Porters Diamond Model

Factor Conditions - Moderately Good

South Africa is a middle-income country with abundant natural resources, wellestablished financial, legal, communications, energy, and transport systems, and a stock exchange that ranks among the ten largest in the world. Its economy is the largest in Africa, with strong financial and manufacturing sectors. It is a leading exporter of minerals, and tourism is a key source of foreign exchange. During the apartheid era, South Africa long afforded its white minority the opportunity to enjoy a developedcountry standard of living at the expense of its black majority. The economy was based on a system that had deprived the majority of the population of education and economic opportunities. Since the end of the apartheid in 1994, the government has made great efforts in stabilizing the economy, improving fiscal management, slimming the state sector, cutting public debt, and freeing trade while struggling to extend economic opportunities to the majority. However, the daunting economic problems from the apartheid era still remain, including widespread poverty, persistent high unemployment especially among the disadvantaged groups, and large wealth disparities.

However, South Africa presents a very desirable climate for foreign investors. The country boasts a substantial market with significant growth potential, an economy with a market orientation, logistical access to other markets in Africa, well-developed financial

institutions and capital markets, excellent communication and transport links, liberal repatriation of profits and other earnings, lower labor costs when compared to western industrialized countries (albeit with lower overall productivity), and availability of inexpensive electrical power and raw materials.

On the other hand, the scarcities of freshwater resources and highly variable hydrological conditions have led to every major river in South Africa being regulated in order to ensure adequate water supply for development. South Africas available freshwater resources are already almost fully-utilized and under stress. At the projected population growth and economic development rates, it is unlikely that the projected demand on water resources in South Africa will be sustainable. Water would be increasingly becoming the limiting resource in South Africa, and supply will become a major restriction to the future socio-economic development of the country, in terms of both the amount of water available and the quality of what is available. Therefore, the South Africa government has legislated strict environmental laws and has entered into multinational environmental agreements that require better water purification processes.

However, Most of the large international water treatment equipment vendors have offices or representation in South Africa. The use of membrane technology is yet to become the mainstream in South Africa, and there are no local membrane manufacturers. All MBR technology will be imported for the foreseeable future. ZENON will compete with the same global players in South Africa as it does in most emerging markets.

The national diamond analysis also shows a number of competitive weaknesses related to the factor (input) conditions. For example, SA is known for having highest number of HIV/AIDS patients in the world. The impact of HIV and AIDS on the population is uncertain, however it is likely that the disease will have the greatest impact on the economically active section of the population and could reduce productivity. Moreover, the lack of local MBR expertise and ZENONs company policy to just be an equipment vendor exposes ZENONs end users to a higher level of risk. The level of transparency in the South African government tendering and bidding process is a serious concern. The opportunity cost of investing time and effort in South Africa is higher compared to markets.

Demand Conditions - Increasing

There was a huge demand for fresh water across South Africa. South Africa is an arid country with only 8.6% of the rainfall available as surface water which is one of the lowest conversion ratios in the world. The scarcity of freshwater resources and highly variable hydrological conditions has led to every major river in South Africa being regulated in order to ensure adequate water supply for development. However, because of the spatial variability of water resources and the scarcity of water throughout the country, in many catchments the need for water exceeds the supply. This situation is likely to worsen as the discrepancies between water requirements and availability in other waterscarce catchments increase. At the projected population growth and economic development rates, it is unlikely that the projected demand on water resources in South Africa will be sustainable. Moreover, The South Africa government has legislated strict environmental laws and has entered into multinational environmental agreements that require better water purification processes. Still, the need for purified and sanitized water supply within South Africa is expected to grow rapidly than any other developed country. At a high level, market for filtered water can be broken down into the following segments. 1. Municipal: Drinking Water Treatment and Sewage Treatment 2. Industrial: Process Water Treatment and Effluent Treatment The Municipal and Industrial segments together, (excluding agriculture) represent 98% of the market, comprised of: Municipal (94%) Water Treatment (65%): Per capita use of water on a yearly basis is 240,000 liters/day by the urban and domestic population of South Africa, which accounts for 11% of overall water usage (S.A.WRC, 114). One quarter of this amount or 2,640,000 million liters of this water is used by tier one cities. Of this an estimated 1,8482,000 ML/year is output as sewage much of which goes untreated, representing (29%) of the water market. The Municipal market can be broken down into three tiers and into whether the membrane will be used for water or sewage treatment. Tier 1 consists of municipalities with a popula- tion that exceeds 1,000,000 people. Tier 2 consists of those cities which have between 250,000 and 1,000,000 people. Tier 3 consists of those cities with less than 250,000 people. All consumption and volume information in the following table are in liters per year.

