Industry Analysis for Peru
Date: April 16, 2007
Authored by:
Toyin Adegbuji
Umanat Chantanaskul
Dominic Markwordt
Edwin Hipolito
Phanphop Moleeshati
Ed Shellman
Executive Summary
Peru is a dynamic, fast-growing South American economy poised for success in
international markets. It has enjoyed five years of stellar GDP growth, is on the verge of
achieving an investment-grade credit rating, and is eagerly waiting for the US Congress
to ratify the US-Peruvian Free Trade Promotion Agreement.
Two Peruvian industries poised for both domestic and global growth are the beverage and
financial sectors. The Peruvian soft-drink market is dominated by Coca-Cola, Pepsi, and
upstart Ajegoup. Its flagship brands are Inca-Kola, Pepsi, and Kola Real respectively.
Kola Real, a Peruvian owned beverage maker, has had great success due to finding a
niche in the lower priced soft drink market. Given that most of the population lives in the
arid coastal region, beverage companies have no trouble selling their beverages to
customers; tourists and locals alike.
With the economy on the rise, investments and construction booms have followed. This
has sparked growth in the financial industry; particularly the banking sector. As Peru
evolves into a global player, the growth potential of the banking industry is high due the
fact that only a small portion of Peruvians have a bank account. Lack of access to credit
means that home ownership rates are low, despite government programs that partner with
banks to reach the poorer segments of the population. Given the stellar economic growth
Peru has exhibited in the last few years, pent-up consumer demand is unleashing a flood
of construction that is transforming Lima. Our analysis reveals that banks can both help
fuel and share in this wave of building activity.
Our reports also focuses on Prof. Geert Hofstede’s cultural dimensions and shows Peru
and the US are quite different in many respects. The biggest gap is between the more
collective nature of Peruvian society and the more individualistic mindset that
predominates in America. Peruvian organizational structures are hierarchical and reflect
the larger power distance present in society. Uncertainty avoidance in more pronounced
than in Peru and may help explain why Peru is considered to have a more feminine
culture than the US. Combined, our research shows that while potential cultural
challenges exist, they are not insurmountable. The more collective team-based approach
may make it easier for Peruvian companies to agree to form joint ventures or strategic
alliances with US firms. Different management styles and organizational structures will
make it imperative for firms from each country to reassess their approaches to standard
business situations and learn from one another. We believe that if synergies can be
developed and pitfalls minimized, the US and Peruvian firms can cooperate and achieve
mutually beneficial results.
Competition will definitely intensify in both the beverage and financial industry in the
coming years as newcomers enter the market. But these two industries are by no means
the only that our research showed possess global potential. Cursory research revealed that
the agricultural, mining, and construction industries are all growing at a rapid clip and
have excellent chances to post double-digit growth. In order to more fully assess the
global potential of the financial and beverage industries , we would like to find more
about the exact circumstances regarding the failure of the US Congress to pass the Free
Trade Promotion Agreement with Peru.
Peru Overview
Peru is a country of twenty-eight million inhabitants located in Latin American and
borders Ecuador, Columbia, Brazil, Bolivia, and Chile. It has over 2,414 kilometers of
coastline on the South Pacific Ocean (CIA World Factbook). The country can be
subdivided into three main regions. The coastal region is desertlike. Lima, the capital
and home to approximately one-third of the country’s residents, is located in this arid
coastal belt that receives less than one inch of rainfall per year. Further inland, the Andes
mountain range emerges only to give way to highlands inhabited by predominately poor
native peoples who speak the indigenous Quechua language. The far eastern region of
Peru, bordering Columbia and Brazil, is home to lush tropical rainforests of the Amazon
Basin.
Peru has experienced record economic growth in the last few years. The country went
from running a trade deficit in 2000 to running a seven billion dollar trade surplus just six
years later (American Commercial Service 7). During this same time frame, real gross
domestic product (GDP) increased over 50% to $81.1 billion and GDP per capita grew by
over 30% (American Commercial Service 7). These statistics, while impressive, do not
give a complete picture of Peru’s economy. Per capita GDP was still only $3,000 in 2006
and is by no means distributed evenly throughout the country, either geographically or
among individual citizens, leading to social tensions. Nevertheless, Peru is currently one
of the most politically stable countries in Latin America and is poised to regain an
investment-grade credit rating from international rating agencies (Pimentel and
Jaramillo). This would mark a milestone for Peru; it would join the elite club of South
America countries (currently only Mexico and Chile) with an investment-grade credit
rating.
