Internationalization of JBS

 

 

Table of Contents

1.0 Introduction. 3

1.1 Background of the Case. 4

1.1.1 Key Patterns and Trends in International Business Activity. 5

2.0 Internationalization Strategies. 6

2.1 Identification of Current Internationalization Pattern. 7

2.2 Theories of Internationalization. 8

2.2.1 Sequential Theory (Uppsala Model) 9

2.3 Assessment of the Current Internationalization Strategies. 10

2.3.1 Joint venture. 11

3.1 Recommended Future strategic direction. 12

3.1.1 Proposed Strategy. 12

3.1.2 Porter Generic Strategy. 12

3.1.3 Ghemawat’s Strategic Choices. 13

Bibliography. 14

 

1.0 Introduction

This is a report based on J.B.S, S.A, a Multinational Company headquartered in Brazil. It presents a theoretical analysis of the process of internationalization by the Brazilian multinational over the years. It will identify and critically evaluate the strategies used by the company to internationalize. In the first section, the report will give an introduction of the company and what it entails as a ‘Story’. It will then identify some of the key patterns and trends in international business activity that the company is engaged in.

In the second section of this report, a critical analysis of internationalization strategies that the company is engaged in will then be given followed by the identification of the current internationalization pattern. The report will then look into the theories of internationalization based on the pattern already identified and then give a critical assessment of the current internationalization strategies of the company. This will finally be followed by a critical appraisal of the success of the current strategy used by the company in addressing the external influences on international business.

In the third section, the report will give recommendations for future strategic direction for the company to attain competitive advantage. This will mainly be based on the analysis and engagement of models with a proposition of the most suitable and relevant internationalization strategy that would give it competitive advantage. Using the Porter Generic Strategy, the report will classify the proposed strategy and then it will look at Ghemawat’s Strategic choices of adaptation, aggregation and arbitrage.

1.1 Background of the Case

Brazilian food Company, JBS, is the largest (by sales) meat processing and producer of meat in the world with engagements in the production of chicken, beef and pork and the sale of by-products from the processing of the meats (JBS S.A. 2016). The main headquarters is in Sao Paulo. The company was founded in Anapolis, Goias in 1953 and over the years has expanded to 150 industrial plants all over the world. It has expanded to establish itself in five continents with facilities of production in Australia, Italy, Argentina, Brazil, Uruguay, United States, China, Mexico, Russia, among others (Torres, 2011). With the responsibility of over 120,000 employees, the company has become significant in participating in the economy of countries it is present in (JBS 2012).

Initially, JBS was established by rancher Jose Baptista Sobrinho as a slaughtering business in 1953 killing just five animals per day, with the founder’s initials making up the company’s name (The Economist 2011). The business began to expand when Brasilia, Brazil’s capital was established bringing in a new market within the reach of the ranch. During the late 1960s, it expanded into various slaughterhouses and grew in the 1980s to incorporate the whole of Brazil and purchase of other companies of meat processing (JBS S.A. 2011). In 2007, JBS became a company held by the public, receiving a major investment from the Brazilian Development Bank (Blankfield 2011).

In the years that subsequently followed, the growth of the company in the beef sector has substantially grown to make the company the world’s largest through the acquisition of various food companies and stores in brazil and around the world. This includes the acquisition of the U.S. Company Swift & Company, the third largest U.S. pork and beef processor in 2007 for US $225 million and renamed it JBS USA (Barreto 2007). JBS, S.A, leads in slaughter capacity in the world with 51.4 thousand head daily and continued focus on processing, operations of production, and export plants both at the national and international levels. The meat giant has an annual sale of around US $45 billion, incorporating various international markets (Paul 2016).

