Market Entry in Africa- Global Strategy

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  • 1. Assignment 2 MBAS 881 – Global Strategy Entry into Africa Business School in MoroccoKarthik ArunagiriMuneet BhatiaIgor BuryakPatrick FrankDavid Peuto 1
  • 2. ContentsExecutive Summary ................................................................................................................................ 3I. Morocco Overview .......................................................................................................................... 4 Demographics...................................................................................................................................... 4 Economic and Business Overview ...................................................................................................... 6II. Opportunity ................................................................................................................................... 11III. Our Entry Strategy..................................................................................................................... 13 Mode of entry .................................................................................................................................... 13 Physical Assets .................................................................................................................................. 14 Reputation Assets .............................................................................................................................. 14 Intellectual and Human Assets .......................................................................................................... 14 Technological Asset .......................................................................................................................... 15 Service Excellence ............................................................................................................................ 15IV. Risk............................................................................................................................................ 16V. Mitigation ...................................................................................................................................... 17VI. Marketing Plan .......................................................................................................................... 18VII. Financials................................................................................................................................... 19 Key Assumptions .............................................................................................................................. 19 Projected Income Statement .............................................................................................................. 20 Sources of Funding............................................................................................................................ 25 Financial highlights ........................................................................................................................... 25 Sensitivity analysis ............................................................................................................................ 26 Scenario Analysis .............................................................................................................................. 28Exhibits.................................................................................................................................................. 29 Exhibit 1 – Partner evaluation for Strategic Alliance ........................................................................ 29 Exhibit 2 – Morocco GDP by Sector................................................................................................. 30 Exhibit 3 – Trend on Services Contribution (% of GDP).................................................................. 31 Exhibit 4 – FDI flows for Morocco ................................................................................................... 31 Exhibit 5 – FDI flows into Morocco by Industry .............................................................................. 32 Exhibit 6 – FDI flows into Morocco by Geographical Origin .......................................................... 33Bibliography .......................................................................................................................................... 34 2
  • 3. Executive Summary Morocco is one of few African countries with stable economy and continuous growth over thepast half-a-century. As it still has great potential for business growth, which would require highlyeducated business graduates, we will establish a business school in Morocco. We are planning to enter into Moroccan business education industry through a joint venturewith Moroccan university - we will give first preference to Université Cadi Ayyad and secondpreference to Al Akhawayn University. Our business school will offer both undergraduate andgraduate business programs. Course duration for undergraduate studies equals 3 years and for graduatestudies it equals 1 year. Tuition fee for undergraduate students will be $8,000 per year and for graduatestudents it will be $18,000 per year – thus we will focus on the richest 20% of Moroccan households.In our school we will have both local faculty members and professors from famous internationalbusiness schools. Administrative staff will also play an important role in our business school. Among the risks, which are related to the business education in Morocco, it is necessary tomention high illiteracy rate and unemployment rate. We will try to mitigate these risks using severalmethods, which are described further. In order to reach our target audience several communication activities will be used: above-the-line activities (advertisements in newspapers, magazines, TV and Internet et cetera) and below-the-lineactivities (bus-stand-hoardings, advertisements on trains et cetera). Concerning financial aspects of our project, we will try to use three sources of finance:government grants, bank loans and own funding. According to most likely scenario the net presentvalue of the project will be $3,555,510.73 (project duration equals 18 years), payback period equals 7years – thus we can conclude that that project can be accepted. 3
