Country manager simulation how to win

Latin America Case —13—

1: Latin America Case

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The CountryManager Case: Latin America

AY PASAH, HEAD OF THE CONSUMER HEALTHCARE DIVISION of Allstar Brands, looked across the table at her category and brand managers. She had a determined look. "Our sales in our traditional markets of Western Europe, North America, and Australia are performing well. But

these markets are mature with lots of competition and aging, slow growing populations. On the other hand, we've been too slow in developing our business in the newly emergent economies around the world, such as the BRIC nations (Brazil, Russia, India and China). Our board believes, and I agree, that to generate the kind of growth needed to drive our stock price, we need to develop a stronger market presence in these types of countries. Our plans will be rolled out on a regional basis, with Latin America and Asia being the first two regions to consider. What I need from you is an analysis of these regional markets and a plan of entry. You need to tell me where we should be, when we should be there, and how we will need to manage the business. I want us to be in at least one country in the region next year. Each of you has been assigned one of these regions and I’ve provided you with some background information to get you started." Allstar Brands Allstar Brands is a multi-national consumer products company that produces and sells ethical (prescription) pharmaceuticals, OTC (over-the-counter or nonprescription) drugs, and consumer products. It is an $8.9 billion firm that was formed in 1924 and competes with a variety of larger and smaller firms, depending on the product market. It has a number of leading brands in various product categories, including (in the OTC division) Allround, the leading liquid cold remedy in North America, and Zemlef, a heartburn remedy soon to be converted from prescription to OTC status. The consumer products division includes various types of packaged goods: hand and beauty soaps, laundry detergent, shampoo, toothpaste, shaving cream, etc. Over the years, it has expanded its product category width through internal new product development and acquisition of brands and companies around the globe. The company had been historically organized into three divisions (Ethical Pharmaceuticals, Consumer Products, and International), but recently reorganized into a global product management structure with three major divisions (Ethical Drugs, Consumer Healthcare, and Consumer Products). A group of category managers exists within each division. For example, the Consumer Healthcare division has an oral care category manager, a vision care category manager, etc. Most major brands also have their own brand manager who reports to the category manager. Under the new structure, each division is responsible for its own international operations and, to some extent at least, can pick the products and categories to pursue internationally. The country managers are responsible for the selection and marketing of products in a particular country. Figure 1 illustrates this organizational structure.

K

Latin America Case —15—

Figure 1: Organizational Structure of Allstar Brands

ALLSTAR BRANDS

Ethical Drugs Consumer Healthcare Consumer Products

Product Categories

International Operations

Home Operations

Oral

Category Europe

Latin America

Finance

Production

Toothpaste Asia

Accounting

MIS

Country Management

World Toothpaste Market Current world toothpaste sales total approximately $20 billion. The largest country market for toothpaste is the United States, with $3.4 billion spent during the past year. A number of firms produce and/or market toothpaste in the world market. Table 1 lists the five major producers of toothpaste for the world market, including Allstar Brands. Not all global brands or global competitors will be represented in every market, and some markets might include brands produced by local firms. These local brands may have a minor or major share of the market, depending on the country. Table 1: World Toothpaste Producers with Major Brands

COMPANY NAME WORLD SALES (% of world market)

BRANDS

Allstar Brands 13 Allsmile

B & B Healthcare 15 Britesmile Bancav

Caremore Company 21 Clean & White Caregate Driscol Corporation 10 Dentacare Evers Consumer 7 Eversmile

Toothpaste is available in a number of sizes, delivery systems, textures (paste or gel), and formulations. The basic toothpaste product is a paste or gel with flavoring and one or more active ingredients that provide specific benefits to consumers. Research has identified four key consumer segments in markets around the world based on benefits sought:

1) Economy: basic cavity protection at a low price 2) White: seeks whiter teeth 3) Healthy: tartar control and disease prevention for healthy teeth 4) Kids: seeks a good tasting product that appeals to children

