South Africa Factor Conditions - Term Paper Example

?South Africa Factor Conditions Factor conditions are the first step of the Porter diamond analysis model, these are essentially human, physical knowledge and capital resources which are often specific to an industry and are critical in boosting its competiveness. For a firm to commence operations in South Africa, they will have to expect a challenge in the labor segment since over the last decade there has been a series of crisis spurred by lack of skilled workforce. Owing to low educational standards in most of the country as well as drawn out delays in importation of labor, many companies have been forced to contend with an acute skilled labor shortage (Shona 2011). Despite this, the country has a lot of unskilled employees and with good strategic planning, it is possible to train some of the locals in non-demanding professional skills and import only the labor that is impossible to reproduce locally. There is a high supply of raw materials in South Africa owing to the extensive scope of the mining and manufacturing industry. Steel and plastic which and other materials which are required for production of toys can be locally procured thus cutting on the costs that could have been incurred if the material were to be imported. Demand conditions The demands conditions in South Africa are conducive for a toy market since the population of young middle class is growing as the economy grows many of these especially the educated ones will likely increase demand for toys products. In addition, the toy market has of late diversified to encompass the production of technology based games which are popular among children and younger adults. As a result, the local demand is likely to push firms in manufacturing the country to produce more products customized for them. Normally, a demanding local market is good for local industries since when the demand is high, innovation improves since the firms have to come up with ways to deal with the demand. As such, a firm investing in South Africa is more likely to be highly innovative since the locals will pressure it to make quality and diverse products so they will not have to buy imported goods. Related and Supporting Industries  In South Africa the toy and gaming market is dominated by a few large companies which maintain their market position by continuously broadening their portfolios and acquiring international licenses. Prima Leisure, Just Fun Group and Kids II lead the industry which offers a wide range of products in the local market (Toy and Game Companies 2012). Contrary to popular assumption the existence of these industries can be seen as incentive for new entrants because they actively participate in market upgrades and stimulate growth. In addition the state actively tries to encourage investment South Africa as to create jobs for the local, this is done by giving investors subsidies and tax cuts. Firm Strategy, Structure, and Rivalry The structure and the management of different firms in various countries are different and this can impact the competitiveness of the firms operating within. South African companies can generally be categorized as a blend of hierarchical systems and organic, this is more so in the toy and games industry and as a result the competiveness is moderated. The home market in as far as toy manufacture is concerned is very competitive, nevertheless, this will work to the advantage of new entrants. The domestic competition also encourages firms to diversify their products, this way a new firm venturing in South Africa will find that there exists a ready market for their products both locally and abroad. While the porter 5 forces make low rivalry seem attractive, the contrary is true in the diamond model; this is because when low rivalry may be good for the firm in the short run, in the long run it will even be more beneficial. In South Africa for instance, the toy manufacturing market is dominated by a few major companies which will undoubtedly provide formidable opposition. On the other hand, this way the new firms will be motivated to become innovative and thus develop their comparative advantage, consequently, a new firm will likely experience exponential growth driven by the competitive forces on the ground. The Government The government of South Africa plays a proactive role in influencing the above mentioned factors for example through the promotion of higher education by building schools and colleges; it is helping to increase the skilled labor pool. In addition, a lot of infrastructural development in the country has been initiated to ensure that investors can easily access transport warehousing and other requirements for production. The manufacturing standards are quite stringent and firms are closely monitored to ensure the produce quality goods, the government also encourages investment especially that which will stimulate trade and create employment. Chance Determinants While South Africa has enjoyed a comparatively stable economy in the last few decades, the threat of political and civil unrest is very real, in the last few years, there have been several strikes by workers in various firms and this has compounded the unemployment crisis. Therefore, before a company invests in South Africa they may need to consider the possibilities of political and social instability affecting their business and negatively impacting on the production and supply. Seychelles Factor conditions In comparison to