The Peruvian government, under President Alan Garcia, has embarked on an ambitious
plan of privatization and free market reforms that include lobbying the United States
Congress to pass the Trade Promotion Agreement the two nations signed in April of 2006
(Office of U.S. Trade Representative). The prospects for economic growth and
development are very bright for Peru because it appears to be successfully avoiding the
pitfalls like the re-nationalization of key industries that other nations in the region, like
Bolivia and Venezuela, are struggling with.
Soft Drink Industry – History
The Peruvian soft drink industry is unlike any other in the world. Coca-Cola is not the
top-selling soft drink brand. This distinction belongs to the aptly named Inca Kola, a
beverage that many say tastes akin to a carbonated bubble gum flavored soda. The drink
was the brainchild of English immigrants to Peru, José Robinson Lindley and his wife
Martha, who took inspiration from an existing local beverage based on indigenous
ingredients (Alejandro). By cleverly naming his new concoction Inca Kola, Lindley was
able to tap into the strong sense of Peruvian national identity and pride, resulting in Inca
Kola becoming the best-selling bottled beverage in Peru by 1945 (Alejandro). American
multinationals like Coca-Cola tried for years to penetrate the Peruvian market and
become the number one seller of soft drinks as they had done in virtually every other
country in the world. In 1999, realizing finally that its marketing campaigns were
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unlikely to have the desired effect, “Coca-Cola and the Corporación José R. Lindley
entered in a strategic alliance whereby the multinational purchased 50% of the company
for a rumored $300 million” (Alejandro). Part of the deal included then Coca-Cola CEO
M. Douglas Ivester having to drink a glass of Inca Kola at a press conference, which
proved a media sensation and was featured on the front pages of major Peruvian
newspapers.
Inca Kola was by no means the only threat that multinational beverage manufacturers like
Coca-Cola and Pepsi faced in Peru. An upstart Peruvian company named Kola Real
grew from a family-owned operation in the Peruvian hinterlands to become a formidable
competitor that competes vigorously throughout Latin America from its home base in
Peru.
Industry Leaders and Key Competitors
The industry leader is clearly Coca-Cola, especially now after it purchased a 50% stake in
the JR Lindley Corporation (JRL) that controls the hugely popular Inca Kola brand. By
working closely with JRL and letting JRL do the majority of its bottling, Coca-Cola has
achieved its desired number one status in terms of market share. JRL is the premier
bottler in Peru. “With the Latin American Bottling Company (ELSA) under its belt, JRL
now operates 11 plants in Peru and bottles approximately 70 percent of the country's soft
drinks” (Beverage World).
Coca-Cola is attempting to implement its tried and true strategy of selling a branded
product for a premium price in countries outside the Unites States betting that consumers
will flock to purchase desirable Western products. This strategy can only work among a
minority of a population in Peru because, according to the U.S. Agency for International
Development, “Peru has a sizeable population that lives in poverty (over 54 percent). The
poverty rate rises higher to 70 percent for its 29 percent indigenous population.” The
truth is that many Peruvians cannot afford to purchase Coca-Cola, even if they wanted to.
This large under-served market proved to be an opportunity for Kola Real (officially
called Ajegroup).
Kola Real’s low-cost business model means that “Kola Real doesn't pay franchise fees
like the Coca-Cola and Pepsi bottling companies; investment in advertising is minimal;
the corporate structure is horizontal, with less than 100 people involved in management
and administration; and they target Peru's poor urban and rural classes” (Chauvin). On a
visit to Peru this past month, the lack of Kola Real’s advertising was evident in Central
Lima. Advertisements for Coca-Cola were ubiquitous, but Kola Real signage was notably
absent. On the train ride to the southern city of Cusco, numerous poorer small towns
lined the railroad tracks. Tienda’s, visible from the tracks, had Kola Real’s logo painted
on their storefronts. Kola Real seems to be thriving by serving the lower end of the
income spectrum. It is not hard to see why given that “Kola Real's shelf price in Lima, for
example, is about 30 percent lower than well-known brands like Pepsi and Coca-Cola.
The poor in Peru make up 85 percent of the market” (Chauvin). This has led to Kola
Real capturing 20% of the Peruvian soft drink market in about fifteen years (Mireles).
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Strengths
The Peruvian, and indeed the entire South American soft drink market, is very attractive
to global companies. But “Kola Real is emerging as an unlikely threat to both Coca-Cola
Co. and PepsiCo Inc. in a region [Latin America] where the two soft-drink giants enjoy
some of their fattest global profit margins” (Wall Street Journal). Given the red-hot pace
of economic growth in Peru over the last few years, more wealth is being created that will
lift incomes, although certainly not equally among all income classes, and lead to
significant opportunities in the soft drink market. Growth opportunities in the region,
especially for relatively small companies like privately-held Ajegroup abound. Mexico is
one of the largest consumers of soft drinks on a per capita basis. This has led the
Ajegroup to aggressively expand into Mexico where it now has a four percent market
share with a goal of ten percent (Wall Street Journal). As incomes throughout Latin
America rise, ever more citizens can afford to either begin drinking a premium soft drink
like Coca-Cola or increase their existing consumption further. Multinationals must
convince consumers to purchase their products now because if they don’t, they run the
risk of not being able to penetrate the market later; even once these consumers begin to
earn more money and can afford a premium product.
