We met Mike Johnson professor of Business, Marketing and Innovation at University of Sunderland on the sidelines of a Leadership and Entrepreneurial Symposium at Intel College in Nairobi recently.
The former CEO of Castro Oil and vice president of Shell BP talked to Smartinvestor’s Samuel Kariuki and shared with him insights on tactful business strategies and why Kenya should not hasten to exploit its oil.
The following are excerpts of the interview.
SAMUEL: Thank you for finding time to have an interview with me. Several Mega companies based in Kenya now risk closing business due to financial crunch. Should we categories this a global situation or just a local challenge?
MIKE: It is a global challenge. We are in a new phase of global recession that started in 2009 which is hurting business. Companies around the world are coming out of business every year. Remember, all these companies had developed well-spelt out strategic plans. The reason why companies are closing business is they do not implement such plans well or never at all. This is because in the business environment, people fear transformation due to perceived loss of power, job or status. Implementation of new strategies is met with lots of opposition from people concerned.
SAMUEL: Do start-ups have an option to stay afloat in current harsh economic times where even big companies with robust structures and expertise are heavily exposed?
MIKE: In UK for instance, 90 per cent of companies that go bankrupt make a profit at some point. However, the reason why they end up closing business, not just in the UK but world wide, is that they overstretch the cash flows by borrowing heavily and procuring too many assets. Cash is a problem when the economy is going down. When the crunch comes, nobody wants to buy your assets.
Why buy assets when you can lease? The advantage of leasing assets is that when business come down you can cancel the lease. In an attempt to survive, when the economy starts to decline, firms are forced to sell the assets rather cheaply.
SAMUEL: How then do they manage debts?
MIKE: When companies have too much debt, it increases their running cost which in most cases may drive them out of business. Even companies that are performing well financially should aim at lowering their debts at about 25 per cent of capital on the highest side. Poor planning of business expenditure especially during good economic times may increase the debt to about 70 per cent of capital which puts the business at risk when the market becomes unstable.
SAMUEL: You were CEO for multinational company, Castro Oil which gave you a lot of experience on the oil market. From your experience, what direction is the oil industry headed to?
MIKE: The oil industry is going through a phase which I don’t think is stable. OPEC used to rule the world. When prices of crude oil went down, OPEC would turn the volume down, slow the supply which would then cause prices to rise due since demand was constant or rising.
OPEC’s big players such as Saudi Arabia would determine the volume of crude oil that other members would export to safeguard its own market share. Now OPEC, is almost falling apart because it doesn’t have the influence it had before. Currently, Iran is producing 300 million barrels per day for the world market after the US and European Union lifted sanctions it had imposed on the country. This means that Iran can now export as much crude oil to the world as its customers want, probably at lower prices to win more buyers.
SAMUEL: Having found oilfields in its northern region, Kenya is ambitious to exploit the oil both for local consumption and for export. Is this the opportune time for Kenya to venture into the market industry?
MIKE: With the current fluctuation of oil prices in the world market, it is not economically viable for Kenya to exploit the oilfields. It will be hard for Kenya to break even due to the high costs of producing the oil and the soaring oil supplies from the other oil producing countries. Kenya ought to focus more on investing in other sectors of economy until oil prices at international level improve.
In the long term, what are some of the business strategies that guarantee profit growth for investors? People who excel in business are those who continually invest in efficient infrastructure and technology for their companies because these are constantly evolving. This helps them to review their business model so that they can make the right adjustments on their business portfolio.
SMES should ensure that they lay a stable foundation that can survive any economic cycle. Ensure that your cost base is sustainable.
Avoid huge debts. Don’t get carried away by the good times. One way to do that is by maintaining a cost base that is sustainable when the market heads downward. Entrepreneurs should avoid being over confident in good times for example planning for expansions but rather they should embark on building their businesses step by step.