South Africa, the firms that have dominated the toy and gaming production in Seychelles are very influential and profitable thus they can afford to lower prices significantly or offer incentives to consumer’s effectively locking out new comer’s especially when they work in collaboration. One of this is the Pillayr group which has interests and investment in a variety of fields ranging from manufacture to food production and is therefore in a position to control various resources in toy manufacture and related industries. Another firm with a heavy market presence in Seychelles is plush toys which are specialized in the production of toys such as bunnies and dolls. This notwithstanding, if a firm could successfully venture into the market, they would reap huge benefits since is quite extensive owing to the fact that only few firms are servicing it. On the other hand, the infrastructure is not as good as South Africa’s and one the firm is likely to incur comparatively higher costs in areas such as transport and communication. Besides, owing to the fact that Seychelles is not as rich in minerals and natural resources as South Africa, the firm will require to import a lot of raw materials which could have a negative impact on profitability. Demand conditions In Seychelles the population is low and the distribution of wealth is marginally more even than the case in South Africa where there are a few with access to most of the resources while the public majority lives below the poverty line. Notwithstanding, the population of South Africa is over 50 million persons while Seychelles has a population of slightly less than 100,000, therefore the demand in the country is much smaller compared to South Africa since what may be seen as high demand percentages in Seychelles may translate into small figures in South Africa. Related and Supporting Industries Like South Africa, there are several competing firms in the production of toys some local and other international; as aforementioned one of the most dominant is the Pillayr group which specializes in a diverse range of manufacturing services ranging from electronics sporting goods and toys. The existence of such a firm is potentially advantageous for firms since it will help them create and capitalize on the existing competitive advantage. Firm strategy, structure and rivalry The toy production industry is likely to benefit a great deal from other industries in in the country that are either competing or producing related goods, this is because the motivate new entrants to work harder to produced better goods than the competition. Government Like South Africa’s government, the government of Seychelles has tried to encourage investments through subsidies and tax cuts; for example, for most of the goods that are imported the tax has been reduced to 0% and therefore the process of production is comparatively cheaper. However, the scope of what they can do is significantly lower than the situation in South Africa owing to the small size of the economy. In addition to encourage investors, Seychelles has been aggressively following up on Double Taxation Avoidance so as to gain preferential terms for business operating in Seychelles (Consulate of the republic of Seychelles 2012). Chance Finally, the fact that Seychelles’ current president entered office after a bloody coup in which thousands were killed is evidence that the political environment may be potentially volatile (Erwood and Latrach 2004). Despite the fact that South Africa suffers political instability, their government has on the largely remained popular and had the backing of the people so anarchy to a scale that would destabilize or topple the state is unlikely. In Seychelles, the situation is more delicate and investors have to be wary incase the political upheavals interrupt activities or endanger their property and staff. Recommendation Ultimately, in view of the factors considered, the firm will be better off investing in South Africa than Seychelles. The formers wealth is an incentive and it also translates into higher buying power, ergo demand, this is further enhanced by the population density. In addition, South Africa has a lot of natural resources and from this the investing firm can acquire raw materials and save on the cost of importing. While competition is high in South Africa, the high population and economic growth rates make it easy for a new firm to create a niche which is difficult in the economically and demographically impoverished Seychelles where the existing firms have a firm hold on the few markets. In conclusion, although the two countries have in the past experience political difficulties, the magnitude and consequences of these in Seychelles is wider and more far reaching than is the case in South Africa making the latter comparatively safe. References Erwood, F. and Latrach, S., 2004. SEYCHELLES: Albert Rene's legacy. African Business, (297), pp. 44-46. Shona, K. 2011. Search Report on Retail Trade in Toys. Who owns whom; Essensial Business information. Viewed from http://www.whoownswhom.co.za/public/sasector/report_content/Pages%20from%2062393b%20-%20Retail%20Trade%20in%20Toys%20-%20April%202011%20-%20Contents.pdf Toy and Game Companies. 2012.  Kids II Expands Global Footprint with Addition of South Africa Office. Entertainment Newsweekly, , pp. 83. Consulate of the republic of Seychelles. 2012. Investment opportunities. Viewed from http://www.seychellesconsulate.org.hk/bus_investment.html Read More