MBA
Drivers and Constraints of IT Consulting Firms’ Market Entry and
Expansion Strategies in Africa
An assessment of a German multinational IT firm’s market entry options for the African market
Research report presented in partial fulfilment of the requirements for the degree of Master of Business Administration at the
University of Amsterdam, 2015
Submitted by: Daniel Lebotse Supervisor: Prof. John Cullen
Abstract
The modern ‘Scramble for Africa’ has shifted from resource-seeking to market-seeking as the continent’s economic and socio-political environment improves. The positive economic outlook of Africa and growing middle class with more disposable income and appetite for better products and services has attracted investors across industries. Given the increasing competitive intensity in developed markets, Africa has emerged as the next frontier for market-seeking multinational firms.
Advances in technology such as social networking, mobile, analytics and cloud computing have created new and innovative opportunities for engaging both consumers and businesses in developing markets. For technology firms that were previously hamstrung by poor infrastructure and low margins, cloud computing and subscription-based models offer an alternative, low-cost delivery model for businesses in developing markets that have limited IT budgets.
While the opportunities look promising and attractive, there are many challenges and risks that a foreign firm will encounter when doing business in Africa. However, these can be mitigated by engaging in prior learning, careful and strategic market selection and entry mode. This paper explores theoretical frameworks that can be used to seize the opportunity and mitigate the constraints of doing business in Africa for global IT consulting firms, through a case study of a German-based multinational IT consulting firm.
Table of Contents
I. Chapter 1 - Introduction ... 1
A. Background ... 1
B. Research Methodology ... 2
C. Research Outline ... 3
II. Chapter 2 – Framing: Theoretical Frameworks and concepts ... 4
A. Purpose of Consulting ... 4
B. Consulting Industry Typology ... 6
C. Foreign Market Entry Strategies ... 8
i. Market Selection ... 8
ii. Timing of Entry ... 10
iii. Entry Mode ... 11
D. The Eclectic (OLI) Paradigm ... 12
E. Institution-based View ... 14
F. Liability of Foreignness ... 16
G. Global Market Opportunity Assessment ... 17
III. Chapter 3 – The IT Consulting Industry ... 20
A. Top Global IT Consulting Firms ... 21
B. IT Consulting Firms in Africa ... 22
C. Opportunities and challenges ... 22
IV. Chapter 4 - Case description ... 25
A. Organizational Overview ... 25
B. Organizational Structure ... 25
C. Products and Services ... 27
D. Market Entry & Expansion Strategy ... 28
i. Kenya Experience ... 29
ii. Nigeria Experience ... 29
E. Case Questions ... 30
V. Chapter 5 – Case Analysis ... 31
A. Consulting Firm Typology ... 31
B. OLI Framework ... 31
C. Global Market Opportunity Assessment ... 32
i. Organizational Readiness ... 32
ii. Product or Service Suitability ... 32
iv. Industry Market Potential ... 35
v. Foreign Business Partner Choice ... 35
D. Market Entry Strategy ... 37
VI. Chapter 6 – Recommendations ... 39
VII. References ... 41
VIII. Appendix ... 44
A. Exhibit 1 – Drivers and Constraints of FDI ... 44
B. Exhibit 2 – Theoretical Models and Frameworks ... 45
C. Exhibit 3 – msg Global Solutions Facts and Figures ... 48
D. Exhibit 4 – Country Assessment and Selection ... 52
Table of Figures Figure 1: Segments and Key Areas in Management Consulting ... 6
Figure 2: Market Entry Strategy Decisions ... 8
Figure 3: Determinants of Country Attractiveness ... 9
Figure 4: Framework for Country Market and Industry Attractiveness Assessment ... 10
Figure 5: Determinants of Foreign Market Entry Choice and Firm Performance ... 14
Figure 6: Effect of Institutions and Resources on Market Entry Choice ... 15
Figure 7: Factors Influencing Liability of Foreignness ... 16
Figure 8: Common Types of IT consulting services ... 21
Figure 9: Challenges of Doing Business in Africa ... 44
Figure 10: Host Country Determinants of FDI ... 45
Figure 11: Hierarchy of Consulting Purposes ... 45
Figure 12: OLI Framework and Forms of Market Entry... 46
Figure 13: The CAGE Framework ... 46
Figure 14: Hierarchical Model of Foreign market entry mode choices ... 47
Figure 15: Framework for Country Risk Analysis ... 47
Figure 16: msg Global Solutions Locations ... 48
Figure 17: Global Management Board 2015 ... 48
Figure 18: msg Global Solutions Customer Distribution ... 49
Figure 19: Regional Focus - Primary customer contacts ... 49
Figure 20: Organizational Structure Transformation - 2014 ... 49
Figure 21: Global Services Unit and functional areas ... 50
Figure 22: Shared Services Unit and supported Units ... 50
Figure 23: msg Global Solutions - Development of Sales 2011 to 2014 ... 51
Figure 24: Africa Competitiveness Report 2015 ... 52
Figure 25: Country Attractiveness Analysis ... 53
Figure 26: Africa Risk and Opportunity Matrix ... 54
Figure 27: Africa Insurance Industry Overview... 54
1 | P a g e I. Chapter 1 - Introduction
In this chapter, the research background is introduced. Then the research methodology and outline are provided.
A. Background
Africa is one of the fastest growing regions in the world, attracting high volumes of FDI as MNEs search for new markets. However, the African market is not homogenous. While some regions and countries are well developed and stable, there are also markets that are still risky and underdeveloped.
Recent years have seen a shift in FDI sector focus in Africa from the traditional extractive1 industry to consumer-facing industries. The share of extractive industry in FDI in Africa reached an all-time low of 3% in 2013 from 11% in 2003-2007 while investment in technology, media and telecommunications (TMT) rose from 14% to 20% over the same period (fDI Intelligence Report, 2013). The high FDI on TMT, improvements in; infrastructure, macroeconomic management, and a growing middle class, provides an opportunity for IT consultancies to expand to Africa. The question is where, when and how to best invest in such a fragmented market?
A large body of research has considered the internationalization process and issues related to investing in emerging markets. Ghemawat (2001) provides a framework for analysing several factors that should be considered when deciding to invest in new markets such as culture, administration, geography and economic distance (CAGE). According to Ghemawat (2001), companies should look beyond the traditional financial forecasts when assessing opportunities in foreign markets. He argues that MNEs are more likely to face fewer constraints and adapt in foreign markets that have the least distance from the host’s market.
Furthermore, MNEs are always at a disadvantage in foreign markets compared to local companies due to their lack of local market knowledge, foreign exchange risks and discrimination by local authorities, the so-called liability of foreignness (Petersen & Pedersen, 2002; Sethi & Guisinger, 2002). According to Peng (2002), the state of institutions is another factor that should be considered when deciding on foreign investments, especially in
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politically unstable markets such as Africa where the rules of the game are being written in the presence. These are general issues related to foreign investments.