Weaknesses
A weakness faced by all manufacturers in the region is the lawmaking affecting the soft
drink industry, especially in Mexico. The Mexican Congress passed a 20% tax on
nonessential items including soft drinks in 2001 because these items contained high
fructose corn syrup (HFCS). “The tax was not imposed on soft drinks manufactured with
sugar, which led companies like Coca-Cola to announce plans to gradually phase out
HFCS from their products in favor of using 100% sugar” (Mexican Economic News and
Analysis). Soft drink makers have appealed to the World Trade Organization (WTO). In
2006, the Mexican government moved to impose a new 5% excise tax increase on soft
drinks (Associated Press). The tax was defeated but could have made selling soft drinks
in Mexico even more difficult, especially for higher priced-brands like Coca-Cola and
Pepsi, since it would have made their products more expensive and potentially led
consumers switch to a cheaper brand like Ajegroup’s highly successful Big Cola.
Competition is heating up in the soft drink market as capacity is being expanded faster
than the market is growing, leading to a zero sum game and attendant hardball tactics
among market participants. “Last year, the antitrust commission ruled Coke was abusing
its dominance of Mexican retailers and ordered it to stop certain sales practices designed
to keep out competitors, such as exclusive contracts” (Wall Street Journal). But despite
these formidable obstacles, Ajegroup may not be able to be stopped by tough regulations
or intense competition; it is already operating in Columbia, Ecuador, Venezuela,
Honduras, Cost Rica, Mexico, and recently expanded into Thailand. Given the
competitive nature of the market, Ajegroup has decided to expand its product offering by
selling and brewing beer. The Ajegroup had intended to target the large Mexican beer
market, but “scrapped that project after Mexico enacted a law to tax beer sold in
nonreturnable bottles and cans at a higher rate than returnable bottles, a hurdle for new
entrants” (Arce). Now the Ajegroup is planning to begin its foray into brewing and
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selling beer in Peru. Given their track record, brewing bear has the potential to be a big
boost to Ajegroup’s revenue stream.
Factor conditions
A primary factor helping to shape the growth of the beverage industry in Peru is the
government’s emphasis on consuming Peruvian products and its stoking of nationalist
sentiment. State offices and an association of Peruvian manufacturers have encouraged
Peruvians to buy and use national products. The purpose of this campaign is to create
jobs. Ajegroup, makers of Kola Real, is a good example of a company that succeeded in
the beverage industry. Originally, the company was established as the small firm in the
rural area but became success both in local and international markets due to this
government supported campaign. The company itself also plays to nationalism as their
employees don the red and white of the Peruvian flag and the history of the firm was a
key component of their discussion with our visiting group. Another key to the demand
for soft drinks in Peru is the climate. A majority of the population lives in the arid coastal
region. When Ajegroup was asked why it hadn’t expanded into southern Latin American
countries like Brazil, they responded that they chose Thailand instead because it had a
climate similar to Peru’s that they felt would make it easier to sell soft drinks.
Demand Conditions
One would not expect Peru to be home to South America’s leading soft drink
manufacturer given its size and status as a developing country. Peru’s population is
predominately low-income with the average monthly income of just $450 per month
meaning purchasing power is very low. This fact has proved to be a competitive niche
that firm’s like Kola Real have exploited. The poor segment of the population was largely
being ignored by multinational soft drink manufacturers like Coca-Cola and Pepsi. Kola
Real offers these consumers with a limited income the opportunity to purchase a large
volume of soft drink and is readily accessible at most tiendas or food stands on the street.
Kola Real is selling its products approximately 30% lower than its competitors and as a
result has captured a niche in the soft drink market.
Related and Supported Industries
Retailers are crucial to the success of soft drink companies in Peru. In the soft drink
industry, approximately 49% of all products were sold in supermarkets and hypermarkets
in 2005. When your customers are large hypermarkets, this levels the playing field a bit
for soft drink firms. A strong competitive environment leads to jockeying for shelf space
and lower prices for consumers. In order for soft drink companies to survive, they have to
lower prices, help retailers build displays, and jointly develop new promotional
campaigns to attract new and retain old customers. The tourist industry also provides a
base of consumers for companies like Coca-Cola and Pepsi who are familiar with and
will buy their products. The number of tourists also makes it imperative that local
restaurants serve either a Coke or Pepsi product. Because of its lack of advertising, most
visitors to Peru would not expect to a product like Kola Real.
