Challenges Faced by Companies Entering Foriegn Markets Essay Example for Free

Challenges Faced by Companies Entering Foriegn Markets Essay 1. INTRODUCTION Companies move into foreign markets for various reasons. In certain cases, it is towards achieving a required sales volume. In other instances, it might be a bid to increase brand awareness. Other companies go into foreign markets to re-invigorate sales after their products have gone through their life cycle from inception to decline in home markets. Regardless of reason, moving into a foreign market tends to portend great opportunities for companies, particularly if it entails serving products in an emerging economy that has recently become wealthy enough to afford such products; or selling a new but needed product or service to a developed and wealthy market. However, in foreign markets, challenges are as numerous as opportunities. Some sources of challenges are discussed below. a) Socio-Cultural Differences Companies tend to adopt practices that were successful in home markets without adapting these models to fit the cultural inclinations of markets entered. When large cultural differences exist between the home country and that entered, such practices may result in ineffective business development and partnerships. An example is the now well known Chinese practice of longer meetings in the bid to become acquainted with potential partners, compared to the Anglo-American practice of brief to-the-point meetings. Adopting either approach in a market more inclined to the other, will no doubt hinder business development. Language differences are other examples of socio-cultural differences that posit challenges to companies entering a foreign market. Language differences make effective and efficient communication difficult between companies and local stakeholders. A light example is the Chevrolet Nova which was selling far below expectation in Latin America. Executives of General Motors could not understand why this was so until it was brought to their attention that, in Spanish â€Å"no va† means â€Å"it doesn’t go†. b) Differences in Levels of Bureaucracy – Efficiency of Procedures and Processes Company registration, the opening of a bank account, getting import permits, obtaining required licenses, etc, all reflect the ease of doing business in a country as well as the levels of bureaucracy that exist in that country. For companies used to relatively low levels of bureaucracy, entering a market with significantly higher levels of bureaucracy may result in unrealistic project plans translated into unachieved implementation. c) Differences in Availability of Skilled Human Resources Availability of a particular skill in a company’s home market may result in presumptions about the availability of the same skill in the market entered. 4This occurred in Nigeria in 2001 when the first set of GSM licenses were given to foreign companies MTN and Econet (both from South Africa). At the time, neither entrant foresaw a dearth of local skilled manpower. This ended up costing both companies an unprecedented increase in salaries and other expenses associated with bringing in expatriate workers. The challenge of sourcing skilled labour in foreign markets is further exacerbated when quotas exist on the number expatriates allowed into the country entered despite the dearth of local skill. d) Differences in Infrastructure Prevailing infrastructure affects how companies operate. Prevailing transportation infrastructure affect how companies move goods and personnel for service delivery; market infrastructure affect how players on a given value chain relate with one another; and the level of basic infrastructure such as power and water affect cost allocations and management. For companies entering a foreign market, failure to take into account the infrastructural base of the market entered may result in ineffective and or inefficient operating plans and processes. e) Legislation Favouring Local Companies Unsupportive legislation is another major source of challenges to companies entering foreign markets. Countries tend to enact laws intended to protect or enable local industries. These legislations take many forms. They could be outright levies on foreign businesses; or banning of the activities or management structure of foreign companies; or may be through more indirect means such as required licenses or permits to operate; cumbersome registration processes or permit procedures. 4 David Ogah, â€Å"Expatriates, some semi-skilled, take over even menial jobs from Nigerians†, The Guardian Newspaper Nigeria, December 21 2011, http://www.ngrguardiannews.com/index.php?option=com_contentview=articleid=71436:expatriates-some-semi-skilled-take-over-even-menial-jobs-from-nigerians-catid=72:focusItemid=598, accessed August 2012. 