Market Structure and Pricing: FedEx
FedEx Company wishes to enforce a new freight business in East Africa in a country called Kenya. This country was preferred for global expansion because of its promising macroeconomic policies that have enabled its economy to advance to a middle-income economy. Kenya is in the expansion stage, currently, there has been an increase of production capacities and employment.
Current Global Economic Conditions and Their Effect on Kenyan Economy
The global economy has now entered its 6th year of stagnation, and the development standpoint for 2017 demonstrates a continuation of this pattern. An anticipated adjustment in stabilization in energy and commodity prices may give a little tailwind to asset rich economies in 2017. However, the medium-term drift continues to be dominated by a weaker growth in key inputs, specifically investment and labor supply (Eckes, 2011). Positive signals are emerging from the base scenario showing some strengthening in qualitative growth factors, such as more advanced technology, enhanced labor force skills, and more prominent productivity. But those potentially favorable factors are under pressure from ongoing political, policy, and economic uncertainties around the world (Eckes, 2011).
Despite the slowdown in global economic performance, Kenya’s economy keeps on indicating resilient growth. So far this year, the nation has been one of the best-performing economies in Sub-Saharan Africa and the positive pattern is credited to a change in the extensive improvement in the large agricultural sector, rising public investment spending, curbed oil costs, and a pickup in remittances (Lineberry, 1968). Kenya’s GDP is projected to expand by 6.2% in 2017 compared to 5.9% in 2015. This growth is mainly supported by agriculture, transportation and storage, real estate, wholesale and retail trade. Population in Kenya is expected to be 45.18 million by the end of this year. By 2020, the country’s population is projected to trend around 48.30 million (Mshomba, 2000). GDP per capita PPP in Kenya is expected to be 2997.74 USD by the end of this year. In 2020, Kenya’s GDP per capita PPP is projected to trend around 3416.66 USD (Brown, 2004).
Exports in Kenya diminished 7.5 percent year-on-year to KES 46204.2 million in September of 2016, mostly driven by fall in outbound shipments of food and drinks. During the same period, sales bounced back for non-food industrial supplies (+2.5 percent from – 18.9 percent) and consumer products (+1.9 percent from – 26.2 percent). With the ongoing technological developments, exports and sales are projected to increase by 30% in 2020. (Mshomba, 2000). All these development portray Kenya as an upcoming investment hub in Africa, capable of attracting global investors. With the ongoing infrastructural development activities, flee transport will be a very marketable business in the near future. FedEx Company wishes to tap this opportunity and be the first global fleet transportation company in Kenya.
Type of Economy
Kenya’s economy is market-based with a few state-owned infrastructural enterprises. On overall, the country maintains a liberalized trade. The country is seen as Eastern and Central Africa’s central point for financial, communication, and transportation services. Major industries include agribusiness, mining and minerals, mechanical assembling, energy, transport, tourism and financial services. Nonetheless, Kenya’s economy is far behind American in terms of economic growth and development. The American economy is the largest in the world while the Kenyan economy is ranked 75th in the world. While the two countries have common means of transport, the American transport sector is much developed than the Kenyan one. Roads, railway, and waterways in America are by far much advanced as compared to those of Kenya. The majority of the cities in America have tarmacked roads while not all major cities in Kenya have tarmac roads. These differences are likely to affect the expansion of FedEx new transportation fleet in Kenya in terms of time, costs, and management. For instance, it will be expensive and time-consuming to transport cargo from the Kenya’s biggest port (Mombasa) to the country’s capital city (Nairobi). Despite these major differences, Kenya’s infrastructure indicators look moderately great compared to other evolving economies in Africa. Key infrastructural projects are currently ongoing. As a result, FedEx Company wishes to capitalize on the opportunity to expand its services not only to Kenya but also to the neighboring countries.
In spite of the fact that there are significant players in each of the commercial carrier market segments, the market remains exceedingly fragmented. Major competitors for FedEx Company are those companies who have similar truck fleets and are targeting the shipping lines. The main competitor for FedEx is Transport 70.71. Company 70.71, which was established in August 2009 with the aim of developing a socially responsible, small medium enterprise logistics and transport company that generates fair profit is the . The company offers transport services mainly at the Port of Mombasa, which is Kenya’s second largest city.
A customer survey has demonstrated that at present Transport 70.71 is losing market because of the organization being not able to provide quality services. Although customers are quick to offer more special order contracts, the lack of an adequate number of fleets has made the company unable to deliver cargo in time. In addition, the company does not offer its services in other cities in the country.
FedEx new strategies of branding, low-cost delivery services, and use of automation systems make it have an edge over the other cargo transportation companies in Kenya. Being a multinational company, FedEx more capital necessary for market penetration through increased marketing and customer focus. Unlike the other companies, FedEx will be able to utilize its advanced technology brought about by the many years’ experience in the transport sector.
