Saudi Solar Systems: Establishing a Photovoltaic Startup in Saudi Arabia, Capturing Value, and Providing Electricity

Executive Summary

Photovoltaic (PV) is the technology that entails the use of solar cells to convert solar energy into electricity. It is a reliable source of renewable and clean energy, especially in those countries with abundant sunlight resources. Saudi Arabia is one such country. The country sits on the so-called ‘Sun Belt’. According to analysts, the average sunlight energy in Saudi Arabia is approximately 2200 thermal kWh/m2. Consequently, the country has the potential of being one of the largest producers of solar energy in the world.

In this report, the author sought to analyze how a PV startup can create value in a subsidized energy market, such as the one in Saudi Arabia. The report is a detailed analysis of Saudi Solar Systems, a startup in the country’s solar energy industry. Two business models were proposed for Saudi Solar Systems. The two are manufacturing and distribution models. The distribution model was selected as the preferred strategy given that it is more cost effective compared to manufacturing. Manufacturing would require the importation of parts from different countries around the world. It will also be labor and technologically intensive. However, the distribution model makes economic sense given that Saudi Solar Systems will import assembled solar panels from two companies in Germany and France. Personnel in Saudi Arabia will then be trained on installation and maintenance of the solar panels.

The ROI for the firm stands at 1, which is an indication of a profitable entity. On its part, ROCE stands at 56.9%. Key performance indicators are divided into 3 metrics. The three are financial, customer, and people metrics. The company will strive to increase its revenue while reducing the costs and expenses incurred. Efforts will also be made to acquire new customers and retain the existing ones. In addition, the management will make efforts to improve the satisfaction of the employees.

 

 

Table of Contents

Executive Summary. 2

  1. INTRODUCTION.. 5

1.1.          Background Information. 5

1.2.          Saudi Solar Systems: A Brief History. 6

1.2.1.     Overview.. 6

1.2.2.     Mission and vision statements. 6

1.3.          Trends in the Cost of PV Technology. 7

  1. ANALYSIS AND DISCUSSION.. 9

2.1.          Analysis of External and Macro Environment for Saudi Solar Systems. 9

2.1.1.     The size and dynamics of the energy market in Saudi Arabia. 9

2.1.2.     Analysis of customers targeted by Saudi Solar Systems. 11

2.1.3.     Analysis of suppliers. 14

2.1.4.     Analysis of competition. 16

2.1.5.     Analysis of the energy industry in Saudi Arabia. 18

2.2.          Internal Analysis. 27

2.2.1.     Analysis of the value provided by Saudi Solar Systems. 27

2.2.2.     The key functions and requirements for Saudi Solar Systems: Marketing, finance, human resource, and business processes. 29

2.2.3.     The primary resources required by Saudi Solar Systems. 29

2.3.          An Assessment of Strategic Options Available for Saudi Solar Systems. 30

2.3.1.     Supply of solar energy as a business model 30

2.3.2.     Distribution and supply of PV technology and systems business model 32

2.4.          Model Implementation. 33

2.4.1.     Execution plan. 33

2.4.2.     Change management and change leadership. 36

2.4.3.     A review of local market and competition. 38

  1. RECOMMENDATIONS AND CONCLUSION.. 40

3.1.          Recommendations. 40

3.1.1.     An analysis of the supply and distribution business model as the most valuable strategy  40

3.1.2.     A review of actions and time plan. 40

3.1.3.     Financial forecasts for Saudi Solar Systems. 41

3.1.4.     An analysis of key performance indicators for Saudi Solar Systems. 44

3.1.5.     Potential risks and mitigation plans. 46

3.2.          Conclusion. 47

References. 48

Appendix. 51

Appendix 1: Gantt chart for Saudi Solar Systems. 51

Appendix 2: Marketing mix 52

Appendix 3: Finance. 53

Appendix 4: Operations 54

Appendix 5: Human Resource. 55

Appendix 7: Process and Organization. 56

 

 

 

 

 

Saudi Solar Systems: Establishing a Photovoltaic Startup in Saudi Arabia, Capturing Value, and Providing Electricity

1.      INTRODUCTION

1.1.Background Information

Photovoltaic technology (herein referred to as PV) involves the conversion of light energy, mostly from the sun, into electricity [1]. The conversion involves the use of semiconductors. A conventional PV system is comprised of solar panels [1]. Each of the panels is, on its part, composed of individual solar cells. It is the cells which are responsible for the conversion of light energy into electricity.

In addition to hydroelectricity and wind energy, PV is one of the most common sources of renewable energy in the world [2]. It is also one of the cleanest sources of energy. The reason is that the operation of PV systems is not associated with any pollution to the environment. For instance, PV systems generate electricity without the need for any moving parts. Furthermore, the energy used in the production of the solar panel can be recouped after the system has operated for between 1.5-3 years [3].

Photovoltaic technology is associated with several advantages when compared to conventional sources of energy, such as carbon fuel. One of the major advantages is the pollution free nature of the energy [1]. The waste and emissions from the manufacture of the PV panels can be effectively managed by applying existing pollution control standards. Plans are also underway to develop recycling technology for PV systems. Furthermore, the panels have a lifespan of more than 100 years [4]. They require minimal maintenance, and the operator only incurs the initial set-up cost.

However, the technology is also associated with various disadvantages. One of them is the fact that the generation of electricity is dependent on direct sunlight [2]. What this means is that PV systems are ineffective in regions that receive little or no sunlight. In addition, tracking system is required to ensure that the panel is facing the sun at all times. If the tracking system is not used, approximately 20% of the energy is lost. The PV technology is also adversely affected by dust, cloud cover, and other impurities in the atmosphere [5]. The impurities reduce the amount of sunlight energy that is received by the panels. However, in most cases, the benefits far outweigh the costs, making PV one of the most efficient sources of energy today.

In this paper, the author analyzes how a PV startup can create value in a subsidized energy market. The market forming the focus of the report is the Saudi Arabian solar energy industry. The PV startup will provide electricity consumers in Saudi Arabia with monthly bill saving solutions through the installation of PV systems on their facilities.

1.2.Saudi Solar Systems: A Brief History

1.2.1.      Overview

The name of the proposed startup is Saudi Solar Systems. The business will be located in Riyadh, the capital and most populous city in the Kingdom of Saudi Arabia. Saudi Solar Systems is a partnership between 3 investors. In addition to the 3 partners, Saudi Solar Systems will have a number of employees. The number will be determined by demands for labor.

The investors came together to address the felt need for renewable sources of energy in Saudi Arabia. The electricity market in the country is growing at a rate of 7-10% per annum [6]. The growth reflects the increase in the rate of electricity consumption in Saudi Arabia. In spite of the fact that Saudi Arabia receives an average of 2200 thermal kWh/m2 solar energy, renewable energy accounts for a small fraction of the total electricity consumption in the country [6]. Saudi Solar Systems seeks to fill this gap.

1.2.2.      Mission and vision statements

  1. Mission statement

To be the choice provider of solar energy to help consumers effectively and efficiently manage and reduce their electricity consumption expenditure.

  1. Vision statement

To create value for solar energy consumers in Saudi Arabia.

1.3.Trends in the Cost of PV Technology

Compared to electricity from other sources, such as fossil fuels, the cost of electricity from PV technology in Saudi Arabia and other countries around the world is cheaper. Consequently, analysts are of the opinion that the future of the energy sector lies in the renewable sources, including solar [6]. It is noted that PV technology is a serious competitor to conventional generation of electricity, especially when the indirect costs of fossil fuels are taken into account. One of the major indirect costs of electricity from fossil fuels is the emission of greenhouse gases into the atmosphere. The emissions bring on board the external costs of fossil fuels. On average, the external costs of CO2, SO2, and NOx are 0.0001 SR/g, 0.0086 SR/g, and 0.0412 SRg per kWh respectively. In Saudi Arabia, the total indirect costs associated with fossil fuels with regards to the generation of electricity are approximately 0.1688 SR/kWh.

