Kaseem Damilare Ayanlola Bachelor thesis Fall 2009
Department of Economics Author:
Bachelor thesis Kaseem Damilare Ayanlola
Supervisor:
Roger Bandick
Topic:
Mobile telecommunication in Africa-
An investment opportunity for Telenor
Aarhus, Denmark
2009
Abstract
Mobile telecommunication in most developed countries has reached a saturated stage which makes it highly competitive for the big companies in the industry. Many of these big companies are now looking forward to the developing nations where the industry is still at its growing stage.
Africa as a continent is one of those places where mobile telecommunication is still at its growing stage. There are growing opportunities in the industry which can be evidence in the amount of FDI of some international companies into the continent.
This thesis is aimed to evaluate the mobile telecommunication in Africa as an investment opportunity for Telenor, the Norwegian telecommunication giant which has grown beyond the Scandinavian border to Eastern Europe and to some part of Asia in recent years. This part of the world (Africa) was chosen because there has been no telecommunication company in Scandinavia that has been in Africa despite the growing opportunities.
Telenor group strategy is by 2011 to be one of the fastest growing mobile operators in the world, with a strong broadband position in all markets, successfully developing new services and adopting new and responsible business models. The company business strategy is to explore new markets and technologies to make long-term investments. This could be achieved if the company tries to expand it base to Africa. To achieve this aim, Nigeria was chosen to be the target market due to its enormous opportunities. Also the country is the regional leader and the front runner in issues concerning Africa and the rest of the world and also tagged the most populous black nation in the world.
In investigating the opportunities for Telenor in this market, external as well as internal analysis will be made. Since this market is completely new to the company, the market entry mode will also be analyzed to see the cost/benefit for the company and a way forward.
Table of Contents
1. Introduction
2. Delimitations
3. The history of Telenor
3.1 In the past
3.2 The Present
4. Business environment in Nigeria
4.1 PEST( The country)
4.1.1 Political factor
4.1.2 Economic factors
4.1.3 Social/Cultural factors
4.1.4 Technological factor
4.2 Porters five forces (The market)
4.2.1: Threat of new entrants
4.2.2: Threat of intense Industry competitors
4.2.3: Threat of substitutes
4.2.4: Bargaining power of suppliers
4.2.5: Bargaining power of buyers
5. Exploring new market
5.1 The competitive advantage of Telenor
5.1.1: Factor Endowments
5.1.2: Demand condition
5.1.3: Related and supporting industries
5.1.4: Firm strategy, structure and rivalry
5.1.5: Government
5.2 Can Telenor utilize their strength in Nigeria?
5.2.1: Opportunities
5.2.2: Threats
6: Internal analysis
6.1: Resource-based view of Sustainable Competitive Advantage
6.1.1 Prior or acquired resources
6.1.2 Innovative capability
6.1.3 Being truly competitive:
6.1.4 Substitutability
6.1.5 Appropriability
6.1.6 Durability
6.1.7 Imitability
7. Market Entry Strategy
7.1 Exporting
7.2 Contractual entry mode
7.2.1 Licensing
7.2.2 Franchising
7.3 Investment entry modes
7.3.1 Joint ventures
7.3.2 Wholly-owned susidiaries
8. Determinants of choice of entry mode
8.1 External factors
8.2 Internal factors
9. Conclusion and recommendation
Bibliography
List of abbreviations in use
1.Introduction
There have been changes in the business and marketing activities around the world. This could be evidence in changing technology, globalisation, deregulation in market places and heightened competition for capital and resources (kotler and Keller, 2006, p. 12).There is need for global companies to look beyond their borders in conducting business to achieve much needed expansion and return on the investor’s capital. In regards to this, companies should seek for more opportunities in current and emerging market while trying to minimise cost.
In his 2005 annual report speech the President/CEO of Telenor, Jon Fredrik Baksaas, made it clear the company mission and vision for the coming years. One of such is to build a unique group of companies in mature and emerging markets with more than 100 million customers. He expressed further the significance of mobile communication as a key driver to economic growth especially in the financially constrained societies which can also contribute to bridging cultural gaps.
This paper will give a thorough investigation of Nigeria’s telecom market in order to find out the profitability of the market for an international company seeking a possible expansion in an unknown business territory.The report will also expose the opportunities and the threats if any, in this new market for Telenor based on the company’s past and current strengths. More so, the outcome from the report should be conclusive enough to determine if the company’s current strategy could work in the new market and to determine a suitable entry strategy.
For this reason, there are some basic issues that need consideration especially if the new market is beyond the sphere of current operation. These basic issues will be addressed in question forms like:
- What are the political situations of the new market?
- Is the economic situation favourable for business?
- What social/cultural issues need to be considered in this market?
- What is the level of technology in the host country?
- How can the company’s current position affect the new market?
- And lastly, in which way can the company do business in this new market?
All the above mentioned issues will be main discussion points in this report and effort will be made to give a comprehensive report and to make clear what might be ambiguous for the company decision maker.