3. NIGERIAN E-COMMERCE E-commerce is the buying and selling of products or services over electronic systems such as the Internet and other computer networks. E-commerce uses the World Wide Web at one point in the transactions life-cycle, although it may include a wider range of technologies such as e-mail, mobile devices and telephones. - The major customers of e-commerce businesses are individuals living in major urban centres in Nigeria, notably Lagos, the commercial capital; Abuja, the political capital; and Port Harcourt, an oil rich city in Southern Nigeria; as these cities tend to house the highest number of internet users in Nigeria. 5Nigeria has over 47 million internet users, with a majority of them living in the urban cities. In the mid 2000s, a couple of e-commerce companies were launched in Nigeria. They barely survived. The reason for their demise, or in other cases, stagnant growth, was the difficulty of getting customers to embrace the e-payment options available in Nigeria at that time. This difficulty was due to known cases of fraud that occurred over the insecurity of Interswitch, the only e-payment platform available in Nigeria at that time. However, with the entrance of major card payment solutions like Master card and Visa card in 2006, coupled with the improved security features of Interswitch, the industry experienced an increase in the number of Nigerians executing online payments.6(online transactions grew by 25% in 2011) Prior to the end of the first quarter of 2012, the Nigerian e-commerce scene had been somewhat lukewarm as the only vibrant players were Dealdey.com and Wakanow.com. At the beginning of the second quarter, the sector experienced an increase in the number of e-commerce company in Nigeria, amongst which were Rocket Internet’s Sabunta.com and Kasuwa.com. The long-term outlook for the e-commerce industry in Nigeria is positive, with analysts predicting a significant increase in new entrants. The implementation of the use of mobile money in Nigeria by the Central Bank of Nigeria is expected to accelerate the development of the e-commerce industry in Nigeria, as mobile money allows a greater number of individuals engage in electronic transactions. Currently, the Nigerian e-commerce industry has slightly over 70 companies, though the industry is yet to have an estimated dollar value. Companies in the sector are categorized into: a. Fashion Retailers These are online fashion shops that primarily sell shoes, clothes and other fashion accessories. Major players in this category are Sabunta.com, Kamdora.com, Taafoo.com and 3stitches.com. The clear leader among them is Sabunta, despite the fact that the platform was launched less than 3 months ago while most other players have been in the scene for significantly longer. Sabunta offers a wider range of international brands and possesses a more integrated logistic supply chain. This makes them more capable of serving customers all around Nigeria than competitors. b. Travel and Tourism These are primarily online companies that sell travel and tour packages. The clear market leader is Wakanow.com with a current turnover of thirty-five million naira (N35 million) per month. Other players in this sector belong to private airline operators e.g. www.fly.arikair.com, www.myairnigeria.com, etc c. Electronic Gadgets and Books These are companies that sell electronic gadgets and books online. The major players in this category are Kasuwa.com and Konga.com. It is however difficult to tell who the bigger player is. Both players are less than 3 months old. Apart from electronics, Konga.com also retails baby and female make-up products. d. Broad Product Retailers Players in this category include group-buying deal sites such as Dealdey.com, Buynownow.com and Buyright.biz. The major player with the largest market share is Dealdey.com. It was launched in 2011 and possesses the most robust group-buying deal site in Nigeria. 2. SABUNTA.COM Sabunta.com is a fashion online retailer that offers a wide range of International and Nigerian fashion brands for sale in Nigeria. Sabunta.com is an e-commerce company owned by Jolali Global Resources Limited, a privately held company in Nigeria, set up and owned by the German Company, Rocket Internet. Rocket’s headquarters is the vibrant centre of Berlin, Europes Silicon Valley, home to a network of 25 international Rocket offices that cover the operations of the company’s subsidiaries in developed and emerging markets. Rocket Internet is the largest, fastest and the most successful international online venture builder. It currently has over 50 online ventures in 7 continents where they are all playing in the top segments of the market. The primary focus of Rocket is building proven, transaction-based business models in the online and mobile space. The company has been executing this model since 2007 and have created over 100 market leading companies in over forty (40) countries, dozens of which have been exited successfully. The Rocket