Managing  International Operations BI Norwegian School of Management  

GRA  5102 Fall  2004

Content   

1.  Introduction.  4

2.  FINS  4

2.1  Features  4

2.2  Market.  4

2.3  Actors  5

2.4  Product  5

3.Strategy   5

3.1  Overall strategy.  6

3.2  Specific Strategy  8

3.2.1  Ownership and Business Purpose.  8

3.2.2  Markets.  8

3.3  Alternative Strategies  9

3.4  Modifications of the strategy.  9

4.  Negotiation History.  9

5.  Finance.  12

5.1  Agreement with Tanaka.  12

5.2  Agreement with the Brazilian government  14

6.  Evaluation and Results  14

7.  Personal Comments  17

7.1  General learning experience  17

7.2  Negotiation learning experience.  18

7.3  Critics.  18

8.  Conclusion and Ending Remarks.  19

8.1  The Group.  19

8.2  Relations with the other groups.  19

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Managing  International Operations BI Norwegian School of Management  

GRA  5102 Fall  2004

Exhibit  1 - SWOT Analysis.  21

Exhibit  2 - Letter of Intent.  23

Exhibit  3 - Term Sheet.  25

Exhibit  4 - Joint Venture Agreement.  26

Exhibit  5 - Purchasing Agreement  29

Exhibit  6 - Agreement with the Brazilian government.  31

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Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

1. Introduction

Economic specialists often refer to today as “The Era of Globalization”. Many key indicators including exports and imports, Foreign Direct Investments (FDI) and the number of cross-border workers have grown rapidly during the last decades. This trend of Free Trade and Globalization is promoted by international institutions such as the World Trade Organization (WTO), the World Bank, and OECD which believe in the spread of market based economy to assure prosperity in the world. But above all, this period marks the supremacy of the Multinational Enterprises (MNEs). Their economies are comparable - in both range and importance - to those of small countries, and they offer thousands of jobs world wide. We, as members of SysBra S.A’s negotiation team, are aware of this phenomenon but believe that there is still a place for local firms in world economy and trade, and that we can share the fruits of the globalization. The key point to utilize is the sustainable comparative advantage. The attractiveness of our local market, determined by its size, market, education, costs etc., combined with our know-how gives us the opportunity to develop a strong partnership with a MNE which wants to invest in Brazil.

2. FINS

2.1 Features

The FINS tries to simulate a foreign investment process between three MNEs located in Europe, Japan and America, the governments of Brazil and Russia which represent two large emerging markets, and four smaller companies based in Russia and Brazil. The negotiations are concerned with the development of a high technology manufacturing microanalyzer industry. Our task was to lead the negotiations on behalf of a local Brazilian company; SysBra S.A

2.2 Market

The microanalyzers market is in rapid development and has still a huge potential all over the world. Today, the major markets are within the “Triangle”; the USA, Japan and Western Europe. Nevertheless, the rapidly growing economies of Russia and Brazil are the focus of considerable analysis and discussion in the international divisions of the world’s microanalyzer manufacturers because of their potential domestic sales and cost reductions for production.

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Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

2.3 Actors

In the microanalyzer industry, we find three dominating MNEs which share 90% of the world market. These three MNEs have their headquarters in different local markets and dominate the home markets completely. The three companies are respectively; Megatronics, a US company, is the world leader and the forerunner of the technology, Tanaka, a Japanese firm, and Eurodata, an European. The two latter are technological followers.

These three MNEs do business world wide, and their intentions are to invest in emerging markets including Brazil and Russia.

As we are members of SysBra, we will focus on the Brazilian market. We know that Russia and the Russian local companies must be considered as competitors as the MNEs are equally interested in investing in them.

To enter the Brazilian market, the MNEs have different strategies. Megatronics has a clear strategy of full ownership for its international subsidiaries, while both Tanaka and Eurodata distribute their products through local distributors respectively SysBra and Brasinfo in the Brazilian market. It is therefore relevant to think of a deeper partnership with one of the MNEs and the Brazilian companies to better target the market.

Nevertheless, even if the Brazilian market is among the largest of emerging countries regarding the microanalyzers, investing here includes some economical and political risks. Therefore, the Brazilian government has a decisive role to play in the development of this new market and must match the different interests of the players.

2.4 Product

Microanalyzers consist of three different parts which have to be assembled. Each unit, as well as the assembly, requires a separate plant. The technical core can be found in the Logic Unit. The other units and the final assembly require more labor force than know-how.

3.Strategy

Our approach to develop and achieve a successful business plan and thereby a profitable operating firm will be as illustrated in figure 3.1. The strategy is the way in which we will try to meet our goals, followed by our tactic or the negotiation plan where we implement the strategy by transforming our strategy into a concrete business plan.

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Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

Fig. 3.1 How to reach our business plan

According to fig. 3.1 we will have to define our goals before making a strategy for our company. The goals have been developed on the basis of a SWOT analysis where we have listed and analyzed our internal strengths and weaknesses and external opportunities and threats. This analysis can be seen in exhibit 1.

One of the main long-term goals for SysBra is that we want to keep our independence. However, we recognize that we need both technological and financial assistance from one of the three major global actors if we want to establish ourselves in the microanalyzer market due to the complexity of the production. The market is, as mentioned in the industry analysis, rapidly increasing and provide a huge potential for investments. Despite the great potential we will firmly seek independency within the range possible, and we do not want to jeopardize either our good brand name or our other product groups which already are well established in the Brazilian market. But the very promising forecasts for the microanalyzer industry will undoubtedly attract other actors, and there is a big risk that the market would be overcrowded in the near future. An operational goal for us is to increase our market share from at present level at 20% to 30% in year 6. Furthermore we want to achieve a solid position as an exporting company in the South American market.

