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Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
Brazil strategy lecture Copenhagen Business School
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Brazil strategy lecture Copenhagen Business School

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  • 1. Jens Lage HansenBRAZILGRADUATE COURSE:FOREIGN DIRECT INVESTMENT STRATEGIESCOPENHAGEN BUSINESS SCHOOL4.4.201314-4-2013 JensLageHansen@mail.dk
  • 2. Jens Lage HansenMy background• Danish and Brazilian citizenship• Lived in Brazil, Argentina, Spain, U.S. Virgin Islands andDenmark• MSc in Electrical Engineering (DTU) and Bcom (CBS)• International career with marketing, general managementand board responsibilities at Novo Nordisk, Novozymes, Foss,Danisco and Grundfos• Board member in two biotech startups: Aquaporin A/S (from1995) and Intomics A/S (from 2009)• Adjunct associate professor at CBS4-4-2013 JensLageHansen@mail.dk 2
  • 3. Jens Lage HansenAgenda• The countries– BRICS– South America– Brazil• The case– Grundfos• The decisions– Question 1: Should Grundfos enter Brazil?– Question 2: How should Grundfos enter?4-4-2013 JensLageHansen@mail.dk 3
  • 4. Jens Lage HansenBRICS4-4-2013 JensLageHansen@mail.dk 4
  • 5. Jens Lage HansenIsn’t it an odd group?The BRIC(S) countries• The BRIC acronym coined in 2001 by John O’Neill a strategistat Goldman Sachs• South Africa joined in 2010 and it became BRICS• Institutionalized with summits between leaders from 2009– Politically motivated to counter developed countries dominance4-4-2013 JensLageHansen@mail.dk 5
  • 6. Jens Lage HansenBRIC countries. What crisis?World GDP growth 2007 - 20124-4-2013 JensLageHansen@mail.dk 6
  • 7. Jens Lage HansenBig differences within the groupGDP growth in the BRICs4-4-2013 JensLageHansen@mail.dk 7The Economist
  • 8. Jens Lage HansenWhere are they right now?BRICS countries economy, population and risks2012CIA factbookPOPULATION(MIO)GNP at PPP(billion US$)GNP per capita(US$)Political Risk *Brazil 201 2,362 12,000 2,0 (Low)Russia 143 2,509 17,700 3,3 (Significant)India 1,221 4,735 3,900 2,7 (Medium)China 1,350 12,380 9,100 2,3 (Moderate)South Africa 49 579 11,300 2,7 (Medium)4-4-2013 JensLageHansen@mail.dk 8* Lasserre (2007)2nd ed. pg. 1791: Insignificant risk5: Extreme riskBRIC countries all have Medium economical riskSA has Low economical riskLasserre
  • 9. Jens Lage HansenSOUTH AMERICA4-4-2013 JensLageHansen@mail.dk 9
  • 10. Jens Lage HansenThe giant and the restMap of South America4-4-2013 JensLageHansen@mail.dk 10
  • 11. Jens Lage HansenBiggest economies of South AmericaBrazil, Argentina, Venezuela, Colombia and Peru2012CIA factbookPOPULATION(MIO)GNP at PPP(billion US$)GNP per capita(US$)Political RiskBrazil 205 2,282 11,600 LowArgentina 43 747 18,200 SignificantColumbia 46 500 10,700 Medium*Venezuela 28 402 13,200 Significant*Peru 30 325 10,700 Medium*4-4-2013 JensLageHansen@mail.dk 11* Lecturers subjective assesment
  • 12. Jens Lage HansenDon’t they like their neighbors?Intraregional exports in Latin America4-4-2013 JensLageHansen@mail.dk 12The Economist
  • 13. Jens Lage HansenTrading blocks• Mercosur– Brazil– Argentina– Uruguay– Venezuela (admitted 2012)– Paraguay (expelled 2012)• The Pacific alliance– Mexico– Columbia– Peru– Chile4-4-2013 JensLageHansen@mail.dk 13
  • 14. Jens Lage HansenBRAZIL4-4-2013 JensLageHansen@mail.dk 14
  • 15. Jens Lage HansenContrasts of Brazil:Scenic beauty4-4-2013 JensLageHansen@mail.dk 15
  • 16. Jens Lage Hansenand massive urbanization4-4-2013 JensLageHansen@mail.dk 16
  • 17. Jens Lage HansenThe AcademicPresident Fernando Henriques Cardoso 1995 – 2002• Tamed inflation in 1994 asfinance minister• Introduced sound macroeconomical policies• Limited and reduced statesand governments deficitsand huge debts• Opened economy• Began social programs4-4-2013 JensLageHansen@mail.dk 17