Internet Company is best known for cloning successful online business in the US in other countries where they play at the top of the market. In Europe, Rocket’s Zalando is currently the largest online fashion retailer. Other well known companies owned and operated by Rocket include; Wimdu in France, Zidora in Azerbaijan, Dafiti in Brazil, Mizado in Egypt, Locondo in Japan, The Iconic in Australia and Zando in South Africa. Sabunta.com and Kasuwa.com are Rocket’s operations in Nigeria. Both operate from their headquarters in Lagos, Nigerian’s commercial capital, home to over 10% of the country’s $413 billion GDP. Sabunta.com and Kasuwa.com serve customers around using warehouses in major urban cities. However, Kasuwa.com sells electronic gadgets and books, while Sabunta.com sells fashion items. Sabunta.com provides customers with flexible online platforms to shop for fashion items from the convenience of their homes, and delivers these items at the doorsteps of shoppers. The company provides flexible payment options including bank deposits, online payment, and its innovative payment-on-delivery option, actually first introduced in Nigeria by Sabunta.com. Sabunta.com is young. The company started operations on the 8th of June, 2012 and is currently only three (3) months. Yet it has already become the largest and the fastest growing online fashion retailer in Nigeria, with over a 100 orders per day, The company aims to maintain its positions as the largest and fastest growing in Nigeria, as is being achieved in other countries by other Rocket Internet ventures worldwide. Sabunta.com currently has 71 staff, 24% of whom are foreign nationals. The workforce at Sabunta.com consists of graduates from Ivy league universities in the US and Europe, as well as top talent from Nigeria. Its management team consists of two foreign nationals and a Nigerian. 4. SABUNTA.COM TARGET MARKET The target market for Sabunta.com is Nigeria’s upper and emerging middle-class living in major urban cities in Nigeria. The age bracket of the typical Sabunta.com customer is between 18 and 65. This age range constitutes individuals who are capable of buying or making purchasing decisions with regards to fashion items. The company’s targeted customers are however less than 10% of the mentioned age range, as the company targets individuals with an annual income of not less than N2million ($12,500). Sabunta’s target market constitutes of individuals who live and work in major urban cities of Nigeria such as Lagos, Abuja, Port Harcourt, Kano, Kaduna, Ibadan, Aba, Warri and Benin. These individuals frequently utilize the internet and various social media platforms to interact with friends, family and colleagues. They are fashion conscious, trendy looking and want to express their personalities with the kind of outfits they wear. They also recognize and wear popular international brands and shop for these brands whenever they or friends and family travel abroad. 5. SABUNTA.COM STRATEGY Having carefully studied the Nigerian e-commerce scene, Sabunta.com concluded that the major problem hindering take-off of e-commerce in Nigeria is the sceptical nature of Nigerians towards online payments. The company responded by introducing the cash-payment-on-delivery option for its customers. Though the company offers regular credit card and online payment options for those who want to do so, the cash-payment-on-delivery option was an ice-breaker: it made sceptical Nigerians participate in online shopping. This enlarged the market of online shoppers, with Sabunta.com being the only company to enjoy the patronage of this new surge in online fashion shoppers. Good performance on the part of Sabunta.com further helped to enforce their dominance. On time delivery, even without having received payment, helped to instil confidence in its target market. To reduce problems associated with deceit and theft, usually by hoodlums posing as customers, Sabunta outsourced its delivery to Red Star Express, a leading Nigerian Franchisee of US global courier brand FEDEX a major courier company that has been in operations in Nigeria since 1992, known for its quality of service, Sabunta.com also introduced various practices that, though standard in mature e-commerce markets, were novel and innovative in the growing Nigerian e-commerce market. These innovations include: a. Free Delivery and Return Policy Prior to Sabunta.com entry, no e-commerce company in Nigeria offered free delivery or allowed customers to return purchased goods. Sabunta.com entered the e-commerce scene offering a nationwide free delivery plan as well as a return policy which allowed customers return goods bought within the first 14 days if they were not satisfied with the condition in which it was delivered. To return goods, customers are allowed to drop the purchased items at any of the 158 Red Star Express offices situated in all the states in