International Business Analysis: Ghana - Essay Example

Author’s name Instructors’ name Course Date International Business Analysis: Ghana Introduction Over the decades, Ghana has attracted various investors from across the globe due to the abundant natural resources available in the country (Flabay et al., 56). The restructuring of the country’s economy started back in the 1980s but the military regimes failed to ensure that corruption was fought. After noticing that the economy was not doing as expected, the president Jerry John Rawlings requested the support of the World Bank and the international monetary fund in reviving and facilitating the social and economy transformation in the early 80s. The impact of these measures started being felt in the 1990s but many blamed the government of note translating the same to the average Ghanaian. Since the being of the last decade, Ghana’s economy has been registering growth but with the occasional shake up. Admittedly, the presence of oil, relatively stable political environment and building up of macroeconomic imbalances has played a critical role in economic development (Flabay et al., 66). The low cost of fuel has however hit the economy hard. In 2014, the fiscal deficits and current account widened to 10.4% and 9.2% of GDP respectively while the rate of inflation averaged 17.0%. The country was able to stabilize the foreign reserve due to the proceeds from the USD 1 -13824 Eurobond money and cocoa syndicate loan of USD 1.7 -13824. In order to stabilize the economy, the government started negotiating with the IMF. The economic growth in 2015 was at 3.9%, which demonstrated the continued reduction in Ghana’s economic performance in the recent years. Evidently, Ghana’s accelerated economic growth over the past decade has helped the country achieve the Millennium Development Goal (MDG) goal of halving poverty (Flabay et al., 26). However, there is evidence of growing disparities as far as income inequality and spatial development across regions are concerned, especially in the three northern regions. Additionally, progress in the achievement of other MDGs remains mixed, with the 2015 targets likely to be missed after the results have been documented in 2016. The following paper intends to discuss some of the basic components of venturing into a new international market. However, the paper seeks to examine the Millennium and Copthorne International Ltd.’s expansion into Ghanaian tourism and hospitality industry. Macroeconomic Environment GDP The country’s macroeconomic environment has remained relatively healthy for the last one decade. However, in recent years, the budgetary operations have continued to show increased budget deficits, which is attributed to the low cost oil among other factors. The deficit has been witnessed despite the initiatives such as raising tax revenue as well as control expenditure (Flabay et al., 55). In the last two years since 2014, the deficit has averaged over ten percent of the Gross Domestic Product due to the reduced domestic revenue collection the increased public expenditure. In 2013 and 2014, the domestic revenue collection was 16.8% and 18% of the GDP respectively. Additionally, the total cost for the country increased by 6.5 percent between 2013 and 2014. The government has consulted the IMF in order to assist in the fiscal consolidation efforts. Recent Foreign Direct Investments Although Ghana has been facing economic problems in the past few years, the country has encouraged multinationals, medium as well as small-sized foreign companies including Ghanaian nationals that reside overseas to increase their business interests in Ghana (Flabay et al., 32). For example, recently, coca cola, which is one of the largest multinational companies in the soft drink industry increased its resides in the country by adding more money to its Ghanaian subsidiary. At the same time in 2013, Heinz also invested close to $20 million in a tuna canning operation, through its StarKist subsidiary. Further, the Ghanaian government has been increasing its emphasis on the development of non-traditional export sectors. Consequently, Coleman, which is one of the renowned companies in America that deals in fish farming, invested over $23 million in facilitating freshwater fish farming in Ghana for export (Flabay et al., 52). As is being indicated by the recent investment plans and other new investments in Ghana such as Caterpillar, Guinness, IBM, Unilever, M&W Pump, Deloitte & Touche, Lazare Kaplan, Southwestern Bell, AT&T, McClendon, Pryor, & Counts, the country continue to attract foreign investment which is healthy for the economic performance. Exchange Rate and Inflation Evidently, some of the most critical factors In Ghana, as far as the Consumer Price Index (CPI) is considered are Non Alcoholic Beverages and Food (accounting for over 43.6 percent of the total weight); Electricity, Housing, Water, Gas and Other Utilities (amounting to 9.5 percent) as well as Footwear and Clothing (8.9 percent) (Flabay et al., 32). Additionally, based on the