The cost of solar energy in the world has declined significantly since the 1980s. The costs have reduced from highs of 90 c/kWh in the ‘80s to around 20 c/kWh currently. In the developed countries, such as the US, the figure is around 15 c/kWh. The cost of PV technology in the US as of 2010 stood at 2.5 $/Wp. The cost is expected to fall to about 1 $/Wp.

Generation of electricity from conventional sources in Saudi Arabia is subsidized to a tune of SR 0.15/kWh. However, when one factors in the indirect costs of these conventional sources, such as fossil fuels, the cost of electricity rises. What this means is that even if solar energy is not subsidized by the government, it is cheaper in the long term. The figure below is an illustration of a forecast of PV technology costs in Saudi Arabia:

Figure 1

The trend in the cost of PV electricity

Source: [3].

From the figure above, it is apparent that PV technology is more efficient in the long term. Governments should be making long term plans for their citizens. As such, the Saudi Arabia government should perhaps consider removing the subsidies on conventional energy and transfer them to solar energy. When this happens, citizens will be encouraged to shift to the cheaper solar energy, which will be more efficient to the future of the country’s economy.

 

 

2.      ANALYSIS AND DISCUSSION

2.1.Analysis of External and Macro Environment for Saudi Solar Systems

The macro environment entails the primary external factors that are beyond the control of the firm [7]. Such factors impact variously on the decision making and performance of the organization. They include, among others, population and market size, legal and socio-political elements, natural phenomena, as well as technology. Saudi Solar Systems is well aware of these factors in Saudi Arabia. They have to be taken into consideration to inform the management of the business.

2.1.1.      The size and dynamics of the energy market in Saudi Arabia

Saudi Arabia is a net producer and exporter of oil in the world economy [8]. In fact, the country is regarded as the largest producer and exporter of this commodity in the world. Consequently, the economy of Saudi Arabia is anchored on oil exports [2]. Approximately 90% of the country’s foreign exchange is earned from oil. The product generates more than 70% of the government’s revenue [2].

With regards to electricity, the country is touted to be the largest and fastest growing consumer of the commodity in the Middle East [6]. The process of electricity generation and distribution is under the country’s Ministry of Water and Electricity. Saudi Arabia reported a rapid economic growth in the years between 1990 and 2010 [8]. Within the same period, consumption of electricity increased sharply. For example, in 2001, peak loads reached approximately 24GW [8]. The figure was more than 25 times that recorded in 1975. By 2023, the figure is expected to rise to 60GW [6]. What this means is that there is a felt need to put in place energy conservation measures. Such measures would lead to sustainable development in the country. The investment needed to achieve this objective is approximated to be $90 billion [8].

It is important to note that the bulk of electricity in the country is generated from oil and natural gas. To this end, oil accounts for 65%, while natural gas accounts for 27% of the total electricity produced in Saudi Arabia [3]. Steam accounts for a paltry 8% of the total generation. The generation capacity in the country is about 55GW. Given the demand for this commodity, it is apparent that an energy shortage is inevitable. The shortage can be avoided if the government increases the generation capacity in the country. To this end, plans are underway to raise the capacity to 120GW by 2030 [8]. To this end, PV technology can play a significant role in the provision of renewable energy in Saudi Arabia. For instance, the government has put in place plans to increase the amount of electricity generated from solar energy to 41GW by 2030 [8].

Analysts in the energy sector are of the opinion that PV technology has multiple applications in Saudi Arabia [9]. The applications include, but not limited to, the generation of electricity. The technology can be adopted as a source of energy for domestic and industrial establishments. It can also be used in desalination and cooling. As the population of Saudi Arabia increases, it is expected that the demand for PV technology would rise as well [9]. For instance, between 2010 and 2014, the country’s population increased by about 3.2%. Between 2008 and 2010, industrial production in Saudi Arabia grew by an average of 4.9% per annum [9]. Within the same period, the economy expanded by an average of a similar margin. All these sectors are consumers of energy. Consequently, the demand for PV energy and other sources of renewable energy is likely to grow in the future.

In the ambitious King Abdullah City for Atomic and Renewable Energy (KACARE) project, the government projected to generate 16GW of energy from solar [10]. The program was an indication of the confidence the authorities had in PV technology. The KACARE program may have failed; but this is not an indication of the fact that PV technology has no place in Saudi Arabian post modern society. The failure was largely as a result of lack of support from the business community.

A 2016 Price Waterhouse Coopers report indicates that the demand for energy in Saudi Arabia grows at an average annual rate of 7-10% [6]. The growth has persisted for the past 10 years or so. In addition to this, the country is experiencing a boom in the building and construction industry. The construction process itself consumes energy. Furthermore, the completed buildings require energy in form of electricity. All these factors point to a rise in the demand for electricity in the country.

In a study conducted by Makbul, PV energy accounts for only 5% of the total energy consumed in Saudi Arabia [8]. The paltry figure can be both an advantage and a disadvantage to PV startups in the country. The disadvantage is evident given the fact that the many companies operating in the industry have to scramble for a small portion of the pie that is the energy market. In addition, it may be an indication of the fact that Saudis are still unwilling to embrace PV technology. However, the small market share can be turned around and exploited by startups in the PV sector, such as Saudi Solar Systems The reason is that it is an indication of a potential for growth. Furthermore, Saudi Arabia is endowed with untapped solar energy resources. The demand for PV solar energy can be triggered through incentives, public awareness campaigns, and feed-in-tariffs [10]. The strategy has worked well in the UK and other countries.

2.1.2.      Analysis of customers targeted by Saudi Solar Systems

The segment of the customers targeted by Saudi Solar Systems is from Riyadh and other regions in the entire Saudi Arabia. The customers are spread over a geographical area measuring approximately 2,150,000 km2 [11]. To this end, the country is ranked as the fifth largest region in Asia. It is only second to Algeria in the Arab world [11]. The target customers are located in the 13 provinces of Saudi Arabia [11].

The size and growth of the target customers can be deduced from the census conducted in 2013. According to the census, Saudi Arabia has a population size of 26.9 million [6]. Since the 1950s, the country’s population size has grown rapidly. At 3% per annum, the country has one of the highest birthrates in the world [8]. The figure below is an illustration of the country’s population growth between 1960 and 2010:

Figure 2

The population growth in Saudi Arabia: 1960-2010

Source: [11].

The figure above shows that the size of the target market in Saudi Arabia continues to grow. The growth is expected to persist into the future. The development is an indication of the fact that the target market for Saudi Solar Systems will continue to expand. It is estimated that Saudi Arabia has a youthful population. The reason is that more than 50% of the total population is under 25 years of age [11]. The youth are likely to embrace technology better than the older population. What this means is that the target market has a potential for absorbing the PV technology promoted by Saudi Solar Systems.

It is important to note that Saudi Solar Systems will be targeting households and other establishments, such as schools, industries, and hospitals. In 2010, the number of households in the country stood at 4.7 million [11]. Out of this, 1.7 million were non-locals. The country has a large number of businesses. For example, in 2015, about 14,000 startups were started in the country [11]. The figure was a significant rise from the number of new businesses operating in the country in 2014, which stood at about 8,000.

Another important attribute of the target customer is the level of disposable income in the country. The level of disposable income is an indication of the ability of the households and individuals to acquire PV systems distributed by Saudi Solar Systems In 2012, disposable income in the country stood at $7500 [11]. The figure was above the global average for the year. The growth of the disposable income is relatively high, at an average of 8% per annum. All this is an indication of the fact that the spending power of the target market is relatively high. The development is probably as a result of the dependency of the global economy on oil, which is the major driver of the Saudi economy.

However, it is important to note that the GDP growth in the country has plummeted between 2011 and 2016. For instance, in 2011, the figure stood at 10%. The figure dropped to 5.4% in 2012, 2.7% in 2013, 3.6% in 2014, 3.5% in 2015, and finally 1% in 2016 [11]. The decline in the growth of GDP, however, is offset by the decline in inflation rate. The rate reduced from a high of 5.9% in 2011 to 3.5% in 2016 [11].

