Gepetto Entering the Peru Market The subject of this paper is to develop a plan to penetrate the Peruvian market by Gepetto, a successful American company which has managed to take a significant part of the Tunisian market. This paper will argue that the best alternative is for Gepetto to open the facility on a “green field” basis, rather than choosing export, partial buyout or partnership. Although this alternative could take longer and a larger investment, this paper will argue that it is the best assurance that Gepetto can succeed in the Peruvian market, and perhaps in exports as well. Examining the Alternatives Gepetto’s least expensive option is to export its shoes from Tunisia to Peru.
In order to prevent costs from going too high, the company could sell directly to a Peruvian importer, using either the importer’s customs capabilities, or hiring a customs agent to handle the import paperwork, bonded warehouse and transfer to the Peruvian distributor. The company may also consider using an export agent in order to minimize paperwork. The export agent can take responsibility from Gepetto’s door to the shipping port (air or ship). There are several potential problems with this scenario.
First, the costs of manufacturing in Tunisia are higher than Peru. The average income in Tunisia is $8,800 (US State Dept), as compared to $2,700 per Peruvian. Assuming that the wage difference is similar, that means that Tunisian labor hours are three times that of Peru. If one assumes that shoes are fairly labor-intensive and the other elements of production are not a major part of cost of goods sold, the difference in cost would be substantial (Freeman).
This cost disadvantage to Tunisian manufacturing is made even less attractive by the high shipping costs, and the average Peruvian imports tariffs of 11%, which may be higher for shoes (U of Florida). Although this is the least-expensive alternative, it is also unlikely to succeed Gepetto’s next cheapest alternative is to consider taking on a joint venture partner in Peru. Given the relatively low capital cost requirements for shoe manufacturing, the total investment required for capital equipment may be fairly low (Freeman).
By choosing to manufacture in Peru, the company would have three main benefits: 1. A lower manufacturing cost, as the labor factor of production would be much less than other countries, and correspond to the manufacturing costs needed in order to respond to market pricing in Peru. 2. The opportunity to leverage local talent which knows the marketing, hiring and management practices in the Peruvian market. Although, as stated in the case, 80% of the population is catholic, that does not mean that there are not significant differences in culture and outlook in Peru than in the United States or Tunisia.
As evidence of this difference, it is a great deal more difficult to open a business, to find employees, and to fire employees than in the average country. Close knowledge of local laws and customs, particularly related to employment, can be very important. 3. The opportunity to export to the United States and local, bordering countries. The US and Peru just completed a free trade agreement, which extends many of the same privileges as Canada and Mexico in NAFTA.
This means that tariff and non-tariff barriers are falling between the two countries. Given that the US is already Peru’s largest and most important trading partner, this should mean that there is substantial infrastructure between the two countries, from export advice and assistance to trade promotion on both the US and Peruvian sides. (Blustein) 4. The opportunity to export to neighboring countries, including Chile, Ecuador, Brazil and Bolivia. Although the Andean group has concluded more favorable terms through Mercosur (to which Peru is not a member), the amount of trade between Peru and these countries has increased in recent years.
The geographical proximity can reduce shipping costs. The cultures are similar in these countries—particularly between the indigenous peoples of the Andes, and the jungle people of eastern Peru, western Brazil and Ecuador. This means that the dress habits, and perhaps the style expectations, of the peoples of these regions is similar. Finally, the costs of production in Peru are more in tune with the prevailing wages in the region.
With a recent deal inked with Colombia, Peru may also have that market available to it (Kahn). While partnering with a local company offers some advantages of rapid entry into the country, and a quick familiarity with the exigencies of the market, there are several disadvantages. Note that the Gepetto’s American managers have not worked in a joint venture in the past. They bring a great deal of business experience in a developing country which can be applied to Peru or elsewhere. Their local partners may have other goals, and may not have the experience that it takes to understand how to erect a shoe manufacturing operation and sell successfully within the market.
In case of a split of the partners, the local partners’ better knowledge of the fairly legalistic and bureaucratic Peruvian government may make it difficult for Gepetto managers to pull out their investment or to sell to others. A related alternative is to buy a small company, or one that is undercapitalized or failing. Although there are some advantages of fast acculturation, this author believes that that alternative is fraught with difficulties.
In particular, if the company is failing, the quality of the managers acquired may be poor. The same disadvantages as above accrue in the case of a purchase of a failing or undercapitalized company. This paper would argue that the best basis for Gepetto in Peru is to develop its own “green field” plant. The reason is that the managers can import their knowledge of shoe manufacturing and marketing, and employ many of the management tools that they used successfully elsewhere.
There are several downsides, however, that management will need to keep in mind if they are to succeed in Peru. The first is that, by simply learning the Spanish language, the managers are not at all acculturated or prepared to deal with the cultural obstacles to hiring, firing, setting up a business or selling a business. For that reason, they will need to supplement their skills by hiring some key local managers. In particular, they should have expertise on the legal side (i. e. hire a “Doctor” to handle legal matters, including dealing with government bodies).
In addition, the significant hurdles to hiring and firing requires that they bring on board a very strong HR manager who has acquaintance with both procedures in Peru. They may also consider hiring a strong local production manager who has experience running a labor-intensive operation like shoe manufacturing. Finally, they should consider bringing in local marketing talent in order to establish their sales and distribution strategies; this may be a mix of a local advertising/marketing agency along with local sales and sales management talent. Depending on the success of their venture, the Gepetto managers may want to consider developing an export plan, which would start with the highest-potential markets.
There is not enough information in the case to indicate which markets they should be, but the Americans should consider investing most of their efforts in the market with the best financial returns. In conclusion, success in one third-world market does not imply success in another. The cultural and business aspects in Peru may be as different as America is from Tunisia.
The managers should therefore set out carefully in Peru. By choosing to go direct, rather than exporting, they may have to work harder and longer to earn a profit, but the end result should be worth it. Bibliography Blustein, P. "U. S., Peru Strike Free-Trade Agreement. " Washington Post 8 December 2005: n. p. Freeman, R. B. and Kleiner, M. M. "The Last American Shoe Manufacturers: Decreasing Productivity and Increasing Profits in the Shift from Piece Rates to Continuous Flow Production. " Industrial Relations (2005): 307-330. Kahn, J.
"Free trade hits another barrier. " Fortune 1 May 2006: n. p. U of Florida. "A Primer on Exporting to Peru. " 2007. University of Florida. 29 November 2007 . US State Dept. A Background on Tunisia. 2007. 29 November 2007 .