Challenges Faced by Companies Entering Foriegn Markets Essay Example for Free

Ch all(prenominal)enges Faced by Companies Entering Foriegn Markets Essay1. INTRODUCTIONCompanies move into foreign grocerys for various reasons. In certain cases, it is towards achieving a required sales volume. In some other instances, it might be a bid to increase smirch aw arness. Other companies go into foreign markets to re-invigorate sales after their products have got g wizard through with(predicate) their life cycle from inception to decline in home markets. Regard slight of reason, moving into a foreign market unravels to por draw great opportunities for companies, particularly if it entails helping products in an emerging economy that has recently become wealthy enough to afford such products or selling a new but necessitate product or service to a developed and wealthy market. However, in foreign markets, challenges atomic number 18 as numerous as opportunities. Some sources of challenges are discussed be petty(a).a) Socio-Cultural DifferencesCompanies te nd to adopt practices that were successful in home markets without adapting these models to fit the cultural incli earths of markets entered. When large cultural differences exist between the home country and that entered, such practices may outgrowth in ineffective course development and partnerships. An example is the now well known Chinese practice of longer meetings in the bid to become introduce with authorisation partners, compared to the Anglo-American practice of brief to-the-point meetings.Adopting either approach in a market more than inclined to the other, will no doubt hinder line of descent development. Langu eld differences are other examples of socio-cultural differences that posit challenges to companies entering a foreign market. Langu climb on differences make effective and efficient communication difficult between companies and vellicateical anesthetic stakeholders. A light example is the Chevrolet Nova which was selling far below expectation in Latin Ameri ca. Executives of General Motors could non understand why this was so until it was brought to their precaution that, in Spanish no va means it doesnt go.b) Differences in Levels of Bureaucracy Efficiency of Procedures and Processes Compevery registration, the opening of a bank account, getting import earmarks, 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 utilise to comparatively low levels of bureaucracy, entering a market with significantly higher levels of bureaucracy may terminus in unrealistic project plans translated into unachieved implementation. c) Differences in availability of Skilled Human Resources Availability of a particular skill in a associations 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 offshoot set of GSM licenses were given to foreign companies MTN and Econet ( both(prenominal) from South Africa). At the time, incomplete 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 InfrastructurePrevailing infrastructure disturbs how companies operate. Prevailing transportation infrastructure affect how companies move goods and personnel for service delivery market infrastructure affect how players on a given hold dear chain relate with one another and the level of basic infrastructure such as power and water affect cost allocations and charge. For companies entering a foreign market, failure to take into account the infrastructural base of the market entered may result i n ineffective and or unable operating plans and processes.e) Legislation Favouring Local CompaniesUn alivenessive 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 marks. 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, Expatriates, some semi-skilled, take everyplace even menial jobs from Nigerians, The Guardian rawspaper Nigeria, December 21 2011, http//www.ngrguardiannews.com/index.php? pickaxe=com_contentview=articleid=71436expatriates-some-semi-skilled-take- everyplace-even-menial-jobs-from-nigerians-catid=72focusIte middle=598, accessed August 2012.3. NIGERIAN E-COMMERCEE-commerce is the buy and sell ing of products or serve 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 embarrass a wider localize 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- salary options available in Nigeria at that time. This difficulty was due to known c ases of fraud that occurred over the insecurity of Interswitch, the only e-payment plan 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 penalize 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 vivacious 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 Internets Sabunta.com and Kasuwa.com.The long-term scout 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 cash in Nigeria by the Central banking concern 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 intoa. Fashion RetailersThese are online vogue shops that primarily sell shoes, clothes and other make 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 slight than 3 months ago opus close other players have been in the scene for significantly longer. Sabunta twistings a wider paradigm of global brands and possesses a more integrated logistical supply chain. This makes them more capable of serving customers all around Nigeria than competitors.b. Travel and TourismThese are primaril y online companies that sell travel and turn 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, etcc. electronic Gadgets and BooksThese 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(prenominal) than 3 months old. Apart from electronics, Konga.com too retails baby and female make-up products.d. Broad Product RetailersPlayers 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.COMSabunta.