Business Overview of Soyfutures Company - Case Study Example

? Soyfutures Soyfutures CONTENTS Chapter Executive Summary…………………………………………………………………3-4 Chapter 2 Introduction of Soyfutures Company 2.1 Company Overview ……………………………………………………………………..….4-5 2.2 Biodiesel Industry Analysis………………………………………………………………..5-6 Chapter 3 Identifying market for International Development 3.1 Country/Market Screening………………………………………………………………….6-8 3.2 SWOT Analysis……………………………………………………………………………..8-9 3.3 Choosing appropriate route to market……………………………………………………….9 3.4 Market Segmentation………………………………………………………………………9-10 Chapter 4 Choosing market entry strategy…………………………………………………..10-11 Chapter 5 Financing option for International Expansion…………………………………….11-12 Chapter 6 Recommendation……………………………………………………………………...12 Bibliography Chapter 1 Executive Summary The soya bean (or soybean in the US) is a legume grown mainly because of its edible bean which also has other multiple uses (Sidney & Smith 1972). A native crop of East Asia, the UN Food and Agricultural Organisation classifies it as an oilseed and not a pulse. Of the entire soya bean crop produced worldwide, 85 percent is processed into vegetable oil and soya bean meal. 60 pounds of soya bean bushel yields 11 and 47 pounds of crude soya bean oil and soya bean meal respectively when processed. The high protein content makes soya beans ideal in the manufacture of livestock feed, especially in the United States. Human consumption is mainly in the form of dairy and meat substitutes, edible oils, soya flour, and infant formula. The use of soya beans in the non-food industry has also been on the rise, most significantly in the energy sector. Through the process of transesterification, biodiesel fuel can be obtained from soya bean oil for use in diesel engines (Drapcho, Nghiem & Walker 2008). The process simply removes glycerine from soya bean oil. Because soya biodiesel burns cleaner than petroleum based diesel oil, it is non toxic, environmentally friendly and renewable. Environmentally friendly solvents can also be produced from soya oil that remove oil from shorelines, streams and creeks without causing any harm to the environment, humans, animals and marine life. It is also used in the manufacture of industrial solvents, lubricants, paints and cleaners. In the building industry, soya bean extracts are used in the manufacture of building materials, known as biocomposites, replacing the traditionally used wood in furniture making and flooring (McCormick 2006). Another use of soya bean oil is the manufacture of crayons, which makes them safer for children because they are non toxic. Candles made from soya bean oil produce less smoke and burn longer. With the growing non-food use of soya beans, this report will identify and analyse international market opportunities as well as risks involved for Soyfutures in their bid to develop market for soya bean oil. The US remains the world’s highest producer of soya beans, as shown in the table below, provided by UN Food and Agricultural Organization. Country Million Metric Tons in 2011 United States 90.6 Brazil 68.5 Argentina 52.6 People's Republic of China 15.0 India 9.8 Paraguay 7.4 Canada 4.3 Uruguay 1.8 Ukraine 1.68 Bolivia 1.63 With an annual soya bean production of 500,000 metric tons that is mostly used locally, Nigeria can produce and export biodiesel to Latin America, Asia and Europe where there is extensive use of diesel engines in farm equipment, automobiles, trains, generators and marine machinery. Although the focus of Soyfutures was to venture into markets outside Africa, the research found that Africa still has a potentially inexhaustible market for biodiesel (Mitchell 2010). Chapter 2 Introduction of Solar City Ltd 2.1 Company overview Soyfutures is a Nigerian company in its third year of operation with an annual earnings of ?1 million. It is the first Nigerian company to shift its key operations away from soya bean-based food production to purely industrial. The company is seeking to expand its trading of soya-based biodiesel beyond Africa. The company is seeking to take advantage of the Nigerian government’s push for an increased output from the agricultural sector. The biodiesel will be processed locally in Nigeria in collaboration with the University of Agriculture and energy ministry, and shipped via sea to the selected markets. Already used locally, the biodiesel is preferred to petroleum-based diesel due to its affordability, and the company’s marketers intend to use the low pricing as one of the strong points in selling it. It is also a cleaner source of fuel compared to mineral oil (Kuplow 2007). Market research and operations will initially be funded by the government’s enterprise fund, but Soyfutures is expected to take over the funding in the second year. In addition, three regional offices will be set up in Latin America, Europe and Asia, each with a Nigerian CEO and team of local directors. 