Global
Edge
Consultants
Global Human Resource Management:
Forest Laboratories in Mexico
Tara Camp
Amy Marks
Kenneth Willis
AMBA606, Section 9011
Professor Jane Ross
August 6, 2006
Table of Contents
Executive Summary ...................................................................................................................... 3
Introduction ................................................................................................................................... 4
Global Human Resource Management ....................................................................................... 4
Staffing Approach ....................................................................................................................... 4
Training and Management Development.................................................................................... 5
Performance Appraisals .............................................................................................................. 5
Compensation ............................................................................................................................. 6
International Labor Relations ..................................................................................................... 7
Sustainable Business Issues .......................................................................................................... 7
Economic Sustainability ............................................................................................................. 7
Environmental Sustainability ...................................................................................................... 8
Social Sustainability.................................................................................................................... 9
Business Risks & Opportunities ................................................................................................ 10
Opportunities............................................................................................................................. 10
Risks.......................................................................................................................................... 11
Previously Founded Issues for Mexico ...................................................................................... 13
Recommended Mode of Market Entry ..................................................................................... 14
Conclusion ................................................................................................................................... 14
References .................................................................................................................................... 16
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Executive Summary

Global Human Resource Management

A geocentric staffing approach would most benefit Forest in Mexico.

Cultural, language, and practical training for expatriate managers will reduce the chance
of failure.

Feedback from both the host country and the home office should be equally weighed in
performance appraisals.

The Balance Sheet method should be utilized when determining an expatriate’s
compensation package.

Mexican trade unions are highly visible. Forest will need to approach this with great
intelligence.


Sustainable Business Issues

NAFTA implemented tariff relief will help Forest’s economic stability.

Sustainability reports will help Forest benchmark off other pharmaceutical companies.

Forest should expand their existing code of conduct to the Mexican community.
Business Risk and Opportunities

Strength of the market, geographic location, strength of the economy, and its leadership
position in pharmaceuticals in Latin America enhance Forest’s opportunity in Mexico.

Risk factors that must be considered by Forest are political, social, economic,
environmental, and infrastructure.

Recommend Mode of Entry

Global Edge Consultants found that a joint venture would be most suitable method for
Forest to enter Mexico
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Introduction
When expanding into Mexico, Forest must take many factors into account with respect to
Lexapro and method of entry. Human resource management is one of the most important
considerations. Employees are the key to any successful business and managing this commodity
will prove beneficial to Forest. The board of directors must consider issues of compensation,
performance evaluation, cultural issues and labor relations in Mexico prior to expansion.
There are several key competencies that Forest must consider in terms of sustainability.
They are issues of economic, social, or environmental sustainability (Dow Jones, 2006). As Hall
and Vredenburg (2003) assert, proper handling of social and environmental issues, in addition to
economic issues, have become increasingly critical to success. The board of directors of Forest
must examine each of these components in relation to Mexico in order to determine the viability
of this market for Lexapro.
Establishing business operations in Mexico also requires an assessment of the
opportunities and risks associated with foreign market expansion. The board of directors and
senior management of Forest must consider these opportunities and risks in relation to the firm’s
business model and strategy. This report includes a summary of important opportunities and
risks for consideration in establishing business operations.
We will also report on key findings from previous reports as related to this issues
outlined. And lastly, this collective knowledge will be used to make a recommendation for
Forest’s most viable mode of entry into the Mexican pharmaceutical market.
Global Human Resource Management
Staffing Approach
Hill (2007) identifies three staffing approaches: ethnocentric, polycentric, and geocentric.
Each was discussed in detail and identified as potential options in the Foreign Trade
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Opportunities paper. The ethnocentric approach could benefit Forest because employing local
citizens would help the organization understand how to be successful in Mexico. The polycentric
approach was identified as a viable possibility if Forest chooses to follow a decentralized
structure. Otherwise, the key roles would be positioned at the corporate headquarters in New
York. The geocentric approach was identified as the most ideal approach, allowing Forest to hire
some Mexican nationals but also focus on the operation of the organization.
Training and Management Development
Once a staffing approach has been determined, it is important to develop a training
program for management. This is especially true if Forest decides to hire employees from outside
Mexico. These individuals may need extensive training to help prepare for an international
experience. Hill (2007) points out that the most common reasons expatriate managers fail is
because either they or their spouse were unable to adjust to the foreign environment. Training
can help expatriates alleviate or avoid this stress.
Expatriates should be trained in the areas of culture, language, and practical (Hill, 2007).
Cultural training focuses on the country’s culture and helps provide useful information for the
expatriate to identify with host-country nationals. Language training will not only improve
communication, but it will also help the expatriate build a rapport with local employees. Practical
training addresses the day-to-day lifestyle and routine to help the expatriate and family to adjust
more quickly. By spending time on this type of training, Forest will ultimately benefit by helping
to prevent failures and help ease the transition for both managers and their families.
Performance Appraisals
“A firm’s performance appraisal systems are an important element of its control system,
which is a central component of organization architecture” (Hill, 2007). Forest needs to establish
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an appraisal process that avoids the unintentional biases that often become a hindrance in this
process for expatriate managers. These issues can be limited if Forest implements a structure that
required both host-country feedback and home-office input. This approach will allow
management to see the perspective of the host-country, allowing them to get a picture without
those biases interfering.
Compensation
Due to the disparity in pay scale between Mexico and the U.S., the question of whether
Forest should equalize pay on a global basis needs to be addressed. As Hill (2007) explains, this
would not be an issue if Forest chose an ethnocentric or polycentric staffing approach; however,
since the best staffing approach for Forest was identified as the geocentric staffing policy,
management must decide whether to standardize pay for expatriate managers regardless of
nationality or pay based on local expectations. It is Global Edge’s suggestion that Forest utilize
the Balance Sheet method for determining expatriate pay. This would be established using the
following breakdown:

Base Salary: Forest should approach this by matching the expatriate’s home salary

Foreign Service Premium: This is used as a form of enticement to receive interest in foreign
positions. Most firms offer between 10 and 30 percent of the expatriate’s base salary. Forest
should expect to offer about 16 percent, which is the average premium.

Allowances: This covers hardship, housing, cost-of-living, and education expenses and is
generally a substantial expense. On average most firms offer 10 to 30 percent of the
expatriate’s total compensation package.

Taxation: If expatriates are required to pay taxes to both the host and home country or if the
tax rate is higher than the home country, it is customary for Forest to pay the difference.
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
Benefits: It is important that Forest ensures that all expatriates receive the same level of
medical benefits that they would expect in their home county.
International Labor Relations
Hill (2007) asserts, “The key issue in international labor relations is the degree to which
organized labor can limit the choices of an international business”. Therefore, Forest must take
into consideration the information discovered on Mexican unions illustrated in the previous
report; since trade unions are highly visible and very politically powerful, often times linked to
the Mexican government. This can be an impediment to Forest if not approached with the utmost
intelligence and precision.
Forest must also consider Mexican federal labor law. Although workforce standards are
similar to those in the U.S., there are some differences to address. The most significant issues to
address are overtime pay, which is typically double or triple hourly wage; and observed holidays,
which fall in line with the federal holidays in Mexico.
Sustainable Business Issues
Economic Sustainability
The economic component is critical for the continued success of any profit-based
organization. In addition to investor relation issues, this includes policies such as compliance,
corporate governance, and crisis management planning – all of which affect a company’s
economic performance. Forest maintains a strong governance policy and has already seen
successful operations in two foreign markets, which bodes well for additional expansion.
We can see in table 1 that net sales and assets of Forest’s subsidiaries in Ireland and the
United Kingdom have experienced consistent growth over the past three years, which indicates
Forest’s economic stability in existing operations. This indicates that Forest has shown economic
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sustainability in foreign ventures thus far; however, the challenge is in sustaining growth in a
Latin market which is considerably different than those Forest has experience in currently.
Table 1. Economic Performance of Subsidiaries
2006
2005
Net sales
Assets
Net sales
Assets
2004
Net sales
Assets
(In thousands)
United States
Ireland
United Kingdom
$2,738,592 $474,451 $2,997,731 $490,248 $2,604,479 $446,499
11,064 118,786
9,905 140,527
7,331 134,658
44,278
10,430
44,772
10,847
38,622
11,068
$2,793,934 $603,667 $3,052,408 $641,622 $2,650,432 $592,225
Source: Forest 2006 Annual Report. http://media.corporate-ir.net/media_files/irol/83/83198/2006AR/Financial-Data_AR06.pdf
Economic sustainability is also enhanced in Mexico by the NAFTA free trade agreement.
The tariff relief and other trade considerations under this agreement minimize the risk to Forest
when entering this market. This, taken together with Forest’s existing strong financial position,
bode well for the company’s economic sustainability in Mexico.
Environmental Sustainability
As we reviewed in week 2, poorly managed environmental issues can have grave
consequences. Sustainable companies have responsible environmental policies in place and
support environmentally friendly legislation. As Gallagher and Zarsky (2004) report,
environmental trends in Mexico are worsening as soil erosion, municipal solid waste, and urban
air pollution all continue to increase. Forest must adopt a strategy to mitigate the risk of adding
to these problems and actively work as a community partner to alleviate them.
Unlike many other pharmaceutical companies in today’s market, Forest does not issue a
sustainability report that addresses environmental issues. For this reason, the Roberts
Environmental Center Pacific Sustainability report on pharmaceuticals for 2006 graded Forest
with a “D”. Forest appears to perform poorly against most other pharmaceutical companies,
several of which have operations in Mexico. In addition, Forest utilizes none of the many
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voluntary guidelines and partnerships like the Global Reporting Initiative or ISO14001
Environmental Management System. The Roberts report specifically states, “The company has