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. Rockets headquarters is the vibrant centre of Berlin, Europes Silicon Valley, home to a network of 25 supranational Rocket notes that cover the operations of the companys subsidiaries in developed and emerging markets. Rocket Internet is the largest, fastest and the most successful international online fortuity 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 Roc ket 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, Rockets 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 Rockets operations in Nigeria. Both operate from their headquarters in Lagos, Nigerians commercial capital, home to over 10% of the countrys $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 pr ovides 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 MARKETThe target market for Sabunta.com is Nigerias upper and emerging middle-class living in major ur ban 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 companys 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).Sabuntas 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 vesture. They also recognize and wear popular international brands and shop for these brands whenever they or friends and family travel abroad.5. SABUNTA.COM STRAT EGYHaving carefully studied the Nigerian e-commerce scene, Sabunta.com concluded that the major problem hinder 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 shrivel up problems associated with deceit and theft, usually by hoodlums posing as customers, Sabunta outsourced its delivery to ruddy Star Express, a leading Nigerian Franchisee of US global messenger 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 develop e-commerce markets, were novel and innovative in the growing Nigerian e-commerce market. These innovations includea. Free Delivery and Return PolicyPrior to Sabunta.com entry, no e-commerce company in Nigeria offered indigent delivery or allowed customers to kick in leveraged goods. Sabunta.com entered the e-commerce scene offering a nationwide free delivery plan as well as a return constitution which allowed customers return goods bought deep down 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. Th is 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 OfferingSabunta.com recognizes that its target market constitutes those familiar with and who wear International fashion brands. Consequently, the company partners with sis 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 regardles s of its current stock.6. SUCCESSFor 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 includea. Exceeding Projected RevenuePrior to entering the Nigerian market, the management of Sabunta projected revenue of 15,000 from about 150 orders in the first quarter of business. This undertaking was exceeded after the companys 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 SuppliesBeing an online fashion store, the ability to get local suppliers goes a long counsel 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 ProvidersTo ensure timely and accurate nationwide delivery, Sabunta.com required operate 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 l ogistic 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 countrys 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 infallible PersonnelAnother envisaged challenge was availability of skilled local labor. Given the poor state of Nigerias I.T. infrastructure and sophistication, the company was unsure of the availability of I.T tie in skill sets to carry out Rockets model as practiced in various other markets. The company was however rel ieved to distinguish competent local talent. Sabunta.com operates with a 100% local I.T team, capable of carrying out functions required by the Rocket model.7. CHALLENGESDespite Sabunta.com successes, the company faces a myriad of challenges, most of which result from differences between Rockets countries of operation and the Nigerian market. Some of these challenges include a. Challenges Resulting from Socio-Cultural and Socio-Economic DifferencesUnlike successes gained in recruiting and maintaining local personnel, Sabunta.com has not been able to maintain its international staff. Over seventy percent (70%) of Sabuntas 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 comforts such as food, water, regular electricity supply, health services, cooking gas, transportation, int ernet 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. out of the blue(predicate) costs and time associated with replacing and training international staff proceeds 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 original 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 nations power needs and resulting in frequent power outages. Sabunta.com spends over N640,000 (3,200) per month on diesel to fuel their s tand-by generators, and is constantly plagued with this high cost of power. The company also has high internet connectivity expenses N450,000 (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 LegislationA key component of Sabuntas 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 pe rfumes..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 staffs 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 stretch Practices.De spite the absence of contraband, Sabuntas 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 copulationship with the Customs officials due to the companys implemented policy of not offering bribes as is the order of the day. Sabuntas management continue to experience and consequently to remain alert to the constant threat of fraudulent and impair 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 FEDEXs collection and remission of cash, the courier company collected payment from customers on delivery.However, the company frequently bestial 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 crafter related services such as plumbing, equipment repairs and office maintenance, and are frequent sources of lost funds or delayed services to Sabunta.8. SABUNTAS FUTURE THE nuclear fusionPlans are currently being made for a merger with Kasuwa, Rocket Internets 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, us ing 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 simplification 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 Kasuwas 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 p ower needs.d. Internet Connectivity More than just reduction in costs, the merger is expected to result in Jumias 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 sustainment 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. RECOMMENDATIONS11Doing a proper market research and analysisWhen 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 AlliancesWhen 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 do work 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. vermiform process 1Mobile Money In NigeriaMobile money as the name implies is the transfer of monetary value from one persons 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 hardiness 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 2Economics of Lagos StateLagos State is the commercial nerve centre of Nigeria. Located in the occidental 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 3Income Distribution of the Nigeria Population in 2010Ni geria 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 nation in income bracket of 0-500 PPP Dollars 55.68% Percentage of universe 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 nerve