A Work Project, presented as a part of the requirements for the award of Masters Degree in Management from the NOVA – School of Business and Economics
EXPANSION PROCESS OF SKYPRO FOOTWEAR TO THE
RUSSIAN MARKET
OLGA DRYUCHENKO Nº2616
EXHIBITS
A project carried out on the SME Competitiveness: Internationalization Strategy Field Lab, under the supervision of:
PROFESSOR SÓNIA DAHAB
Table of Exhibits
Exhibit 1 – Skypro’s footwear characteristics ... 3
Exhibit 2 -Distribution of Skypro sales by geography and market segment ... 3
Exhibit 3 - Skypro’s Organization Resource Platform ... 4
Exhibit 4 – VRIO framework analysis ... 5
Exhibit 5 - Value Chain ... 6
Exhibit 6– Criteria for Russian Market Attractiveness ... 8
Exhibit 7 - PESTLE framework analysis ... 9
Exhibit 8 - Top 15 Russian Airlines ... 11
Exhibit 9 - Estimation of number of pilots and cabin crews of the companies with more than 1% market share ... 12
Exhibit 10 - TOWS Analysis ... 13
Exhibit 11 - 4M’s analysis – Memo ... 15
Exhibit 12 - Estimation of the costs of participation in Obuv’ Mir Kozhy fair ... 15
3
Exhibit 1
–
Skypro
’s
footwear characteristics
Exhibit 2
-
Distribution of Skypro sales by geography and market segment
10%
14%
77%
Sales Jan- Jun 2016 by geographic market
National Market Comunity countries (PALOP) Extra comunity countries
97% 3.4%
Sales Jan-Jun 2016 distribution by market segment
4
Exhibit 3
-
Skypro’s
Organization Resource Platform
Competences Specialized Assets Architecture of relationships
Know-how of footwear making:
Skypro operates in one of the 3 countries with the biggest know-how in footwear making and with long centuries tradition
of shoe crafting.
Reputation and brand image:
Skypro holds several awards and supplies its product to worldwide recognized airlines, such as Etihad. It has a long list
of clients who trust their crew’s comfort
to Skypro.
Important network of partners:
Skypro possesses a large network of institutional partners which assist in product improvement and quality control.
R&D skills and in house design:
The firm researches and develops in-house the footwear latest comfort
features.
Unique technologies:
Unique technologies and innovative materials are used in order to make
outstanding comfort footwear.
Large international network:
Skypro has innumerous business partners who promote the brand and the product.
CRM:
The relationship with the clients is carefully taken care of, and it extends
from the initial contact to after sales services, resulting in a long lasting relationship via specialized channels.
Bimodal operations:
Company’s sales streams come from
direct contracts with corporate clients but also via on-line shop, which extends the
potential clients’ number.
Direct access to raw materials:
A large list of suppliers enables the company to rapidly assess the necessary inputs for products with the best quality.
Change management:
The company effectively adjusts its self to the needs of the market and performs the
necessary corporate changes in order to secure the success of the business.
Quality control:
Five steps quality control if performed in every stage of production which is scrutinized until the product is assembled
5 Key:
V– Valuable
R - Rare
I– Imperfectly imitable
O– Organizationally embedded
Exhibit 4
–
VRIO framework analysis
Resources/ Capabilities V R I O
R&D skills and in-house design: Yes - - -
Competitive Parity
Change management: Yes - - -
Direct access to raw materials: Yes - - -
Bimodal operations: Yes - - -
CRM: Yes Yes - -
Temporary Advantage
Quality control: Yes Yes - -
Large international network: Yes Yes - -
Important network of partners: Yes Yes - -
Reputation and brand image: Yes Yes - -
Know-how of footwear making: Yes Yes Yes -
Unused Competitive
Advantage
6
Exhibit 5 -
Value Chain
All the following calculations of the value chain were performed using the accumulated balance sheet updated up to the second half of 2016, courteously provided by Skypro. The correspondent items were distributed by each of the components of the value chain and their totals were divided by the revenues in order to determine their percentage weight. The next page contains the detailed information about all the items included in each primary and support activity. All the calculations were made in euros.