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Consumers purchase different formulations based on the benefits they seek and their purchasing ability. The benefit segments also link to demographics. For example, families with children often focus on decay prevention; young singles are typically more interested in whiteness; those in middle age are concerned with tartar and gingivitis; and children find taste of the toothpaste to be a primary feature. Similarly, the appeal of certain attributes may differ among consumer groups. For example, pump dispensers add convenience and may be a novelty for children but are more expensive to produce than tubes. Also, single people might prefer the convenience of smaller package sizes, whereas families may prefer a larger package which is typically more economical on a cost per gram basis. A general description of these variations in the United States market is listed below. Not all companies produce all possible combinations. Table 2: Toothpaste Packaging and Formulation Variations

Sizes Delivery Systems Texture Descriptions (Benefit /Ingredient)*

Small (25g) Tube Paste Economy is a basic formulation for prevention of dental cavities.

Medium (75g) Pump Gel White formulation contains hydrogen peroxide for whitening and prevention of gingivitis.

Large (150g) Healthy contains baking soda for tartar control.

Kids contains special flavorings to appeal to children.

*All formulations contain fluoride. Country Analysis Latin America is a region of great potential. Its population of over 500 million is 50 percent larger than that of the United States and Canada combined. The region has a history of having been politically unstable and has had many weak economies characterized by low growth, high inflation, and a reluctance to take tough economic actions to correct these problems. The dominant national language across Mexico and Central and South America is Spanish, except for Brazil, where the primary language is Portuguese. Some portions of the population in many South American countries speak one or more native Indian languages. Kay’s team scoured the Internet for additional sources of data and came across a site maintained by the CIA. "Our tax dollars at work!" Kay exclaimed. Tables 3 and 4 (shown next) compare economic and social characteristics of the home market and the scenario markets under consideration.

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Table 3: Market Comparison on Economic Considerations*

COUNTRY Pop (Mill) GDP

(Bill $)** GDP/Capita

($)** GDP

Growth CPI

Increase % Below

Poverty Line Argentina 43.0 771 17,900 3.5% 20.8% 30.0% Brazil 202.7 2,422 11,900 2.5% 6.2% 21.4% Chile 17.4 335 19,300 4.4% 1.7% 15.1% Colombia 46.2 526 11,400 4.2% 2.2% 32.7% Mexico 120.3 1,845 15,300 1.2% 4.0% 52.3% Peru 30.1 344 11,400 5.1% 2.9% 25.8% Venezuela 28.9 407 14,100 1.6% 56.2% 31.6% Home 318.8 16,720 52,400 1.6% 1.5% 15.1%

**Purchasing Power Parity *Source: CIA World Factbook 2014 Table 4: Market Comparison on Social Characteristics*

COUNTRY Pop Aged 65+ Urban Pop.

Pop. in 3 Largest Cities

Pop. Avg. Growth

% Pop. w/access to Safe Water

Infant Mortality

/1000 births Argentina 11.3% 92% 37.7% 1.0% 99% 10.2 Brazil 7.3% 87% 18.5% 0.8% 97% 19.2 Chile 9.7% 89% 44.7% 0.8% 99% 7.0 Colombia 6.5% 75% 32.2% 1.1% 91% 15.0 Mexico 6.9% 78% 22.9% 1.2% 94% 12.6 Peru 6.7% 77% 38.4% 1.0% 85% 20.2 Venezuela 5.8% 93% 24.0% 1.4% 93% 19.3 Home 13.9% 82% 12.9% 0.8% 99% 6.2

*Source: CIA World Factbook 2014 A variety of trade enhancement actions have been struck in recent years. For example, Mexico was signatory of the NAFTA agreement, along with the United States and Canada. This agreement reduces trade barriers among the three countries and has encouraged a variety of companies to establish production in Mexico to take advantage of low labor costs and fairly seamless access to the United States and Canadian markets. The MERCOSUR agreement provides similar linkages among the South American countries of Argentina, Brazil, Paraguay, and Uruguay, including association agreements (but not membership) with Bolivia and Chile. The Andean Community links Bolivia, Colombia, Ecuador, and Peru. Most recently, Mexico, Colombia, Peru and Chile formed the Pacific Alliance. Numerous bilateral agreements also exist.

