Peru Task 1
Peru is a developing country that is rich in their physical resources. Due to its geographical location and climate conditions, it is suitable to set up vineyard in the country. The continuation economy growth in Peru, give foreign company an opportunity to go into Peru to invest. This report will show the advantages and disadvantages of the entering the Peru’s wine industry.
2. Factor Conditions
2.1 Physical Resources
Peru is a great country for wine making and grapes growing due to its geographical location and diverse physical resources. The grape production is the key factor for Peru wine industry; it is a raw material for winemaking. The production of grape in Peru is good which is mainly due to its stony soil (Peru Embassy, 2014).
Vineyards are usually located in warm valleys where there is minimum rainwater on the plains. The soil is spongy and sucks up the water of rivers that come down from the mountains and soaks those sandy places (De Acosta, J., 2002). Smaller berries from less fertile soils are more preferable for winemaking because it gives a greater skin to juice ratio (University of California, 2014).
The average temperature in Peru is about 20?? and it rainfall is about 130mm per month (The World Bank Group, 2014). Normally, wine grapes are harvested between 19?? to 25??. The water used for irrigation come from the ice caps of the Andes Mountains is needed for the vineyard (Delange, 2011). A good trellis system is also require for the vineyards, as photosynthesis is very important for wine growing (Grape growing guide, 2014) Hence, Peru has its climate and geographical advantages.
Opportunity: Peru can produce good quality wine, as the geographical location and climate condition can produce good quality grapes for winemaking.
The transportation in Peru is undeveloped and inefficient, and it rank 93rd in the world (World Economic Forum, 2012). Transportation in Peru is fairly complicated, due mostly to the country’s natural borders. Peru is also a large country, and thus navigating it by land can be a very time consuming affair (Destination360, 2014). About 60% of inland freight and 90% of all passengers are carried by road (Advameg,Inc, 2014). Many areas of Peru are isolated and the road condition is poor (The World Bank Group, 2014).
Different types of Transport
1. Domestic Airplane
4. Shared Taxi
6. Motor Taxi
7. Pickup Truck
Much of Peru would be inaccessible without air transport. In 2001, there were an estimated 239 airports, 49 of which had paved runways. The two principal airports are Col.Fco.Secada at Iquitos and Jorge Chavez at Lima (Advameg,Inc, 2014). Even though geographical location and climate is an advantage, these inadequate transport facilities will be a major factor to discourage the investors to come in Peru to invest.
Peru’s telecommunications market was liberalized in 1999, and the country enjoys free competition in fixed and mobile, internet and value added services. Telecommunication services are still largely monopolized by a single company, Telef??nica del Peru. In spite of the continuation of market expansion, Peru has a fixed line teledensity rate of 7%, one of the lowest in South America due to the lack of competition within the area. Teledensity levels remain below compare to other countries in the region and there are persistent disparities between socioeconomic status and the regions with fewer resources have limited access to these telecommunication services. Few services are offered that respond to the needs and demands of low-income consumers, and those that do are mainly in smaller cities and the urban periphery. (Miguel Saravia, 2014). Communication system is a basic requirement for foreign companies to invest in Peru, as they need to monitor the daily activities of their companies. High poverty and inequality are still striking features of Peruvian society. Year 2000, more than half the Peruvian population remained poverty despite economic growth did lead to significant rise in public health expenditures in 1990s. According to the Peruvian Demographic and Health Survey (DHS), chronic malnutrition rates fell, from 33% in 1992 to 29% in 2000. The nutritional deprivation during pregnancy will have direct impact on a child’s future performance in school and in the labor market. Behrman et al. (2004) use their own estimates on child growth and cognition, as well as estimate on the effect of height, schooling and cognition on wages. All these have shown that health, nutrition and education help to determine an individual’s productivity. (Valdivia, 2004)
Threat ‘ Inadequate transportation and telecommunication will lead to inaccessibility toward the Peru’s Market. Undeveloped healthcare will impact the performance of the Peruvian’s workers. This will lead to low productivity from the individual.