1.1.1 Key Patterns and Trends in International Business Activity

A year after its creation in 2005, JBS began internationalizing through the acquisition of Swift Amour in Argentina. With a mutual border being shared and being the second largest processing region of land mass in Latin America, Argentina became the most appealing market. According to the report by the Brazilian Beef Export Industries Association, the beef exports of Brazil surged in 2006 to 27% from $3.13 billion in 2005 to reach $1.39 billion in 2007 (Barreto 2007). This was due to the business ventures of JBS. With the acquisition of Swift and Company in 2007, JBS began a fast rising global business. The new acquisition gave JBS the opportunity of entering into the pork market with the feature of an impressive performance to make it the third largest processor and producer in the United States of this type of meat. The company’s portfolio expanded to include the worldwide use rights of the Swift brand. In 2008, Smithfield Foods’, a beef business was also acquired and renamed JBS Packerland.

Earlier on, as the global financial crisis hit the sector, many of the main companies exited giving JBS the opportunity of buying some of the plants and in 1999, as the market stabilized; the company put all its focus on its operations in the foreign markets, greatly strengthening its internationalization. Furthermore, as the consumer market expanded, the operations of the company also expanded due to the attractive market providing high margin gains. However, as per the company analysis, the market now has the tendency of decreasing due to the more difficult task of selling to consumers who are more responsible and conscious, seeking for green products and only buying products from companies offering products according to the animal health standards.

There were reports in August 2010 that it was the consideration by JBS to sell some of the eight slaughterhouses in Argentina that it owned due to the export restrictions and scarcity of livestock. By 2011, JBS tried to bid for control of a meat business, Sara Lee Corporation, though it still struggled ending up unsuccessful. Having the takeover of Sara Lee, JBS would have consolidated its power as a global integrated producer of meat to rival its competitors. In 2015, JBS paid US $1.5 billion for Moy Park, a poultry company in Northern Ireland and recently filed with the Securities and Exchange Commission (SEC) in New York for documents outlining its plans of effectively moving its parent company to Ireland (Lewis 2016).

2.0 Internationalization Strategies

As a company, JBS has gone through an internationalization process like other companies. For most of the beef industry companies in Brazil, there is poor consolidation or tendency of being family oriented with reservations for local consumption (The Economist 2009). However, JBS went outside the box with a shopping spree of companies. Its main success factor has been its understanding of the goal it has and its mentality of expansion.

When using internationalization strategies, the multinational companies need to have an understanding that they are more than just a business sector since they also engage in the political factor (Fosgren 2008). The company needs to have a perfect and clear understanding of the environment and legitimacy has to be established for each subsidiary. This entails the society’s perception of the company as successful, respectful and honest.  Hymer (1976) noted that it is significant to have an understanding of the border differences meaning different cultural values and legal systems that should be adapted to by the companies.  In 2008, JBS had a case where 100 Muslim workers were fired and complained that they were not granted a break by the company for the Ramadan prayer hours causing a lawsuit against JBS (Candela, 2007). Therefore, it becomes important to understand the values and norms of others and ensure they are respected and followed so that legitimacy can be maintained.

2.1 Identification of Current Internationalization Pattern

In 2010, JBS posted an increase of almost 60% in year-over-year revenues, partly driven by its business acquisitions, ranking it as the third largest company in Brazil by revenue. JBS, under Joesley Batista undertook an aggressive strategy of international expansion leading to acquisitions and alliances in Australia, Argentina, the US and Europe. By late 2010, JBS got into a joint venture of 50/50 with Jack Link’s Beef Jerky, a top maker of US meat snack brand. Simultaneously, Jack Link’s made a purchase of a beef jerky manufacturing plant  from JBS with an agreement made to supply raw meat for processing, packaging and distribution to Jack Link’s.

There have been significant acquisitions also made by JBS like the taking over of Swift in 2005 and Pilgrim’s Pride in 2009. In 2007, JBS purchased Swift in the US in order to establish its operations in other regions of the world allowing the company to have more effective dealings with the currency fluctuations and have better management of sanitary restrictions and other barriers of trade (Bell & Ross, 2008). It also purchased 50% of one of the largest beef products producers in the European market, Inalca, an absolute leader in the beef industry of Italy. This led to operations expanding to Europe, Africa and Russia. This was a representation of a strategic alliance costing 225 million euros, creating important synergies between the selling channels and products. It also led to the introduction of products by JBS to key markets throughout Western Europe and brought Inalca-JBS into close contact with the main beef suppliers of the world. This was an important initial step represented by the acquisition for the future growth of JBS in the market of Europe (JBS 2008).

