Part Two: Case Study- Gafatt Cement Manufacturing CompanyThe cement-manufacturing industry in Ethiopia is of the largest components of the national and regional trade in cements. Until 1991, one company was the only source of cement mainly serving local and national markets in limited manner. With the change in government the industry which was only reserved for government became opened to local and international investors. The cement manufacturing industry is dependent on the supply of local inputs. Gafatt, Muger, Messebo, Habesha, National, Dangote and Durba are among major cement producers of cement in Ethiopia. These companies in total have estimated production capacity around 46.4 million of quintal of cement. Meanwhile, the cement market, which was estimated at 67 million quintals in 2020. All the companies in the industry can only satisfy 69.3% of the demand. This indicates a huge supply gap in the in the industry i.e. 30.7%. Gafatt Cement Manufacturing Company, established in 2003 had a very small share in cement production with about 1.6 million quintals of cement per annum. The company has the state-of-the art technology in comparison with other companies in the industry which has a production capacity of 2.2 million quintals. The major reasons for under production mentioned were power shortage and limited technical ability of the workforce. The high temperature of the location is also resulting in high turnover of experienced employees which requires greater attention from the company management which is located in Addis Ababa. In this regard, the company has been designing and implementing different regular staff training programs, leadership programs and performance enhancement programs for employees. It engaged outside consultants to assist in training employees and to enhance their performance.
Mugar Manufacturing Share Company, established before 1974, produces approximately 25% of cements in the nation, while Messebo and National produce approximately 22% and 9%, respectively. Mugar, one of the big companies in the industry, is serving around 17.3% of the total demand in the market. However, the production and market share of Gafatt is approximately 3.44% and 2.4% respectively. In the cement in industry in Ethiopia, the distribution of cement was dominated by a few companies. For instance, approximately three large firms accounted in control of 50% of the cement distributed in the market. The remaining 50% of the distribution was by around 92 participants, out of which 37 were youth enterprises. The cement manufacturing companies are obliged by law 10% of their produce through youth enterprises although sometimes some companies are distribution 12 to 15 percent of their produce through the enterprises. Payment terms for distributors typically involved payment of 15% of the aggregate purchase price by the distributor on the placement of an order, an additional 35% of the payment on the delivery of products to the distributor, and the remaining 50% of the payment within 60 days of such delivery. The commission to distributors varied from 10-20%. The company also provided continued brand promotional support to distributors and to retail chains through sales promotion campaigns.
Competition in the industry is primarily based on quality and availability of products. Current and potential competitors include those existing companies and protentional future local and foreign investors. To remain competitive, firms had to reduce procurement, production, and distribution costs, and improve operating efficiencies. New players could enter the industry, though there were some entry barriers like substantial investment to establish and working capital to run the business as well as the long-term relationships required with experienced distributors. Another challenge for new entrants comes from the limited availability of skilled workforce. The senior management of the company is believed to be a composition of having significant industry experience was instrumental to make the company competitive in the market by achieving consistent growth in revenues and operations. In addition, the Board included a strong combination of management as well as independent members that brought significant business experience to the Company. The company management had a strong belief that motivated and empowered employees were the key to competitive advantage. As a means of motivation and empowerment, in addition to a base salary and a performance linked variable pay, benefits to employees included medical expenses, housing or rent assistance, annual leave and travel allowance, provident fund, healthcare, schooling, pension, and group gratuity schemes. Employees and contract employees were also covered under insurance schemes that make the only company to design this kind of scheme for contractual employee.
The cement sales and distribution business were dependent on developing and maintaining continuing relationships with customers. The business was dependent on certain market segments, including wholesalers, distributors and retail. Large amount purchasing customers under specific purchase-orders raised from time to time and the company did not have any long-term contracts with customers; nor were customers subject to any contractual provisions or other restrictions that precluded them from purchasing products from competitors. The firm identified specific customer requirements and delivered on such requirements efficiently within the shortest possible time-frame. Continuing relationships with customers enabled them to identify the requirements of customers and supply cements of specific sizes, shapes, cuts, and quality to customers in accordance with their specifications. CRM also enabled them to reduce payment risks. Regional buyer-customers visited the manufacturing facilities in Ethiopia and placed orders for cements of certain specifications. Participation in trade shows in international markets enabled existing and potential customers to examine manufacturing capabilities and the processed cement product range. Participation in such trade shows and fairs was also used as a forum to develop new relationships with customers and better understand their requirements as well as the latest trends in the cement producing and distributing processing markets.
Recently with boom in the construction sector, the demand is expected to be greater than the above estimation since there is no available recent statistics. In response to this, different new local and international investors are anticipated to join the market. The government is also introducing different tax packages particularly for foreign investors which interested to work in partnership with local investors, with the aim of technology transfer, employment generation and using established distribution channels in the global market. However, due to the market imperfection, the price cement is becoming unpredictable. The supply deficit is attracting illegal actors in the distribution channel which result in soaring in price. A case in point in 2019, without justifiable reason and added value, the price cement on the average increased from 288 to 460 birr. When the government take intervene in the market and producers take some measures, the price declined significantly. Parallelly in order to mitigate the unnecessary price increase in the value, the company has introduced maximum retail price policy where the price is written on the package that takes in to account the distance of the sales point throughout the country. This policy is introduced in an attempt to develop customer loyalty.
Gafatt is located in Afar Region. The production facility spreads over an area of 40,000 square meters with modern cement processing equipment and employing more than 600 permanent and temporary skilled employees. It comparably is small company having two modern cement manufacturing facilities which contain two product line of production. In 2016, the company has won the prize for national quality award due to technical efficiency and quality of product. The company mainly focused on producing cements that can be used by individuals constructing their residential buildings. This product is sold to domestic users in customized manner with packages containing 5kgs, 10 kgs and 25 kgs which makes the company different from others in addition to standard 50 kgs container. Besides, the second product is intended to serve as input to medium building. Given the market conditions the company management is looking to add high-graded-quality to the production line. The new product is intended to serve the demand of cement for mega projects like dams and road construction. But, due to incomplete information, decision is not so far agreed by the management in relation to adding to the new product. This decision may also enable the company to benefit out of the recent Ethiopian government initiatives to promote export of internationally demanded products. The initiative included 34% tax concession on cement sold at regional market and beyond. Moreover, the management is pushed by some experts in the company to join the construction industry with the aim of producing pre-fabricated building materials. This is anticipated to increase the revenue of the company by 24% annually.
Required:Using the resource-based approach, conduct the internal environment analysis and indicate the strategies that can be used to enter international market. (4 marks) Conduct the necessary SWOT analysis for the respective company; with proper explanation to each variable (6 marks)What types of expansion strategy is the planning to introduce? Relate your discussion with the three level of strategies; and what type of information is needed to make expansion decision by the management? (5 marks)Write the potential mission, vision and values by support your argument from the facts given in the case. (5 marks)Write about the distinctive competencies of the company. Why? (5 marks)