Management of International Business South African Development Community - Assignment Example

Expanding into Foreign Businesses By [Student name] [Student ID] Management of International Business Presented to [Tutor Name] Plagiarism Declaration I declare that this report is my own, not copied partially or wholly from another. I have used the Harvard Referencing convention for citation and referencing. Each contribution to, and quotation in, this essay/assignment from the work(s) of other people has been attributed, and has been cited and referenced. Student Name: ____________________________________________ Signature: _____________________________________________ Date: _____________________________________________ EXECUTIVE SUMMARY This study contains the findings and analysis of the research seeking to find a solution for a real business problem. The research in management of International Business seeks to solve the problem of an international business by finding the most appropriate way for it to expand into a new market. The research contains the analysis of the business climate of the country of the business entry. The country of choice is South Africa, which is a member state of South African Development Community (South African Development Community 2012) SADC is a regional block in Africa analysed in the report giving emphasis to the policies that shape its business climate. The report gives details of the KenolKobil Group Company Limited, a Multinational Enterprise under the Petroleum Sector. It analyses the strategies and conditions that will give this company access to South Africa and operate competitively with already established companies from the oil sector. The report contains details on the Petroleum Industry that enables the placing of KenolKobil in context. Finally, it analyses the Foreign Market Entry Mode choice that would be optimal for KenolKobil to colonize a new region. The report concludes that it is possible for KenolKobil to venture into South Africa because there is a favourable business climate. The SADC block is accommodative to investment despite the competitive challenge that KenolKobil will face to establish itself in South Africa. The petroleum sector is a highly competitive one and South Africa hosts many large and well-established Oil Companies. These companies will be a lot to compete with, but following the record of accomplishment and strategies, it will be possible to compete. The Joint venture Mode is the ideal entry into South Africa. Sanol Oil is the established ideal venture partner because it has its headquarters in South Africa and has been in operation for long. The report has established that it is easier for trade within the SADC block than for a non-member state. The host country of KenolKobil is Kenya, a country outside the SADC regional block, thus the choice of Sanol Oil to counter possible problems. TABLE OF CONTENTS EXECUTIVE SUMMARY 2 Economic condition 5 Major trade and investment partners 6 Growth and potential 6 Markets, distribution and demand patterns 6 Human and Natural Resources 7 Political-economic risk 7 ANALYSIS OF THE SOUTH AFRICAN DEVELOPMENT COMMUNITY (SADC) 8 Trade and investment policy/strategy of the regional organization 9 THE KENOLKOBIL GROUP LIMITED ANALYSIS 10 International experiences and strategy 11 PETROLEUM INDUSTRY ANALYSIS 12 MODE OF ENTRY 14 JUSTIFICATION 15 Choice of Partner Company 15 CHOICE OF MODE OF ENTRY 16 RECOMMENDATIONS 17 CONCLUSIONS 17 REFERENCES 18 ANALYSIS OF THE REPUBLIC OF SOUTH AFRICA Republic of South Africa is the largest state in the SADC region at the southern end of Africa. It has a population of approximately 51 million people divided into nine provinces (Guy 1996). Economic condition The country has the largest income in the SADC region and the whole of Africa and 28th largest globally. The country ranks the fifth at per capita income in Africa (World Bank 2012) The purchasing power of the citizens, however, may be a little less than ideal because of unemployment (a scenario present all through the SADC member states and through the countries that colonized by the KenolKobil Company Limited). A quarter of the South African population is unemployed, and they live on a little below US $1.25, less than a Euro (Bloomberg, 2009.) The country has a high poverty rate coupled with a relatively low GDP per capita. Petroleum products are quite expensive, and that will mean that a significant section of the target market will not have the purchasing power. After 1994, the policies brought down inflation and made public finances more stable. This attracted foreign capital, but has not fully enabled growth (Organisation for Economic Co-operation and Development, 2012). However, economic growth picked up significantly after 2004 leading to employment and capital formation. South Africa is a tourist destination. This became even more popular after hosting the 2010 Football World Cup that put the country into the lime light and market as a tourist destination all over the world uniquely. The urban population of South Africa is about 62% of the total population (CIA World Fact, 2012) Major trade and investment partners South Africa has always been ready to trade with other countries. It is a member state of many regional and trading blocs set up to