Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.
Introduction
This project reports on the need of to introduce and market its detergent products in Brazil, the Northeastern region. Unilever is a multinational corporation (MNC) located in European Union (EU). It is an Anglo-Dutch company, which has two headquarters in London and Rotterdam in the United Kingdom Netherlands respectively. This company product falls into three broad categories. They include Unilever cleaning agents, beverages, and personal care products. In 2011, Unilever was rated as the world’s largest ice cream producer and third largest world consumer.
Unilever Company controls 81% of detergent market shares in Brazil. In this market, detergents products are presented in three brands. They include Campeiro, Omo, and Minerva. Unfortunately, this dominance does not extend to the North East region. This scenario is associated with poverty, which is high in this region compared with other regions. Selling of detergents in the North East region of Brazil by Unilever remains a challenge, calling for the adoption of an international business method that will help capture the North East market.
Selling the detergent product in the North East region, the identified MNC should use the product line extension method. This is the method in which a company uses an already established product brand name to introduce a new item of a similar product. Considering the two brands of detergents introduced in the Brazilian market (Omo, and Minerva), Unilever can make an extension of these products. Extending the Minerva product will help the company increase visibility and maintain the original Omo quality. An extension is better than repositioning top products, which is likely to lead to a company losing its loyal customers. Extension becomes helpful where more than one brand of products is available in the market. In addition, extension is known to favor a product that has good market penetration.
Assessing Country Factors that will affect the Demand for the Product
A country’s internal and external factors are vital in determining the demand for a product. There is a range of factors, which range from an individual to the government determining a product demand. This paper reports on Brazil’s government factors that affect the demand for Unilever detergents products in the North East region.
As explained earlier, Brazil’s North East region is a low-income region. This implies that the purchasing power in this region is weak (Reddy 45). The government is forced to encourage both foreigners and local investors to penetrate this region. In addition, most domestic industries in Brazil continue to rely on imports making it hard for the government to develop trade restrictions that would scare foreign traders.
To support the domestic industries, import duties have been reduced by an average of 50%. Reduction of import duties is encouraging to an MNC because it helps to produce goods at low costs. Cost-effective production is essential for Unilever as it prepares to introduce its new product in North East Brazil, a region of low income.
The Brazilian government also provides tax incentives in the North East region to increase purchasing power. Removal of tax incentives in Brazil North East region would heavily impact the locals than investors because most of the occupants in this region are low-income earners.
Assessment of government trade barriers in North East Brazil indicates that the barriers will not hinder Unilever from introducing its’ new detergent product. North East region requires the government to remove or lessen trade restrictions to boost the economy of this region. Therefore, the MNC has favor with the Brazil government trade barriers, making it easier to introduce its’ new product in North East Brazil.
Using the Foreign Exchange Market
Brazil has adopted the freely floating exchange system. In this system, exchange rates are determined by market activities. However, governments can influence the exchange rates through monetary and fiscal policies. Understanding currency exchange rate is vital for an MNC to understand a country’s competitive level. In Brazil, the currency used is known as the Brazil real (abbreviated as R$). By April 13, 2013, the U.S. dollar to Brazilian real exchange rate stands at 1.992. This was an improvement from the previous day, which stood at 2.018 (-1.26%). In addition, this exchange rate had also increased from 1.830 (8.90%) a year ago.
A table showing U.S. dollar to Brazilian Real, Historic data from March 4 to April 5, 2013.
From the above table, it is a clear indication that the U.S. dollar and Brazilian real exchange rate have been appreciating in recent days.
By April 12, the Brazilian exchange rate was reported to be performing well in the top trading partners. See the table below:
A table showing the exchange rate of Brazilian real in top ten trading partners by 12 April 2013.
From the above table, the Euro is the most competitive foreign currency in the international market. Fortunately, Unilever MNC uses the Euro as its main foreign currency. Its reports and assets are presented and calculated in Euros. In this case, Unilever has an advantage over other competitors that have a different main foreign currency. However, this advantage cannot be expected to last in the long- run. This is because Brazil’s exchange rates are designed on free-floating exchange rate systems, which change day by day, depending on the market and other government regulations. This risk can also be minimized by making borrowing in local currencies of their trading partners.
Using Exchange Market Derivatives
Unilever as an MNC is exposed to risks of the changing foreign currency values. Changes in foreign currency values affect a company’s earnings. To protect an MNC from this risk, hedging is essential. Unfortunately, Hedging is not that feasible to prevent foreign exchange fluctuations risk. In addition, for Unilever, it is believed that the Euro currency can equalize with other foreign currencies in time. With this in mind, the company operates on prescribed limits when trading on financial foreign exchange.
