food products to the needs of consumers. This increases the ability of results for successful product development as well as for effective and targeted communication strategies.

Opportunities in new market segments

Looking for new market segments may provide opportunities, but product or service features may need to change. Furthermore, indentifying the strategic customer is crucial in new market segments. Therefore, for the dairy products the retailer is one of the strategic customers as the way it displays, promotes and supports the dairy products in store is hugely influential on the final consumer preferences.

2.2.3 Summary

The market analysis of market level gives specific background of one market by providing the concepts of strategic group analysis and market segmentations. Strategic group are used to understand the competition in one given industry. It can be accessed on the basis of two categories:

  1. The scope of organization's activities
  2. The resource commitment

According to the research objective, there are two statements critical for this research. The one is the strategic groupings assist to chart future directions of firms' strategies and the other is strategic group are useful in thinking through the implication of industry trend for the strategic group as a whole.

According to research background, the dynamic of consumer demand and emerging of younger generation are considered as a major trend of dairy market.

2.4 Ethiopian Government Policy for Foreign Investor

ETHIOPIAN INVESTMENT AGENCY

ESTABLISHMENT

The Ethiopian Investment Agency (EIA) is a government agency established in 1992 to promote private investment, primarily foreign direct investment. The overall activities of the Agency is supervised and followed up by an Investment Board, which is chaired by the Minister of Industry. The EIA is headed by a director general who is also a member of the Board.

Vision

‘To be a strong institution, which will make Ethiopia one of the leading investment destinations in Africa'

Mission

‘To enhance investment, both foreign and local, in the country by promoting its resource potentials and investment opportunities, initiating policy and implementation measures to create conducive investment climate and providing efficient services to investors so as to bring fast and sustainable economic development in the country'

Services

  • Promoting the country's investment opportunities and conditions to foreign and domestic investors;
  • Issuing investment permits, work permits, trade registration certificates and business licenses;
  • Registering technology transfer agreements and export-oriented non-equity-based foreign enterprise collaborations with domestic investors;
  • Negotiating and, upon government approval, signing bilateral investment promotion and protection treaties with other countries;
  • Advising the government on policy measures needed to create an attractive investment climate for investors; and
  • Assisting investors in the acquisition of land, utilities, etc., and providing other pre- and post-approval services to investors.

Areas of Investment

All areas of investment are open for foreign investors other than the following:

a. Areas reserved exclusively for the government:

  • Postal services with the exception of courier services;
  • Transmission and supply of electrical energy through the integrated national grid system; and
  • Passenger air transport services using aircraft with seating capacity of more than 20 passengers.

b. Areas reserved for Ethiopian nationals:

  • Banking, insurance and micro credit and saving services;
  • Travel and shipping agency services;
  • Broadcasting services; and
  • Air transport services using aircraft with a seating capacity of up to 20 passengers

c. Areas reserved for domestic investors:

  • Retail trade and brokerage;
  • Wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their products locally produced);
  • Import trade (excluding LPG, bitumen and up on the approval from the Council of Ministers, material inputs for export products);
  • Export trade of raw coffee, chat, oil seeds, pulses, hides and skins bought from the market and live sheep, goats and cattle not raised or fattened by the investor;
  • Construction companies excluding those designated as grade 1;
  • Tanning of hides and skins up to crust level;
  • Hotels(excluding star-designated hotels), motels, pensions, tea rooms, coffee shops, bars, night clubs and restaurants excluding international and specialized restaurants;
  • Travel agency, trade auxiliary and ticket selling services;
  • Car-hire and taxi-cabs transport services;
  • Commercial road transport and inland water transport services;
  • Bakery products and pastries for the domestic market;
  • Grinding mills;
  • Barber shops, beauty salons, and provision of smith workshops and tailoring services except by garment factories;
  • Building maintenance and repair and maintenance of vehicles;
  • Saw milling and timber making;
  • Customs clearance services;
  • Museums, theaters and cinema hall operations;
  • Printing industries.

Capital Requirement

Under the Investment Proclamation No.280/2002 (as amended), a foreign investor, who invests on his own, except in consultancy services and publishing, is required to invest not less than US$ 100,000 in cash and/or in kind for a single project. However, if he invests in partnership with domestic investor(s), the minimum capital required of him is US$ 60,000. The minimum capital required of a wholly foreign investor investing in consultancy services or publishing is US$ 50,000, which may be in cash and/or in kind. But this capital amount is lowered to US$ 25,000 if he invests in partnership with domestic investor(s). A foreign investor reinvesting his profit or dividends, or exporting at least 75% of his outputs, however, is not required to allocate a minimum capital.