Chironga et al. (2011) argue that business success in Africa requires contextual intelligence and innovative custom solutions by executives. For IT consultancies in particular, the state of technological infrastructure, industry technology adoption trends, availability of skilled labour and focus in terms of government policy is particularly important. A market that promotes technological advancement and investment as one of the key development factors is more attractive than a commodity (mining and/or agriculture) focused one.
msg Global Solutions2, an IT consulting firm based in Germany, has recently been expanding its footprint in search of new markets. The firm has established new offices in emerging markets such; Serbia, Brazil and South Korea in the last 3 years. The market entry mode has so far been through Greenfields in these regions, usually following its strategic partner and vendor, SAP’s expansion strategy. Africa has so far been ignored due to the comparably high costs and maintenance associated with ERP products and consulting services offered by the company. However, as the costs for implementing ERP solutions are increasingly declining due to new business and pricing models such as managed services, cloud computing, offshoring and usage-based pricing, the barriers for investing in Africa are increasingly diminishing.
Where, when and how should msg Global Solutions expand its operations in the African market?
B. Research Methodology
The research methodology used in this company project is secondary research. Extensive use has been made of published information on the topic based on authoritative publications on management consulting and international business, trend analysis of IT and technology investments in African countries and msg’s company records. These were supplemented by external/secondary sources of information such as individualized reports, specialized reports and reports from international organizations and agencies for a more practical and up to date research. I also drew on research focusing on management consulting firms due to the increasing trend of convergence between IT and management consulting firms.
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C. Research Outline
The structure of this research paper is as follows;
Chapter 2 – Framing: Theoretical Frameworks and concepts
The theory, concepts and frameworks used to answer the research theory are presented in this chapter through literature review. The chapter starts by exploring the purpose of consulting and the consulting firm typology for an understanding of the various types, size and practices of consulting firms. Theory and frameworks on drivers and constraints of international expansion such as; consulting industry typology, foreign market entry strategies, OLI paradigm, institution-based view, liability of foreignness and global market opportunity assessment are reviewed in this chapter.
Chapter 3 – The IT Consulting Industry
An overview of the IT consulting industry, top global IT consulting firms, IT consulting firms in Africa and, the challenges and opportunities in the industry are presented in this chapter to give the reader contextual reference of the industry being analysed.
Chapter 4 – Case Description
A description of the case being investigated is provided in this chapter using msg Global Solutions as an exemplary case of a multinational IT consulting firm assessing market expansion opportunity in Africa.
Chapter 5 – Case Analysis
This chapter provides an analysis of the case using the concepts and frameworks presented in chapter 2. An overview of the case company, its products and services, and market expansion strategy to date is presented.
Chapter 6 – Recommendations
This chapter summarizes the case analysis findings, provides recommendations and suggestions on further research and investigation.
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II. Chapter 2 – Framing: Theoretical Frameworks and concepts
This chapter provides a summary of the relevant theories and concepts that can be used to address the research question of where [country], when [timing] and how [entry mode] should a global IT firm enter the African market. An overview of the purpose of consulting and the industry typology are provided for a contextual understanding of the industry.
A. Purpose of Consulting
Organizations seek consulting services for various reasons, mainly for; specialized knowledge and experience e.g. industry best practices, external objective advice and recommendations or lack of capacity internally required in formulating and achieving strategic objectives. The professional advice sought is usually aligned to one or a mix of the value disciplines of; operational excellence, product leadership and/or customer intimacy (Treacy & Wiersema 1993), or Porter’s generic strategies of cost leadership, differentiation and focus (Porter 1985). According to Kubr (1996, p.10) there are five generic objectives for employing consulting services;
1. Achieving organisational purpose and objectives 2. Solving management and business problems 3. Identifying and seizing new opportunities 4. Enhancing learnings
5. Implementing changes.
The purpose of consulting can also be classified hierarchically into two segments [Table 1] of; traditional purpose and additional goals (Turner 1982).
Table 1: Purpose of Consulting
Category Rank Purpose
Traditional purpose 1 Provision of requested information (or advice) 2 Provision of solution to given problem
3 Conducting diagnosis that may redefine the problem 4 Providing recommendations
5 Assisting in solution implementation
Additional goals 6 Building consensus and commitment
7 Facilitating client learning
8 Improving organizational effectiveness Source: (Turner 1982)
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While there are several existing economics frameworks and theories that can be used to study the consulting profession [Table 2], there seems to be no unifying theoretical framework for the consulting discipline (Srinivasan 2014). This led to the conclusion by some scholars that consulting is indeed a “practice in search of a theory” (Srinivasan 2014, p.257). Studying the consulting profession through these discrete lenses is comparable to studying the head to understand the body.
Table 2: Theoretical Lenses for Consulting Industry
Theoretical Framework Focus and concepts
Institutional theory Institutional entrepreneurship
Transaction cost economics Principal-agent theory, transaction costs of outsourcing
advice and implementation
Core competencies Knowledge [tacit], skills and abilities as sources of
competitive advantage
Organizational behaviour Occupational strategy, knowledge-work
Resource-based View Knowledge and experience as intangible resources that are
valuable, rare, inimitable and non-substitutable Source: Adapted from Srinivasan (2014) and Fincham (2006)
Srinivasan (2014, p.258) attributes this lack of extensive study and a holistic theoretical framework in the consulting discipline to four main factors, namely;
1. Fragmentation – consulting is a highly fragmented industry with a variety of firms from large firms to independent consultants, offering various types of consulting services
2. Regulation – lack of a common body of knowledge, code of ethics and standards like other professions such as accounting and law
3. Positioning and differentiation – variation in size, scale, positioning and differentiation of consulting firms and their service offerings
4. Complexity – services offerings that are hard to study measure and quantify.
To address some of these issues, we begin with a look at the consulting industry typology to understand the various types of consulting services and the position of IT consulting in this complex industry.
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B. Consulting Industry Typology
Traditionally, management consulting was divided into four segments; strategy, human resources, operations, and information technology consulting (Gross & Poor 2008).The most renowned global typology according to Consultancy.uk divides management consulting into five key segments with IT consulting as one of these segments [Figure 1]. This is basically an extension of the traditional typology with an additional segment of financial advisory and key service areas under each segment.
Figure 1: Segments and Key Areas in Management Consulting
Source: http://www.consultancy.uk/consulting-industry/market-segments
Srinivasan (2014, p.260) proposed a typology of management consulting firms with three levels based on firm specialization instead of business functional areas [Table 3]. In this typology, IT consulting falls under the second category of ‘technology/operations and cost control’ firms.