2.2 Biodiesel Industry Analysis The use of fossil fuel has long been the key source of petro-diesel (Max, Ball & Turner 1965). Although the European Union produced 85 percent of the global 3.8 million metric tons of biodiesel in 2005, it came from sources other than soya beans. The key source was palm oil, followed by coconut oil, rapeseed, Chinese tallow, peanuts and sunflower in that order. Out of all the vegetable-oil sources used, soya beans were only above hemps, which were the least used. Increased use of soya beans to produce biodiesel can significantly grow global production of the fuel, whose demand is growing owing to the environmental benefits that are associated with using it. The European, Asian and Latin American central governments are keen on the reduction of biodegradation rates and greenhouse gas emissions (Salunkhe et al 1992). According to a report published by the Environmental Protection Agency (EPA) of the United States in 2010 on the standards of renewable fuel, the use of biodiesel produced from soya beans oil reduces greenhouse emissions by 57 percent in comparison to petro-diesel. Biodiesel from soya bean oil got a market share growth when the same agency published in 2012 that biodiesel from palm oil would no longer count towards the region’s renewable fuels mandate because it is not friendly to the environment. Environmentalists, even in Europe, agreed that the growing oil palm plantations were contributing to tropical deforestation, most notably in Malaysia and Indonesia (Vergroesen & Crawford 1989). However, the demand may give rise to new market entrants, especially from large producers of soya beans like the Unites States and Brazil, who might have a greater bargaining power because of their ability to meet demands and proximity to the potential markets. Alternative sources such as animal oil and other vegetables also pose a threat to soya bean oil. A recent research identified alligator fat as a biodiesel source (Hodgson 2008). Europe and the United States alone dispose of alligator fat in excess of 15 million pounds annually in landfills as waste products from the alligator skin and meat industry. Researchers found that the composition of biodiesel made from alligator fat and soya bean oil is similar (Turcotte & Schubert 2002). Furthermore, since the product of alligator fat is essentially a waste product, refining it is cheaper. However, Soyfutures can segment and develop a market from the rural parts of developing economies in Asia, Latin America and some countries in the Arab world where the use of generators for lighting is rampant, as well as the use of diesel in powering farm equipment. Chapter 3 Identifying market for International Development 3.1 Country/Market Screening By venturing into markets out of Africa, Soyfutures will grow its market share in the energy sector, whose demands are on the rise, especially in the developing economies. It will be able to generate profits and take over funding of its own operations in the second year as agreed between the company and the Nigerian government. Although there will be stiff competition from the large scale producers of soya beans, the demand of biodiesel will easily balance it out. International expansion of Soyfutures is based on the quest of seeking cleaner energy by most governments around the world. Market screening in Asia: Soyfutures can take advantage of the poor contracting and sales skills in the clean energy sector of Asia. Generally, the Asian market has few platforms, lack of broking and trading market and poor trading awareness in the sector. Philippines has the most favorable international trade policies on biodiesel among all the Asian countries. With jatropha being the key source of biodiesel, soya bean oil has a good entry point as an alternative. In the Asia Pacific region, the requirement of energy independence will provide a reliable market and demand for biodiesel produced from soya bean oil. Market screening in Europe: The European Union intends to minimise oil dependency, direct emissions and greenhouse gases by 2020 through producing and distributing biodiesel efficiently in the transport sector (Duchane & Brown 2002). After abolishing the import taxes imposed earlier, it is ready to work with international companies towards achieving the goal, and soya bean oil has been identified as one source. The union is seeking low cost providers of biodiesel, and since Nigeria produces substantial quantities, meeting the price threshold is a possibility. The rural areas of the eastern part of the union are in particular need of clean energy, hence a potentially viable market. Biodiesel from soya beans oil meets the required targets of societal and environmental benefits, cost effectiveness and technical reliability. This is further boosted by the shift away from palm oil as the key source of biodiesel. Market Screening in Latin America: Local demand in Brazil has been on the rise from 2010. Although Brazil is also a large producer of soya beans, the supply requires subsidising from imports to satisfy the market. Argentina is also a potential market with its demand of clean energy. 