Nigeria at their convenience. This reduces the cost which customers incur during the return process. The ability to purchase goods at no extra cost of delivery and to return these goods if dissatisfied at minimal costs make Sabunta.com a provider of high quality at low costs – attributes that appeal to the price sensitive and yet quality sensitive Nigerian market. b. International Product Offering Sabunta.com recognizes that its target market constitutes those familiar with and who wear International fashion brands. Consequently, the company partners with sister fashion companies around the world, owned by the parent, Rocket Internet, to offer a large range of international brands over 150 different brands to the Nigerian market. Sabunta.com enhances the display of international products on its site, both those it has in stock as well as those in the stock of its sister companies around the world. This allows the company serve the diverse international tastes of the Nigerian market, and to respond to trends regardless of its current stock. 6. SUCCESS For a company that has been in existence for less than three months in a foreign market, Sabunta.com has been able to achieve a lot of success and has been able to overcome a significant number of envisaged challenges. Sabunta.com successes include: a. Exceeding Projected Revenue Prior to entering the Nigerian market, the management of Sabunta projected revenue of â‚ ¬15,000 from about 150 orders in the first quarter of business. This projection was exceeded after the company’s first month of operations. The company found itself operating in a large market with a greater potential for online products than it had envisaged or planned for. The result was a restructuring of its operations to meet the demand. b. Obtaining Local Supplies Being an online fashion store, the ability to get local suppliers goes a long way in determining the amount of profit made. Local supply eliminates the various cost associated with getting supplies from outside the country – [The average mark-up for goods sold on Sabunta.com is 50%]. The Sabunta.com team was concerned about getting high quality local supplies for their business as the number and industry size of local fashion suppliers were not obtainable from official records or research archives. However, the company was pleasantly surprised at the large number of local fashion suppliers resident in Nigeria. The result has been high mark-ups on locally produced and sold products. This has lead to profitability in less time than projected.[Sabunta.com currently makes an average gross profit of 40% while their operating and net profits are still in the negative]. c. Finding Adequate Logistic Providers To ensure timely and accurate nationwide delivery, Sabunta.com required services from delivery firms who possess best practices as well as offer cost-effectiveness as a value proposition. The firm understood that a weak or inconsistent logistics arm (for example due to different qualities of delivery by several logistic partners) will result in negative customer perception. This challenge was overcome through a partnership with Red Star Express – a Franchisee of the US international courier and logistics service provider, FEDEX, that has been operating in Nigeria since 1992. Red Star Express knowledge of the country’s transportation infrastructure aids in its optimal logistics service delivery. Moreover, Red Star Express provides support with more than just delivery and return of goods. It also collects cash from customers who chose to pay in cash upon delivery, and remits these funds to Sabunta. This saves the company costs associated with cash management. d. Recruitment of Required Personnel Another envisaged challenge was availability of skilled local labor. Given the poor state of Nigeria’s I.T. infrastructure and sophistication, the company was unsure of the availability of I.T related skill sets to carry out Rocket’s model as practiced in various other markets. The company was however relieved to find competent local talent. Sabunta.com operates with a 100% local I.T team, capable of carrying out functions required by the Rocket model. 7. CHALLENGES Despite Sabunta.com successes, the company faces a myriad of challenges, most of which result from differences between Rocket’s countries of operation and the Nigerian market. Some of these challenges include: a. Challenges Resulting from Socio-Cultural and Socio-Economic Differences Unlike successes gained in recruiting and maintaining local personnel, Sabunta.com has not been able to maintain its international staff. Over seventy percent (70%) of Sabunta’s international staff who started out with the company left within two (2) months. The reason? Inability to acclimatize to the Nigerian environment with particular regards to the type of readily available food as well as the lack of or the high costs of, basic amenities