total index, Transport account for 7.2, while Miscellaneous Services and Goods for close to 7 percent. In addition, Cafés, Hotels, and Restaurants account for approximately 6 percent, while Household Equipment and Furnishing for about 4.6 percent. Statistics also indicate that education sector represents around 3.8 percent of the total weight, Communication 2.6 percent, Culture and Recreation another 2.7 percent. Further, Health accounts for the remaining 2.4 percent while Tobacco, Alcoholic Beverages as well as Narcotics 1.6 percent. As of February 2016, the annual inflation rate of Ghana was recorded at 18.5 %, which was down from 19 % in the month of January 2016 (Flabay et al., 35). For the first time in six months, the rate of inflation was reported to ease, as the cedi’s stability in the month was able to avoid further increases in cost of imported products and services. Interest Rates Decisions on interest rates In Ghana are done by the Monetary Policy Committee of the Bank of Ghana. The official interest rate is referred to as the Monetary Policy Rate (MPR) (Flabay et al., 36).. Company Profile- Millennium and Copthorne International Ltd Millennium and Copthorne International Ltd is a global company that deals with management of rewards, loyalty programmes, and incentive schemes for clients in the hospitality industry. The company is headquartered in Singapore and is present in more than twenty countries in the world mostly in Asia.The company is also involved in product promotions, sales promotion through frequent guest recognition programmes as well as arranging for the discounted services in the hospitality industry. However, the company wishes to expand its services by venturing into new markets in Africa through Ghana. Macro Environment Tourism Industry In recent times, tourism has become of the major areas that contribute a lot to the economic development of Ghana. Admittedly, the tourism industry is applauded for its rapid and sustained growth across the globe (Mashiny, 39). In Ghana, as is the case across the world, statistics show that in the 21st century, tourism is the second fastest growing sector and the third one as far as international export is concerned after petroleum and motor vehicles. The development of tourism in Ghana has been attributed to different reasons that included economic, cultural, social, and environmental benefits. However, studies on Ghana’s tourism sector as is observed in many other countries show that economic advantages have played a critical role as driving forces for the tourism development. In addition, the continued dwindling of commodity prices across the globe has forced many developing as well as developed countries to integrate tourism sectors in their economic plans, which is also the case in Ghana (Mashiny, 59). With the wake of terrorism around the globe, the tourism industry is one of the most affected sectors of any economy. However, despite the terrorist attacks that keep taking place in Mali, Libya, and many countries in the western African nations, they have not negatively affected the tourism industry in Ghana. Over the last five years, Ghana has reported increased visitors who always consider the country as one of the few secure nations in entire West African region. At the same time, as some foreign nations such as America and European countries issue the travel advisory to its citizen in order to caution them against visiting the region. Ghana has always been singled out in the list, thus making it the most suitable and safest West African nation to visit and invest in tourism and hospitality (Mashiny, 36). Tourism Data As noted above tourism is one of the strongest pillars of the Ghanaian economy. The country has continued to register increased visitors every year (Mashiny, 69). In 2012, Ghana recorded approximately, 993,600 international tourist arrivals, which was 6% increases compared to the previous year. In 2013, the country also saw an increased international arrival compared to 2012, where the total number of tourists that visited Ghana was around 996,500. However, there was no significant increase in the number of tourists visited the country in 2014 compared to 2013. However, due to the increased awareness of the tourism sites by the ministry as well as other efforts, the number of visitors in 2015, is expected to have risen. Economic Contribution Notably, Ghana’s tourism sector is diverse ranging from cultural events to game. Consequently, the government has recognized the role that tourism industry is playing towards economic development thus increasing its budgetary allocation to creative industry up to GH¢ 5 million in 2015. The objective of supporting tourism industry is to show the government’s recognition of the potential of the industry in spurring the country’s economic growth (Mashiny, 35). In 2013, the Minister of Finance and Economic Planning, Mr. Seth Terkper had indicated that Ghanaian government would ensure that it facilitated the development of cultural villages as well as enclaves as one of the critical