Dark Side of Brazils Economic Rise - Essay Example

?Assignment on Brasil Foods Executive Summary Brazil is among the four countries in the world that are experiencing economic boom, increasing middle-class wealth to the extent that they are referred to using a special acronym BRIC (Brazil, Russia, India and China). Studies expect the Brazilian economy to surpass those of several developed nations to become one of the world’s largest economies by 2050 (European Commission, 2007). This paper studies one of the companies, Brasil Foods, which have emerged from the booming Brazilian economy with the mettle to wrestle for a place among the world’s top multinationals. The paper specifically studies three things. First it studies Brazil as a country and the impact of its economy with regards to providing a competitive advantage to its home bred companies and industries. Porter’s Diamond Model is used extensively in this section. Secondly, the paper studies globalisation and specifically the rise of emerging markets, their characteristics and ways for multinational corporations to succeed in these high potential markets. The frameworks developed by Khanna and Palepu (2010) are used extensively in this section. The third section analyses the internal and external environments of Brasil Foods using the classical frameworks: PESTEL, SWOT and Porter’s five forces. The paper finds Brasil Foods to be a strong organisation with a sound business model, a strong home economy and sustainable core competencies that should enable it pursue its multinational strategy. The paper concludes by recommending that Brasil Foods begin its multinational strategy in the Middle East where it has an established base that it could use to advance into North Africa as well. China is also recommended. Table of Contents Executive Summary ii Table of Contents 1 1.Introduction 2 2.Literature review 2 3.Analysis 5 3.1.Internal and external influences on Brazil 5 3.2.Globalisation, emerging markets and Brasil Foods 7 3.3.Internal and external analysis of Brasil Foods 9 4.Conclusion and recommendations 11 References 13 Appendix A: PESTLE analysis 15 Appendix B: Five forces analysis 17 Appendix C: SWOT analysis 19 1. Introduction Brasil Foods seeks to replicate its domestic success internationally. Its international strategy so far has been to simply export commodities and low-value added goods to its foreign customers. However, for the company to realize the vision outlined in its strategic plan titled “BRF 2015”, the company’s international strategy has to move from being export-based to transnational where the company will need to produce, distribute and brand products within its target emerging markets. There are four broad factors at play that could influence the success or failure of Brasil Foods 2015 vision: the internal and external influences of the company’s host country – Brazil; the effect of globalisation; the strategies, structure, culture and capabilities of the company itself; and how it shall go about managing the complexity and change that shall arise out of its new international strategy. This paper looks at each of these factors and gives a concludes with some recommendations for the senior management of Brasil Foods to take into consideration as they seek to remodel their international strategy from export-based to a multinational strategy. 2. Literature review In looking at the internal and external influences of the company’s host country, Brazil, the immediate question that arises is whether Brazil provides an environment where Brasil Foods will be able to create and sustain competitive advantage against the world’s best competitors in the food industry. Porter (1990) proposed a diamond model that outlined four broad attributes of a nation that shape the environments in which local firms compete and that could either promote or impede the creation of competitive advantages for its local firms. The diamond model tackles a broad range of issues from the strength of Brazil’s domestic market, to level of local competitive rivalry, to the relevance of sophistication of local competition to the population’s level of education and agricultural capacity as a food exporter. Secondly, at the moment, exceptional global circumstances have acted in favour of Latin American countries especially Brazil. These exceptional circumstances have resulted in a double bonanza of easy foreign financing and high terms of trade particularly for commodity exports from Latin America. Eyzaguirre et al. (2011) and Lyons (2011) argue that this flooding of foreign direct investments and huge demand for commodity exports from Brazil has the potential of exaggerating the competitiveness of Brazil and its industries. According to them managing this abundance will be critical to avoiding a boom-bust cycle. Other authors, the Economist (2009); Anderson et al. (2012); Cave (2012); and Lavoratti (2010) identify the four bigger problems that Brazil needs to urgently address if it is to create sustainable competitive advantages as infrastructure, education, government bureaucracy and innovation. An example of infrastructure