Vanderbilt helps LP break through in Brazil
Researchers and students work with LP to retool the company’s strategy in a key South American market
For Victor and Edward Fischer, who directs the Center for Latin American Studies, LP’s Brazil challenge offered a unique opportunity to work closely with a hometown company on an element of its global strategy, while giving MBA students at a partner school the chance to gain real-world learning experience. The pair co-authored a case study based on the problems LP faced in Brazil and presented it to a class of Executive MBA students at FIA in São Paulo.
When building-products maker LP Corp. purchased a production facility in Ponta Grossa, Brazil more than two years ago, it did so hoping to replicate the kind of success it was experiencing in neighboring Chile.
For nearly a decade, LP had been working to introduce its plywood-like oriented strand board (OSB) into the Chilean market, no easy task since houses there have traditionally been built with brick. Nevertheless, the country was developing rapidly and Chile’s pro-business government was eager to assist foreign companies coming in creating local jobs, and in LP’s case, introducing innovative new building methods and materials.
All told, Nashville-based LP has seen its revenue attributable to Latin America grow from around $3 million a decade ago to more than $150 million in 2010, with a significant amount coming from Chile. Currently that figure represents more than a 10 percent slice of the company’s annual $1.3 billion in annual revenue.
As those gains accumulated, company CEO Rick Frost turned his gaze to Brazil, a country 10 times larger than Chile, whose youthful population is expected to spark demand for as many as 14 million new homes over the next decade. That works out to a rate of about 1.4 million new houses getting built every year, a figure on pace with the U.S. market, Frost says. “The beauty of Brazil is that we don’t have to hit a homerun – just a single or even a bunt – and we’d fill the capacity of that new mill.”
So with its Chilean playbook and new Brazilian factory in hand, the company worked for a year to understand the market and prepare alternative strategies in a country whose land mass rivals China and has some of the most populous cities in the world. But it didn’t seem appropriate simply to copy what had worked in Chile. “To think that we could take what we learned in Chile and just transfer it to Brazil would be very naïve,” Frost says. “For starters, we ran up against the sheer size difference in the two countries. Chile is much smaller, so it was easier to get things done there.” Brazil also has what Frost calls an “impermeable bureaucratic wall” that made it hard for a foreign company – even one that had acquired a local production facility – to work its way into the construction industry like LP had done in Chile.
Around the time that Frost started to realize that LP wouldn’t be able to simply copy its Chilean strategy and apply it to Brazil, he happened to mention the company's Brazil conundrum during a CEO luncheon on doing business in Latin America, co-hosted by Vanderbilt Owen Graduate School of Management's Executive Programs and the University's Center for Latin American Studies. The two groups quickly tapped Bart Victor, a professor at the Vanderbilt Owen Graduate School of Management who studies developing markets, as well as faculty at FIA Business School, a private offshoot of the University of São Paulo, with which Vanderbilt has maintained ties for over 50 years.
“We made it very clear to LP that we weren’t acting as consultants who would come up with a set of precise strategy recommendations,” Victor says. “We wanted to teach them – and the students – how to answer or think about the problem themselves. That’s what we do in academics.”
Victor says the key question involved thinking through what elements of LP’s Chile strategy don’t apply in Brazil.
“If they could answer that question, they could really start to build a stronger Brazil strategy,” he says. “Let’s think about this in a careful, thorough way. Let’s test the assumptions and unpack the logic. And yes, it mattered that we had this conversation with executive MBA students in Brazil because they know how business gets done there.”
Broken into six teams, the 40 Brazilian students studied the LP case for several weeks before returning to a daylong session with LP executives and course instructors to discuss their findings. While the students came up with some non-starters – like a suggestion to spend millions on local advertising – much of the advice coalesced around the idea that LP not try to do too much too quickly. “They said we needed to slow down, that we needed to find ways to create market acceptance,” Frost says.
The students helped LP realize that where Chile had sought foreign investment in the country, Brazil tended to be more protective, not just of its markets, but also of its workers. Frost says those insights prompted the company, for starters, to team up with steel workers to show how its products could help save on their material costs. LP also began working more closely with the Brazilian government to help deliver on a need for subsidized housing. Frost says the country has called for 4.5 million homes to get built over three years. LP’s involvement with builders engaged in that effort allows those in the construction industry to experience the company’s products, encouraging local governments to adopt LP materials into their building codes, leading to wider acceptance in upper and middle tier markets.
“I don’t know if the class gave us a panacea solution, but it certainly gave us enough to know that what we were doing wouldn’t work,” Frost says. “It’s also nice to know that we have this kind of expertise in our backyard at Vanderbilt.”
Working through Vanderbilt’s Executive Development Institute on the Brazil project, Frost says there are no formal arrangements in place for more programs, but would welcome similar opportunities.
Says Frost, “You know, I’ve been thinking a lot about Argentina and Colombia…”
Copyright 2011 Vanderbilt Owen Graduate School of Management