International expansion process for SMEs. A strategic analysis of the oil field supply and services company "Benood"

CONTENTS

LIST OF FIGURES:

LIST OF TABLES:

GLOSSARY:

EXECUTIVE SUMMARY:

1. CHAPTER ONE: INTRODUCTION
1.1 GENERAL OVERVIEW:
1.2 BENOOD’S BACKGROUND:
1.3 IRAQ’S BACKGROUND:
1.4 PROBLEM ORIENTATION:
1.5 RESEARCH QUESTIONS:
1.6 AIMS AND OBJECTIVES:
1.7 SUMMARY:

2. CHAPTER TWO: LITERATURE REVIEW
2.1 EXTERNAL ENVIRONMENT FRAMEWORKS:
2.1.1 PESTEL Framework:
2.1.2 Porter’s Five Forces Industry Analysis:
2.1.3 Industry Life Cycle:
2.1.4 Strategic Group Analysis:
2.2 INTERNAL ENVIRONMENT FRAMEWORK:
2.2.1 Value Chain Analysis:
2.2.2 Hofstede’s Cultural Dimensions:
2.2.3 SWOT Analysis:
2.3 MODES OF MARKET ENTRY:
2.4 ANSOFF’S MATRIX:
2.5 SUMMARY:

3. CHAPTER THREE: RESEARCH METHOD
3.1 RESEARCH PERSPECTIVE:
3.2 RESEARCH DESIGN:
3.3 RESEARCH STRATEGY:
3.4 DATA COLLECTION:
3.5 STUDY LIMITATIONS:
3.6 RELIABILITY VALIDITY AND GENERALISABILITY:
3.7 ETHICAL CONSIDERATIONS:

4. CHAPTER FOUR: DATA COLLECTION, ANALYSIS, AND FINDINGS
4.1 EXTERNAL ENVIRONMENT ANALYSIS:
4.1.1 PESTEL Analysis:
4.1.2 Porter’s Five Forces:
4.1.3 Industry Life Cycle:
4.1.4 Strategic Group Analysis:
4.2 INTERNAL ENVIRONMENT ANALYSIS:
4.2.1 Value Chain Analysis:
4.2.2 Hofstede’s Cultural Dimensions:
4.2.3 SWOT Analysis:
4.3 ENTRY MODES ANALYSIS:
4.4 STRATEGIC REVIEW:

5. CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS
5.1 CONCLUSION:
5.2 RECOMMENDATIONS:

REFERENCES:

LIST OF FIGURES:

Figure 1.1: Iraq's Map

Figure 2.1: Literature Review stages

Figure 2.2: PESTEL Framework

Figure 2.3: Porter’s Five Forces

Figure 2.4: Industry Life Cycle Model Stages

Figure 2.5: Strategic Group Analysis

Figure 2.6: Value Chain Model

Figure 2.7: SWOT Framework

Figure 2.8: Modes of Entry and Risk

Figure 2.9: Ansoff’s Matrix

Figure 3.1: Research Stages

Figure 4.1: Industry Life Cycle in UAE, China and Nigeria

Figure 4.2: Strategic Group Analysis for UAE

Figure 4.3: Strategic Group Analysis for China

Figure 4.4: Strategic Group Analysis for Nigeria

Figure 4.5: Hofstede Dimensions for UAE, China and Nigeria

LIST OF TABLES:

Table 4.1: Economic Indicators

Table 4.2: Social Culture

Table 4.3: Porter's 5 Forces

Table 4.4: UAE SWOT Analysis

Table 4.5: China SWOT Analysis

Table 4.6: Nigeria SWOT Analysis

GLOSSARY:

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Acknowledgement

My grateful thanks and appreciation to Ali Ehsan for his efforts in supervising and inspiring me to accomplish this fine work. This work is also dedicated to my loving parents, Ahmed and Sabah, without their love, support and encouragement this journey would have been impossible.

EXECUTIVE SUMMARY:

Apart from the high costs attributed to the expansion process, when it comes to SMEs, their characteristics can pose additional challenges related to expanding. The limited financial resources and the managerial structure of SMEs can make them more vulnerable to environmental factors than large MNEs. Hence, by taking an oil field supply and services company named Benood as a case, the purpose of this research is to strategically analyse the company’s expansion process by analysing the internal and external environmental factors, as well as evaluating and reviewing the possible modes of entry and the strategic consequences within three different locations which are: UAE, China and Nigeria.