3. Demand Conditions
3.1 Home and Export Demand
Over the years, Peru’s economic growth has developed and improved in food retail, gastronomy and tourism. The growth in all of these sectors has a positive impact in wine consumption. Household income are also rising significantly as such, consumers have better buying powers as compare to last time. Peru’s increasingly sophisticated cuisine, allowing consumers to try new food and wine pairings. The expansion of retail food channel in the Peru has been instrumental for wines reaching new consumers. The trade promotion agreement between US and Peru, allow wines originated from US to be duty free when accessing to Peru. Domestic production of wine grew 13.3% in 2007 and is mostly red wine varieties. Locally produced wins represent 30% of the wine market and less than 1% of domestically produced wine is exported (Alvaro L, Caroline S, 2009)
(Alvaro L, Caroline S, 2009)
3.2 Buyer Sophistication
Demand for higher-end wine in Peru is growing by about 20% each year, thanks to a increase in restaurant dining and stable economy which grown by an average of 6% a year. The popularity of Peru’s culinary has been driven by number of local chefs whom have received international recognition, which include Gaston Acurio. Acurio and his colleagues have opened a range of Peruvian food restaurants. Meanwhile people’s ability to dine in restaurants is being fuelled partly by profits from the country’s mining sector (Wine Business International, 2013). According to a recent IPSOS study, Consumers like to shop at supermarkets and gourmet stores once a week, and dine in at restaurants at least twice a month. All these locations provide wines for the consumers (Exporting Wine to Peru, 2009).
Opportunity – Increase of high consumer power and the convenient of retail food restaurants, Peruvian tend to move toward higher quality wines to suit their gastronomic taste buds.
4. Related and Supporting Industries
4.1 Small and Medium size Enterprises (SMEs) in Peru
In Peru, SMEs play a critical role in the economy. Nearly all businesses and employing over half of the active working population. Over one-third of the Peruvian firms cite an inadequately train workforce as the major obstacle to growth (World Bank, 2010). Complex labor regulations are found to be a negative impact on the firm growth, with a larger effect on small businesses. Although Peru’s economies has grown and businesses are poised to expand, but the data shows that an inadequate trained workforce is one of the major obstacles growth confronted by Peruvian firms. Peru is targeting for a double in the number of SME firms that export by 2016. In order to achieve this target and its economic potential, developing high skilled human capital is a priority. A poor regulated framework was created between firms and qualified workers. Firms in developing countries, like Peru, face an uphill challenge as they battle to move up the value chain. SMEs contribute to the production of goods and services and also play an important role in creation of job and innovation. Labor regulations play an important role in providing a skilled workforce, and research shown that a strong negative relationship between regulation in the form of taxes and labor demand (Siobhan Pangerl B.S, 2013).
Conclusion ‘ SMEs play a critical role in the Peru’s economy. In order to continue to growth, Peruvian SMEs firm have to maximize their human capitals in the firm. A poor regulated framework will slow down the growth.
The Peruvian Educational System
(Foreign Credits, Inc, 2012)
Education in Peru is mandatory for ages from 6 to 16. The challenges that faced by Peru are related to teachers, training, methodology and incentives. All these challenges are contributing the ineffectiveness of the education systems in Peru. Problems within rural schools, multi-grade classrooms, teacher absenteeism and absence of financial or personal incentives are also the factors. Teachers are unable to prepare classes or develop professional skills before each semester start. The lack of communication between Ministry of Education (MOE) and the different institutions poise another problem. There is no administrative support for the teachers to carry out their school’s official activities. The financial and personal incentives also post a challenge to the teacher. A drive to supplement income with a sideline may leads to absenteeism in the classroom. Peru’s educational systems faces challenges of poverty, lack of sufficient teaching materials, geographically dispersed schools, and students from various language backgrounds (WordPress, 2013)
Threat ‘ Lower educational level for the newly graduates, will face problem. As lacking of knowledge hinder them to learn during the course of work. Thus, companies that hired them cannot maximize the human capital.
5. Firm Strategy, Structure and Rivalry
5.1 Cultural impact on firm strategy and structure ‘ Motivations and culture of their employees and manager’s by using HOFSTEDE
Power Distance ‘ Peru has a high PDI score of 67. In general, Peru has a relatively big gap between the wealthy and the poor. Peruvian has accepted and expect that power is distributed unequally. It suggests that a society’s level of inequality is endorsed by the followers as much as the leaders (Hofstede, 2014). As compare to UK’s score of 35, the English will want to have a sense of equality and respect from everyone, which includes the boss.