Hedging against payables is the best option for Unilever. In a money market, hedges on payables are less expensive when the interest rate in a foreign country is high (Madura 37). In Brazil, the interest rate of the Euro (main Unilever foreign currency) is higher than both the Brazilian real and the U.S. dollar. In addition, the Euro is the most competitive in the world’s top 10 trading partners. This implies that the Euro has a higher interest rate in most markets in the world including the United States and Brazil markets.
Using the futures and options, it is revealed that the euro stands in the best position of hedging against receivables. The Euro and U.S. dollar stands to be the best and most valued future options globally. For instance, the current futures and options of the Euro and U.S. dollar indicate that the foreign interest rate is expected to remain high. The future options indicate that by June 2013, the EUR/USD future options will open at 1.3120 and the highest and low rates being 1.3132 and 1.3064 respectively. By September 2014, this rate’s prior settlement is expected to be at 1.3169 (Chicago Mercantile Exchange Group (CME) 1). Customers associate the EUR/USD futures and options with numerous benefits. These futures and options are known to have deep liquidity, easy to access around the world, demonstrate transparency and integrity in their prices, and risk is catered for in clearing.
The future and options value of the Euro reveal that the interests of this currency are increasing and changing with time. This is a benefit to Unilever, which can hedge against its receivables in a prescribed time, with the hope of an interest rate increase in the future. This will help the company increase or maintain its profits in Brazil North East region market. The futures and options on Euro currency show that the foreign exchange interests are constantly going up than the previous days. For example, by July 2014, the EUR/USD foreign interest rate will change by -0.0002. This implies that the rate would be up by -0.02% than the previous days.
In this case, Unilever has an opportunity to hedge against payables, rather than receivables. The U.S. dollar and Brazilian futures and options indicate that the U.S. dollar is competitive in the Brazilian market. The Euro is more competitive than the U.S. dollar, showing the need for Unilever to hedge against payables. This kind of hedging can be strengthened by the company making borrowings in the Brazil local currency. In addition, Brazil has a reliable floating exchange rate system.
The hedging process by Unilever is not a guarantee to avoid the foreign transaction exposure risks. This company can adopt other strategies that can supplement hedging to prevent the exposure of foreign exchange risks. The company can develop a well-integrated information system to help it evaluate the market needs. Improvement of the sales promotion strategies can help the company increase its profitability, rather than relying on foreign exchange rates. In addition, the company can utilize the opportunities provided by the foreign government to introduce and benefit from its new product. For instance, the Brazilian government encourages investors in Brazil North East region by reducing restrictions, which can help compensate for the foreign exchange risks.
Summary and Conclusions
The product line extension method is a suitable strategy for Unilever MNC to use in introducing its detergents product in Brazil North East region. The Company already exists in the Brazilian territory but is not well developed in the country’s North-East region. Coupled with the government’s need to develop the North-East region, Unilever has to introduce and expand its product in this region. The North East, a region occupied by low-income earners, requires the government’s motivation to increase investors’ activity. This explains why the Brazilian government trade barriers are reduced. This factor is vital for the operation of an MNC in introducing a new product. Favorable trade barriers in Brazil help an MNC operate at lower costs. This in turn leads to a distribution of goods affordable to people of low income.
Exposure to foreign exchange transactions risks is not that huge for Unilever. Unilever’s main currency is the euro. In this report, the Euro is revealed to be a more competitive currency in the foreign market. It has a higher interest rate than the U.S. dollar and the Brazilian Real. Futures and options indicate the probability of the Euro to remain competitive in foreign exchange rates. This attribute puts Unilever at the forefront to hedge against the payables and continue enjoying the foreign exchange profits. However, to effectively control the risk of foreign transactions exposure, Unilever should use hedging and other strategies like information systems integration and proper use of sales promotions.
It is concluded that MNC’s needs to select a suitable method of introducing a product in the market. This should be followed by the assessment of that particular foreign country’s factors to see the viability of the identified method. The international method used should put into consideration the already existing efforts by that particular company. Finally, the MNC should understand the risk of foreign exchange transactions and decide on ways to protect itself from the risk.
Works Cited
Chicago Mercantile Exchange Group (CME). CME: How the World Advances, 2013. Web.
Madura, Jeff. International Financial Management. 11th ed. Stamford: Cengage Learning, 2011. Print.
Reddy, Prasada. Global Innovation in Emerging Economies. London: Routledge, 2010. Print.
Do you need this or any other assignment done for you from scratch?
We have qualified writers to help you.
We assure you a quality paper that is 100% free from plagiarism and AI.
You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)
NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.
NB: All your data is kept safe from the public.