Market Forces
Energy production and transmission is important to the society because it is used in households and industry in a daily basis. Although natural gas has vast global reserves, its supply is concentrated to locations and countries far from the users. In effect, the primary concern of every government is the security of supply for their own citizens. Many energy exporters, however, only possess twenty eight percent (28%) of the world’s reserves which undermines the capability of gas powerhouses such as Russia and several Arab countries that hold at least fifty percent (50%) of the world’s total gas supply. Resources are waiting to be exploited but the apparent limiting factor is the ability of potential suppliers to successfully finance their exploration and/or production endeavors and successfully market their produced. The focus of energy production is financing and availability of markets which can be restricted by political/ social boundaries can appear significant to explain financial bottlenecks in energy investment (i.e. payback period). Specifically, companies will research the comparative significance of individual financing and integrated financing for the production supply chain; namely, gas production, liquefaction, tankers, receiving terminals and pipelines.
Competitive Industry
Economies of scale is crucial for players that produced emerging and leading energy products (e.g. geothermal) but mature, declining and volatile categories (e.g. transmission) requires less of this aspect. The latter has greater dependence to innovation and product development to be re-accepted by the market. On the other hand, if promoted successfully, energy products can achieve the benefits of economies of scale because of higher volume necessary to serve the market. In this regard, scale economies serve as barrier for players because it is a source of cost-savings that can support the large revenue base and mitigate the effects for declining market. The application to mitigate looses is possible under the condition of absence of research facilities and development efforts as the products are seen as mass-produced. Overall, if a player producing transmission services would shift to other strategies, economies of scale eminent in its current product category will be reduced as it enters new production, distribution and marketing environment.
As scale economies is lost due to the category shift, capital requirements are also increased to purchase new physical facilities, maintain manageable amount of inventories and restructure marketing activities (e.g. from purely enjoyment energy reduction concepts). Alternatively, the company can acquire a target from the category of interest which is the current trend in Brazil. But acquisition strategy is not risk-free where problems in pre-, during and post-acquisition phases such as having large or extraordinary debt, managerial focus only on acquisition rather performance and inability to achieve the expected results are undetectable until there is a direct impact on performance.
The switching costs is relatively low but would increase in the future as people become more and more cost conscious that may result to preference shift to energy saving alternatives. As a result, general energy companies planning for product diversification are confronted with volatile switching costs that can undermine outlooks and proposals for expansion. Geothermal products are considered sustainable while alternative energy source are only tagged as emerging. As there is no straightforward solution in configuring the switching costs dimension, player mobility is limited to conservative and gradual investments toward still category. However, first-mover advantages by the incumbent energy producers can substantially reduce the possibility of entrance of the “inching” alternative sources firms.
Government policy is also currently hardened by recent fraudulent marketing campaigns of energy distributors and brands particularly in the cost efficiency and services of their brands. As a result, start-up investments of shifting energy firms and their advertisements are not enough to attract customers and bogus campaigns will now face rigid litigation. They have the option to acquire established geothermal energy producers but the anti-trust policy can delay their market entry and also add to their costs. In effect, mobility is reduced by government actions and pro-active policies which re-direct shifting firms in their research/ development capabilities to claim brand’s features. However, expertise in other categories’ product developments is only possible after substantial strategic focus of the player to the core requirements of energy production and distribution area.
The United States is the largest investor in the country. The Northern part is considered the poorest regions although investments are gradually building up to stimulate its local economy. Privatization and emphasis on education are major themes in the present government. However, the economy is volatile to trading partner’s condition and world affairs including Argentinean, Asian and Russian crises that affected its economic performance. On the other hand, the present reforms of the government made its economy resistant to international economic shocks. As a result, it continued to increase real wage and employment suitable for economic exchanges within the economy. It has close relations with the IMF that helped it developed its economic reforms. Real currency is pegged into the dollar to revert high inflation experienced during 1980s and 1990s.
Threats and Opportunities
Brazil requires 30% corporate tax and 15% withholding taxes against profit and dividend remittances. It has double taxation treaty with the United Kingdom and other several countries providing additional incentive to foreign investors and managers which mean unnecessary decrease in their income resulting to higher motivation and possibly lower turn-over in managerial positions assumed to be from home countries. Tariff ranges from 17% to 23% depending on the industry. Automobile sector is highly dependent on the economy and share the over 10% of GDP in 1998 figures.