Table 3: A Typology Of Management Consulting Firms
Specialization Basis of differentiation Engagement period Implementation responsibility Customer influence Strategy & organizational restructuring Tacit knowledge Short - medium Minimal involvement Very high Technology/operations & cost control Breadth of experience and expertise Long-term, project duration and post-support Strong involvement in implementation of the solution Medium-high
Niche consulting Deep domain
expertise Long-term, retainer model Ownership of the implementation Low Source: Srinivasan (2014, p.260)
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1. Large-diversified firms: provide consulting services across business functional areas and industries, at multinational level, mostly to Fortune 500 enterprises.
2. Large-strategy firms: provide specialised consulting services focusing on management or strategy advisory across industries, at multinational level, mostly to Fortune 500 enterprises.
3. Medium-size IT firms: provide specialised consulting focusing on IT services and some of services offered by large firms, mostly to small-medium enterprises.
4. Boutique/niche firms: provide specialised consulting services focused on a particular area (e.g. risk management) or industry (e.g. insurance).
Another way of classifying IT firms is by size using the tier-system [Tier 1 – 5]. This type of classification tends to focus on; scalability (number of users supported), number of IT firm employees and financial measures such as revenue, operating profit and cost to customer [Table 4]. SoftResources software consulting3 describes the tier levels as follows;
Tier 1 – large and diversified firms providing IT consulting services globally across industries. Firms at this level tend to focus on large Fortune 500 multinationals as customers, providing ERP systems and/or enterprise IT infrastructure. Typical customers have 2000 or more employees globally and a global IT strategy. Examples of IT consulting firms in this tier are IBM, Accenture, SAP and Oracle.
Tier 2 – IT firms in this category focus on large to medium-large organizations as customers. They provide relatively cheaper services compared to Tier 1 firms. Target customers tend to have approximately 1000 to 2000 employees.
Tier 3 – these firms focus on small and medium enterprises (SMEs) and also provide industry specific IT services. Target customers tend to have 50-1000 employees.
Tier 4 – these firms focus on the lower market businesses with 20 to 200 employees.
Tier 5 – these firms provide consulting services to small office/home office (SOHO) customers. Typical customers are small businesses.
Table 4: IT Consulting Market Tier
Level Market
level
Customer Focus
No. of users No. of Employees Revenue Cost to customer Major IT Firms
Tier 1 Enterprise Fortune 500 60 – 1,000+ 2000+ $250m+ $750 - $2m IBM, SAP, Oracle
Tier 2 Upper market Medium-Larger businesses 1000+ 1000+ $100-$500m $250K-$1.5m Infor, MS ERP
Tier 3 Mid-market Vertical market/ Industry 50-1,000 50-1,000 $25-$250m $25K-$250K Sage, Syspro
Tier 4 Lower market Small-medium businesses 5-200 20-200 $1-$50m $5K-$75K Accpac, Sage Tier 5 Commercial Off-the-shelf Small businesses 1-40 1-25 $0-$5m $100-$500 Sage, Intuit 3 http://www.softresources.com/resource-room/software-market-overview/
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(COTS)
Source: http://www.softresources.com/resource-room/software-market-overview/
C. Foreign Market Entry Strategies
Peng (2006) identified 3 main drivers of firms’ international expansion, namely;
1. Economies of scale – to achieve economies of scale by increasing customer base
across countries;
2. Reduce market dependency – to reduce risk of overdependence in a single country
or market by spreading operations in multiple markets or countries;
3. Home success replication –to replicate home success in new markets.
Dunning (2004) identified four main economic determinants or motives for FDI by
multinational firms, namely; market-seeking, resource-seeking, efficiency-seeking and asset-seeking [Figure 10].
The decision and process of entering a foreign market (also known as internationalization) can be quite complex and challenging as multiple internal and external factors have to be
considered. Foreign market entry strategy consists of three major decisions of; where to enter [market selection], when to enter the market [timing of entry] and how to enter the market [entry mode choice].
Figure 2: Market Entry Strategy Decisions
i. Market Selection
The process of country evaluation and selection involves an assessment of potential countries’ associated benefits, costs and risks for the entrant firm. With 54 economic and
socio-politically diverse countries in Africa, the assessment criteria can be a challenging task. The process of country evaluation and selection can be performed through five main steps;
1. Scanning for alternatives;
2. Choosing and weighing comparison variables; 3. Collecting and analyzing data,
4. Using tools or frameworks to compare variables and narrow alternatives, 5. Final country selection.
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Market scanning can be performed for an overview of potential countries’ attractiveness based on perceived benefits, costs and risks [Figure 3]. This type of analysis is based on transaction costs theory, the idea that the benefits of providing a product or service should exceed the associated costs.
Secondary information from reputable international agencies and consulting firms such as the World Bank, World Economic Forum (WEF) and African Development Bank (AfDB) can be used to rank countries and weigh alternatives. The WEF’s African Competitiveness Report 2015 provides comprehensive analysis of major economies in Africa based on the agency’s own research, World Bank data and country specific research centres. The report measures country competitiveness on a scale of one to seven, using three sub-indexes and 12 pillars across economic, social, political and technological development areas.
Figure 3: Determinants of Country Attractiveness
Source: Adapted from http://www.slideshare.net/SujenNisha/countryattractiveness
The African Competitiveness Report can be used as a preliminary filter for narrowing the list of potential countries, focusing on relevant indexes or indicators such as market size,
institutional strength and/or business innovation. Other reports such as the Global Risk Report and industry specific ones like the ICT Competitiveness in Africa report can be used to further narrow the selection. In addition to the various country assessment reports, various tools and frameworks such as Ghemawat’s distance comparison tool and others [Figure 4 below and Figure 15] can also be used to compare and evaluate potential countries.
10 | P a g e Figure 4: Framework for Country Market and Industry Attractiveness Assessment
Source: http://www.slideshare.net/SujenNisha/countryattractiveness
ii. Timing of Entry
Timing of entry refers to the moment when a firm decides to establish its operations in a new or foreign market. The firm can establish itself as an early entrant or a late entrant in a market or geographical location. An early entrant firm (or ‘first-mover’ in game theory terms) is the first firm that introduces a new product or service to a particular market segment or
geographical area.
Some of the advantages associated with being an early entrant are; the ability to anticipate potential entrants, building brand loyalty, acquiring the best market places and key
distribution channels which can create entry barriers for late entrants4. However, there are also certain disadvantages such as; pioneering costs (new distribution costs and new product or service marketing costs), mistakes due to lack of local business practices, imitation by late entrants and risk of product or service failure in new market. Therefore, early entry should be considered after thorough market research and if the benefits exceed the costs and associated risks, or if there are special benefits such as possibility of a monopoly status.