In spite of the impressive disposable income among the target consumers, it is important to note that they are susceptible to prices. Their sensitivity to prices is enhanced by the fact that the government has subsidized electricity from conventional sources. As such, if the price of the PV technology sold by Saudi Solar Systems is high, most consumers are likely to stick to the conventional sources of energy, which are cheaper due to the government subsidies.

2.1.3.      Analysis of suppliers

A set of four criteria was used to select two potential suppliers for Saudi Solar Systems. The four were range of products, distribution network, size, and customer service. With regards to range of products, Saudi Solar Systems will be dealing with 10 types of PV products. The selected supplier must be able to supply at least 7 out of the 10 products. The products are:

  1. Solar panels
  2. Mounting systems
  • PV kit
  1. Inverter
  2. Charge controller
  3. Equipment
  • Battery
  • Converter
  1. Tracker
  2. Monitoring system

In addition to the products, the supplier should have an experience in dealing with international customers. What this means is that the supplier must have an international business model. The supplier should also be large and reputable enough. Size matters as it is a major determinant of the ability of the supplier to meet orders. It is a fact that even small sized companies can meet orders well. However, Saudi Solar Systems is not in a position to gamble with regards to the ability of the firm to deliver its orders, given that it is a startup operating in a competitive market. Finally, the supplier must be able to provide customer care services and support. To this end, the manufacturer must commit to replace any faulty systems or repair them at no cost to Saudi Solar Systems. It is important to note that price will not be a major determinant given that the prices of PV technology do not vary much between suppliers.

Saudi Solar Systems will be importing PV systems from two companies that met the above criteria. The first is Krannich Solar from Germany and Conergy from France. The two suppliers have varying bargaining powers. The reason is that they are of different sizes and their expertise in the solar energy market differs.

  1. Krannich Solar

Compared to Conergy, Krannich Solar GmbH & Co. KG has less power as a supplier. The company is a wholesaler and supplier of PV systems. It has customers in different parts of the world. Krannich deals in solar modules, panels, inverters, mounting systems, and power optimizers. It also sells storage and self-consumption systems. One of the reasons why Krannich was selected by Saudi Solar Systems is that it provides after sales services and marketing support to its customers.

Krannich has a long history in the energy market. It was started in 1995 and has operations in 15 countries around the world. Its operations in the foreign countries are carried out through 24 companies. The company, whose headquarters are in Weil der Stadt, Stuttgart, has more than 250 employees. It assembles its PV systems by acquiring parts from different manufacturers. The manufacturers include, among others, Luxor, Kaco, and K2 Systems. Its association with these suppliers is an indication of the high quality of PV systems it deals with.

One of the major weaknesses of this company, which diminishes its bargaining power as a supplier for Saudi Solar Systems, is the fact that it is a family business. Kurt Krannich and Sabine Krannich serve as the company’s Executive Officers. What this means is that the business is exposed to the vagaries and conundrums associated with family enterprises. Such risks include poor management and sibling rivalry.

  1. Conergy AG

The company was started as a private enterprise in Hamburg, Germany. However, it has operations in other parts of the world, and Saudi Solar Systems will be dealing with the company’s subsidiary in France. In 2005, Conergy went public. It started trading its stock at the Frankfurt Stock Exchange. The fact that it is trading publicly is an indication of a company with a strong financial base, increasing its bargaining power as a supplier. Although the Asia-Pacific headquarters of the company are located in Singapore, Saudi Solar Systems will be importing PV systems directly from the French subsidiary. The reason is that the French subsidiary is offering the products at a competitive price.

Currently, Conergy has over 67 distributors and wholesalers. The businesses are located in over 19 countries around the world. The bargaining power of the company is evident in the number of large scale projects it has completed around the world. For instance, in 2014, the firm installed the first large solar farm in the UK. The farm, which is located at Hawton, Nottinghamshire, has the capacity to generate 5MW of electricity. The company has also won tenders to complete solar power plants in among others, Philippines, New Caledonia, and British Columbia. Conergy also has contracts with multinationals. They include LG Electronics, Kawa Capital, and MEMC Electronics.

2.1.4.      Analysis of competition

Competition in the PV solar sector in Saudi Arabia is stiff. The market is dominated by Chinese companies. It is difficult for a startup like Saudi Solar Systems to compete with these firms given the fact that they enjoy cheap labor and advanced technology from China. Cheap labor is not something that can be wished away given that a slight increase in prices may be catastrophic to the success of a startup. The risk is especially heightened given that the Saudi Arabian solar energy market is highly subsidized.

For the purposes of this report, three entities that pose more threats to the success of Saudi Solar Systems will be highlighted:

  1. Yingli Solar Company

Yingli is one of the largest fully vertically integrated PV manufacturers in the world. The company is based in Baoding, China. It has operations in most parts of the country, including Riyadh. The firm produces high quality PV products in China. It is able to produce them at a cheaper price given the favorable labor costs in the country. It then exports the products to different parts of the world, taking advantage of its economies of scale to maintain a chokehold on local markets.

  1. Vico Export Solar Energy

The firm specializes in the wholesale and distribution of PV systems around the world. It is based in Valencia, Spain, with operations in other parts of the world, including Saudi Arabia. It specializes in the distribution of solar panels, electrical inverters, and other appliances. One major advantage of Vico, which it uses to exploit local markets, is its wide and effective supply networks. It operates in conjunction with some of the best and largest suppliers in the world, such as Yingli Solar, Sharp Solar, Kyocera Solar, Risen Energy, Renesolar, among others. Saudi Solar Systems will try to compete with this company by establishing its own supply networks in Saudi Arabia.

  • JPC Solar Company

The company also supplies high quality PV systems in Saudi Arabia. It is able to offer its products at competitive prices. The firm acquires its merchandise from manufacturing companies based in China, such as Yingli Solar. Its ability to access these modules at low costs makes it possible to sell them at a cheaper price to local consumers. One of the competitive advantages enjoyed by JPC is the fact that it offers its customers a 25 years warranty for all its products. Saudi Solar Systems will need to offer a competitive warranty offer for it to compete effectively with this company.

2.1.5.      Analysis of the energy industry in Saudi Arabia

The energy industry in Saudi Arabia can be described as vibrant. It is important for Saudi Solar Systems to analyze it in order to effectively establish a niche in the market. In this section, the energy industry will be analyzed using the Porter’s Five Forces, PESTEL, and SWOT Analysis models.

  1. Analyzing the Saudi energy market using the Porter’s Five Forces

The Porter’s five forces model will be used by Saudi Solar Systems to analyze the level of competition in the industry [12]. The five forces used in the model will be used to determine the attractiveness of the market to the investors. The identified elements will largely focus on the micro environment of Saudi Solar Systems. The reason is that the factors are close to the firm and will affect its ability to make profits. The figure below is a graphical representation of the five forces:

The five forces as they relate to Saudi’s energy market are explained below:

  1. Threat of new entrants

It is a fact that a profitable industry is highly appealing to new investors [12]. As such, many startups crowd the market, diluting the profits enjoyed by the existing firms. Saudi Arabia has one of the most vibrant energy markets in the world. For example, in 2015, energy consumption per capita was estimated to be 7.2 toe [11]. Consumption of electricity stood at 9600 kWh within the same period [11]. It is also noted that the consumption of energy in this market has more than doubled since 2000. Consequently, as of 2014, the country was ranked as the sixth largest consumer of oil in the global market [11]. All these factors are an indication of the fact that the industry is attractive to new investors. Investors will be attracted to the energy subsectors where entry is feasible. Such a subsector is the one concerned with solar energy. As such, the threat of new entrants in the energy market, especially the solar energy market, is likely to be high.

