Abstract
Global business organizations are planning to diversify and expand the business for the emerging markets. For last few years, Africa has been considered as the emerging market. So business organizations are planning get a foothold there. The country Nigeria is selected as the base station because of it good economic performance and scope for expansion in oil refinery business.
Introduction
Key Assumptions:
The business: Manufacturing tools and machineries for oil refineries
Imaginary name of the company: Oil & Gas Engineering Services Co. Ltd (OGES)
Present market: USA and European market
Emerging market: overall Africa and especially Nigeria
Cause of moving out: Over saturation in the present market and poor economy
Advantage: Business expansion and market diversification
Main challenge: Poor infrastructure and political problem
Entry strategy: agency formation and hire- purchase strategy
News Link:The assignment has taken a clue from news with the headline “Africa’s Richest Man Bets Big on Oil Refinery” published in Wall Street Journal. (http://online.wsj.com/news/articles/SB10001424052702304607104579210322347689090). The news tells that a Nigerian man Aliko Dangote, the richest man in entire Africa for last two decades is going to step in oil refinery business. The estimated investment is $9 billion for coming two years to construct the largest private refinery in Nigeria. It is expected to produce more oil compared to any African country.
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PART A Company & Industry Analysis
Company overview: In this case it is supposed that the certain organization (OGES) is a manufactures of tool and machineries, which are used in oil refinery business. The organization manufactures valves, liquid level gauges, digital flow meters, intube exchangers, electrically heated exchangers and many more equipments used in refinery facilities. Basically it is an ancillary company of oil and gas exploration and refining sector.
Industry/Sector Overview: Many big companies across the globe are present this business. Companies which are making equipments for oil and gas refineries like Armstrong Engineering Associates, Inc. John C. Ernst Co., Inc and Shangqiu Jinyuan Machinery Equipment Co Ltd. are the competitors of the business. The level of competition is fair and health. These peer organizations have an association in the form of chamber of commerce to discuss and address the sector specific problems. The company has operation in the US and European market.
Saturation in the Present Market: It is known that the US and European market is highly saturated and overcrowded. Manufactures from other areas like Chinese and Indian companies are giving tough competition in the US and European market. More over the economies of these two areas are not growing. So much so that dome countries are reporting negative figures. The problem has started in 2008 with the initiation of sub prime crisis. It is nearly six years; the problem has not been solved. It is very difficult to run a business in such a country which is not growing. Limited expansion opportunities and limited marketing scopes restrict the business to grow further. But if a business is not growing it is actually lagging behind its competitors because they are growing. So if a particular market or region is not working favorably, it is advisable to focus on other areas. Market diversification and product diversification should be the regular agendas for a successfully running business over a long period of time.
Identification of Emerging Market: But it not only diversification it wants to spread its wings in others areas as well. In this contest, Nigeria, a Sub-Saharan-African country is considered as the destination. Because the organization thinks that Africa in general and Nigeria in specific can be viewed as the emerging market. The growth of overall African economy is much better than the US and European economy. It is always advisable to bet on something which is rising or growing rather that which is facing stagnation. It has a plan to set us a base office in Lagos, the capital of Nigeria and supervise the business operation in entire sub Saharan Africa. Nigeria has been selected as the base country because it is most populous country in Africa and positioned in such a way that communication can be done with any African country. It is not the case that the manufacture is leaving the known US and European market. It will continue to operate in these regions. Side by side it is just coming out of its comfort zone and trying its hand in an emerging market.
Asian markets like China, India, or Latin American countries are also considered as Emerging markets. But Africa and especially Nigeria has been finalized because of its better than average economic growth rate and a better expansion possibilities of oil and gas refineries.
PART B Market Specific Issues, Challenges and Risks
SWOT analysis is done to explore the potential for equipment manufacturing for oil refining business in Nigeria
Strength: traditionally Nigeria is an oil reach country. According to the International energy agency, there is a huge demand supply gap exists for oil refining business in Africa. Even the installed capacities are also low compared to demand in African countries. That is why oil and gas exploration and oil refining is a growing business in Nigeria. It has already a developed oil refining business including government participation. The regulator of the participants of the petroleum sector of the country is The Nigerian National Petroleum Corporation (NNPC). It is the state oil. The organization was founded in 1977 through a merger of Federal Ministry of Mines and Steel and the Nigerian National Oil Corporation. It is expected that there will be continuing demand for oil refineries in the future. It is a simple calculation that more the oil refineries more the tools and machineries required in the sector.