problems is that it takes two hours for workers living at the periphery of Sao Paolo to get to work every day (The Economist, 2009). Education challenges is manifested by the Brazil’s multinational petroleum companies move towards establishing corporate universities to train their staff in addition to the high number of work permits issued to specialist foreign workers (Anderson et al., 2012). Government bureaucracy is demonstrated by the existence of 85 different business taxes (Cave, 2012). Finally, Brazil’s innovation challenges could be deduced from the country’s profile for exported goods which largely comprises of primary products (Lavoratti, 2010). This closely resembles the profiles of developing economies rather than the developed economies that it seeks to not only match but better. The second factor that this paper analyses is the how globalisation shall influence polices and decision making at Brasil Foods. Globalisation could be described as the integration of markets in the global economy. It has made the world trade network to become more multilateral and intertwined. One event that manifested the effect of globalisation is the financial crisis of 2008 that begun in the US and spread to most parts of the world, resulting in one of the worst economic downturns of the decade in 2009. That crisis was been blamed on a failure of markets and free trade; as a result, anti-market sentiment and calls for protectionist policies are growing (OECD, 2008). Another effect of the economic downturn was that it made nations to realise the need to change how they operate in global trade (Deloitte, 2011). Friedman (2007) identified developments in transport and information and communication technologies, increase in free trade, increase in capital mobility, and growth of multinational corporations as the major drivers for globalization. Improvements in these elements naturally lead organisations to decide whether to exploit these advantages from a location outside their home country or to increase their domestic investments. Dunning (2000) proposed a paradigm that organisations could use to help them make this decision on whether to invest abroad or domestically. In the case study we are informed that Brasil Foods has made a decision to change its international strategy. Bartlett and Ghoshal (2002) proposed a matrix that could be used to analyse the choice of internationalisation strategy to take. Most importantly this paper shall focus on of the major consequences of globalisation: the rise of emerging markets. According to Khanna and Palepu (2010) these markets provide an innovation platform that justifies the tailoring and invention of products and services just for them. It is these markets that Brasil Foods seeks to exploit with a multinational strategy. In undertaking an analysis of Brasil Foods internal and external environment, the paper looks at the classical PESTEL framework, SWOT analysis, and Porter’s five forces framework. The paper also covers Prahalad and Hamel's (1990) core competencies framework. PESTEL analysis enables a company to analyse its macro-environment. From the macro-environment the company’s strategist can then figure out which factors are more likely to change and which amongst these will have the greatest impact on their organisation (Gillespie, 2007). Five forces analysis helps a company to understand the structure of its industry and stake out a position that is less vulnerable to attack and more profitable (Porter, 2008). SWOT analysis assists the company’s management to identify their business’s specific weaknesses and strengths which shall then be compared with the opportunities and threats identified by PESTLE and five forces analysis (Gillespie, 2007). 3. Analysis 3.1. Internal and external influences on Brazil In order for Brazil to create an environment that will give a competitive advantage to its larger food producers over their rivals in the global arena, the country will need to deeply comprehend the impact of the four broad attributes delineated by Porter’s Diamond. These attributes are factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. This section analyses how each of these factors plays a critical role in influencing the competitiveness of Brazil as the home of Brasil Foods. Factor conditions could be categorised into five broad categories: human resources, physical resources, knowledge resources, capital resources, and infrastructure. Brazil has an abundance of physical resources and unskilled and semi-skilled human resources. According to OECD (2008) Brazil is the fifth largest country in the world, both in terms of territory (8.5 million square kilometres) and of population. Also Bell and Kindred (2012) stated that the country has still got significant room to expand its food production given that it has the world’s largest renewable water supply and it is currently using only 50 million of its 300-400 million hectares of potentially arable land. With regards to capital resources, Brazil is currently enjoying a flood of easy and cheap foreign financing conditions and large capital inflows (Eyzaguirre et al., 2011). Porter (1990) further categorised the factor conditions into a four-tier hierarchy: (1) basic factors – those that tend to be inherited or require modest investment such as natural resources, unskilled/semi-skilled labour, location and climate ; (2) generalised factors – those that can be deployed in a wide range of industries such as highways, debt capital and university-educated employees; (3) advanced factors – those that require larger sustained investments and are more difficult to produce globally such as highly educated personnel, modern communications infrastructure and research institutes; and (4) specialised factors – that refers to specific skilled personnel, specific knowledge bases or infrastructure. According to Porter (1990) advanced and specialised factors tend to create the most significant and sustainable competitive advantages for example India’s IT and software industry has been able to sustain its competitiveness because of the continued investments in the country’s education system. With globalisation, the standard of factors is constantly rising. This means that Brazil will need to continually invest in factor-creating mechanisms like education institutions and research institutes. The nature of home demand for the food industry’s product or service in Brazil could be looked at positively in two areas: nature of buyer needs and the size and pattern of growth of home demand. Brazil, like other emerging markets, is experiencing the paradox of a rise in its middle-class on the one hand, and a widening of the gap between the haves and the have-nots. It is also experiencing high urban migration and increase in consumption of convenience foods and food-shopping like other emerging nations (OECD, 2008). Based on their numerous consumer segment similarities, industries in Brazil are well placed to anticipate buyer needs for similar consumer segments in other emerging nations in Asia, Latin America and Africa. Brazil needs to be wary of the last two factors of Porter’s Diamond Model: related or supporting industries and firm strategy, structure and rivalry. Several authors, Anderson et al. (2012); Lavoratti (2010); and the Economist (2009) have cited federal bureaucracy and infrastructure as major weaknesses to Brazil’s economy. These two factors directly affect the investment, establishment and successful operation of supporting industries. However, the prospects of infrastructure improving are particularly high with the 2014 World Cup and 2016 Rio de Janeiro Olympics seeing proposed infrastructure investments of US $90 billion and US $30 billion respectively (Cave, 2012). With regards to firm strategy, structure and rivalry the Brazilian government has policies aimed at that promoting industrial concentration in order to create national champions that will have the scale needed to compete internationally. These policies weaken domestic rivalry. For example even though Sadia and Perdigao dominated the Brazilian food industry as shown in Exhibit 9 (Bell & Kindred, 2012, p.17), they had an intense rivalry. The government’s policies aimed at that promoting industrial concentration go against the empirical findings of Porter’s (1990) study. Porter (1990) found that nation’s tend to lead where there are a number of strong local rivals. In the quest of creating national champions, Brazil may actually be weakening the competitiveness of its firms globally. 3.2. Globalisation, emerging markets and Brasil Foods From the literature review a broad range of issues, positive and negative, arise out of globalisation. Two issues stand out, the effect of the financial crisis on national economic policies and rising sentiments of nationalism calling for return to protectionist policies, and the rise of emerging markets (Deloitte, 2011; Khanna & Palepu, 2010; OECD, 2008). The anti-market sentiment and calls for protectionist policies are mostly coming from the developed economies of Europe and the US. However, Brasil Foods has set its sight on achieving growth in the emerging markets. For this reason, the paper shall concentrate on the emerging markets. Khanna and Palepu (2010) proposed four steps that organisations could adopt to help them achieve success in operating in these emerging markets: experiment to fit business models in these markets, position the businesses as partners in progress, balance ambition with humility and keep in mind the inherent risks of operating in emerging markets. Emerging markets are not industrialised thus they are characterised by lack of or presence of poorly functioning specialists institutions and intermediaries that are available in developed countries. These specialist institutions and intermediaries offer critical support services that give organisations in the developed world sustainable competitive advantages over their emerging markets counterparts. Khanna and Palepu (2010) refer to this phenomenon in emerging markets as the presence of institutional voids. For Brasil Foods to succeed in these markets it has to experiment its strategy to respond to the challenges posed by these institutional voids. Brasil Foods would need to project