  1. Threat of substitutes

Saudi Solar Systems understands that the existence of alternative products in the market will increase the threat of having customers switch to the substitutes [12]. In addition, the increased marketing of the substitutes may further reduce the profits of the startup. With regards to the Saudi energy market, Saudi Solar Systems is aware of the fact that various substitutes do exist. They include fossil fuel from the national grid and diesel generators. On January 2017, Saudi Aramco commissioned a wind turbine in Saudi Arabia. The facility is expected to generate 2.75 MW of electricity. Furthermore, the government has made plans to generate energy by recycling waste products. It is estimated that the proposed recycling facility will generate 6 MW of electricity from waste [11]. The government is also planning to start generation of electricity from nuclear energy. All these factors point to the fact that consumers have several options when it comes to the selection of their energy sources.

  1. Bargaining power of consumers

Saudi Solar Systems understands that an industry where consumers have high bargaining powers is unattractive to investment [7]. In contrary, a market where the power of customers is reduced is associated with increased profitability. Consumers with high bargaining powers are sensitive to price increases. In addition to price sensitivity, another factor that points to the existence of high bargaining powers among consumers is the existence of substitutes [12].

A critical analysis of the Saudi energy market, especially the solar energy market, which is the focus of Saudi Solar Systems, indicates that the bargaining power of consumers is high. The reason is that there are various alternatives the consumers can switch to. In addition, a rise in the price of power and associated products by a company would drive consumers away.

As already indicated in this report, the government of Saudi Arabia has subsidized electricity from fossil fuels. What this means is that the cost of this source of energy, without factoring in the indirect costs associated with the environment, is low. For example, residential consumers pay SR 0.05 per kWH for up to 2000 units. It is one of the cheapest rates in the world. Consequently, if consumers feel that the cost of purchasing and installing PV technology will be higher than their monthly electricity bills, they are likely to stick to the conventional sources of energy.

  1. Bargaining power of suppliers

The energy market in Saudi Arabia indicates that the power of the suppliers is highly reduced. The reason is that there are various suppliers of energy in the industry. Similarly, Saudi Solar Systems can choose from a wide range of distributors of PV systems. Consequently, Conergy and Krannich, the two suppliers that Saudi Solar Systems will be dealing with, have reduced power over the startup. Consequently, Saudi Solar Systems will be able to bargain with the suppliers for better terms of service, including after sale services and reduced prices. The move will have a positive impact on the startup’s bottom line.

  1. Industry rivalry

A review of the solar energy industry in Saudi Arabia paints a picture of a competitive market. There are various firms dealing with PV systems in Riyadh and other cities around the country [8]. Most of these firms import the systems from China and other developed nations, where the cost of production is low.

  1. Analyzing the Saudi energy market using the PESTEL framework

The Saudi energy market can also be analyzed from the perspective of the PESTEL framework. The model takes into account the Political, Economic, Social, Technological, Environmental, and Legal factors and their impacts on businesses operating in the industry [13].

  1. Political factors

Political stability is fairly evident in Saudi Arabia. For example, there was a smooth transition of power after the death of King Abdullah. Saudi Solar Systems acknowledges that the political environment is conducive for business growth and development. The Saudi government has expressed interests in the PV industry. For instance, in the country’s Vision 2030, one of the goals is to empower the country to generate 9.5 GW of renewable energy [11]. Considering that PV is a form of renewable energy, Saudi Solar Systems will take advantage of the political will of the government to establish itself in this sector [14].

The level of unemployment in Saudi Arabia stands at approximately 5.7% [11]. To address the problem, the government is encouraging the youth to invest in innovation. Such innovations include PV technology. It is also noted that the Saudi government supports the projects initiated by the youth and which are likely to create employment. Consequently, Saudi Solar Systems is assured of government support in its activities in the country.

The government requires a foreign entity operating in Saudi Arabia to have a local partner with a controlling stake in the venture [6]. In addition, the startup must convince the government that it has the financial capabilities required to operate in the particular market. The requirements are for liability reasons. The case applies to startups in the solar energy sector. Considering that Saudi Solar Systems is owned by locals, government support is assured.

Another political element is the issue of subsidies in the energy sector. The Saudi government has introduced subsidies to the cost of conventional sources of energy, such as diesel [6]. Such measures are likely to work against companies operating in the energy sector. The reason is that the cost of electricity in Saudi Arabia is reduced. Consequently, the profit margins of firms operating in this sector are affected. In addition, the Saudi government has made efforts to liberalize the electricity market in the country. However, the industry is still under the control of the government controlled Saudi Electricity Company (SEC) monopoly.

The tax regime in Saudi Arabia is also punitive to players in the corporate sector. For instance, corporate tax for a company owned by non-Saudis is 20% [6]. For companies owned by Saudi residents, income tax is pegged at 2.5%. In addition, businesses have to pay Zakat, which is obligatory under Islamic law. The money is used for charitable and religious purposes. In Saudi Arabia, Zakat is about 2.5% of the earnings made by the business [6]. In comparison, the tax regime in other parts of the world is friendlier to investors. For instance, on average, businesses in Europe pay 15%. In addition, the Saudi government appears to provide its support to businesses discriminately. For instance, companies in the manufacturing and exporting sectors are categorized in the free zone. Here, export duty, commercial taxes, license fees, and land taxes are subsidized [8]. Saudi Solar Systems will be negatively affected considering the fact that it will be operating in the import business sector.

  1. Economic factors

The market for electricity in Saudi Arabia is growing at an average of 8.5% per annum [6]. In addition, electricity consumption in the country is high. The factors are favorable to Saudi Solar Systems in spite of the fact that the renewable energy sources account for only 5% of the total consumption [8]. The reason is that with support from the government, the market share of the renewable energy is likely to rise. The economy of the country is also on a rising path. The growth is supported by the reliance of the global economy on oil, most of which is exported from the Arab countries. Furthermore, poverty levels in Saudi Arabia are low. For instance, the country has the 10th lowest poverty levels in the world. The poverty line is set at $480 per month [6]. About 12.7% of the country’s population lives in poverty. What this means is that Saudi Solar Systems will be dealing with consumers with high spending powers.

  1. Social factors

Majority of the people living in Saudi Arabia are Muslims. The religion guides most aspects of the social life in this country [11]. There are no religious teachings against the use of PV technology in the country. To this end, Saudi Solar Systems is not likely to face acceptance barriers in the society. However, it is important to note that the working hours in the country are significantly different from those in other parts of the world. For instance, a typical working week in Saudi Arabia runs from Sunday to Thursday. On average, people in the country work for about 8 hours per day. In-between, the employees take breaks for prayers, which are about 5 in a normal day [6]. During the holy month of Ramadan, people work for about 6 hours per day. Saudi Solar Systems has to be aware of these factors and how they are likely to affect its operations in the country.

  1. Technological factors

Technological innovation in the country is high. For instance, currently, the government sets aside about 12% of its budget for upgrading of higher education [6]. It is one of the most optimistic funding from the government in the world. The country has established the King Abdulaziz City for Science and Technology (KACST). The establishment is an autonomous scientific entity that is regarded as the country’s science agency. It is under the auspices of the Office of the Prime Minister [6]. Most universities in the country are also dedicated to science and technology. A case in point is King Fahd University of Petroleum and Minerals. All these factors point to an industry that is technologically savvy, something that Saudi Solar Systems can take advantage of.

  1. Environmental factors

Saudi Arabia is an arid country. It experiences sandstorms and a lot of dust from time to time [6]. The conditions may affect the performance of the PV systems. Environmental conditions in an arid area can greatly affect the performance of different types of PV modules [15]. For instance, if a PV is exposed to dust for a period of 1-6 months, its performance is likely to reduce by between 33% and 65% [15]. The elements are likely to affect the market for Saudi Solar Systems products.

  1. Legal factors

Saudi Arabia’s legal framework is still under development. Mostly, the country is still relying on Sharia laws [6]. There are no clear codified laws to control contracts in Saudi Arabia. The government is still in the process of putting in place a regulatory framework with regards to generation and distribution of renewable energy [6].

