The expansion of Amazon Web Services into the Nigerian economy is a viable alternative given the economic dynamics in the country. Nigeria is an emerging economic hub in Africa owing to the increased number of second class citizens (Okunola, Rowley& Johnson, 2017). This has increased the general purchasing power in the country making it one of the potential markets for the AWS. However, despite the fact that Nigeria is an emerging potential market for investment, there are risks that should be analyzed and managed to prevent possible losses. Some of them are strategic risks such as competition, logistical difficulties, political and civil instabilities, and technological hindrances. These risks should be analyzed and mechanisms to overcome them put in place to cushion against potential losses. Apart from strategic risks, the AWS may face foreign exchange risks in the course of their operations in Nigeria. Foreign exchange risks arising from the fluctuation of currencies which in turn affect the revenue, profit margins, asset value and operational costs. The foreign exchange risks need a closer examination to determine the likelihood of their occurrence and the means to reduce their effect on the business. The AWS faces these risks because of its expansion into another country where a different currency is used and its stability against the dollar is not guaranteed.
Strategic Risks
Competition
The AWS faces a potential stiff competition from Google Cloud Platform (GCP), a commonly used cloud services platform. GCP has been around for a considerably longer time and people many people tend to opt for services from providers that they know about. GCP provides services at a cheaper cost and AWS to create a pricing policy that will match or beat GCP’s. Prices are important especially in growing economies like Nigeria where most of the companies and businesses serve people who earn less compared to other regions where AWS has offices. The billing for the online products provided needs to consider the amount of revenue that the businesses, institutions, and organizations get (Sadgrove, 2016). Although GCP might be a difficult competitor, AWS has an advantage because of the varied services and products provided. AWS is also a long-term presence in the cloud computing market making it a possible easy choice for the customers compared to GCP and other cloud services providers. AWS can take this advantage and look into their discount, big data, instance configuration, and traffic security so as to compete with GCP.
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Adaptation to Change
Changing from the traditional paper and computer-based services to cloud-based services is not an easy step. There are needed infrastructural developments required for configuration and communication. The initial costs for their installation and maintenance are a burden borne by the clients. Although the services become relatively cheaper and secure in the long run, the clients may be reluctant to acquire them because of the associated initial costs. An example of infrastructural change required includes strong and reliable internet infrastructure to enable communication and sharing of information. Cloud platform services require computers and phones to connect, configure, upload or download data. The computers or phones must also be connected to the internet to enable communication and updating information in online systems. The network requirement is a challenge in Nigeria because of the lack of reliable internet services. Although Nigeria is among the leading nations in internet penetration in Africa, the internet services are still not reliable compared to Europe, Asia, and North America. AWS services and products depend on the availability of the internet and lack of it jeopardizes the efficiency of such services.
Other than the lack of reliable internet, there is also a need for the intensive provision of information for the potential customers. The use of Internet-based cloud services is technical and requires enlightenment of the customers. Most people in developing countries do not use the service because of the costs and lack of adequate knowledge about the same (Sadgrove, 2016). Providing information through online and offline media is can play an important role in the clients’ acceptance of the AWS services. Reaching out to the potential customers enhances organizational and employee acceptance of a new system of operation and its use.
Political, Religious, and Ethnic Conflicts
Nigeria has been a center of conflicts in the recent past because of terrorist activities, political disagreements and ethnic clashes (Sadgrove, 2016). These conflicts have an overall effect on the country’s economic stability and the people’s ability to use AWS services over a long time. Although most of the regions in the country are peaceful, there are ethnic clashes that may affect AWS service provision and its use by the client. In the last five years, Boko Haram has been carrying out terrorist activities in parts of the country making them insecure to work in. Additionally, cases of kidnapping and demanding ransom pose a danger to the potential AWS staff and potential clients. Should such cases occur, AWS may be forced to part with large sums of money that affect their income and profits.
The conflicts and instability that may affect the AWS service provision and penetration are being addressed by the nation. The government is committed to enhancing stability in the warring regions as well as eliminating the Boko Haram threat. In addition to security measures, the Nigerian government also has plans to improve their technological use which might serve as a foundation for AWS penetration in the country. There is potential in the government and other institutions such as schools and companies that can use the AWS services in their day to day operations.