such as food, water, regular electricity supply, health services, cooking gas, transportation, internet connectivity, etc. Other reasons for the departure of international staff included health concerns. As at August 2012, over 90 percent of international staff who resumed operations with the company (in June 2012) were diagnosed with malaria, a tropical disease most had never experienced. Unanticipated costs and time associated with replacing and training international staff continues to plague Sabunta.com. b. Challenges Resulting from Unavailability of Infrastructure. Being an e-commerce company, Sabunta.com core operations involve the use of the internet. Consequently, the company requires reliable and (preferably) cheap internet connectivity and power. Yet, neither internet connectivity nor power supply exists cheaply or reliably in Nigeria. Nigeria generates and distributes less than 4,000Megawatts barely enough to serve the nation’s power needs and resulting in frequent power outages. Sabunta.com spends over N640,000 (â‚ ¬3,200) per month on diesel to fuel their stand-by generators, and is constantly plagued with this high cost of power. The company also has high internet connectivity expenses N450,000 (â‚ ¬2,250) per month for a bandwidth size of 4/4Mbps. Even with such huge sums spent on internet connection, Sabunta.com continues to experience less than optimal services from Nigerian internet service providers. c. Challenges Resulting from Legislation A key component of Sabunta’s strategy is offering a wide range of international brands in Nigeria, using stock held by sister companies around the world. Research and studies of Nigerian importation laws suggested that importation of fashion stock into Nigeria would be relatively easy. This left the company vulnerable to the shock it received when the first set of drop-shipment was seized at the airport by the Nigerian Customs Service (NCS). The NCS claimed that the goods contained items that were contraband in Nigeria. Sabunta responded by removing such items from their offerings fragrance and perfumes.. Notwithstanding its response, Sabunta continues to face ever present threats associated with bans on importation of fashion related items including textile, leather, clothing, and shoes. Nigerian history reveals frequent policy changes and inconsistencies with regard importation of goods into the country, long identified as a major cause of failure of businesses in Nigeria. Another challenge faced by Sabunta from the Nigerian legislation is the restriction placed by the CBN on the sale of Foreign Exchange to companies and individual except for special purposes like the importation and exportation of goods and services and also the payment of services abroad. This meant that Sabunta had to buy foreign exchange at a higher price in the black market to settle all its international staff’s salary and other payments which were denominated in US dollars.(Official rate is 1$=159Naira as against the black market rate of 1$=163Naira). d. Challenges Resulting from Corrupt Practices. Despite the absence of contraband, Sabunta’s management continue to experience delays in the release of their consignment by Nigerian Customs officials. Further inquiry revealed that the logistic company they employed (FEDEX) to handle importation of their goods did not have a good relationship with the Customs officials due to the company’s implemented policy of not offering bribes as is the order of the day. Sabunta’s management continue to experience and consequently to remain alert to the constant threat of fraudulent and corrupt practices that plaque business in Nigeria. The company continues to face the challenge of local business partners who try to cut corners and deliver less. Prior to partnering with FEDEX, a Nigerian courier company was chosen and partnered with for local delivery. Similar to FEDEX’s collection and remission of cash, the courier company collected payment from customers on delivery. However, the company frequently fell short of its obligations in terms of timing and amount of cash remitted. The courier company also failed to report accurate figures collected from customers, and till date, owe Sabunta over 40% of payments collected. Sabunta was quick to recognize this problem and swiftly partnered with FEDEX for its logistics services. Nevertheless, other sources of corrupt practices persist especially from small independent service providers. This is particularly so with artisan related services such as plumbing, equipment repairs and office maintenance, and are frequent sources of lost funds or delayed services to Sabunta. 