Late entrants (‘second-movers’) firms enter markets after the early entrant firm either due to perceived improvements in the market’s associated benefits, costs and risks, or as a strategic decision to let other firms test the market and incur associated early entry costs. Late entrants can enter markets later after learning from the experience of the early entrant, offering improved products and services or simply imitating the early entrant firm. Some of the
advantages of being a late entrant are; lower marketing costs as the market is already aware of the product or service offered, opportunity to learn from early entrant’s mistakes, ability to leverage early entrant’s infrastructure and markets developments such as distribution
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channels, and ability to focus on superior service or niche market sector. Late entrants also benefits from the decline in transaction costs due to technological and market developments (political, economic and legal environment) over time.
iii. Entry Mode
The choice of entry mode in a foreign market is a crucial decision as it also has influence on the level of risk exposure and management control the firm has on its foreign entity. Root (1994) argues that there are three main rules employed by firms when deciding on entry mode;
1. Naïve rule – using the same entry mode for all foreign markets;
2. Pragmatic Rule –market specific entry mode, usually starting with low-risk modes; 3. Strategic rule – comparing and evaluating different entry modes for each new market.
Pan & Tse (2000) distinguish between two main choices of entry mode; non-equity modes and equity (FDI) modes [Figure 14]. Non-equity modes are further divided in to exports and contractual agreements. Exports include direct exports, indirect exports and others while contractual agreements are; licensing or franchising, turnkey projects, R&D contracts and co-marketing.
Equity modes consist of joint ventures (JVs) and wholly-owned subsidiaries (WOS). Joint ventures can be further decomposed into; minority JVs, 50-50 JVs and majority JVs. Wholly owned subsidiaries on the other hand consist of; Greenfields, acquisitions and others.
Contractual agreements and joint ventures are considered to be strategic alliances and involve shared or limited risk exposure and management control of the foreign entity, while for
wholly owned subsidiaries the firm has higher risk exposure and full control of foreign entity (subsidiary).
According to Daniels et al. (2011), the choice for the collaborative modes of entry is mostly driven by the need to; gain location specific assets of partners, overcome government
constraints and minimize exposure to risky markets. Non-collaborative entry mode choices on the other hand are mostly driven by; the need for full management and operational control, firm’s experience in the foreign market and perceived low risks.
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Modes of Entry
Characteristics Exporting Contractual
Agreement
Joint Venture
Acquisition Greenfield
Risk Low Low Moderate High High
Return Low Low Moderate High High
Control Moderate Low Moderate High High
Integration Negligible Negligible Low Moderate High
Source: Kumar & Subramanian (1997)
The focus for this paper will be on equity modes as these are the most common types of market entry modes in the consulting industry and other service industries. Some theoretical international business concepts outlined in this chapter such as OLI paradigm, institution-based view and liability of foreignness can be used to provide guidance in choosing the optimal entry mode for the entrant firm.
D. The Eclectic (OLI) Paradigm
The eclectic paradigm or OLI framework asserts that determinants of the extent and pattern of FDIs undertaken by MNEs can be attributed to a combination of three main factors or
advantages that firms possess (Dunning 2001);
Ownership advantages – net competitive advantages that a foreign firm has over foreign firms in supplying a particular market (ibid). Examples of such advantages are the firm’s intangible assets such as knowledge, brands, organizational structure and management capabilities.
Location advantages – these are alternative countries or regions that offer more benefits or incentives than the home country for undertaking an MNE’s value-adding activities. Examples of such advantages are low wages, special taxes or tariffs, market size or existence of natural resources5.
Internalization advantages – this refers to the advantages of the firm carrying out production activities on its own (in a foreign country) rather than through partnership arrangements such as joint-venture or licensing6. These advantages usually relate to protection of a firm’s knowledge assets and/or corporate governance in markets with weak institutions.
5 https://en.wikipedia.org/wiki/Eclectic_paradigm 6 https://en.wikipedia.org/wiki/Internalization_theory
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The OLI framework can be used as a guide when choosing the form of market entry a firm should pursue based on the advantages it has [Figure 12]. According to the OLI framework, firms should enter foreign markets through;
Licensing – if only ownership advantages exist;
Export – if only ownership and internalization advantages exist;
FDI – if ownership, location and internalization advantages exist.
However, according to Dunning (2001, p. 176), “the significance of each of these advantages and the configuration between them is likely to be context specific, and in particular, is likely to vary across industries (or types of value-added activities), regions or countries (the
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E. Institution-based View
Scott (cited in Peng et al. 2008, p.21) defines institutions as ‘‘regulative, normative, and cognitive structures and activities that provide stability and meaning to social behaviour’’. Peng et al. (2008) argue that “there is increasing appreciation that formal and informal institutions significantly shape the strategy and performance of firms – both domestic and foreign – in emerging economies”.
According to Peng et al. (2008), firms’ market entry strategies and performance in emerging markets are strongly influenced by the institutional conditions and transitions in these markets, in addition to the traditional industry conditions (industry-based view) and firm-specific resources and capabilities i.e. resource-based view [Figure 5].
Figure 5: Determinants of Foreign Market Entry Choice and Firm Performance
Source: Peng et al. (2008)
According to Peng (2006), industry considerations on the degree of competitiveness are; rivalry among firms, entry barriers, bargaining power of suppliers and buyers, and availability of substitute products or services. Firms-specific conditions relate to the ability of
firm-specific assets’ attributes such as being valuable, rare, imitability and organized to provide competitive advantage. Institutional considerations on country risks are; regulatory risks, trade barriers, exchange risks, cultural distance and institutional norms (ibid).
Yiu & Makino (2002) further define the 3 pillars of institutions as;
1. Regulative institutions – rules and laws that maintain stability 2. Normative institutions – domain of social values, culture and norms
Market entry Strategy& Performance Industry conditions Institutional conditions Firm-specific conditions [resources]
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3. Cognitive institutions – interpretation and understanding of one’s environment.
MNEs market entry choice between joint-venture (JV) and whole owned subsidiaries (WOS) are influenced by isomorphic pressures from both formal and informal institutions in foreign markets, as well as internal practices in order to gain legitimacy i.e. local acceptance (Yiu & Makino 2002). MNEs tend to opt for JV if there is high pressure for regulative and normative complicance such as in dynamic and culture-sensitive markets of Asia and Africa in order to gain from the local entities knowledge and network (Meyer et al. 2009; Yiu & Makino 2002). Yiu & Makino (2002) state that the more restrictive the regulatory and or normative
instituions a foreign country has, the more likely the MNE will opt for JV over WOS. MNEs also tend to adopt the same market entry strategy used by the dominant industry leader or the most commonly used entry mode in the host country (ibid).
Meyer et al. (2009) argue that the choice of market entry in a foreign country is directly linked to the strength of the country’s institutional framework and the foreign firm’s need for local resources [Figure 6] . If a foreign country’s institutions are deemed to be strong and there is low requirement for local expertise, MNEs will often enter the market through Greenfield or acquisitions instead of strategic alliance options (ibid). On the other hand, if institutions are deemed to be weak and there is high need for local expertise, MNE’s tend to opt for JV over Greenfield to mitigate the liability of foreigness.