and weigh the challenges and costs of filling these institutional voids against the company’s projected benefits. Here Dunning's (2009) eclectic paradigm suggests that the greater the ownership and internalisation advantages possessed by Brasil Foods and the more the locational advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside Brazil, the more successful its foreign direct investment (FDI) will be. One major advantage to Brasil Foods is the numerous similarities between Brazil and other emerging markets. For example the company had contended with lack of or low investment in cold chain infrastructure in the rural parts of Brazil that presented distribution and product mix challenges (Bell & Kindred, 2012). This resembles the conditions in rural areas of other emerging markets. The company could use its experience in Brazil to work with partners in the emerging markets to mitigate these challenges. Brasil Foods could also leverage its marketing expertise to develop the consumption habits in these new markets. Positioning their business as a partner in progress would endear the company to both consumers and governments. The third step that Brasil Foods would need to take is to carefully evaluate the extent to which they have the local knowledge and capacity to fully exploit those opportunities. This way the organisation will get to balance its ambition to exploit the tremendous opportunities in emerging markets against its limited local knowledge and capacity to fully exploit those opportunities. Brasil Foods seeks to establish a Unilever-like presence in other emerging economies that have a similar past to it. It is possible that consumers in these markets may view them as neo-colonialists and as such may be wary of their participation in their markets. Such suspicions have the potential to humble the performance of Brasil Foods in these markets. In its target emerging economies, Brasil Foods will also have to contend with challenges such as bureaucracy, corruption, social and political volatility, and low-income. These factors are what Khanna and Palepu (2010) refer to as the inherent risks in emerging markets that multinationals have to be prepared to face. Being aware of the major risk at each of the countries is paramount. After awareness, the next step would be to build internal mechanisms such as audits and internal vigilance, to deal with these risks. 3.3. Internal and external analysis of Brasil Foods From the PESTLE analysis in Appendix A it is clear that most external factors other than environmental factors directly or indirectly support Brasil Foods business model and therefore its plans for global expansion. Brasil Foods happens to be in the midst of a booming domestic economy and a weak global economy. The company is in a good position to take advantage of the double bonanza of influx of foreign direct investments and huge demand for commodity exports in the emerging markets of Asia (Eyzaguirre et al., 2011). This is supported by the five forces analysis of the Brazilian food industry as tabulated in Appendix B. All forces bar the power of buyers seem to be aligned to favour Brasil Foods. The positive outcomes of the PESTLE and five forces analysis however do not necessarily imply that Brasil Foods will remain as competitive in future as it is now. For starters, the merger of Sadia and Perdigao robbed the country off a very important competitive rivalry. According to the empirical findings of Porter’s (1990) study, a nation tends to lead where there are a number of strong local rivals. Now that the two great rivals have merged in Brazil the net result may actually be a weakening of both the country and their individual competitiveness in the global arena. Nevertheless, all is not lost. Hamel and Prahalad (1996) postulated that organisations such as Brasil Foods could ensure that they remained as competitive in future as they are now by focusing on enhancing their core competencies and acquiring new ones as competitors keep matching their abilities. Brasil Foods core competencies are identified under the strengths section of the SWOT analysis in Appendix C. These are: a finely tuned supply and production chain, understanding of consumers and brands and an ability to build products from scratch based on the understanding of consumers. Looking at these core competencies it is evident that none of the competencies are location-specific and they could, with slight modifications, be transferred to and utilised within other markets. The question that arises here is whether Brasil Foods has the capacity to handle the increased complexity that comes with establishing bases in other emerging markets as it wants to do. So far Brasil Foods has been able to manage complexity in Brazil through meticulous planning, investing in a sophisticated IT system that enables it to constantly study the market and adapt its product mix and pricing strategies, and by committing itself to deeply understand its consumers. Increased complexity implies increased reliance on robust systems, and systems here refer to people, technology and processes. Evidence of the success of systems at Brasil Foods is manifested by the successful export partnership between Sadia and Perdigao prior to the approval of the merger by CADE. This showed that the employees of these two rival companies could work together so long as their leadership was united towards meeting a common goal. Kotter (2007) talked about creating a guiding coalition that is powerful and then establishing a great enough sense of urgency to meet specific goals. Brasil Foods CEO could borrow from Kotter by identifying powerful individual from both Sadia and Perdigao and have them form a group that would evangelize the importance of both sets of employees working together towards meeting the company’s common objectives. 