in Nigeriain Nigeria

Submitted to: Submitted to:

Prof. Sanjay GuptaProf. Sanjay Gupta

Submission Date: 07/09/2012Submission Date: 07/09/2012

Submitted By:Submitted By:

Dadhich Bhatt (20121017) Dadhich Bhatt (20121017)

SPM PGP-12 Batch SPM PGP-12 Batch

TABLE OF CONTENTS

1. MEMO……………………………………………………………………………………………………………………….3

2. ABBREVIATION…………………………………………………………………………………………………………4

3. EXECUTIVE SUMMARY…………………………………………..…………………………………………………..5

4. SITUATIONAL ANALYSIS…………………………………………………………………………………………….5

5. PROBLEM STATEMENT………..…………………………………………………………………………………….6

6. STATEMENT OF OPTIONS……..…………………………………………………………………………………...6

7. CRITERIA FOR EVALUATION.....…………………………………………………………………………………..6

8. EVALUATION OF OPTIONS………………………………………………...……………………………….………7

9. RECOMMENDATIONS…………………………………………………………………………………………………9

10. PLAN OF ACTION………..……………………………………………………………………………………………...9

11. EXHIBIT-1............................................................................................................................................................10

12. EXHIBIT-2............................................................................................................................................................12

13. REFERENCES......................................................................................................................................................13

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To: Mr. David Larson

From: Mr. Dadhich Bhatt

Date: January 6, 2004

Subject: Detail analysis report on future course of action for business operation of Larson Inc. in Nigeria.

As detail analysis required regarding Nigerian business environment to take decision about Nigerian subsidiary, this analysis contains feasibility study and evaluation of possible options against defined criteria.

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Abbreviation

NIPC – Nigerian Investment Promotion Commission

FDI – Foreign Direct Investment

CAGR – Compound Annual Growth Rate

EBU – Existing Business Unit

JV – Joint Venture

SWOT Analysis – Strength, Weakness, Opportunity and threat analysis

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Executive Summary:

Nigeria is suffering from corruption, inadequate infrastructure and weak leadership hence business viability is at question. If company can change its strategy by increasing exports as government is promoting exports and targeting big private players for sales then it can increase profitability, growth and reputation which are the basic criteria, alternatively company should wind up business from Nigeria and reinvest in EBU or open subsidiary in other country. By analysis, it is recommended that company should continue with its Nigerian subsidiary because Nigerian government is trying to make economic reforms through attractive policies, hence future prospects of Nigeria is good in which company can enjoy the growth if it goes with proper strategic road map.

[Total Words: 115]

Situation Analysis:

Every country has its own business environment, while undertaking a business in a particular country organization has to consider all the external and internal as well as macro and microeconomic factors, which are likely to contribute to the success or failure of the business. Nigeria, having a diversified social structure and complex business environment, also poses many merits and demerits for organizations. Thus, a SWOT analysis becomes an essential step to understand the business environment of Nigeria (see Exhibit: 1). We can infer from the SWOT analysis that “Nigeria possesses great potential of becoming the world’s largest economy by exploiting the unexploited resources, undertaking the ignored business ventures, and making lucrative policies for foreign players, however, the country has, unfortunately, suffered by mismanagement, corruption, inadequate infrastructure and weak leadership. Nigerian government is putting efforts to provide investor friendly environment in Nigeria, hence it has been seen that investors are taking interest in Nigeria to set up business. (See Exhibit: 1, strength * & fig-2)”

Annual sales revenue of Nigerian subsidiary contributes 4.80% of total worldwide Larson’s sales revenue, if this high rate of inflation will persist then sales revenue will decline as per the exhibit 2 and other negative factors like: policies, repatriation of capital, retention of expatriate also affect the sales revenue of the firm. (See Exhibit-2)

Also the major customer is the government of Nigeria, out of total revenue it contributes to 87.5% of revenue, and company is facing serious delay from obtaining payments from government so liquid cash flow of company is declining.

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35

37

39

41

43

45

47Sales revenue of Nigerian subsidiary of Larson Inc.

2003 2004 2005 2006

Years

U

S D

olla

r in

Mill

ion

Figure 1

Problem Statement:

Should Larson Inc. continue its business operation in Nigeria with the strategic roadmap or wind up business in Nigeria?

