Definition Of Free Trade Business Essay

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INTRODUCTION AND BACKGROUND

Castrol Petroleum Limited is an oil marketing company registered in Zambia. It has got a head office in Lusaka and other offices located all over the country. This company markets and sales the Castrol branded lubricants. Castrol Petroleum Limited has got shares in a local blending plant where it blends its products. It imports the blending raw materials (base oil and additives) from South Africa. It is from this blending plant where Castrol products are made, packaged and distributed all over Zambia.

Castrol Petroleum Limited intends to expand its business into foreign markets where the Castrol products are in short supply and on high demand. Apparently, there is free trade between Zambia and all these foreign countries where Castrol Petroleum Limited intends to set up its businesses.

As a Management Consultant, I have been requested to advise Castrol Petroleum Limited on free trade opportunities when looking to expand into these foreign markets.

3.0. DEFINITION OF FREE TRADE

Free Trade is an agreement between two or more countries to eliminate tariffs and other barriers to trade in products and services. The free trade area emphasizes the pursuit of a comparative advantage for a group of countries rather than individual states.

According to the Philips Revised Kyoto Convention (1999), "Free Trade is a specified area within territorial jurisdiction of a country where such a country allows minimum or no customers control on the entry or exit of goods."

Zambia and other foreign countries, where Castrol Oil Limited intends to set up its businesses, are all members of the Southern Africa Development Countries (SADC), (see appendix 1, page 12) where free trade was introduced to provide opportunities for business development and growth, especially for developing economies.

The Southern Africa Development Countries' membership consists of 14 African countries (see appendix 1, page 12) who have agreed to come together and eliminate trade barriers, promote sustainable and equitable economic growth and socio-economic development that will ensure poverty alleviation with the ultimate objective of its eradication among member states.

According to the Times of Zambia Newspaper (2010), the eventual result of the SADC organisation is regional integration where all its members apparently need to have the same standard of living, people moving freely from one country to the other within the region and have policies that will not hinder the movement of capital and labour.

The integration of the regional grouping will also create a large market to compete favourably with Balkan markets on the international markets

FREE TRADE BUSINESS OPPORTUNITIES FOR CASTROL OIL PETROLEUM

4.1. Emerging markets from up-coming Mining Industries

Apparently, there has been a lot of mining activities in the SADC Region arising from an influx of Multinational Mining Companies who have been doing a lot of mineral exploration in the region. Deposits of Copper, Cobalt, Gold, Uranium and many others have been found. These mines have provided markets for petroleum products. Companies like BHP Billiton, Rio Tinto, First Quantam Minerals and Anglo American Corporation are all expanding their activities in the SADC region.

4.2 Favourable business environments in other SADC Countries.

Some SADC member countries have better and favourable business and commercial environments such as lower taxes, lower interest rates, strong currencies, and fewer regulatory requirements relating to energy business and labour laws.

For example after the 2010 World Cup, the South African Rand has strengthened moving from ZAR 7.9 to ZAR 6.8 to US$1.00. This has made South African companies import Crude Oil from the Middle East cheaper than before. This has opened opportunities for Castrol Petroleum Limited to extend its businesses and take advantage of this favourable currency fluctuation.

4.3. Competition with other Oil Marketing Companies

Some SADC member countries have few oil companies as compared to others. For instance, the Congo DRC, has fewer reputable oil companies. This has attracted Castrol Petroleum Limited to set an operation there and take advantage of the less competition.

4.4. Good international relationships in the SADC region

Free Trade offers and provides cordial and bilateral relationships which helps trade among member countries. SADC Heads of State or their representatives meet regularly to discuss trade relationships and conduciveness of business environments. This has improved business relations.

ADVANTAGES OF DOING BUSINESS IN A FREE TRADE AREA

5.1 Competition and High Quality Products.

Free Trade in the SADC Region has brought about competition which has resulted into higher product quality and other competitive advantages. Castrol Petroleum Limited has over the years improved in the standard and quality of its products, which has made it penetrate the markets in the region. The Blending Plant in Ndola, Zambia has been upgraded to meet international standards. It is audited annually by Total Technical Audit teams based in Paris, France.

