DIB 504 Assignment Benefits of COMESA to menber countries - Kenyan Firms_ Timothy Mahea

8/7/2019 DIB 504 Assignment Benefits of COMESA to menber countries - Kenyan Firms_ Timothy Mahea

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UNIVERSITY OF NAIROBISCHOOL OF BUSINESS

MASTER OF BUSINESS ADMINISTRATION

May august 2009

DIB 504: INTERNATIONAL BUSINESS

Benefits that can accrue to Kenyanfirms from COMESA Countries and howthe firms can position themselves to

benefit from them.BY:

MAHEA TIMOTHY KIMANI D61/70146/2008

NYANGAYO SARAH ADHIAMBO D61/70178/2008

ANNE NASILA WEKESA D61/70184/2009

KINUTHIA ROSE WAMBUI D61/70360/2009

BASHIGE GABRIEL LOYA D61/70292/2009

MAGORI VIOLET D61/70300/2009

ROP MOSES D61/70200/2009

SUBMITTED TO: LECTURER DR. YABS

25th July 2009


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Table of Contents

Table of Contents...................................................................................................................................... 1

INTRODUCTION..................................................................................................................................... 2

Objectives of the Common Market for Eastern and Southern Africa:...................................................... 3

Fundamental Principles of the Common Market for Eastern and Southern Africa: ................................3

Kenya Country Profile............................................................................................................................... 4

Nature of Firms in Kenya.......................................................................................................................... 6

HOW FIRMS CAN POSITION THEMSELVES................................................................................... 13

Training staffs and increasing their level of professionalism..................................................................14

Differentiation......................................................................................................................................... 15

Expand market for export........................................................................................................................ 15

Business outsourcing opportunity........................................................................................................... 15

................................................................................................................................................................. 16

................................................................................................................................................................. 16

Conclusion............................................................................................................................................... 16


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INTRODUCTION

Background of the Common Market for Eastern and Southern

Africa (COMESA)

The Common Market for Eastern and Southern Africa (COMESA) was established in December 1994

from among the respective States of the Preferential Trade Area for Eastern and Southern African

States towards the creation of a Common Market and eventually of an Economic Community for

Eastern and Southern Africa.

The Treaty for the establishment of the Common Market for Eastern and Southern Africa as an

organization of free independent sovereign states followed the development of the Preferential trade

Area into a Common Market and an Economic Community. Member States of the Common Market

for Eastern and Southern Africa have agreed to co-operate in developing their natural and human

resources for the good of all people by focusing on the implementation of the objectives and principles

of the organization, listed below as specified in the treaty. Member states include: the Republic of

Angola, the Republic of Burundi, the Federal Islamic Republic of the Comoros, the Democratic

Republic of Congo, the Republic of Djibouti, the State of Eritrea, the Transitional Government of

Ethiopia, the Republic of Kenya, the Kingdom of Lesotho, the Republic of Madagascar, the Republic

of Malawi, the Republic of Mauritius, the Republic of Mozambique, the Republic of Namibia, the

Republic of Rwanda, the Republic of Seychelles, the Somali Democratic Republic, the Republic of

Sudan, the Kingdom of Swaziland, the United Republic of Tanzania, the Republic of Uganda, the

Republic of Zambia, and the Republic of Zimbabwe.

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Objectives of the Common Market for Eastern andSouthern Africa:

Attain sustainable growth and development of the Member States by promoting a more

balanced and harmonious development of its production and marketing structures;

Promote joint development in all fields of economic activity and the joint adoption of macro-

economic policies and programmes to raise the standard of living of its peoples and to foster closer

relations among its Member States;

Co-operate in the creation of an enabling environment for foreign, cross border and domestic

investment including the joint promotion of research and adaptation of science and technology for

development;

Co-operate in the promotion of peace, security and stability among the Member States in order

to enhance economic development in the region;

Co-operate in strengthening the relations between the Common Market and the rest of the

world and the adoption of common positions in international flora;

Contribute towards the establishment, progress and the realization of the objectives of the

African Economic Community.