2.2 Theories of Internationalization

The internationalization process of JBS clearly shows that it follows the establishment chain of the Uppsala model (Johanson & Vanhle 1977) where it first did exportation through agents in Brazil to a point where it could acquire 21 plants in Brazil and five plants in Argentina meaning a capacity of slaughter of around 22,000 head of cattle compared to 1970 with 500 cattle (Torres 2011). This is then followed by setting up of sales subsidiaries along the facilities of production internationally.

With economic theories explaining the process of internationalization through the aggregation level of macroeconomics, firms and industries, the theories of international operations give explanations of the variety of plants located internationally. Porter (1986) noted that the internationalization process has been studied from the competitiveness perspective. The internationalization decisions made by companies like JBS can be driven by a variety of motives especially on internalization of the production activities in terms of market transactions and ownership. JBS has proven to use indirect exporting methods. In this method, a company does not have an international activity by itself, operating through intermediaries in the foreign market for physical distribution of services and goods. JBS utilized the sequential theory in its internationalization strategy.

2.2.1 Sequential Theory (Uppsala Model)

The Uppsala model is a theory explaining how companies intensify gradually in their activities in foreign markets. In this model, the company is able to gain experience from the domestic market before moving into the foreign markets. They also start foreign operations from geographically or culturally close countries and gradually move to more distant ones. The Uppsala model is based on sequential theory. It was developed by Swedish researchers Johanson and Vahlne (1977) and Johanson and Wiedersheim-Paul (1975) as a more independent model of explaining the sequential steps in the direction of increasing foreign dedication. The Uppsala Model of Internationalization distinguishes various steps of getting into an international market that cannot be independently viewed by the situation of the company, the market knowledge and the market itself. The model involves four steps (Hollensen 2007);

Step 1: Sporadic export (export activities are irregular)

Step 2: Export mode (export through independent representation)

Step 3: Establishing a foreign sales subsidiary

Step 4: Foreign manufacturing/ production

The proposition of the model is that foreign sales start with export orders occasionally given and followed by regular exports. Through the observation of the Swedish researchers, it is indicated that companies usually begin their expansion in a psychic nearby market. Through this, there is enhanced knowledge of the market and more resource control where gradually, more experience is gained and better resources acquired for expansion to the more distant markets.  JBS began by acquiring the Argentinian company Swift Amour in 2006, internationalizing through the acquisition. With a mutual border being shared and being the second largest processing region of land mass in Latin America, Argentina became the most appealing market.

In the subsequent years that followed, it acquired Swift in the US to make it the third largest beef processor in the US after Tyson Foods and Cargill Meat solutions, with holdings in Europe, Australia and the US in addition to Argentina and Brazil. JBS also acquired Tasman Group, an Australian Company in 2008 to consolidate its leadership in the meat industry of the world. Through the acquisitions, JBS represented the investment plan for constructing a sustainable platform for production, slaughter, and commercialization of meat in Australia and US. The model’s core explanation is that market knowledge increase leads to an increase in market commitment.

2.3 Assessment of the Current Internationalization Strategies

Through its international acquisitions, JBS has purchased various other companies and gained consumers in the foreign markets. This illustrates a form of internationalization that creates competitive advantage for the company. JBS also used the Foreign Direct Investment (FDI) where a company physically invests in other countries. Through this method, it was able to gain the greater control level over its information and technology propriety.

