Foreign Direct Investment in Internet Service Provision

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Executive summary

Kamuga Internet Providers is an internet service provider that seeks to begin its operations in partnership with Jamii Telecom in Kenya. A team comprising of a regional director, marketing manager, operations manager, and human resource manager will oversee the management of the company. The objective of the venture is to exploit the vast market in Kenya.

The company will collaborate with Jamii Telecom in offering the internet services to the target market. Among the strategies that the company intends to apply to attract clients, include offering its services at a lower cost relative to other companies. Additionally, the company will run promotional programs like offering free internet services to clients.

To cater for cash shortage, the management will ensure that it identifies those clients that take long to pay for the services and ask them to deposit an amount of money as retainer. Among the risks that the company is likely to encounter include, security risks and sensitivity risks. Nevertheless, there are high prospects that the company will succeed, with its operating profit expected to be approximately $50,000 annually.

Introduction

Demand for internet services in the developing countries is in the rise. Majority of the companies in the developed countries outsource their human resource tasks to developing states. This underlines the reason why many business-outsourcing firms are emerging in developing countries like in Kenya. Outsourcing firms process the tasks and send them back to their clients.

All these activities require internet. Demand for internet services in Kenya is what prompted the desire to establish Kamuga Internet Providers, an internet service firm aimed at offering internet services to Kenyan companies. The firm will operate in collaborate with Jamii Telecom, which is a Kenyan company that offers internet services to clients.

This paper will focus on the benefits of establishing the company in Kenya, prospective success, and challenges that might arise in the process of running the company in Kenya.

Advantages of establishing the business

Engaging in international trade brings numerous benefits to an organization. These benefits include, risk diversification and growth (Rose and Van Wincoop 387). One of the benefits that Kamuga Internet Providers will enjoy for engaging in international trade will be enhanced growth. Because of high demand for internet services in Kenya, the business will make good returns, which will facilitate in its growth.

Besides, the business will enjoy a better margin. The Kenyan currency is weaker relative to the U.S dollar. Consequently, the business will require less capital to start, while the returns will be high. Jamii Telecom will also benefit from this investment in different ways. The company’s income will increase. Currently, Jamii Telecom is in partnership with other companies.

Hence, this partnership will act as a diversification strategy to the company. Another benefit that the trade partner is likely to enjoy from this investment is earlier payments. Majority of the overseas payments are made upfront, and Kamuga Internet Providers intends to observe this.

Challenges and opportunities

The investment is likely to face numerous challenges, as well as opportunities. One of the challenges that this investment will encounter is cultural challenge. Jamii Telecom and Kamuga Internet Providers operate in different environments. Hence, the two companies use different organizational strategies. The companies will encounter challenges when managing the joint venture.

Besides, there will be an economic challenge. Because of political instability in Kenya, the country’s currency keeps on fluctuating (Kenya National Bureau of Statistics 34). This implies that it will be hard to estimate the total working capital for the investment at a given year. The two partners will have to monitor the business’s working capital and to increase it whenever necessary.

Another challenge will be competition from other internet providers. Already companies like Safaricom and Orange have invested in internet services. Hence, Kamuga Internet Providers will face stiff competition from these firms.

To operate in the Kenyan market, the company will have to obtain a license from the Kenyan government. Besides, the company will site its operation base at a strategic position. To contribute to its success, it will have to look for labor capital. Despite collaborating with Jamii Telecom, Kamuga Internet Providers will require having local employees to facilitate in marketing its services.

Moreover, the company will have to obtain intellectual property protection rights to avoid conflicts with rival companies. This will facilitate in safeguarding its innovations and technology, therefore, enhancing its competitive advantage (Kameri-Mbote 18).

In spite of the numerous challenges, there are many opportunities in Kenya. Currently, the existing internet provider companies focus on key firms and offices. Kamuga Internet Providers intends to target business outsourcing companies, as well as leading institutions like universities and banks. These companies cannot operate without internet.

Therefore, there will always be a ready market for the company. Majority of the companies that source their internet services from Safaricom and Orange, complain about the reliability of their services. Therefore, consumers will be willing to try a new service provider, giving Kamuga Internet Providers an opportunity to expand and consolidate its consumer base.

Covering logistics

Logistic is one of the challenges that affect internet-providing companies. Poor logistics lead to consumers complaining about the quality of the services. Kamuga Internet Providers will liaise with Jamii Telecom to supply the internet services through its fiber optic cables. This will ensure that consumers are satisfied with its services.