The law favors women in Saudi Arabia. They are protected from any form of work that may harm them [6]. For example, women are not allowed to work under dangerous and harmful conditions. To this end, Saudi Solar Systems will be prohibited by law from employing women to work in the installation of PV systems. Furthermore, under KSA (1389), women are supposed to be given 16 weeks maternity leave. In some cases, depending on the duration within which the woman in question has been in employment, the employer may be required to pay her full salary during the leave and cater for her medical bills. Under Article 168, it is illegal to terminate the employment of a woman due to pregnancy and associated complications. In addition, the employer is supposed to provide comfortable seats for all women working for them. To this end, it will be expensive for Saudi Solar Systems However, the costs can be mitigated by taking a cover for all the employees.

The Saudi Arabian law has set minimum wage for local and foreign employees. The wage is set at SR 2500 per month [16]. Employers in the private sector are expected to adopt this pay structure. What this means is that it is expensive to operate a manufacturing business in Saudi Arabia. The cost is higher than in non-labor controlling countries, such as China. Consequently, a manufacturing company based in China, but with operations in Saudi Arabia, will have a competitive advantage over local entities, such as Saudi Solar Systems

  • A SWOT analysis of the Saudi Arabian energy market

The SWOT analysis of the Saudi Arabian energy market will provide a review of the strengths, weaknesses, opportunities, and threats that are likely to affect the performance of Saudi Solar Systems in the market. The following table is a summary of SWOTs present in the Saudi Arabian energy market:

Table 1

A SWOT analysis of the Saudi Arabian energy market

Strengths Opportunities
i.                    Strong customer base

ii.                  Strong economy

i.                    Technological innovations

ii.                  Political stability

iii.                Opportunity for growth

Weaknesses Threats
i                      Stiff competition

ii                    Low demand for renewable energy sources

i.                       Punitive laws from the government

ii.                     High costs of doing business

iii.                   Subsidies from the government

 

Below is a detailed explanation of the SWOT elements:

  1. Strengths

One of the major strengths of the Saudi Arabian energy market is the strong customer base. As already indicated in this report, the population is an upward growth trend. The same goes for the disposable income of the consumers [6]. Startups, such as Saudi Solar Systems, can take advantage of these strengths to establish themselves in the market.

  1. Weaknesses

There is stiff competition in the energy sector in Saudi Arabia. The competition is both vertical and horizontal, and both intra- and inter-subsectors of the energy market. To start with, the market is characterized by many players. In addition, there are various sources of energy in the Saudi Arabian market. The sources include hydrocarbon and electricity. With regards to electricity, there are various sources of this energy, including oil, natural gas, steam, nuclear, solar, and wind [6].

Another weakness is the low consumption levels for renewable energy sources. As already indicated, renewable sources of energy account for only 5% of the total electricity consumed in the country. One of the plausible explanations for this may be the fact that renewable sources are likely to be more expensive than non-renewable sources [4]. In a market where consumers have high bargaining powers, fluctuations in prices are likely to be detrimental to firms operating in a given sector.

  1. Opportunities

One of the opportunities in the energy market that startups, such as Saudi Solar Systems, can take advantage of is the support from the government and the political goodwill in the country [6]. The Saudi government is cognizant of the fact that energy is the backbone of the country’s economy. As such, efforts have been made to support entities in this sector. Such efforts include investment in technological innovations. Most universities in Saudi Arabia are offering courses that are in line with the government’s vision for an empowered youth population. There is also the issue of political stability and opportunity for growth. Political stability makes it possible to conduct business in the country, while opportunity for growth makes it attractive to invest in the energy sector.

  1. Threats

One of the major threats associated with the Saudi energy market is the legal requirements put in place by the government. For starters, businesses are required to obtain Saudization certificate. In addition, a percentage of their workforce is supposed to be drawn from the local citizens. The threat may affect Saudi Solar Systems in case where the citizens lack the required skills to install and maintain PV systems. The Saudization certificate, the corporate tax, and Zakat increase the cost of doing business in Saudi Arabia, which is likely to eat into the profits of Saudi Solar Systems. Finally, the government has subsidized electricity in the country. What this means is that the cost of this commodity is reduced. As such, consumers are likely to compare the cost of PV technology to their monthly power bills and go for the cheaper option.

2.2.Internal Analysis

2.2.1.      Analysis of the value provided by Saudi Solar Systems

Saudi Arabia cannot continue relying on energy from fossil fuels. The fuels have an adverse effect on the environment, and they will be depleted at one point in time. Consequently, a renewable source of energy comes in handy. The need for renewable energy from solar, wind, and nuclear highlights the value of Saudi Solar Systems to the market. Countries across the globe, especially in the developed nations, are embracing PV technology to combat environmental pollution. Harvesting of solar energy has become a global concept.

In 2010, the solar energy collected in the globe stood at 195.8 GWth. Out of this volume, China accounted for 60%, while the US collected 7.5%. On its part, Europe collected 18%, while the remaining was shared by other regions in the world. It is also important to note that China leads in the production of PV technology around the world. Saudi Arabia should not miss on this field of solar energy. The reason is that the country has proved to be a leader in the production of energy from alternative sources in addition to the fact that it is endowed with sunshine for a longer duration throughout the year.

Saudi Solar Systems is aware of the fact that installation of PV systems will be highly valuable in a subsidized market like Saudi Arabia. The company will provide technology that is beneficial to both the people and the government. It is important to note that the subsidies going to the energy sector are from the government resources, something that increases the country’s tax burden through increased government expenditure. With the PV systems, such as those provided by Saudi Solar Systems, the government can come up with legislations to encourage feed-in tariffs. Feed-in tariffs is used to refer to the money that is paid to the ordinary energy users as a result of their adoption of renewable energy sources. It is noted that the money for such a program is not from the government coffers. On the contrary, it is from the suppliers of renewable energy. The system has worked well in other developed nations, such as the UK. The value of Saudi Solar Systems to the state is enhanced considering that the government will no longer need to pay for the subsidies. Instead, the government will be able to focus on other development projects. The move will not in any way increase the cost of electricity. The reason is that consumers will be helped by Saudi Solar Systems to produce energy that they can use in their homes and facilities, thus reducing the cost of energy.

Saudi Solar Systems will liaise with large scale consumers who will generate solar energy and supply the electricity to the national grid. Such consumers will be able to make extra money by selling the energy. In addition, Saudi Solar Systems will have the value of addressing the unemployment problem in Saudi Arabia, which the government subsidies have been unable to address. The company will employ many people either directly or indirectly. Saudi Solar Systems will also solve the problem of wasting direct normal irradiation. The PV systems will maximize the utilization of the natural resources available in the country.

2.2.2.      The key functions and requirements for Saudi Solar Systems: Marketing, finance, human resource, and business processes

To establish a niche in the renewable energy market, Saudi Solar Systems will engage the services of reputable marketing firms in the country. The marketing will help the PV startup to promote its services and products in the competitive market. In addition, Saudi Solar Systems will require investment from the partners. The startup capital will be generated from the savings of the three partners. In addition, Saudi Solar Systems will approach financial institutions with the business plan with the aim of securing extra funding. Whereas this source of financing may not be assured, it will be helpful if it can be secured. However, it will only be used to expand the business. As such, the partners will initially rely on their savings and finance from private sources to establish the company. A total of 10 employees will be required to initially take the startup off the ground. The team will be made up of marketers and PV technology technicians. Their initial salary will be catered for from the startup capital of the business before the enterprise starts generating revenue that can be used to finance its business operations. With time, the team will be expanded as the market of the company expands. With regards to business processes, the company will require an office space and a warehouse to store the PV systems. Two vans will also be required to support the movement of the technicians in the field. To reduce the expenses of the firm, the vans will be leased for a period of six months, after which the company will acquire its own fleet.

2.2.3.      The primary resources required by Saudi Solar Systems

The most important resource required will be financial capital. As already indicated, this will be generated from the savings of the partners. In addition, efforts will be made to secure funding from financial institutions in Saudi Arabia. Human resource will also be required. To this end, 10 employees will be hired. The employees will support the operations of the 3 partners. There will also be need for an office space and a warehouse. To reduce costs, a large office space will be leased on the industrial section of Riyadh. The space will be partitioned into offices and a warehouse. Two vans will be required for mobility. The two will be leased for a period of 6 months.