Figure 6: Effect of Institutions and Resources on Market Entry Choice
16 | P a g e F. Liability of Foreignness
The concept of liability of foreignness in international business is widely credited to Stephen Hymer’s seminal dissertation in 1976 on The Theory of Foreign Direct Investment. According to Hymer (1976, p. 34), ‘‘national firms have the general advantage of better information about their country: its economy, its language, its law, and its politics.’’ Hymer called this phenomena the foreign subsidiary disadvantage (Hymer 1976). Building on Hymer’s work, Mezias (2002) defines the liability of foreignness as “benefits denied to foreign firms that are enjoyed exclusively by domestic firms,” Perhaps a more concise definition is that of Zaheer (1995, p. 342) defining the concept as “the costs of doing business abroad that result in a competitive disadvantage for an MNE subunit”.
Petersen & Pedersen (2002) suggested that liability of foreignness is composed of three main factors [Figure 7] related to doing business in a foreign country;
1. Exchange risk of operating businesses in foreign countries
2. Local authorities’ [and/or consumers] discrimination against foreign companies 3. Foreign firms’ unfamiliarity with local business conditions [laws, customs and/or
language].
Figure 7: Factors Influencing Liability of Foreignness
Source: Petersen & Pedersen (2002)
One of the ways to mitigate liability of foreignness is through learning engagement (Petersen & Pedersen 2002). The costs of doing business in foreign markets decline in time as a firm(s) gain knowledge of the local market (Zaheer & Mosakowski 1997; Petersen & Pedersen 2002).
Liability of Foreignness Foreign exchange risk Local authority discrimination Firm-specific conditions [resources]
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The unwillingness to adapt to local business practices and adoption of standardized
international business practices are associated with a low learning engagement, whereas pre-learning, use of local management talent and adoption of local practices indicate a high learning engagement and reduce the liability of foreignness (Petersen & Pedersen 2002). Daniels et al. (2011) suggested that firms can reduce liability of foreignness by; going to markets with similar characteristics to the home country, engaging experienced intermediaries to handle the process and/or operations, operating in formats that require commitment of fewer resources in the foreign market and initially entering one or fewer foreign countries. Ghemawat (2001) suggested that in addition to using traditional market attractiveness tools such as the Country Portfolio Analysis (CPA) which emphasis sales potential, firms should also consider “distance” between the home market and foreign market. The CAGE framework [Figure 13] of distance proposed by Ghemawat (2001) considers four differential attributes of;
1. Cultural distance – religious beliefs, race, social norms, and language that are
different for the target country and the country of the company considering expansion
2. Administrative distance – colony-colonizer links, common currency, and trade
arrangements
3. Geographic distance – the physical distance between the two countries, the size of
the target country, transportation and communications infrastructures
4. Economic distance - disparities in the two countries' wealth or consumer income and
variations in the cost and quality of financial and other resources
Interestingly, studies indicate no significant difference in foreign investment in countries with less distance i.e. shared culture, language or historical ties (Petersen & Pedersen 2002). This is attributed to the “different institutions that do not allow the simple transfer of business practices and attitudes across borders” (ibid). Nevertheless, learning engagement and consideration of distance between markets are some of the tools that can be used in assessing a foreign country’s market attractiveness and for copying with liability of foreignness.
G. Global Market Opportunity Assessment
Cavusgil et al. (2008, p.159-60) describe global market opportunity as “a favorable combination of circumstances, locations, or timing that offer prospects for exporting,
investing, sourcing, or partnering in foreign markets”. Global Market Opportunity Assessment (GMOA) can be performed through six tasks proposed by Cavusgil et al. (2008);
18 | P a g e 1. Organizational Readiness – conduct an internal assessment of the firm’s readiness to
engage in international business activity. Assessment criteria should include factors needed for international business success such as; financial resources, relevant skills and competences, and senior management commitment and motivation. Outcome of the assessment should be a list of the firm’s strengths and weaknesses in the context of international business and recommendations for resolving impediments.
2. Product or Service Suitability –evaluate the degree of the fit between foreign
customer needs or requirements, and the firm’s products or services. Identify features or procedures that need to be customized to foreign requirements, regulations, and expectations of intermediaries and competitors offerings.
3. Country Screening- compare target countries according to relevant criteria such as
market size/growth, economic freedom, commercial infrastructure development, benefits, risks and costs of doing business [see section Market Selection]. The objective is to reduce the number of potential target countries to about five or six for final selection and/or further in-depth market research.
4. Industry Market Potential – develop and analyse short-term industry sales forecasts
based on factors such as industry trends, market size, growth rate and expected trade barriers. The objective of the analysis is to estimate likely sales expected for all firms in the industry and to identify any potential barriers to market entry. Firms can estimate industry market potential by monitoring key competitors and through industry or market reports.
5. Foreign Business Partner Choice – Identify the value adding activities that need to
be performed by the foreign partner and define qualities and characteristics of desired business partner(s) in the foreign market. Ideal qualifications for an IT firm in an emerging market could be; financial strength, competent management, commitment to international venture, level of technical expertise, number and quality of own distinct products or service offerings, quality of staff, quality of service and customer
portfolio, known in market place and well connected with relevant industry players or local authorities.
6. Estimate Company Sales Potential – develop a short-term sales forecast for the firm
based on factors such as; pricing and financing, partner capabilities, human and financial resources, marketing and promotions, competitive intensity, industry sales forecast and risk tolerance management.
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The GMOA provides a systematic firm level guide for assessing market entry which can be used together with some of the theories and frameworks explored in this chapter.
20 | P a g e III. Chapter 3 – The IT Consulting Industry
There are different types of consulting firms which can be classified according to the services provided or areas of focus such as; functional area, industry and niche sectors. Table 6 shows some of the common types of consulting services and focal areas of global consulting firms.
Table 6: Common Types of Consulting Services
Functional Area Industry Niche sectors
Management/Strategy Finance
Information Technology (IT)
Marketing & Sales Human Capital Operations
Risk Management
Automotive
Consumer goods & services Financial Services Health Care Hospitality Natural Resources Retail Public Service Transportation TMT Advertising Public relations Real Estate Insurance
Global consulting firms tend to offer consulting services across both functional areas and industries. Niche consulting firms on the other hand tend to focus on a particular functional area and/or industry.
IT consulting is the provision of advice on how organizations or individuals can solve their problems and/or achieve their strategic goals by using technology7. In addition to providing strategic advice on optimal IT systems and architecture, IT consultants also; implement systems, provide user training and post-implementation support to organizations.