3.1 Overall strategy

To show which corporate strategies that are available for a firm in their search for growth Ansoff (1957) presented a matrix that focus on a firm’s present and future markets and products. By combining the possibilities of selling existing products or new products on either current markets or new markets, Ansoff constructed four possible strategies. Fig. 3.2 Ansoff’s Matrix

Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

We will primarily seek to achieve growth through selling existing products, since the microanalyzer already is a part of our product range, and stay in our current markets to increase our market share in Brazil. The strategy is not risky which is a useful fact for us due to our limited financial means.

In a growing market, like the microanalyzer market, simply maintaining the market share will result in growth. However, there may evolve good opportunities to increase market share following the positive development of the market if competitors are close to reach their capacity limit. Compared to sales figures, market share measurement and evaluation can provide a better picture of the firm’s actual performance because sales figures in general tend to be very dependent on the overall development in the market and in the economic conditions and not reflex the firm’s individual performance.

An improvement in market share has generally a good influence on profitability by achieving economies of scale and thereby cost advantages in most of the value adding activities. Furthermore, a larger market share can increase our bargaining power. A larger player will most likely have an advantage when negotiating with other stakeholders due to either financial power or a widespread product range and distribution channels.

One way for us to increase market share is by changing the variables in our marketing mix; product, price, distribution or promotion, and thereby making our products more attractive for the customers. This can either be done by increasing product quality or lowering prices. The latter has to be implemented with thorough consideration and analysis, because this tactic can lead to a price war if the competitors are able and willing to meet the price cuts by lowering their prices correspondingly. Since we have limited financial means this risk is significant when developing our strategy. However, if a price reduction succeed and a price elastic demand is assumed, then a price reduction will be followed by an increase in sales revenue.

Growth through market penetration has limits and the market might gets saturated, as a solution other strategies must be pursued and implemented to continuously gain growth and profitability. We will combine the market penetration strategy with a market development strategy by pursuing additional market segments. This can either be done by expanding to new segments within the existing market or by capturing new geographical regions. We will mainly do the latter since the microanalyzer is sold to a very limited range of segments as the costumers are found within business-to-business industries. The market development strategy is more risky than market penetration, and the strategy is especially valid if a firm’s core competencies are related to the

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Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

products and not the market. We do not have a superior knowledge about either developing or producing microanalyzers, and we are competing with Megatronics which introduced the product, and therefore can be expected to have a product specific competitive advantages in this area due to their first mover advantage.

3.2 Specific Strategy

3.2.1 Ownership and Business Purpose

Our primary strategy is to cooperate with one of the three major actors, and since we already have a good business relationship with the Japanese company Tanaka as we are distributing microanalyzers for them, we will seek to establish a joint venture with them. The ownership and thereby the control will ideally be split 51% for us and 49% for Tanaka. The reason for this is mainly to get control over the joint venture and to fulfill our goal to maintain a certain level of independency. Besides establishing a local owned company might help us to get the government’s support for our operations in Brazil.

As the main business purpose of the joint venture we wanted to build a mini plant for assembling microanalyzers with financial and technical support from Tanaka. The advantages for Tanaka will be that a local assembly plant would reduce production costs. The complexity of the production process makes it hard, if not impossible, to establish our own production plants and still keep our managerial control due to high investments. If the joint venture gets too big and widespread it will be impossible for us to achieve independence in the future. With a long term investment perspective we would like to invest further by expanding the number of plants and the level of production capacity. But we have chosen a rather risk averse strategy to make sure we do not jeopardize our other business areas. If we enter a joint venture with Tanaka our strategy is based on cost focus, using Porter’s Generic Strategies. Tanaka’s competitive advantages is mainly based on low costs, and our competitive scope of the market is rather narrow. Hence we will try to lower the price to the end consumer.

3.2.2 Markets

We want to focus on the Brazilian market, but we also want to increase our export to the neighboring countries. Again, this will hopefully improve the government’s incentive to support the joint venture and maybe provide tax reduction or favorable operational terms. Even though Brazil is

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Managing International Operations BI Norwegian School of Management GRA 5102 Fall 2004

the biggest country in South America, we have to prepare for entering the other South American countries. A way to increase our bargaining power is to focus on our competitive advantage of export knowledge compared to Brasinfo which can be considered as our closest competitor on the Brazilian market due to similar size and operations.

3.3 Alternative Strategies

If the first strategy falls through, we will have to apply other alternative strategies. In this case we will try to establish a cooperation with Brasinfo. The focus, if cooperating with BrasInfo, would be gaining economies of scale and reaching cost advantages in production and distribution. Alternatively we would seek to establish a learning relationship, however this can be very hard to manage and there has to be shared goal and an equal interdependency between the two companies. This strategy is quite risky and could lead to problems since they are our competitors and we can not be sure of their incentives.

A last alternative would be a licensing agreement with Tanaka. This would not be a preferred strategy and is considered an absolute last solution to enter the microanalyzer market. Licensing would allow us to use Tanaka’s property in exchange for a royalty fee, but we would not have as much control as if entering a joint venture agreement with Tanaka.

3.4 Modifications of the strategy.

After meeting with Tanaka, we discovered that they had almost unlimited financial means, and they had a big interest in great investments on the Brazilian market. Naturally it was tempting for us to accept and benefit from their investments but we would not have the needed financial capital to invest and keep an equal level in control and ownership with Tanaka. However, after looking at our own financial numbers and potential demand on the Brazilian market we adjusted our goal and were planning to invest in a medium plant.

We also decided to lower our focus on the government as an active part of the negotiations and joint venture mainly due to the fact that we had a strong partner which showed great interest in a joint venture with us.

4. Negotiation History

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