Exporting Event Cinemas to South Africa - Case Study Example

Assignment 3 1. Executive Summary Event Cinemas is an Australian based movie theatre exporting its products and services to South Africa in Africa. It will target customers in Johannesburg, Cape Town, Durban, and Pretoria which are popular towns. The product and services of Event Cinemas will be to provide ultimate movie experience to children, teens, families, young adults and adults between ages 5 years to 54 years. The environment influences of Event Cinema in the target country are political issues, economic issues, technological issues, social issues, cultural issues and legal issues. The business model to be used as an entry to the target country will be Bricks and clicks business model. The market is segmented by age, genre and movie rating. Event Cinemas targets about 30 million movie-goes in South Africa. The key competitors are Ster-Kinekor, Nu Metro Cinemas, and CineCentre. The current capabilities, experience and expertise of Event Cinemas are valuable physical assets, valuable intangible assets, intellectual capital and human assets, and specialized expertise. The capabilities, experiences and expertise needed to make the project successful are personnel experience, specialised expertise, powerful brand and valuable facilities. The ‘gaps’ are lack of cinema experienced and unestablished brand in the target country. The strengths of Event Cinemas include state of the art facilities, customer loyalty rewards, top performing websites, and state of the art venues. Its weaknesses included unestablished market and high prices due to operation costs. Its opportunities in the target country is the increase of movie-goers to gain market share from, immigration to digital platform, and rapidly expanding middle class with high spending power. Its threats are already established competitors and other substitutes like pay-tv and pirated movie DVDs. Event Cinemas will position itself as a provider of ultimate movie experience and state of the art facilities for viewers in a caring manner. Event Cinemas will endorse a broad differentiation strategy an offensive strategy to attack the strong competition. Variable pricing method will be used a pricing strategy. Promotion strategy will be establishing communication through website, blog and social media, advertising, and sales promotion. Event Cinemas will make a loss of approximately $30000 in Year1, a profit of $120,000 in Year2 and $190,000 in Year3 2. Preliminary Analysis - Overseas Market 2.1 Target country / market area definition and key criteria The target country for Event Cinemas is South Africa in Africa. The company will target customers living in urban areas specifically in major cities; Johannesburg, Cape Town, Durban, and Pretoria. This was chosen based on the popularity of towns and the population of people; Johannesburg (7,860,781), Cape Town (3,430,992), Durban (2,786,046), and Pretoria (1,763,336) (Statistics South Africa, 2011). The cineplexes will be located in popular malls in those towns where people come to shop, hung around and seek entertainment. Those locations are also easily accessible and relaxing environment to enjoy movies. 2.2 Definition of product / service opportunity Event Cinemas will provide ultimate movie experience to its families, children, teens, young adults and adults of age between 5 years to 54 years. Different movies will target different customers depending with their preferred genre such as comedy, adventure, action, thriller, drama, romantic comedy and musical. Children, teens, young adults and adults will be provided movies according to the rating as U, PG, 12, 15 and 18. The customers live in urban areas in top four popular towns in South Africa; Durban, Pretoria, Cape Town and Johannesburg, with a population of 15,841,155 people (Statistics South Africa, 2011). According to South African Audience Research Foundation (2015), about 37,214,000 attended a cinema between January-December 2013. They need super experience when watching a movie; intimate seating, extra-large screens, waiter services and VIP experience. 2.3 Evaluation of key environment influences 2.3.1 Key political issues South Africa is a constitutional democratic country divided into nine provinces with each having its own provincial legislature. The structures of the government develop their functions and powers from the country’s constitution (Lowtax, 2013). There have been reports of political instability and poor service delivery in delivery. Nagar (2013) showed that about 57% of businesses were impacted negatively by poor government service delivery in terms of utilities such as electricity and water supply, roads (traffic and pothole issues) billing issues, labour strikes, tender fraud, and poor payment from government. This creates uncertainty of the future and growth of businesses. 