Lee College Ethiopia Market Case Study Review attached Coursepack: Ethiopia: An Emerging Market Opportunity Case. In this assignment, you will have an oppo

Lee College Ethiopia Market Case Study Review attached Coursepack: Ethiopia: An Emerging Market Opportunity Case. In this assignment, you will have an opportunity to utilize the skills from this unit to solve a case study.

INSTRUCTIONS
Carefully review the assigned case.
In a 3-5 page paper, address the following questions:
Does Ethiopia represent an attractive investment opportunity?
What key success factors will matter most in Ethiopia?
Evaluate each company’s proposed entry to Ethiopia on these factors of success:
How would you evaluate each company’s proposal?
What do you think is the payback period for each company?
What recommendations would you make to each company? For the exclusive use of S. Stone, 2020.
9 -9 1 5 -5 0 1
JUNE 16, 2015
JOHN QUELCH
SUNRU YONG
Ethiopia: An Emerging Market Opportunity?
In January 2014, three companies were debating whether they should extend their operations to the
emerging market of Ethiopia. Since the 1990s, economic reforms and liberalization had opened
opportunities for foreign direct investment, and businesses from many countries were already active
there. All three companies believed that they needed to decide what to do soon.
In a London boardroom, the director of global strategy at CareCo argued, “The purchasing power
of Ethiopian consumers will only grow. If we move in now, we ensure that our brands are established.
If we wait, competitors will have time to build brand awareness and tie up distribution channels. We
cannot miss this window of opportunity!”
A similar conversation was under way in Beijing, where the ShoeCo executive team debated the
merits of the Ethiopian opportunity. The vice president of global sales commented, “The labor costs in
Ethiopia are low. A factory there would give us a great cost position to serve the local and regional
markets. This would require significant expenditure and risk, but could establish us there.”
At the MedCo headquarters in Abu Dhabi, the chief operating officer cited the expected growth in
health care spending and MedCo’s own track record, and noted, “Demand in Ethiopia will grow
quickly for the next 15 or 20 years. We offer good quality at a lower cost than competitors do. This
value proposition has been our blueprint for success!”
Historical Background
The Federal Democratic Republic of Ethiopia is a landlocked country in East Africa. It is bordered
by Eritrea to the north, Djibouti and Somalia to the east, Sudan and South Sudan to the west, and Kenya
to the south. Many Ethiopians believe their country is distinct from its immediate neighbors and the
rest of sub-Saharan Africa because of its religious and cultural history and its success in warding off
numerous attempts to colonize the nation.
From 1974 until 1991, Ethiopia was ruled by a Soviet-backed military junta. This regime was marked
by human rights abuses and corruption. Under its rule, Ethiopia suffered a series of famines that left
________________________________________________________________________________________________________________
HBS Professor John Quelch and writer Sunru Yong prepared this case solely as a basis for class discussion and not as an endorsement, a source of
primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual
companies, this case is fictitious and any resemblance to actual persons or entities is coincidental.
Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by Shane Stone in BUSN 595 DOL taught by GUY DELOACH, Lee University from Feb 2020 to Aug 2020.
For the exclusive use of S. Stone, 2020.
915-501 | Ethiopia: An Emerging Market Opportunity?
one million people dead and drew worldwide attention. These events led many foreigners to associate
the country with poverty and starvation, a perception that still lingered.
In 1991, the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) overthrew the standing
government. Following several years of transition, a new constitution was written in 1994. The EPRDF
was victorious when formal elections took place in 1995. The government had remained stable since
then and had run the country as a single-party state.
Starting in the mid-1990s, the government invited private companies to compete in sectors that the
state had controlled. More than 300 state-owned enterprises had been privatized, attracting both
domestic and foreign investors. The government also eased the administrative burden of starting a
business and revised the tax code to encourage private enterprise.
