Group 8, MW 4 PM Kevin Song David Shu Kayla Wolonsky Timothy Solichin Malea Malik Stephanie Tong
Table of Contents
EXECUTIVE BRIEF CHILE COUNTRY ANALYSIS CHILE MARKET ANALYSIS COMPANY OVERVIEW ENTRY STRATEGY RECOMMENDATIONS APPENDIX
3 4 8 11 14 17 19
As a global leader in English Language training, it is imperative that Kaplan have a strong presence in Latin America. We believe that South America has the highest potential for growth and revenue based on Kaplan’s Core Competencies. Due to the Chilean cultural emphasis on strong education and low barriers to entry, and due to Kaplan’s softwarebased teaching system, Kaplan should enter Chile as a wholly-owned, greenfield organization.
Why Latin America?
Certain nations within South America have significant economic growth as well as government stability. These key factors will allow Kaplan to penetrate the market with its experience in Brazil, Columbia, Panama, and Venezuela. We believe that the next Latin American country Kaplan should enter is Chile. Because Kaplan already has experience in South America, it can bring the knowledge it has from those markets to Chile, to work to their best advantage. Many Latin American markets are similar in many aspects, so the things that work in those markets will work in Chile, giving Kaplan an advantage over its competitors.
Chilean education expenditures have increased considerably in the last 5 years, nearly doubling from 2001 education expenses. The country has a relatively large middle and upper class, and the population is young, with almost 40% of citizens under the age of 25. A 2004 free trade agreement between the United States and Chile has fed the strong trade and interaction between the two countries, making English language learning imperative to younger generations.
While Kaplan will enter Chile as a wholly-owned institution, Kaplan will be partnering with local universities for classroom space and other tangible items, as it has done in other countries. While in Chile, Kaplan will offer ESL programs two different ways: In-class sessions with a licensed professional, and online as a form of independent study.
CHILE COUNTRY ANALYSIS
Chile is an emerging economy with high level of growth potential. Chile’s long-standing relationship with the U.S. and the government’s outlook on foreign investment will allow Kaplan, as a U.S. firm, to be welcomed into Chile in offering high quality education services. Kaplan’s various product and service offerings will provide a high level of value to Chile’s growing education industry. Not only is there great economic growth potential, but as a fast developing nation, Chile’s education industry is rapidly developing and requires the level of sophistication in education that Kaplan offers. Chile’s focus on improving its education sector through government subsidies will promote education services from private firms such as Kaplan in increasing English Learning Programs as well as Higher Education Programs. Kaplan will also find it relatively unproblematic in replicating its competitive advantage and business model in Chile which will be further discussed within the report.
45 and over
25 - 45 25 and under
Comparison Between US and Chile Education Sector
As Chile transitions into a developed nation, the global education standard has shown promising results in Chile. As Chile develops its education industry, there are similar characteristics between both Chile and the United States that will allow Kaplan to replicate its business model and competitive advantage within Chile2.
Similarities between US and Chile Education Sectors • Highly Subsidized by Government • Mandatory Requirements of Primary and Secondary Levels of Education • Highly Subsidized Public Universities • High Enrollment Participation of Primary and Secondary Level of Education
Almost 40% of the Chilean population is under the age of 25. This indicates that the nation is still a developing country leaning toward manufacturing and service industries1.
These similarities are promising for Kaplan as they will be able to bring and build Kaplan’s business model that will resemble Kaplan’s business model within the United States. Despite the subtle differences that Kaplan must initiate through adaptation, Kaplan’s strategy of entering Chile will be reinforced by the similar characteristics of the United States and Chile’s education sector.
Close Chile-U.S. Relations
Chile’s economic ties to the United States enhance the need for foreign language proficiency and boost demand for tertiary education that is aligned with international standards. The United States is both a major supplier and major market (Exhibit 1), making English vital to Chile’s business relations.
Chile has a relatively large, educated middle class, with a per capita GDP of $15,500 (2010 est.) Adult literacy is at 96%, and less than 20% of the population is disadvantaged (Exhibit 3) leaving 3), approximately 12 million people within our potential target market.
86% of Chileans live in urban areas, with 40% of the population % located in Santiago. This makes the Chilean capital an ideal launch site for Kaplan.3
National Economic Growth
Chile’s annual real GDP growth rate was -1.5% in 20094, but is 1.5% expected to be 3.4% in 2010 as Chile rebounds from the global economic downturn.4
Administrative and Economic Similarities Will Allow for a Smooth Transition into the Chilean Market
Using the CAGE analysis, it can be seen that the distance between Chile and the United States are low on all dimensions, making Chile a desirable destination for Kaplan’s ESL learning programs5.