Threat ‘ The basic problem involved is the degree of human inequality that underlies the functioning of each particular society. The English might be over dominating the Peruvians, which causes inequality and social unbalance.
Individualism ‘ With the value of 16, Peru shows a very collectivistic score. In general, Peruvian find that large companies are attractive, particularly among blue collar workers (Hofstede, 2014). They often cohesive in groups since young and they are very loyal to their families. They aspire to conformity and prefer having security over having autonomy in their position (Hofstede, 2014). With the score of 89 for UK, it shows that the people in UK are very individualistic. They like to work independently and they do not need groups to survive.
Threat ‘ Two very different styles of working might cause friction between the two communities.
Masculinity ‘ At a value of 42, Peru is rather a feminine society. This is because of many cultural differences and misunderstandings. Peruvian’s achievement motivations are low and they prefer to human contacts and family over recognition or wealth (Hofstede, 2014). With the high score of 66 in UK, which mean that the British is a masculine society. They are highly success oriented and driven by goals (Hofstede, 2014).
Threat ‘ As Peruvians are more feminine, they tends to work with little expectation. If there is any collaboration between UK and Peru, friction will produce as the Peruvians will take time to meet the expectation of the British.
Uncertainty avoidance ‘ At 87 Peru scores high on this aspect, is due to their previous ruling by Spanish government. These societies show a strong need for rules and elaborate legal systems in order to structure life. However individual are not obey these laws, hence corruption is widespread (Hofstede, 2014). With the low score of 35 for UK, the people are tending to work around with any change of plan. They do not strictly follow the rules and regulations.
Threat ‘ The working cultures are totally different for these two countries. This meant that tasks being given might not be complete properly.
Pragmatism ‘ With a low score of 25, Peruvian culture is more normative than pragmatic. Peruvian exhibit great respect to their traditions, a relatively small propensity to save for the future, and a focus on achieving quick results (Hofstede, 2014). With an intermediate score of 51, a dominant preference in British culture cannot be determined (Hofstede, 2014).
Indulgence ‘ Peru has an intermediate score of 46 on this dimension (Hofstede, 2014). Peruvian basically do not feel over restrain or indulge in socializing. With a higher score of 69 in this dimension, people in UK willingly to relies their impulses and desires with regard to enjoying life and having fun (Hofstede, 2014).
5.2 Threat of New Entrants
The threat of new entrants is relatively low. Large investment requirements are needed to create wine-making facilities especially one capable of taking a stake in the export market. Great time investments are also required to launch a vineyard. Furthermore, there are barriers to entering distribution systems used by wine-makers as there is limited space on liquor store shelves and restaurant menus that is already aggressively fought over by existing competitors (Jonathan B 2009). Already According to World Bank 2014, Peru had only 16.8% of agricultural land. Only 4.3 million hectares (10.6 million acres), or 3.4% of the total land, was under cultivation in 2003 (World Encycolopedia of Nations, 2007). The area of available agricultural land per capita is one of the lowest in the non-industrialized world (World Encycolopedia of Nations, 2007).
Peruvian state has been unable to successfully develop adequate capacity of enforcement authorities. There is a lack of independent, sufficiently resourced investigation and prosecution authorities and judiciary. Even though National Anti-corruption office was established, due to clear lack of firm guidance and leadership on the part of the government it was closed less than a year. Further delays in processing corruption cases and imposing sanctions have created a sense of impunity in Peru. Peruvian state should review on the code of penal and laws for corruptions. More resources should cater to the govern body. Collect and publish statistics and other information on corruption. Educate the Peruvian on corruption. Provide proper trainings to all the institutions in anti- corruption system, especially the judiciary and the Public Prosecutor’s office (Pro??tica and the UNCAC Coalition, 2011).
Threat ‘ Corruption affects the country’s political environment and business’s climate.
(Transparency International, 2014)
6.2 Educational Policies
In recent years, Peru continues to grow in their economies and more SMEs firms were set up in the cities. More than half of the Peruvian’ workforces are working in the SMEs firm in Peru. Alongside with the growth of the economy, the earning power also grows as well. All these are contributed by the rising of education level in Peru. Peruvians starting to know that with higher educational level, they are able get into a bigger company, which allow them to command a higher salary. With the increase of the salary, Peruvian can enjoy a better and sophisticated lifestyle.