Most global IT firms such as IBM and Accenture provide management or business consulting services in addition to IT consulting. This is due to the growing prominence of IT as a tool for strategy implementation and IT capabilities of organizations as a source of competitive advantage. As a result, there is an increase in consolidation of IT and business consulting firms and services as the two practices complement each other.
Figure 8 shows the common types of IT consulting services, namely; IT advisory, ERP implementation, data analytics, software management, systems integration and enterprise architecture.
21 | P a g e Figure 8: Common Types of IT consulting services
Source: http://www.consultancy.uk/services/it-consulting
A. Top Global IT Consulting Firms
The top global IT consulting firms are multinational enterprises that provide IT consulting services across industries and business functional areas. These firms are well established globally and known for their breadth of experience and expertise.
According to HfS Research, the Top 10 global IT service firms [Table 7] based on revenue, market share and profit margin are;
Table 7: Top 10 Global IT service firms
Rank Name Headquarters Est.
Revenue 2013 ($Bn) Market share (%) Est. Profit Margin No. of African subsidiaries/ countries8 1 IBM US 54.4 8.6% 17.9% 50 2 Fujitsu Japan 32.1 5.1% 5.9% 52 3 HP US 29.2 4.6% 2.8% 6 4 Accenture US 25.4 4.0% 15.3% 6 5 NTT Data Japan 16.7 2.6% 4.7% 0
6 SAP Germany 15.4 2.4% N/A 7
7 Oracle US 13.5 2.1% N/A - 8 Capgemini France 13.4 2.1% 8.3% 2 9 CSC US 12.4 2.0% 8.9% 1 10 TCS India 10.5 1.7% 28.5% 2 Source: http://www.horsesforsources.com/tcs-breaks-hfs-it-services-top-ten_041314
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B. IT Consulting Firms in Africa
According to the ICT Competitiveness in Africa 2014 report, IT has been a major driver of economic growth in sub-Saharan Africa over the past decade. The report estimates continued double digit growth in IT expenditure (as % of GDP) in major African economies9 from the range $95-$100 billion in 2009 to $155-$180 billion in 2016.
All of the top 10 global IT service firms have subsidiaries in Africa with NTT Data being the sole exception10. The top ranked firm, IBM, invested in Africa back in 1933 through a subsidiary in Algeria. The company entered the sub-Saharan market through South Africa in 1952 and Kenya in 1959. IBM currently has operations in 50 of the 54 African countries and continues to invest heavily in the continent. Tata Consultancy Services (TCS) which is India's largest IT firm and new to the top 10 list, only has 2 subsidiaries in Africa. TCS has operations in South Africa as of 2007 and Botswana. In the same year, TCS set up operations in Morocco with the aim of establishing an offshoring centre for the French and Spanish speaking parts of Europe11. In 2014, TCS closed its operations in Morocco as it could not get enough outsourcing volumes to sustain operations12.
All top global IT firms with operations in Africa have been expanding their operations rapidly over the last 5 years in line with positive economic and socio-political developments in Africa. In addition to global IT firms, indigenous African IT firms such as EOH, SCI and telecommunications companies such as MTN and Safaricom play a major role in the African technology market. Global IT firms tend to focus on multinational businesses and government tenders while local IT firms provide low-cost, customised services based on their understanding of local culture and business administration. Local IT firms mostly provide consulting services to SMEs who cannot afford the high rates charged by international firms.
C. Opportunities and challenges
Opportunities
The increase in competition in the IT consulting industry, new technologies and IT practices such as mobile (smartphones), cloud computing and business process outsourcing (BPO) have lowered the cost of IT investments for organizations. As a result, there is an increase in
technology investments throughout the continent According to EY’s Attractiveness Survey -
9 Countries in sample set are Algeria, Cameroon, Egypt, Kenya, Morocco, Nigeria, Senegal, South Africa and
Tunisia
10 No mention of African office or subsidiary was found on corporate profile of NTT Data on 01.09.2015 11 http://tata.com/article/inside/fv!$$$$!uy0N4XFc=/TLYVr3YPkMU=
23 | P a g e Africa 2015, about a fifth of FDI investments in 2014in Africa were in telecommunications,
media and technology (TMT), mostly in South Africa, followed by Nigeria, Morocco and Kenya. According to the report, most of the investment came from US companies with IBM announcing plans to open innovation centres in Morocco and Nigeria, focusing on trending innovation topics of big data, analytics and cloud computing.
One of the trending topics and opportunities in Africa is he use of technology for socio-economic development, especially mobile computing. This is evident in numerous cases of mobile banking and health such as the famous case of M-PESA in East Africa that extended banking to the previously financially-excluded segment of society. Other examples can be seen in agriculture where farmers receive expert advice (through smartphones) on optimal ways to care for crops or livestock based on scientific data on regional climate and land composition i.e. ‘precision farming’. These are examples of successful, innovative and organic solutions developed to address local issues and create shared value for both business and the wider community. The use and adoption of information systems has also brought transparency and efficiency to government services which have traditionally been plagued by inefficiencies and maladministration.
At a business-level, there has been an increase in business process offshoring, especially in regional hubs such as Kenya and South Africa. Africa’s current and forecasted economic growth has also attracted a number of international firms across industries that will need IT consulting services to address unique opportunities and challenges in the region. This creates an opportunity for firms that have a presence and experience in the African market to leverage local resources at high margins compared to ones that have to import IT consultants from abroad. Furthermore, a number of countries have also adopted technology policies that aim to promote investments in IT industry through skills development, incubation hubs (shared service and administration costs) and tax and/or subsidies incentives for IT investments.
Challenges
Despite the numerous opportunities, a number of challenges besiege the IT industry from both a global and regional perspective. Disruptive innovations such as technological advancements in social media, mobile, analytics and cloud computing (SMAC) have led to the introduction of new business models. The delivery and consumption of technological services by both business and individuals has changed drastically over the last decade with new market entrants shaking the industry and challenging incumbents to innovate or diminish. The
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increase in competitive intensity has resulted in more options and lower costs for consumers. For businesses, the global shift from ‘on-premise’ to cloud-based solutions and subscription- based (‘on-demand’) pricing models have reduced previously high costs associated with of IT investments. The increase in IT offshoring practice also means that organizations can now focus on their core operations instead of dealing with IT issues.
The IT consulting industry has to keep abreast with the fast paced changes in the industry in order to provide advice on optimal IT strategy and architecture for various organizations. Christensen et al. (2013) warns that consulting is on the cusp of disruption similar to that experienced by the legal industry when organizations established corporate legal departments instead of depending on external legal firms. The main drivers of this innovation are
alternative staffing models, increasing number of experienced consultants, availability of comparison data on service and costs provided by market research companies such as Gartner and Celent (ibid).