Barriers to Entry
Chile has had a long established relationship with the United States that allows for many businesses, especially within the services industry to enter into Chile. Furthermore, the Chile-United States Free Trade Agreement extensively covers the service industry. These broad ranges of coverage will be beneficial for Kaplan as there are no administrative barriers that Kaplan faces in entering Chile. Barriers to entry in Chile for the economic sector are fairly low. However, there are still certain factors that contribute to some level of difficulty that Kaplan may face when entering into Chile7:
Language differences exist, but this feeds directly into Kaplan’s business model Very traditional society that places heavy value in education and social status Significant immigration has created a culturall and racially diverse society Prejudice based on class status is prevalent in the urban centers in which Kaplan would be entering Education in Chile is of high standards
2004's The United States-Chile FTA significantly decreased administrative distance between US and Chile Eliminates tariffs and opens markets, reduces barriers for trade in services, provides protection for intellectual property, ensures regulatory transparency, and guarantees nondiscrimination in the trade of digital products
• Weak enforcement of Intellectual Property (IP) Protection • Piracy of Kaplan Products and Software • Medium Level of Competition in ESL Programs
With the lack of strong IP protection, Kaplan will face challenges in retaining the brand’s competitive advantage, especially within the software market. Kaplan must focus on offering its services through its ESL/Education Programs rather than in the form of Kaplan software programs.
Geographic: Low 86% of Chile's population lives in urban areas6 Urbanization will allow Kaplan to quickly and effectively target a large market without concern of transportation
Economic: Low The large middle and significant upper class offers Kaplan a market income structure very similar to that of its other target markets
CHILE MARKET ANALYSIS
Chile Needs Kaplan to Act as a Leader in the Private Education and ESL Sector, Furthering Their Current Initiatives
Chile Education Spending in
10,000,000,000.00 9,000,000,000.00 8,000,000,000.00 7,000,000,000.00 6,000,000,000.00 5,000,000,000.00 4,000,000,000.00 3,000,000,000.00 2,000,000,000.00 1,000,000,000.00 0.00 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Education spending in Chile is largely privatized, with private funding making up 48% of total education spending8. This makes Chile a highly desirable market for foreign companies. Government spending on education is relatively low at 3.3% of GDP9. However, the high level of private funding makes total spending toward education 6.4% of GDP, comparable to levels reported by Mexico10. Close to 75% of the total students in Chile study in private institutions.
Projected Education Expenditure in Chile ($US)12
2011 2012 2013 2014 2015 6,863,317,613.00 7,345,698,983.00 7,861,984,043.00 8,414,555,678.00 9,005,964,254.00
Chile education Spending in US$
Only 2% of Chileans graduating from high school speak English well enough to pursue work or studies in English11. Within the 18-24 age range, around 38% of Chileans are enrolled in tertiary education. Of these students, 55% entered universities, 26% entered professional institutes, and 18% into technical training centers5. Students from the richest 40% of households make up 70.2% of student population in universities, 51.3% in professional institutes, and 45.5% in technical training centers12.
Chile’s ESL market is fragmented, with dozens of institutions vying for the patronage of higher income families. Current competitors are a mix of local and international companies; the most popular learning systems have multiple locations open within Santiago.
Wall Street Institute
Founded in 1972, Wall Street Institute has taught over 2 mi million students through its over 400 centers in 28 countries countries. Products include: TOEIC Certification Number of Locations in Chile: 17
Berlitz has more than 550 company company-owned and franchised locations in more than 70 countries. dl Since 2002, Berlitz has partnered with Chile’s University Adolfo Ibañez to teach English to its Since undergraduates. They offer discounts to alumni and progeny progeny. Products include: TOEFL Certification Number of Locations in Chile: 6
Tronwell is a dome domestic competitor which teaches through heavy use of Internet They offer Internet. classes in in-house at Tronwell facilities or off-premises, for corporate or individual purposes. English courses include Conversational English, Communicative English, and Business English. Products include: TOEFL, TOEIC, RELTA Number of Locations in Chile: 21
Instituto Chileno Norteamericano
Ad domestic company, Norteamericano is part of the Binational Institute of Culture English Culture. courses are structured for all ages, ranging from children and youth to adult learners. from Pr Products include: GMAT, GRE, TOEFL, ETAAP, USMLE, CIA, PMP, ETAAPP, Michigan Test, Study ,P Abroad opportunities Number of Locations in Chile: 9
Expanding Opportunities Worldwide
With an increasing global demand for higher education and English language training, Kaplan International has grown to be one of the largest providers of academic English language instruction worldwide. Kaplan International institutions give international students the opportunity to experience a Western-style education without leaving the comforts of home. Today, 20% of Kaplan’s total revenue comes from its international operations14.