7.1 Political decisions by foreign governments
Ever since Peru has been integrated into the world economy, it has signed free trade agreements with the United States and other key trade partners such as Canada, Chile, Japan, Singapore, South Korea and Thailand. Peru also signed a commercial and technical agreement with the Gulf Cooperation Council. In 2013, Peru’s free trade agreement with the European Union went into effect. These keys decisions that made by Peru, gave a boost in their economy growth.
7.2 Environmental Crisis
Peru’s environment is under serious threat from several of activities which including deforestation, logging, oil exploration, and etc’ Peru, once pristine rainforest environments were destroyed by these activities.
To conclude, currently it is not advisable to tap into the market in Peru. Although Peru has a good advantage on its geographical location and climate condition but there are still a lot of factors need to be improving on. Political decision made by the government improves the imports and exports of Peru. Transportation and communications infrastructure has been lagging behind the modern. Providing healthy competitions within the markets can enhance the infrastructures. Poverty which lead to lack of good health care system, determine the development of the children. The stable growth of Peru, led to increase of Peruvian’s household income. With the increase of buying power, Peruvian is starting to wine and dine in the restaurants. Over half of the workforces are working at SMEs in Peru. In order to attain economic growth and it higher potential, the Peruvians need to be train properly. The educational system in Peru will need to buck up as the quality of the education is very lousy. MOE of Peru needs to have a better communication and give the teachers a proper training before commencing of the school. Remunerations or incentives should be increase to retain teachers’ loyalty. Certification also needed to be awarded to the teachers upon completing the course. There are little threats of new entrants for the wine industry, as high capitals and time is needed. Lands are also very scarce in Peru. One thing to take note, there is environmental crisis in Peru, as pollutions are taking place during other activities such as mining and loggings. Soon Peru might make policies to control their environmental issues; this might impact the businesses for the businesses. Corruption is also an impact to the business operators in Peru. Although, corruption has improved in recent year, the corruption index is still high.
Peru Task 2
In order to penetrate into the wine industry in Peru, a multinational company (MNC) may want to consider using Join Venture strategy as a form of entry into the country. A joint-venture is when two or more parties, called co-venturers, enter into a limited-time agreement to complete a specific business venture. All involved parties are able to share in the profits and losses during the venturing. Combining their resources simultaneously so that to complete the specific objective. We may also tap into the knowledge of the local market from the local company in-order to gain market shares.
Accessing into additional resources is one of the advantages in joint venture. Enterprises in Peru are able to make use of one another resources to complete a specific task. Not only the task can be completed faster, knowledge is also passed down to the individual during the course of work. By sharing newer methodology, technology and approach, the Peruvians are able to take advantage on any new technologies without having to invest any on them. For example, Peruvian firms have the physical resources but they do not have good technologies to harvest or processing it. By engaging foreign investors, they can make use of the technological advantage to develop better wine. Learning new methodology enable the Peruvian firms to enhance their knowledge in the industry. Passing down knowledge enable company to gain more human capitalization. Hence its gain better profits and market shares.
There are a lot uncertainties and risk in Peru, as corruption index shown that Peru is rank 83rd in 2013. Understanding that the local firms also do not want to risk their capitals and resources, hence they will also share their information to identify the risks involved during the partnership. Thus, sharing of economic risk make more sense for the foreign investors.
Lacking of control will be one of the disadvantages of Joint Venture. Operational control and decision making are sometimes compromised during Joint Venture. Since there is an agreement that divides which company will take over a particular operation, but the other party may not be satisfied.
Strategic alliance also can be considered as one of entry mode to the Peru wine market.
Bringing in a product into Peru might cause confrontation with the political factors and strict regulations imposed by the Peruvian government. In-order to tap into the market, we need to use strategic alliance with the local firm. Hence, we are easily able to access to Peru market, and minimize the risks for the foreign investors.
Due to collaboration between the companies, it’s actually created larger network to attract more customers and partner. This will increase the company’s image and profitability. Knowledge and training will be shared among the companies, hence its promote efficiency, productivity and financial stability for the company.
Peruvian firms fear that collaboration will lead to future merger. This will create panicky mentally toward the employees to the Peruvian firm.
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