Forecast of sales
Growing import volumes are a key indication of Kenya’s rapidly expanding consumption. Consistently, high volumes of food items, industrial raw materials, refined petroleum products, heavy and light equipment’s, vehicles and consumer goods valued in billions of dollars arrive in Kenyan via sea and air transport from America, Europe, Asia, and China.These substantial volumes of imported goods need to be transported to several towns and cities until they reach the small retailers and final consumers. Accordingly, freight transport is a lucrative business in Kenya. The transport business has been growing at an average rate of 24% annually. This growth is expected to increase after the completion of major roads and railway transport projects in 2017.
Credit Market Conditions
Credit markets conditions in Kenya are strictly regulated by the country’s Central Bank. These policies favor not only the domestic companies but also global companies doing business in the country. The country has 44 commercial banks, 12 deposit taking microfinance banks, 30 non-directed credit-only microfinance institutions, as well as 199 registered savings and credit cooperatives. In addition, there are 5 mobile money operators and a substantial number of community-level based services providers such as village banks, financial services associations, and savings groups as well as a developing number of start-ups in financial and technology services. Therefore, access to credit is easy for business in this region. Since a majority of companies and business people in Kenya can access credit facilities, FedEx Company will face stiff competition from both small and big player in the logistics industry (Pride, 2016).
Supply chain challenges
The major supply chain challenges anticipated in an attempt to sell FedEx Company services to countries outside the Kenyan market include:
- Cost control. Operating expenses are under extreme pressure due to rising fuel and freight costs, poor infrastructure, and increasing labor rates.
- Planning and risk management. With a specific end goal to remain as efficient and effective as possible, occasional appraisals and overhauls are required. These adjustments are due to changes in the market. Advancing to a new market in a different country comes with many different types of risks and calls for adequate planning, failure to which the business is likely to fail.
Role of Central Bank in the Kenya’s Economy
The Central Bank of Kenya (CBK) makes laws, directions, and rules that govern commercial banks, microfinance banks, credit reference agencies, mortgage finance organizations, and others in the banking and credit sector. In addition, it ensures financial system’s stability and efficiency. CBK is likewise ordered to concentrate on access to finance. Accordingly, bringing financial inclusion into the mainstream. For instance, in 2014, 7 years after the mobile money was introduced, the National Payment System (NPS) directions were passed into law, giving the primary formal legitimate structure in mobile money transactions and paving the way for increased interoperability across payments providers. In general, the CBK has encouraged and nurtured innovations in the financial sector, Hence ensuring efficiency in the business world.
Education and Job Skills
Kenya’s education policies have enabled many people to access formal education. The majority of Kenyans have degrees, diplomas, and certificates in various business fields. However, due to a high population, unemployment levels are high; therefore, the availability of labor is guaranteed. On overall, these employees are skillful, therefore, with a little training they can adapt to the duties and activities in a freight company (Heizer & Render, 2014).
Additional challenges of international production
Other additional challenges that FedEx Company is likely to face include:
- Political instability: Kenya’s political status has been stable for the last ten years. However, with the country gearing toward general elections period in 2017, there is a risk that the political environment might be unstable.
- Availability of government financing: The government of Kenya has been faced with budget deficits for the last 15years. Therefore, relying on the government for any form of financing is likely to be a major challenge.
- To encourage direct foreign investment the Kenyan government has been giving incentives to both the domestic and global companies operating in Kenya. However, most of the incentives are usually towards local and small enterprises and not multinational companies like FedEx.
- Exchange rate risks: Over the past two years, exchange rates in Kenya have been stable. However, because Kenya is a small country, there is a risk that any changes in the demand or supply for hard currencies like the dollar are likely to affect the Kenyan exchange rates.
Based on the above research FedEx Company should expand its business in Kenya. The Research demonstrated Kenya as a fast developing country. Due to its inherent reliance on foreign imports, the potential for cargo transport business flourishing in the country is high. In addition to this, the country is a member of the East African Community, a region with over 200 million people as well as one of the areas with the fastest growing economies in the world.accordingly, this region offers a lot of opportunities for FedEx
Brown, K. (2004). Political economy of Kenya — past and present. African Affairs, 103(413), 665-666. http://dx.doi.org/10.1093/afraf/adh083
Eckes, A. (2011). The Seamy Side of the Global Economy. Global Economy Journal, 11(3). http://dx.doi.org/10.2202/1524-5861.1797
Heizer, J. H., & Render, B. (2014).Operations management: Sustainability and supply chain management. Boston: Prentice Hall.
Lineberry, W. (1968). East Africa (1st ed.). New York, NY: Wilson Publishers.
Mshomba, R. (2000). Africa in the global economy (1st ed.). Boulder, Colo.: Lynne Rienner Publishers.
Pride, W. M. (2016). Foundations of business. New York, NY: Cengage learning