  • 4. I. Morocco OverviewDemographics Morocco is a country situated in North Africa sharing a common border with Algeria,Mauritania and Spain. Its main cities are Casablanca (population 3.245 million), its capital city Rabat(population 1.77 million), Fes (population 1.044 million), Marrakech (population 909,000) andTangier (population 768,000). Its overall population is about 32 million within a territory of 446 550km2. That makes a human density of 70.92 people/km2. The age distribution of Morocco’s population(by 2020) shows that there will be a considerable population between the age groups of 24 and 34which is our target market. Morocco Age Pyramid - 2020 100+ 90-94 Male Population 80-84 Female Population 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 -2000000 -1500000 -1000000 -500000 0 500000 1000000 1500000 2000000 Source: http://www.census.gov Morocco’s literacy rate has been steadily growing in the past few years. More and morechildren have access to primary education, even though it is still an area of concern for the Moroccangovernment. We can see from the chart below that the youth literacy rate is higher than the adultliteracy rate, depicting that this problem is being tackled by the government. 4
  • 5. 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Primary Primary Primary Literacy rate Literacy rate Literacy rate Literacy rate Literacy rate Literacy rate completion completion completion - adult - adult male - adult total - youth - youth male - youth total rate - female rate - male rate - total female female Source: http://www.tradingeconomics.com Looking at the higher education level, Morocco has a very high international mobility rate of15%. These are the students who leave country after high school in order to pursue higher education inforeign destinations; this rate is less than 5% for other Maghreb countries such as Algeria and Tunisia.The recent trend shows an increase in the number of students opting for management and businessstudies 5% 3% Sciences 8% United States Administration & 8% Management 37% Health Spain 9% Political Science Germany 30% Human Science France Languages Other 0 10000 20000 30000 Source: http://www.indexmundi.com Moroccan student’s preferred destination to pursue their studies is France because they canbenefit from a better cultural and language fit as French is the primary medium of instruction fromprimary school. More and more of them are getting into prestigious French business schools such asHEC and ESSEC. In order to assess the differences between Morocco and Western countries we used the CAGEframework to give us an indication on the areas which will need adaptation from our perspective. 5
  • 6. Morocco is distant from Europe or North America from a cultural point of view. First of all on thereligion side, a large majority of Moroccans are Muslims (98.7%), creating a cultural barrier with thewestern world which has a more Christian heritage. The official languages are Arabic and Tamazight(since 2011). However, French is taught at school from the age of 8 years old.This cultural distance isimportant for our opportunity as we are planning to use best western practices in our business sphere,and these practices should be adapted to Moroccan circumstances. Cultural peculiarities of Moroccowill especially affect operational processes of our business – for instance, we will need to adjust ourtimetable to Muslim prayer times, and moreover we will need to provide special places for thistradition. As an old French colony, Morocco’s administrative distance is less pronounced. Though it is aconstitutional monarchy, its political system is quite stable. As for the geographic distance, its location in Northwestern Africa makes it a privilegedbusiness partner for European countries. Morocco is situated 15km from Spain and a project exists tolink both continents with a tunnel, which will give tremendous incentive for business in Morocco.Economically, Morocco still suffers from a big disparity in income. Economically, Morocco still suffers from a big disparity in income. According to the WorldFactbook of the Central Intelligence Agency Morocco’s Gini index, which measures the degree ofinequality in the distribution of family income in a country, equals 40.9 [CIA, 2012]. This confirmshigh disparity in income distribution in Morocco. For instance, Scandinavian countries in averagehave index of 25 – income is quite equally distributed [CIA, 2012]. Moreover, according to the WorldBank income share held by poorest 20% equals 6.5% and income share held by richest 20% equals47.9% [WDI, 2012].Economic and Business Overview Morocco is becoming an attractive country to locate a business. According to the WorldInvestment Directory report of 2008 (published by United Nations Conference on Trade andDevelopment), as many as 38 multinational companies such as Alcatel-Lucent, Bayer, Colgate-Palmolive, IBM, Kraft Foods, Nestle, Renault, Societe Generale, and Unilever in the areas of 6
  • 7. Industrial, Tertiary (Trade related), Finance and Insurance have already set up offices/factories inMorocco through Licensing, Joint Venture or FDI. These companies take advantage of Morocco’sreformed investment laws, liberalized trade and prices, reduced red tape, updated financial system,privatization of certain state firms and concession in telecommunications, power generation and watermanagement to establish their business in the country. Under the privatization and liberalizationprogram, the telecommunications sector has been opened to competition and is expanding rapidly withnew services and platforms. This opportunity has allowed the French telecom company Alcatel-Lucentto bid and win the services proposal for a major opportunity with Morocco Telecom.Morocco is alsothe first country in North Africa to install a 3G network. Morocco has abundant natural resources. It’s abundance in phosphate based products hasprompted the Chemical/Pharmaceutical company like Bayer to setup a manufacturing plant in thecountry to produce fertilizers for their crop protection venture. Morocco is integrated with the regionaland international economic systems through its membership schemes such as Arab Maghreb Union,and Association Accord with European Union. Morocco is also a member of World TradeOrganization. Morocco has a GDP of 139.5 Billion USD, giving them a GDP per capita of 4712.01 USD. Incomparison, it is close to Guatemala, Syria or Vanuatu and 8 times lesser than Canada. But, if we look GDP - composition by sector Labor force - by occupation Agriculture 17% Services Agricultur 35% e Services 45% 51% Industry 32% Industry 20%at the latest Source: http://www.indexmundi.comprojection, it is said that its GDP will grow around 4% in 2012. It is interesting to see they havealready switched to a more service oriented economy, which represents 51% of their total GDP. 7