The literature review oriented the theoretical contribution by reviewing the applied frameworks, which aims to identify the major environmental factors that would affect the firm within each location. PESTEL analysis was applied to evaluate the macro external environment. On the other hand, Porter’s five forces, industry lifecycle and strategic group analysis were applied to evaluate the external micro environment which represents the competitive situation in each country. Accordingly, value chain analysis and Hofstede’s cultural dimensions are the applied tools to analyse the major internal environment of the firm. Moreover, SWOT analysis summarised the major external and internal factors within each country in order to assess the evaluation of entry modes and strategic option.

Consequently, based on secondary data from governmental and trusted agencies, the findings of this research revealed that each location could offer lucrative opportunities to exploit, given that the industry represents a substantial percentage of the imports and exports within the three countries. At the same time, the firm could face several challenges in each location. For instance, the recent drop in oil prices could affect the value chain significantly.

In addition, cultural differences have been determined in order to avoid any cultural conflicts that may affect the employees’ commitment and the firm’s performance as a consequence. Furthermore, the characteristics of SMEs would drive them to select one of the exporting activities, since the level of risk in these activities is the lowest among any other entry mode. Lastly, adopting a market development strategy could increase the revenues by reaching new customers and distribution channels, while the failure to identify customer’s needs would be one of the obstacles of this strategy.

A further quantitative research to measure the potential customers and revenues in each country may be suggested in order to investigate further information for each country. Additionally, the current slump in oil prices may delay the adoption of an expansion strategy.

1. CHAPTER ONE: INTRODUCTION

1.1 GENERAL OVERVIEW:

Firms of all sizes consider to expand their operations internationally (Kotzaivazoglou et al. 2014). The number of small and medium enterprises (SMEs) that are adopting an expansion strategy is significantly increasing, where in most countries, SMEs represent the majority of the firms (Francioni and Musso 2014). Therefore, it tends to apply geographically diversifying activities in order to reduce the overall risks, as well as to decrease cash flow’s volatilities (Joliet and Muller 2013). However, expansion decisions could always be vital for the business since they may affect the profits directly, as the cost that comes along with this process increases significantly (Espínola-Arredondo et al. 2011). The idea of international expansion could be considered as a challenging strategic decision that may change the existing business model of the firm (Chen et al. 2015). Also, adopting this strategy could be combined with several threats such as operating under new regulations, new competitors and new market risks (Ernst & Young 2011). Furthermore, that the main hazard of adopting an expansion strategy is becoming over optimistic, as well as the lack of experience in the new market. The firm’s management should hence consider the potential costs and threats of taking this crucial decision, by reviewing the external environment factors, and improving the internal factors of the business before moving into the new market, in order to avoid the negative circumstances of this critical decision (Wilson and Bates 2003:254-255). This research is going to strategically analyse the process of adopting an international expansion strategy for a petroleum services company called “Benood” that operates from Amman, the capital city of Jordan, and considers international expansion into one of three potential locations which are: China, United Arab Emirates (UAE) and Nigeria.

1.2 BENOOD’S BACKGROUND:

Since its establishment in 1993, Benood’s target market has been the Iraqi oil and gas industry. Offering petroleum equipment and services into both private businesses and governmental companies such as the South Oil Company (SOC), which is considered as one of the major fundamental formations of Iraqi National Oil Company and has the largest production level in Iraq (South Oil Company n.d.). Through its offices in Amman, Baghdad and Basra, Benood’s objective is to deliver high quality equipment from European manufactures such as laboratory equipment and measuring systems into the Iraqi market. The company also aims to link the representative companies with SOC and organize the contracting process by organizing the meetings, managing logistics and decrease cultural differences. The long experience in the Iraqi market gave Benood a good competitive advantage as well as decent relationships in the industry, which enable it to react rapidly for any issue during any project. As a consequence, it is one of the most reliable petroleum equipment suppliers in Iraq (Benood Oil Field Supply and Services 2015).

1.3 IRAQ’S BACKGROUND:

During World War I, the former part of the Ottoman Empire was occupied by Britain in 1920. It was under the UK administration until it attained independence as a kingdom in 1932. It later became a republic in 1958, when a series of strongmen ruled this Middle Eastern country, the last was Saddam Hussein. As of 2003, the adopted government in the republic of Iraq is Parliamentary Democracy, and the current prime minister is Haydar Al Abadi; a Shia from the capital of Iraq “Baghdad”. The political situation in the past years could be described as unstable. Beginning with the territorial disputes with Iran which lasted for almost eight years (1980-1988). The disputes were followed by the events of 1990; when Iraq seized Kuwait which resulted in several requirements from the United Nation Security Council (UNSC) including scraping all massive destruction weapons and long range missiles. Hence, the constant noncompliance with the UNSC requirements led to the 2003 war, which put an end to Saddam Hussein regime (CIA 2015a).