appendages to the tourism industry (Larimo et al., 24). Consequently, the ministry’s efforts so far shown the significant contribution to the economic development especially when it comes to the generation of revenue. In Ghana, tourism lead to national GDP is nearly 3.5 %. At the same time, the industry has played a key role in providing jobs for many Ghanaians especially the young people. The study shows that tourism and hospitality industry have helped the country in alleviating and halving poverty levels in recent years though a lot needs to be done. Porter’s Five Force Model Porter formulated the Porter Five Forces model. The five “forces” analyze both the external as well as internal factors that affect the competitiveness of a company or industry (Hill et. al, 34). The Five Forces in the Porter model include the threat of substitutes and the new entry, customers' and suppliers’ bargaining power, as well as the magnitude of rivalry in a given industry (Hill et. al, 59). The five factors have been identified and applied in the in different industries to assess the viability of venturing in new markets. As explained below, this section seeks to use the Porter Five Forces model in analyzing the feasibility of venturing into tourism and hospitality industry. Bargaining Power of Customers “Bargaining power of suppliers and customers” refers to the power that supplies consumers have in determining the prices of products or services being offered (Hill et. al, 91). The element takes into consideration the ability of users and suppliers in manipulating the prices due to changes in the forces of demand and supply. For example, if consumers had high bargaining power regarding a given product, the suppliers and sellers of the product may not be able to determine the future demand for the product from customers, which may affect the profit sustainability over a given time. In Ghana, the current situation in the tourism industry shows that customers have a high bargaining power. The situation is attributed to the increased investments that have been done in tourism and hospitality industry. Therefore, it would be advisable that if a company wishes to invest in this industry, there should be creativity and innovation in order to provide unique services to customers. Bargaining Power of Suppliers In the Porter’s Five Forces Model, “bargaining power of suppliers” refers to the power that vendors have in determining the price of products or services in a given industry of region (Hill et. al, 56). Suppliers with high bargaining power can apply different techniques such as restraining supply and hoarding of products. However, it is critical to note that some techniques are illegitimate and attract legal punishments such as revocation of business licensing. Research shows that suppliers may or may not have a low bargaining power in the Ghana’s tourism industry. For example, due to the presence of many investors’ suppliers and the variety of services in the market, an investor may not be able to sell their products at high prices. The large supply of these products makes customers be able to influence the price. However, if a company produces unique products and services that are not available in the Ghanaian market, it will have a higher bargaining power. Admittedly, the most affected companies are the new entrants. To enhance the company’s bargaining power, the company should employ innovative personnel who will look at new ways of attracting customers. Threat of Substitutes According to this model, the “threat of substitutes” refers to the fears that are created after same products are produced by different competing firms (Hill et. al, 95). In this case, suppliers or manufacturers may lose their bargaining power if customers can access the same products elsewhere. Under this factor, manufacturers or supplies are made to develop new products or services that meet the demands or needs of a specific segment. As noted earlier on, a high threat of substitutes is experienced in the Ghanaian tourism industry, which is due to the increased number of investors in recent years. As described earlier, a new company in the industry will need to make use of innovative individuals to invent products that have unique attributes in order to beat other substitutes that exist in the market. Barriers to New Entry As one of the five factors, barriers to entry looks at how easy a company can enter into an industry. Industries that are competitive enough attract firms that are able to capture the market share. Customer loyalty is developed through coming up with new products that meet customer needs. Further, for firms to become profitable over a long time, they need to have customer loyalty strategy in the industry (Hill et. al, 42). This is crucial in ensuring profit sustainability. It makes their share in the market unaffected after new firms enter the market. Notably, although a low barrier of new entry is witnessed in the tourism and hospitality industry, Ghana has a lot of potential for growth in this sector since the country