Ideas… Props – “red metal toolbox” Martini glass (to pull out of the toolbox… for “recommendations”)
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There are 3.8 million citizens of Costa Rica. Spanish is the official language. The demographics resemble those of a developed nation. The birth rate is 2.47 children per woman. The death rate is 4.3/1,000 Costa Ricans. Sixty four percent of the population lies within the 15-64 age group. The majority of the people are Catholic (76%). Costa Ricans take great pride in their education; the literacy ratio is 95%. The country hosts about 20,000 U.S. citizens as of November, 1999 according to the U.S. Embassy in Costa Rica. (per http://costarica.com/business/business-travel-information.html)
Costa Rica has enjoyed a stable political environment for over a century. The government is structured under a democratic system. The government is divided into three entities, Legislative Branch, Judicial Branch, and Executive Branch. The chief of state is President Miguel Angel Rodriguez, in position since May 1998. The Asamblea Legislativa has 57 seats; members are elected by direct popular vote to serve four-year terms. There are seven provinces each with a political voice. The judicial system is model after the Spanish Law structure; the Supreme Court seats 22 members each elected for eight-year terms. Two political parties represent 75+% of the voting population. These parties are the Social Christian Unity Party or PUSC and the National Liberation Party or PLN. head of government: President Miguel Angel RODRIGUEZ (since 8 May 1998); First Vice President Astrid FISCHEL (since 8 May 1998), Second Vice President Elizabeth ODIO (since 8 May 1998); note—president is both the chief of state and head of government cabinet: Cabinet selected by the president elections: president and vice presidents elected on the same ticket by popular vote for four-year terms; election last held 1 February 1998 (next to be held NA February 2002) election results: Miguel Angel RODRIGUEZ elected president; percent of vote—Miguel Angel RODRIGUEZ (PUSC) 46.6%, Jose Miguel CORRALES (PLN) 44.6%
Costa Rica’s economy is basically a stable foundation based upon tourism/services (56.8%), agriculture (12.5%) and industry exports (30.7%). Foreign investors are attracted to the stable political and economic environment. GDP is growing at 3% annually. And inflation is strong but not overpowering at 11%. Poverty has reduced over the past 20 years and social programs have been enacted to support the low-income households. Yet, there is downside. Traditional export volumes have fallen. The agricultural sector has suffered due to low coffee prices and a overabundance of bananas. In addition, the government is servicing a large budget deficit and massive internal debt ($4.2 billion). There is a great need to service the commerce infrastructure (electricity, telephones, communication channels, etc.) with no available funds.
Currency images from http://costarica.com/business/currency/bills.html
1995-2001 values from Banco Central de Costa Rica website (http://www.bccr.fi.cr). Following text and older year values from http://www.cocori.com/genfo/xchng.htm The evolution of the Costa Rican Colon exchange rate against the U.S. Dollar can be divided into four phases. 1945-1979 The exchange rate showed minimal variations. It was protected by the modified gold standard, adopted during the implementation of the International Monetary Fund, and was based on the price of gold fixed by the United States, with one exchange rate between all countries. At the beginning of the 70s the U.S. stopped converting dollars to gold because of internal problems. The dollar began to fall in the international markets. Countries fixed an upper and lower limit in order to try to control prices. The Colon's value passed eight to the dollar in 1973 but managed to remain below nine until 1979. 1979-1983 Costa Rica saw an economic crisis during this period. It adopted a liberalization policy for the exchange rate in the face of a failure of division of power in the Central Bank, and free floating currency. The exchange rate quadrupled during this four-year period. 1984-1992 The Central Bank established a policy of &quot;mini-devaluations,&quot; which helped economic decision making and price calculations. There was a disadvantage in that the setting of the rate was very subjective. 1992-present The exchange rate was liberalized in 1992, causing a period of instability. The Bank soon returned to the mechanism of &quot;mini-devaluations,&quot; which remains in effect today. There [has been] talk about returning to a scheme of a free floating currency, with limits. However, no surprises in the behavior of the exchange rate policies [have occurred]. Source: &quot;The Rate of Exchange in Costa Rica&quot; by Luis Carlos Peralta and Johnny Alvarado
Carter’s has a facility in Alajuela and another in Barranca (Puntarenas). Employees traveling to these locations will need to take medications for prophylaxis against malaria. Dengue viruses are transmitted by mosquitoes, which are most active during the day. These vector mosquitoes are found near human habitations and are often present indoors. Epidemic transmission is usually seasonal, during and shortly after the rainy season. Dengue fever is characterized by sudden onset, high fever, severe headaches, joint and muscle pain, nausea/vomiting, and rash. The rash may appear 3–4 days after the onset of fever. Infection is diagnosed by a blood test that detects the presence of the virus or antibodies. The illness may last up to 10 days, but complete recovery can take 2–4 weeks. Dengue is commonly confused with other infectious illnesses such as influenza , measles , malaria , typhoid , leptospirosis , and scarlet fever.
