Assignment Final

Hult & Company - Global Managemen Managementt Individual Written Assignment António Chagas, 12/11/2012

Executive Summary The present report analyses the strengths and opportunities related to the expansion of NATURE LAB in South America. One of the suggested countries is Colombia. Colombia presents itself as a challenging and growing market opportunity. It is a fast pace driven economy, with a young and rising middleincome class, and strong predisposal for health care and beauty products. However, there are some possible setbacks that the company should be aware of, which will also be described. Therefore, Hult & Company will draw some recommendations regarding the expansion market and the most suitable strategic action.

Country Overview Colombia is a rising global economy. With a warm climate, a diverse geography, and a multiethnic population, Colombia is also one of the richest countries in South America concerning natural resources such as petroleum, coal, coffee and fruit. „Services‟ is the leading sector , accounting 57% of the Gross Domestic Product (GDP) between 2000 and 2005, and Oil is its major industry (Export, 2007). In order to analyse the investment opportunity we will use the CAGE framework to compare “distances” between Colombia and NATURE LAB‟s home base , France (see Exhibit 1):

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012

1) Cultural Distance: Colombian culture is very different in comparison with France. Besides the language there is also a difference in the way business is done. According to the Communicaid 2012 Report, three factors guide Colombia‟s business environment: family, indirect communication and time. Family is central in Colombian society, many companies are family owned. In terms of indirect communication, Colombian businesses role in an informal and subtle mater, usually avoiding direct confrontations. Finally, within the Colombian society, punctuality is not a priority and meetings usually last for several hours. Colombia uses the same metric system but different voltage (the voltage is 110120 Volts, same as U.S.). In terms of values, norms and dispositions, there could be some similarity because both cultures share their Roman Catholic heritage. But Colombia‟s

culture also inputs a strong African and Amerindian influence.

Administrative Distance: Historically, Colombia shares stronger ties with Spain, its former colonizer, which can be positive, considering its proximity with France. According to the French site „France Diplomatie‟ , the trading relations between

France and Colombia have been continuously rising since 2004 but it is not a strong partner (4 th exporter in South America). France exports to Colombia mainly automobiles, chemicals and pharmaceuticals and imports mainly coal,

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 ferro-nickel and agricultural products. But from Colombia‟s perspective France is a good financier, accounted as its 4 th largest investor. Politically, the relations between these two countries have been mainly neutral with some exceptions related to FARC, the Colombian rebel force and most recently (2008) the release of Ingrid Betancourt. The Colombian legal system has been influenced by the French, Italian and Spanish legal traditions. As a result the legal system in Colombia is based on written codification rather than common or case law.

Geographic Distance: There is an opposite relation between profit margin and distance to the home base, which is why it is so important to analyse the geographic distance. In this case, the distance is quite considerable (8,600 Km). However, its three main sea ports (Buenaventura, Cartagena, and Barranquilla) make this country one of the most accessible of South America. France

has

a

temperate

climate

where

Colombia‟s

climate

is

tropical and isothermal.

Economic Distance: In terms of economic overview, the World Bank 2012 report ranks Colombia in 42th place, above the regional average of Latin America & Caribbean. But, in comparison to France, Colombia is still an emerging country, or more precisely, a

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 „Capital Market‟. Countries in t his category share low markets capitalization, low

stock market turnover and low sovereign debts rankings (A. Bhalla, 2012). This condition is reflected on Colombia‟s GDP. According to CIA‟s World Factbook, France ‟s GDP per capita (PPP) was US$35,600 in 2011, while Colombia‟s GDP was US$10,400. However, in terms of its real growth rate, Colombia has showed a better performance (see Exhibit 2).

Choosing the portfolio Our recommendation for choosing from NATURE LAB‟s portfolio is to take Nestlé‟s successful approach to emerging markets. Nestlé usually enters in

emerging markets early (before competitors) and narrows its initial market focus to just a handful of strategic brands. This is called a „Multi-domestic approach‟ (Nguyen, 2011). In our case, although there are already some important global players in the market, its growth potential suggests there is room for an additional player, but it would be wise to start with just one product line and then progressively adjust and introducing the rest of its portfolio. Many considerations should be taken before the decision of which line of products should NATURE LAB begin with (see Exhibit 3). In this case, using the SWOT analysis (see Exhibit 4), we believe that „personal beauty care product s‟ is the most promising line for the present investment opportunity. It is a relatively young market with an increasing demand, and with

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 viable possibilities for establishing a new player. There are many small Colombian companies operating and several global players that are not established yet.