5.2 Economies of Scale

The growing markets will cause higher volume of products to be blend at the blending plant where Castrol Petroleum has shares, this will in turn bring about economies of scale, since production will be done at lower unit cost because of the high quantities for many customers.

5.3 Government Procedures and Regulations

Government procedures and regulations are reduced because of the elimination of trade barriers, which will also help in speeding up business transactions.

5.4. Increased Innovation

Free trade will widen the petroleum markets and competition amongst member states. This will in turn encourage Castrol Petroleum Limited to seek ways of creating a comparative advantage which will lead to increased innovation that will improve its products.

As a result of this, Castrol Petroleum Limited has invested huge money in training its staff to improve marketing and technical competences to outshine the competition.

5.5 Employment and Economic Growth.

Since there will be increased trade and business activity between Castrol Petroleum Limited and its associated companies in the SADC region, Castrol Petroleum Limited will grow its business to firms to meet the wider markets. This trend will be similar with other businesses and other sectors in the bloc. This will in turn grow economies of member countries and will create employment.

6.0. CHALLENGES OF DOING BUSINESS IN FREE TRADE AREAS

6.1 Trade Diversion

As trade barriers fall within the free trade bloc, each member country tends to favour trade with countries inside the bloc over trade with countries outside the bloc. At the same time, once the bloc is in place member countries will discontinue some trade with non member countries, leading to trade diversion. The aggregate effect is that national patterns of trade are altered - more trade takes place inside the bloc, less trade takes place with countries outside the bloc (Cavusgil et al 2006, p. 21).

6.2 Competitive Pressures

Since free trade encourages all investors to identify markets and venture into them, Castrol Petroleum Ltd will find stiff competition from other companies who are chasing for the same markets. According to Cavusgil et al (2006), stiff competition brings about competitive pressure, which will in turn hinder a firm's market penetration strategies. For example, Engine Petroleum of South Africa is expanding rapidly into the region. They are making acquisitions of small oil businesses in order to realise their objectives. Free Trade is equally helping them.

6.3 Regulatory Framework

Different regulatory requirements to set up businesses in different countries differ and tend to be costly, complicated and delay the processes.

6.4 Export Supply Capacity Constraints

According to TIPS Forum (2002), ' Global Sustainable Development and Southern African Economy'. http://www.tips.org.za. [12 November 2010]. "Export supply capacities constraints are major limiting factors for the smaller countries to exploit possible niche markets. The very fact that pockets of opportunities cannot be taken advantage of, due to supply constraints, the capacity of the smaller regional countries to generate foreign currency required to increase trade is also limited."

7.0 RECOMMENDATION TO CASTROL PETROLEUM LIMITED ON EXPLOITING OPPORTUNITIES IN FREE TRADE AREAS

To fully exploit the free trade opportunities in the SADC regions, Castrol Petroleum Limited should go through the diversification channel, which entails moving away from existing markets and existing products. This move extends the scope of the organisation.

According to Penrose (1959/1995; Marris, 1964 who says, "diversification has been an essential basis for the growth and survival of firms in the last half of the twentieth century, due to the vulnerability of the specialised firm to the fast and unexpected changes in the environment.''

Diversification refers to the increase by a firm in the kinds of businesses which it operates, by moving in into other products and markets.)

The Ansoff Growth Matrix brings out the fact that diversification is a strategy best used for direction and strategic development of a firm.

Castrol Petroleum Limited should therefore, in addition to the existing markets and products within Zambia, diversify into the SADC countries as follows:

7.1 Tap into the new markets

Castrol products are of high grade with international specifications. They are not currently being sold in the SADC region, although there is competition with other brands.

As a Consultant for Castrol, I will advise the company to introduce this strong brand on the markets and get a good market share. I know for sure that Zimbabwe, the DR Congo, Malawi and Botswana will grow even faster than Zambia due to less competition from other brands.

7.2 Introduce fuel business in these other SADC markets

It is my understanding that Zimbabwe, Malawi, Botswana, Lesotho and Swaziland are landlocked and do not have fuel refineries with free trade in place. I would therefore, recommend, fuel exports into these countries from the Indeni Fuel Refinery, situated in Zambia.