The main challenges for IT consulting in Africa are; access to financing, corruption, lack of technological infrastructure (especially outside the major cities), inefficient government bureaucracy and IT skills gap [Figure 9]. Other challenges that are more of general risks of doing business in Africa are; political instability and public safety, low education and skills development, and institutional weaknesses (corruption, asset appropriation and intellectual property protection issues). However, there is a general increase in GDP % allocated to infrastructure development and skills development in most countries. Paradoxically, one of the solutions for addressing these obstacles to technological development is through
25 | P a g e IV. Chapter 4 - Case description
A. Organizational Overview
msg Global Solutions AG was founded in March 2008 with its headquarters in Regensdorf, Switzerland. The company is a product-based systems integrator that serves insurers and reinsurers in all regions of the world. msg Global Solutions has subsidiaries in Germany, Spain, The Netherlands, United Kingdom, India, Brazil, Serbia, Italy, South Korea, The Philippines, USA and Singapore [Figure 16].
As part of the msg group, one of the top 10 IT Consulting and System integration companies in Germany, msg Global Solutions benefits from more than 30 years of broad insurance industry know how as well as long term and client proven IT implementation expertise for insurance. As of 2015, the company has a staff complement of approximately 600 employees globally.
msg Global Solutions maintains successful cooperation with leading international technology and development partners such as; SAP, Microsoft, OpenText, Finnova, Nokia, Informaat, Netconomy and Pitney Bowes. The company’s flagship consulting services are in the area of SAP for Insurance. msg Global Solutions currently has customers in all regions except Africa [Figure 18]. The company’s biggest customers in terms of revenue are based in USA,
Germany and Netherlands [Table 12]. msg Global Solutions main competitors in the area of SAP for Insurance are ConVista Consulting and Virtusa. However, the company remains market leader in this area in terms of revenue from SAP insurance projects.
B. Organizational Structure
i. Leadership
msg Global Solutions leadership comprises of co-CEOs Bernhard Lang and Perter Umscheid, and the Global Management Board which includes regional leaders and the company’s Chief Financial Officer [Figure 17]. Bernhard Lang has been the company’s CEO since its
establishment in 2008. He joined msg systems AG (sister company focusing in German speaking countries - DACH13) in 2000 from SAP AG where he was a consultant for many years. Since 2008, he has pioneered the international expansion of the msg group, establishing subsidiaries in North America, Europe and Asia Pacific [Figure 16]. As the company’s CEO,
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Mr Lang’s key responsibilities are; sales and marketing, international expansion, global strategy and administration.
Peter Umscheid has been with msg group since 1996, playing a leading role in the setup of its SAP division. Mr Umscheid has extensive experience in SAP primary solutions, product development and support. He was appointed COO in March 2008 and subsequently rose to become co-CEO. He is mainly responsible for msg group’s global delivery and sourcing. The two CEOs maintain strong relations with the company’s strategic partner SAP, and the company has earned the special accreditation of Special Expertise Partner in the area of SAP for Insurance.
ii. Company Structure
In 2014, msg global solution transformed its organizational structure from a ‘virtual’ global organization made up of competence centres and market centres, to a global services structure that placed more responsibility on country organizations, supported by a central service organization [Figure 20]. The company’s organizational restructuring was driven by three main factors;
1. Increasing size of the organization and global distribution of consultants required local people management rather than centralized one to cater for local HR practices and employee wellbeing;
2. Utilization responsibility was not clearly assigned in the old structure leading to suboptimal resource allocation and utilization;
3. Competence Centre managers had little time to focus on content and delivery due to people management obligations.
The new organization distinguishes between two types of country organizations;
1. Market Countries – these countries are responsible for project acquisition, project
delivery and local profit and loss accounts. Market countries comprise of subsidiaries (USA, Netherlands, Germany and Singapore) and branch offices (Brazil, South Korea, UK and Italy). Furthermore, market countries have two main organizational units governed by country management; Market Centres which manages local customer accounts (no longer globally managed) and Delivery Centres which are responsible for management and delivery of local consulting capacity.
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2. Global Sourcing – responsible for recruitment and skills development in order to
service international projects. Global sourcing countries are Serbia, India and Philippines.
All country organizations are supported by Global Services and Shared Services units. The global service unit is responsible for project portfolio services (standardized methodologies, tooling and quality assurance), solution architecture service and delivery services (global governance, community leadership, training and staffing). The overall objective of the global services unit is to ensure consistent high quality delivery of products and services to
customers [Figure 21].
The Shared Services unit supports internal back-office teams (HR, IT, Admin, Legal, Marketing, Finance) to standardize and optimize processes within msg global and in collaboration with the msg group [Figure 22]. It acts as a link to internal back office departments by ensuring better cooperation and providing shared support services.
C. Products and Services
msg global solutions offers technology solutions and consulting services to the financial services industry (FSI) in three main areas; Insurance, Reinsurance and Banking.
Table 8: msg global solutions Products and Services Overview
Industry Area Solution Area
IT Consulting Services Insurance [Primary]
Property & Casualty (P&C) SAP for Insurance
Car Insurance Application Management Service
Life & Pension Technology and Mobility
Health Insurance SAP for Banking
Insurance Package for SME's Insurance Academy
Reinsurance P&C Reinsurance Enterprise Content Management
Life Reinsurance SAP Insurance Analyzer
Health Insurance Sales Performance Management ACORD Compliance Insurance Product & Actuarial Reinsurance Package for
SMB Reinsurers
Insurance Process & Methodology
Banking Core Banking Insurance Workflow Management
SAP Banking
FINNOVA Banking Software
The reinsurance consulting area remains the company’s most profitable segment accounting for more than 50% of the revenues (mostly from customers in USA).
28 | P a g e D. Market Entry & Expansion Strategy
Since 2008, msg Global Solutions has expanded globally in search of new markets and revenue streams. The global expansion was also driven by location advantages such as size and growth of financial services industry in certain markets (USA, Netherlands and Asia), regulatory requirements for local presence (legal and tax issues), and availability of low cost skilled labour in certain countries (India, Serbia and Philippines).
Key decision-makers on foreign direct investments are the company’s management board in consultation with the Chief Financial Officer. The most common market entry modes so far have been Greenfield investment, followed by acquisitions (mostly from sister company msg Systems which now focuses on DACH countries) and joint ventures (JVs).
Table 9: msg Global Solutions Market Entry Strategy 2008-2012
Region Country Year Entry mode
EMEA Netherlands 2009 bought by global
(msg systems since 2007) Acquisition UK 2010 Greenfield Spain 2008 Greenfield Italy 2011 Greenfield Serbia 2011 Greenfield
North America USA 2012 bought by global
(msg systems since 2000)
Acquisition
Latin America Brazil 2011 Greenfield
Asia-Pacific India 2009 Joint Venture
Singapore 2009 bought by global (msg systems since 2005)
Acquisition
Philippines 2009 Acquisition
South Korea 2012 Joint Venture
Source: Adapted from data provided by msg Global Solutions – CEO & Legal Counsel In all foreign subsidiaries, the company tries to leverage local resources as much as possible for both management and consultant capacity. As evident from Table 12, msg Global
Solutions has no subsidiaries in Africa. However, in recent years, the company together with its strategic partner SAP have been involved in some sales and marketing activities in Africa. The Kenyan and Nigerian experiences described in the following section have to a certain extent shaped the company’s perspective and sentiments on investing in Africa.