4. Conclusion and recommendations Studying the opportunities presented by each of the regions where Brasil Foods is interested in commencing its multinational strategy and having analysed the company and country in this paper the following recommendations are made. The Middle East and China present the best areas for Brasil Foods to begin their multinational strategy. The company is big exporter to the former whereas the country is a big exporter of commodities to the latter. It is easier for Brasil Foods to cement its position in the Middle East where it has a strong brand presence and then use that platform to venture into North Africa. The Middle East and North Africa also provide a longer-term market given their limits in generating their own food supplies. China on the other hand presents a good opportunity because of the sheer size of its population, rising income levels, and urbanisation and urban migration. Brasil Foods is a national champion in the food industry. We envision that the Brazilian government could in some way influence the Chinese government with regards to policies that shall favour increased cooperation with Brazilian food producers in China. This could make it easier for the company to establish a subsidiary in China. In conclusion, based on the analysis of country and company in this paper, we predict that Brasil Foods has the potential to succeed in its quest to be the first multinational food production company. The fact that no other company has done it does not imply that this is an impossible quest. Brasil Foods has a sound business model, a strong home economy and sustainable core competencies that should enable it pursue its multinational strategy. As Khanna and Palepu (2010) stated about achieving success in emerging markets, Brasil Foods’ senior executives need to remember four things: they will have to experiment with business models, they must balance their ambition with humility, they need to position themselves as partners in progress and lastly keep in mind that operating in emerging markets has its inherent risks. References Anderson, M., Baldwin, T., Lovallo, L. & Pumariega, G. (2012). Will a Shortage of Qualified Labor Derail the Brazilian Economy? Knowledge@Wharton. Bartlett, C.A. & Ghoshal, S. (2002). Managing Across Borders: The Transnational Solution. 2nd Ed. Boston, MA: Harvard Business School Press. Bell, D.E. & Kindred, N. (2012). Brasil Foods. Cave, A. (2012). Brazil’s samba economy will keep on dancing. [Online]. 12 May 2012. The Telegraph. Available from: http://www.telegraph.co.uk/finance/globalbusiness/9261508/Brazils-samba-economy-will-keep-on-dancing.html. [Accessed: 28 July 2012]. Deloitte (2011). Leaving Home: Global Powers of Retailing 2011. Dunning, J.H. (2009). Location and the multinational enterprise: A neglected factor? Journal of International Business Studies. 50. p.pp. 5–19. Dunning, J.H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review. 9. p.pp. 163–190. European Commission (2007). Brazil Country Strategy Paper 2007 - 2013. Eyzaguirre, N., Kaufman, M., Phillips, S. & Valdes, R. (2011). Managing Abundance to Avoid a Bust in Latin America. Friedman, T.L. (2007). The World is Flat: A Brief History of the Twenty-First Century. 3rd Ed. New York: Picador. Gillespie, A. (2007). Foundation of Economics. Oxford: Oxford University Press. Hamel, G. & Prahalad, C.K. (1996). Competing for the future. Boston, MA: Harvard Business School Press. Khanna, T. & Palepu, K.G. (2010). Winning in Emerging Markets: A Road Map for Strategy and Execution. Cambridge, MA: Harvard Business School Press. Kotter, J.P. (2007). Leading Change: Why Transformation Efforts Fail. Harvard Business Review. (January). p.pp. 92 – 107. Lavoratti, L. (2010). Industry’s Challenges: Innovation and competitiveness. The Brazilian Economy. 2 (8). p.pp. 12–18. Lyons, J. (2011). Dark Side of Brazil’s Economic Rise. [Online]. 13 September 2011. WSJ.com. Available from: http://online.wsj.com/article/SB10001424053111904716604576544722103262938.html. [Accessed: 28 July 2012]. OECD (2008). Globalisation and Emerging Economies: Brazil, Russia, India, Indonesia, China and South Africa. Porter, M.E. (1990). The competitive advantage of nations. New York: Free Press. Porter, M.E. (2008). The Five Competitive Forces that Shape Strategy. Harvard Business Review Online. R0801E. p.pp. 1–18. Prahalad, C.K. & Hamel, G. (1990). The Core competence of the corporation. Harvard Business Review. (May-June). p.pp. 79 – 91. The Economist (2009). Getting it together at last. [Online]. 