The Kenyan economic environment will affect the start-up cost and the Modern Solar Systems Company’s market potential. The country’s infrastructure, including roads, is well developed to support access to the target areas. The inflation rate in 2019 was 5.8, down from 5.7. The currency exchange rate was 101.4 in 2019, down from 101.9 in the previous year, while the interest rate was 8.50, down from 9.00. The unemployment rate is relatively high, at 5.70 in 12 months and is expected to increase to 7.00 in 2021 and 8.00 percent in 2022 (Kenya Economic Outlook). A majority of Kenyans are middle-income earners, although the country has a massive number of low-income families. The factors will affect the performance of Modern Solar Systems Company’s products in the country, especially considering the COVID-19 pandemic’s impact on the economy.
The cost of starting up the business will include finances required for equipment, building, vehicles, infrastructure improvement, training costs, consultations, legal fees, and licenses in the target market. The management should consider the cost to determine the potential of the product in the target market, such as whether it will be profitable. The cost of beginning the business is analyzed below:
|Training and Certification||$6000|
|Consultations, legal aspects and licensing||$30000|
Modern Solar Systems Company’s management should consider various sources of finances to fund the business. The firm should consider sources, such as selling stocks, issuing bonds, or loans from major financial institutions, considering that it is a global company. The company can sell stocks to major investors to generate enough funds to establish the business or issue bonds to get the desired amount of capital. However, the most viable option for Modern Solar Systems Company is to get a loan from a bank or any other financial institution to finance its operations. The company will take a $10M loan from the financier to begin operations and fund the rest from the owner’s contribution.
The Economic Environment
Modern Solar Systems Company should consider various economic factors when making pricing decisions for its solar panels. The personal income level in Kenya has grown over the years from 2004 to 2019, averaging at 4197.76 KES Billion. In 2019, the level reached an all-time high of 8591.30 KES (Kenya National Disposable Income2004-2019). The inflation rate in the country has remained relatively stable over the past one decade, with minimal changes. The taxation system in Kenya is relatively flexible and lower than other countries, which makes it an impressive market for foreign investors. The factors will determine the prices of the product, considering that the target market is rural, with relatively lower personal income rate than the national average. Besides, the company will enjoy relatively low taxes, allowing them to market the product at a lower price.
Various other factors will affect the pricing and market potential of the new product in the Kenyan market. The production cost will be relatively high amounting to more than $500,000 in direct cost of production. Besides, the company will cater for the cost of marketing and transportation of the products to the market, considering that it will not have local production capacity during the earlier years of business. Administrative and overhead expenses are expected to go beyond $200,000. Therefore, when pricing the product, the management will consider the huge cost of producing and delivering the product to the market and consider the competitor’s s pricing strategy.
The solar panel demand will be high in rural Kenya since the electric grid does not serve the region. The current demand will be high, although it will depend on the level of marketing. With effective marketing, the company will reach more target customers who need solar panels for their domestic and commercial usage. As the country’s rural parts require energy to develop, the company will have a huge market for its panels. Besides, Shahsavari and Akbari indicate that solar energy in the urban areas of developing countries is cheaper compared to electricity, especially during dry seasons, when the levels of water decline (275). Besides, the solar panel’s demand in the country will grow as rural residents require more energy to meet their need.
Modern Solar Systems Company’s pricing plan will consider the strategies taken by competitors, such as Go Solar Systems Ltd and the Kenya Power and Lighting Company (KPLC), which is the leading supplier of electric grid in the country. For solar companies, pricing depends on the cost of providing power through KPLC. Solar companies ensure that their prices are always lower than the electric power to attract more customers. Modern Solar Systems Company will use a similar strategy, but consider the panels’ power to add value and sell the product at a reasonable price and recover production cost. Manufacturing panels with higher watts will allow it to market at a higher price through the promise of value-added customer benefit.
Kenya Economic Outlook, 2020. Available at https://www.focus-economics.com/countries/kenya
Kenya National Disposable Income2004-2019 Data, 2020. Available at https://tradingeconomics.com/kenya/disposable-personal-income#:~:text=Disposable%20Personal%20Income%20in%20Kenya%20averaged%204197.76%20KES%20Billion%20from,1357.30%20KES%20Billion%20in%202004.
Shahsavari, Amir, and Morteza Akbari. “Potential of solar energy in developing countries for reducing energy-related emissions.” Renewable and Sustainable Energy Reviews 90 (2018): 275-291.