been listed on the Forbes Platinum list for the past 3 years, and was given special recognition for
best management in the Drug and Biotechnology Sector in 2004, so it surprises us that it
provides no environmental information or recognition of environmental issues”
(http://library.corporate-ir.net/library/94/940/94004/items/204480/pharmaceuticals2006.pdf ).
Forest has proven economic sustainability in two foreign markets already; however, to
ensure that the company achieves environmental sustainability in new markets, I would strongly
recommend the issuance of a sustainability report and adherence to voluntary guidelines as
appropriate to reassure stakeholders that the company is operating ethically. It would be wise to
benchmark against what other pharmaceutical companies of a similar size are doing.
Social Sustainability
In addition to economic and environmental considerations, sustainable companies are
those that prove themselves to be good corporate citizens and desirable employers. This includes
meeting criteria such as accessibility, participation, social identity and institutional stability
(Basiago, 1998). Forest has established a history of meeting these criteria in existing ventures,
but the company must now support the development of the Mexican market to be successful.
Through financial support of non-profit organizations and local education and healthcare,
or lobbying for favorable public policies, corporate citizenship is an important component of
sustainability. Similarly, internal human resources initiatives that promote employee
development and work-life balance will help attract a talented and dedicated workforce.
As with environmental sustainability, Forest does not publicize any corporate social
responsibility initiatives you may engage in. Other U.S. chemical firms have partnered with
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Mexican chemical firms to develop responsible codes of conduct and ethics guidelines
(Gallagher & Zarsky, 2004). To promote sustainability, Forest should reach out the Mexican
community by promoting and publicly acting on your existing code of conduct which includes
sections on legal compliance, fair dealings, non-retaliation, and reporting of unethical behavior
(Code of Business Conduct and Ethics, Forest Laboratories Inc.).
Business Risks & Opportunities
Overall, the Mexican market is strong. As of year-end 2005, the Mexican pharmaceutical
market generated $7.4 billion in total revenues with a compound annual growth rate of 7.8
percent for the periods between 2001-2005 and had a 1.4 percent share of the global market
(Datamonitor, 2005, p.8). It is projected that the market will continue to grow, as key industry
determinants indicate that there is room for further expansion, with a forecasted market value of
10.8 billion by the end of 2010 and sustained compound annual growth of 7.7 percent.
Opportunities
A strong pharmaceutical market, ideal geographic location, the fact that it is the ninth
largest economy in the world, and its position as the leading Latin American pharmaceutical
market, all anchor Forest’s ability to establish opportunities in Mexico. These factors will allow
Forest to leverage its firm to realize a number of opportunities in the marketplace.
Forest has the potential to increase revenues and profits by marketing Lexapro to a
significantly wider consumer base afforded through an expanding Mexican pharmaceutical
market. The company will also likely benefit from location economies and develop long-term
sustainable growth in a growing pharmaceutical market. A market analysis of the Mexican
pharmaceutical industry indicates that growth is strong, that government investment in healthcare
10
resources is increasing, and the population is demanding newer and better medical treatments as
life expectancy increases (Kermani, 2006, p. 20).
There is also a potential to realize increased capital inflows and the ability to become
more efficient through the division of labor and specialization. Additionally, Mexico’s
geographic location can be used as a launching point into other Latin American Pharmaceutical
markets that are also emerging, including Brazil and Argentina. Mexico’s location also provides
for an efficient distribution corridor to the United States and Canada.
Lastly, Forest has the ability to choose the most efficient and effective mode of entry, as
Mexico’s regulatory framework is accepting of several modes, including joint ventures,
licensing, and franchising. The company can also increase efficiency through Mexico’s
developed economic and social infrastructure, including well-developed manufacturing and
distribution networks and emerging reforms in education and healthcare.
Risks
Realizing opportunities in the Mexican pharmaceutical must be assessed against the