Industrial Policy and Market Opportunities
Between 2003 and 2013, Ethiopia’s population increased by 30%, to 94 million people, and its GDP
increased from $8.6 billion to $47.5 billion.1 Economic growth had occurred relatively more in the
service and agricultural sectors than it had in the manufacturing sector. In a recent report that assessed
the market opportunities for 54 countries in sub-Saharan Africa, Ethiopia had ranked sixth. 2
The Ethiopian government adhered to a state-led development model. Massive public investments
in transportation, power, and telecommunications infrastructure were key drivers of economic growth.
Public investments accounted for nearly one-third of GDP. Yet, with public debt at 23% of GDP, the
government still had capacity to finance its projects. 3 Improvement of road infrastructure and power
generation, in particular, was expected to pay long-term dividends in fostering private-sector growth
and attracting foreign capital. New rail and road corridors to modern seaports in Djibouti were
intended to mitigate the challenges of being a landlocked country and give access to a trade route that
accounted for 30% of global container traffic.4
The government also had a presence in sectors it considered important. Areas of state monopoly or
dominance included telecommunications, power, financial services, air transport, and shipping. Both
domestic and foreign firms complained about unfair competition when dealing with state-owned and
party-affiliated businesses. Such companies were perceived to have an advantage in accessing credit,
navigating government bureaucracy, winning government tenders, and clearing customs.
The Ethiopian government attempted to protect local companies and encourage import
substitution, while attracting inflows of foreign direct investment. It reserved some industries for
domestic firms only, such as the media, retail, and transportation industries. Similarly, the financial
sector was reserved for domestic investors, and most bank assets were held by state-run banks. The
government also promoted certain sectors, such as domestic pharmaceutical manufacturing.5
The government also attempted to attract foreign investment for local manufacturing and exportoriented sectors that needed inflows of technology and knowledge. It provided income-tax exemptions,
for up to five years, to investors who established enterprises in manufacturing, agro-processing, and
the production of agricultural products. Enterprises in targeted areas of underdevelopment could enjoy
an additional tax deduction after the standard exemption period had expired.
Ethiopia also granted customs exemptions for capital goods, such as plants, machinery, equipment,
spare parts, and construction materials. The law protected private property and permitted investors to
convert capital and profit into foreign currency. Despite this policy, there had been shortages of foreign
exchange due to the country’s trade imbalance, with imports far exceeding exports. Overall, the World
2
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This document is authorized for use only by Shane Stone in BUSN 595 DOL taught by GUY DELOACH, Lee University from Feb 2020 to Aug 2020.
For the exclusive use of S. Stone, 2020.
Ethiopia: An Emerging Market Opportunity? | 915-501
Bank ranked Ethiopia 129th of 189 countries in its global rankings for ease of doing business. 6 However,
Ethiopia ranked within the top third of countries in sub-Saharan Africa.
Investing in Ethiopia
Foreign companies deciding whether to invest in Ethiopia had to consider several other factors:
Infrastructure Ethiopia was near the bottom of the World Bank’s ranking of countries for facilitation
of cross-border trade and logistics performance. 7 Even with a modern air-cargo terminal, Ethiopia
depended on the port of Djibouti for surface shipments.8 Although the road infrastructure between
cities had improved, more than one-third of the population still lived five or more hours from a city.
Although the government was constructing a high-speed rail and multi-lane highway connection to
bordering countries, logistics costs were expected to remain high in the near term.
There were other infrastructure limitations. The power grid had been upgraded, but power cuts
remained frequent. Many businesses had to rely on expensive backup generators. Likewise, the quality
of telecommunications was spotty and Internet outages were frequent.
Human resources Ethiopia was cost competitive with China for light production. 9 It also produced
more than 10,000 university graduates each year, creating a supply of skilled, affordable employees.
Some foreign employers, particularly from the United States and Europe, believed that the gaps
between expatriate and local employees in work culture, management style, and communication were
difficult to bridge. Many foreign businesses viewed native Ethiopians who had worked elsewhere and
returned as the best-trained talent, but such hires were relatively scarce and costly.
Limited competition Many Ethiopian industries were still developing, so firms with greater
marketing resources or superior products could capture market share more easily. Yet the limited
competition also created opportunities for upstarts that could negate the advantages of an established
multinational. Because Ethiopia had long been closed to foreign influence, global brands did not enjoy
the same awareness among consumers.