Fundamental Principles of the Common Market forEastern and Southern Africa:

equality and inter-dependence of the Member States;

solidarity and collective self-reliance among the Member States;

inter-State co-operation, harmonization of policies and integration of programmes among the

Member States;

non-aggression between the Member States;

recognition, promotion and protection of human and peoples' rights in accordance with the

provisions of the African Charter on Human and Peoples' Rights;

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accountability, economic justice and popular participation in development;

recognition and observance of the rule of law;

promotion and sustenance of a democratic system of governance in each Member State;

maintenance of regional peace and stability through the promotion and strengthening of good

neighbourliness;

Peaceful settlement of disputes among the Member States, the active cooperation between

neighbouring countries and the promotion of a peaceful environment as a pre-requisite for their

economic development.

Kenya Country Profile

Major Cities: Nairobi, the capital and chief manufacturing centre; Mombasa, the principal seaport; and

Kisumu, the chief port on Lake Victoria. Other cities include Nakuru, a commercial and

manufacturing centre in the Eastern Rift Valley; and Eldoret, an industrial centre in western Kenya.

The population of cities, according to the 1999 census, was Nairobi, 1,346,000; Mombasa, 465,000;Kisumu, 185,000; Nakuru, 163,000; and Eldoret, 105,000.

Trade with the nearby Arabian Peninsula was well-established in Kenyas coast by A.D. 100. Swahili

was the commercial language of the coastal trade that exchanged trade goods from Kenyas interior

animal skins, ivory and horn, agricultural produce, and slaves for goods from the Middle East and even

the Far East. In the mid-nineteenth century, British influence superseded that of the Arabs. The

British showed interest in controlling land beyond the coastal region and encouraged European

explorers to map the interior. Beginning of 1895, a railroad was built from Mombasa to Kisumu on the

Lake Victoria in order to facilitate trade with the interior and with Uganda. The British opened the

fertile highlands to white settlers, who established themselves as large-scale farmers. At the

Independence, policies of free-market capitalist were introduced to back foreign investments, but with

limitation of foreign ownership of industry with aim to boost economic growth.

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The economy has now been market-based, with some state-owned infrastructure enterprises, and has

maintained a liberalized external trade system. There are expansions in tourism, telecommunications,

transport, and construction and a recovery in agriculture. The agricultural sector is the largest

contributor to Kenyas gross domestic product (GDP) and the main cash crops are tea, horticultural

produce, coffee, sisal, pyrethrum, corn, wheat, coconuts, pineapples, cashew nuts, cotton, and

sugarcane. Fishing on Lake Victoria and on Lake Turkana has been declining because of ecological

disruption and the use of unauthorized fishing equipment which has led to falling catches and has

endangered local fish species. Kenyas minerals produced are soda ash, limestone, gold, salt, and

fluorspar. Industrial activity includes food-processing industries such as grain milling, beer

production, and sugarcane crushing, and the fabrication of consumer goods, e.g., vehicles from kits; oil

refinery that processes imported crude petroleum into petroleum products, mainly for the domestic

market; small-scale manufacturing of household goods, motor-vehicle parts, and farm implements.

Kenya is a beneficiary of the U.S. Governments African Growth and Opportunity Act (AGOA) and

has given a boost to manufacturing of Kenyas clothing sales to the United States.

Energy: Kenyas electricity supply comes from hydroelectric stations, a petroleum-fired plant on the

coast, and electricity imported from Uganda. Kenyas installed capacity stood at 1,142 megawatts a

year between 2001 and 2003. The state-owned Kenya Electricity Generating Company (KenGen),

handles the generation of electricity, while the Kenya Power and Lighting Company (KPLC), handles

transmission and distribution. Shortfalls of electricity occur periodically, when drought reduces water

flow.

Kenya has yet to find hydrocarbon reserves on its territory, despite several decades of intermittent

exploration. Kenya currently imports all crude petroleum requirements. Kenya Petroleum Refineries

operates the countrys sole oil refinery in Mombasa and the product is transported via Kenyas

MombasaNairobi pipeline.