  • 8. However, this sector employs only 35% of its workforce.The services sector in Morocco comprisesmainly of Tourism, Information Technology, Retail and Construction. Tourism has always been one ofthe largest source of foreign currency for the country. It contributes close to 10% of the overall GDP.Please see Exhibit 2 for detailed breakdown of Morocco’s GDP by sector.Exhibit 3 shows the trendline on the contribution towards Morocco’s GDP for services sector. We can see that it is consitentlyover the 50% mark for the past 10 years. Unemployment RateAlso they have an unemployment rate of 8.1% 30.00% 20.00%(4th quarter 2011) which is quite comparable to 10.00%the 7.4% of Canada. The trend shows a 0.00% 2010 1998 1999 2002 2003 2004 2005 2006 2007 2008 2009 2011decrease in the unemployment rate over the pastten years. Source : http://www.indexmundi.com The World Bank’s “Doing Business in Starting a BusinessMorocco” report also gives us an indication Getting 150 Dealing with Electricity Construction… 100(relative world ranking) on the barriers to setting up Resolving Registering Insolvency 50 Propertya business in this country. In the chart below, we 0 Enforcing Getting Creditcan see that they are quite efficient in trading across Contracts Trading Across Protectingborders, resolving insolvency and enforcing Borders Investors Paying Taxescontracts. However, they are lagging in areas likeregistering property and getting electricity.This is particularly useful Source: World Bankfor gauging the mode of entry for a foreign enterprise into Morocco. For example, the relative ease ofgetting credits, paying taxes, and enforcing contracts helped us with the decision of going for a jointventure as opposed to a greenfield strategy. One of Morocco’s biggest economic geographical and administrative neighborhood.concerns is their negative trade balance. The To decrease this deficit, it is important for themmain reason for this is that it is the largest energy to enhance their productivity and trade with moreimporter in North Africa. Its biggest export business partners.partners are Spain and France due to their 8
  • 9. Source : http://www.indexmundi.com 45 39.16 40 34.19 35 30.55 30 25 21.22 20.6 18.15 20 15.63 13.92 14.49 12.4 12.75 15 10.4 9.75 11.72 8.2 8.47 9.47 10 7.5 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Exports (Billion $) Imports (Billion $) In recent years, Morocco has established free trade agreements with many countries therebyenhancing its business opportunities and exchanges. Some of the trade agreements they have takenpart in are Euro-Mediterranean free trade area Tourism Real estateagreement, Greater Arab Free Trade Area and US- TelecommunicationsMorocco Free Trade Agreement. Industry Transports The level of Foreign Direct Investment (FDI) Energy and mininghasrecently decreased in Morocco because of the Bankingnegative effect of the Arab spring which might have brought fear in FDI distribution in Morocco (2007)the mindsets of its majorinvestors. The main sectors which have benefitted from FDI were tourism,real estate and telecommunications – these figures are taken from 2007 when Morocco attracted $2.57billion. Exhibit 4 shows the FDI inflows and outflows in Morocco between 2007 and 2009. Exhibit 5and 6 show the FDI flow into Morocco by Industry and Geographical origin. From the industryperspective, we can see that the secondary sector comprising of mining and fuel extraction contribute alarge amount to the FDI followed by transportation and storage services. For the geographical origin,it is clear that the European Union especially France and Spain lead the world in the FDI investment inMorocco. These Foreign Direct Investments have helped develop the infrastructure in Morocco in thelast few years in many areas such as transport, water and energy. Here are a few examples which willcontribute to make Morocco more attractive to foreign investors as a country to do business in. 9
  • 10. • High speed train project, the first phase linking Casablanca to Tangier will end in 2013 for a global cost of 1.8 billion euros. • The automobile freeway network covers 1000km today and should reach 1420 km then 1800 km respectively in 2011 and 2015. • Launch of a tramway in Rabat in 2011 and in Casablanca it will launch at the end of 2012. • 200 million euros project for an extension of Tangier Med port, in order to increase its capacity to 8 million, Twenty Foot Equivalent (as a comparison, it is twice the capacity of Tokyo or Mumbai). • The Access to drinking water has been increased as high as 90% (2009). It is also interesting to see their development concerning their internet usage. As an exampleof their online activity, we can look at the number of Facebook users in Morocco. Even though it doesnot depict a demographic trend, it can give a good perception of how information can be shared. Thereare 4,408,340 Facebook users in Morocco. This represents 13.94% of its total population; however itis only 42.22% of Morocco’s online population. It is the 5th country in Africa in terms of internetpenetration and in comparison, the penetration of online population in Canada is 66%. The populationis sharing more and more information online and it is becoming an important means ofcommunication. In other Maghreb countries such as Tunisia or Egypt, this information sharing playeda significant role in the revolutions of the Arab spring. Such advances in Internet propagation, telecommuncation (3G network) is a major advantagefor disseminating course materials over web, arranging web meetings/conferences with prominentbusiness leaders around the world. This would also help in expand our portfolio of offerings to web-based MBA programs in future. 10
  • 11. II. Opportunity The opportunity which we have identified is to setup a business school in Morocco throughjoint venture with an existing university. We see Morocco and Africa in general has tremendouspotential for business growth which would require grooming of business graduates. Theprofessionals/students aspiring for business education but unable to pursue due to lack of qualitybusiness schools right now would be eager to join our school. By breaking into this market which istouted as the “last frontier” for business, we would be able to gain a strong foothold and thoughstrategic expansion be able to propagate our brand and be highly profitable. In order to assess the profitability of the opportunity, we looked at the industry using Porter’sfive forces.The threat of new entrants in the higher level education in Morocco is low because of thehigh barrier to entry in this business. A high level of capital is needed to create a university fromscratch; there are indeed many expenses such as the infrastructure cost, the marketing cost of buildingawareness among potential students, the cost of securing high quality faculty from renowned partneruniversities and partnering with corporates who will hire them upon graduation. 11