Statement of options:

1. Make strategic roadmap to grow in Nigerian market.

Larson inc. should make collaboration with other local firms, so that share of local ownership will increase and local firms will help company in various business aspects in Nigeria, also company should change his marketing strategy.

2. Wind up business in Nigeria.

Company should wind up business in Nigeria and invest either in existing business operations or make JV in another country with proper strategic roadmap.

Criteria for evaluation:

1. Profitability2. Future growth3. Reputation

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Evaluations of options:

1. Make strategic roadmap to grow in Nigerian market.

o Profitability:

As per exhibit- 2 if we assume steady deterioration of naira and this inflation rate continues in future then sales revenue will decrease by 13.71% in 2006. However Nigerian government is trying to create investor friendly environment by various means, for example: two laws, the NIPC Act 16 and the Foreign Exchange (Monitoring and Miscellaneous Provision) Act 17, both of which were enacted in 1995, due to which FDI in each sector is growing since 1995 as per the figure-2.

CAGR = (Ending Value / beginning value) ^ (1/no of years) -1 = (23853511.9 / 11316712.7) ^ (1/9) -1 1

= 8.63 %

CAGR of Nigeria from 1994 to 2003 is around 8.63%, which should be considered good.Hence if company will make collaboration with local firms, they provide help in recruitment of good quality local staff, make better relationship with government, provide help to diversify target market etc., by means of which company can increase its profit in following years.

Source: Central Bank of Nigeria – Statistical Bulletin Dec. 2001

Figure 2

1 World Bank, World Integrated Trade Solution database

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o Future growth:

We have seen that though at a slow rate, government is continuously trying to encourage foreign players to invest in Nigeria and trying to provide better and competitive environment. Company should diversify its segment market by increasing exports and sales revenue through private players. As per the figure – 3, Nigeria’s exports are extremely concentrated on three major products i.e. oil, gas and agriculture hence Nigerian government is providing export promotion policies2 to diversify its exports so if company will take advantage of these policies along with coastal locations of Nigeria, then sales revenue from export will increase gradually.

Nigeria Ghana Cameroon0

20

40

60

80

100

120

Nigeria’s exports are extremely concentrated, even incomparison to other resource-dependent nations (1994-2003)

Per

cen

tage

Source: United Nations Comtrade database. CAS Code: 24s1

Figure 3

o Reputation:

As per the SWOT analysis done in exhibit-2, there are many challenges for foreign players in Nigeria for doing business and if a company can sustain and grow in this environment then it will raise trust of share holders, creditors, banks, suppliers and customers toward the management of a company which can lead to easy cash flow in company and also increase the market price and so market capital of the company.

2 IMF, “Nigeria: Selected Issues and Statistical Appendix, August 2003

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2. Wind up business in Nigeria.

o Profitability: If company will wind up business from Nigerian market then it will have two options to deal with the amount which it will get from divestment.

I. Invest in either one or more EBU depending on their CAGR.II. Make JV with other firms in other country after carrying out techno-

economic feasibility study to expand business territory.In first case, as company is going to invest in EBU which required more investment or invest depending upon CAGR, it will definitely provide high return to the company.

o Future growth:

As said above, if company will invest in EBU, then definitely that unit will grow in terms of volume, sales revenue and in other financial terms or if company will open subsidiary in some other country then also company will make growth towards globalization.

o Reputation:

As per the figure-2, FDI in Nigeria since 1995 is growing so in this case company divest its Nigerian subsidiary then it may shake trust of share holders and investors towards management, however at the same time company invest in EBU or open new subsidiary will help company to justify the divestment so that reputation of the company will not spoil.

Recommendation:

After evaluating each option on each of the criteria, it is suggested that Larson Inc. should continue with its Nigerian subsidiary because Nigerian government is trying to make economic reforms through attractive policies, hence future prospects of Nigeria is good and simultaneously reputation of the company can remain intact.

Action plan:

Company should change its strategy and also take following vital steps to enhance growth in Nigerian market.

Make collaboration with new local firms Diversify target market, e.g. along with government target big private players to include them in

list of customers. Enhance export business.