Five models for analysis… Value Chain Porac’s Pods Discipline of Market Leaders Congruence Model … and the obligatory 2x2 matrices
This is important… it sets the stage for “where” Costa Rica can *play* in Carter’s Value Chain… Talk to the fact that Cost Rica does NOT plan for demand or source supplies AND is not involved downstream in the value chain once manufactured.
All control rests with HQ. Managers from the foreign subsidiaries travel to HQ at least quarterly and many times monthly for meetings/instruction etc.
Business strength shown on 2x2 grid… next page!
The Free Zone System is the mainstay of Costa Rica's export and investment promotion strategy. The Free Zones are, by definition, areas of customs and fiscal extra-territoriality. These facilities have been designated to carry on operations based on importing raw materials, manufacturing, assembly and marketing of products or services for the subsequent export.Tax exemption, ease of operation and monetary exchange, excellent communications, public service infrastructures and basic services installations as well as a highly educated labor force, constitute the cornerstone of development within the companies that operate under the Free Zone Regulations.
Growth Share Matrix on next slide!
A “reminder” slide
Talk to this, revisiting points made in earlier slides
I plan on pulling out the Martini glass at this point … saying that I’ve run out of time to give the full slew of recommendations, so there’s only time for a “One Martini” recommendation… Conflicts arising from attempts to lower local manufacturing costs versus increased cost for the firm. Local sourced materials for lower costs but corporate duty costs are prohibitive Tension between Corporate planning which schedules work load based on sales forecasts and Facility which seeks to keep plant running at optimum levels and reduce downtime since they are required to pay workers whether working or not.
Using Porter’s Diamond model to analyze Carter’s multinational operations… Factor Conditions… use of skilled labor and infrastructure, but not “materials” which must be imported Demand Conditions… There is NO demand here, since “home market” is not allowed to buy from this operations Related and Supporting Industries… Carter’s Costa Rican operations do not benefit from supplier or other related industries in Costa Rica due to ‘free zone’ status of manufacturing plant Firm Strategy/Structure/Rivalry… Costa Rican government created ‘free zones’ to allow corporations such as Carter’s to set up assembly operations
Costa Rica Carters team project
The William Carter Company Country Manager Orientation Republic of Costa Rica A presentation by “Team 3 Consultancy”
Welcome New Country Managers <ul><li>Part 1 </li></ul><ul><ul><ul><li>Overview of the Republic of Costa Rica </li></ul></ul></ul><ul><ul><ul><li>Local operations </li></ul></ul></ul><ul><li>Part 2 </li></ul><ul><ul><ul><li>Analysis of MNC and Costa Rican Subsidiary </li></ul></ul></ul><ul><ul><ul><li>Guidance and Advice </li></ul></ul></ul>
Republic of Costa Rica Overview <ul><li>Demographics and Geography </li></ul><ul><li>Political and Legal Environment </li></ul><ul><li>Economic Environment </li></ul><ul><li>Medical Concerns </li></ul><ul><li>Culture </li></ul>
Demographics <ul><li>3.8MM citizens </li></ul><ul><li>Official language is Spanish </li></ul><ul><li>Birth rate is 2.47 children per woman </li></ul><ul><li>Death rate is 4.3/1,000 citizens </li></ul><ul><li>Majority are of Catholic religion </li></ul><ul><li>Literacy ratio is 95% </li></ul>
Political Environment <ul><li>Democratic System </li></ul><ul><li>Two major parties </li></ul><ul><ul><li>Social Christian Unity Party (PUSC) </li></ul></ul><ul><ul><li>National Liberation Party (PLN) </li></ul></ul><ul><li>Three branches of government </li></ul><ul><ul><li>Legislative Branch </li></ul></ul><ul><ul><li>Judicial Branch </li></ul></ul><ul><ul><li>Executive Branch </li></ul></ul>Dr. Miguel Angel Rodriguez President May 1998 to May 2002
<ul><li>Stable and attractive to foreign investment </li></ul><ul><li>GDP is growing 3% annually </li></ul><ul><li>Inflation is currently 11% </li></ul>Economic Environment
Economic Environment <ul><li>Currency is the Costa Rican Colon (Colón) </li></ul>
Economic Environment <ul><li>Currency is being managed by Banco Central de Costa Rica </li></ul><ul><li>Floating Peg </li></ul><ul><li>Minimum wage reset every 6 mos. </li></ul>