  • 12. If we look at the bargaining power of the buyers, we Rank University 22 Université Cadi Ayyadcan see that have the choice between several universities 25 Al Akhawayn University 51 Université Abdelmalek Essadiwhen they enter tertiary level education. However, these 63 Université Hassan II – Aïn Chock 64 Université Hassan II – Mohammediauniversities are not well ranked in Africa; most of them are 65 Université Mohammed V – Souissi 68 Université Ibn Tofailbelow 50th rank thought it is the 5th ranked economy in 77 Université Mohammed V – Agdal 81 Université Hassan IerAfrica. Therefore we could say that the bargaining power of Université Sidi Mohamed Ben Abdellah 85 Féssuppliers is low in Morocco. Source: www.webometrics.info From the buyer’s point of view, that is to say the students and the high school pupils who are thetarget, the bargaining power is also low. Given the few number of high level universities inMorocco, theydo not have the opportunity put them into balance. However if we look at the threat of substitutes, it is an important threat to Moroccan universities.Indeed as we have seen, close to 15% of the students go abroad to fulfill superior education because of thelower quality of universities in Morocco. Therefore, it will be very important to hire high quality staffmembers and estimate a convenient pricing strategy so that students are not tempted to go abroad.Another available substitute is the online education which is able to play an important role on Moroccogiven the level of online population (more than 13 million people in 2009 according tohttp://www.indexmundi.com). However, online programs currently available from top north americanindustries don’t pose a threat as a substitute as those programs are designed for working professionalswanting to enhance their management knowledge. Moreover, those online courses don’t have a credibilityin the industry when compared to full time courses from well known universities. This global context drives the rivalry between the different universities to be quite low. This isnot a mature business in Morocco. However, foreign universities and business schools have startedopening subsidiaries in Morocco, increasing the quality of higher education. 12
  • 13. Suppliers New entrants - Few skilled staff - High capital needed - Few universities - Infrastructure Low Rivalry Buyers Substitutes - Increasing number of students - Studying abroad (15%) - Low level universities - Online courses Morocco’s situation as one of Africa’s most advanced countries, their growing economy and theincreasing level of their education system make them an attractive country for international businesses tolocate there; either to oversee their African operations from this location or to directly operate on theMoroccan market. For this purpose, more and more skilled management workforce is required to fill thedifferent positions provided in these companies, where international trade plays a vital role. Therefore,opening an international business school in Morocco is an opportunity to fill this education role in orderto meet the growing economy and business needs of this country. Moreover, developing managing skillscould drive them to become an important business hub for Africa given their geographical position as anopen door on this continent.III. Our Entry StrategyMode of entry We will enter in to the Moroccan business education industry through joint venture with a well-positioned local university. Joint venture is a strategic alliance in which two or more firms create a legallyindependent company to share some of their resources and capabilities to develop a competitiveadvantage. We will evaluate the partners for this joint venture on the basis of criteria mentioned in Exhibit1. We will give first preference to Université Cadi Ayyad and second preference to Al AkhawaynUniversity during our consideration for the local partnership. 13
  • 14. Physical Assets We would have access to the physical infrastructure of the partner university and hence we wouldneed minimal capital investment in this area. We would however need to take care of the initial setup(business registration) and operating costs. These costs would be discussed in detail in the financialanalysis section.Reputation Assets We will have partnerships with various top notch universities around the world and we wouldleverage their brand name in building our reputation in the region. We would hire adjunct faculty fromthese universities and invite them to conduct courses on a 12 to 16 weeks period basis. These facultymembers will not only bring their international experiences and research expertise to the class rooms butalso will be able to build strong relationships with the local industries. We will leverage these brandnames to build our relationship with the local and international firms in the region and bring seniorexecutives of these firms as members of Advisory Board or Board of Directors. This would also establishcredibility in the local market, enhance industry acceptance to the high quality education and this willdrive high willingness to pay from the consumers’ point of view.Intellectual and Human Assets Professors from the partner universities would be contracted for the first five years. We will forman engagement team between the partner university in Morocco and the foreign partner universities. Thisteam would select the Dean, Associate Dean and the Program Director for the programs. Efforts would bemade to search for faculty around the world who would have migrated to other parts of the world fromMorocco earlier and are now willing to come back to their home country. This will allow us to have agood mix of local understanding and global perspective in the faculty members. Since Africa in general has become a very attractive destination for the global businesses, facultyfrom top global b-schools would like to join us as visitor faculty. This arrangement would provide them 14
  • 15. an excellent opportunity to the international faculty to learn about the region, business environment,cultural implications on businesses and in general about the industry in Morocco and other Africancountries. These faculty members would collaborate with the local industry leaders and faculty from otherlocal b-schools to launch research projects specific to the region.Technological Asset We would have access to some of the most advanced IT systems in the education industry whichwould allow us to differentiate our services. This would include virtualization technologies which wouldsimulate a real time class room for the students present in different geographical locations. Ourpartnership with Queen’s School of Business would provide us access to such innovative educationtechnologies and tools. Using these technological capabilities, we would design part –time and weekendcourses for the working professionals. Working professionals from other part of the country and otherAfrican countries would be able to join us and take advantage of the high quality graduate businesseducation.Service Excellence We will provide excellent education experience to our students. This would include class lectures,class discussions, case studies, access to industry experts from local as well as global enterprises, accessto world class faculty and research material etc. We would also provide access to the latest industry trendsthrough various international conferences and lecture series events. Our excellent relationship with theglobal b-schools will differentiate us from the other local b-schools and also provide access to ourstudents more contemporary business knowledge and best practices. We will build close industry relationswith the support of our local partner. This would provide more visibility to the Partner University andalso direct access to industry for our students. We will also facilitate international faculty members to getaccess to the local business markets through research and consulting projects. This would allow them tobroaden their research base and motivate them to visit Morocco on a required basis. 