Why Colombia The best way for analysing the attractiveness of an emerging economy is looking to its institutional voids. Using World Bank‟s 2012 report of business attractiveness (see Exhibit 5), we can

adapt its finding with our own framework and then compare it with other South American countries. By comparison with Chile and Peru, Colombia is a more difficult country to start a business, getting electricity, registering property, paying taxes, trading across borders and enforcing contracts. The advantages are mainly on protecting investors, resolving insolvency and dealing with construction permits. In conclusion, Colombia is not a good platform for expansion. Nevertheless, Colombia is still a very viable objective due to the potential that represents. Our suggestion turns into investing in Colombia and taking measures to minimize the adversities.

Entry market strategy Before deciding on the market entry options let‟s consider the product specifications. Using the „Intangible Asset portfolio‟ framework (see Exhibit 6) ,

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 assuming that Cosmetics are R&D intensive and the products effectiveness are not dependable on culture, type of skin, or the environment, we consider this product to have low need for differentiation and a high degree of transferability (Type 3). According to the framework, this type of intangible assets is affected by Intellectual Property rights and patents. This is the ideal set for a global company.

Entering in the Colombia market requires deciding which strategy is more suitable. Considering the three available options (license its brand to a local market player, set-up a fully-owned subsidiary, and set-up a joint venture with a local market player), the best option relies on setting up a joint venture with a local operator. This option brings more advantages due to the following reasons: 1) Minimises the risk of entering the market by using the local supply chain and market insight; 2) Keeps some control on the Intellectual Property, especially when in comparison with licensing its brand; 3) NATURE LAB can free its resources to invest in premium products such as „organic compounds‟ for new product development ;

4) NATURE LAB avoids working with the existing institutional voids, like for example, the establishment and creation of new business;

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 5) The company could take advantage on arbitrage with wages and costs of raw materials; 6) The risk of this position is that there is not full control of the subsidiary and the company should prepare for facing the problem of enforcing contracts.

Considering the AAA framework (see Exhibit 7), the best way to implement this strategy is to either choosing an already existing Colombian player from the 79% on the market, or a Colombian company already established in a different industry but willing to invest. It is important to have its own supply chain (a retail operator could fit this option). At the moment it enters the market, NATURE LAB will focus on adaptation and operational risk minimization, taking also advantage of arbitrage conditions, especially by hiring experienced managers from competition. On the second stage and before expanding, the company will then have the possibility of releasing more products and more potential for aggregation, by purchasing other market players or vertical integration, for market consolidation. The company then must choose which country to expand. As we have seen before, the best possible candidates are Chile and Peru. But NATURE LAB should take similar strategy by narrowing the product portfolio and choose the entering option.

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Appendixes Exhibit 1: The CAGE Distance Framework

Source: Pankaj Ghemawat (2007)

Exhibit 2: GDP Real Growth, between 2004 and 2011 10 8 6 4

Colombia France

2 0 2004 2005 2006 2007 2008 2009 2010 2011 -2 -4

Source: CIA World Factbook

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 Exhibit 3 – NATURA LAB‟s portfolio Product Considerations Baby food - The birth rate is declining but mitigating this trend is the tendency of more affluent parents to invest in products in Baby food (Euromonitor, 2010). - The main competitor, Nestlé is very well established. (Euromonitor, 2010) - “The market for baby food in Colombia increased at a compound annual growth rate of 2.7% between 2003 and 2008 ” (Datamonitor, 2012) Nutritional vitamin - Difficulties on definition of what are food supplements supplements and what are vitamins (Larrañaga, A., 2011) - The market access to food supplements is difficult in Colombia. It is required to go through a registration process. (Larrañaga, A., 2011) Household care - Moderated growth (Euromonitor, 2010) - Companies are redefining products to reach more Colombians (Euromonitor, 2010) - Very strong competitors (Euromonitor, 2010) Personal beauty care - In France, the outlook for the beauty and personal care market is stagnant. (Euromonitor, 2010) - Home base advantage. The French market is the second largest of Europe, and the European market of cosmetics is the largest in the world, and (Ferrer, 2012).

Exhibit 4 - The SWOT Analysis of entering in the Colombian „Personal Beauty Care‟ market Strengths - “79% of total beauty and personal care companies are Colombian and 21% multinationals. However, in terms of value sales the position is reversed, with an 81% value share accounted for by foreign companies and only 19% by domestic companies ”. (Euromonitor, 2010) Weaknesses - Some major competitors already establish (Natura, P&G, Unilever) (Euromonitor, 2010). Opportunities - In 2011, almost 30% of Colombian population has between 0-14 years old, against the world average of 26%. (CIA, 2011).