  • 18. Jens Lage HansenThe Union ManPresident Luiz Lula da Silva 2003 – 2010• Won for the first time in 4elections by moving to thecenter• Continued sound macroeconomical policies• Boosted social programs• Pursued South – South ties• Increased state interventionin economy4-4-2013 JensLageHansen@mail.dk 18
  • 19. Jens Lage HansenThe Efficient BureaucratPresident Dilma Rousseff 2011 –• Lula’s choice, and that was enough• Continued sound macroeconomical policies• Fights corruption– 7 ministers out in first year• Promotes meritocracy• Boosts education andinfrastructure investments• Meddles in economy and increasesprotectionism• Personal approval rating march2013: 79%4-4-2013 JensLageHansen@mail.dk 19
  • 20. Jens Lage HansenBrazil’s extraordinary energy mixDomestic energy supply in BrazilSOURCE BRAZIL(% in 2007)OECD(% in 2005)Oil 37.4 40.6Gas 9.3 21.8Coal 6.0 20.4Uranium 1.4 11.0Hydro 14.9 2.0Biomass 30.9 4.2Total 100.0 100.0Renewable 45.8 6.24-4-2013 JensLageHansen@mail.dk 20
  • 21. Jens Lage HansenJust start diggingReserves of natural resources. World ranking• Bauxite no. 3• Iron ore no. 5• Nickel no. 3• Tin no. 3• Uranium no. 6• Oil no. 10• Forests no. 24-4-2013 JensLageHansen@mail.dk 21
  • 22. Jens Lage HansenHow on earth are we going to match this?Brazilian agriculture has world class efficiencies4-4-2013 JensLageHansen@mail.dk 22
  • 23. Jens Lage HansenFeeding the worldAgribusiness production. World ranking• World class Brazilian institute for agro research• Orange juice no. 1• Sugar no. 1• Fuel-ethanol no. 2• Soybeans no. 2• Chickens no. 3• Coffee no. 1• Beef no. 2• Pork no. 4• Maize no. 4• Cotton no. 54-4-2013 JensLageHansen@mail.dk 23
  • 24. Jens Lage HansenWhat markets are interesting?Some business opportunities as seen from Denmark• Vastly expanding middle class moving up the consumption chain• Environmental technologies– Supply of potable water– Effluent treatment. Industrial and domestic– Reducing air pollution– Energy saving• Oil and gas exploration• Food processing technology• Bioethanol production• Fashion, design and clothes• Pharmaceutical equipment• Medico technical products• Information and communication technology in health care4-4-2013 JensLageHansen@mail.dk 24
  • 25. Jens Lage HansenThe Brazil cost• High interest rates– SELIC 7.25 %• High taxes– Brazil 34.4 % of GDP– Russia 36.9, India 17.7 %, China 17.0 %, Denmark 48.2 %• Complicated tax system• Bureaucracy• Poor physical infrastructure• Inflexible labour market with untouchable employees– Cost of employees double up because of taxes, social contributionsand mandatory benefits (transport, meals, vacation bonus, extrasalary)4-4-2013 JensLageHansen@mail.dk 25
  • 26. Jens Lage HansenCASEGRUNDFOS IN BRAZIL 19984-4-2013 JensLageHansen@mail.dk 26
  • 27. Jens Lage HansenDo you want to move water?Some examples from Grundfos product range4-4-2013 JensLageHansen@mail.dk 27
  • 28. Jens Lage HansenHow do you make that work?Grundfos matrix organization around 20004-4-2013 JensLageHansen@mail.dk 28Corporate Management (CEO, CFO, CPO)BusinessesRegionsGround water Industry Building servicesEuropeNorth AmericaSouth America (JLH)AsiaGroup Executive council:Corporate management, business managers, regional managers
  • 29. Jens Lage HansenStrategy Hierarchy• Mission (Why we exist)• Values (What we believe in and how we will behave)• Vision (What we want to be)• Strategy (What our competitive game plan will be)–Objective (Specific, measurable, time bound)–Scope• Customer or offering• Geographic location• Vertical integration–Advantage• Value proposition• Unique activities combination4-4-2013 JensLageHansen@mail.dk 29Colis and Rukstad (2008): Can you say what your strategy is? HBR April.