15
  • 16. IV. Risk There are several risks related to the educational sector in Morocco. As the employment andeducational sectors are interconnected, so are the risks. Therefore, risks have to be seen combined. First and foremost, the illiteracy rate of 50 percent among Moroccans is a serious problem(“Bouoiyour n.d.”). As our project aims at higher education (University level), future students need to beliterate. As the problem of illiteracy is fundamental, it has to be tackled at a primary education level itself.It cannot be accomplished by a university as its main existence aims at providing high education.Therefore, illiteracy is a major impediment as a top academic career cannot be pursued without a basicskill set. Another problem is the high unemployment rate among the highly educated youth (Achy 2010).This means that the job market cannot absorb highly skilled people. Especially people in the age from 15to 34 years are unemployed. There could be several explanations for this phenomenon. On the one hand,young people could be provided with the wrong education, i.e. wrong or inappropriate skills are taught or,on the other hand, the job market is in bad condition. Both possibilities represent a risk as the marketcould be temporarily saturated. Per“Achy (2010)”, high unemployment is mainly rooted from educational reasons, economicpolicies, and governance. Especially the two latter reasons represent a major risk. When economicpolicies are underdeveloped and for instance the job market is not well aligned with graduates(unemployment agency) then good education might be no goal of the youth in Morocco. They realize thatdespite top education, the situation is tough and finding a job is extremely hard. Highly educated youngpeople often choose bad or indecent jobs in order to make a living. Going along with that, they lose theiracquired skills; this worsens the situation further. Attributable to the previous described circumstances,young people are reluctant and listless to pursue an academic career; this is a major risk. Often, young 16
  • 17. people drop out of class as they do not see a future. But an academic institution depends on willing peoplewho want to study; they are the “lifeblood” of any academic institution. The risk of governance refers to the lack of qualified people who could run an academicinstitution. This includes professors and leaders. A good university depends on high qualified personnel.Without appropriate personnel a solid and state-of-the-art education cannot be provided. It is thereforevital to being able to draw on an excellent set of skills. As Morocco is a constitutional monarchy, the King has the power over the parliament and theministries. He basically can make solely decisions in any matters. He therefore could make any kind ofchange in the area of education. However, the reports and facts which depict increased governmentspendings in Education sector, setting up of new schools and universities corroborate the fact that theKing is pro education. Also, the fact that we are planning on a joint venture with an already existing andestablished university makes the risk quite low.V. Mitigation There are several possibilities to mitigate risk. First of all it is important to create awareness ofhow important education is. A fruitful partnership with governmental institutes could be established toinitiate a countrywide campaign. Also, partnerships can be entered with other academic institutions. Thiscommon approach can be beneficial to all academic institutions. It is important to show socialresponsibility. The youth has to understand that good education only can be beneficial. Examples ofsuccess-stories could be communicated in order to demonstrate that good education is vital. Furthermore, it is important to communicate among the youth that the new institution’s expertisecan help improving their situation. It is important that the young people understand how the institutiondifferentiates itself and how its expertise can help them to be better prepared for the job market. Themessage has to be clear and simple. In pursuing this approach, awareness can be raised dramatically. It is also important for the new academic institution to stimulate the job market and to tightlywork together with major companies in Morocco. This can be achieved by actively initiating campus 17
  • 18. events (for instance case study challenges) and job fairs. It must be clear that an academic institution is avital intermediate between students and companies. Additionally, a business incubator could beestablished to enable students and graduates to found their own company. This also stimulates the jobmarket and makes young academics confident. Overall, the above mentioned activities help to establishtrust and hope among the youth and to make them optimistic for the future. In order to minimize risk further, the government can be supported to reduce bureaucracy and toincrease efficiency. This helps not only to create a more efficient job market (unemployment agencyoptimization) but also to optimize especially the primary educational institutions to reduce the illiteracyrate. Last but not least, a program in cooperation with the government could be developed in order toincrease the qualifications of teachers and professors and therefore to increase the quality of academicinstitutions. The objective is long-term. In order to solve short-term issues, qualified personnel can behired form abroad in designing and implementing lucrative incentive programs.VI. Marketing Plan As a sophisticated marketing plan would go beyond the scope of this paper, the main focus lies onhow awareness among the target group in Morocco will be created. The inception of the new institution is accompanied with a marketing strategy in order to createawareness among the youth in Morocco. Both graduates from primary educational institutes and dropoutsare targeted. Furthermore, individuals who want to study further and who want to improve themselves area target. In order to reach this target audience several communication channels will be used; i.e. the TTL(trough-the-line) approach will be applied. To reach a maximum of individuals, ATL (above-the-line)activities will be pursued. These include TV-ads on relevant TV-channels, advertisements in newspapers,and further ads in relevant magazines. Furthermore, the Internet plays an important role. Especially 18