Nonetheless, the current political situation is not considered better than Saddam’s regime. Until now, military engagements against armoured militias are still taking place in Iraq (CIA 2015a). Similarly, the economic situation is also being affected by the political one, where even that the Gross Domestics Products (GDP) has been increasing since 2009, allowing it reached 232.497 USD Billion in 2013 (World Bank 2015a). Iraq ranked 161 out of 189 countries around the world in the “ease of doing business” report (World Bank 2015b). The following figure (1.1) will show the exact location of Iraq on map:

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Figure 1.1: Iraq's Map

Source: CIA (2015)

1.4 PROBLEM ORIENTATION:

The war in 2003 had a significant impact on the oil and gas industry. For instance, SOC suffered critical difficulties when the total destruction ratios of the belongings reached (80%- 90%), which led to a huge decrease in the production of oil barrels. SOC used to produce around 2 million barrels per day before the events, whereas the production did not exceed 150 thousand barrels per day by that time. The rebellious attacks on the oil industry which came along with the lack of the investments in the industry, all decreased the oil productions significantly (United State Senate 2008). However, SOC managed to increase the production even better than before 2003, when it produced around 2.15 million barrels per day by 2014. (South Oil Company n.d.). Hence, the previous events could indicate that Iraq may not possess the best business environment in the MENA region. The external environment’s instability could affect any business operating within that geographical area. Therefore, adopting a strategy that targets a new market in a different geographical area would be considered a logical choice for Benood, in order to allow it to spread its risks and increase its market share.

1.5 RESEARCH QUESTIONS:

The study represents an investigation into the possibilities of expanding the company’s operations within one of three regions: China, UAE and Nigeria. Hence, the following are the research questions:

1- What are the major opportunities and challenges of expansion within each country?
2- How could the recent drop in oil prices affect the company?
3- What are the entry mode options for the company within each country?

1.6 AIMS AND OBJECTIVES:

Relying on the Iraqi market could come along with several threats, and some of these threats could be described as fatal such as the ones which took place after 2003. Therefore, the aim of this study is to evaluate the opportunity of adopting an international expansion strategy, by critically analysing and evaluating a large amount of data that will be categorised under the external and internal business environment for three different countries. Hence, the following objectives should be achieved:

1- To analyse the internal and external environment which contains both micro and macro external factors within the three locations.
2- To evaluate and review the entry modes and the strategic option circumstances for the firm within the potential locations.

1.7 SUMMARY:

This chapter gave a general overview of the international business expansion. On one hand, geographic diversification could reduce the general risks and decrease the volatility of cash flow. On the other hand, the profits of the firm could be directly affected because of the increasing costs associated with the expansion process. It also provided a background of Benood Company, which is operating from Amman and it is targeting the Iraqi oil and gas industry. Moreover, it reviewed the main products and services which are offered by the company, such as laboratory equipment, managing logistics and organising contracts. However, the 2003 events in Iraq have significantly affected major sectors in the oil and gas industry, such as the SOC which suffered from a large destruction ratio of its belongings. As a result, the instability in the external business environment would affect most of the businesses within that geographical area, and would cause several losses. Despite the current military engagements against armoured forces, which is affecting the political situation negatively, Iraq ranked 161 out of 189 countries around the world according to “Ease of Doing Business” which indicates instability in the economic environment as well. Therefore, operating in a new market in another region could be a logical strategic decision for Benood Company. This report is going to investigate the opportunity of adopting an international expansion strategy within the UAE, China and Nigeria, in order to spread the risks from the current market, and to increase the company’s market share by achieving the previously stated objectives.