29 | P a g e i. Kenya Experience14
Case 1
In 2013-14, msg Global Solution was invited to participate in a request for proposal (RFP) and solution demonstration for one of the biggest insurers in East Africa based in Nairobi, Kenya. The company partnered with one of the leading IT consulting firms in Kenya for the bid process .However, the bid was not successful and the local partner company failed to honour its financial obligations to msg Global Solutions. In addition to this negative experience, some of the issues highlighted by the CFO are the low rate requests
($200/day), travel and visa issues, and security fears which all culminated into an overall negative experience for the company.
Case 2
In the second case, msg Global Solutions participated in another RFP for a major reinsurer also based in Nairobi, Kenya. Again the company partnered with a local IT consulting firm (different one from Case 1) for the bid process to gain from knowledge of local business practices. The bid process spanned a period of three years with several RFPs and postponements. However, this time msg insisted on commitment from the local partner such as bond payment for participation in the bid process which the local partner agreed to. Despite winning the bid, the project was awarded to another bidder under questionable circumstances.
Both cases left negative sentiments within the company with the CFO suggesting that perhaps the African market should be avoided in the next two to three years.
ii. Nigeria Experience15
msg Global Solutions is currently (2015) involved in a bid process for IT transformation of AfricaRe at the invitation of SAP West Africa. AfricaRe is one of the continent’s largest reinsurers, based in Nigeria with subsidiaries in South Africa and Egypt. Once again, the company has a local partner to minimize the liability of foreignness. Learning from past experience in Kenya, msg has insisted on concrete commitment from the local partner in both the bid process and project delivery. Part of this commitment includes sales and marketing expenses and skills development of local consultants.
14 Based on correspondence with msg Global Solutions’ CFO and Reinsurance Community Lead 15 Based on correspondence with msg Global Solutions Reinsurance Community Lead
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So far, the arrangement has worked well and local partner has sent one consultant to msg’s offices in Princeton, USA for training on the reinsurance solution. It is expected that more consultants will attend the training in the near future to ensure local project delivery capacity under msg’s leadership. msg Global Solutions’ Community Lead for Reinsurance, Mr Agostino Assi (also leading the msg team in the bid process) has
reported a positive experience so far compared to Kenyan experience. Mr Assi stated that he was quite impressed with the professional conduct of the Nigerian partner company and he found the state of technological service in Lagos to be as good as in most European cities. However, it remains to be seen how the experience develops in the coming months.
E. Case Questions
Should msg Global Solutions setup operations in Africa? If so, where and how should the company enter the African market?
To answer the case questions, I will apply some of the theoretical frameworks described in Chapter 2, with a focus on the Global Market Opportunity Assessment framework as it encompasses the other theories as well.
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V. Chapter 5 – Case Analysis
A. Consulting Firm Typology
In terms of consulting firm typology, msg Global Solutions falls under the niche IT consulting firm category. The company’s key IT consulting areas are ERP implementation and systems integration [Figure 1] with deep domain expertise in insurance technology solutions. msg Global Solutions is considered to be a systems integrator as it mainly implements software solutions produced by SAP and has limited products of its own.
B. OLI Framework
An assessment of msg Global Solutions’ ownership, location and internalization (OLI)
advantages can be used to provide guidance on whether the company should undertake FDI in Africa;
Ownership advantages – the company has deep domain expertise in SAP for Insurance and is well known in the insurance industry for this specialty. This intangible knowledge asset (skilled, specialized and experienced IT consultants), global customer references, strong relations with SAP and brand recognition provides msg Global Solutions with competitive advantage over local IT firms in Africa.
Location advantages – Africa’s projected market growth and increasing focus on telecommunications, media and technology provides opportunities for new revenue streams. Expanding operations to Africa will indeed place msg Global Solutions as a ‘global’ company as suggested by the name and enable the company to support global companies across all regions which can be a selling point to global insurers.
Internalization advantages – to ensure consistent high quality and adherence to the company’s corporate governance, msg should consider internalizing some
management and operational areas of its African operations. The company’s existing global and shared services centre can be used to internalize some of msg’s operations. Based on the assessment above, it is evident that msg Global Solutions has all required advantages for engaging in FDI in Africa. The most prominent advantage is that of location, specifically the expected market growth and additional revenue stream as other markets become increasingly competitive. This location advantages are in line with international trends of driver’s for FDI in Africa as organizations aim to tap into the growing middle class’s increasing disposable income and demand for high quality services. The company is a market leader in SAP for Insurance which is a distinct advantage that will provide competitive edge in new markets.
32 | P a g e C. Global Market Opportunity Assessment
The GMOA provides a more comprehensive framework for assessing market opportunity in Africa for msg following the six tasks proposed by Cavusgil et al. (2008).
i. Organizational Readiness
To assess msg’s readiness for investment in Africa, we should evaluate several factors such as; financial resources, relevant skills and competences, and senior management commitment and motivation.
msg Global Solutions is a financially stable company and has experienced continued increase in sales over the years with a staggering sales increase of 32% in financial year ended 2014 [Figure 23]. msg is a market leader in SAP for Insurance and has extensive global experience in IT transformation for insurance and reinsurance companies. The company’s skills and experience are sought out globally as evident from the global spread of its customers [Figure 18] and new requests for services in Asia and Africa.
msg’s senior management is committed to the company’s international expansion with the company’s CEO spearheading and responsible for the international expansion. There is also an understanding by senior management that Africa cannot continue to be ignored given the continent’s positive economic outlook and decrease in new accounts in developed markets. In the last five years, the company has expanded to emerging markets such as Brazil and other large markets such as South Korea. msg has the requisite international expansion experience as shown by its global footprint and some experience of doing business in Africa (aware of the risks and challenges) from the Kenya and Nigeria experiences described in the previous chapter.
Therefore, from an organizational readiness perspective, the company appears to be ready to venture into new markets such as Africa.
ii. Product or Service Suitability
The current modular insurance solution offered by SAP has been a cause for concern in the industry for some time now. Insurers are increasing looking for a single end-to-end solution for their IT transformations. However, SAP is aware of the issue and is working on an all-in-one solution (SAP A1 or SAP Business-All-in-One) with a subscription-based pricing model for small to medium insurers such as ones in Africa. This product is most likely to fit the requirements of the African market as pointed out by SAP West Africa’s managing director when he stated that “West Africa is a price