2.3.2 Key economic factors affecting the market South African’s economy is ranked by the World Bank as an upper-middle income economy among. In terms of purchasing power parity it accounts for 24% of its gross domestic product (GDP), and is rated the second largest in Africa, after Nigeria. However, it has high unemployment rate of 25% and poverty remains a major problem with the poor not accessing basic services and economic opportunities. 4% of Whites, 11% of Asians, 29% of Coloured, and 62% of Black Africans live in poverty. This means a big number of the population do not have money at their disposal to spend on products and services. The inflation rate of South Africa has been stable for some time, but current it has increased to 4.5% from 4% in January 2015 (Trading Economics, 2015). In case the inflation rate continues to rise income redistribution will be affected, frozen better pay and fallen real incomes which will reduce disposal amount for spending. 2.3.4 Legal issues and structures of the market Before, it was required to pay filing fees before starting a business in South Africa equal to approximately 7.5% of the average income per capital and it took over 35 days to do so. With better legal changes today, things have become easier involved only $21 (R175) payment to the Companies and Intellectual Property Commission. This process takes only 19 days. Companies are required to pay a tax rate of 30%. A secondary tax of 12.52% is collected on companies on all income. Value-added tax is collected at a rate of 14% which is standard on all services and goods (Ftomasek, 2015). 2.3.5 Cultural issues and factors that are likely to impact on the customer offer Customs, manners and language are elements of culture. Language cannot be overlooked and learning it implies getting to know the country’s culture. Individuals prefer their own language and Event cinemas will need to be part of the market language rather than just being aware of it. When gathering information and communication the valuability of language becomes obvious. Zulu, Xhosa, Venda, Tsona, Sotho, Venda, Shangaan, Pedi, Ndebele, English and Afrikaans are the languages recognized by the South African government. However, the official languages are Afrikaans and English. To be successful in this market Event Cinemas will need to understand and be able to speak at least the official languages (Department of Trade and Industry Republic of South Africa, 2014). South Africa consists of 75.2% black, 13.6% white, 8.6% colored and 2.6% Indian. There are different religions in South Africa: 68% Christians, 28.5% animist and indigenous beliefs, 1.5% Hindu, and 2Muslims. Understanding religions can provide opportunities for Event Cinemas to introduce new products such as Christian movies in order to extend its market share. Business negotiations are conducted when there is mutual trust. Sending a woman to negotiate may be challenging as compared to male colleague because of the condescending behaviour that may take place. Interrupting a South African when speaking is seen as disrespect. They strive for win-win and consensus situations. Deadlines are not seen as firm commitments but as fluid. Price haggling is not accepted, only a realistic figure is welcomed. 2.3.6 Social issues consideration and analysis South Africa has the one of the highest literacy rate (86.40 in Africa, implying that approximately 86.4% of the total population of age 15 and above can read and write, though the quality of education is hard to come in most South Africa communities. The high level of education literacy shows that consumers can be able to comfortably flip through the information of the company and its competitors and be able to do product and price comparison. Event Cinemas will need to provide services and products of high quality and unique in order to compete in this market. Despite of this high literacy rate, many continue to live in poverty and hunger in outskirts of big towns like Soweto which is an urban area of Johannesburg populated with lower-class individuals. Several Blacks and Whites survive on soup kitchen, and 17.8% of the population (adults) has contracted HIV/AIDS. These issues leave no customers with enough money at their disposal to enjoy a movie, a factor that may impact greatly on Event Cinemas (Department of Trade and Industry Republic of South Africa, 2014). Unemployment and poverty has led to high rates of crime. Unemployment means there is availability of quality human resources that Event Cinema can utilize at a cheaper cost. However, high rate of crime can affect investment and growth of the business in other areas of the country. Currently, South Africa suffers Xenophobia (an irrational or intense fear or dislike of people from other countries). Properties of foreigners including businesses are destroyed and foreigners attacked or killed. This is may be risky to the Event Cinema which is a foreign company and exported its services and products to South Africa. 