The choice of market is based on investment opportunities and the size of the market. In 2007, the population of Africa stood at 965 million and Nigeria at 148 million ( UN, 2008) which makes the country 15.4 percent of African population. The choice of the company is based on the company’s international experience. TDC and TeliaSonera were considered but as for TDC, the company has limited international experience with operation in four countries. TeliaSonera is currently operating in 20 countries through WOFI and joint venture. Telenor is currently operating in 13 countries and could expand to Africa which has not been explored by other Nordic telecom companies to gain more market share.
Business environmental analysis will incorporate political, economical, social and cultural as well as technological (PEST) factors in this target market. Following this will be the chosen market competitive attractiveness and long-run profitability and with this Porter five forces will be used for the analysis. This will be followed by the competitiveness of international mobile telecommunication industry and with this Porter’s diamond theory will be used in assessing the industry. More so, internal analysis will assess what the company is better at doing to affect their position in the chosen market. The seven elements resource-based view of competitive advantage will be used to analyse the company’s sustainability in the chosen market.Lastly, the choice of entry mode will be discussed. This section can considered the engine that runs any organisation due to the significant impact it has on a company. Different market entry mode will be considered before the right entry mode will be chosen for Telenor
Conclusively, after the thorough investigation of Nigeria telecommunication market and the company capabilities, one can conclude that it will be a good idea for Telenor to expand their business to Nigeria as both the country and the industry has a lot of potential to offer. Joint venture is recommended as initial investment entry mode and after the company has gained a certain foothold, wholly owned investment should follow.
2. Delimitations
The information that will be used in the external analysis will be from 1999-2008 due to the economic turnaround that happened during this period in the chosen market. Also most of the information about the company background, facts and figures will only be obtained from the company website as no effort is made to contact the company for this project. Due to the company product varieties, only mobile phone and broadband will be discussed in this project.
3.The history of Telenor
3.1 In the past
Telenor has a long history which goes back to 1855. The company started as Norwegian Telegraph Administration and the first telegraph line was opened between Christiana and the city of Drammen.1867 saw the connection between Norway and Denmark and two years later the telegraph cable connection extended to Great Britain.
In 1870 the telegraphic connection reaches the far north of Norway thereby ensuring a nationwide coverage. Seven years after in 1877 there was a public display of the first Bell telephone in Norway. With this new development, telephone cables were connected across the country and in 1881 the Norwegian government passes the Monopolies Act, which gives the state exclusive rights to convey messages by means of telegraph lines and similar installations.
The beginning of the 20th century saw the automatic telephone exchange and the connection between Norway and the United States. In 1946, telex was introduced to the people and between this period and 1970 the number of subscriber increased from 55 to 3531. The first telephone satellite by Norway from the United States was received in 1965 which gave way for more connectivity in the telecommunication industry and it is at this period that the direct distance dialling was enabled in Norway.
The 70s and 80s could be viewed as the turning point in modern telephoning. The Norwegian Telegraph Administration changed its name to Norwegian Telecommunication (Televerket) with total employment of 17250 staff. There is also unique cooperation between Nordic countries to create a common standard which results in Nordic Mobile Telephony. This period also see improvement in the network coverage in Norway with 50 percent of the country covered andpartnerships set up to establish international standards for the telenetwork mobile networks. The 1980s saw a period of cooperation with international partners in creating technical solutions such as satellite services, the NMT 450 (Nordic Mobile Telephony) and GSM (Global System for Mobile communications) mobile systems.
In the late 80s and the 90s, the market for telecommunications terminals was opened up to competition and the Norwegian Telecom develops international business in accordance with customer needs and this has been one of the company’s strategies till date. Mobile phone was introduced and there was a huge increase in its usage.1995 through 1999 had significant impact in the company in many ways. International expansion became a proclaimed strategy and the company brought its business into international market but these activities had started long before the mid 90s. The company changed its name to Telenor, the company linked its infrastructure to the internet and sms from mobile to mobile was enabled.
It was also this year that the company invested in joint ventures in Ireland, Austria, Russia, Lithuania, Hungary, Bangladesh and Montenegro and a licence to develop GSM networks in Montenegro and Bangladesh was awarded. The company together with partners was awarded licences to develop the mobile network in both Greece and Austria. Entered a consortium to build mobile networks in Ukraine and Germany and mobile networks was opened in Ireland
Figure 1: Telenor company logos and names
Source: Telenor.com
3.2 The Present
From 2000 till date the company has engaged in horizontal integration through merger and acquisition and also wholly owned foreign investment with the aim to increase the market share and to reduce the company cost of operating in foreign countries. There has been so much expansion through merger and acquisition from the company inmany parts of the world and these are not limited to mobile phone but also to other parts of the company’s core activities. From 100 percent acquisition of Sonofon Denmark in 2003, acquisition of both broadband suppliers Cybercity in Denmark and Bredbandsbolaget in Sweden to acquisition of Vodafone Group in Sweden and launching of Telenor in Pakistan in 2006.