Fragmented distribution channels Distributors sourced many goods from Mercato, the large
wholesale market in Addis Ababa, and relied on sub-distributors to serve retailers outside cities to
rural areas, where more than 75% of Ethiopia’s citizens lived. There were no international retailers and
very few retail chains with a significant footprint; small independent outlets and kiosks remained the
largest channel. Servicing so many small players was costly. Some wholesalers, particularly in
consumer goods, argued that a realistic estimate of the addressable market had to exclude households
outside of urban areas. Because wholesaling of any imported goods was restricted to domestic firms,
importers had to work with local partners. Any firm engaged in local manufacturing was free to
manage its own wholesaling and distribution, but some foreign companies found it difficult to navigate
the distribution networks and manage customer relationships without local partners.
Cross-cultural adaptation and customer relations Entering Ethiopia required an understanding of
local customs, norms, and expectations. In consumer marketing, for example, companies could
inadvertently offend a particular group with the wrong choice of music or spokesperson. Other
companies, particularly those engaged in selling goods and services on a business-to-business basis,
reported challenges in building trust with potential customers. To mitigate this risk, some global
professional services companies had formed joint ventures with local firms.10
Intellectual property Enforcement of protection for intellectual property was unreliable. Ethiopia
had not signed all of the major international intellectual-property treaties, and the Ethiopian
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For the exclusive use of S. Stone, 2020.
915-501 | Ethiopia: An Emerging Market Opportunity?
Intellectual Property Office focused on protecting Ethiopian materials and copyrights. Furthermore, its
capacity for law enforcement was limited, and numerous businesses used well-known names and
trademarks without permission. Counterfeit and pirated products were also common.
Corruption Public-sector corruption was suspected to be high. In 2013, Transparency International
ranked Ethiopia 111th of 177 rated countries in perceived public-sector corruption.11 Foreign investors
had complained about the lack of transparency in government tenders. Many believed that select firms
received preferential treatment.
Market Entry Options
Foreign businesses had four ways of entering the Ethiopian market.
Local agent or importer Non-Ethiopian businesses were barred from wholesale trade and retailing,
except for locally produced goods. For multinational businesses that exported to Ethiopia, working
through a local partner was the only way to sell. An Ethiopian partner had existing relationships and
knew how to manage the local distribution channels and other on-the-ground challenges. Although
the multinational had less control over sales and marketing, it was a low-risk way to enter the market.
Licensing arrangement Foreign businesses could license their brand, technology, or products to
local partners or designate a local franchisee. Having goods produced locally allowed for more
competitive pricing and access to the local partner’s understanding of how to sell and distribute in local
markets. The margins for this approach were typically thinner, and there was risk of infringement on
intellectual property. Licensing and franchising were relatively rare compared to other modes of
market entry.
Joint venture In a joint venture, multinational corporations could maintain greater control while
benefiting from the advantages offered by a local partner. The local partner could be a private entity or
the government, which might keep an equity stake. However, multinationals that planned to export
most of their output or to reinvest profits in the joint venture were exempt from this requirement.
Subsidiary A foreign parent could set up wholly owned subsidiary or branch as a limited liability
company. With a subsidiary, a multinational could avoid coordination and alignment issues with any
local partners and protect proprietary technology or know-how.
Opportunities for Three Potential Entrants
Each company had to consider whether it could succeed in Ethiopia. See Exhibit 1 for a summary
of each company’s projections and estimates for entering Ethiopia.
CareCo
Axel Kazuo, the new director of global strategy at CareCo, made his case to the executive team: “All
our flagship brands are struggling to catch up with the competition in key markets—Brazil, India, and
China. If we do not move decisively, we can expect to add Ethiopia to that list.”
Founded in 1961, CareCo manufactured personal-care products. Several of its brands enjoyed
global recognition. Historically, the company would enter a market through an independent local
distributor, which could leverage local knowledge and existing relationships with wholesale traders
and retailers to help CareCo establish a foothold in the market. This method had been a low-cost, low4
BRIEFCASES | HARVARD BUSINESS SCHOOL
This document is authorized for use only by Shane Stone in BUSN 595 DOL taught by GUY DELOACH, Lee University from Feb 2020 to Aug 2020.