maintain international trade relations the key international out of Africa countries include China, Germany, Spain, Japan, the United States, and the United Kingdom (CIA - The World Fact book, 2012). South Africa does not highly depend on its Agricultural industry. Unlike other parts of Africa where the agricultural industry is the backbone of the economy, in South Africa, it contributes relatively low employment and even less GDP for the nation. Most of the land is arid and not suitable for farming. Growth and potential Since the end of apartheid in South Africa, the black business sector has continued to grow as the Blacks in the country are also taking up businesses and governance. South Africa is a developing country, and as it develops, there is potential for it to expand its technical needs, and in turn its fuel needs will increase. Markets, distribution and demand patterns South Africa consumes about 11.3-billion litres of petrol and 9.1-billion litres of diesel (South African Petroleum Industry Association, 2012). There is a raising demand in petrol consumption and a decrease in diesel demands. The main market is in the urban centres. Currently, just like in all the other parts of the world, the country is putting effort in using renewable sources of energy. Human and Natural Resources The size of the country and its population are a human resource. The unemployed citizens translate to available and affordable labour. The country has reserves of natural gas and coal (CIA - The World Fact book, 2012). In comparison to the rest of Southern Africa, South Africa’s infrastructure is quite developed and supportive of business. The use of the railways, roads and water transport, is quite dependable. Technological, it has relatively advanced in the region. The South Africa Host government has continually been a member of different regional and trading blocs with aims of economic and social growth and peacekeeping. It has set friendly government policies to encourage investments in the country. South Africa is an active exporter and co-ordinates with other countries to establish mutual business relationships. South Africa has Sound economic policies, favourable legal and business environment, access to markets, gateway to Africa, trade reform and strategic alliances and ease of doing business (World Bank, 2012). Political-economic risk South Africa continues to maintaining international relations and peace within the country. South Africa is ranked highly on the Ibrahim Index of Governance in Africa. It scores highly in Rule of Law, Human rights transparency, corruption and participation. It, however, does not do so well in Safety and Security. Culturally, the countries of the SADC do not differ so much Most of them are Multi-Ethnic. English is a common language for both the country of entry and the other countries hosting the company. ANALYSIS OF THE SOUTH AFRICAN DEVELOPMENT COMMUNITY (SADC) The head office of Southern African Development Community (SADC) is located in Gaborone, Botswana. It is an inter-government organization aims to advance socio-economic cooperation within the member states. SADC complements the roles of the African Union as it also fosters security and political collaboration with the member states. The member states are Angola, Botswana, Democratic Republic of Congo, Malawi, Lesotho, Mauritius, Namibia, Seychelles, Madagascar, Mozambique, Namibia, South Africa, Zambia, Tanzania, Swaziland and Zimbabwe (South African Development Community, 2012). Before the establishments of SADC, there was The Southern African Development Coordination Conference, (SADCC). From 1977, representatives of the Frontline States held consultations on the regional cooperation. In 1979, they finally met in Arusha, Tanzania and the Conference led to the establishment of SADCC in April 1980. By then there were only nine countries involved, which included, Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe (South African Development Community, 2012). SADCC had its transformation into SADC in 1992 by the nine founding members and Namibia. According to South African Development Community (2012) SADC covers many has developed since then, to become an organization that has a Programme of Action, covers extensive economic and social sectors. The different member states coordinate different sectors. Some states coordinating more than one sector (South African Petroleum Industry Association, 2012). Trade and investment policy/strategy of the regional organization Protocol governs the trade operations of the member states and the non-member states. The different agreed upon rules are to maximize the opportunity for members state to gain from each other. They also influence how other members’ trading is affected. An example is the exclusion of export and import duties within the member states for products and services (South African Development Community, 2012). The fact that KenolKobil group has already ventured into some SADC member states means that they can benefit from this trade policy. The South African Development community requires that both the member states and non-member states have to meet international standards in conducting business. The only exception is in the case that the standard conflict with their goals (South African Development