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Business and Economic Imperatives in 2008 and Beyond: Perspectives of a Consumer Business Operator Larry E. Ettah, Group MD/CEO October 14, 2008 1 Outline Introduction Broad Environmental Challenges The Changing Market Context Internal Organizational Dynamics Implications for Consumer Market Businesses The Management Imperatives Conclusion 2 Introduction It is trite to say that the business environment is becoming more complex and fast-changing (A week is now a decade in Global Economy). Globalisation is creating global rather than local markets, with suppliers and competitors liable to be at the other end of the world. Business these days is all about “competing with everyone from everywhere for everything”. (Globality; BCG) Increasingly, no longer is competition company vs. company, product or service vs. product or service, but supply-chain vs. supply-chain. 3 Introduction The local market is itself characterised by rapid change-intensifying competition, more sophisticated consumers, a dynamic communication industry with a deluge of advertising offering buyers greater choice. Meanwhile businesses in Nigeria must compete in this dynamic and evolving market with our hands tied behind our backs, almost literally A power crisis that increases production costs, by some estimates, by more than 30% Decrepit and lamentable transportation infrastructure, freight services that are constrained by frequent stops at police checkpoints and illegal toll gates. 4 Introduction (contd.) Capricious, prickly & predatory government agencies which impose unfair regulations and costs on businesses often without statutory backing. a multiplicity of taxes, rates and charges all of which combine to raise the bar of corporate success so high that only the very agile can survive (not thrive). While growth is possible, it is lower than the potential of our peers in more clement climes. In this presentation, I review some of these environmental, market and management challenges we all face, and offer my views and perspectives on them and suggest some broad imperatives for managerial action 5 Environmental Challenges: Global The global energy crisis caused by rising oil prices has raised the cost of doing business for producers and suppliers, and raised the cost of living (particularly transportation) for households and consumers all over the world. For retail industry and producers, this has meant declining sales as buyers re-allocate their spending and re-evaluate purchase decisions. This has been reinforced by the global food crisis resulting in the virtual doubling of food prices in the last two years, and a global credit crunch caused by the still-unfolding sub-prime mortgage crisis which is now developing into a full-blown financial crisis in the US and other markets. 6 Global Challenges (contd.) In this increasingly interconnected world of ours, it would be naïve to think we are immune from these global pressures. The Theory of decoupled market has been decoupled. Already the looming threat of US recession (which some say is already here) threatens to drive the world economy into a slowdown One side-effect for instance has been the decline in oil prices over the last two months to around $77 per barrel as global demand falls 7 Global Challenges (contd.) Another is the rise in domestic food prices, driven by partly by higher transportation costs, and by global food scarcity as the search for alternative energy sources means that increasing amounts of food production and resources are diverted to bio-fuel production And as managers who also have to manage investor returns, we all have seen share values decline (in some cases, such as I would argue UAC Plc) below their intrinsic value, partly at least due to the activities of offshore portfolio investors reallocating their portfolios away from the Nigerian market in the wake of turmoil in their home markets 8 Environmental Challenges: Economic I have already alluded to the critical infrastructural challenges that Nigerian businesses must contend with-power and transportation, as well as governance issues such as multiplicity of taxes and capricious municipal governance Nigeria must also deal with the risk of contagion from the adverse global financial and economic crisis and looming US and European recession. 9 Environmental Challenges: Economic (contd.) Fortunately Nigerian Macro-economic conditions provide some relative insulation due to Large FX Reserves Low Foreign Debt Much as we “vilify and malign” OBJ we have him to thank for this. Nevertheless negatives remain such as Declining Oil Price and Higher Spending Declining Capital Market Financial Sector exposure to margin lending Slowed Economic Reforms/Weak Policy Posture Weak Infrastructure 10 Economic Challenges (contd.) But there are other economic challenges as well Our middle class, even though has grown in the last few years is still not large enough to sustain the growth aspirations of a growing consumer sector in Nigeria. (Goldman Sachs middle class $6,000 - $30,000 annual income. Beyond $6,000 consumption of energy starts to rise; at $8,000 - $9,000 higher value durable takes off. Nigerian middle class starts more at approx. $10, 000 ??) Interest rates in Nigeria remain high, in spite of banking consolidation and economic reform Businesses still contend with severe logistic challenges, especially in relation to import and export of inputs and output through our ports and borders; and local products distribution within Nigeria (Entry and exit taxes? Lagos new container tariff) 11 Economic Challenges (contd.) Domestic service providers continue to labour under serious skill and capacity constraints which affect ultimate service delivery standards and product quality (Internal Brain Drain?) Related to the point about the size of our middle class, purchasing power is still limited, with the result that businesses in unrelated businesses are all competing for scarce “share of wallet”-especially with the consumer market. Food, Beverage, Entertainment, Household Electronics, Telecommunications, Cable etc expenditure are competing with education, transportation and other critical household needs in an inflationary environment in which unemployment is high and new jobs are not being created rapidly. (More workless class than working class.) 