  • 19. Google AdWords will be used to place online-ads successfully. This helps to create awareness and trafficcan be created on the institute’s homepage. Also, SMO (search machine optimization) is important. BLT (Below-the-line) activities include using bus-stand-hoardings and ads on trains. This reachespeople who might have no TV or do not use the internet. Public transport is frequently used and thereforea good match to increase awareness. Pamphlets are a cheap way to reach a big amount of people. Thesewill be distributed in public in locations were the target group resides. This includes sport-clubs, kiosks,cinemas, etc. In order to create maximum awareness, individuals are not only targeted individually by the abovementioned activities but also strategic co-operations will be entered. These include a partnership with theunemployment office in order to make the staff aware of the new institution so that they can informjobless persons about new possibilities. This can be achieved with information events for instance.Furthermore, co-operations with primary educational institutions will be entered in order to also createawareness among teachers. Again, information events are most effective. It is also important to work together with major employers and business clubs (e.g. RotaryMorocco). A kick-off event will be organized where CEOs, leaders, and clubs’ presidents will be briefedabout the opportunities the institution can offer. It is vital that the industry supports the new university. Last but not least an open house is initiated. Everybody who is interested and wants to see the newfacility will be welcomed to get a picture of the university. This creates publicity.VII. FinancialsKey Assumptions The financial model is based on the following assumptions: 1. We are a top ranked MBA institute based out of Canada with branches in many countries. 19
  • 20. 2. The building facilities are leased/rented with a variable rent payment structure which changes based on inflation rate. 3. We will recruit our own staff who are experienced and preferably local. 4. We will offer undergraduate and graduate business programs. Course duration for undergraduate studies is 3 years and for graduate studies is 1 year. 5. Program is for locals (within Morocco) only. 6. Initial Intake capacity for undergraduate studies is 80 students and for graduate studies is 50 students. 7. Tuition fee for undergraduate students is $8,000 per year and for graduate students is $18,000 per year. 8. Student housing and dining provided at the rate of $1,500 per year for undergraduate students and $2,000 per year for graduate students. 9. Proposed number of administrative and teaching staff is 30 (1 Dean, 1 Associate Dean, 1 Program Director, 1 Career Manager, 20 teaching staff (part-time and full-time) and 6 administrative staff). 10. Changes to student/staff intake considered every 5 years based on macro and micro economic conditions. 11. Staff salary & tuition/other fees would be revised based on change in inflation and growth in GDP. 12. Projected tax rate is 30% 13. Average Projected GDP growth rate is 4.5% 14. Average Projected Inflation rate is 1.75%Projected Income Statement We will utilize the first 2 years to performsetup related activities by incurring initialinvestment expenses of approximately $301,500. 20
  • 21. For the first 2 years of operation, the university is projected to have negative net profits since we will notbe operating at full capacity. Once we start operating at full capacity (240 undergraduate + 50 graduatestudents), from the 3rd year of operation, our profits will slowly start building momentum. The projectednet profit for the 3rd year is $389,061.80. The revenue generated for this year is $3,764,812.50 which ismostly driven by the graduate and undergraduate tuition fees. For operating expenses, we have used thesplit-up shown in the right. We are planning to increase the tuition fees by 5% periodically considering the economic outlooksuch as GDP, inflation rate etc. A small portion of the revenue is derived from the endowments receivedby investing funds from alumni, corporate sponsors in various financial instruments. 21
  • 22. Table 1 – Projected Income statement for 2012 to 2017 YEAR 2012 2013 2014 2015 2016 2017INITIAL INVESTMENTBusiness Registration $ 1,500.00Equipment, Marketing and Furniture $ 300,000.00 $0EXPENSE 1.64% 1.60% 1.56% 1.52%Rent payments $ 210,000.00 $ 213,444.00 $ 216,858.52 $ 220,245.78 $ 223,602.80Salary and Benefits $ 1,440,000.00 $ 1,440,000.00 $ 1,512,000.00 $ 1,587,600.00 $ 1,666,980.00Supplies $ 180,000.00 $ 182,952.00 $ 185,878.73 $ 188,782.10 $ 191,659.54Interest expense $ 240,000.00 $ 243,936.00 $ 247,838.31 $ 251,709.46 $ 255,546.05Scholarship $ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00Other expenses $ 630,000.00 $ 640,332.00 $ 650,575.55 $ 660,737.34 $ 670,808.39 TOTAL EXPENSE $ 1,500.00 $ 300,000.00 $ 2,810,664.02 $ 2,903,151.17 $ 2,999,074.70 $ 3,098,596.79REVENUE 4.43% 4.40% 4.37% 4.34%Tuition fee Graduate 50 18000 $ 900,000.00 $ 945,000.00 $ 992,250.00 $ 1,041,862.50 Undergraduate 80 8000 $ 640,000.00 $ 1,280,000.00 $ 1,920,000.00 $ 2,016,000.00Student Housing and Dining $ 0.05 Graduate 50 1500 $ 75,000.00 $ 150,000.00 $ 225,000.00 $ 228,257.92 Undergraduate 100 2000 $ 200,000.00 $ 400,000.00 $ 600,000.00 $ 608,687.78Interest from Endowments $ 25,000.00 $ 26,250.00 $ 27,562.50 $ 28,940.63 TOTAL REVENUE $ - $ - $ 1,840,000.00 $ 2,801,250.00 $ 3,764,812.50 $ 3,923,748.87EBITDA $ (1,500.00) $ (300,000.00) $ (970,664.02) $ (101,901.17) $ 765,737.80 $ 825,152.08Depreciation expense $ - $ - $ 196,746.48 $ 203,220.58 $ 209,935.23 $ 216,901.78EBIT $ (1,500.00) $ (300,000.00) $ (1,167,410.50) $ (305,121.76) $ 555,802.57 $ 608,250.31Tax $ - $ - $ - $ (91,536.53) $ 166,740.77 $ 182,475.09PROFIT NET PROFIT $ (1,500.00) $ (300,000.00) $ (1,167,410.50) $ (213,585.23) $ 389,061.80 $ 425,775.21FREE CASH FLOWS $ (1,500.00) $ (300,000.00) $ (970,664.02) $ (10,364.65) $ 598,997.03 $ 642,676.99 22