For the exclusive use of S. Stone, 2020.
Ethiopia: An Emerging Market Opportunity? | 915-501
risk way to learn and had been CareCo’s practice in most of its Asian, South American, and Eastern
European markets.
However, CareCo had found that revenue growth using this approach often plateaued quickly due
to the local distributor’s inexperience or lack of focus. Consequently, CareCo had begun to establish its
own subsidiaries, build local manufacturing facilities, and put its own people in charge of growing the
local business. Capital expenditures with this approach were much higher, as were the ongoing
operating costs of a subsidiary. The results of this shift were not yet clear.
If CareCo entered Ethiopia using a local distributor, it would face customs duties of 30% or more.
Even with gross margins of 35% to 45%, its product line would be more expensive than were local
offerings, and its market share might be reduced by half. The projected costs of this approach were up
to $3 million upfront, with a similar annual investment for local marketing.
CareCo could also establish a local manufacturing subsidiary. It could charge lower retail prices to
compete against existing brands, expand reach, and gain market share while achieving average gross
margins of up to 70%. It would have more control of brand image and better government relations,
which could help the company battle counterfeit products and brand infringement.
CareCo’s research indicated high awareness of CareCo’s brands among Ethiopian consumers,
particularly in Addis Ababa. The market for CareCo products was $125 million, but Kazuo’s team
believed that this reflected only purchases by higher-income, urban customers. Kazuo explained, “The
market should be much bigger. Incomes are rising fast and discretionary spending is growing. Market
growth will be at least 15% in the years to come, and it could be more like 20%.”
The company was also concerned that a competitor had moved into the market and begun
manufacturing locally. Delays could prove costly in the long run, just as they had elsewhere. Kazuo
stated, “If we invest in our own facility, we can produce most of our core product portfolio, have a
competitive cost position, and price our products the right way. We would ensure quality, manage
distribution, branding, and positioning. This is the market opportunity and our chance to get in early.”
ShoeCo
ShoeCo, a footwear manufacturer, had experienced modest success in exporting shoes to Ethiopia
through a third-party distributor, and its management team believed it was time to move more
aggressively. Beatrice Chen, vice president of global sales, described the strategic decision faced by the
company: “The local market offers a significant growth opportunity, and having a factory will give us
a cost advantage over other importers, including our Chinese competitors, throughout the region.
Founded in China in 1991, ShoeCo produced a wide range of casual and formal leather footwear.
Its relentless focus on efficiency had enabled it to bid aggressively on new opportunities and grow
quickly. Its early success came through contract manufacturing for U.S. and European brands and
providing private-label goods for mass merchandisers and discount shoe retailers. Starting in 2003,
ShoeCo also began to develop its own brands for emerging markets.
In expanding, ShoeCo had used third-party importers and local manufacturing. A market that could
be served by an existing offshore manufacturing facility, preferably in the region, was a candidate for
a third-party, import-only strategy, in which ShoeCo usually established a long-term exclusive contract
with an independent distributor. If the appropriate conditions for local manufacturing existed, it could
choose to establish a local manufacturing facility, either wholly owned or as a joint venture. The case
for local manufacturing was strengthened if ShoeCo could profitably export to surrounding countries.
HARVARD BUSINESS SCHOOL | BRIEFCASES
This document is authorized for use only by Shane Stone in BUSN 595 DOL taught by GUY DELOACH, Lee University from Feb 2020 to Aug 2020.
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For the exclusive use of S. Stone, 2020.
915-501 | Ethiopia: An Emerging Market Opportunity?
In Ethiopia, ShoeCo already imported its shoes through a local distributor. Its experience had given
it insight into growth opportunities. The company forecasted approximately $40 million in exports
from the proposed factory; the economics of production in Ethiopia meant ShoeCo’s existing regional
markets, already growing at nearly 10 % annually, could be served more profitably this way.
ShoeCo’s proposal was based on tax incentives and the low cost of inputs. The facility would be
built in a special economic zone outside Addis…
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