Services: Tourism has seen a substantial revival over the past several years and is the major contributor

to the pick-up in the countrys economic growth and it is now Kenya's largest foreign exchange

earning sector, followed by flowers, tea, and coffee. In the financial system, the Kenya banking

system is supervised by the Central Bank of Kenya (CBK). The system consisted of commercial banks,

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non-bank financial institutions, including mortgage companies, four savings and loan associations, and

several score foreign-exchange bureaus. Two of the four largest banks, the Kenya Commercial Bank

(KCB) and the National Bank of Kenya (NBK), are partially government-owned, and the other two are

majority foreign-owned (Barclays Bank and Standard Chartered). Most of the many smaller banks are

family-owned and -operated.

Labour: Kenyas labour force was estimated to include about 12 million workers, almost 75 percent in

agriculture and pastorals.

Imports and Exports: Kenyas chief exports are horticultural products, tea and coffee. Kenyas other

significant exports are petroleum products, sold to near neighbours, fish, cement, pyrethrum, and sisal.

The leading imports are crude petroleum, chemicals, manufactured goods, machinery, and

transportation equipment.

Africa is Kenya's largest export market, followed by the European Union. The major destinations for

exports are the United Kingdom (UK), Tanzania, Uganda, and the Netherlands. Major suppliers are the

UK, United Arab Emirates, Japan, and India. Kenyas main exports to the United States are garments

traded under the terms of the African Growth and Opportunity Act (AGOA).

Foreign Investment: Kenyan policies on foreign investment generally have been favourable since

independence, with occasional tightening of restrictions to promote the Africanization of enterprises.Foreign investors have been guaranteed ownership and the right to remit dividends, royalties, and

capital.

Nature of Firms in Kenya

Kenyan firms operate in different fields such as industrial equipment and supplies, agricultural

chemicals and machinery and supplies; pharmaceutical products and supplies; consumable products,

information technology and communication systems and consulting and equipment and supplies,

laboratory equipment and supplies; motor vehicles accessories and assembly, office equipment and

supplies, oil and petroleum supplies, packaging services, road building equipment and supplies,

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shipping and freight forwarding, supermarkets, medical equipment supplies, telecommunication

equipment and services, tours and safaris, transport logistics and management services, travel agencies,

Universities, veterinary products and supplies, website designers, welding equipment and supplies,

wildlife conservations, wood products. These include; Hotels and lodges; agricultural chemicals,

commodities, equipments; beauty products; clothing; construction and building materials and supplies;

bus and coach body builders and services; business centres and consultants; cargo handling services,

clearing and forwarding agents; communication and computer equipments and consultants; consumer

products; courier services; dairy equipments and machinery; E-commerce, Electrical components,

products, equipments; banks, engineering consultants; cable and wire supplies; cement products;

ceramic products and tiles; pharmaceutical products; hospital equipments and supplies; industrialagricultural machines; information technology systems and equipment. This has resulted

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BENEFITS THAT CAN ACCRUE TO KENYAN FIRMS FROM

THE COMMON MARKET FOR EASTERN AND SOUTHERNAFRICAN COUNTRIES

Kenya, like other member of the Common Market for Eastern and Southern Africa makes effort to

plan and direct its development policies with a view to creating conditions favourable for the

achievement of the aims of the Common Market and the implementation of the provisions of this

Treaty, which will enable its firms to improve their volume of trade within the sub-region and

maximize their benefits. Kenya is neighbouring with some other landlocked member countries of the

organization, which gives it the advantage to play a major role as a gateway to accessing the

international market in serving such countries through its port and from its local market in different

areas depending on the needs that arise and the level of competitive products or services in the market.

Kenya firms prove to be very active within the regional trade bloc of the Common Market for Eastern

and Southern Africa (COMESA) towards Kenya, Uganda, Tanzania, Southern Sudan, Eastern

Democratic Republic of Congo, Burundi, Rwanda and partially Zambia and Zimbabwe. In the relationto the application of measures to improve trade and economic growth within the region, many

opportunities have appeared more profitable to firms in terms of producing, processing and

manufacturing products and supplies, services & transportation, monetary exchange and financial

transactions to enable sustainable development. Areas that members States have resolved to

emphasize on with the aim to promote common market include the following among others:

(i) In the field of trade liberalization and customs co-operation: establish a customs union, abolish all

non-tariff barriers to trade among themselves; establish a common external tariff; co-operate in

customs procedures and activities; adopt a common customs bond guarantee scheme; simplify and

harmonize their trade documents and procedures; establish conditions regulating the re-export of

goods from third countries within the Common Market; establish rules of origin with respect to

products originating in the Member States;

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(ii) In the field of transport and communications: foster such co-operation among themselves as would

facilitate the production of goods and facilitate trade in goods and services and the movement of

persons; make regulations for facilitating transit trade within the Common Market; adopt a Third

Party Motor Vehicle Insurance Scheme.