Hence, the value chain turned up to be the following:
SUPPORT ACTIVITIES
PRIMARY ACTIVITIES
Inbound Logistics
1%
Firm infrastructure – 4%
Human Resources Management – 0.69% Technology – 2%
Procurement – 1% MARGIN
19,28% Marketing
& Sales 5,3% Outbound
Logistics 2% Operations
64,4%
7 Inbound logistics
Other rents 456.00
HR logistics and
operations 17123.29
Total 17,579.29€
% 0.9%
Firm Infrastructure
Electricity and water 411.02
Bank expenses 1,718.98
Management and accounting 3,600.00
Headquarters rent 2,690.10
Oeiras' office rent 9,000.00
Technological support services 2,119.98 HR general management and
finance 32,024.47
Medicine, health and safety at work
60.00
Tools and utensils 6,347.70
Office supplies 1,272.76
Comission on Explorer 15,000.00 Comission on Explorer
transaction 4,999.98
Cleaning 282.77
Total 79,527.76
% 4.0%
Operations
CMVMC 1,292,775.64
Total 1,292,775.64
% 64.6%
Outbound Logistics
Fuel 2,564.99
Transport of goods 31,563.87
Tolls 983.65
Packaging material 3,853.28
Total 38,965.79
% 1.95%
Marketing and Sales
Marketing 6,112.66
Marketing 3,231.00
Marketing 9,343.66
Events and Fairs 14,319.65
Advertising 5,294.48
Propaganda 405.00
Other Adds 4,139.48
Travel outside national
territory 15,987.77
Travel- hotels 163.00
Roads 174.00
HR Marketing and
commercial 43997.7063
Skypro communication 11,687.40
Total 105,512.15
% 5.3%
HRM
HR 6,797.031
Bonuses and Commisions 414.06
Other remunerations 1,304.51
Allowances 2,399.57
Insurances for accidents at work and illness
602.16
Other HR costs 2,384.77
Total 13,902.10
% 1%
Service
HR customer assistant 5927.8
Total 5927.8
% 0.00296
Technology
Chemical experiments for product
development 942.99
IDT 14,375.53
HR IDT 24,711.13
Total 40,029.65
% 2.00%
Procurement
Trips and accomodation 18,439.04
Total 18,439.04
Exhibit 6
–
Criteria for Russian Market Attractiveness
Criteria Indicator Unit Year Source Result
Market size Number of pilots and flight attendants, estimated1 people 2016 Annual Reports of the Airlines
36 322 estimated
Market growth rate Real GDP growth rate
% The World Bank: GDP
growth (annual %)
1.4% estimated 2017
Country Economic
Freedom Rating
Index of Economic Freedom Overall risk score in
points
2016 Heritage Foundation –
Ranking
50.6
Market receptivity
to imports
Imports of goods and services percentage of GDP (Imports of goods and services represent the value of all goods and other
market services received from the rest of the world)
% 2015 The World Bank:
Imports of goods and
services (% of GDP)
21.2%
Trade (% of GDP) Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product
% 2015 The World Bank: Trade
(% of GDP)
40.3%
Country Risk
Rating
Country Risk Indicator Scale
A1,A2,A3,A4,B,C,D
2015 Country Risks
Assessment
C
1Estimation was based on the assumption that Skypro’s targets largely recognized Airlines with a fleet of 30 and more airplanes. Hence, some of the bottom 10 Airlines from exhibit X were
Exhibit 7
- PESTLE framework analysis
Political The recent events involving Russia and Ukraine had a strong effect on foreign
business. The sanctions upon the country turned it towards the domestic market due to
the prevention of trade with an ensemble of partner countries. As an effect on the airline
industry, the number of domestic flights increased due to the refusal of the Russian
flights by international partners. It also boosted ever further the protectionism of the
market and the burden of the taxes and legal procedures towards foreign importers.
Hence, the competition tightened and the domestic businesses was taken as priority.