2.3.An Assessment of Strategic Options Available for Saudi Solar Systems

2.3.1.      Supply of solar energy as a business model

  1. An analysis of the energy supply business model

The first option will entail generating solar energy and supplying it indirectly to the consumers via the Saudi Arabian national grid. In this case, Saudi Solar will be paid directly by the government. In other words, the major consumer for the startup will be the government. The strategy will require investing in a solar farm to generate electricity that can be fed into the national grid. It will also require investment in land to set up a solar farm. Furthermore, Saudi Solar will have to adhere to the regulations set up by the government with regards to energy generators and suppliers in the country.

  1. An evaluation of the competitive advantage of the energy supply business model

The energy supply model is advantageous given the fact that the firm will be dealing with the government. Governments are regarded as reliable and profitable business partners around the world, especially in countries with political and economic stability, such as Saudi Arabia. Another advantage of the strategy is that it will only require a one-off capital investment in land and PV technology. Once this is done, the company will only require paying salaries, renewing licenses, and paying taxes, such as those imposed on land.

However, the major disadvantage of this model is that it will require huge investment from the partners. Currently, the partners do not have the money required to lease land and acquire PV technology on a large scale. In addition, the government may require the firm to show its financial capabilities before a license to inject energy into the national grid is provided. Such a requirement will be hard for the startup to meet.

  • A review of the potential financial statements for the energy supply business model

The table shows a budget that will be required to establish Saudi Solar Systems as an energy supplier:

Table 2

A budget for an energy supply business model

Item Cost (in US dollars)
Saudisation certificate 5500
Business permit 2300
Land lease 10000
Solar panels 1000000
Other PV technology items 500000
Office space 100000
Hiring employees (salaries/wages and bonuses) 500000
Infrastructure (pylons, transmission wires, etc) 2000000
Transport (vans, air tickets, etc) 400000
Total 4607800

 

From the above budget, it is apparent that supplying energy to the national grid will require an initial capital of $4607800. Considering that Saudi Solar Systems cannot access this kind of money currently, this business model is out of the question. As such, it is not necessary to analyze the revenue that could be generated from such a venture.

2.3.2.      Distribution and supply of PV technology and systems business model

  1. A review of the distribution business model

The strategy will entail the importation of PV technology from foreign manufacturers and distributing the same at a profit to consumers at a profit. A matrix will be developed to compare several potential suppliers. Two of the suppliers will then be selected. The company will then acquire an importation license from the government. The systems will be supplied to both small scale and large scale consumers in the country. The consumers will then generate solar energy for their consumption or for distribution to the country through the national grid. The customers will pay for the systems at once or on monthly installments.

ii.An evaluation of the competitive advantage of the distribution business model  

One of the major disadvantages of this model is that the profits generated will be lower than those in the supply of energy model. In addition, it will involve dealing with a diverse customer base, increasing expenses in marketing. In addition, the firm will be operating in a highly competitive market. However, the capital outlay required for this strategy is affordable to the investors. The expenses are expected to be recovered after one year of operations. What this means is that the company will start generating profits after one year.

  1. A review of the potential financial statement for the distribution business model

The budget below covers the business operation for the first year:

 

 

 

Table 3

Budget for the distribution business model

Item Cost (in US dollars)
Saudisation certificate 3500
Business permit 1300
Lease for premises 10000
First shipment of PV systems 1000000
Marketing 1000
Hiring employees (salaries, wages, and bonuses) 50000
Lease of vans 120000
Miscellaneous 100000
Total 1285800

 

As already indicated, the vans will be leased for 6 months. The Saudisation certificate and business permit for a distribution business are charged lower compared to those of a supply of energy model. The miscellaneous item in the budget will cover for overhead charges, such as stationery and money to be retained at the bank. The budget is an indication of the fact that the distribution business model will be cheaper than a supply model.

 

2.4.Model Implementation

2.4.1.      Execution plan

  • Strategy map for Saudi Solar Systems

The following is the strategy map for Saudi Solar Systems:

Figure 4

 

A strategy map for Saudi Solar Systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The strategy map illustrates 5 core objectives for Saudi Solar Systems. They include financial, customer, supplier, internal operations, and learning and growth objectives. Most strategy maps contain four pillars. However, given the important role that is expected to be played by the suppliers, Saudi Solar Systems will have a fifth pillar highlighting the objectives of the company with regards to these stakeholders.

  • Performance scorecard for Saudi Solar Systems

The performance scorecard for Saudi Solar Systems is closely related to the strategy map. The reason is that it is a reflection of the expected outputs with regards to the five objectives identified in the strategy map. In other words, scorecard illustrates how the five objectives in the strategy map will be exploited to meet the mission and objectives of Saudi Solar Systems. In addition, it will highlight the relationship between the five pillars. The following is a graphical representation of Saudi Solar System’s performance scorecard:

Figure 5

Saudi Solar System’s scorecard

Efficiency of Internal Business

Processes

Customer

Satisfaction/Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From the above performance scorecard, it is apparent that the overall objective of the firm will be enhanced performance to create financial value for the investors and consumption value for the customers.

2.4.2.      Change management and change leadership

Identification of change management strategies is not a requirement during the formulation of a business startup plan. The reason is that change can be captured and harnessed during the implementation stage. However, given the dynamic nature of contemporary markets, Saudi Solar Systems will identify the change management strategy before the business is established. The aim of identifying the change management strategy is to help the startup avoid mistakes and take corrective measures when issues arise during its operation in the Saudi solar energy market. It will also help to improve the competitive advantage of the firm in the market.

Two change management strategies will be adopted by Saudi Solar Systems. The two are the business process reengineering and redesign (BPR) and the kaizen strategy.

  1. Business process redesign and reengineering

When implemented, the strategy will call for absolute change in the operations of Saudi Solar Systems. To this end, the company will abandon its old practices and adopt a totally new business process. Consequently, it may require the company to shift its market, target on a different set of consumers, or change the product line it will be dealing with. A case in point is when Saudi Solar Systems will need to expand its operations. When this happens, the management may have to hire new members of staff, start dealing with more established financial institutions, and even change its suppliers.

Business process reengineering will entail a fundamental rethinking and radical redesign of the company’s business processes. Saudi Solar Systems will adopt this strategy to achieve a dramatic improvement in critical contemporary measures. Such measures include the costs and quality of its products, as well as the speed of its operations.

  1. Kaizen change management philosophy

The change management strategy will also be adopted by Saudi Solar Systems. The strategy has its origins in Japan. Loosely translated, kaizen means good change. What this means is that the startup will adopt an effective change management strategy, which will be continuous and characterized by small improvements on the business processes. The process will take place on a daily basis and it will bring on board the business partners, as well as the employees working for Saudi Solar Systems [17]. The management of the company understands the fact that the company is likely to experience a wide range of problems on a daily basis. However, such changes will also be accompanied by opportunities for change. A case in point is when the company has an issue with some of the employees working for it. One strategy that could be used to deal with such a problem is train the employees, or hire other employees who are more qualified.

One advantage of adopting the kaizen strategy is that it will be cost effective to Saudi Solar Systems compared to the reengineering strategy. The company is well aware of the fact that change entails expenses as it may require training of the employees to bring them up to date with the new business processes. As such, kaizen will be preferred over the reengineering strategy. The latter will be used as a last resort when the company needs to make far reaching changes to its business operations. In addition, kaizen can be implemented while the business is still operational. On the contrary, reengineering may require Saudi Solar Systems to close down its operations, leading to losses. Kaizen will be used by the company to handle the problems that affect businesses on a daily basis, such as customer problems, procurement issues, and changes in government legislations. To this end, Saudi Solar Systems will operate based on the feedback from the customers and the experiences of the employees while on duty.

