Political Strategy Case - Heinz in Zimbabwe - Essay Example

Political Strategy Case: Heinz in Zimbabwe INTRODUCTION: The aim of this essay is to clearly mark out political and non political strategies that are necessary for foreign companies to succeed well in unfamiliar markets. The case kept in mind during the construction of this essay is of the divestment of Heinz from the Zimbabwe based company Olivine Holdings. Heinz is a US-based food conglomerate, it has been a familiar name associated with quality food products world wide. COMPANY BACKGROUND: The company was founded in the year 1869 in Pennsylvania by Henry John Heinz it began to manufacture and deliver condiments to the local grocers. The initial products that the company manufactured and sold were pickles, tomato ketchups and horseradish. The company was initially known under the name Anchor Pickles and Vinegar works while it was run by Heinz and his partner L.C Noble. When E.J Noble became a joint owner in the company in 1872, the name was changed to Heinz, Noble and Company and the company was relocated to a place near Pittsburgh. In the year 1875 the company was met by a devastating blow. Heinz was forced to bankruptcy and with the help of his brother and cousin he restarted this business, the new company then was F & J Heinz until Henry bought over maximum shares and gave it the name Heinz. Since then the company has grown vastly and expanded into an international business. Heinz has factories situated all over the world that produce more that 100 products. Not just that but Heinz is also considered to be the major share holder in various other food companies all over the world. Until quite recently it was also known to be the co-owner of the Zimbabwe based company called Olivine Holdings. It ran this company under a management contract. (Alberts, Robert C.) HEINZ AND ZIMBABWE: MUTUAL BENEFITS: Why Heinz entered Zimbabwe & why Zimbabwe accepted the investment. Zimbabwe is known to have achieved its independence in April 1980. The investment of a multinational company in would have been very helpful as the growing country would be able to make good use of the foreign exchange as well as the technological skills that a multinational company would bring with it. There fore when Heinz proposed investment the Government of Mugabe which was socialist in nature finally saw that they had attracted a multinational company and welcomed its investment with open arms. When it came to seeing how Heinz would benefit from this merger the answer was simple that Zimbabwe would provide the Multinational Company with the shining opportunity to build and extend markets for its products and as the country has great agricultural potential there fore it is an ideal country for new sources of supply and raw material. It could also boost the mushrooming of Heinz European Subsidiaries. Heinz however was able to see greater benefits from this investment as just to get the company to come into Zimbabwe and invest the country had to make concessions that increased the cost of living for the poor people in the country. The country had to make these concessions as Heinz had given them the ultimatum that the country would either increase the price on cooking oil or Heinz would not invest. The concession making decision was one which required some very serious political thinking as it was to affect the lower earning groups in the country very much however they made the concessions and the agreement was signed. The document that was signed was a six page document in which they were provisions which stated that any foreign investing firm or investor would not have the ability to take over locally-owned firms. This provision was added by the Zimbabwe government to ensure the protection of the country’s local markets and the lower earning class. The over all aim of this provision was to ensure that the economic sector of the country would in no way suffer from this nouvelle investment plan. Yet the Heinz investment was termed to be in Zimbabwe’s best interests and it was aimed at increasing the export earning of the country. The investment would also provide them with American expertise and high technology, local staff training and extend its manufacturing industry. This would cause an over all advancement in the country’s economic status and improve quality of life. THE POLITICAL SERIES OF EVENTS: What lead to the divestment: The Zimbabwe market was unfamiliar territory for Heinz mainly due to its lack of control over the supporting locally owned firms and the low economic status of Zimbabwe as a whole. The company started to suffer severe loss and also lost billions of potential value. The products offered by Heinz are such that can be considered as luxury items and there fore their cost for manufacturing and ultimately making its sale price high as well. The fact the company is based in America an economically stable country make the fact that they enjoy strong sales understandable however in the economically weak Zimbabwe the case was much to the contrary. In addition to the company facing loss in the sales, the government began to play its own tricks and imposed a crack down on the manufacturers of basic foods that compelled oil processors to bring edible pre-packed oil production to a standing halt which in turn created shortages in the commodity and thus disabled Heinz from also producing in the magnitude that it had always been. The inability to produce goods caused a great loss in terms of other already purchased raw materials. And this chain of loss due to frequent government crack downs continued as did the loss of the company. Simultaneously various price cuts were imposed by the government in July and those were made on the basis of the government taking over majority of the manufacturing companies and lowers their sale prices, this in turn caused the over all competition for rule over the market to increase. The increase in competition caused Heinz no choice but to reduce its sale prices as well which again caused a large degree of loss to the company. As the company was spending more on buying raw material for production of its high level products and was earning less on its sales. The result was Heinz having to put a halt to its cooking oil production in Zimbabwe altogether. Heinz’s reputation also received a major blow which affected its popularity in the market when Harare accused the company of halting the oil production because it had be stopped by the U.S government from purchasing raw material from farms that belonged to the Zimbabwean Government. Olivine being taken over meant that it would be the first company that the government would have taken over since it said it would take over companies which had stopped production when the government had imposed the price freeze. In addition the government fought back as the provision signed during the investment deals that stated the inability of foreign investors to take over locally