Community, 2012). The member states recognize the need to involve with non-member states. They have an accommodative protocol that allows for development of cooperation with third countries or groups of third countries. They also have provisions for international organizations (South African Development Community, 2012). Advantages of being foreign investors in the region Several factors influence foreign direct investment. These factors determine how suitable a region is for foreign investment. They include the market size, the economic prospects, political stability within member states, and the entire region, the cost of good production, quality of infrastructure and availability of natural resources. The availability of scarce natural resource, however, may outweigh all the rest. Countries in this region based on the factors named have an attractive climate for investment (South African Development Community, 2012). The Community objectives tell a lot about the community the South African Development Community wishes to attain growth, improve the living conditions, alleviate poverty and assist the destitute (South African Development Community, 2012). With these objectives in mind, it means that the region is accommodative to development and will grab any opportunity that will help to achieve the goals. Some of its other goals include evolving common political values, systems and institutions, to promote and defend peace and security, to attain sustainable use of natural resources and environment conservation (South African Development Community, 2012). The community also promotes the self-sustaining development based on collective self-reliance, and the interdependence of Member States. It is necessary to note that the community seeks to have the national and regional strategies and programmes complement each other. It is also their goal to maximize the full utilization of resources. This is crucial for foreign investment. In the pursuit of these goals and more, the region has to be considering issues of infrastructure, economic development, education and training. THE KENOLKOBIL GROUP LIMITED ANALYSIS The Multinational Enterprise of choice for this module is the KenolKobil Group Limited. KenolKobil is an African based Multinational enterprise that has ventured to parts of eastern, Central and southern African. It has its head office in Kenya and operates in nine other countries including; Uganda, Tanzania, Rwanda, Zambia, Ethiopia, Burundi, Zimbabwe, Mozambique and Democratic Republic of Congo (KenolKobil, 2012) This was an enterprise of choice because it has subsidiaries in the Sothern African region, which are members of the SADC, yet it has not ventured into South Africa, the country of choice for analysis. The selection of this international corporation and the country allows for a wide scope of relevant issues to analyze. The KenolKobil Limited Company is one of Africa’s leading corporate brands, which deals in the sourcing, and marketing of petroleum. The company trades crude and refined petroleum products. These products include engine oils, lubricants, LPG, among other high-quality oils. The product list keeps expanding as the company continues to grow (KenolKobil, 2012). Resources KenolKobil Limited has built links with leading trading corporations in Middle East, Europe, The United States of America and Africa. This gives the company an exceptional edge in the petroleum market, in Africa. KenolKobil has distinguished itself from the rest of S&T players by cultivating a dependable financial base characterized by ties with first class European International Banks. These banks enable them to meet products needed by customers (KenolKobil, 2012). This means that the company can easily get financial resources to expand. The company makes use of standard marine vessels that deliver safely and in time. International experiences and strategy KenolKobil Limited, which has got its head company on Kenya, has other establishments in several member states of the SADC which the country of entry, South Africa, belongs too. These member states include Tanzania, Zambia, Zimbabwe and Democratic Republic of Congo. This gives it an edge in that the organization has operated in an economic climate similar to that of South Africa. This means that it will be easier for it to gain entry, apply earlier strategies, and predict possible trends for success. KenolKobil Limited actively sells crude and refined petroleum products. This means that they source for their own raw materials, which can provide the company with a competitive edge over its rivals who use a third party process to acquire crude oil. The company has intergraded Commercial Marketing into their business where they supply products in Fuels, K-gas and bulk to their commercial clients. They have developed a Non-Fuel Business, which is a key focus of the Group’s strategic business growth. It serves as an alternative revenue source. The non-Fuel Business incorporates marketing and sale of non-fuel based products and services that supplement the core business. This is primarily by leasing the group’s premises to fast food outlets, supermarkets, banks, vehicle tyre resellers, and pharmacies. Non Fuel Business helps the company to develop by encouraging leading brands to collaborate with the group. At the same time, the customers can comfortably get a range of supplies within a single location. KenolKobil has established itself as a reliable trading partner over time. They have an established customer base, which include governments and large private sector actors.  