Castrol Petroleum could therefore increase its petroleum business by diversifying into fuel and take advantage of these markets.

One other possible source of diesel is the bio diesel concept. This is diesel from natural products from a tree called Jayatroper. This tree grows over the years and produces some substances which is used to make diesel. I would recommend this to be considered as it can be a substitute to the diesel from Crude Oil. South Africa is already growing this tree

7.3 The diversification strategy can be classified into four categories. One where new investments involve similar products; two when they lead to the vertical integration of complementary activities (corresponding to backward or forward integration); three, when firms internationalize by adding operations in foreign markets which involve similar products (even if these investments take place in culturally and geographically distant markets); and four when the new business shares intangible assets such as marketing knowledge, patent protected technology, product differentiation, superior managerial capabilities, or routines and repertoires (Nelson and Winter 1982).

Related Diversification is corporate development beyond current products and markets, but within the capabilities of the value network of the organisation. Johnson et al (2008)

An example of related diversification is that of Lyons who had a vast array of businesses not only in cakes, biscuits and other confectionery, where it owned firms such as Donut Corporation, but also operated in grocery and frozen chilled foods. Williamson (1975)

Unrelated diversification is the development of products or services beyond the current capabilities or value network. This is usually described as a conglomerate strategy.

One good example of unrelated diversification is in the case of Unilever who have diversified into the food industry, where they have now included the production of Ice Cream into their product portfolio.

Some of the benefits of diversification include efficiency gains made through the applications of the organisation's existing resources or capabilities to new markets and products or services.

Diversification also increases the market power of an industry due to having a diverse range of businesses which can be used to support or subsidize one or more businesses from the earned surpluses in a way that competitors cannot imitate.

7.4 The other ideal market entry strategy is to access the market through Acquisition or Mergers.

Acquisition involves the acquiring of another business in order to improve the market share and growth of a firm.

Right now there is a bidding process taking place for the acquisition of all the British Petroleum (BP) Outlets in the Southern Africa, this has come about after the gulf oil spillage that took place sometime back, which has caused the British Petroleum Company to lose billions of money rectifying the problem and compensating companies or industries who were affected by this spillage. The highest bidder will be given a chance to acquire all the outlets. Castrol Oil Petroleum could take advantage of this opportunity.

An example of an acquisition is that of the Chinese personal computer manufacturer Lenovo who acquired IBM's PC business, which accounted for two-third of its revenue in 2005 The acquisition helped Lenovo to rapidly extend its market reach and become a global player. Cavusgil et al (2008)

Recently, here in Zambia Engen Oil Marketing Company had acquired Caltex Oil Zambia outlets, a move which has increased the market share for Engen, which will now give then higher profit margins.

Mergers involves two firms coming together to form a larger firm. One typical example of a merger is the coming together of Lucent Technologies in the United States and Alcatel in France. Their merger resulted in the creation of the world's largest company in the global telecommunications equipment business. Cavusgil et al (2008).

CONCLUSION

Finally, looking at the potential in the SADC region for Castrol Petroleum Limited to increase its businesses, diversifying and investing will be the best strategy for growth.

The absence of tariffs and other trade barriers will enhance the penetration into these foreign markets. Many multi-nationals, such as Coca Cola, Colgate Palmolive, Toyota and many others are what they are today because they took advantage of a similar initiative.

Castrol Petroleum Limited, going by the benefits of international markets outlined above can one day join the list of these successful multi-nationals who have grown internationally.

As a Consultant for Castrol Petroleum Limited, I will urge my client to immediately put strategies of investing in the SADC region.

APPENDIX 1

SADC MEMBER COUNTRIES

ANGOLA

BOTSWANA

DEMOCRATIC REPUBLIC OF CONGO

LESOTHO

MALAWI

MAURITIUS

MOZAMBIQUE

NAMIBIA

SEYCHELLES

SOUTH AFRICA

SWAZILAND

TANZANIA

ZAMBIA

ZIMBABWE

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