Foreign Expansion Strategy in the Middle East

Foreign Expansion Strategy in the Middle East – JERRY'S PORTFOLIO https://jerryxyyang.wordpress.com/2018/01/02/escaping-financial-pressu...
JERRY'S PORTFOLIO
CASE ANALYSIS, RSM490
Foreign Expansion Strategy in the Middle East
JANUARY 2, 2018MARCH 7, 2018
AN ANALYSIS OF THE IVEY CASE “CHABROS INTERNATIONAL GROUP:

A WORLD OF WOOD”
Executive Summary
With the onset of the global financial crisis in 2008, Chabros International, a wholesaler and
manufacturer of lumber and veneer, suddenly found themselves facing financial issues only a year later.
Their expansionist policies of the past few years have returned and faced them as part of a glaring
problem with their continued international growth strategy within the MENA (Middle Eastern and
North African) region. Given limited resources and even fewer choices, the company needs to figure out
whether they are to further expand their operations in newer markets in order to shore up the loss of
demand within current domestic markets or whether to divest their Serbian lumber mill facility, a key
competitive advantage they’ve built themselves over the past few years (by exploiting the dichotomic
manufacture-wholesaler operational model). Through an extensive internal micro as well as external
macro analysis using different models to look beyond than what is presented on the surface. The
company is strongly suggested to pursue the path of further expansion into foreign markets within
relatively stable MENA countries with decently sized markets in order to shore up their demand
shortage and continue to operate their dichotomy model that has worked well for the company so far.
Through this strategic change the company will leverage its existing advantages in the new foreign
market of Morocco, a country without any major dominant players within the veneer and European
lumber industry, and gain a solid market share within the coming fiscal year to help endure the
economic recession. At which point when the conditions be er then the new Morocco subsidiary will
bolster its efforts in capturing a major share in the market before other multinational competitors enter
into the domestic fray. Thereby granting Chabros a first-mover advantage and helping them relieve their
financial duress.
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Background
Founded during the 1960s, Chabros was a Lebanese-based company that had originally dealt with the
trading wholesale of veneer, thin slices of would made for decorations on wooden furnishings. The
company is held and led by the Chami brothers, and later expanded their products to include wood and
lumber as well, but due to extenuating political and economical situations within Lebanon during the
late 1980s and early 1990s, Chabros seeked buyers of their products from surrounding countries. After
having achieved domestic success within Lebanon’s stabilized post-civil conflict market, they strived for
international growth, with the first branch office subsidiary opening in Dubai in 1999. Chabros Dubai
proved to be a huge success within the coming years and would eventually come to be the largest source
of Chabros yearly sales and profits. With the success of their international expansion to Dubai, the firm
continued to fuel its international growth with the expansion into other MENA (middle eastern and
North African) countries. Starting with an International Joint Venture in Saudi Arabia along with 2 like
minded Italian suppliers, the firm has over the years rapidly expanded their area of operations to Qatar,
Oman, and Egypt. With the last subsidiary being opened in Egypt, Chabros utilized this opportunity to
expand their product lines by offering the local Egyptian market cheaper, lower quality “B” ranked
veneer, exploiting a market deficiency and leveraging it for the company’s long-term success. By 2009,
Chabros had established a dominating international presence within the MENA area with 8 subsidiaries
established in 6 foreign markets excluding Lebanon, with every country having access to at least one
local office and UAE and Saudi Arabia having 2, the firm had expanded its scopes from being just a high
quality (A, AB rank) veneer trader to partaking in the manufacturing process of veneer and lumber as
well with its Serbian lumbermill subsidiary. Chabros recent purchase of their Serbian lumber mill had
recently received funds and resources to expand, spending $11 million to further increase the
production capacity to satisfy the company’s demand for European wood. Currently, Chabros is an
international presence within the wood and veneer industry that competed with other multinational
entities of similar size. Products are imported from all over the globe, helping bolster their expansive
products lines and these products were then on their way to one of the local markets in each of the 7
countries the company held presence in.
Problem Definition
From 2005 to 2008, Chabros experienced tremendous growth in sales volume and revenues, achieving a
67% growth within 2 years reaching a grand total of $100 million total sales figure. However, with the
onset of the economic recession of 2008, the sales figures started to falter, and the company outlooks
seemed increasingly bleak as time passed. Their record high of $100 million sales figure had diminished
to by 10% to $90 million. In 2009, Chabros most profitable subsidiary Chabros Dubai, suffered the
largest hit of the recession, a 30% drop in sales and only contributed $35 million to the firm’s total sales
that year opposed to the $50 million the market operations could achieve the year prior. Suddenly, the