Medical Concerns <ul><li>Risks while you’re there… </li></ul><ul><ul><li>Dengue Fever </li></ul></ul><ul><ul><li>Diarrhea </li></ul></ul><ul><ul><li>Malaria </li></ul></ul><ul><li>When you return… </li></ul><ul><ul><li>Continue taking your antimalarial drug for four weeks (chloroquine, Lariam®, doxycycline) or seven days (Malarone™) </li></ul></ul><ul><li>Antimalarial treatment before you leave </li></ul>
Culture <ul><li>Interpersonal </li></ul><ul><ul><li>Not as respectful of personal space as Americans </li></ul></ul><ul><ul><li>However… Costa Ricans are more “American” than most Latin countries </li></ul></ul><ul><li>Provocative dress </li></ul>
Value Chain MNC Procurement Costa Rica Manufacturing & Quality Merchandising Marketing & Promotion Fulfillment & Returns Customer Service Demand Planning Inventory Management Inventory Management
Porac’s Pods Top Management Organizational Structure Technology Environment Size Interdependence Goals/Strategies Effectiveness Criteria Routineness Information Control Strategies Formalization Life cycle and crises Uncertainty Resource Dependence Asset Specificity Opportunism Contract Complexity
Porac’s Pods ~ Top Management ~ <ul><li>Organizational control </li></ul><ul><li>How does HQ view Costa Rica? </li></ul><ul><li>Role of Country Manager </li></ul>Goals/Strategies Effectiveness Criteria Top Management
Organizational Control Relationship with Foreign Governmental Agencies External Reporting Transportation Shared Control Internal Management Reporting Product Planning Distribution Raw Material Sourcing MNC Control Staffing Daily Scheduling Subsidiary Control
HQ Orientation toward Subsidiaries Develop best people everywhere in the world for key positions worldwide Local nationals for key positions in the host country, not worldwide Home country nationals for key positions worldwide Perpetuation (recruiting, staffing, development) Truly international but identifying with national interests Nationality of host country Nationality of owner Identification Both ways and between subs. Sub heads – part of worldwide mgmt. team Little to and from HQ. Little between subs High volume to subs; orders, command, advice Communication; information flow International and local execs rewarded for both global and local objectives Wide variation; can be high or low; rewards for sub. performance High in HQ, low in subsidiaries Rewards and punishments; incentives Find standards which are universal and local Determined locally Home standards applied for persons and performance Evaluation and control Goal: collaboration between HQ and subs Relatively low in HQ High in HQ Authority; decision-making Increasingly complex and interdependent Varied and independent Complex at home, simple in subsidiaries Complexity of organization Geocentric Polycentric Ethnocentric Org. Design
Role of Country Manager <ul><li>Interact with country government to obtain and maintain favorable relationships with officials </li></ul><ul><li>Seek to obtain and maintain economic incentives such as labor subsidies, tax exemption, and duty free imports </li></ul><ul><li>Recruit appropriate staffing and develop local management potential </li></ul><ul><li>Encourage English training and local interaction with related corporate staff </li></ul>
Porac’s Pods ~ Technology ~ <ul><li>Visibility to demand forecasting is limited </li></ul><ul><li>Inventory management is shared between Costa Rica and MNC </li></ul>Routineness Interdependence Information Control Strategies Technology
Porac’s Pods ~ Environment ~ <ul><li>Dependence on supplies from MNC </li></ul><ul><ul><li>Only labor can be sourced locally </li></ul></ul><ul><ul><li>Operational bottle-necks </li></ul></ul><ul><ul><li>Labor must be paid whether in use or not </li></ul></ul><ul><li>Business strength of internal competition </li></ul><ul><li>Quality Issues </li></ul><ul><li>Free Trade Zones </li></ul>Uncertainty Resource Dependence Environment
Business Strength of Internal Competition Strong Medium Weak Low Medium High Business Strength Market Attractiveness General Electric Multifactor Portfolio Matrix Dominican Republic Asian Costa Rica Mexico