Tier 1 Cities

Number of Total Average Water Consumption Sewage Cities Population Population Generation 8,216,161 1,643,232 394,375,728,000

% of Market

Aggregated 5 Information

276,063,009,600 78%

Tier 2 Cities

Number of Total Average Water Consumption Sewage Cities Population Population Generation 2,970,575 371,322 89,117,250,000

% of Market

Aggregated 8 Information

62,382,075,000 18%

Tier 3 Cities Number of Total Average Water Cities Population Population Consumption Aggregated 54 Information 4,032,614 74,678

Sewage Generation

% of Market

17,922,728,889 12,545,910,222 4%

Industrial (6%) In contrast, the water used by industry and manufacturing accounts for 6% of overall water usage which amounts to 69,696 ML on a yearly basis. This in turn generates an estimated 11,088 ML of industrial sewage, much of which goes untreated. The industrial segment of the market is made up of process water treatment and effluent treatment, which in turn is further made up of the type of industry that will use the product.

In addition to increased South African demand for sanitized water and the potential size of the SA market, Zenon may face some disadvantages for its volatile currency, and the exchange rate of rand and dollar.

Firm Strategy / Structure - Focused on Quality and Aggressive

Sales and Marketing

Zenon management had defined the strategy of the firm to be focused on developing world leading membrane technologies for water and wastewater treatment, selling membranes and membrane systems in all water and wastewater markets around the world, in cooperation with over 100 global partners and leading the market transition in replacing conventional technology with membranes and become the industry standard. ZENONs goal is to develop membrane systems that are cost-competitive with all other filtration technologies, while setting higher standards for water and wastewater treatment. This goal will allow ZENON to be the foremost provider of immersed membranes and membrane systems in the world.

Besides, ZENON designs, manufactures, and markets an extensive range of both standard and custom- engineered water and wastewater treatment systems. All applications stem from its core ZeeWeed membrane technology used for a wide variety of applications, including: 1. Purification of drinking water to the highest practical standards to improve public health. 2. Treatment of any type of municipal or industrial wastewater to near drinking water quality for safe 3. Discharge to waterways. 4. Reclamation of treated wastewater to alleviate water shortages (Reuse/Recycle). 5. Provision of high quality industrial feed water to improve reliability and reduce manufacturing costs.

The Sales and Marketing organization at ZENON is divided into Strategic Business Units (SBUs) and Regional Offices. Each SBU is responsible for a Product and/or Industry vertical where it works with the market in fine tuning the processes, product, and message for that vertical. The Regional Office, on the other hand, specializes in customizing that message for the local Geography and completing the sale. These sales teams are further supported by the R&D teams (who provide process and product information), and the Contract Management team (as these are big ticket items and ZENON can incur other liabilities than just financial risk).

Regionally, the Sales and Marketing team are divided into the following teams: North America (from Toronto); Latin America (Mexico to Argentina from So Paulo, Brazil),

Europe-Mid East- Africa (from England), and Asia (from Singapore). Each of these teams works in tandem with the SBU teams and reports to the VP Business Development.

For the international markets, but especially emerging markets like SA, ZENON has developed a multi- pronged sales strategy that addresses all aspects of the market. (Relationship in the MarketSelling Integrated Solutions.)
1. Education: Information about the technology and the processes is disseminated to the

Customer, their consultants, the local design firms, the Systems integrators, Aid/Donor, and the government organizations (e.g., pollution control boards). 2. Design/Engineering services: Since many of the emerging markets do not have local membrane- based design/engineering services, ZENON will provide these services to them. This is out of the ordinary for ZENON because, in mature markets, the engineering and design firms design a solution that best meets the needs of the customer (instead of what the technology vendor wants). 3. Systems Integration firms: In mature markets, such as North America and Europe, ZENONs customers request that it propose a solution and then implement it as well. ZENON has so far steered clear of taking System Integration roles in emerging markets because: a. The competitive bidding process has peculiar nuances

b. It is not well aware of the local resources needed to complete the job (such as civil, electrical wiring, etc.) c. The Financial risk is greater in not-so-transparent markets.