12 November 2009. The Economist. Available from: http://www.economist.com/node/14829485. [Accessed: 28 July 2012].  Appendix A: PESTLE analysis Issue Impact on business Political -Government policies that promote industrial concentration -Stabilised democracy with a well-developed political and institutional system. - Increasingly playing an active role in multilateral for a; positioning itself as a representative of emerging countries and as a staunch defender of poorer countries -Pushed for approval of merger between Sadia and Perdigao -Makes country attractive for foreign direct investments -Brasil Food benefits from increased trade agreements and other concessions from some global trade bodies Economic - A leading destination for foreign direct investments (FDIs) -High demand for Brazilian commodity exports in Asia -Provides capital for investment in competence-building, research and development, marketing and so on. -Avails capital needed to support foreign expansion -Demand for products in Asia boost investor confidence Social / Culture -Rising number of middle-class in Brazil and other emerging markets -Increasing urbanisation and urban migration in Brazil and other emerging markets leading to increased preference for convenience in food purchasing decisions -Increases the target market size for Brasil Foods products which gives the company confidence to invest more to meet this growing demand - Increasing urbanisation and urban migration guarantees food producers of sustainable demand now and in future Technological -Improvements in cold chain technologies -Advancements in information technologies (IT) -Investing in better cold chain equipment such as trucks enables Brasil Foods to meet the challenging distribution demands of rural areas -Brasil Foods relied on sophisticated IT systems for its product mix and pricing strategies -Sophisticated IT supports a key company’s core competency: supply chain management Legislation -Government policies that promote industrial concentration -Supported the merger of Sadia and Perdigao that created Brasil Foods Environmental -Increasing constituency of customers demand for products from environmentally responsible businesses -Increasing demand for organic products - Endears Brasil Foods products especially in the developed world -Organic products offer the company a premium market segment (Bell & Kindred, 2012; European Commission, 2007; Eyzaguirre et al., 2011) Appendix B: Five forces analysis Industry Force Impact on business Industry rivalry - Low -Dominates the industry in Brazil -Brasil Foods dominance is only restricted by the CADE ruling Threat of Entry - Low High barriers to entry for the following reasons -Supply-side economies give the company economies of scale that a new entrant may have a challenge acquiring quickly -Huge capital requirements to layout cold chain facilities and distribution network in rural areas -Incumbency advantages such as brand, preferential access/special arrangements with huge number of farmers/contract farming -Barriers to entry favour Brasil Foods by giving them huge bargaining power over the government -Elevates the company to national champion status Threat of substitutes - Low -The company has -Barclays has entered into joint ventures and alliances with some of the new market entrants to offer additional delivery channel targeting SMEs -Barclays private public partnership with the UK government to support the Enterprise Finance Guarantee (EFG) scheme that targets SMEs Buyer Power - Medium -Buyers are price sensitive because food items represents a significant fraction of their cost however given the company’s brand and dominance buyer power is moderated to medium -Brasil Foods has to balance between product quality and price. Supplier Power - Low -Company procures from a huge number of contract farmers whom it guarantees a market -Supplier products are not differentiated -Supplier group cannot threaten to integrate forwards -Brasil Foods is able to dictate pricing, quality and quantity which give it assurance over its product mix and pricing strategy. (Porter, 2008; Bell & Kindred, 2012) Appendix C: SWOT analysis Strengths Weaknesses - Supply and production chain is finely tuned: Unmatched operational know how – managing a complex, interdependent stream of ingredients needed to create its diverse portfolio of products -A deep understanding of consumers and brands in Brazil -Has a sophisticated IT system that enables it to constantly study the market and adapt its product mix and pricing strategies -A strong brand image - A company that builds products from scratch - Largely a Brazilian outfit, lacking global expertise and global team to fully realise its global vision and potential - Internal rivalry between Sadia and Perdigao employees Opportunities Threats -The fast-growing food service sector in Brazil -Increasing demand of food especially in the emerging markets -Strong Brazilian currency undermining export competitiveness (Bell & Kindred, 2012) Read More