[Total Words: 1060]

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Exhibit 1

Factors affecting Business environment in Nigeria

1. SWOT Analysis :

SWOT Analysis

External Factors Opportunities Threats

Internal Factors Strengths Weaknesses

Strengths:

Availability of young and mobile Labor Force Many Investment Opportunities for the Local Entrepreneurs Great Potentials for Future Growth and Investment Easy availability of short and medium term loans to localities Strategic coastal location Large domestic market *Nigerian government is putting efforts to provide investor friendly environment in

Nigeria, although it will take more time for government to transform the investment environment. It has been seen that investors are taking interest in Nigeria to invest their money; this situation is supported by following data on investment in Nigeria during 1999 to 2002. Investment commitment by the 143 companies registered by the NIPC was 70.52

billion naira (US $466.4 million). Re-investment by major multinationals amount to over US $ 2 billion Projected employment generation is over 20,959 Total capital imported for investment purposes was US$ 506.2 million Capital market capitalization was 156% change between 1999 and 2002 Annual return on investment in capital market was 105% making Nigerian stock

market one of the most profitable in the world. Foreign investment inflows from the privatization program were US$ 470.3

million in 2002.3

Weaknesses:

Increase in inflation rate Lack of Power Supply, Road Networks, Security Setups and Other public utilities Lack of Finance and Capital Resources Lack of Information System, New Technology, and Scientific Base Serious delays of payment from Federal and state government The arbitrary restrictions on the percentage of professional fees Royalties and trade mark period Stringent procedure for work permits and visas for expatriate work force Low quality and lazy workers

3 The challenges and opportunities of the investment environment in Nigeria (Dr. Julius J. Bala, 2003, p.7)

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National Labor Congress – strongest labor union of Africa High rate of Pilferage Imprecise definition of legislation and regulations Bribery

Opportunities:

High Population Density creates High Demand for Products and Services Economic and Political Improvements create More Opportunities and Attracts

Investors Opportunities of Outsourcing, Good Bilateral Relations Opportunities for Diversification and Ultimately, Progressing Economy Large technical and skilled workforce if technical and higher education provided to

large workforce, the education sector received enhanced budgetary allocation, which rose by 10.6 per cent in 2001 and accounted for 7 per cent of the government’s total budget.

Threats:

Increasing crimes, frauds, scams, and corruption Threat of Import Substitution Effect to the domestic markets Lack of funds, higher costs of doing business, higher opportunity costs, and lower

economies of scale while opting for Globalization Lack of economic policy which stimulates foreign players to invest in Nigeria

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Exhibit 2

Sales Revenue Analysis

In 2003, Total worldwide annual sales revenue of Larson Inc. = $ 936 MillionTotal annual sales revenue of Nigerian subsidiary of Larson Inc. = $ 45 Million (5,841 million naira)

95%

5%

Annual Sales of Larson Inc.Other Countries Nigeria

Inflation rate of Nigeria = 11.7 %Depreciation of naira from 1998 to 2003 = (129.8-85.3) / 85.3

= 52.16 %

For the sake of calculation, if we assume flat depreciation over the period of 5 years then, per year naira depreciates 10.43 % against US dollar. If major economic and policy reforms will not take place this inflation and depreciation of naira will be continue at this pace only.

We can also calculate total sales revenue for the next three years base on following assumptions. Assumptions:

If major economic and policy reforms will not take place this inflation and depreciation of naira will be continue at this pace only.

Each year company’s sales volume increase by 5%. Each year naira depreciates by 10.43%

Year 2003 2004 2005 2006Total sales revenue in Naira (in Mn)

5841 6133 6440 6762

Total sales revenue in US dollar (in Mn)

45 42.79 40.84 38.83

Value of naira in US dollar

129.8 143.33 157.66 174.1

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References

1. Economic Policy of the Obasanjo administration for 1999-2003

(http://www.nigerianbern.org/nig_ecopolicy.htm)

2. http://www.odin.org.ng/index.php?option=com_content&view=article&id=49&Itemid=18

3. http://www.state.gov/r/pa/ei/bgn/2836.htm#history

4. http://www.oecd.org/countries/nigeria/2497560.pdf

5. IMF, “Country Focus: Reforming Nigeria’s Pension System

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