To overcome this, ZENON decided to license (non-exclusive) its solution to a few Engineering Procurement and Construction/Systems Integrator firms in each market. ZENON has become a supplier to these licensees. 4. Build Own Operate/Transfer (BOO/T): Operation of water plants: In mature markets, ZENON takes on the operation of the water treatment plants for a certain fee. In emerging markets, ZENON does the same but only through a licensee.

In order to enter into the South African Market depends on the decision to take an active interest in South Africa hinges on ZENONs ability to establish strong partnerships with players that share complementary goals and similar business values.

Related & Supporting Industry -

Not much information provided other than that of big growing market.

Through the analysis of the case, it could be found that the case does not mention much about any related or supporting industry that helped the Zenon Environmental, other than that of slight mentioning of a big market for growing industries in South Africa. However, South Africa is a climatically sensitive country. Most crop agriculture in South Africa takes place where it is only just climatically viable, particularly with respect to rainfall. Water is the resource most limiting to national development. Its availability now and in the future is closely linked to rainfall, temperature, management of water resources, and land use practices. Besides, the scarcity of freshwater resources and highly variable hydrological conditions has led to every major river in South Africa being regulated in order to ensure adequate water supply for development. In South Africa, the starting point of the Market is the Department of Water Affairs and Forestry (DWAF) who is in essence, the manager of South Africa natural water resources as well as the supplier of all raw water. They sell water to bulk water purchasers, who serve the needs of the major metropolitan areas they purify and treat raw water then sell and deliver it to the reservoirs of the Local Authorities. The local Water Services Authorities in turn sell the water to consumers through piping systems. This water is then returned as wastewater down the drains and sewers for sewage treatment. ZENONs goal in South Africa is to help its customers the systems integrators, be efficient in catering to their customers needs. Rand Water is by far the largest processor of water for the Local Authorities. All major city governments such as Pretoria, Johannesburg, Cape Town, Durban, etc. use the services of Rand Water to provide its residents with water. Rand Water also has the ability to provide design and build services for its cities, but when it comes to large and complex systems; it brings in consultants and systems integrators to assist it. There are a few other water processing companies, which are typically captive city/local government organizations. Not only that but also, there are many domestic and international water treatment vendors who offer products and services in South Africa. Most of the large international equipment vendors have offices or representation in South Africa.

Government Extremely Influential

The South African government and industry are interested in improving the quality of water and also conserving their water resources. But, typically, when a Customer (city/local government/industry) has a need for water treatment or sewage treatment, it would usually hire experts in this field to advise them. These experts (Water technology consultants) would understand their clients needs and suggest a series of actions to address their needs. So, The Consultant is the most influential person in the sales process. For an equipment vendor to sell their product, in addition to convincing the consultant of their technology, they will need to influence the Design firm to incorporate their technologies in their designs; comfort the systems integrators about the quality, reliability, and ease of installation of their products; convince the Operators about their products ease of operation and maintenance; show the regulatory authorities how their technol- ogy will meet or beat their benchmarks; and finally demonstrate to the financial organizations the risk- worthiness of their technology. Obviously the final decision relies on the Government of SA.

On the other hand, South Africa presents a very desirable climate for foreign investors. The country boasts a substantial market with significant growth potential, an economy with a market orientation, logistical access to other markets in Africa, well-developed financial institutions and capital markets, excellent communication and transport links, liberal repatriation of profits and other earnings, lower labor costs when compared to western industrialized countries (albeit with lower overall productivity), and availability of inexpensive electrical power and raw materials. As well, South Africas Companies Act provides for clear, transparent regulations regarding the establishment and operation of businesses. Meanwhile, the Competition Act of 1979 provides for the control over restrictive trade practices and monopolies. Yet these measures to restrict anti-competitive behavior notwithstanding, South Africa is known for rather close and intertwined relationships among business owners, which may involve cross sitting on one anothers boards. That said, South Africas tax laws and its health and safety regulations remain rather non- bureaucratic and transparent, thus offering a business-friendly environment for investors. In 2001 an inflow of US$7.3 billion resulted from large new investments by foreigners and repatriation of more than US$3 billion in overseas investments by South Africans. In 2003, FDI totaled US$820 million. The country has done relatively well in consistently attracting portfolio investment; its well-developed financial sector serves well in this regard. The only drawback can be the volatile nature currency of South Africa.