2. CHAPTER TWO: LITERATURE REVIEW

Establishing an expansion business plan would require the collection and analysis of a wide number of data related to the internal and external environment of the firm. Hence, a successful business strategy is one that fits well with the environment in which the business operates (Roberson-Saunders et al. 2014:18-19). However, there will be several unpredictable factors in real life that could affect the firm in future such as “Black Swans”, which means firms should mind the uncontrollable future conditions that would affect them (Kennon and Schutte 2015). Accordingly, this chapter is going to review several environmental tools, entry modes and strategic options frameworks that would support the decision making process. Figure (2.1) below illustrates the stages of this chapter:

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Figure 2.1: Literature Review stages

2.1 EXTERNAL ENVIRONMENT FRAMEWORKS:

The external environment of a business is consistently changing, and it includes macro and micro environment. The macro environment represents all the factors that could affect the business indirectly, such as the political, economic and legal environment, and it has a low intensity over the business activities, while the micro environment represents the factors that could affect the business directly, such as customers, competitors and suppliers and has a higher intensity (Manea and Cetina 2014). The PESTEL framework will be applied in order to measure the macro environment, whereas Porter’s five forces, industry life cycle and strategic group analysis will be applied in order to analyse the micro environment of the firm and to give a better understanding of the industry.

2.1.1 PESTEL Framework:

PESTEL is a framework that provides managers and decision makers with different macro environmental factors, which could affect the business whether in the present or future. The framework includes six types of important external environment factors, and they are displayed in figure (2.2) below (Rahman et al. 2014). However, PESTEL factors have a qualitative structure, which may not allow the factors to be rationally or objectively measured. The factors are measured independently, and this could lead to unintegrated results (Yüksel 2012). Although, the main aim of applying this framework is to develop a good understanding of the external macro environmental factors that could affect the company indirectly in the future in all three countries.

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Figure 2.2: PESTEL Framework

Source: Rahman et al. (2014)

2.1.2 Porter’s Five Forces Industry Analysis:

This framework is designed to analyse the external micro environment of the industry, and it is based on five competitive forces that could determine the profitability on the medium and long run for the business (Ostapenko 2014). The following figure (2.3) illustrates Porter’s forces:

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Figure 2.3: Porter’s Five Forces

Source: Yunna and Yisheng (2014)

The first force is “Entry Barriers”. It measures the ease or difficulty to enter the market, with factors such as globalisation and deregulation creating an opportunity for more competitors to enter the market. However, factors like economies of scale, product differentiation and the substantial investment required could all represents entry barriers for the industry. The second force is “Power of Suppliers”, where high suppliers’ power will limit the ability of cost reduction. The third force is “Power of Buyers”, where the buyers’ high power would force the business to reduce prices, since customers would search for alternative sellers. The Fourth factor is the “Threat of Substitute” which represents the risk of replacing the product by another one from a different industry that offers the same benefits for customers. The fifth and final factor is the “Degree of Rivalry” where a high degree could reflect a high number of competitors, which allows buyers to easily switch from one supplier to another (Cadle et al. 2014:45-47).

Porter’s framework is easy to use and understand, it also helps organisations understand their external micro environment. However, the framework was criticised for not including the governmental factor as a sixth force. The framework was also identified as difficult to apply on non-profit organisations. Nonetheless, it is a useful and widely acceptable tool in understanding the competitive situation in the industry (Cadle et al. 2014:45-47). This tool might help in analysing the competitive environment that could vary in each location. Hence, the outputs of this framework could be one of the determinants for whether to expand into a specific location or not.

2.1.3 Industry Life Cycle:

The industry life cycle model could analyse the competitive situation in the industry, where the life cycle can be broken down into five stages. The first stage is the “Development Stage”, where there are only a few players, making the rivalry level low, and the level of differentiation high. Also, because of the high investments required in this stage the profits would be low as well. The second stage is the “Growth Stage”, where the bargaining power for buyers, level of rivalry and entry barriers for the industry are low. At the same time, there are plenty of opportunities in the market for everybody. The third stage is the “Shake-out Stage”. It includes declines in the growth rate due to the increasing number of competitors, where the rivalry level increases, causing the entry barriers to increase as well. The fourth stage is the “Maturity Stage”. The bargaining power of buyers and entry barriers increase in this stage, which result in more standardised products and services and more price sensitivity from customers. Finally, the “Decline Stage”. This is when the level of rivalry and the exit barriers are extremely high, which could lead to price competition in the industry. Interestingly, each stage would influence Porter’s forces, where the factors varies in each stage (Johnson et al. 2012: 33). Therefore, it could be considered as a useful micro environmental tool that would analyse the industry that the frim operates within. However, the industry may not follow the same stages and patterns of the model in practice, where in some cases the industry may skip one of the stages, or may not survive until the next one. Also, the duration of each stage may significantly differ from one stage to another (Hill et al. 2013: 67). The following figure (2.4) summarises each stage of the industry life cycle model.