ESL In-Class ESL Online (Independent Study) English language Study Abroad Test preparation services Financial services, business and legal training programs Undergraduate and postgraduate degrees, study abroad
While Kaplan’s financial services, business and legal training programs are highly regarded in Europe and in the Asia Pacific, the majority of Kaplan’s international locations focus on the teaching of English as a Second Language (ESL)15.
Kaplan International is the largest provider of academic English language instruction, and presents quality education in each of its markets. Its innovative use of online teaching material, coupled with human-to-human interaction, allows Kaplan to give students from all markets the same standardized, high-quality courses.
Competitive Advanta Advantages
Online ESL teaching material used worldwide
Kaplan uses online teaching systems for their ESL courses worldwide. The online materials are available in multiple languages, making it easily transferable from one country to another. The standardizati of course standardization material guarantees the same high quality teach experience across countries. high-quality
Emphasis of technology minimizes costs of human capital
Online ESL program are used for both in-class and at-home courses. This decreases the total number of ESL teachers needed for in in-class programs, lowering the cost of hiring and teaching ESL teachers.
The authenticity of the Kaplan system comes from Kaplan’s strong brand image. Kaplan’s in-person approach at marketing works well in Chile, as the culture puts a strong emphasis on brand person Chile, in choosing supplemental education programs programs.
While there are intellectual property protection problems in Chile, Kaplan’s ESL system has buil built-in safeguards against piracy. Kaplan’s lesson materials are only accessible through logging in through Kaplan’s website, and lesson classroom handouts are only relevant when paired with online content.
Chile Population Distribution
Over one-third of the Chilean population and 45% of Chile’s GDP come from its capital, Santiago16. Therefore, Kaplan will target Santiago for entry, with future plans of moving into other densely populated cities17.
Kaplan has used two different entry strategies in the past:
Santiago Valparaiso Concepcion La Serena Antofagasta Temuco
What Services to Bring
Financial services, business and legal training programs Chile does not use the US accounting method, GAAP or the US bar exams. Therefore, Kaplan’s financial and legal training programs will prove largely irrelevant to Chile. Test preparation services Demand for US standardized test preparation (SAT, ACT, etc) is low; the number of Chileans who study internationally in the USA is low. English language study abroad Kaplan currently gives Chilean students the opportunity to study English at English-speaking campuses. However, these services are run out of Kaplan’s Brazil branch. ESL in-class and online Low English fluency and increasing demand for Englishcompetent workers makes ESL the most desirable service to extend to Chile .
Partnership with Educational institutions Kaplan would use current university infrastructure for ESL classes. This is a more cost-efficient option which also allows Kaplan to have a wide reach of possible students. However, because of profit sharing with the university, this will be less profitable. Also, with the sharing of computer hardware, there is the risk of intellectual property theft from the university. Wholly owned brick-and-mortar Self-owned facilities will allow Kaplan to make more profit. Also, a Kaplanowned storefront will increase the reputation of Kaplan to Chilean consumers; companies that own property are seen as more reputable. A Greenfield operation will also be a greater investment that holds greater risk.
While Kaplan has entered other international markets through acquisition in the past, the acquisitions were focused on the entry into financial, legal and business training industries. The acquisition of an ESL education facility would not be desirable, as ESL companies are heavily defined by intellectual capital and educational learning programs. The costs of training and implementing a Kaplan-style educational program would be considerable.
Looking at 5 possible methods of entry, it is best for Kaplan to enter as a WOFE Greenfield. Although it is more expensive than the other options, due to the industry relying more on intellectual property and staff rather than facilities, the start-up costs are mitigated.