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Toothpaste sales in the region have been growing in recent years. The trends by country are shown in the table below. Amounts in the table are shown in dollars. Table 5: Manufacturer Toothpaste Sales by Country Market, last six years (Millions of $)

COUNTRY 5 Years Ago 4 Years

Ago 3 Years

Ago 2 Years

Ago Previous

Year Current

Year Sales per Capita ($)

Argentina 131.1 135.1 139.4 144.8 149.5 155.4 3.65 Brazil 376.2 397.5 408.1 415.0 437.7 482.6 2.40 Chile 77.7 81.9 86.4 90.6 95.2 100.5 5.86 Colombia 34.1 40.8 45.0 54.8 63.3 70.5 1.54 Mexico 233.6 247.1 259.3 268.0 282.3 296.3 2.49 Peru 27.5 29.9 32.9 36.3 41.2 46.2 1.55 Venezuela 35.2 34.4 35.7 36.1 33.5 32.0 1.13

Although the numbers in the table show the underlying change in demand, some fluctuations are caused by changes in currency exchange rates. The relative value of different currencies affects many of the decisions facing Kay's team, as well as the data used in their analysis. For accounting purposes at Allstar’s corporate offices, revenues and costs are converted into dollars. Therefore, fluctuations in the exchange rate will affect consolidated reports directly. However, pricing and spending budgets are set in local currency, so Kay’s team must manage in the local culture and currency but remain aware of the effects of exchange rates. Table 6 shows the current rate of exchange for each country in the region. Table 6: Currency Exchange Rates

COUNTRY Currency Exchange Rate (per $1.00) Argentina Peso (ARS) 8.1301 Brazil Real (BRL) 2.1529 Chile Peso (CLP) 492.61 Colombia Peso (COP) 1851.85 Mexico Peso (MXN) 12.7600 Peru Sol (PEN) 2.6990 Venezuela Bolivar (VEB) 6.0481

The Latin American markets have traditionally been served by local and regional companies, but global competitors have already begun entering the region. The next table shows total manufacturer sales in each country, with competitive market share:

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Table 7: Competitive Market Shares (%)

COUNTRY Mfr. Sales (Mill. $) Allstar B & B Caremore Driscol Evers. Loc. Reg.

Argentina 155.4 17.4% 56.8% 25.8% Brazil 482.6 9.0% 30.7% 19.5% 40.9% Chile 100.5 9.0% 14.8% 32.8% 31.3% 12.1% Colombia 70.5 7.8% 59.7% 32.5% Mexico 296.3 46.2% 24.1% 29.7% Peru 46.2 4.1% 59.5% 36.4% Venezuela 32.0 82.0% 18.0% Overall 1,183.5 6.0% 13.3% 13.4% 8.8% 36.6% 24.9%

Your job as the first country manager for the region is to determine which of the scenario countries recommended by Kay's team is the most attractive for Allsmile. You are expected to build the Allsmile business in one market and expand into two or more other regional markets. For each market that you enter, you will need to determine Allsmile’s target market and positioning strategies, products to launch, production location, channels of distribution, pricing, advertising, and promotion. As country manager, you are responsible for the performance of your operations, including revenues, market share, and profitability. Therefore, you must develop and implement strategies that are attractive to customers and profitable for Allstar Brands. Products Allsmile is a key asset of Allstar Brands. It is one of the company’s most recognized brands in the United States. It is produced in the United States, Germany, and Australia for the North American, European, and Australia / New Zealand markets, respectively. A large number of stock keeping units (SKUs) are produced. There have been reformulations of the brand, but as of today, the product formulations are essentially the same across all markets for a given SKU (although there are slight differences in packaging and in the type and intensity of flavoring that are thought to reflect regional preferences). Overall toothpaste market growth in the more mature markets such as the United States, Western Europe, and Australia, is very slow, matching the slow growth of the population, so that increases in sales of a brand are due to reductions in share of competitors. Much of the shift in market share in toothpaste has resulted from aggressive product development and reformulation supported by promotion to create interest in the brand. For example, product management has developed three line extensions of the original Allsmile brand for the United States market: Allsmile Whitening, Allsmile Tarter Control, and Allsmile Kids. These line extensions focus on particular benefit and demographic segments. Management of Allstar Brands has made the decision that Latin American market entry is to be done using the most popular existing SKU formulations. For each market entered, the country manager in Latin America must decide which of the 21 available Allsmile SKUs to use in the chosen market. Next is a summary of the current choices. Note that the pump delivery system is not available at startup, though those and other SKUs may become available as the simulation progresses.