political, social, economic, environmental, and infrastructure risk factors associated with
expansion by Forest. In addition, these factors must be analyzed in context with the firm’s
appetite for risk versus reward. The risk factors are further exacerbated because the Mexican
pharmaceutical market is complex and presents a number of unique challenges. The following
issues are currently impacting the Mexican pharmaceutical market and may expose Forest to
risks in establishing operations.
Mexico’s current political climate is somewhat unsettled due to the recent presidential
election ending in a technical tie. Felipe Calderon of the conservative National Action Party was
the declared winner; however, Andres Manuel Lopez Obrador of the Party of the Democratic
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Revolution is legally contesting the results. Calderon has promised to maintain the existing free
market, pro-business, pro-foreign investment stance and is considered a friend of the U.S., while
Lopez Obrador represents a fundamental shift in ideology. Lopez Obrador supports greater
government intervention and argues that foreign investment and trade agreements to not benefit
all Mexican residents. These issues have polarized the nation and many are displaying their
frustration by demonstrating in the streets. It is expected that Calderon’s victory will be
reaffirmed in September 5, 2006.
Additionally, the structure of Mexico’s pharmaceutical market is complex and presents a
potential risk. Unlike the U.S. market which classifies drugs as either branded or generic,
Mexican pharmaceuticals fall into one of five classifications: (1) branded patented, (2) branded
generics, (3) interchangeable generics, (4) similarities, and (5) public health sector generics, each
with varying degrees of regulatory oversight. This exposes Forest to potential market and
economic risk, as the value proposition of Lexapro may get lost in the maze of pharmaceutical
products. Sales could be impacted if consumers are unable to perceive the value of Lexapro or
distinguish it from other available products. Positioning Lexapro in the Mexican marketplace
will require a robust promotional campaign. In addition, generics and similarities pose
additional market risk because manufacturers can produce them less expensively without having
to meet the bioequivalence standards of branded pharmaceuticals.
Mexico’s regulatory environment, while significantly reformed, still poses a risk to
operations because it lacks rigorous enforcement and contains ambiguous terminology in many
instances. Also, the country’s intellectual property law has been significantly upgraded to include
stiffer penalties to offenders. In addition, enhancements have been made to protect trade secrets
and to tighten limits on licensing and technology transfer agreements; however, piracy still
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occurs. Lastly, Forest will have to consider currency risks, as the value of the Mexican Peso to
U.S. dollar will fluctuate as a result of macroeconomic conditions.
Previously Founded Issues for Mexico
As identified and discussed in reports submitted to the board of directors in weeks 4, 9,
and 11, numerous other factors can either facilitate or impede Forest’s ability to establish
operations in Mexico. Piracy of intellectual property, burdensome administrative and legal
policies, and cultural and business differences were cited previously as potential impediments to
expansion. Protecting intellectual property and litigating issues of counterfeiting in the Mexican
legal structure is both time consuming and costly. This is could escalate the cost of Lexapro on
the market. In addition, firms seeking expansion in Mexico must navigate onerous and
ambiguous administrative policies with respect to product registration and business transactions.
Lastly, Forest must consider how the various cultural, social, and business differences in
Mexico will align with the firm’s strategic approach and corporate culture. The U.S. is an
individualistic society while Mexico is a collectivist society. In this regard, Mexican’s focus on
family and the greater good of the group. This translates to the workplace; therefore, Forest must
be cognizant and respectful of the differences in cultural norms.
Having a modern free-market economy, bilateral accords with 32 countries including
NAFTA, and a nationalistic focus on sustainable economic growth, Mexico has positioned itself
well for international trade and commerce. Under Porter’s Diamond model for competitive
advantage, Mexico benefits from advanced factor endowments possessing skilled labor and
technological knowledge; strong demand conditions resulting from reforms to healthcare and
increased life expectancy; support from related industries; and, has an adaptable environment to