3.2 SWOT Analysis Strengths The Asian market is moving away from oil palm as a source of biodiesel because of its deforestation effects on tropical forests, with some countries like Philippines having trade policies that encourage the use oil soya biodiesel (Casson 1999). Both the European and Latin American markets have policies with a promise of delivering clean energy, justifying the shift from fossil fuels to biodiesel Weakness The Asian market has poor awareness of the product, with jatropha still being widely used. They have also been slow to stop the use of oil palm even with pressure from environmentalists. The proximity of Latin American and European countries to the United States places Soyfutures at a weak spot because of the United State’s high capacity to produce soya beans Opportunities Rural Asian and Latin American rice plantations run diesel pumps in their irrigation schemes as well as diesel machines in their mills (Casson 1999). In the European market, although they have capacity to produce soya biodiesel, their demands greatly outweigh the supply both in rural and urban areas. A common feature that provides another opportunity within the three target markets is the drive to reduce carbon emissions from fossil fuel. Threats The large scale soya bean producers, especially the United States and Brazil, may set up more processing plants and increase their local production capacity, which will definitely make their product cheaper than imports. 3.3 Choosing appropriate route to market: Soyfutures is venturing into the international market with full awareness of the risks involved, most of which are caused by distance and the implied costs of coordinating overseas trading. With that information, the selected partner countries have favorable political, cultural and economic landscapes that can blend well with those of Nigeria. Nigeria is not really a poor country, and has the monetary assets, marketing knowledge, modern manufacturing units and distribution networks to trade with most European, Asian and Latin American countries. Philippines, Brazil, Romania and Argentina provide ideal routes to the international market. The government of Serbia has also placed emphasis on the use of clean and renewable energy (Lim 2012), hence can act as a perfect hub of expanding the business in the region. 3.4 Market Segmentation: Market segmentation will assist in determining the best targets with optimum and sustainable profitability. Soyfutures will be able to concentrate on areas not infiltrated and strongly held by the larger competitors. Some segments will be made up of entire countries, such as Serbia, whose governments are in the forefront of promoting the use of soya bean biodiesel, while other will be regions or communities within countries, such as the rural areas of the eastern European Union. The general formation of segments will be based on factors like how the biodiesel will be used as well as the bulk demanded the potential consumers. 1. How the biodiesel will be used Some of the market, especially the poor and rural ones in Asia and Europe, will generally use it in generators for home lighting, as well as those who will use it in farm equipment on their small scale farms (Monoj 2007). Although most of this market is made up of small scale consumers, their use is consistent because biodiesel is their most affordable option. 2. Volume demanded Some users buy in small quantities for use in personal transportation, while others, such as the large transport companies, buy large quantities. Manufacturing companies that run large diesel plants will form the largest segment. Chapter Four Choosing the market entry strategy Numerous entry strategies exist, all of which are informed by research. Common business theories suggest that the key factors that determine the chosen mode of entry are the cost and what a company intends to achieve within a stipulated period. Gradual entry, especially in untested markets, is the best mode for new companies. However, with biodiesel already an existing business area, the research conducted established that market opportunities are plenty, the key obstacle being the established players in the industry. Soyfutures has established that permanent presence in the selected markets is its most suitable entry strategy, hence the decision to set up the three foreign regional offices. Because the industry is awash with companies with similar interests, managing the business of Soyfutures can best be conducted from within the markets, rather than having all the operations run and managed remotely from Nigeria. Entering the market through subsidiary companies is a viable idea in developing Asian and Latin American countries, but not