company’s average profits margins dropped from the stable average of 6.4% to a frighteningly low 4.2%
for the year. With dire financial situation that the company finds itself bogged down in along the global
economic recession, the recent investment into their Serbian lumber mill subsidiary seemed to loom over
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the company’s top management as a catalyst for the company’s decline. Should Chabros shut down a
section of their lumber mill and reduce capacity and expenses related to that subsidiary in order to
avoid the problem of overproduction? Or should the company reinvigorate their growth strategy and
expand into other countries with the hopes of being able to increase market demand to match their
production at full capacity? Even among growth increasing strategies, the firm has a choice between
concentrating their efforts within market penetration, product development, market development, and
diversification. Chabros currently, is being forced to decide on the path that will yield them the most
optimal results going forward into the future; either that’s bolstering their expansion and development
to match sales and demand with their overcapacity production or cut down on costs and production to
ride out the recession.
Key Criteria
The Key criteria here for a plausible solution for Chabros current situation would be to reduce financial
pressure, to achieve that Chabro’s options are limited in a variety of ways. To start with, Chabros can
only undertake expansion projects that pertain a high possibility of returning yield on their investment
within the coming fiscal periods, as any longer a time delay for the firm to see returns on their
investments would put the company into further and increasingly dire straights of financial instability.
Therefore, when looking along expansionary strategies, the firm must be able to perform some level of
extensive market research, including market and economic conditions, potential demands for products
and supplier availability among others beforehand and ensure that the expected benefits are at a level
that is acceptable for their current situation. Secondly, if the firm goes towards the route of cu ing costs
and mitigating losses for the near future, top management must realize that costs cut present time will
be losses of available resources in the future, especially when regarding their Serbian subsidiary. As all
losses of human talent and will be required to rehire in the future after the recession passes and along
with that comes with additional costs (training, HR, recruitment) that would not have occurred if the
capacity of the facility is not reduced. On top of that, all other sunk resources will be lost, and a time
delay period will also be incurred when the firm decides to return to full capacity. Finally, Chabros
should seek to maintain their current competitive advantages during this period, many of the
competitive advantages for the firm are extremely valuable and they are the cornerstones of the
company’s rapid growth. As such, the firm should be extremely reluctant to give any of these up in
hopes of cu ing costs in order to preserve what their key leveraging capabilities are going forward into
the long-term future.
Internal and Industry Analysis
Diamond-E Framework
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Inference – seen above within the framework that the current inner working of Chabros is very
meticulous and they play well to their strengths while showing li le weaknesses. They have many
advantages from which to leverage to their benefit when considering both expansionary and recessive
strategies, as is evident of their great relationships built with international suppliers which no doubt can
be partly a ributed to the flexible mentality of their culturally-open minded employees. Their
management experience and style are very suitable for the multinational subsidiary based
organizational structure they have built around themselves and they do not back off from the possibility
of risk.
Porters 5 Forces Model
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Inference – There seems to be li le threat from external entries and product substitutions for Chabros,
but their a entions should be placed upon the current competitors within this highly competitive
market. Current and future supplier relationships are key to maintaining competitive advantage within
this industry especially when Chabros are to continue their strategy of quality selection over quantity in
order to satisfy buyer demand.
VRIO Analysis of Core Competencies
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Inference – The few key core competencies for Chabros are all very well organized, the firm is utilizing
and leveraging their advantages to their utmost limits in their operations and strategy. While many are
imitable in the long-term by their competitors, Chabros can ensure to gain a dominant market share
within that given period of time on a global scale before similar sized competitors can boast similar
competencies. Their expertise on carefully procuring the finest collection of veneers represents their
greatest asset and they should seek to continue to leverage this into future operations.
External and Country Analysis
PESTELID
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Inferences – The biggest external macro factor is the general slowing down of the global economy due
to the recession. As a side effect of this, current suppliers may seek to limit their engagement with
Chabros within the foreseeable future, current debtors of the company may default on their accounts