Opportunity: when most of the first world countries are reporting poor Gross Domestic Product (GDP) or even running into negative GDP figure, many sub-Saharan African countries are showing good GDP figures. Especially in the case of Nigeria the GDP is hovering above 6% for last 10 years. Initially Brazil, Russia, India and China (BRIC) countries were considered as emerging markets. But a report of Goldman Sachs is putting down the BRICs idea. But the research has identified other eleven countries as emerging countries. Nigeria is the leading among them. The availability is making Africa fastest growing oil user in the world. As per the International energy agency’s expectation the oil consumption in Africa is going to surge by 30% and reach 4.5 million barrels per day by 2018. It is a 15% surge of projected oil demand.
Weakness: the ease of doing business is not at all appreciable. The infrastructure system is not up to the mark for the business development. The electricity or power supply channel is not high-quality. There are irregularities is the system. More over many investors think that the practice of corruption bringing down the business environment in the country. Environmental issues are difficult to address in Nigeria. The country rich in minerals, oil coal gold and others but mining and extraction procedure as a whole is not very environment friendly. Some precautionary measures are taken In case of legal mining the environment gets damaged. Naturally environmentalists are against it.
Threat: the biggest challenge of doing business in Nigeria is handling political uncertainties. The country has come out from the political problem few years back but it is still caring some problems in the system. There are many political and ethnic groups present in the country. Conflicts and power struggle among those groups are destroying the peaceful position of the area. Once the government, administration and law and order are not in position it is very difficult for any entrepreneur to give shape to any project. It is not at all easy for the business organization to get government permissions, sanctions or licenses on time. There are huge risks involved in it. Another continuing threat comes from technological side. If the technology gets change the company needs to upgrade its product portfolio. But if the world changed towards unconventional source of energy like solar, wind, hydro or bio diesel or at least shale gas then the survival of the company will come at a stake.
PART C Political & Economic Analysis
PESTLE Analysis Is Done To Get the Proper Picture of the Market
Oil economy and oil politics in Nigeria
Notable Economic Growth: The economic growth of Niger delta is really draws attention. Because amidst the severe global downturn, the economy has managed to maintain its GDP growth rate above 6% for last 10 years. Hardly any other country matches its potential. But Inflation is a concern for entrepreneurs. It was 12.2% in 2012, However it has eased down over 8%. As many as, 170 million people resides the country and the collective demand from the population helps the economy to grow. It is said that in Africa it is the most populous country and globally it holds the seventh position in terms population. According the projection of United Nations the population could surpass the population of United Sates and make a position in top three countries by 2050.
Availability of Oil: Oil is a natural abundance in the Niger delta and oil export earns 80% of the sovereign budget of the country. Though there are many commodities that the country exports but 95% of the export revenue comes from the oil sector only. It should be highlighted that the country in recent days exports 117 different items to 103 countries across the world but oil id the prime product. The per day oil output is 2.5 million barrel. But unfortunately it is alleged that nearly 400,000 barrels oil is shifted illegally. It is accused that this oil is supplied to ships. Pipeline and leakages are another big problem in the oil sector. While the main propeller of the country’s growth is agriculture, services, retail and wholesale trades the oil sector is facing a stagnation period. Rather the oil economy has fallen by 1%. But it is expected that as the country is expected to grow by 5%-6% a year in 2014–17 the oil sector is also expected to see good days.
Uncertainty about the Business Trend: But poor pace of structural reform is considered as a disadvantage for the nation. As of now, on an average the country and the overall oil business have been befitted by the price rise of crude oil. But researches are unable to say what will be the future trend of the business. But is it is expected that the economy has the potential to absorb another price shock if comes because the banks have learnt lessons from 2008 and are less vulnerable compared to 2008.
Another problem is change in business trend. Change of business scenario is changing everywhere and oil is no exception. With the introduction of shale gas boom in the US market the future of oil market looks fragile. At present 40% of Nigeria’s oil gets exported the US. But after changing the configuration of the energy market in US the oil sector in Niger delta will face challenge.
Petroleum Industry bill of Nigeria is the biggest concern in the global oil market. The take of the government, on the profitability of the oil business is going to change. People are eyeing at 2014 election because only after that it can get a legislative structure.
Addressing the Risk Factors: Risk factors such as financial and political risks exist in the market. To address that, one has to start the business in the new market with a good capital investment. It can be assumed that it would take time to reach the breakeven point. Apart from the regular measures political connection is very important to stem in a market like Nigeria. Before actually setting up a unit there some welcome assurance from the political leaders or from the ruling parties is required. Without active political help it is a though market there. As the power supply is highly irregular and caused lots of trouble it is advisable to maintain a strong electricity generator. Or an indigenous power plant from unconventional source can be designed to be power independent.