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Treats

- “A Colombian woman on average spends twice as much on cosmetics as a European woman ” (Proexpor, 2010); - “11% growth in the number of women in the workforce between 2001 and 2006, against a 7% growth worldwide ” (Proexpor, 2010); - “Colombia has the highest share of women in the workforce in the region ” (Proexpor, 2010); - “Colombia has the highest share of economically active women in Latin America ” (Proexpor, 2010); - Cosmetic‟s major trend is related with natural products and Colombia is has a significant advantage due to their richest resources. - Political instability due to the FARC unsolved question; - Neighbour political and economical instability (Venezuela).

Exhibit 5 - Business Attractiveness Ranking (1-185) Colombia 65

Venezuela 147

Chile 27

Peru 53

Argentina 150

Brazil 122

26

110

84

104

172

130

129

160

41

78

72

61

Registering Property

53

93

54

21

137

105

Getting Credit

67

165

52

23

67

97

Protecting Investors

6

181

29

17

114

79

Paying taxes Trading Across Borders Enforcing Contracts

99

185

35

87

147

154

91

167

44

58

103

123

151

78

68

115

46

120

Resolving Insolvency

19

164

89

106

88

139

Overall 44 Source: World Bank, 2012

179

33

43

116

128

Starting a Business Dealing with Construction Permits Getting Electricity

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Exhibit 6 – Intangible Asset Portfolio (A. Bhalla, 2012) Degree of Transferability High Low Need for High Type 1 Type 2 differentiation Low Type 3 Type 4

Exhibit 7 – The AAA Framework

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References A. Bhalla, P. J., 2012. Class Slides. Canada, A. a. A.-f., 2010. Market Indicators Report. [Online] Available at: http://www.ats-sea.agr.gc.ca/eur/pdf/5328-eng.pdf [Acessed at 10 11 2012]. CIA, 2011. The World Factbook. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/fields/2004.html [Acessed at 10 11 2012]. Communicaid, 2012. Communicaid. [Online] Available at: http://www.communicaid.com/access/pdf/library/culture/doing-businessin/Doing%20Business%20in%20Colombia.pdf [Acessed at 09 11 2012]. Datamonitor, 2012. [Online] Available at: http://www.datamonitor.com/store/Product/baby_food_in_colombia_to_2013?productid=D BCM5612 [Acessed at 10 11 2012]. ERC, 2010. Baby Nutrition Insignts. [Online] Available at: http://www.erc-world.com/sample/BFood%20Insights%204.pdf [Acessed at 10 11 2012]. Euromonitor, 2010. Colombia mirrors solid beauty industry growth seen elsewhere in Latin America. [Online] Available at: http://blog.euromonitor.com/2010/11/colombia-mirrors-solid-beauty-industrygrowth-seen-elsewhere-in-latin-america.html [Acessed at 11 11 2012]. Export, C., 2007. Caribbean Export Development Agency. [Online] Available at: http://www.carib-export.com/login/wpcontent/uploads/2009/08/Doing%20Business%20With%20Colombia.pdf [Acessed at 09 11 2012]. Ferrer, 2012. Revision of European Ecolabel Criteria for Soaps, Shampoos and Hair Conditioners. [Online] Available at:

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Hult & Company - Global Management Individual Written Assignment António Chagas, 12/11/2012 http://susproc.jrc.ec.europa.eu/soaps_and_shampoos/docs/Market%20Analysis_Draft%20 Repor.pdf [Acessed at 12 11 2012]. Larrañaga, A., 2011. Nutritional Outlook. [Online] Available at: http://www.nutritionaloutlook.com/node/8184 [Acessed at 12 11 2012]. Nguyen, N., 2011. Case Study: Nestle’s Growth Strategy. [Online] Available at: http://pt.scribd.com/doc/61400194/Nestle-Case-Study [Acessed at 12 11 2012]. Proexpor, 2010. Cosmetics Sector. [Online] Available at: http://www.botschaftkolumbien.de/descargas_proexport/berlin_2011/english/investments/aosmetics/cosmetic_ profile.pdf [Acessed at 11 11 2012]. The International Bank for Reconstruction and Development, W. B., 2012. Doing Business in Colombia. [Online] Available at: http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/profiles/count ry/COL.pdf [Acessed at 09 11 2012].

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Assignment Final

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