At the moment, Telenor has its presence in all the Scandinavian countries, Hungary, Serbia, Ukraine, Montenegro and Russia in Eastern Europe, Thailand, Pakistan, Bangladesh, Malaysia and India in Asia. The company is dynamic and flexible in its business approach and always trying to explore new markets and new technologies to make long term investments. At the end of the second quarter of 2009 the mobile subscriber had reached 168million(see figure 8 below).
4. Business environment in Nigeria
The strategic thinking of an organisation starts when considering going abroad from the external business environment analysis. These are factors which the company cannot affect in any way but has to adapt to in the host country and they determine also the mode of entry for a company and how the company should or will operate. For this, PEST analysis will be made to describe the external business environment in the chosen market. In section 4.2, Porter five forces will be used to analysis the market competitive environment.
4.1 PEST( The country)
4.1.1 Political factor
The administration of the country is divided into three tiers, which is the federal government, the states governors and local government chairman. There are 36 states and the federal capital, Abuja, and 774 local government areas in the country. The legal system is based on English common law, Islamic law in 12 states and traditional law. The legislative branch consists of National assembly and House of Representatives (CIA fact book, 2009).Nigeria has been under one military rule to another since independence which has ruined the economy of the country due to corruption and embezzlement of public funds by those military leaders without any check and balances. After the death of the last tyrant (Sanni Abacha) in 1998, this paves ways for a democratic election which may be regarded as a new beginning for the country (OECD report, 2001).
After over 15 years of military rule, Olusegun Obasanjo was elected as the president in 1999. After his inauguration, he implemented series of reform which include improved macroeconomic management, financial sector reform, privatisation and deregulation, institutional reforms, and improvement of the infrastructure of the country (OECD report, 2004/2005;J.Harnischfeger, 2008).
The reform in the financial sector consolidated the banking system by stipulating a minimum paid-up capital of $188 million. This resulted in mergers and acquisition of number of banks from 89 in 2004 to 25 at the end of 2005. The aim of the government was due to the role the banking sector plays in financial economic development of the country. The privatisation and deregulation also saw an improvement with this new democracy and 45 public enterprises have been privatised among which is the communication sector which improved access to telecommunications services in the country. Downstream petroleum was also deregulated and this was accompanied by reduction in government subsidies on petroleum products (OECD report, 2004/2005).
Infrastructure is another reform in which the Obasanjo administration tried to bring back into normalcy. Transport infrastructure services are inadequate and in deplorable condition in all the sub-sectors which requires urgent rehabilitation. The Bureau of Public Enterprise (BPE) was formed to address the transport sector reform. BPE reform agenda was centred on setting up legal and regulatory framework for participation of private sectors in the transport sector. To achieve this, National Transport Commission was formed in collaboration with the Federal Ministry of Transport (OECD report, 2004/2005).
Nigeria is a member of different international organisations. Regional organisations like the African Union (AU) and Economic Community of West African States (ECOWAS). The country also is part of international trade, peace and health organisations tomention but few, which give the country an international recognition (CIA fact book, 2009).
In an effort by the government to create an effective private driven economy, there have been some incentives by the government to attract FDI which will promote innovation and competition, employment generation, improve the country’s export profile, increased domestic capital and transfer of technology. Some of these incentives cover all sectors while target specific sectors (Baah & Jauch, 2009). The lists ofincentives which are from the Nigeria Investment Promotion Council are listed below:
- Companies income tax: - The Companies Income Tax Act amended and potential and existing investors and entrepreneurs pay 30 percent except for petroleum
- Pioneer Status: - This is a tax holiday granted to qualified industries. Also a seven years tax holiday to industries located in economically disadvantaged local government area of the country. The list of pioneer product includes installation of scientific instruments and communication equipment, information and communication technology. ( More on the list could be seen at NIPC.gov.ng)
- Tax relief for research and development: - Up to 120 percent of expenses on R&D are tax deductable if carried out in Nigeria. R&D on local raw materials carries 140 percent of the expenses deductable. Long-term research will be considered as capital expenditure and will be written off against profit.
- Capital allowance: - 75 percent of assessable profits for manufacturing companies and 66 percent for others
- In-Plant training: - 2 percent tax concession is granted for 5 years to industries that have established in-plant training facilities.
- Investment in infrastructure: -This incentive granted to industries that provide facilities that ordinarily should have been provided by the government. 20 percent of the cost of providing theses infrastructure is tax deductable.
- Telecommunications: - Government provides non-fiscal incentives to private investors. Taxes and duties do not exceed those charged on essential electrical goods
There are some political and economic challenges faced by the Nigerian government among which are Niger Delta, corruption and religious crisis. Foreign oil firms are the target of the militant group in Niger Delta and in some cases foreign employees are taking hostage. Movement for the Emancipation of Niger Delta (MEND) has been responsible for most of the violence in the region which include vessel attack and hostage taken. This development has led to the formation of Ministry of Niger Delta by the government to see to the issues concerning the region and to end violence (OECD report, 2007)