owned. However there is a silver lining and that is the slowing down of competitor movement within
the markets as well for they are suffering from the same conditions, therefore it may be optimal to
undertake growth strategies where there will be fewer obstacles and resistances presented by
competition.
Country Analysis
Morocco
From a basic rundown of the SWOT analysis, the market conditions in the country is both encouraging
and discouraging depending on Chabro’s point of reference. The fact that there are no serious local
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rivals means that Chabros can focus on maximizing their operational efficiencies when initially
penetrating into the market if they are to decide to do so and ensure a major foothold within the market
share within a short amount of time due to the fact that there is a lack of domestic suppliers for veneer.
To top off that, the economic stability presently exhibited by the local markets reduces the amount of
risks that are presented with the market diversification strategy. Coupled with that is the stability of the
local currency, being strongly tied to the Euro indicates even greater risk insurance against economic
instability. On the flip side, domestic contracts are monopolized by key supplier firms, and while there
is a reduced possibility of entry from current international competitors as is laid out within the
PESTLEID analysis, it is still necessary to be cautionary of the local businesses forming anti-foreign
businesses alliances with one another, which will only hinder Chabros entrance into the market and
slow down the gain of shares within the market. The lack of domestic connections within the local
industry and the firms already lacking brand image and reputation will draw hesitation from even
potential suppliers and buyers which will only further complicate the process for the firm to gain a solid
foothold.
Morocco has very fiscally conservative policies against foreign businesses trying to invade its market.
With its high tariffs on veneer boards added onto an above average income tax percentage, it might
prove difficult to breakeven within the first few years of operations. Even looking beyond that, the tax
rate of 30% after 5 years is beyond reasonably high when compared to Saudi Arabia’s 20% corporate
income tax. That said, the country does have ideal political and social economic conditions, with a
rather stable political climate that’s only tainted slightly by its infrastructure support for ease of doing
business (which is ranked 128 out of 183). However, with the countries economic indicators for current
market and consumer wealth as well as future growth rate being just above average when compared to
the other MENA countries, a potential expansion into Morocco should be thoroughly researched and
deliberated upon.
On the other hand, alternative potential candidates such as Kuwait and Jordan seems to be more
appealing and may prove to be more fruitful for Chabros to look into for future market expansions. As
both pertain to similar if not be er political climates which boasts and indicates stability within the
region for the foreseeable future; they both also hold a higher position on the commercial system scale
for ease of doing business (61 and 100 for Kuwait and Jordan respectively). Although the only downside
towards these two markets is the lacking size, as both are states with smaller landmasses and fewer
population, thereby limiting the size of the potential demand within the market for Chabro’s products.
Key Assumptions
1. Chabros still have the resources and capacity to perform expansionary strategies if they are to
undertake them.
2. That international and domestic businesses and institutions will not alliance together and form an
obstacle for Chabros diversification if they choose to do so.
3. That if Chabros were to divest the Serbian subsidiary that it would be sold off at a reasonable market
price, covering for a majority of the expenses paid for the acquirement and expansion of it in the first
place.
4. If left untouched, the Serbian subsidiary will produce amount of inventory that is larger than
demand for the firm and that the demand within current local markets will not increase for the
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foreseeable future.
5. Current market shares within the veneer sectors are not near full domination (>80%) and that further
market penetration is possible.
6. Chabros can self sustain for one more fiscal period on its own in order to for the change in strategy to
start taking effect.
7. Recession is short-term and economies will recover within the near future.
Alternatives
Divesture of the Lumber Mill Facility: This option will prove to be the risk free option for Chabros
to get through the financial pressure without incurring any unforeseen outcomes that other options
do not offer. By divesting the subsidiary, Chabros is essentially giving up the dichotomy
organizational structure that they have built many of their strategic policies around, as well as the
competitive advantage of being able to manufacture their own supply of lumber and veneer for the
foreseeable future. Giving a chance for other multinational competitors to potentially take up this
key strategy as one of their own after the recession ends.
Diversification into foreign Markets (Morocco): This option will prove to be risky within the
current economic state of the global economy. If done poorly then the entire entirety of Chabros may
collapse under increased financial pressure being put on by proceeding with this plan of expansion.
However, if done successfully, not only will Chabros succeed in alleviating their financial pressure
