Porters Diamond Model

Factor Conditions - Moderately Good

South Africa is a middle-income country with abundant natural resources, well-
established 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 developed-
country 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 water-
scarce 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 Number of Total Average Water Sewage % of
Cities Cities Population Population Consumption Generation Market

Aggregated 5 8,216,161 1,643,232 394,375,728,000 276,063,009,60078%

Information

Tier 2 Number of Total Average Water Consumption Sewage % of

Cities Cities Population Population Generation Market

Aggregated 8 2,970,575 371,322 89,117,250,000 62,382,075,000 18%

Information

Tier 3 Cities Number of Total Average Water Sewage % of

Cities Population Population Consumption Generation Market
Aggregated 54 4,032,614 74,678 17,922,728,889 12,545,910,222 4%
Information

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.