Free Trade Zone System <ul><li>Exemption of import taxes and surcharges on imports (raw materials and inputs) necessary for the production process and operation of the company </li></ul><ul><li>Exemption of taxes on capital and assets, export taxes, local and excise taxes, and profit repatriation taxes </li></ul><ul><li>Exemption of taxes on profits, according to location and years of operation </li></ul><ul><li>No restrictions on capital repatriation </li></ul>
Quality Issues <ul><li>Lamentablemente…. este año nuestra Calidad empezo con el pie izquierdo; nuestra primera auditoria de E.E.U.U. fue de un 5.7% </li></ul><ul><li>Esta auditoria nos dejo en un ultimo lugar, cosa que no nos conviene a nosotros ya que uno de los puntos importantes que determinan un cierre de planta es la Calidad. </li></ul><ul><li>1 Linares Mejico 1.2% </li></ul><ul><li>2 Carterco Costa Rica 1.8% </li></ul><ul><li>3 Montemorelos Mejico 2.8% </li></ul><ul><li>4 Barranca Costa Rica 5.7% </li></ul><ul><li>Hagamos nuestro mayor esfuerzo para ser numero uno y no ultimos. </li></ul><ul><li>Ronald Vega. </li></ul>La Calidad hoy. <ul><li>Unfortunately....this year our quality started off on the wrong foot; our first U.S. Audit resulted in a 5.7% seconds ratio. </li></ul><ul><li>This audit put us in last place, a result that is not good since one of the important factors that determines a plant closing is its quality. </li></ul><ul><li>1 Linares Mexico 1.2% </li></ul><ul><li>2 Carterco Costa Rica 1.8% </li></ul><ul><li>3 Montemorelos Mexico 2.8% </li></ul><ul><li>4 Barranca Costa Rica 5.7% </li></ul><ul><li>Let’s do our best to be number one and not last . </li></ul><ul><li>Ronald Vega. </li></ul>Quality Today.
Porac’s Pods ~ Size ~ <ul><li>Two locations within Costa Rica </li></ul><ul><li>Growth Share Matrix </li></ul>Formalization Life cycle and crises Size
Growth Share Matrix for Subsidiaries Boston Consulting Group’s Growth-Share Matrix Question Marks Stars Cash Cows Dogs 0.1x 0.5x 10x 1x 1.5x 2x 4x 0% 5% 10% 15% 20% Relative Market Share Relative Growth Rate Asian Contractors Costa Rica Dominican Republic Mexico
Porac’s Pods ~ Organizational Structure ~ <ul><li>Organization Chart </li></ul><ul><li>Alignment of interests with HQ structure </li></ul>Organizational Structure Asset Specificity Opportunism Contract Complexity Top Management Technology Environment Size
Organizational Chart VP of Offshore Production Costa Rica Manager Mexico Manager Admin. Staff Prod. Staff Admin. Staff Prod. Staff Admin. Staff Prod. Staff Admin. Staff Prod. Staff Corporate Administration Accounting Engineering Human Resources
Discipline of Market Leaders Discipline of Market Leaders preaches that successful businesses must be excellent at one of the following three disciplines: Product Leadership -- selling the best widget on the market, such as Hewlett-Packard's laser printers. Operational Excellence -- having your processes under such great control that you offer your customers the best total cost, such as McDonalds. Customer Intimacy -- you solve all of your customers' problem in an area, so they give you their business. Amazon.com, when it knows what books you like, is being customer intimate. Operations The axes represent 50% effort The tick-marks represent 25% The sum of the 3 axes is 100% A balanced strategy will have 50% on any one axis and 25% each on the other two A company can only excel at any one of the three but at no time should ignore the other two Discipline of Market Leaders Michael Treacy, 1994 Technology Customer Customer Intimate Product Leadership Operational Excellence
Subsidiary Strategy Customer Operations Subsidiary Strategy Make the most of ongoing efforts in operational efficiency and become headquarters' top-of-mind first-choice for long run products Competition Other country-specific subsidiaries and Asian subcontractors Operational Excellence Technology Product Leadership Customer Intimate
Congruence Model Strategy Performance Corporate Structure fit Structure People Process Systems Key Tasks
Recommendations <ul><li>Become more Customer Intimate </li></ul><ul><ul><li>Keep operational efficiency as core, but focus on systems and communication with HQ to become preferred supplier for long-run items </li></ul></ul><ul><li>Align local organization structure with HQ </li></ul><ul><ul><li>Foster and facilitate communication of all subordinates with like peers in HQ </li></ul></ul>
The William Carter Company Country Manager Orientation Q & A
Determinants of National Competitive Advantage Related & Supporting Industries Government Firm Strategy, Structure, Rivalry Demand Conditions Factor Conditions