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Figure 2.4: Industry Life Cycle Model Stages

Source: Johnson et al. (2012:34)

2.1.4 Strategic Group Analysis:

Strategic group analysis identifies and reviews the organisations that have similar characteristics to the firm within the same industry. Moreover, it helps in understanding the competitive situation as well analysing the upcoming opportunities and barriers. Therefore, it would assess in analysing the micro external environment for the firm. However, there are several distinguishes in the characteristics between the strategic group, and these could be summarised into two categories: the “scope of an organisation activities”, and the “resource commitment”. Strategic group analysis could be mapped by two dimensional charts, where in this case one axis will be the “Organisation Size”, while the other is the “Market Share”. The following figure (2.5) displays the factors of strategic group analysis (Johnson et al. 2012:36-38).

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Figure 2.5: Strategic Group Analysis

Source: Johnson et al. (2012:37)

2.2 INTERNAL ENVIRONMENT FRAMEWORK:

The internal environment represents the internal resources and capabilities of the firm, it also includes the human resource skills and the capital of the organisation. Moreover, it is essential to survive in the long term and to investigate the competitive advantage of the firm (Lynch 2012:9-10)

2.2.1 Value Chain Analysis:

Value chain analysis is an internal environmental framework which evaluates the firm’s internal activities, and aims to create a competitive advantage by providing awareness about costs and differentiation. This common used framework was developed by Porter in 1985, and divided the firm’s activities into two categories: first, the “Primary Activities” which may determine the factors with a significant influence on the competitive advantage. Primary activities include operations, services, marketing and sales and outbound and inbound logistics. Secondly, “Support Activities”. These are very important in “sustaining competitive advantage” and include technology, human resource, procurement and the firm’s infrastructure. Porter argued that competitive advantage could arise from one or more sub- activity whether in the primary or/and the support activities. Also, these activities should be integrated and linked together, where the linkage between these activities is crucial since they depend on each other. However, the misunderstanding of the actual costs, the failure of introducing a permanent long-term cost management plan and exploiting the benefits of the possible gains from the integration of the activities could all affect the results of this model (Martin et al. 2014:127). This framework may analyse the ability of the firm to expand, and identify the effect of the recent oil prices drop on the internal factors of the environment and how the margin will decrease if the firm did not react correctly. The following figure (2.6) summaries the value chain components and how it could affect the firm’s margin.

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Figure 2.6: Value Chain Model

Source: Agosto and de Souza (2013)

2.2.2 Hofstede’s Cultural Dimensions:

Hofstede’s cultural dimension framework is one of the models that received remarkable acceptance by researchers (Yeganeh 2014a). Hofstede (1991) identified five dimensions in order to distinguish between cultures at a national level (Hamister and Braunscheidel 2013). The first dimension is the Power Distance (PDI), which measures the acceptance of the less powerful members towards the unfair power distribution in the organisation. The second dimension is the Individualism (IDV) and measures the relationship between the individual and the group. An individualism society’s beliefs and behaviours are mainly determined by the individuals, where the beliefs and behaviours are influenced by loyalty to groups in a collectivism society. The third dimension is the Masculinity (MAS) where a masculine society is more concerned about challenges and promotions at work, while a feminine society looks for job security and good relations at work. The fourth dimension is the Uncertainty Avoidance (UAI) which represents the fear of the uncertain future. The fifth and final dimension is the Long Term Orientation (LTO) for the society (Yeganeh 2014b).

This model allowed researchers to compare the differences in cultural characteristics and behaviours between different nations (Barbarossa et al. 2015). However, it faced several criticisms by researchers, since the framework assumed that individuals within one nation have shared values. For instance, the model did not consider the sub-cultures within a particular nation. Also, the model treated culture as a homogenous and a static factor in the society. The flexibility of culture and the ability to change was not reflected in the model. Nonetheless, Hofstede’s framework offered the necessary flexibility for studying the role of culture in a specific nation (Potnis 2015). It also offered a good background about the culture in a specific nation or country. This makes it possible to avoid any cultural collision between the home country and the new one. A cultural collide is when what seems to be right for a cultural group could be not for another (Lee et al. 2015). Therefore, Hofstede’s framework will be applied within the three countries in order to give a better understanding of individuals’ culture and how to deal with them since it may affect their commitment and the firm’s performance as a consequence.

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