PART D Entry Strategy Plan
Product-Market-Growth-Matrix: Management expert Igor Ansoff’s product-market-growth-matrix can be followed to plan entry strategy. This case the aforesaid business falls under ‘market development because it is existing product going to be tries in a new market. According to the theory, the marketing manager has to identify four section of market segment and these are existing customers, competitor customers, new or potential customers and non-buying in current domain. First a detailed list has to be created to acquire information of the potential market. Then different strategies for each segment have to be planned and executed to develop the business. For existing customers a competitive offer has to be given so that they will be interested to take equipment and machineries from our company. To penetrate the market is a common technique to offer lower price compared to the market rate. This can also be followed for this company.
For the competitor customers can be tapped by showing g good performance delivered to the existing one. If the feedback is really good then chances are there the competitor customers will be convinced to take products from new company. The point can be highlighted that the existing customers are getting an edge by making us a business associate.
Business to business Advertisements and brand building is the key to success in the case of winning potential customers. They should be told and motivated to use products from us and relationship marketing can be a tool to do so.
Non buyers of these segments are not low hanging fruits. These people can be kept aside for future. As the business grows, these people can be incorporated to the mainstream. For the mean time the company should continue advertisements and brand building to hit their mind with the brand and when they decide to step in to the segment they should think of us.
Local People: To deal with a new market it is very important to get some people in the team who understand and have reasonable experience in the market. So it should be a useful strategy the local people and son of the soils should be hired in the management.
Political Connections: As the political interference is very high in Nigeria it is also maintain some people who can keep close coordination with the political leaders and administrative personnel or the decision makers on behalf of the government. The problem of getting license, sanction or permission is so tough that the richest man of Nigeria who has planned to set up the largest private oil refinery of the nation has not got clear permission. The person who has so many influential connections also has to face these problems. Then it can be imagined that how tough the situation is for a new entrant. To cam bat the situation a new participant has to have good lobby with the political parties starting from political level to top boss. Then only one can expect to get the job done.
Agency Formation: Local agency formation especially commission based direct sales agency can be a good option. These agencies are expected to know the tricks to sell tools and machineries for other organization. The expertise and experience can be useful. As these agencies will be commissioned based the establishment costs and other regular overheads can be minimized. This will not require salary or other for m of payments. Only when a sale will take place a pre agreed commission will only be shared. To motivate these agents a commission rate higher that the market rate, can be offered to them. It should be done to keep this organization a step ahead in the competitive market.
Hire- Purchase Arrangement: There is another kind of technique is in practice that is hire purchase. As per the system, the user does not need to buy the equipment from this organization. It can take lease from this organization. The user can take the machinery and start using it against monthly fees. Sometimes, it is pre decided that after few years the user will but the machinery and in some cases there is no such compulsion.
It is also a good option to tie up with any financial organization so that it can provide loans d to buy the equipment and machineries. By doing this the organization can minimize its financial liability and can shift the risk to the financial organization. This way the manufacturer can get rid of the risks involved in giving credit to the buyers and incurring loss after turning this credits to bad debts.
Another assumption is that the growing demands the widening gap between demand and installed capacity to supply will create space for a new entrant. The assumption is based on the theory of a market-specific fixed entry. The model explains that the number of exporters systematically increases with the increase of market size. This fact was reported by Eaton, Kortum, and Kramarz (2004). There is a reverse theory present in the market that is called supply creates its own demand. That means as the new facilities will be built there will be takers for those goods and services.
Conclusion and Recommendations
After an extensive the organization concluded that it is expanding its business of manufacturing equipments used in oil and gas refineries, from conventional USA and European market to an emerging market. It is known that the US and European market is highly saturated and overcrowded. Manufactures from other areas like Chinese and Indian companies are giving tough competition in the US and European market. When it comes to emerging economies, Africa at large and a sub Saharan African country Nigeria has been chosen for that. As this country is economically performing well and oil is a natural abundance here this country has been selected. Though there are many problems to run a business but there are solutions and strategies as well to address that.
When in the one sides the favourable points were good economic growth and oil abundance, simultaneously lack of infrastructure and irregular power supply were making the environment difficult to do the business. Apart from this Political uncertainty, corruption and lack of transparency is making the business vulnerable in Nigeria. The ease of doing business is also not good in other African countries. However there are solutions. Lobbying with political parties good connection with administrators and government officials may fasten the process. Agency business channels and hire purchase theory can be used to develop the business. However, a further detailed and strategic market research is recommended before actually stepping into the new country.
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