Moreover, the scale of the country gives space to arbitrary decision making performed
by regional authorities and brings extra barriers to business establishment and
negotiation.
Furthermore, a globally negative image of the country is still representing a political
risk for the new coming businesses.
Economic The steep drop in the GDP and the devaluation of the currency are mirrors of the
downstate of the local economy. However, at the same time, Russia is already
receiving and still in title to receive foreign investment, especially in the aviation
sector, including investments in the refurbishing of existing airports and construction
of new ones.
Social In social terms, the income distribution among the population is quite uneven which
makes the difference between low and high income families quite significant.
Furthermore, there is a noticeable language barrier, since the majority do not speak
English, which hardens the task of establishing business relationships, especially in
distant regions.
However, foreign products are often socially perceived as quality products and people
10
Technological In what concerns to the technological environment, Russia is indeed a very developed
country. It often engages in the newest production techniques in the most different
areas. Furthermore, in what respects to the social use of the new technologies, the
country accompanies the pace of the world, registering a steep increase among the
social media users.
Legal Doing business with Russia in the footwear market may be quite difficult due to long
bureaucratic procedures, a complex system for necessary documents and safety
certificates approval and also additional import taxes. The trade convention applies a
combined tax, which amount depends on the model and also determines specific
packaging requirements.
Furthermore, corruption and local laws should not be disregarded.
Environmental The environmental outlook of Russia comprises severe air and water pollution,
specifically due to the heavy metallurgical industries. However, nowadays the country
is also a part of Kyoto Protocol and canalizes its efforts towards the reduction of
11
Exhibit 8 -
Top 15 Russian Airlines
Rank Airlines Number of seats % of market share
1 Aeroflot 948.158 41.4%
2 Transaero Airlines 315.115 13.8%
3 S7 Airlines 314.994 13.8%
4 Ural Airlines 192.648 8.4%
5 UTair Aviation 162.319 7.1%
6 Pobeda 97.520 4.3%
7 Yamal Airlines 40.804 1.8%
8 NordStar Airlines 30.631 1.3%
9 Nordavia 28.666 1.3%
10 Yakutia Airlines 27.988 1.2%
11 Orenair 20.992 0.9%
12 RusLine 20.800 0.9%
13 Alrosa Mirny Air Enterprise 16.027 0.7%
14 Saratov Airlines 14.972 0.7%
15 Grozny Avia 9.120 0.4%
12
Exhibit 9 -
Estimation of number of pilots and cabin crews of the companies
with more than 1% market share
2 Data from 6M 2016 after new purchases and also the joining of the fleet of Transaero
3 Enlarged number of employees after new hiring in 2016 and also after reemployment of Transaero employees. Numbers
based on calculations out of total number of employees.
4 Data that refers to the total number of employees, since there was no possibility to have more exact data. 5 Data that refers to the total number of employees, since there was no possibility to have more exact data. 6 This number refers only to airplanes, and excludes the number of helicopters
7 Data updated up to 2012
Company Active fleet Number of pilots and crews
Aeroflot 257 2 18 400 + 3 600 + 550+2030+740 3
S7 Airlines 45 2 7524
Ural Airlines 37 2 2605
Utair Aviation 896 60007
Yamal Airlines 26 -
NordStar Airlines 15 -
Nordavia 9 -
Yakutia Airlines 12 -
13
Exhibit 10 -
TOWS Analysis
Having in mind the SWOT analysis, it is possible to formulate four different strategies for Skypro to maximize its strength and opportunities and minimize its weaknesses and threats:
(I) Maxi-Maxi strategy (use strengths to maximize opportunities):
S6+O3+O4 Use the new tendencies in social networks and on line shopping in order to communicate differently and reach more B2C customers, responding to the need for comfort footwear, also increasing the revenues. Make a stake on e-marketing and advertising in order to spread the word about Skypro, built upon a differentiated and customized product.
