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Analysis of Ethiopia for Business Opportunities

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Tue, 06 Feb 2018

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 ‘


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