Grew

The McGrew Company

Mini case 2.1

Rosalba Garcia
Randy Aram
Anthony Craig

LeTourneau University School of Business

Dr. Juan Castro
International Business

January 14, 2003
Executive Summary McGrew Company has owned a secure share of the market for peanut combines in Brazil while importing all of their products. McGrew Company must have done research and concluded that it was to their advantage to import all of these products rather than producing them locally. Many factors can influence the cost of selling these products in Brazil. One deciding factor is the difference in cost of making the peanut combines in Brazil as opposed to making them abroad and the additional cost of transporting and various import taxes that would apply. Other factors, such as the stability of the economy, environmental factors, or political factors could also influence the risk of producing these products. We assume that McGrew performed significant research before organizing their business and evaluated these factors, concluding that producing these products abroad and importing them into Brazil was the most efficient way of running their business. However, once the local competition arose, these factors evidently changed, because it was evaluated that McGrew should produce the combines locally. Whether some of the economics or political factors changed or whether having the local support of customers would be influenced if they did not produce the combines locally is unknown to us. The local distributor in Brazil recommended to McGrew that they move their production operations to Brazil, and we were asked to evaluate the potential decision and advise them.
Situation Analysis The McGrew Company, a manufacturer of peanut combines has for years sold a substantial number of machines in Brazil. However, a Brazilian firm has begun to manufacture them, and McGrew’s local distributor has told Jim Allen, the president, that is McGrew expects to maintain its share of the market, it will also have to manufacture locally. Allen is in a quandary. The market is too good to lose, but McGrew has had no experience with foreign manufacturing operations. Because Brazilian sales and repairs have been handled by the distributor, no one in McGrew has had any firsthand experience in that country. Allen has made some rough calculations that indicate the firm can make money by manufacturing in Brazil, but the firm’s lack of marketing expertise in the country troubles him. He calls in Joan Beal, the export manager, and asks her to prepare a list of all the options open to McGrew, with their advantages and disadvantages. Allen also asks Beal to indicate her preference. 1) Prepare a list of all the options and give the advantages and disadvantages of each. 2) Which of the options would you recommend? 3) Assuming the president’s calculations are correct and a factory to produce locally the number of machines that McGrew now exports to Brazil will offer a satisfactory return on investment, what special information about Brazil will you want to gather?

Another important question to consider is why the local distributor recommended that the production of these combines should be moved to Brazil. It might actually be cheaper to produce the peanut combines in Brazil rather than importing them but the previously mentioned economic or political factors might have made it too risky. South America has historically been politically unstable, although Brazil is the most stable of these countries. Other local factors such as high crime rates are frequently present, in addition to unstable and poor economies. Brazil has generally been the most stable South American country, and we researched the recent economic condition of Brazil before making our recommendation to McGrew Company. The results of this research are in the following section, and generally show that, from an economic standpoint, producing peanut combines in Brazil would still be profitable and a stable investment. However, Jim Allen is also concerned that his company has no experience producing and marketing in Brazil. This is an additional situation that Jim Allen will have to deal with if they do move their production operations to Brazil.
Research
In the last few years, Brazil has improved its economy in many ways. It has stabilized its currency despite facing 4.75% average annual inflation from 1997-2001. However they averaged 1.94% annual increase in GDP from 1997-2001. The agriculture sector of the Brazilian economy produces 14% of their annual GDP, and peanut combines would affect the agricultural portion of the economy. Agriculture is a major portion of Brazilian business and a huge portion of their exports. In 2001, Brazil had a GDP per capita of $6,011 compared to $32,042 of the US. Only Chile, Argentina, Venezuela, and Uruguay have a higher GDP per capita among the South American countries.
Strategic Alternatives The decision for McGrew Company is relatively simple as they really only have two possible solutions. They can either keep producing their peanut combines abroad and importing them to Brazil, or they can move production of these combines to Brazil. If McGrew opens a manufacturing branch in Brazil, it will help expand their company into a new foreign market by manufacturing their products in Brazil. According to the local distributor, they need to open a local manufacturing plant to maintain their share of the Brazilian market. They would also save on the cost of importing their finished products to the company and could hire local workers who would require lower salaries. They would also enhance the local economy by putting extra money into it, which will end up helping the local market. However, their company does not have anyone with any experience marketing or producing in Brazil. Brazil also has a higher risk of potential political and economic problems compared to the US and would cost some extra money to set up the necessary facilities. McGrew Company is also not completely sure about how successful their local production operation would be. However, judging from the current economic conditions from Brazil, the recommendations from the local distributor, and the company’s current status, we feel that it would be advantageous if they start manufacturing peanut combines in Brazil.
Recommended Strategy We recommend that McGrew Company establish a peanut combine production facility in Brazil. Because of the nature of Brazil’s economy, production should be cheaper in Brazil than the US, and importing the raw goods should not cost any more than importing the whole products. Thus it should not be any more expensive to produce the peanut combines in Brazil. In addition, by producing these products in Brazil, they will help stimulate the local economy, which will only help their business more. It will also provide stiffer competition to their new local competitors. Because Jim Allen is worried about having a lack of foreign experience within the company, he could either move some of his current managers to Brazil while they are setting up their production facilities so they can gain some quick experience in Brazil. He could also look to hire some people that have foreign experience, especially people from Brazil, assuming he can find ones that would be qualified to work for them. McGrew should also spend some time researching effective ways to market products in Brazil and any other local customs.
Implementation Plan McGrew Company should immediately start building a peanut combine production facility or find a suitable existing facility. They should also start looking for managers with international experience, particularly with marketing or production in Brazil. If they cannot find any suitable managers, they should move some of their current managers to Brazil to at least get a small flavor for managing an organization in Brazil before their facilities are ready to open. They should perform some additional research to get a better idea of how to market their products in Brazil and become familiar with any business customs that would be important to understand.
Sources
http://finance.yahoo.com/ http://biz.yahoo.com/f/g/ http://www.bae.ncsu.edu/programs/extension/agmachine/farmequip/harvest/peanut_harvest_guide.htm/