  • 23. Table 2 – Projected Income statement for 2018 to 2023 YEAR 2018 2019 2020 2021 2022 2023INITIAL INVESTMENTBusiness RegistrationEquipment, Marketing and FurnitureEXPENSE 1.49% 1.45% 1.41% 1.37% 1.34% 1.30%Rent payments $ 226,926.55 $ 230,214.04 $ 233,462.23 $ 236,668.11 $ 239,828.65 $ 242,940.85Salary and Benefits $ 1,750,329.00 $ 1,837,845.45 $ 1,929,737.72 $ 2,026,224.61 $ 2,127,535.84 $ 2,233,912.63Supplies $ 194,508.48 $ 197,326.32 $ 200,110.48 $ 202,858.38 $ 205,567.41 $ 208,235.01Interest expense $ 259,344.63 $ 263,101.76 $ 266,813.98 $ 270,477.84 $ 274,089.88 $ 277,646.68Scholarship $ 90,000.00 $ 90,000.00 $ 110,000.00 $ 110,000.00 $ 110,000.00 $ 110,000.00Other expenses $ 680,779.66 $ 690,642.12 $ 700,386.70 $ 710,004.32 $ 719,485.94 $ 728,822.54 TOTAL EXPENSE $ 3,201,888.34 $ 3,309,129.71 $ 3,440,511.13 $ 3,556,233.26 $ 3,676,507.74 $ 3,801,557.72REVENUE 4.32% 4.29% 4.26% 4.23% 4.20% 4.17%Tuition fee Graduate $ 1,093,955.63 $ 1,148,653.41 $ 1,206,086.08 $ 1,266,390.38 $ 1,329,709.90 $ 1,396,195.39 Undergraduate $ 2,116,800.00 $ 2,222,640.00 $ 2,333,772.00 $ 2,450,460.60 $ 2,572,983.63 $ 2,701,632.81Student Housing and Dining Graduate $ 228,257.92 $ 228,257.92 $ 237,979.17 $ 237,979.17 $ 237,979.17 $ 247,912.15 Undergraduate $ 608,687.78 $ 608,687.78 $ 634,611.11 $ 634,611.11 $ 634,611.11 $ 661,099.08Interest from Endowments $ 30,387.66 $ 31,907.04 $ 33,502.39 $ 35,177.51 $ 36,936.39 $ 38,783.21 TOTAL REVENUE $ 4,078,088.98 $ 4,240,146.14 $ 4,445,950.75 $ 4,624,618.77 $ 4,812,220.20 $ 5,045,622.64EBITDA $ 876,200.64 $ 931,016.43 $ 1,005,439.62 $ 1,068,385.51 $ 1,135,712.46 $ 1,244,064.93Depreciation expense $ 224,132.18 $ 231,639.08 $ 240,835.78 $ 248,936.33 $ 257,355.54 $ 266,109.04EBIT $ 652,068.45 $ 699,377.35 $ 764,603.84 $ 819,449.18 $ 878,356.92 $ 977,955.89Tax $ 195,620.54 $ 209,813.21 $ 229,381.15 $ 245,834.75 $ 263,507.07 $ 293,386.77PROFIT NET PROFIT $ 456,447.92 $ 489,564.15 $ 535,222.69 $ 573,614.43 $ 614,849.84 $ 684,569.12FREE CASH FLOWS $ 680,580.10 $ 721,203.23 $ 776,058.47 $ 822,550.75 $ 872,205.38 $ 950,678.16 23
  • 24. Table 3 – Projected Income statement for 2024 to 2029 YEAR 2024 2025 2026 2027 2028 2029INITIAL INVESTMENTBusiness RegistrationEquipment, Marketing and FurnitureEXPENSE 1.26% 1.22% 1.18% 1.15% 1.11% 1.07%Rent payments $ 246,001.70 $ 249,008.25 $ 251,957.52 $ 254,846.59 $ 257,672.57 $ 260,432.60Salary and Benefits $ 2,345,608.26 $ 2,462,888.68 $ 2,586,033.11 $ 2,715,334.76 $ 2,851,101.50 $ 2,993,656.58Supplies $ 210,858.60 $ 213,435.64 $ 215,963.58 $ 218,439.93 $ 220,862.20 $ 223,227.94Interest expense $ 281,144.80 $ 284,580.85 $ 287,951.45 $ 291,253.24 $ 294,482.93 $ 297,637.25Scholarship $ 110,000.00 $ 110,000.00 $ 125,000.00 $ 125,000.00 $ 125,000.00 $ 125,000.00Other expenses $ 738,005.11 $ 747,024.74 $ 755,872.55 $ 764,539.76 $ 773,017.70 $ 781,297.79 TOTAL EXPENSE $ 3,931,618.50 $ 4,066,938.16 $ 4,222,778.22 $ 4,369,414.30 $ 4,522,136.92 $ 4,681,252.16REVENUE 4.15% 4.12% 4.09% 4.06% 4.03% 4.00%Tuition fee Graduate $ 1,466,005.16 $ 1,539,305.42 $ 1,616,270.69 $ 1,697,084.23 $ 1,781,938.44 $ 1,871,035.36 Undergraduate $ 2,836,714.45 $ 2,978,550.17 $ 3,127,477.68 $ 3,283,851.57 $ 3,448,044.15 $ 3,620,446.35Student Housing and Dining Graduate $ 247,912.15 $ 247,912.15 $ 258,049.01 $ 258,049.01 $ 258,049.01 $ 268,381.00 Undergraduate $ 661,099.08 $ 661,099.08 $ 688,130.68 $ 688,130.68 $ 688,130.68 $ 715,682.67Interest from Endowments $ 40,722.37 $ 42,758.48 $ 44,896.41 $ 47,141.23 $ 49,498.29 $ 51,973.20 TOTAL REVENUE $ 5,252,453.21 $ 5,469,625.31 $ 5,734,824.47 $ 5,974,256.71 $ 6,225,660.57 $ 6,527,518.59EBITDA $ 1,320,834.72 $ 1,402,687.15 $ 1,512,046.26 $ 1,604,842.41 $ 1,703,523.65 $ 1,846,266.43Depreciation expense $ 275,213.29 $ 284,685.67 $ 295,594.48 $ 305,859.00 $ 316,549.58 $ 327,687.65EBIT $ 1,045,621.42 $ 1,118,001.48 $ 1,216,451.78 $ 1,298,983.41 $ 1,386,974.07 $ 1,518,578.78Tax $ 313,686.43 $ 335,400.44 $ 364,935.54 $ 389,695.02 $ 416,092.22 $ 455,573.63PROFIT NET PROFIT $ 731,934.99 $ 782,601.04 $ 851,516.25 $ 909,288.39 $ 970,881.85 $ 1,063,005.14FREE CASH FLOWS $ 1,007,148.29 $ 1,067,286.71 $ 1,147,110.72 $ 1,215,147.39 $ 1,287,431.43 $ 1,390,692.80 24
  • 25. Sources of FundingThe following sources of funding are available for this project: 1. Government Grants – We can seek government grants by submitting a written proposal as a means of funding. The government usually provides this as a means to stimulate growth in particular sectors. Since education sector is poised for growth in Morocco, we could consider this option. However, the approval of grants is not 100% guaranteed. 2. Bank Loans – We could get loans from major banks in Morocco such as Attijariwafa Bank, Banque Populaire du Maroc, BMCE Bank etc. Bank Al-Maghrib, which is the central bank of Morocco, regulates the lending rate which is typically around 6.25%. We could avail loans from Canadian banks as well. 3. Own Funding – We could use our own cash assets (from other branches) as a source of initial funding.Financial highlights Table 4shows the financial highlights which can be used to make a decision about acceptance orrejection of the project. All calculations were made in Microsoft Excel using built-in functions. Discountrate was taken as WACC of the project: 0.6*11%+0.4*9%=10.2%, where 0.6 – share of equity in thecapital, 0.4 – share of debt in the capital of school, 11% and 9% are cost of equity and debt respectively.Cost of debt was taken as the real interest rate, offered by the biggest Moroccan bank - Attijariwafa Bank(Attijariwafa Bank, 2012). Table 4 - Financial highlights Financial coefficients ValuePayback period 7 yearsNet present value (NPV) $3,555,510.73Internal rate of return (IRR) 37%Profitability index (PI) 14 25
  • 26. As the NPV of the project is more than 0, then we can conclude that that project can be accepted.Other financial coefficients also confirm this outcome.Sensitivity analysis To investigate the influence of various factors on the financial results of the project and itsfeasibility, we selected the following parameters: salary and benefits of employees, tuition fee forgraduates, tuition fee for undergraduates, and total number of students. The range of change from theirinitial levels is from -20% to 20% in increments of 4%. As an indicator of the financial results of theproject, we chose the net present value. Analysis of the results of sensitivity analysis presented in table 5 below shows that the outcome ofthe project is strongly influenced by the total number of students, tuition fee for undergraduates, salaryand benefits and tuition fee for graduates. We should these results take into consideration in the actualproject implementation. 26