2.4.3.      A review of local market and competition

As already indicated, Saudi Solar Systems will be entering a market that already has established companies offering similar services to the customers. Three rivals are identified and will be identified as they pose the largest challenge to the success of Saudi Solar Systems. The reason is that the three have a business strategy that is similar to that of Saudi Solar, and they are located within a short distance from the proposed location of the new company. The three are Yingli Solar Company, Vico Export Solar Energy, and JPC Solar Company.

Yingli is a subsidiary of Yingli Solar Company, which is based in China. One of the competitive advantages of this company is that it can procure its PV systems from China at a cheaper price. The reason is that production costs in China are lower due to the high population in the country. As such, the company is able to offer its products to consumers at Saudi Arabia at a cheaper price, giving it an edge. Another reason is that China is a technological power house in the world. As such, the quality of PV systems produced in the country is likely to be high. However, the major thing that is working against this company is the fact that it is affiliated to China. Most consumers in Saudi Arabia are still skeptical about the quality of electronic goods from China, which tend to flood the local markets. In addition, the operations of the company in Saudi Arabia are hampered by the fact that it is dependent on the mother country in China. As such, the managers at the Saudi branch cannot make decisions fast as they have to consult their superiors in China. Consequently, their response to market fluctuations is delayed, giving Saudi Solar Systems an edge.

JPC Solar Company is able to import PV systems in bulk from China and other developed nations. The fact that it can procure the systems in bulk enhances its economies of scale. In addition, it is able to secure credit from its suppliers given that it has been in the solar energy business for a long time. Furthermore, the company has an established customer base, especially considering the 25yrs warranty it offers its customers. Saudi Solar Systems will compete with this company by offering a warranty of 15yrs. In addition, the startup will make sure that its PV systems are of high quality.

The business strategy adopted by Vico Export Solar Energy is largely similar to that of Yingli. The reason is that the company is an affiliate of a multinational based in Valencia, Spain. One of the major advantages of this company is its established supply networks in Saudi Arabia. In addition, like Saudi Solar Systems, it procures its PV systems from different suppliers. However, just like Yingli, managers at the local Vico branch cannot operate autonomously. Most of the important decisions regarding the operations of the market have to be approved the mother company.

Saudi Solar Systems will make efforts to differentiate itself from the competitors. One strategy to achieve this entails sourcing for PV systems from different suppliers. The two suppliers selected are from two different countries. They will be in virtual competition with each other, giving Saudi Solar Systems a competitive advantage. In addition, the company will provide a flexible payment system to its customers. To this end, the company will liaise with financial institutions to help consumers purchase the PV systems on credit financed through the banks. In addition, a monthly payment system will be introduced.

Saudi Solar Systems will make sure that the PV systems imported and supplied to consumers in the country are of high quality. Such a move will help in the establishment of a reliable and loyal customer base. It is also noted that decision making in the company will be easier and faster. The reason is that the decisions will be made locally by the three investors. As such, responding to market shifts will be timely.

3.      RECOMMENDATIONS AND CONCLUSION

3.1.Recommendations

3.1.1.      An analysis of the supply and distribution business model as the most valuable strategy

The alternative strategy entails generating and supplying electricity from solar energy to the consumers through the national grid. The model will require Saudi Solar Systems to acquire land to establish a solar farm, apply for Saudisation permit, and prove to the government that it has the financial muscle to operate in the capital intensive power generation market. The strategy will also require the investors to have $4607800 as the startup capital. Given the financial capabilities of the investors, this business strategy is not viable. As such, the alternative of importing PV systems from France and Germany and distributing the same to local consumers is more preferable.

The distribution model is affordable compared to the energy supply option. The investors will need to have $1285800 to start the business. In addition, the government regulations and requirements will not be expensive to adhere to. For instance, the business permit and the Saudisation certificate will be cheaper. In addition, the firm will not have to pay high taxes compared to those expected from power generators operating in Saudi Arabia. For instance, the power generators have to pay for land taxes, lease of the distribution system, as well as a host of other legal requirements.

3.1.2.      A review of actions and time plan

A Gantt chart will help the investors to come up with a visual representation of the milestones that should be met and the timeframe for each of these milestones. As such, it will help to keep the operations of the firm running on a timely basis. The figure in appendix 1 is the Gantt chart that will guide the establishment of the firm.

The Gantt chart covers the operations of the firm for 1 year. The year of operation covered in the chart is 2017. As earlier indicated, the company will lease two vans for a period of 6 months. Before the expiry of the lease, the firm will acquire its own fleet of vans.

3.1.3.      Financial forecasts for Saudi Solar Systems

The financial forecast for Saudi Solar Systems will include a profit and loss statement, a cash flow statement, a presentation of return on capital employed (ROCE), and a return on investment (ROI) statement.

Saudi Solar Systems will be dealing with the importation and supply of 10 products associated with the PV technology. The 10 products can be sold independently or in different combinations depending on the needs of the consumer. They include solar panels, mounting systems, PV kits, PV inverters, charge controllers, PV equipment, PV batteries, PV converters, trackers, and monitoring systems. The price of each of the products varies. For instance, the cost of the products from Krannich will be different from those imported from Conergy. However, it is important to note that the prices will reflect the prevailing market prices in Saudi Arabia. The financial statements below are based on the revenue generated from the cumulative sale of these 10 products within the first year of operations. The projected volume of sales for the first year of operations is shown in the profit and loss and statement. The volume is made up of different combinations of the 10 products from the two suppliers.

  1. Profit and loss statement

The table in appendix 3 is a representation of Saudi Solar Systems’ profit and loss statements for the first year of operations. The business is expected to make a total of $695590 in profits during its first year of operations. Considering that Saudi Solar Systems will not be operating in the exploitation of natural gas or production of oil and hydrocarbons, it will not be charged the high rates of taxes charged on companies operating in these sectors (30% for natural gas, and 85% for oil and hydrocarbons). On the contrary, the company will pay Zakat, which stands at a constant rate of 2.5%, and Saudi shareholder tax, which stands at 2.5%. The reason is that the investors are Saudi nationals, meaning that the company is local in nature.

  1. Cash flow statements for Saudi Solar Systems

The following table is a representation of cash flow statement for Saudi Solar Systems for the first year of operations:

Table 5

Cash flow statement for Saudi Solar Systems

Saudi Solar Systems

Cash Flow Statement

For the Year Ended Dec. 31, 2017

CASH FLOWS FROM OPERATING ACTIVITIES  
Cash receipts from customers (1600000+400000) 2000000
Cash paid to suppliers (1000000)
Cash generated from operations 1000000
Net cash flow from operating activities 1000000
   
CASH FLOW FROM INVESTMENT ACTIVITIES  
Overhead costs (262000)
Income taxes (36610)
Other expenses (licenses and marketing) (5800)
Net cash flow from investment activities (304410)
   
ENDING CASH BALANCE 695590

 

The cash flow shows that Saudi Solar Systems will operate at a profit for the first year of its operations. It is expected that this profit margin will increase in coming years as the company expands its operations in the market.

  • Saudi Solar Systems’ return on investment (ROI)

The following formula is used to calculate the return on investment:

ROI= (Revenue – Cost of goods sold)/ Cost of goods sold  

The figure is represented as a percentage. For Saudi Solar Systems, the following are the parameters that will be used to calculate the ROI:

Revenue (for year 1) = 2000000

Cost of goods sold (for year 1) = 1000000

Consequently, ROI for Saudi Solar Systems for the first year of operation is as follows:

ROI = (2000000 – 1000000)/1000000

= 1

The ROI for Saudi Solar Systems stands at 1. The figure is an indication of the fact that the business is profitable to the investors for the first year of operations. As already explained, the figure is expected to rise in the coming years. However, it is important to note that the ROI above did not take into consideration the other expenses that will be incurred by the company, such as labor and taxes.