The production structure of JBS is embedded in the worldwide consumer markets with the installation of plants in the four leading beef producing nations in the world; Brazil, the United States, Argentina and Australia, to serve 110 countries through exportation. An announcement on September 16, 2009 by JBS indicated that it had made another acquisition of one of three market leaders in Brazil, Grupo Bertin, consolidating its world position as the largest producer of beef. The transaction was assisted by the banks Santander Brasil and JP Morgan Chase. 64% of Pilgrim’s Pride was also acquired on the same day for a US $800 million bid, establishing the position of JBS in the industry of chicken production. However, JBS currently owns 75.3% of the company.

2.3.1 Joint venture

De Propris (2009) noted that a company can utilize various ways to FDI through the acquisition of an existing company, merging and establishing a foreign operation or creating equity joint ventures. JBS chose the use of joint ventures by creating a new identity where both the initiating partners actively take roles in making decisions and formulating strategies.  The joint ventures make companies gain economics of scope and scale in value by adding activities globally. The company is able to secure access to the technology of its partner and accumulated the learning process effectively used for future competition in the industry.

With the JBS, the internationalization process was generally natural as it was a joint venture with the meat processor Bertin. The realization of the company was that the exchange rate was the main factor associated with the price of sale of beef internationally. For instance, while a kilo of steak in Brazil is sold by US $20, the foreign market sales reach US $20, making the international sales more profitable than in the market domestically. The exports by JBS almost entirely go to Russia in its industrialized production. The joint venture formed between JBS and Bertin was a partnership to enable control of all the operations of Bertin by JBS. The two companies gained and strengthened their market position in the world. The international joint venture that was established as a partnership sought synergies between the companies and explored the best skills of each entity and thus created more competitiveness in the external market.

3.1 Recommended Future strategic direction

3.1.1 Proposed Strategy

Based on the analysis and engagement of models, JBS can utilize a proposed internationalization strategy that would be most relevant to attain competitive advantage. By focusing on mergers and acquisitions of competitors that are less efficient and on the global markets, the best strategy would be that of global consolidation.

3.1.2 Porter Generic Strategy

Porter (1985) proposed the Generic Strategy which can be utilized by JBS. The relative position of a company within its industry determines whether the profitability of the company is below or above the average of the industry. When the average profitability in the long term is above average, then it gains sustainable competitive advantage two basic types of competitive advantage can be possessed by a company; differentiation or low cost. These two, in combination with the activity scope for which the company seeks to achieve, leads to three generic strategies in the achievement  of above average performance in the industry; differentiation, cost leadership and focus.

The cost leadership strategy can also be utilized to set out to become a low cost producer in the industry. Depending on the industry structure, the low cost production can find and exploit sources of cost advantage. The focus strategy can also be used by selecting segments of cost advantage to exploit the differences in cost behavior.  Using the differentiation strategy, JBS can seek to be unique in the meat industry along dimensions that buyers widely value by selecting the attributes of many buyers. This will be efficiently done through the generic strategy of global consolidation. In this way, the domestic markets would be large and fast growing. This strategy will enable excellence in production and design to meet the needs of consumers for the company.

3.1.3 Ghemawat’s Strategic Choices

Ghemawat’s AAA framework will be adequately used by JBS to gain competitive advantage. The framework gives three generic approaches of value creation globally; adaptation, aggregation and arbitrage.  Adaptation seeks to increase the market share and revenues in tailoring the components of the business model for the company suiting the preferences and requirements of the locals. Arbitrage exploits economic differences between the markets by locating various parts of the supply chain while aggregation focuses on the achievement of economies of scope and scale through the creation of efficiencies by typically involving the standardization of a significant portion of value grouping and proposition. JBS can utilize focus to reduce the need of adapting, innovation to improve on the existing adaptation, design to reduce the cost of adaptation and externalization to reduce the burden of adaptation. Using the vertical focus strategy, JBS will limit its direct involvement to specific supply chain steps while outsourcing others. It will be able to sell its products globally from different countries and earn from the price differences. While globally expanding, JBS can have an emergence of a new scale from the offered acquisitions offering competitive advantage but only if the individual resources and operations work in coordination with each other. This will be a form of aggregation.

 

 

 

 

Bibliography

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