S3+S9+S6+O1+RO3+RO5 Participate in fairs in Moscow and capitalize the existent portfolio of clients in order to attract new customers in latent industries. Use the partnership with LSG Sky Chefs in order to acquire credibility. This strategy will most probably require new
investments in the customization of the product which will also mobilize the existent partnerships in the area of R&D. Hence, Skypro will be able to meet competition with advanced design technology.
RO1+S2+S1+S4 Increase revenues by penetrating the Russian market and exploring its potential by using the best know-how in shoes, its inherent quality and the brand “Made in
Portugal”. Use the low fixed costs in order to rapidly expand the production and create
economies of scale by ordering more from the suppliers and achieving a lower price.
(II) Mini-Mini strategy (overcome weaknesses and cope with threats):
W3+T1+T2+T3 Protect the design technologies by patenting it, thus overcoming the new entrants threat and also stating the differentiation towards substitute products.
14
RT7+RT6+RT5 Overcome the bargaining power of the clients by establishing contracts of supply with the local companies which hold the stake to supply each airline. This will also neutralize the lack of trust in Skypro by the new clients.
(III) Mini-Maxi strategy: (use strength to minimize threats)
RT2+S4 When deciding to enter the Russian market, choose to supply only the footwear, disregarding the uniforms and accessories segments, in order to avoid competition on fields with poor competitive advantage. This will also diminish the tax impact which will be charged on only one category of product. This could be pilot strategy in order to understand whether the market is receptive to additional product categories.
(IV) Maxi-Mini strategy (boost the opportunities by minimizing the weaknesses):
15
Exhibit 11 -
4M’s analysis –
Memo
Objectives Target Initiative Measurement
Financial -Increase revenues;
-Incremental increase in sales of 20%
-Supply contract with Aeroflot
-The volume of the contract with Aeroflot
Customer
-Reach new B2B customers;
-Increase awareness among the B2C customers in the new market;
-Start
negotiations with at least one more airline;
- Reach 500.000 of potential B2C customers
-Participate in fairs; -Present the company through
advertisement in airports and social media
-Increase in number of Russian visitors on the web-site and Facebook
Internal
-Take another step towards being the most valuable specialized
footwear supplier;
-85% satisfied air crews among Aeroflot airline
- Provide the best service and the best product;
-Feedback from Aeroflot crews by
means of
questionnaires
Learning
-Improvement of the design of the product;
-Penetration of latent industries in Russia;
-Accomplish at least 2 new models suitable for the new market weather; - Find at least one other industry where Skypro footwear is needed;
-Engage in new materials and models construction with CTCP;
-Assign a responsible person to collect information about latent industries to be penetrated in Russia;
- Volume of sales of the new models; -Number of contacts and meetings with companies out of the airline industry;
Exhibit 12 -
Estimation of the costs of participation in
Obuv’ Mir Kozhy
fair
Requirements Estimated costs for 3 days
Rent of the exhibition area 2000€ including the participation fee
Advertising services
1500€ includes outdoors, advertising on plasma
panels, on e-tickets and also licenses for advertising
Rent of presentation equipment 150€ includes sound and video projection equipment
16
Exhibit 13 -
Financial Projections
Normal Scenario:
In order to calculate the outcome of the normal scenario it was assumed that in the first year of partnership, Skypro is going to supply Aeroflot with 4 different models of men and women footwear and with only one pair of footwear during the following years. Women will be supplied with one high-heel model and one medium-heel and men are going to receive only two pairs from the collection.