8. SABUNTA’S FUTURE: THE MERGER Plans are currently being made for a merger with Kasuwa, Rocket Internet’s other company in Nigeria, also launched in June 2012, to form Jumia. The merger is expected to result in the biggest e-commerce retailer in Nigeria a one-stop shop for all products related to fashion and electronic items. The new website, Jumia.com, will offer a wider variety of international brands, using strategies currently employed by Sabunta. Jumia is intended to provide benefits associated with scale such as discounts and bargaining power (in relation to suppliers), while addressing current challenges faced by both companies. They include: a. Staffing: The merger is expected to reduce the number of required staff. This will result in the reduction of salary expenses and will result in the need for fewer international staff. In other words, international staff who have acclimatized to Nigeria from both companies may continue to provide required services to Jumia without the need to recruit and retain new staff. b. Office Space: The merger is expected to result in shared office space at a cost smaller than the combined cost of Sabunta and Kasuwa’s current office cost. c. Fueling and Power: Similar to the effect on office space, the merger is expected to result in fueling and power costs that will be smaller than the combined current cost of both companies current fueling and power needs. d. Internet Connectivity: More than just reduction in costs, the merger is expected to result in Jumia’s ability to purchase larger bandwith sizes directly from internet providers in South Africa, Europe, and North America. This will address the unreliability of internet connectivity currently faced by Sabunta and Kasuwa. e. Repair and Maintenance: It is expected that the larger Jumia will be able to partner with large and reliable providers of office and equipment repairs thus eliminating small service providers who have corrupt or unreliable practices. 9. RECOMMENDATIONS 11Doing a proper market research and analysis When entering a foreign market, it is recommended that a firm carry out proper market research and analysis on that market prior to entry. Top on the list is an environmental analysis that needs to be taken also. There are uncontrollable forces which are external forces upon which the management has no direct control, and it can exert an influence. There are also Internal forces which are controllable forces upon which the management to adapt to. 12Form Strategic Alliances When entering a foreign market, it is recommended that a firm forge strategic alliance to enable them get the following * Great synergy with the partnering local company. * Opportunity to access assets that are not readily available in the market. * Access to larger market and technology for small companies. 11 Jusuf Zekiri and Biljana Angelova, Factors that Influence Entry Mode Choice in Foreign Markets, European Journal of Social Sciences – Volume 22, Number 4 (2011), http://www.eurojournals.com/EJSS_22_4_12.pdf, accesses August 2012. 12 Mihaela Belu, Strategies of Entering New Markets, The Romanian Economic Journal, http://www.rejournal.eu/Portals/0/Arhiva/JE%2027/JE%2027%20-%20Belu%20Caragin.pdf, accessed August 2012. Appendix 1 Mobile Money In NigeriaMobile money as the name implies is the transfer of monetary value from one person’s mobile phone to another. It has been made waves and affected commerce greatly in certain parts of eastern Africa where it was launched in 2009. In Nigeria, the CBN (Central Bank of Nigeria), granted license to 11 mobile money operators in 2011. The CBN rolled out the Mobile money campaign in Lagos State, Nigeria commercial nerve center in January 2012, and planned launching it around the federation by 2013.The CBN also put in place some incentives for using the Mobile money services, by placing charges for Bank cash transactions above 500,000 for individuals and 1million naira for companies.| Appendix 2 Economics of Lagos StateLagos State is the commercial nerve centre of Nigeria. Located in the western part of Nigeria, it is home to over 18million people and has over 2,000 industries. 65% of the countrys commercial activities are carried out in the state. Two of the nations largest seaports -Apapa and Tin-Can Ports are located in Lagos State.| Appendix 3 Income Distribution of the Nigeria Population in 2010 Nigeria Population in 2010-156,051,000 (Source: International Monetary Fund 2011 World Economic Outlook) This report shows the distribution for seven groups within the Nigerian Population in 2010. Percentage of population in income bracket of 0-500 PPP Dollars –55.68% Percentage of population in income bracket of 500-1000 PPP Dollars-28.22% Percentage of population in income bracket of 1000-2500 PPP Dollars- 14.61% Percentage of population in income bracket of 2500-5000 PPP Dollars- 1.17% Percentage of population in income bracket of 5000-10000 PPP Dollars- 0.17% Percentage of population in income bracket of 10000-20000 PPP Dollars- 0.05% Percentage of population in income bracket of 20000+ PPP Dollars- 0.1% Source-Marketline analysis based on information from National Statistical Organization