A conducive tax environment

  • Corporate income tax is 30%;
  • Excise tax is levied (minimum 10%) on selected local or imported products;
  • Income taxes range from 0-35% on monthly income of $16.50 and above;
  • Capital gains tax - share of companies 30%; business 15%;
  • Rental income tax (on annual rental income) is 0 -35%, dependent upon the level of rental income;
  • Stamp duty-leasing is 0.5% of value;
  • Export duty is zero; and tax treaties to avoid double tax payment are signed with several countries, along with bilateral treaties for the protection and promotion of investments.

Investment guarantee and protection

a) Guarantee against expropriation

The Constitution of the Federal Democratic Republic of Ethiopia protects private property. The Investment Proclamation also provides investment guarantee against measures of expropriation and nationalization that may only occur for public interest and in compliance with the requirement of the law. Where such expropriations are made, the Government provides adequate compensation corresponding to the prevailing market value of property and such payment is effected in advance.

Ethiopia is a member of the World Bank-affiliatedMultilateral Investment Guarantee Agencywhich issues guarantees against non-commercial risks to enterprises that invest in signatory countries. The country has also concluded bilateral investment promotion and protection agreements with a number of developed and developing countries.

b) Remittance of funds

Foreign investors are guaranteed to make the following remittances out of Ethiopia in convertible foreign currency at the prevailing exchange rate on the time of remittance:

  • Profits and dividends accruing from investment;
  • Principal and interest payments of external loans;
  • Payments related to technology transfer agreements;
  • Proceeds from the sale or liquidation of an enterprise;
  • Proceeds from the transfer of shares or of partial ownership of an enterprise to a domestic investor;

Expatriates employed in an enterprise may remit, in convertible foreign currency, salaries and other payments accruing from their employment in accordance with the foreign exchange regulations or directives of the country.

Legal and Judicial System

Ethiopia has a hybrid legal system consisting of features from the Anglo-Saxon Common Law system and the Roman-based Civil Law system. Despite this feature, the majority of its laws are codified like most Civil Law jurisdictions. Among others, the codified laws include the Civil Code, the Civil Procedure Code, the Criminal Code, the Criminal Procedure Code, the Commercial Code, and the Maritime Code. There are also other legislations promulgated from time to time by the Parliament. These laws codified or otherwise have to be published in the official and authoritative government gazette, namely, the Negarit Gazeta. The codes which had been promulgated during the second-half of the twentieth century and other legislation have undergone amendments or revisions throughout the past years.

Ethiopia has a dual system of courts - a Federal Judiciary with the Supreme Court at the top along with a separate and parallel judicial system in each Regional State. The Federal Supreme Court, the Federal High Court and the Federal First Instance Court constitute a single Federal Judiciary, having jurisdiction over all cases pertaining to federal matters. Likewise, there is a similar court structure in each Regional State that has jurisdiction over all regional matters. The Judiciary has to dispense justice not only between individuals, but also between the state and the citizens. In administering justice, the Federal courts are directed by internationally accepted principles of justice as well as the laws (include ratified international agreements) of Ethiopia. The practice of law is reserved for Ethiopians.

The Federal Constitution is the supreme law of the land, overriding all other legislations in the country. Second in the hierarchy are Proclamation, which are legislations enacted by the House of Peoples' Representatives (Parliament), the highest authority of the Federal Government. Third, Regulations (Council of Ministers Regulations) are executive enactments. The lowest enactments are Directives, issued by Government Departments to execute Proclamations and Regulations.

3. Opportunities in Ethiopia

As there are lot of business opportunities in Ethiopia in different sectors, as it is not possible to address all of them. But try to concentrate and search opportunities on some of basic and important business sectors for foreign investors

3.1 Business Opportunities in Manufacturing Sector

The manufacturing sector plays an important role in economy of Ethiopia it has almost a share of 5% of GDP and 37.8% to the annual output value of industrial production in 2008/09 (Central Statistical Agency Statistical Abstract 2009). The important manufacturing sectors in Ethiopia areproduction of food, beverages, tobacco, textiles and garments, leather goods, paper, metallic and non-metallic mineral products, cement and chemicals.The production of textile, leather products and food and beverages are one of the most important industries for investment, because of its geographical advantage of easy and fast access to Middle-East and E


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