Low costs Low risk Flexible Access to market
Access to market Shared risk Quicker Complement product lines
Total control All learning No culture clash
Quicker Take out rivals Total control Market Access
Rebuilding Finding the right company Valuation/Premium Not a blank sheet Sunk costs Political risks
Trade barrier Transportation costs > margin No control of brand
Partner conflict Ownership distribution problem Finding the right partner
More expensive Slow Risks
For the Partnership with Educational Institutions options, it would be best to target Chile’s Traditional Universities, a group of partially government-funded institutions that hold the highest prestige within Chile’s domestic universities.
Of Traditional Universities that are based within Santiago, there are three choices:
Universidad de Chile18
Founded in 1842, it is the oldest educational institution in Chile. Population: 24235 undergraduate, 6086 graduate, 4128 Masters, 930 Doctorate Ranked 6th in Latin-American Universities Notable alum: 19 Chilean Presidents, Nobel Prize winners Gabriela Mistral and Pablo Neruda Facilities: 100% Wi Fi coverage and IP phone system in all the faculties and institutes; availability of video-conference/streaming
Pontificia Universidad Catolica de Chile
Founded in 1888 Ranked 3rd in Latin America19 Population: 19040 undergraduate, 3808 graduate, 96812 alum 89% of enrolled students place in top 10% percentile in country Facilities: Four campuses in Santiago, each equipped with Wi Fi coverage and computer labs
Universidad de Santiago de Chile20
Formerly known as the State Technical University, it is known today as a prestigious technical school Focuses on science, technology, and arts and humanities
We recommend that Kaplan use Option 1: Partner with : Educational Institutions. tional Kaplan has used this ed strategy in other middle income countries to great effect.
We recommend that Kaplan enter Chile as a wholly owned enterprise in the ESL market. Kaplan already possesses the capabilities to pro . properly teach English in a Spanish-speaking country, and English language programs fit best speaking with the current needs of the country.
Kaplan should use different teaching formats depending on geographic location in Santiago. These targeted geographic locations are chosen on the d basis of population density and GNI of residents. We recommend that the top two tiers of consumers be targeted, as those are the consumers who pursue university educations.
City Central and North Eastern
Kaplan’s ESL In-Class format, which utilizes online software heavily, will be Class implemented in Santiago’s City Central and North Eastern sectors. Teaching ted sessions will take place in one-on-one or small groups in a variety of difficulty one levels: Vacation English, General English, Intensive English, and Business English. Teachers for courses will be placed depending on language fluency and difficulty.
All Other Regions
University space will be used, with all educational materials found online. There are no instructors in person, but instructors will access the classroom son, through a webcam format. Kaplan ESL Online – Independent Study will be promoted through campus representatives marketing (Exhibit 4).
Kaplan’s long-term goals include starting wholly owned bri term brick-and-mortar Kaplan English centers, as well as implementing sales of Kaplan print materials. Brick-and-mortar English centers will reduce its dependence on mortar outside facilities. The intellectual property of Kaplan print materials are already ntellectual developed; Kaplan must look into the best distribution practices of print materials in Chile. A scholarship program for low low-income students should also be created in order to improve brand image.
Exhibit 1: Profitability Analysis
Assuming certain parameters, it is a realistic estimate that Kaplan can capture 1% of the ESL market from the first year of operations in Chile, with future projections of 20% market share in 5 years. Due to the low variable cost and ease of replication of both ESL courses and learning materials, Kaplan can have returns within its first year of operation. Kaplan can have $2 million net profit in its first year of operations and $35 million net profit by the end its fifth year, with the assumption of normal economic growth and 20% market share by the end of 5 years.