The company is active in Corporate Social Responsibility (CSR) activities. PETROLEUM INDUSTRY ANALYSIS KenolKobil Group Company Limited is under the petroleum industry. This industry involves the processes of exploring, extracting, refining, transporting and marketing and distribution of petroleum products. The transportation of these is by use of pipelines and oil tankers. The transportation of crude oil across continents is mostly through shipping. The final bulk products of this industry are gasoline (petrol) and fuel gas. The crude oil also known as petroleum is a raw material for other chemical products. The chemical products include pharmaceuticals, fertilizers, solvents, pesticides and plastics (Halliday, 2005) The petroleum industry is in three sections, the upstream operation, midstream operations and downstream operations. It is almost impossible for any industry to maintain its industrial civilization without making use of petroleum products. It accounts for a large percentage of the world’s energy source. Globally oil consumption is approximately c 30 billion barrels (4.8 km³) of oil per year (CIA - The World Fact book, 2012). Currently, it is a global concern that the oil reserves are running low, and every region is taking all the possible measure to use renewable energy sources. Most governments provide public subsidies to petroleum companies; giving them substantial tax breaks at the many stages of production every stage. The Middle East countries currently are the leading oil produces and enjoy a large market of crude oil that they drill. The multi-government international organization plays an immense role in deciding and setting petroleum prices and policies regarding the petroleum industry. The organizations include OPEC and OAPEC. The American Petroleum Institute (2012) divides the industry into five sectors. There is the exploration and production of petroleum or natural gas, which is under the upstream sector. Under the downstream sector are the oil tankers, refiners, retailers and consumers. Third is the pipeline then the marine and the final sector is service and supply. The Oil companies in South Africa that will be strong competitors to the KenolKobil group include BP, Caltex Oil, Total Limited, Engen Petroleum Limited, Sasol Oil and Zenex Oil. With the exception of Zenex, all are members of The South Africa Petroleum Industry Association- SAPIA (South African Petroleum Industry Association 2012). In South Africa, the government regulates the fuel prices, just as in most countries. The government regulates the petrol retail price but not the diesel retail price. The latter price then adjusts according to the Petrol price. South Africa has six refiners who import crude oil and refine it. These refiners include, Chevref owned by Chevron South Africa, Enref by Engen Petroleum, Natref, Sapref, Sasol Secunda and Petro SA. Globally, companies that would be of competition are National Oil Companies (NOC). The NOCs are in control of large oil reserves as opposed to International Oil Companies. These companies include Saudi, Qatar, Petroleum, National Iranian Oil Company, Kuwait Petroleum Corporation, Iraq National Oil Company, Petróleos de Venezuela, Abu Dhabi National Oil Company, Kuwait Petroleum Corporation, Petróleos Mexicanos, Nigerian National Petroleum Corporation, Libya NOC and Sonatrach (The Market Position of National Oil Companies, 2007) International Oil companies that have not yet ventured and may be interested in venturing into South Africa may include Chevron, Mobil ConocoPhillips and Eni. MODE OF ENTRY The report of this module is under the assumption that I have a position in the corporate strategy department of The KenolKobil Group Company Limited, which is seeking to expand further internationally. The country that The KenolKobil Group, a multinational enterprise, wishes to expand to is South Africa, which is a member state of SADC. After the analysis of South Africa, SADC and the Sector that KenolKobil operate under, the petroleum Sector then the report is able to draw proper recommendations and justification of a suitable Mode of entry of KenolKobil Company into South Africa. According to Hennart (1997) a multinational enterprise is a private institution set up to organize through employment contracts interdependence between individuals located in more than one country [sic]. A multinational enterprise (MNE) otherwise known as, a multinational corporation (MNC), or an international corporation is a corporation or business registered in various nations or that operates in more than one country. There are modes of entry into a foreign market. Different modes of entry have different degrees of risk, control, commitment of resources, and the returns they have on the investments JUSTIFICATION Choice of Partner Company There are several reasons of the choice of Sanol oil as the joint venture. First, Sanol Oil concentrates more on gas and Coal. They have their gas and coal deposits, which is their greatest specialization. (South