There are few restrictions in fund transfers while the economy accepts all sectors under foreign investments although registration to the Central Bank is required to every aspirant. In 1990s, Brazil experienced trade liberalization that benefited consumer durables and installed the country as the world’s eight largest automotive industry. It has intensive partnership with the Argentina and Mercosur where around 30% of its automobile produce is exported. As a result, economic influence of the region to Brazil can be considered high as illustrated by decline in demand, in effect production, of automobiles when Argentina’s economy slowdown.
Bureaucracy is likely to skew towards excessiveness because of democratic type of governance. The passing of law is undertaken by two separate but complementary bodies under bicameral system which can hamper the investment policies. Corruption is guarded by several political parties and other public associations that guard the dealings of the government. The experience of the country in the impeachment of its 1990s President Fernando Mello can suggest that its system secures the good governance of public servants. In the process of such impeachment, political parties also had an impact, partly to spark public vigilance in the performance of executive officials. The interaction of bureaucracy and corruption is a necessary course of a democratic government. Without bureaucracy, corruption cannot be filtered. On the other hand, without corruption, bureaucracy is unlikely be necessary.
Market Segments
The country has one of the biggest supply and demand of energy in the South American continent. The demand for energy and lighting or alternative sources of energy is directly relevant to the spending patterns of the elite class situated at the tip of the consumer pyramid occupying around 2% of the total population or 1.1 million families. Wealthy family will be the one who will make the investment. They are considered wealthy with annual income 14 times greater than the Brazilian average and whose purchasing behavior is attached to product’s capability to be unique or/and reflect their social status. Their number are concentrated in the Southeastern region (73.5%) of the country and scattered in the cities of Sao Paulo, Rio de Janeiro and Brasilia. When the economy is performing well, it will affect the middle class’ incomes which are said to aspire purchasing patterns of their wealthy counterparts.
Decisions relating to product should be according to differentiation strategy which is the current strategy of the producer. Price is not an issue rather how the consumer perceives value in the product. Throughout this marketing mix, it is important to note that excellent customer service (ECS) should be infused because Brazilian market is too conscious with quality and design. In definition, ECS is the ability of the firm to surpass the initial perception about its products in a sustaining manner. Due to this, the product service should continue even after delivery and obvious quality markings in the product. As consumers will tend to test and re-test the energy product and will place high expectations on performance, it is expected that before-sales service would be conducted. During the actual purchase, salespeople must be knowledgeable and experienced. This will be complimented with after-sales service and even installation if possible.
Price is related to cost-leadership strategy which can be a weak tool for the Brazilian consumers as quality is undermined by low price. However, ECS can minimize the adverse effects of lowering price by making it non-price factor through integration with promotions. For example, corporate clients can have bundled discounts when they bought not just only transmission but also the entire production package to the benefit of manufacturers. Alternatively, the efficiency and cost-savings in licensing and aggressive export can actually make the price tags of energy-dedicated products lower than other brands. As a result, this can serve as discount for consumers who would buy the new and promising technology who can be feeling the risk of the unknown. To support this, production of energy should be made more efficient to be able to sell them to manufacturers and retailers with a slim mark-up.
A strong distribution channel is a source for successful marketing. For production companies, the right channels are through direct delivery of products and making appropriate contract quotations. For retailers, wholesale price must be offered. It is also advisable to target Brazilian states which have sufficient infrastructure and consumer preference to purchase the new technology. Stiff competition in Brazil and being embedded of local suppliers can increase the role of retailers. When markets are already stratified according to their distribution components such as accessibility, security, interactivity and support, ECS demands the company to select appropriate medium (e.g. accessibility = retailers, interactivity = e-commerce). As it solves this bottleneck, terms of payment and staff attitude issues are shouldered by retailers/ manufacturers.
Bibliography
Auty, R 1993, Sustaining Development in Mineral Economies: The Resource Curse Thesis, Routledge, New York.
Energy News Brazil, viewed 23 January 2008, http://energy.einnews.com/brazil/
Reiss, G. (1995). Project Management Demystified: Today’s Tools and Techniques. London: E & FN Spon.
Credit:ivythesis.typepad.com
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