many European countries may welcome the idea because they are already considerably funded and supported by their governments and the Union respectively. Soyfutures will, therefore, establish itself fully as a company in Europe, as well as the other two targets, by license agreement but partner with local distribution networks for growth. Chapter Five Financing option for the International Expansion In the entry stage and for the first two years of operation, the business venture will be financed by the enterprise fund given the Nigerian government. This is in view of the fact that most private financial institutions may not be willing to invest colossal sums of money in a company as young as Soyfutures. For transparency and better management of money, use of the funds will also be monitored by the government during the period. Within the two years, sales are estimated to have grown, generating operating capital. To increase capacity and hence income, extra soya beans will be imported from the United States, taking advantage of the import credit extended to Nigeria by the United States Department of Agriculture. Although soya beans are ready for harvesting between three and four months after planting (Singh, Nelson & Chung 2006), demand is expected to exceed supply once the production of biodiesel goes large scale. As a backup plan, more money can be borrowed from the enterprise fund at the end of the two years, which is repaid at minimal interest rates. Soyfutures will prepare an elaborate business plan which will be used to seek an additional loan from the Nigerian government and local investment banks. The business plan will detail the business concept and offer information on the target market, applicable start up costs, earning projections for the first three years, public relations plans and information on the competition. Initially, equipment will be leased and inventory bought on net terms, eliminating the need of paying large sums upfront for required materials. To cut down on operating costs, the biodiesel will initially be processed at the University of Agriculture in Nigeria before eventually setting up an independent processing plant. Chapter Six Recommendation With market availability not in doubt, Soyfutures has the full support of the Nigerian government. Additionally, with the selected target market governments also supporting the use of biodiesel, Soyfutures should give itself the competitive edge by having the best introductory prices and partner with reputable distribution networks. Soyfutures should market itself as an international company that can adapt to its new market, rather than a Nigerian firm simply expanding its interests. After establishing the best market segment, Soyfutures should focus its production of biodiesel on blends that will not call for modification of the equipment it will be used to fuel. Most equipment manufactures indicate the recommended blend ratios (Kemp 2006), and Soyfutures should produce different blends for the diverse markets. Soyfutures should also consider taking up several social responsibilities in its new markets to boost its public profile. Market research should also be a continuous process, although not primarily for the purpose of expanding into new territories, but rather, to improve those already ventured into. References Casson, A 1999, The hesitant boom: Indonesia's oil palm sub-sector in an era of economic crisis and political change, Center for International Forestry Research, Bogor. Drapcho, C, Nghiem, N & Walker, T 2008, Biofuels engineering process technology, McGraw, New York. Duchane, D & Brown, D 2002, HDR geothermal energy, Oregon Institute of Technology, Oregon. Hodgson, P 2008, Nuclear power and energy crisis, Prentice, New Jersey. Monoj, G 2007, Practical guide for vegetable oil processing. AOCS Press, Illinois. Kemp, W 2006, Biodiesel: basics and beyond. Aztext Press, Ontario. Kuplow, D 2007, Biofuels – at what cost, Cambridge University Press, Cambridge. Lim, TK 2012, Glycine max, Springer, Dordrecht. Max, B, Ball, D & Turner, D 1965, This fascinating oil business, Bobbs-Merrill, Indianapolis. McCormick, R 2006, Biodiesel handling and use guide, Prentice, New Jersey. Mitchell, D 2010, Biofuels in Africa: opportunities, prospects and challenges, The World Bank, Washington. Salunkhe, D, Chavan, J, Adsule, R & Kadam, S 1992, World oilseeds – chemistry, technology, and utilization, Van Nostrand Reinhold, New York. Singh, R, Nelson, R & Chung, G 2006, Genetic resources, chromosome engineering and crop improvement: oilseed crops, Taylor & Francis, London. Sidney, C & Smith, A 1972, Soybeans: chemistry and technology, Oxford University Press, New York. Turcotte, D & Schubert, G 2002, Geodynamics, Cambridge University Press, Cambridge. Vergroesen, A & Crawford, M 1989, Factors influencing fatty acid chain elongation and desaturation, in the role of fats in human nutrition, Academic Press, London Read More