Projected Sales and Income for ESL online courses 2011 Market Share Sales Volume Unit price Sales Cost of operations Excluding admin and sales Gross Profit Administrative and sales Net operating Income Tax (17%) Income after tax $30 $50 FC 1% 1370 $1,200 $1,644,000 $68,500 $200,000 2012 5% 6850 $1,200 $8,220,000 $342,500 $200,000 2013 10% 13700 $1,200 $16,440,000 $685,000 $200,000 2014 15% 20550 $1,200 $24,660,000 $1,027,500 $200,000 2015 20% 27400 $1,200 $32,880,000 $1,370,000 $200,000
$268,500 $1,375,500 $41,100 $1,334,400 226848 $1,107,552.00
$542,500 $7,677,500 $205,500 $7,472,000 1270240 $6,201,760.00
$885,000 $15,555,000 $411,000 $15,144,000 2574480 $12,569,520.00
$1,227,500 $23,432,500 $616,500 $22,816,000 3878720 $18,937,280.00
$1,570,000 $31,310,000 $822,000 $30,488,000 5182960 $25,305,040.00 |20
Parameters for Profitability Analysis
Assumptions on the calculation of profitability analysis: - Only in Santiago, population of 5,883,000 - The target market is between 10-40 years of age (2,741,395) - The upper 50% of income level in Chile (1,370,697) - Only 10% have the current need and the potential ability to pay Kaplan. This is about 2.3299% of Santiago population (137,069 people) - Flat tax rate of 17% and there is no change for the next five years18 - GDP per capita is adjusted to Santiago, which produces 45% of Chile’s GDP - $19887 GDP PPP - Education spending annually on average is $ 1,272 which is about 6.4% of $19,887, assuming similar spending on half of which is spent on public institution - Chile’s Gini index of 52.4 indicates that distribution of income is very uneven. Therefore, it is assumed that the spending capability is likely to be above $1,272 - Kaplan would want $200 per person monthly and $1200 annually
Exhibit 2: Chile’s Import and Export Partners
Exhibit 3: Income Disparities in Latin American Countries, Compared to Extremity
Exhibit 4: Annual Marketing Budget
Full time marketing Staff Online and Print Materials 3*13000 39000 10,000 10,000
Incentive Plan for Campus Representatives 1-10 new students 10-30 students more than 30 students
$5 $8 $10
- The total marketing budget, $50,000, is already included in the fixed cost of Kaplan’s total budget - Kaplan will engage in lean marketing. Print advertisements and flyers will not be utilized heavily. - Kaplan should offer incentive based marketing to university educators in Chile. Teachers who could bring new students to Kaplan are given $5-$10 per new student, depending on the number of students o For up to 10 students Kaplan would pay $5 per student, for the next 50 students, $8 per student and beyond that $10 per student flat commission rate. o This type of incentives will bring each marketing representative $50/month, which is approximately 5% of their monthly income. All marketing representatives are part-time positions. - The incentive program is included in administrative and sales. - Kaplan will print basic materials for $10,000 annually for posters/ sales materials to be distributed to the region. - This technique is used by Kaplan’s JV partner in Indonesia22 |23
Census Bureau: International Data Base (IDB) - http://www.census.gov/ipc/www/idb/country.php 2http://www.usp.ac.fj/worldbank2009/frame/Documents/Publications_regional/324690CL0Human0resources0LCSHD078.pdf 3The World Bank – Urban Population (%) http://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS 4The World Bank – Chile Data http://data.worldbank.org/country/chile 5Euromonitor International GMID: Chile Consumer Trends and Lifestyles; Economy, Finance and Trade – http://www.portal.euromonitor.com/ 6http://www.nationsencyclopedia.com/economies/Americas/Chile.html 7 USTR - Chile: Foreign Barriers - http://www.ustr.gov/sites/default/files/uploads/reports/2009/NTE/asset_upload_file167_15463.pdf 8http://www.uis.unesco.org/template/pdf/EducGeneral/Factsheet07_No4_EN.pdf 9https://www.cia.gov/library/publications/the-world-factbook/geos/ci.html 10https://www.cia.gov/library/publications/the-worldfactbook/rankorder/2206rank.html?countryName=Mexico&countryCode=mx®ionCode=na&rank=76#mx 11 On the Quality of Private and Public Education: The Case of Chile’ Juan-Pedro Garces - http://www.econ.uconn.edu/Graduate/CV/JP_Chile.pdf 12The World Bank – Tertiary Education in Chile 13 World Bank staff estimates using data from the United Nations Statistics Division's Statistical Yearbook, and the UNESCO Institute for Statistics online database. http://stats.uis.unesco.org/unesco/ReportFolders/ReportFolders.aspx?IF_ActivePath=P,50&IF_Language=eng 14Kaplan Corporate Brochure 2010 15Washington Post Company 10K 16http://www.citypopulation.de/Chile-Cities.html 17http://www.ibm.com/smarterplanet/us/en/smarter_cities/article/santiago.html 18 Universidad de Chile official website: http://www.uchile.cl 19 Pontificia Universidad Catolica de Chile website: www.uc.cl/english/prospectus/html/factsandfig.html 20Universidad de Santiago de Chile: www.usach.cl 21http://www.taxrates.cc/html/chile-tax-rates.html 22Lilis Setiadi, Associate Director and Head of Sales, Schroder Investment Management (Indonesia)