  1. Return on capital employed (ROCE) for Saudi Solar Systems

Just like the return on investment, the return on capital employed will be used to analyze the profitability of the firm and its benefits to the investors. It is expressed as a percentage. The following is the general formula for ROCE:

ROCE = Earnings Before Interest and Tax (EBIT)/ Capital Employed

For Saudi Solar Systems, the following are the parameters that will be used in calculating the ROCE:

Earnings before interest and tax = 732200

Total capital employed = 1285800

Using the above figures, ROCE for Saudi Solar Systems is as follows:

ROCE = 732200/ 1285800

= 0.569

= 56.9%

The above figure shows that the profits generated by the investors will be 56.9% of the total investments. The figure is an indication of the fact that the firm will be profitable in the first year of operations.

3.1.4.      An analysis of key performance indicators for Saudi Solar Systems

The key performance indicators for Saudi Solar Systems will be divided into 4 categories. The categories include financial metrics, customer metrics, and people metrics.

  1. Financial metrics

Profit is the major component of the financial metric. The component will be measured using the ROCE. It is expected that the ROCE for the first year should not fall below 45%. The figure is optimistic, but it is achievable going by the trends in the market. In the profit and loss statement, the profitability of the firm is not expected to fall below $600000 per annum. What this means is that the investors have to strive to increase revenue while at the same time reducing the cost of doing business. The cost of goods sold is also expected to be maintained at between $850000 and $1500000 per annum. What this means is that the management has to work hard to promote the PV systems in the market and deal with the competition.

 

  1. Customer metrics

One of the key indicators of customer metrics is customer lifetime value. It is noted that customer lifetime value is hard to maintain in the PV systems market. The reason is that PV systems are durable and the customer is not expected to make return purchases for several years. However, this metric can be enhanced by ensuring that the customer will always deal with Saudi Solar Systems for the maintenance of their PV systems.

Another important element that has to be taken into account is the customer acquisition cost. The cost will be incurred through marketing and after sales service. Marketing will ensure that Saudi Solar Systems acquires new customers, while after sales service and warranty will ensure that the customer is likely to return to the company in the future. The company will also work towards customer satisfaction and retention. The indicator will be measured using feedbacks from the consumers and keeping track of complaints. Satisfaction will lead to the next indicator under this metric, which is number of customers. The management will strive to ensure that the number of customers served by the firm increase on a yearly basis.

  • People metrics

One of the major indicators of this matrix is employee turnover rate. To retain skilled and talented employees, the management will offer competitive packages to its workforce. The package will include commissions for the sales team, over time payment, bonuses, as well as medical and general insurance cover. Another indicator will be rate of response to open positions advertised by the firm. The indicator will especially be measured when the firm will be expanding its operations. The performance of the firm with regards to this indicator will be enhanced through publicity and interaction with potential employees.

Finally, there is the issue of happy employees. Saudi Solar Systems will measure this indicator by the general output of the employees. To promote this indicator, the management will organize team building activities, improve payment packages, and provide a work environment that is conducive to the wellbeing of the employees.

It is a fact that the aforementioned indicators are many and may be confusing to the firm with regards to keeping track of them. However, it is important to note that Saudi Solar Systems is operating in a competitive market. As such, it is important for the management to ensure that the performance of the firm is enhanced [18].

3.1.5.      Potential risks and mitigation plans

Operating in the Saudi energy market is associated with various risks. It is important for the management of Saudi Solar Systems to identify these risks and come up with plans to manage them. The following are the probable risks and their mitigation plans:

  1. Risk of business interruption

Considering that Saudi Solar Systems is a startup, interruptions to its business operations are likely to be costly to the investors. Some interruptions can be accommodated after the business has been in operation for several years. However, interruptions before the business recovers the investment capital will be detrimental to the investors.

The risks that are likely to interrupt the business of Saudi Solar Systems include fires, vandalism, and loss of property. To counter these risks, Saudi Solar Systems will insure its products and buildings.

  1. Strategic risk

Saudi Solar Systems will be operating in a technological field where changes in technology may lead to shifts in customer preferences and making the PV systems obsolete. A case in point is where a new PV system is introduced in the market. The introduction may affect the operations of the firm if it has acquired a large shipment of PV systems of an earlier technology. To counter this risk, the management will ensure that shipments procured by the company will not last for more than three months. In addition, the investors will constantly carry out market research to keep in touch with changes in the sector [19].

  • Reputational risks

The risk may occur when Saudi Solar System loses its standing in the market. It may occur due to product failures, negative publicity, and failure to meet the orders placed by the consumers. To counter this risk, Saudi Solar Systems will hire a publicity firm to promote its products and image in the market. In addition, efforts will be made to import high quality PV systems. The company will also strive to work on customer feedback to improve the quality of the products and address any issues that may arise in the future [20].

3.2.Conclusion

Saudi Solar Systems wishes to invest in the PV industry in Saudi Arabia. The aim of the company is to exploit the natural resources in the company and be a leading distributor of renewable energy sources. The startup seeks to create value for consumers in the subsidized energy market in Saudi Arabia. The company is a partnership between three investors. The financial records in this business plan show that the company is expected to generate profits in the first year of operations. However, the investors have to deal with the stiff competition in the market. In addition, a number of risks have to be dealt with to ensure that the activities of the business are not interrupted.

References

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    and solar energy deployment roadmap.
    Retrieved from   https://www.irena.org/DocumentDownloads/masdar/Abdulrahman%20Al%20Ghabban%20Presentation.pdf
  10. Montgomery J. (2014). SunEdison mulls massive PV factory in Saudi Arabia. Retrieved from http://www.renewableenergyworld.com/articles/2014/02/sunedison-mulls-massive-pv-factory-in-saudi-arabia.html
  11. Oxford Business Group. (2017). Demographic and economic factors signal Saudi retail market ripe for expansion. Retrieved from https://www.oxfordbusinessgroup.com/overview/ready-take-demographic-and-economic-factors-signal-market-ripe-expansion
  12. Porter, M. (2008). The five competitive forces that shape strategy. Harvard: Harvard Business Review.
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  15. Touati F. et al. (2013). Effects of Environmental and Climatic Conditions on PV Efficiency in Qatar, Renewable Energy and Power Quality Journal, no. 11, p. 275.
  16. Alhamad S. H. (2014). The labor market in Saudi Arabia: Foreign workers, unemployment, and minimum wage. Inquiries Journal, Vol. 6, No. 06, p. 2.
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  1. Pothecary, S. (2016). Saudi Arabia announces new renewable energy target with Few details of deployment. Retrieved from https://www.pv-magazine.com/2016/04/26/saudi-arabia-announces-new-renewable-energy-target-with-few-details-of-deployment_100024304/

 

 


 

Appendix

Appendix 1: Gantt chart for Saudi Solar Systems

Activity/Month Jan. Feb. Mar Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Formulation of business plan                        
Acquisition of capital                        
Identification of suppliers                        
Acquisition of relevant permits                        
Acquisition of business premises                        
Leasing of vans                        
Purchase of vans                        
Hiring of employees                        
Publicity campaign                        
Importation of PV systems                        
Marketing of the PV systems                        

 

Appendix 2: Marketing mix

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 3: Finance

Saudi Solar Systems Profit and Loss Statement (financial year 1) in US Dollars
Operating Revenue  
Sale of solar panels 1600000
Sale of support PV systems and appliances 400000
Total Operating Revenue 2000000
Operating Expenses  
Cost of goods sold 1000000
Gross Profit 1000000
Overhead  
Lease of office space 10000
Lease of vans 120000
Insurance 80000
Office supplies 2000
Labor and salaries 50000
Total Overhead 262000
Operating Income 738000
Other Income (Expenses)  
Licenses (4800)
Marketing (1000)
Earnings Before Income Taxes 732200
Zakat (2.5%) 18305
Corporate tax (2.5%) 18305
Income Taxes 36610
Net Earnings 695590

 

Appendix 4: Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 5: Human Resource

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 6: Process and Organization

 

 

 

 

 

Appendix 7: Process and Organization

 

 

 

 

 

 

 

 

 

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