Hence, it is considered that Skypro is not going to benefit from any B2C sales, and the incremental revenues correspond only to the contract with Aeroflot. As the mother company, Aeroflot employs 60% of the cabin crews and pilots. The assumptions for the calculations are the following:
Assumptions
Reach 60% of all the crews and pilots 15 192
Unit price per pair 55.00€ and 65.00€
80% Women and 20% Men 12 153 and 3 038 people respectively
Cost of capital of Skypro 8%
Incremental Cash Flows and NPV from the project
BENEFITS 2018 2019 2020 2021
Sales B2B 1,731,770 € 865,885 € 865,885 € 865,885 € Other Sales (B2C) - € - € - € - €
COSTS
COGS 724,339 € 419,907.03 € 419,907.03 € 419,907.03 €
Incremental Expenses8 56,800 € 39,000 € 39,000 € 39,000 €
Total Costs 781,139 € 458,907.03 € 458,907.03 € 458,907.03 €
Incremental cash-flow from the project 950,630.65 € 406,977.97 € 406,977.97 € 406,977.97 € Incremental NVP of the project
(discounted at 8%) 2 290 858.171 – 1 087 572.048 = 1 203 286.123 €
8The incremental expenses include the transportation costs estimated with UPS), the import duty to Russian Federation,
17
Hence, according to this scenario, Skypro is going to sell a total of ± 106 000 pairs of footwear. The forecasted Net Present Value of the project is 1 203 286€. Nevertheless, one must pay special attention to import duties to Russian Federation (5.2%). Hence, the import duty of ± 60 000 pairs (supplied in the 1st year) accounts for more than 35 000€ of total incremental costs. The sales tax is not considered in the calculation since the products are not going to be directly retailed. As it was already mentioned before, the import taxes are one substantial burden when making business in the Russian market.
Optimistic Scenario:
In this scenario it is assumed that Skypro is not going to sell just to Aeroflot mother company, but also to one of its subsidiaries (LLC Rossiya Airlines, which accounts for
12.3% of the total headcount of pilots and crews) and to newly acquired B2C clients. Furthermore, all the supplied female crews will receive one extra pair of specialized winter footwear and male crews will receive one regular and one specialized model. It is also assumed that along the four years of the project 2000 pairs are going to be sold to B2C, at the average cost of 110€ (± 6500 RUB), with an average production cost of 30.00€ (increase in 4.42€) due to a sophistication of the models.
Assumptions
Reach B2C clients and other airline from Aeroflot group 2000 + 3114
Average unit price per pair (B2C) 110€
Average production price per pair (B2C) 30.00 €
Average unit price per new specialized model (B2B) 62.00€ and 73.00€
Production price per specialized model (B2B) 28.05€ and 42.00€
18
Incremental Cash Flows and NPV from the project – Optimistic Scenario
BENEFITS 2018 2019 2020 2021
Sales B2B 3,029,458 € 1,045,920 € 1,045,920 € 1,045,920 € Other Sales (B2C) 55,000 € 55,000 € 55,000 € 55,000 €
Total benefits 3,084,458€ 1,100,920€ 1,100,920€ 1,100,920€
COSTS
COGS 1,455,465 € 552,469.20 € 552,469.20 € 552,469.20 €
Incremental Expenses 109,300 € 24,500 € 24,500 € 24,500 € Total Costs 1,564,765 € 576,969.20 € 576,969.20 € 576,969.20 € Incremental cash-flow from the project 1,519,692.73 € 523,950.80 € 523,950.80 € 523,950.80 €
Incremental NPV of the project 3 729 925.42 – 1 906 873.235 = 1 823 052.185 €
Hence, according to this scenario Skypro is going to commercialize roughly 146 000 pairs of footwear during the four years. The final NPV of this scenario is 1 832 052€.
Pessimistic Scenario:
According to the assumptions used to calculate the pessimistic scenario, Skypro is going to only supply Aeroflot mother company with one pair of footwear along all the four years of the project. Overall, the company will commercialize ± 60 000 pairs. This circumstances are highly unlike to happen, however, the NPV would still be positive even under the described conditions.
Incremental Cash Flows and NPV from the project
BENEFITS 2018 2019 2020 2021
Sales B2B 865,885 € 865,885 € 865,885 € 865,885 €
Other Sales (B2C) - € - € - € - €
COSTS
COGS 419,907.03 € 419,907.03 € 419,907.03 € 419,907.03 €
Incremental Expenses 19,550 € 19,500 € 19,550 € 19,550 € Total Costs 439,457.03 € 439,457.03 € 439,457.03 € 439,457.03 €
Incremental cash-flow from the project 426,427.97 € 426,427.97 € 426,427.97 € 426,427.97 €