  • 27. Table 5 - Change of the NPV of the project, depending on variation of selected parametersSelected parameters -20% -16% -12% -8% -4% 0% 4% 8% 12% 16% 20%Salary and Benefits $5,469,463.56 $5,086,673.00 $4,703,882.43 $4,321,091.86 $3,938,301.29 $3,555,510.73 $3,172,720.16 $2,789,929.59 $2,407,139.02 $2,024,348.46 $1,641,557.89Tuition fee for $2,326,877.84 $2,572,604.42 $2,818,331.00 $3,064,057.57 $3,309,784.15 $3,555,510.73 $3,801,237.30 $4,046,963.88 $4,292,690.46 $4,538,417.03 $4,784,143.61graduatesTuition fee for $1,416,903.42 $1,844,624.88 $2,272,346.34 $2,700,067.81 $3,127,789.27 $3,555,510.73 $3,983,232.19 $4,410,953.65 $4,838,675.11 $5,266,396.57 $5,694,118.03undergraduatesTotal number of $188,270.54 $861,718.58 $1,535,166.61 $2,208,614.65 $2,882,062.69 $3,555,510.73 $4,228,958.76 $4,902,406.80 $5,575,854.84 $6,278,798.70 $6,922,750.91students 27
  • 28. Scenario Analysis According to the results of the sensitivity analysis of the project, the factor “Total number of students” had the greatest effect on the financial results of the project. We considered three scenarios: optimistic, pessimistic and most likely. In each of the scenarios we changed the value of the selected factor and then calculated key financial highlights of the project: NPV, IRR, payback period. Table 6 - Effectiveness of the project depending on the scenario Probability of Value, % from IRR, Payback Scenario Factor NPV scenario, % baseline % period, years Total number ofPessimistic 25% 80% $188,270.54 12% 8 students Total number ofMost likely 50% 100% $3,555,510.73 37% 7 students Total number ofOptimistic 25% 120% $6,922,750.91 67% 6 students Results of the scenario analysis are presented in Table 6. As we can see, our project remains acceptable even in the case of the pessimistic scenario. The break-even point of the project (as percentage decrease of total number of students) equals 21.12%. 28
  • 29. ExhibitsExhibit 1 – Partner evaluation for Strategic AllianceWe considered the top 3 universities in the country for our purpose and evaluated those on thefollowing criterion: Complementary Cooperative Compatible Commensurate University Overall skills offered culture goals risk sharingUniversité Cadi Ayyad Y Y Y Y YAl Akhawayn Y May be Y May be May beUniversityUniversité Abdelmalek Y May be May be May be May beEssadiNote: We don’t have sufficient information at this point in time but we are making some assumptionsto take a decision. 29
  • 30. Exhibit 2 – Morocco GDP by Sector 30
  • 31. Exhibit 3 – Trend on Services Contribution (% of GDP)Exhibit 4 – FDI flows for Morocco 31
  • 32. Exhibit 5 – FDI flows into Morocco by Industry 32
  • 33. Exhibit 6 – FDI flows into Morocco by Geographical Origin FDIflowsinthehosteconomy,bygeographicalorigin,1996-2006 (Millionsofdirhams) Region/economy 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Totalworld 2 850 11499 4418 16069 4 998 32486 5 876 23257 9 485 26708 26070 Developedcountries 2 336 10470 3486 15560 4 655 32044 4 943 22586 8 198 24740 23149 Europe 2 249 6726 3179 14550 4 335 31326 4 545 22109 7 734 24502 22228 EuropeanUnion 2 214 6650 3006 14295 4 205 31017 4 300 21808 7 051 23743 21303 Austria - - - - - - - - 1 0 3 Belgium/ Luxembourg 70 29 134 98 172 103 261 190 346 426 2 605 Cyprus - - - - - - - 12 16 31 8 Denmark - - - - 4 1 3 0 2 1 3 France 915 1448 1614 3 657 1 624 27650 2 252 2 889 4 745 19843 8 646 Germany 70 600 48 69 193 257 493 145 475 856 940 Hungary - - - - - - - - 0 1 279 Ireland - - - - - - - - 10 7 40 Italy 44 29 58 118 202 109 69 107 266 210 335 Netherlands 218 257 288 3 157 76 199 239 74 125 260 227 Portugal 645 10 134 4 961 857 1422 237 35 21 60 50 Spain 148 476 490 2 030 564 939 390 18095 477 1442 7 191 Sweden - 3601 - 20 24 52 1 16 113 155 46 UnitedKingdom 105 200 240 186 490 287 356 244 455 452 931 OtherdevelopedEurope 35 76 173 255 130 309 245 302 683 759 925 Iceland - - - - 0 0 0 26 3 - - Norway - - 48 - 11 - 5 15 3 1 19 Switzerland 35 76 125 255 119 309 240 260 676 758 906 NorthAmerica 87 2982 307 1 010 308 710 390 477 461 235 896 Canada - 10 58 - 11 10 10 5 13 8 33 UnitedStates 87 2972 250 1 010 297 699 380 471 448 226 864 Otherdevelopedcountries - 762 - - 11 9 9 0 4 4 25 Japan - 762 - - 11 9 9 0 4 4 25 Developingeconomies 375 876 749 412 304 437 904 623 1 197 1932 2847 Africa 139 248 182 69 27 162 76 190 67 45 150 NorthAfrica 139 248 182 20 27 162 76 179 66 43 134 Algeria - - - - 20 75 23 1 25 1 1 Egypt - - - - 1 11 1 0 13 10 85 LibyanArabJamahiriya 139 248 182 - 3 6 - 26 24 4 8 Tunisia - - - 20 3 70 52 152 5 28 40 OtherAfrica - - - 49 - - - 10 0 2 16 Gabon - - - - - - - 10 - 2 - Mali - - - - - - - - - - 16 Mauritania - - - - - - - - 0 0 1 SouthAfrica - - - 49 - - - - - - - LatinAmericaandtheCaribbean - - - - 1 - 71 - 3 32 - Chile - - - - - - 2 - 3 27 - Panama - - - - 1 - 69 - - 5 - Asia 235 629 567 343 276 275 757 433 1 127 1856 2 697 WestAsia 235 267 192 196 248 275 750 432 1 012 1542 2 418 Bahrain 17 - - - 0 13 - - 83 0 35 Iraq - - 19 - 6 22 7 7 210 137 71 Jordan 9 76 - - - - 1 1 - 5 55 Kuwait 9 10 19 78 33 131 431 17 18 223 1 012 Lebanon - - - - 0 11 11 9 13 17 66 Qatar - - - - - 1 6 0 - 26 50 SaudiArabia 183 76 86 108 145 87 172 163 354 362 330 SyrianArabRepublic - - - 10 - 0 1 - 1 25 14 Turkey - - - - - 0 3 11 3 20 12 UnitedArabEmirates 17 105 67 - 64 9 118 222 331 728 774 South,EastandSouth-EastAsia - 362 375 147 27 1 6 2 116 314 279 China - - - - - - - 0 15 1 - HongKong,China - - - - - - - - - - 13 India - 76 48 147 - 1 6 - 1 184 20 Indonesia - - - - - - - - - - 20 Korea,Republicof - 286 327 - 27 0 0 2 0 - - Pakistan - - - - - - - - 100 129 226 Unspecified 139 152 182 98 39 5 29 48 90 35 74Source:UNCTAD,FDI/TNCdatabasebasedontheOfficedesChanges,unpublished.Note:Datarefertogrossinvestments andmaynotbecomparable tothosepresentedintable3. 33
  • 34. Bibliography - Attijariwafa Bank, 2012. Tariffs for enterprises. Available at <http://www.attijariwafabank.com/Entreprise/VousCherchez/Pages/Nostarifs.aspx>. - Achy, L., (2010), Youth Unemployment in Morocco - Roots, Risks, Responses, accessed 26. March 2012, <http://carnegieendowment.org/files/Lahcen_Achy%20%5BCompatibility%20Mode%5D.pdf> - Bouoiyour, J.,(n.d.), The Determining Factors of Foreign Direct Investment in Morocco, accessed 26. March 2012, <http://www.mafhoum.com/press6/172E12.pdf> - Key Factors for Successful Evaluation and Screening of Strategic Alliance, Ming- Kuen Wang et al. / Asia Pacific Management Review (2007), 12(3), 151- 160 - Global Strategy, Competence Building and Strategic Alliances, David Lei and John W. Slocum Jr., California Management Review, Fall 1992) - Bank, W. (2010). Morocco. Retrieved 3 24, 2012, from World Bank: http://data.worldbank.org/country/morocco - BKAM. (2010). BKAM. Retrieved 3 23, 2012, from BKAM: http://www.bkam.ma/ - CIA. (2010). CIA. Retrieved 3 25, 2012, from CIA: https://www.cia.gov/library/publications/the-world- factbook/geos/mo.html - Govt., U. (2010). US Govt. Retrieved 3 24, 2012, from US Govt.: http://www.state.gov/r/pa/ei/bgn/5431.htm - World Development Indicators (WDI). 2012.Poverty indicators. Available at: http://data.worldbank.org/indicator - World Investment Directory - Volume X Africa by United Nations Conference on Trade and Development 34