(iii) In the field of industry and energy: eliminate rigidities in the structures of production and

manufacturing so as to provide goods and services that are of high quality and are competitive in

the Common Market; provide an appropriate enabling environment for the participation of the

private sector in economic development and co-operation within the Common Market; co-operate

in the field of industrial development; adopt common standards, measurements systems and quality

assurance practices in respect of goods produced and traded within the Common Market; provide

an enabling stable and secure investment climate.

(iv)In the field of monetary affairs and finance: co-operate in monetary and financial matters and

gradually establish convertibility of their currencies and a payments union as a basis for the

eventual establishment of a monetary union; harmonize their macro-economic policies; removeobstacles to the free movement of services and capital within the Common Market; recognize the

unique situation of Lesotho, Namibia and Swaziland within the context of the Common Market and

to grant temporary exemptions to Lesotho, Namibia and Swaziland from the full application of

specified provisions of this Treaty.

(v) In the field of agriculture: co-operate in the agricultural development; adopt a common agricultural

policy; enhance regional food sufficiency; co-operate in the export of agricultural commodities; co-

ordinate their policies regarding the establishment of agro-industries; co-operate in agricultural

research and extension; enhance rural development.

(vi)In the field of economic and social development: harmonize the methodology of collection,

processing and analysis of information required to meet the objectives of the Common Market;

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harmonize or approximate their laws to the extent required for the proper functioning of the

Common Market; promote the accelerated development of the least developed countries and

economically depressed areas through the implementation of special programmes and projects in

various fields of economic development; adopt a regional policy that will look into all possible

economic problems that Member States may face during the implementation of this Treaty and

propose ways and means of redressing such problems in a manner that will satisfy the conditions of

equitable and balanced development within the Common Market; remove obstacles to the free

movement of persons, labour and services, right of establishment for investors and right of

residence within the Common Market; promote co-operation in social and cultural affairs between

themselves; co-operate in tourism and wildlife development and management; co-operate in thedevelopment and management of natural resources, energy and environment; take, jointly, such

other steps as are necessary to further the aims of the Common Market.

Some of the facts that show how Kenyan firms have the opportunities to benefit from the regional

trade market of the Common Market for Eastern and Southern Africa are the following areas:

a) Transport and CommunicationThere are Kenyan companies that operate in the field of transportation and communication in order

to services its neighbouring countries like Uganda, Rwanda, Burundi, the Democratic Republic of

Congo, Sudan, to facilitate the transportation of transiting goods from the port of Mombasa to their

respective countries of destination in the region. Firms operate in the field of transportation of

petroleum products, consumable products, equipments and machines, and raw materials. In some

cases, these firms benefit in doing return business which involves delivering the good to the

destination countries and finding the opportunities to acquire other markets to transport products to

the original for export overseas or for local needs.

Kenyan firms in transportation have the opportunity to grow rapidly as long as the management of

such companies are able to seize the market by searching for those opportunities available.

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More international firms have established their local representations in Kenya in order to target the

regional market on providing their automotive products. To some extend, they deal with local firms

to operate as their agents.

The business for used cars has been booming in the region and Kenyan firms have seized the

opportunity to be able to serve closely the local and neighbouring market.