African Petroleum Industry Association 2012) KenolKobil, on the other hand, has gas as one of its youngest product yet it has Fuel as its key product (KenolKobil 2012). The companies may, therefore, split the products they will market jointly according to their specialization. Second, choice of Sanol Oil over the other multinational companies is because KenolKobil has competed with the other companies in many countries (including its host country Kenya). In the countries that it has ventured into it has proved to have a competitive advantage over them. There would be possible predictions and even strategies already proven by KenolKobil to compete these companies in South Africa just as it has before. However, KenolKobil limited has not had a chance to operate with the Sanol as a competitor and may not have the strategy and predictions to deal with it. In addition, the two companies can collaborate in good faith because there has been no previous competition. Sanol Oil Company, being more native to South Africa, gives KenolKobil in this new partnership a competitive edge over the rest of the competitors. Secondly, it would be easier to manoeuvre through the government policies and trade logistics having a home base company as a partner. As much as KenolKobil has already ventured into a few SADC countries, it would be easier and cheaper to have a home country organization as a partner to associate even better with the SADC According to Foley (1999), the partners are compatible when their size, the resources and market power and resources are smaller comparing to their competitors. This fact applies for Sanol Oil and KenolKobil. CHOICE OF MODE OF ENTRY KenolKobil is venturing into one of Africa’s most sought after market where multinational competitors have established themselves for years. Some of the competitors have an advantage over KenolKobil in that, their headquarters are in a member state of the SADC regional block. KenolKobil has its head office in a non-member state, Kenya. This means that there is a limited market entry and high-risk involved. The main objectives of Joint venture normally include, enabling entry into a new market, to lessen the risks involved and increase chances of Rewards. For KenolKobil to have the best chances to keep making profits, maintaining its high regard and succeeding in this new market is by having a joint venture. Also, it would be expedient to have this type of entry so that the two companies can share technology between them. The two will also have joint product development. Most important, for KenolKobil, is the need to conform to regional and country government and trade policies. Alone there would be so many technicalities. Joint Venture entry mode will allow the company to have a distributed channel access. The partners are also able to scope a wider market. Another benefit that KenolKobil will enjoy through this mode of entry is political connections. RECOMMENDATIONS After careful research analysis of the entry methods into a foreign market, the country of entry, South Africa, the region block SADC, the petroleum Industry and the company KenolKobil, my Mode of entry of choice is Joint Venture. It is my recommendation that the KenolKobil Company Limited gains entry to South Africa by having a joint venture with another South African company in the same industry. CONCLUSIONS The South African venture of choice is Sanol Oil, which is so much of a National Oil company than a multinational company. The joint venture may experience a few problems that are common with partnerships. To prevent problems proper and well-documented contracts will be made to define a clear pathway. Issues like length of contract and the cost and profit sharing will be clearly defined before hand, Conflict over asymmetric new investments REFERENCES American Petroleum Institute 2012, Industry Sectors, viewed on 26 November 2012, Bloomberg 2009, South Africa's Unemployment Rate Increases to 23.5%., viewed on 26 November 2012, CIA - The World Fact book (2012), Country comparison - oil consumption, viewed on 25 November 2012, Foley, J (1999), The Global Entrepreneur: taking your business international Age, Dearborn. Guy, A 1996, Lesotho: Year in review, viewed on 26 November 2012, Halliday, F (2005), the Middle East in international relations: power and ideology. Cambridge University Press, USA. Hennart, JF and Reddy S 1997, ‘The choice between mergers/acquisitions and Joint ventures of Japanese investors in the united states’, Strategic management Journal, Vol 18, pp 1-2. KenolKobil 2012, About KenolKobil viewed on 26 November 2012, Organisation for Economic Co-operation and Development 2012, Economic Assessment of South Africa 2008: Achieving Accelerated and Shared Growth for South Africa, viewed on 26 November 2012 South African Development Community 2012, the South African development community, viewed on 26 November 2012, < http://www.sadc.int/> South African Petroleum Industry Association 2012, South African fuel industry, viewed on 26 November 2012, The Market Position of National Oil Companies 2007, The Role of National Oil Companies in the International Oil Market. , viewed on 26 November 2012, World bank 2012, World Bank annual Report; Data.worldbank.org. viewed on 26 November 2012, < http://www.worldbank.org/> Read More