but they will also keep their competitive advantage of the dichotomy of being both manufacturer-
wholesaler, which will surely lead to greater future benefits down the road. However Morocco
proves to be the most economically stable target for expansion. Although potential conflicts with
local businesses and institutions may arise during the process, the domestic market proves to be
large enough for Chabros to satisfy their lack of demand if expansion is successful. Added on top of
that it pertains very close ties with the EU and therefore insures many of the risks involved in
choosing to expand during the recession.
Diversification into foreign Markets (Others): Similar to the previous option, this will allow
Chabros to expand into a new foreign market (Jordan or Kuwait is recommended to be looked at
with interest). However these other markets may not prove to be fruitful as most of the surrounding
MENA countries that have yet to be penetrated are either too small to be impactful on the companies
financial pressure as a whole or too economically or politically unstable to risk expanding into. With
only Kuwait and Jordan seemingly like acceptable alternatives, but even they have their detriments
when compared to the conditions that are present within Morocco.
Product Development/Market Penetration within Existing Markets: With this option it proves to be
less risky than diversification into a foreign market where all the basic foundations of a new
subsidiary needs to be setup for a period of time before operations can start running smoothly and
efficiently if proven to be successful. By focusing on currently penetrated domestic markets and
furthering development, Chabros can hope to achieve a bigger market share and extract even more
of the demand from the domestic buyers. Some risks are still involved as the efforts may still prove
to be less than optimal and result in less demand than necessary to bridge the gap between Chabros
production capacity.
Valuation Table of Alternatives
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Recommendation and Action Plan
From the analysis and from evaluating the alternatives and options presented to Chabros, it seems like
the best possible choices for the firm would be to either expand into Morocco or to divest their lumber
mill facility in order to alleviate their financial pressure. Being a tough decision between the two to
make, it should be noted the history and management preference of the company and all its past
decisions. This is a firm with a history of taking calculated risks and not backing down when confronted
with potential growth and gains if it meant taking on moderate risks, as is evident from their rapid
expansion during the early and mid 2000s within the MENA region. Therefore the key solution for
Chabros going forward would definitely be the expansion of their operations into Morocco, which
promises the most optimal expected results factoring in the risks as well as the fact that they will not
give up on their current competitive dichotomy manufacturer-wholesaler advantage that they have built
themselves within the past few years. The sunk costs of the subsidiary itself should be discarded and not
factor into the decision of the company as it currently stands going forward into the future. The
company should leverage its current competitive advantages such as their flexible employee a itudes,
which is perfect for a situation like Morocco who have strong ties with European culture, economies of
scale within the MENA region, knowledge and expertise of the veneer industry in an otherwise
unexploited “blue-ocean” domestic market with li le to few competitors. Coupled with the fact that
other multinational competitors are doing as li le as they can to stabilize and presents no threat towards
Chabros entry into the market. All of these factors culminate in the perfect environment for which
Chabros can leverage their advantages to mitigate the risks that they might face in the onset of this
global recession in order to gain back the stable financial foothold they lost prior to the start of the
economic downturn.
Recommendation Cost-Benefit Analysis
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Forecast Action Plan
References
Case File Appendices

h ps://tradingeconomics.com/jordan/corporate-tax-rate (h ps://tradingeconomics.com/jordan
/corporate-tax-rate) (Jordan, Kuwait and Saudi Arabia corporate tax rate)
h ps://www.state.gov/e/eb/rls/othr/ics/2015/241612.htm#1 (h ps://www.state.gov/e/eb/rls/othr/ics
/2015/241612.htm#1) (US Department of State report on Jordan Investment Climate 2015
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Foreign Expansion Strategy in the Middle East – JERRY'S PORTFOLIO https://jerryxyyang.wordpress.com/2018/01/02/escaping-financial-pressu...

CASE ANALYSIS, RSM490

Foreign Expansion Strategy in the Middle East

JANUARY 2, 2018MARCH 7, 2018

AN ANALYSIS OF THE IVEY CASE “CHABROS INTERNATIONAL GROUP:

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Internal and Industry Analysis

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Porters 5 Forces Model

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VRIO Analysis of Core Competencies

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External and Country Analysis

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Valuation Table of Alternatives

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Recommendation and Action Plan

Recommendation Cost-Beneﬁt Analysis

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Forecast Action Plan

Case File Appendices

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