More Kenyan Airlines Companies have been operating in the region and service to connect to the

international lines. This has given Kenyan the opportunity to operate as a hub to other destination

of the world. The market has increase in this sector in to the extend that more new companies have

penetrated the market such as Fly540, Jet-Link to compete with existing companies such Kenya

Airways, Air-Kenya, East African Airlines.

b) Agriculture and related activities:

opportunities for large-scale commercial farming exist in the region for both food and cash crops,

including floriculture and horticulture

c) Infrastructure:

Opportunities exist in road transport, railways, water transport, air transport, port facilities,

information and communication technologies, energy and water and sanitation services as the EastAfrican Countries implement restructuring programmes aimed at reducing government

involvement in commercial activities.

d) Oil and Gas:

There are high prospects for oil and gas in the region and the three Manufacturing: Opportunities

exist in the areas of textiles and apparels; iron, steel and other metals; vehicle parts and assembly;

electronics and electrical equipment; plastics; chemicals; pharmaceuticals and beverages.

Exposure to a wide potential market

The companies change from becoming regional to international by serving a very wide diverse

market. Companies get an opportunity to expand and increase their production capacities. This also

helps them in developing their internal processes in order to be effective and to be able to compete

in a regional environment.

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Utilization of excess capacity

The companies will have an opportunity to utilize any excess capacity that they may have by

increasing their production levels and their levels of output. These helps in increasing the

efficiency in utilization of resources as well as reduce the amount of costs incurred per unit of

output.

Wide source of raw materials

Organizations get a wider source of raw materials which in some instances could be more reliable

and at reduced cost. Various countries have different potentials and are endowed differently in

terms of resources. For example, mineral resources like copper, iron, and also the agricultural

products depending on the climate conditions.

Opportunities to identify partner organizations

With the dream of continuous growth and improvement, companies can establish presence in

various countries through partnering with other organizations. This could be done by establishing

franchises, joint ventures, mergers and takeovers. This helps in cushioning of risks that are likely to

accrue organizations when investing internationally.

Opportunities for expansion through mergers, FDIs, franchises and acquisitions

Small organizations doing business in various countries can identify areas in which they can work

together. This can be through mergers or either working as franchises for larger organizations.

Similarly, large organizations have the ability to develop working relations with small

organizations. For instance, banks can identify potential customers for their products irrespective of

the country within which they operate. Here in Kenya we have a number of training organizations,

trading and service sector players who have identified potential market for their products and

services in Sudan, Rwanda and Uganda. There are many more opportunities that can be exploited

through COMESA.

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Opportunities for new business relations that are easy to exploit e.g. extend business elations

beyond boarders- presence of a company in various other countries

Some international markets could be easier to exploit as compared to the local market. This is

because the industries vary a lot in terms of competition, aggressiveness of the industry players and

the market dynamics. Also, in some cases, some companies have been able to build a strong brand

which is well recognized and easily accepted. Such brands are easy to sell across the various

regions with minimal marketing effort.

HOW FIRMS CAN POSITION THEMSELVES

The firms are constantly faced with numerous challenges. These challenges threaten their survival and

growth in the market. These challenges include limited resources such as raw materials and finances,

competitors actions like competitors pricing policies, quality advertising and a promotion activity,

technological changes, the influence of suppliers, consumers and governments.

Firms need to position themselves strategically to be able to not only survive but also achieve their set

goals. This will give them a competitive advantage. Firms therefore need to position themselves in the

market.

Firms can adopt the following to position themselves:-

When firms increase production capacity, they will be able to serve a wider market within their

products. Kenyan mobile phone service providers such as Safaricom and Zain have tried to increase

the market they are serving beyond Kenyan borders. Increased sales results in greater revenue and will

yield more profit to firms.

Cost leadership is another way Kenyan firms can use to gain competitive advantage. This is whereby

firms aim at producing at lowest possible cost within the industry thus enabling it to complete on the

basis of lower selling prices. Increased production results in cost advantage due to economies of scale.

Another strategy is diversification. This is where by firms engage in production of new products and

services for new market. Firms such as Unilever Kenya have diversified in production to include

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products of variety of goods for various markets segments. Thus production of include; Royco, Blue b

and, Lux, Sunlight, Omo and Vaseline. By doing so firms will be able to increase sales by having a

variety of goods to offer to the market.

Increasing brand loyalty through quality product offering is another way firms can position themselves.

Firms such as East Africa Breweries Ltd offer which Ledger Malt Beer, Tusker, Guinness which

increases brand loyalty among consumers.