2.3.7 Technological issues and structures impacting upon the market South Africa has experienced a transition to digital cinema most recently. This means rolling out of digital cinema servers in cineplexes to enable cinemas to display full length feature movies and advertising from a digital platform. The most challenging thing about this is entry-cost especially the expensiveness of 35mm film prints. In addition, pay-tv can affect cinemas because people can decide to watch movies at home from a wide range of movies (Department of Trade and Industry Republic of South Africa, 2014). 2.4 Business Model to be used for Entry into the Target Country A business model defines the customers of a company, what they value and how to deliver this value, how a firm makes money and how it works cost effectively (Ricart & Casadesus-Masanell, 2009). It also outlines the profits, cost and revenue architecture associated with delivering of value. 2.4.1 Main options The following are the main options of business models for Event Cinemas: Franchising business model This is involves the use of another company’s successful business model. The franchisor avoids chain investment and liability which is already taken care of by the franchisee. The success of the franchisor depends on the franchisee’s success. Event Cinemas as franchisee can easily establish business on a proven idea of the franchisor. It will benefit from the franchisor’s recognized trademarks and brand name, and any promotion or advertising. It will also benefit from easier lending of money by banks because of the good reputation of the franchise. There are already established suppliers which makes it easier for constant supplies to take place. However, it can be costly than expected in that, in addition to the costs of purchasing the franchise, there is continuous payment of management service fees, and forced to pay the franchisor’s products. It is difficult to make changes to suit the local market due to standardization of the franchise. Direct Exporting- This involves Event Cinemas selling its services and products directly to its target market using its own resources in the first instance. The potential profits of Event Cinemas will be greater because it will eliminate intermediaries. By dealing directly with customers it will build trust with them. The company can receive product or service performance feedback faster from the customers. However, it takes more money, energy and time to executive direct exporting. In addition, to cultivate a customer base “people power” is required. Acquisition- This is the purchase of an existing local company to build on its strengths or weaknesses. The local company may be a competitor to Event Cinemas and may already have substantial market share. However, it can be challenging to integrate the activities of the old organization activities with the activities of the new company. It may also be costly to acquire the new business and managing of competencies and resources may be problematic. 2.4.2 Preferred option The preferred option for Event Cinemas is acquisition. Being a new company in the foreign market, it is ideal to have an already market share. Event Cinema will be provided with an established customer base, receive benefits of the knowledge of the local market, gain favour of the government as a local company, and receive a “local company” status. Reference List Africa and the World 2015, Major problems facings South Africa. Africa and the World, viewed 30 May 2015, http://www.africaw.com/major-problems-facing-south-africa- today Department of Trade and Industry Republic of South Africa 2014, South Africa: Investor’s Handbook 2013/14. Deloitte. Ftomasek 2015. South African Income Tax Rates from 2009 to 2015. Ftomasek, viewed 30 May 2015, http://ftomasek.com/rates.html Lowtax 2013, South Africa: Country and Foreign Investment. Lowtax, viewed 30 May 2015, http://www.lowtax.net/information/south-africa/south-africa-geography.html Nagar, D 2013, SA businesses seriously impacted by political instability, poor government service delivery and crime – Grant Thornton survey. Grant Thornton South Africa, viewed 30 May 2015, http://www.gt.co.za/news/2013/07/sa-businesses-seriously- impacted-by-political-instability-poor-government-service-delivery-and-crime-grant- thornton-survey/ Ricart, JE & Casadesus-Masanell, R 2009, From Strategy to Business Models and to Tactics. Harvard Business School. South African Audience Research Foundation 2015, Cinema Trends. SAARF,viewed 30 May 2015, http://www.saarf.co.za/amps/cinema.asp Statistics South Africa 2014, South Africa: Provinces and Major Urban Areas. Citypopulation, viewed 30 May 2015 http://www.citypopulation.de/SouthAfrica- UA.html Statistics South Africa 2015, Knowing the Population, Statistics South Africa, viewed 30 May 2015, http://www.statssa.gov.za/?page_id=595 Trading Economics 2015. South Africa Inflation Rate 1968-2015 Trading Economics, viewed 30 May 2015, http://www.tradingeconomics.com/south-africa/inflation-cpi Read More