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Table 8: Allsmile Available SKUs

TYPE SIZE DELIVERY TEXTURE

FORMULATION S M L TUBE PUMP PASTE GEL

Economy X X X X X X original fluoride formula White X X X X X X fluoride plus hydrogen peroxide Healthy X X X X X X fluoride plus abrasive material Kids X X X X X fluoride plus special flavoring

The usual approach for market entry in the past has been to introduce just four SKUs and review early performance before investing additional resources. Appropriate language packaging (depending on country) is essential for consumer acceptance. Goals and objectives will be set with your instructor at the beginning of the simulation. Your instructor may also provide guidance as to regional rollout timelines. After initial entry into a regional market with a limited number of SKUs, expansion in the region will likely proceed as follows:

• After successful entry into one market, the country managers can expand their operations into other countries in a similar fashion. The products can be the same as those marketed in the initial country, or they may be entirely different SKUs.

• Periodically, market penetration and growth rates for each country will be reviewed. Based on achieving these goals, additional SKUs may be introduced in each market.

Production Toothpaste manufacturing and delivery is reasonably flexible. Product can be sourced from existing facilities in the home country, or can be manufactured locally at a company-owned facility. Location of manufacture has important implications for Allsmile’s overall costs as well as COGS. Three sources of costs exist: manufacturing costs dependent on plant location and production volume; international shipping costs (ISC) based on the location of the manufacturing plant and the served market; import taxes and duties in certain cross-border situations. The parent firm charges a transfer price for product that is purchased by the subsidiary. The total amount (units x transfer price) appears as the cost of goods sold (COGS) in the subsidiary's income statement. Estimates from the parent firm indicate that there is sufficient productive capacity in the existing plant to meet potential demand in the new region. This may be a good short-term source of capacity, but unit costs are likely to be higher, and when combined with tariff and shipping considerations, overall cost will be significantly higher than a locally produced product. On the other hand, the existing plant offers reliable productive capacity and a historically stable currency. Table 9 shows some typical production costs associated with each size, delivery system, texture, and formulation level of toothpaste when produced in the existing manufacturing plant. The base case is a 75-gram tube of fluoride toothpaste that costs approximately $0.50 to produce. These costs incorporate labor, materials, and an allocation for manufacturing fixed costs.

Latin America Case —21—

Table 9: Approximate Home Region Manufacturing Costs by Component

COMPONENT DESCRIPTION COST COMPONENT DESCRIPTION COST

SIZE 25 gram (small) –20%

TEXTURE Paste —

75 gram (medium) — Gel +5% 150 gram (large) +20%

FORMULATION

Fluoride —

DELIVERY SYSTEM

Tube — Hydrogen Peroxide +5%

Pump +15% Baking Soda +5% Special Flavoring +5%

Another approach is to produce the product locally. If you desire to produce locally, the corporation will approve building a single plant in one of the scenario countries under consideration. Building a plant or expanding its capacity are expected to take one year to complete and requires some one-time upfront costs for design and construction. Plant and capacity costs are estimated at $1 million for each 1 million units of capacity, and capacity can be increased by up to 100 million units per period. These costs are depreciated over a 10-year period, resulting in annual charges of approximately $100,000 per million units of annual production. Unit manufacturing costs are expected to be lower with local production after achieving reasonable volume. Table 10 shows the percentage reduction in COGS (unit costs) that can be expected when products are manufactured in a regional plant. These cost savings over home production are based on 100 million units of cumulative production in the local plant. Table 10 Decrease in Manufacturing Costs (based on initial 100 million units of production)