Through adopting superior technology, firms are able to gain competitive advantage in the market, thus

is because they will offer consumers a superior products and service using the technology. Example

include Mobile Service Providers Safaricom and Zain who were able to gain competitive advantage

among other mobile service providers by adopting the money transfer services of M. Banking (m-pesaand Zap) respectively.

Training staffs and increasing their level ofprofessionalism

Well trained staff will conduct the daily duties with motivation and enthusiasm. By increasing their

levels of professionalism they will give a competitive advantage in the markets because employees

input will be of superior quality compared to those of competitive hence they become the preferred

suppliers of adopted this strategy to be able o earn more customers. An example includes the

University of Nairobi.

Firms can also position themselves for a competitive advantage in the market through packaging, good

brand names that are catered towards particular market segments and advertising. This strategy will

enable their products and services to be well known by potential strategies. Advertising and promotion

strategies increase sales revenue and profits of the firm. Coca Cola Company and East Africa

Breweries Ltd, and Safaricom are examples of companies who undertake aggressive advertising of the

products.

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DifferentiationDifferentiation can be applicable whereby a firm seeks to often products services that are considered

unique or superior by its customers relations to those of in competitions. Differentiation can be based

on the product itself, the delivery systems by which it is sold, the marketing approach and a broad

range of other factors. Firms can also gain a competitive advantage through explosions and taking

advantage of potential cheap sources of raw materials and explaining market production will enable

firms reduce production costs and charge lower prices to consumers that are the competitions.

Competitive position can be shaped by a firm. While industry attractiveness is partly a reflection of

factors even which a firm has little influence, competitive strategy has considerable power to make an

industry more or less attractive. At the same time a firm can clearly improve or erode in position

within an industry through choice of strategy.

Expand market for exportCountries can take advantage of the exposure to a wide market, by marketing their products

aggressively. Most countries have been able to achieve a lot by creating awareness about their products

through advertising and promotion activities. Globalization makes it possible to reach a wider market

and at the same time access market that have similar characteristics as those currently being served. In

some cases, it offers extreme potential for the organization to exploit as well as expanding the

organization to tap new markets. For instance, South Africa has taken the opportunities brought by

globalization to sell their apples and oranges to various countries in the world. Kenya has also been

able to attract tourists form various parts of the world especially in South East Asia, where we even

have seven flights by Kenya Airways to various destinations in Asia.

Business outsourcing opportunityA country can develop its infrastructure and communication systems in order to tap businesses from

other countries. Most countries tend to specialize in one area of business which they have a key

strength or advantage in, and concentrate less in areas they do not have an advantage. For instance,

Kencall, a Kenyan company, has been able to acquire business in telemarketing from the UK, an area

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which has a lot of potential but which less effort has been made in their country. Also, with the

advances in technology, it will be easier to outsource jobs from various countries in the world. Some of

these jobs include; data entry, translation of information to various languages, editing of publications,

online surveys and uploading of information to the internet. Countries can also create business hubs

that offer efficient and convenient services to the consumers. For example, Kenya intends to create an

ICT village in Athi-River to enable business outsourcing.

Conclusion

Through Kenyas steadfast implementation of COMESA integration programmes, COMESA has since

become Kenyas leading export destination i.e. accounting for 36.6% total exports as compared to

25.4% to the EU Far East & Australia (12.1%) and Middle East (4.9%) during 2006. Kenyas exports

to COMESA countries has increased over the years from US$ 547.9 million in 1997 to US$915.5

million in 2006 and accounted for 36.6% of exports as shown in figure 1. Similarly, there has been an

increasing trend of COMESA imports into Kenya imports from COMESA countries grew by 5% from

US$174.0 million in 2004 to US$182.6 million in 2005. Dominating imports are mainly sugar,

tobacco, wheat flour and steel bars. There is no doubt that the opportunities created by COMESA to

the country are very valuable and significant to the growth of their economies. It has enhanced

business relations as well as made contributions to improvement of standards of living.

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DIB 504 Assignment Benefits of COMESA to menber countries - Kenyan Firms_ Timothy Mahea