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

January 2017

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

Exhibit 13 - Financial Projections ........................................................................................... 16

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

B2B B2C

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

with perfection.

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 Unique technologies: Yes Yes - Yes

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%

Service

0,003%

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

% 1%

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

1 Estimation 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 excluded taking into consideration that Aeroflot reemployed part of Transaero employees and it is also integrating Pobeda in the group. Other airlines information was not available.

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

are willing to pay more for them, on order to guarantee the quality and durability.

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

greenhouse effect.

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%

Source: CAPA – Centre for Aviation

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 -

Total 490 36 332

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.

RT1+RT2 Objectively evaluate the economic situation of the target country and postpone the

entrance to the Russian market until stabilization and relief of the current entry barriers.

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):

S6+RT4+T4 Make an extra effort in the customization field and start by offering the product

in the B2C segment, in order to take advantage of the willingness to spend more for comfort

footwear. This strategy will overcome the low-cost product dominance competing in quality

and avoid the bargaining power of B2C clients by presenting a new product which fulfils their

needs.

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

Cleaning services 450.00€ - 13.00€ x 35 sq meters of exhibition area

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 €

8 The incremental expenses include the transportation costs estimated with UPS), the import duty to Russian Federation,

the promotion cost and other costs discriminated in the 4M’s model.

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€

Rossiya Airlines ratio: 80% Women and 20% Men 2491 and 662 people respectively

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 €

Incremental NVP of the project 636 451.32 € – 323 014.036 € = 313 437. 29 €