employ its firm’s strategy with the native culture.
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Recommended Mode of Market Entry
As we reviewed in the week 9 mode of entry paper, there are several choices that would
be viable options for Forest in Mexico. After further review, it is our recommendation that Forest
pursue a joint venture arrangement if the company makes the decision to expand into the
Mexican pharmaceuticals market. A joint venture is an entry strategy whereby a company is
established that is jointly owned by two existing companies. This is a popular mode of entry for
pharmaceutical companies new to a market because they can utilize the expertise of a local
partner. This strategy also mitigates the risk associated with opening in a foreign market
including nationalization and government interference (Hill, 2007).
The NAFTA agreement as well as Mexico’s geographic proximity to the United States
makes it an ideal market to consider for a joint venture. In fact, joint ventures have historically
been an important component of Mexico’s economic development (Barajas & Kozolchyk, 2001).
As previously reviewed, there are risks that must be managed, but Forest will be able to use past
experience with joint ventures in other markets to mitigate some risks. The challenge will be in
navigating risks associated with cultural and regulatory differences in Mexico. To that end, we
recommend that Forest partner with a U.S.-based or European pharmaceutical company already
operating in Mexico. This fits well with the recommended staffing strategy and expatriate
training as Forest will be able to leverage the expertise of another foreign company in Mexico
that has already established sustainable operations in Mexico.
Conclusion
Forest has thus far proven itself as a sustainable business in your current markets in the
United States, the United Kingdom and Ireland; however, a Latin American market such as
Mexico will prove to be a challenge. Based on past financial performance, economic
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sustainability will be easily achieved with proper planning and strategic vision. The challenge in
this new market comes with social and environmental sustainability.
To succeed in Mexico, you must be committed to adopting a more public stance on these
two important components of sustainability. Looking back to our reports on infrastructure and
market entry strategy, it is clear that the Mexican market encourages foreign investment. It is
also clear that the market is still developing and faces some unmet needs. Forest has a
considerable opportunity to be successful in this market by promoting good will and improving
the community through corporate social responsibility initiatives and sound environmental
practices.
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References
Barajas, T., and Kozolchyk, B. (2001). Joint ventures in Mexico. National Law Center for
Inter-American Free Trade. Retrieved on July 9, 2006 from
http://www.natlaw.com/pubs/spmxbs7.htm
Basiago, A. D. (1998). Economic, social, and environmental sustainability in
development theory and urban planning practice. Environmentalist, 19(2), 145-161.
Retrieved on August 1, 2006 from the ABI/INFORM global database.
Code of Business Conduct and Ethics, Forest Laboratories Inc. Retrieved on August 2,
2006 from http://www.frx.com/about/corp_governance.aspx?p= GuidelinesDocs&s=
Code%20of%20Conduct
Datamonitor (2005, December). Pharmaceuticals in Mexico. Reference Code: 0071-0372.
www.datimonitor.com. Retrieved May 23, 2006 from Business Source Premier Online
database.
Dow Jones Sustainability Index, Corporate Sustainability. Retrieved on July 29, 2006
from http://www.sustainability-index.com/htmle/sustainability/corpsustainability.html
Gallagher, K. P., and Zarsky, L. (2004, February). Sustainable industrial development?
The performance of Mexico’s FDI-led integration strategy. Global Development
and Environment Institution, Tufts University. Retrieved on July 30, 2006 from
http://ase.tufts.edu/gdae/Pubs/rp/MEXICOFDIREPORT11-03.pdf
Hall, J., and Vredenburg, H. (2003, Fall). The challenges of innovating for sustainable
development. MIT Sloan Management Review, 45(1), 61-68.
Hill, C.W.L. (2007). International Business (6th ed.). New York: McGraw Hill.
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Kermani, F. (2006, February). The emerging but complex Mexican market. Pharmaceutical
Technology Europe, 20-22.
Mexico Labor Law: Labor Relations in Mexico. Retrieved on August 5, 2006 from
http://www.mexicolaw.com/LawInfo11.htm
Roberts Environmental Center Pacific Sustainability Report. Pharmaceuticals Sector.
Retrieved on July 31, 2006 from http://library.corporateir.net/library/94/940/94004/items/204480/ pharmaceuticals2006.pdf
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