Besides, Jamii Telecom will help it to do the networking in all the institutions that require its services. For the major institutions like Universities and business outsourcing firms, the payments will be on postpaid basis. The companies will pay after using the services.

This strategy will facilitate in winning the trust from the clients. A Majority of the clients would decline to pay for the services they have not used in fear that they might frustrate them. Nevertheless, requesting them to pay after using the services would encourage the majority of them to use the services.

Key risks

The venture might be prone to a number of risks. The risks include security risk and sensitivity risk. As the company grows, it might not be able to secure its broadband, making it possible for unauthorized people to use the internet services. This will call for the company to monitor its broadband regularly and work to enhance its security. Sensitivity risks are other key risks that Kamuga Internet Providers is likely to encounter.

The sensitivity risks include government regulations, interest rates, and exchange rates. Variations in the exchange rate might affect the company’s profit. On the other hand, government regulations like intellectual property rights might hamper the company’s innovation capacity.

Revenue, cost and profit estimates

To arrive at the estimated revenue, cost, and profit of the investment, the company will make numerous assumptions. One of the assumptions is that no conflict will arise between the company and the clients, which might lead to clients withdrawing in the course of the contract. Another assumption is that the cost of operations will remain constant throughout the year.

The company will also assume that there will be no changes in government regulations or increase in the inflation rate, which might lead to the operations cost going high. It anticipates that employees’ salary will remain constant throughout the year. Apart from the overhead costs that will remain constant, other costs like customer service and billing are expected to vary from time to time.

Operating statement for year 2013

Total Revenue $100,000

Variable costs $ 20,000

Gross Profit $ 80,000

Fixed costs

Salaries $10,000

Rent $10,000

Utilities $ 5,000

Depreciation $ 5,000

Total Operating Expenses $ 30,000

Operating Profit (EBIT) $ 50,000

Startup costs

To start this investment, the management will require at least $700,000. This will cater for employee recruitment, marketing cost, rent, and broadband procurement, among other recurrent expenditures.

Marketing strategy

Marketing mix is a superior business tool that facilitates in marketing an organization’s products or services. At times, the term four Ps is used to refer to marketing mix (Van Waterschoot and Van den Bulte 85). To promote the success of this investment, the company will employ the marketing mix strategy.

Kamuga Internet Providers will offer its services at lower prices relative to other companies to attract customers. While the majority of the companies offer their services at $0.75 per megabyte, the company will offer its services at $0.5 per megabyte. Besides, the company will run promotional programs to recruit new customers.

It will give its target clients a free internet service for one week. This will encourage many customers to use the service. The company will work in collaboration with Jamii Telecom to distribute its services.

This will help in ensuring that clients have access to its services. Jamii Telecom will help it to lay fiber optic cables in all areas with high demand for the internet services.

Operating plan

A management team comprising of a regional director, human resource manager, marketing manager, and an operation manager will run the company. The company will hire local employees to help the management team. From the hired employees, the management team will select a sales team that will be responsible for marketing the company across the country.

Jamii Telecom will assume the responsibility of identifying the suppliers to supply the company with materials necessary for laying down the required internet platform.

Financing plan

To maintain a smooth running of the company, the management team will have to identify strategies to cover for cash shortage. Clients that are stubborn in paying for the services will be required to deposit some retainer money, as a strategy for addressing cash shortage.

Besides, the team will make sure that it issues invoices on time for all services rendered. This will facilitate in the collection of cash from the clients. Moreover, it will facilitate in avoiding cases of overdue debtors.

Conclusion

The success or failure of any investment depends on the ability of the management team to stick to the laid down business plan. If the management team observes all the outlined strategies, it will succeed in seeing the growth of Kamuga Internet Providers in Kenya.

Works Cited

Kameri-Mbote, Patricia. Intellectual Property Protection in Africa: An Assessment of the Status of Laws, Research and Policy Analysis on Intellectual Property Rights in Kenya, Nairobi: University of Nairobi, 2004. Print.

Kenya National Bureau of Statistics. Kenya Facts and figures 2012. PDF file. 2012.

Rose, Andrew K and Van Wincoop, Eric. “National money as a barrier to international trade: the real case for currency union.” The American Economic Review 19.2 (2001): 386-390. Print.

Van Waterschoot, Walter and Van den Bulte, Christophe. “The 4P classification of the marketing mix revisited.” Journal of Marketing 56.4 (2006): 83-93. Print.

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