  • 30. Jens Lage HansenWhere were we heading and how?Grundfos strategy• Purpose– Grundfos is a global leader in advanced pump solutions and atrendsetter in water technology. We contribute to global sustainabilityby pioneering technologies that improve quality of life for people andcare for the planet.• Values– Sustainable– Open and trustworthy– Focused on people– Independent– Partnership– Relentlessly ambitious4-4-2013 JensLageHansen@mail.dk 30
  • 31. Jens Lage HansenGrundfos strategy (cont.)• Scope in 1998– Pump systems for water supply, water movement and water treatment– In house R&D, Production and Sales– Sales and service companies in most important global markets– Traditionally only production in Denmark, Germany and USA withDenmark being the dominant supplier– Recently established sales and service companies in Russia, China andIndia• Advantage– Value proposition• The most sustainable, advanced and efficient pumps and pumpingsystems in the world– Unique activities system• Customer interaction• Technology4-4-2013 JensLageHansen@mail.dk 31
  • 32. Jens Lage HansenWhat were we looking at?Brazilian market• Huge geographical territory• Big billion dollar pump market• Vast variety of products to cover every application• Products low to medium end• Intense rivalry with focus on price• Low to no profitability amongst pump suppliers4-4-2013 JensLageHansen@mail.dk 32
  • 33. Jens Lage HansenWho were the customers?Customer needs and segments• Customer needs– Low prices– Short delivery times– Technical advice in choosing product– Reliable technical after sales service• Groundwater segment– Public and corrupt• Industry segment– Technical oriented buyers• Building segment– Fragmented with many competitors4-4-2013 JensLageHansen@mail.dk 33
  • 34. Jens Lage HansenHow about competition?Competitors in Brazilian market• Leao– Brazilian competitor with plant in Sao Paulo state– Dominated groundwater segment• KSB– German multinational– Plant in Sao Paulo city– Strong in industry segment• Smaller local outfits– Producing or importing4-4-2013 JensLageHansen@mail.dk 34
  • 35. Jens Lage HansenHigh value of Reais gave favorable COGAverage price and cost of goodsThousand Reais00.511.522.51994 1995 1996 1997Average COGAverage selling price4-4-2013 JensLageHansen@mail.dk 35
  • 36. Jens Lage HansenCASE QUESTIONS 11. Should Grundfos enter Brazil?2. Why?4-4-2013 JensLageHansen@mail.dk 36
  • 37. Jens Lage HansenWhat should we look at?Country attractiveness1. Market opportunities and competitive situation2. Country risk4-4-2013 JensLageHansen@mail.dk 37
  • 38. Jens Lage HansenIs it going to be easy?1. Market opportunities and competitive situation• Market– Big market and growing for Grundfos Products– Customer quality• Price• Some small quality segments (BOT groundwater, industry high emery users)• Competition– High intensity of rivalry– High entry barriers• Established relationships and trust– Bargaining power• Suppliers: Low• Customers: High– Industry profitability low• Incentives– Government protection of local production and jobs– Presence does not increase Grundfos ‘ competitiveness• Brazil is not a critical source of resources4-4-2013 JensLageHansen@mail.dk 38Lasserre 2nd ed. pg. 165
  • 39. Jens Lage HansenWhat is the country like?2. Country risk• Political risks were low– Shareholder exposure– Employees exposure– Operational exposure• Economic risks were significant – a fact we underestimated– Economic growth but high variability– Inflation under control– Cost of inputs risky– Exchange rates• The Devil is in the detail Lasserre 2nd ed. pg. 165• Next slide4-4-2013 JensLageHansen@mail.dk 39
  • 40. Jens Lage HansenWho said economical risk?Average price and cost of goodsThousand Reais00.511.522.533.51994 1995 1996 1997 1998 1999 2000 2001Average COGAverage selling price4-4-2013 JensLageHansen@mail.dk 40
  • 41. Jens Lage HansenCountry risk (cont.)• Competitive risk– Public contracts influenced by some corruption– Cartels and networks working against Grundfos not evident• Operational risk– Infrastructure• Power, telecommunication, transport low risk• Suppliers secure– Regulations• Nationalistic preferences very much in evidence. High risk• Constraints on local capital, local content, local employment a factor• Taxes on imports to protect local production4-4-2013 JensLageHansen@mail.dk 41
  • 42. Jens Lage HansenHow did it work out?Hindsight after 15 years• 1998 start in Curitiba• 2004 acquisition of local pump manufacturer Mark in SaoPaulo• Today a turnover of 150 mio.kr. , market share of 5% and 120employees, of which 5 are Danes• Loss every year since start• Børsen article 18.1.13:– Pumpegigant retter fejlslagen Brasilien-strategi (pump giant correctsunsuccessful strategy in Brazil)4-4-2013 JensLageHansen@mail.dk 42
  • 43. Jens Lage HansenCASE QUESTIONS 21. What should Grundfos objectives for entry be?2. What phase is the Brazilian pump market in?3. What entry mode would you recommend?4. Why?4-4-2013 JensLageHansen@mail.dk 43
  • 44. Jens Lage HansenWhy do we want to do it?Strategic objectives for entering a country• Market development• Resources access• Learning• Co-ordination4-4-2013 JensLageHansen@mail.dk 44
  • 45. Jens Lage HansenHow developed was the market?Phases in entry markets1. Premature phase2. Window phase3. Competitive growth phase4. Mature phase4-4-2013 JensLageHansen@mail.dk 45
  • 46. Jens Lage HansenFactors influencing entry modes• Government requirements• Country risks• Market attractiveness• Strategic objectives• Companies internal capabilities• Time pressure4-4-2013 JensLageHansen@mail.dk 46
  • 47. Jens Lage HansenEntry modesLimited control Full controlHigh investment• JV without control (50% orbelow)• Wholly owned subsidiary bygreenfield investment• Full aquisition• JV with absolute control (above66%)Low investmentArms lenght agreements• Distributor• Agent• Representative• Franchisee• Licensing• Marketing subsidiary• Regional headquarters• Pocurement office• Representative office• Technial observatory4-4-2013 JensLageHansen@mail.dk 47
  • 48. Jens Lage HansenWhat am I missing?Open session• Questions?• Comments?4-4-2013 JensLageHansen@mail.dk 48
  • 49. Jens Lage HansenThanks for participating!4-4-2013 JensLageHansen@mail.dk 49

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