owned firms was breached twice, as it was stated that absolute amount of participation in locally owned firms should not be diluted and neither should the domestic control of holding equity be given up to foreign investors by sales to foreign interests. The Mugabe government could have however shown that these provisions were just general rules and hence breaching them was not unethical. This being the first investment with foreign companies which occurred in Mugabe’s time made a dent in his future credibility and also damaged the future of Heinz and Zimbabwe business aspects. When both these provisions were seen being breached in the case of Heinz for their benefit the government launched its attack. The attack was in the form of putting stops to various forms of productions that were used in great extent by Heinz for their productions and also in increasing the competition by lowering the price of locally produced goods. Both attacks had massive impacts on Heinz and the company’s over all financial earnings. In their annual report they wrote of losses of approximately 111 USD and started planning to explore strategic options to exit the business. FUTURE BUSINESS IN ZIMBABWE: The fact that Heinz was the first ever foreign investment of its kind in Zimbabwe, there fore the investment bill that was signed by both held great importance. The provision stated earlier that had been specifically marked out had their own degree of importance in what the Zimbabwe government and ultimately what the Zimbabwean people hoped to achieve from this investment. The major issue which arose was when those provisions were seen being breached by not only the ‘in power’ government but also by Heinz. The breach in the investment contract caused severe damage to the credibility and trust towards Heinz. The fact as to whether Heinz would ever play by the rules and keep things legal in any business agreements is continuously in question. There fore the future of any business being prosperous between Heinz and Zimbabwe seems to be very bleak due to that point only. THE BUYER: BETTER SALES TERMS POSSIBLE: When the company finally gave in and sold its stake holdings of the company it again might have been on the receiving end of great losses. The company sold out its total share for a grand total of 6.8 million. That seen in comparison with the 111 million USD that the company had invested shows the great amount of financial loss that te company has had to suffer, the question then arises whether there was any way that the company could have gotten better terms from the buyer or not. The buying company Cottco was only interested in Olivine for the sake of the synergies that were available from its oil production. And then the government which was another interested buyer was also interested in what and how the company manufactured rather than the Heinz brand label. The sale deal was brokered by the government controlled industrial development (IDC). And the terms offered were the above mentioned price and the fact that Olivine industries would include to sell some of the Heinz product line for a temporary period under the Heinz brand name after they had taken over and made up a percentage of their spending. This could also be very damaging for Heinz as Olivine may not produce any products that are upto the original standard of Heinz and market them under the Heinz brand name thus damaging their image in the world wide market place. These terms had been all accepted by Heinz in a hurried manner due to Heinz’s urgency to remove itself from this business and such terms which required careful thinking over may not have been seen in depth. THE DIVESTMENT COULD HAVE BEEN AVIODED: The question as to whether or not this divestment and loss of such financial extent could have been avoided all together is often the starting point of many debates. Some houses say that this was inevitable as the company was entering a fresh market as well as non market environment and was unaware of the potentialities there fore it was a loose-loose situation from the very beginning. While other points state that no doubt they had entered un familiar markets they still had the ability to make circumstance go in their favour had they kept the provisions stated in the investment bill in mind at all times of dealing and manufacturing. Heinz being the trend setter for foreign investments in Zimbabwe had the ability to mould the country and its economic status to benefit both the country and the company, and it could have achieved that by putting in the extra time and effort in studying the market environment and analysing the non-market environment. It could have also taken in and trained local labour to get a solid idea of the public view and needs and thus produce in accordance. Further more, the fact that Zimbabwe was taking in an investment like this for the first time Heinz should have seen the fragile nature of the investment bill and acted in every way possible to stick to their word by upholding those provisions. The evident factor here seems that Heinz did not deal with this investment with a long term business relationship in mind rather they entered this investment with the ‘gain quick and get out’ notion. Had they focused their attention towards building a trustworthy and string long term relationship with Zimbabwe the company would not have suffered such extreme losses. LESSONS TO BE LEARNT: The above example could be an excellent learning experience not only for Heinz but for the entire clan of foreign investment countries and individual investors. Things that can be learnt from this example are firstly, when entering an investment it would be wise to check the history of the specific country of company’s investments, investors and outcomes. If there is no history then it would be wise to plan out specific terms and points of investment in accordance with the economic status of the country. Secondly, when investing in un-familiar markets it would be wise to first carefully study the market and non market environments in which that company or country functions. Terms and provisions that are marked out or highlighted in the investment bill should be taken special care of and upholding them should be the number one priority when doing any type of business dealing. Lastly, the political aspects and the political status as well as political hold should be carefully studied in order to be fully aware of the type of impact they can have on business. The above mentioned lessons and points can be applied to any and all of Heinz’s subsidiaries which are out side the united states and have un-familiar markets and policies. REFERENCES: http://allafrica.com/stories/200709130651.html C:\Documents and Settings\Administrator\Desktop\Maravi (HERALD) Govt takes over Olivine.htm http://www.encyclopedia.com/doc/1E1-olivine.html Alberts, Robert C., The Good Provider: H.J. Heinz and His 57 Varieties, Boston: Houghton Mifflin, 1973. Read More