Risks of Foreign Currency Exposure
Foreign exchange risks affect companies that have international transactions with payments made in different currencies. in the case of AWS operating in Nigeria, the investment and returns may be affected by the economic changes in the country. The risks of Foreign Currency Exposure include the Transactional risk, economic risk, and the translation risk. These risks may expose AWS to major exchange rate changes in the global market. As a result, the value of assets and the profit margin of the company may be reduced significantly. There is a need for the AWS to examine the potential exchange rate risks and put in place the measures to overcome them should they occur.
Transaction Risk
These are risks that result from business transactions involving payments using different currencies (Judge, 2015). As a firm operating in an international market, the AWS faces a possible risk whenever cash flows are affected by exchange rate fluctuations. The value of the Nigerian Naira against the dollar fluctuates constantly which puts the AWS business at a risk of losing money by paying out more and receiving little. It is important for the AWS to establish means of cushioning its income from possible transactional risks.
Portfolio management can be used in managing the transaction risks. It is a method by which the company’s management make decisions on investment and human resource based on balancing risks against business performance. The AWS can cushion its potential income against transactional risk losses by hedging (Judge, 2015). Hedging is the investment made to protect the firm from unexpected financial risks such as foreign currency fluctuations. The AWS can invest in bonds and stock to minimize future loses the naira losses value against the dollar. Through extra investment, the AWS increases its source of income that replaces the losses made through foreign currency fluctuations.
Translation Risk
This is a risk that arises from the exposures of the net assets of a foreign company’s subsidiary because of exchange rate fluctuations (Judge, 2015). These are risks that may lead to losses when translating the balance sheet figures of the foreign currency to the domestic currency. In this case, the AWS Nigeria’s balance sheets may have monetary variations when they are converted back to dollars. The variations may arise because of the vulnerability of the foreign currency to lose value against the domestic currency. Translation risks affect the overall reported revenue and as a result, the stock prices are affected.
Translations risks can also be managed through hedging to help shield the overall income against currency fluctuation related losses. The AWS may hedge against transactional risk by selling premium bonds or forward exchange rate agreements for a fixed price for the assets for some time (Judge, 2015). This way, they are able to reduce the losses that occur when a currency devalues within the specified period of time. Another strategy that can be used to manage translation risks is capital budgeting. Thus is where a company only invests in assets when it is necessary to do so and the benefits outweigh the risks even in currency fluctuations. Capital budgeting helps in reducing unnecessary expenses and focusing on assets that have higher returns.
Economic Risk
This is a risk that arises from the effect of exchange rate movement on the revenue and operating expenses (Bessis, 2015). In this case, the AWS faces economic risks if the currency fluctuations affect the company’s value compared to the competitors in the market. If the dollar devalues, there is a likelihood of increased prices for the cloud-based services which in turn affect the company’s ability to sell in the market. Should this effect be profound that the clients opt for cheaper options, the business may incur losses or reduced profit margin at the close of the financial year. Economic risks are subject to foreign exchange fluctuations because such changes affect the value of products, operations, and the overall value company value.
Economic risks can be managed through arbitrage or outsourcing to help reduce the effects of the risk should the fluctuations occur (Schniederjans, Schniederjans, & Schniederjans, 2015). Arbitrage involves the company opting to find sources of income that may help in preventing losses that result from economic risks. Such sources of income may include hedge funds, stock-swaps, and distress sales, among others. The aim is to ensure that the company does not make a big loss. Another means of cushioning the business against economic risks is outsourcing. Outsourcing involves a company’s transfer of business activities from the customers to third party in a bid to raise more revenue. Internet-based services are some of the activities that are commonly outsourced in the cases of a dwindling market and potential revenue losses.
Recommendations
AWS should consider venturing into the Nigerian market because of the potential viability of internet based service provision. There are no companies providing such services that can boast of a strong client base at the moment. Additionally, despite the strategic and foreign exchange risks, there is much on the positive side which can help the business expand throughout the country. Although there are frequent foreign exchange fluctuations, the changes are not so big to cause a profound negative effect on the asset value and affect the business’ revenue. That said, AWS needs to put in place mechanisms to help minimize losses should any of the risks occur in future. This can be done by analyzing the market, competitors, security and the currency performance.
References
Bessis, J. (2015). Risk management in banking . John Wiley & Sons. Print
Judge, A. (2015). The determinants of foreign currency hedging by UK non-financial firms .
Okunola, O. M., Rowley, J., & Johnson, F. (2017). The multi-dimensional digital divide: Perspectives from an e-government portal in Nigeria. Government Information Quarterly, 34 (2), 329-339.
Sadgrove, K. (2016). The complete guide to business risk management . Routledge. Print
Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context . Routledge. Print