continues to attract international visitors. At the same time, the state has eased the entry cost by reducing the bureaucratic process for legal requirements. However, the new company will have to use some considerable amount of money for doing research and development before knowing the best location of the business as well as understanding the market players’ operations. Competitive Rivalry “Competitive of rivalry” is the degree and magnitude of competition in industry. The market concentration is influenced by several factors such as the profit made by individual firms, the quality as well as the price of the product .Evidently, tourism and hospitality industry has high competitive rivalry due to a large number of suppliers of services and investors, which influences the market price of products, which consequently affect their profit margin. Market Entry Strategy As a new company that is venturing into tourism and hospitality industry in Ghana, a firm would be recommended to use “Partnering” as the most suitable entry strategy. Although there are different ways of “Partnering” in international markets, this paper recommends a simple co-marketing arrangement with a small company that understands the market. The objective will be to learn the market through another “small company” in the industry (Ip, 32). The new company should choose the small local company that has the structures ready including a considerable number of employees. In this partnership, the new company should facilitate the local one to become competitive. However, the most important role would be to provide creative ways of competing with already established firm and consequently reducing the initial risks of venturing into a new market. Investment Analysis Cost of Capital The cost of capital is used to indicate the cost of funds that are used for financing a given business. The cost of capital is determined by the mode of financing that is used including the cost of equity and the cost of debt (Ip, 36). A company may decide to one of the options or both alternatives. In most cases, companies use both forms in financing their business. If a company uses the cost of capital and cost of debt in funding its new business, the cost of capital would be calculated by finding the weighted average of the two sources of capital sources, which is commonly known as the weighted average cost of capital (WACC). Cash Flow Forecasting Cash flow management is one of the key financial management techniques for planning future cash requirements of a company in order to avoid liquidity crisis (Ip, 62). If a company is investing, with locally or internationally, it is critical to forecasting cash flow to identify any potential cash balances in future, ensuring that the business would be able to pay employees, suppliers, and spot problems with customer payment. Additionally, this forecasting shows financial discipline and some banks and financial institutions may require cash flow forecasting regularly. Discounted Cash Flow Discounted cash flow is a valuation method that is used in estimating if an investment is attractive (Ip, 35). In calculating the DCF, future free cash flows projections, where they are discounted in order to arrive at a present value estimate that is later used in evaluating the potential for an investment. Conclusion The paper has provided the economic overview of Ghana in order to highlight the viability of investing in the country as a new market segment. Besides discussing the macro environment of the country, the paper has also detailed the macro environment of tourism and hospitality industry in relation to Porter’s Five Forces Model. Finally, the paper has briefly discussed the most suitable entry strategy and investment analysis. Recommendation This paper recommends that the company venturing into Ghanaians tourism and hospitality industry should use “partnering” as the best way to enter into this market. However, the new corporation should choose the small local company that has the structures ready including a considerable number of employees. In these partnerships, the new company should facilitate the local one to become competitive. The most important role would be to provide creativity and innovative ideas to compete with the established companies in the industry. Works Cited Agyeman-Duah, Ivor, Christine Kelly, and Wole Soyinka. An Economic Perspective of Ghana:. Oxfordshire, UK: Ayebia Clarke Pub, 2015. Print. Flabay, Les R, and James C. Scott. An Economic Outlook ;Ghana. Mason, Ohio: South-Western, 2010. Print. Hill, Charles W. L, and Gareth R. Jones. Strategic Management Theory: An Integrated Approach. Boston, MA: Houghton Mifflin, 2010. Print Ip, Greg. The Little Book of Economics: How the Economy Works in the Real World. Hoboken, N.J: Wiley, 2013. Print. Larimo, Jorma, Niina Nummela, and Tuija Mainela. Handbook on International Alliance and Network Research. Cheltenham: Edward Elgar Pub. Ltd, 2015. Internet resource. Mashiny, Niall. The Ghanaian tourism and hospitality industry. 2015. Internet resource. Read More