12 Environmental Challenges: Social In this challenging global and domestic economic environment, our businesses must still: Find the right employees, in terms of both aptitudes and attitudes Increase productivity in a workforce labouring in traffic for approximately 3-4 hours a day, and lacking electricity and other basic amenities at home Cope with labour and employee agitation for increased wages and benefits, (Sometimes what we gain as employees, we lose as consumers) as well as regulatory requirements such as pensions, group life assurance, health insurance etc 13 Social Challenges (contd.) We must still deal with the challenge of creating a professional and ethical culture in our firms, in an environment where people are accustomed to corruption (of greed & need) and nepotism. Climate of cynicism about Institutions. Erosion of trust, failure of the gatekeeper system. Business scandals and overall decline in social morality. We must deal with the challenges of insecurity and crime which increase our cost of doing business, and endanger the lives of our work force. (Ask Banks, Restaurants and Hotels; Protection Tax?) 14 Social Challenges (contd.) It is clear from all the above that business leaders and CEOs in this environment have our work cut out for us. Can’t help but wonder whether I am not underpaid when one looks at what some of our US counterparts are paid for running down their firms. 15 The Changing Market Context Industry and Market Convergence Telecommunications/Broadcasting/Photography/Music & Entertainment/Computing Retailing/Entertainment/Food & Beverage/Consumer Goods/ Electronics Financial Services/Payment Systems/Telecommunications Global Lifestyles Facebook; Google; MTV; Channel O; CNN; TBN Information Revolution Internet; CNN; BBC; Al-Jazeera; Harvard Business Review 16 Changing Context (contd.) Changing Demographics Youthful Population Female Power (Evelution) Educated Consumers Urban Concentration Health Consciousness The rise of China, India and other new economies Zone of legal risk; product liability, employment laws, SHE etc Outsourcing and Global Logistics Global Advertising Quick Service Delivery-Restaurants etc 17 Changing Context (contd.) Sports and Entertainment English Premier League Global Sports Brands-Arsenal/Chelsea/Man U etc Nollywood and Naija Music Alternative Channels Internet and E-Commerce ATMs and POS Credit and Debit Cards Loyalty Schemes Overall- Significant Constraints! Incredible Potential!!! Challenges; Opportunities; Challenging opportunities! 18 Internal Organisational Dynamics Younger Management Teams Greater female ratio in workforce (Retention, Recruitment) Greater Governance Requirements (Leading lights of Corporate Nigeria not practising what they preach) Greater Job Mobility Declining Workforce Commitment (Low career premium) Global Competition for Labour (Refugee/Diaspora talent) Management / Talent deficit. Upward pressure on Compensation 19 Implications for Consumer Market Businesses Stronger Competition (Barbarians at the Gate: Chinese?) Rising Costs; Narrowing Margins More diverse, younger and more demanding customer base Heavy Brand Investment (Media clutter, alternative channels) Threats of faster product obsolescence 20 Implications for Consumer Market Businesses Multiple models) Distribution Channels (new business Trade concentration (Increased power of Buyer) Overall More Complex Market: Consumers demand products at far lower prices and more basic forms or smaller sizes (single serve) than currently do. Business models that allow goods and services to be delivered in fundamentally new ways to consumers. 21 Managerial Imperatives: Anticipate a demanding and tough market in the near term Need to re-examine business models and assumptions Need to re-think distribution channels and strategies (Key Accounts Management) uac Restaurants Food Triangle/pyramid Customer Spend Aspirational Value Mass Market Customer Count 22 Managerial Imperatives (contd.) Need to constantly re-design product configuration and offering Restructuring human capital strategies to create organisational flexibility (Work-life balance, flexible work hours). Strong cost management focus to minimise downsides. (Outsourcing and risk sharing partnership. Move from labour productivity to resource productivity given high cost of fuel, raw material etc (using such more efficiently)). Asset lite Strategy / Off Balance Sheet financing 23 Managerial Imperatives (contd.) Need for constant innovation and creativity to match demands of changing market. Is Health a threat or opportunity? Calorie Counters and Menu labelling Alternative solutions for power and logistics 24 Managerial Imperatives (contd.) Need to engage with policy makers to improve business environment. How to seek and encourage social change in an age where public faith in politics is low. Despite best efforts, politicians are not making much progress as we will like in tackling problems. Business should be a powerful force for good. Play a role of leadership in shaping debate on socio-political issues. Business leaders need comprehensive understanding of public issues and a network of peers of similar interest that makes it possible to exercise such leadership role. More so we need companies that have supportive values and culture to enable exercise of such leadership. 25 Conclusion Forget double-digit GDP Growth. The economy will still grow but certainly the 13% target will not be attained. This may reflect in restrained industrial output and consumption (Don’t worship False gods) Evaluate your credit risk, suppliers & distributors etc Economy may tighten in 2009, cost curtailment, and containment, product innovation and redesign must intensify. 26 Conclusion As money supply and fiscal expansion contracts in 2009, expect inflationary pressures to reduce headroom for price review; but positive implication may be lower cost pressures but watch for possible softening of consumer demands. Competitive offshore input sourcing possibilities as falling Global economic demand could lower cost. Diaspora talent pool may become more available as the wounded head home. 27 Conclusion The market is undoubtedly more complex and the pace of change faster. If you are not facing global competitors, you will be facing global standards. The constraints, locally and globally are significant and rising, but the upside potential is also huge. The imperative is for greater managerial flexibility and strategic action to ensure that our businesses keep up with the demands of the business environment and a more complex market 28 愿你生活在有趣的时期中 - ancient Chinese proverb http://www.uacnplc.com