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Company Strategy and Rivalry
The soft drink industry is highly concentrated in Peru; the only major competitors are
Coca-Cola, Pepsi, and Ajegroup. Building volume is crucial, so price competition is
fierce. Coca-Cola and Pepsi have been struggling to assert themselves in the face of
comparable, less-costly products like Kola Real. Intense local competition has caused
Ajegroup to expand and begin selling bottled water and build its first brewery. Clearly, it
believes it has found a winning formula: produce a quality product, keep costs low, and
sell for less than your main rivals. This strategy appears to be working and has
successfully been replicated in numerous other South American countries.
Coca-Cola, on the other hand, simply bought a successful national brand (Inka Kola) and
hopes to continue marketing its product as the national Peruvian soft drink in an attempt
to convince consumers that Inca Kola is the soft drink that goes with Peruvian food much
better than Coke, Pepsi, or Kola Real. To this end, Inca Kola’s distribution channels
include not only super- or hypermarkets but also restaurants. Coca-Cola offers restaurants
that carry Inca Cola incentives and marketing assistance. In the past twenty years the
Peruvian marketplace has changed drastically. It is now no longer enough for Coca-Cola
or Pepsi to simply produce a product that everyone recognizes and deliver it to stores and
restaurants with the expectation that it will sell. The introduction of Kola Real changed
the ground rules in the Peruvian soft drink industry and spurred intense competition.
Financial Industry – History
Since 1990, the Peruvian commercial banking industry has undergone a host of changes.
The commercial banking system was comprised state-owned commercial banks and 25
institutions after the hyperinflation at the end of 1980s.
Presently, the decline in “barriers of entry” in the banking system allowed the entry of
new commercial banks and other types of financial agents. The ability for overseas bank
to operate in Peru has improved competition, most notably in the consumer loans
segment of the market. Including foreign banks, Peru's banking system is currently
composed of 14 commercial banks and 26 public and rural savings banks, together with
four government-owned entities: the Central Bank (Banco Central de Reserva del Peru,
or BCRP), the government's monetary agent (Banco de la Nacion), and two advance
banks (COFIDE and the Agrarian Bank). The commercial banks, together with five
finance and six leasing companies, are regulated by the Superintendence of Banks and
Insurance called SBS. The Basel, Switzerland-based Bank for International Settlements
(BIS), provides SBS with policy guidelines that meet western standards. For instance,
bank financial statements must be audited in compliance with internationally accepted
auditing standards; in cases not covered by BIS guidelines, regulators use standards set
by the (U.S.) Financial Accounting Standards Board (FASB). In addition, SBS
regulations require that all deposit-taking institutions have periodic compulsory
assessments by at least two independent credit rating agencies, whose capacity to perform
these audits is assessed by the SBS.
Consolidation in the Peruvian banking industry, first begun in 1998, has led to an
extremely concentrated banking system. Since October 2005, the three largest banks held
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about 70% of loan and 78% of deposits. Total commercial banking system assets were
around $20.7 billion, up from an earlier high of $18.6 billion in November 2002. Peru’s
economy grew 8 percent in 2006; the fastest growth rate in 11 years. The central bank
forecasts 6.8 percent growth in GDP for 2007. The country’s banking market expects to
grow about 20 percent in 2007. (Central Reserve Bank of Peru).
Industry Leaders and Key Competitors
The industry leader is Banco de Credito del Peru (BCP), which is the largest and the
oldest banking group in Peru with 661.57 million in Peruvian nuevo soles (PNS) in
revenue in 2006. The Bank offers retail and commercial banking services, as well as an
investment consultancy service. Its range of products and services include credit cards,
debit cards, savings accounts, checking accounts, mortgages, student credit, all types of
insurance, travelers’ checks, currency exchange services and telephone and Internet
banking. There are more than 220 domestic branches throughout the country in addition
to several overseas branches in several countries such as the Bahamas, Chile, Columbia,
and the United States. In 2005, BCP acquired Bank Boston N.A.'s office in Peru. Other
banks are BBVA Banco Continental S.A. and Interbank are classified as key competitors.
BBVA Banco Continental S.A., which was merged with Banco de la Nacion in 1992, is
engaged primarily in commercial banking activities. It is active in the fields of retail,
business and institutional and global wholesale banking. In retail banking, BBVA offers a
traditional range of personal banking services but has also initiated VIP BBVA, a
corporate project that offers VIP accounts, Super Renta VIP mutual funds, Platinum
credit cards as well as rapid VIP banking access. Its business and institutional banking
centers aim to cater to medium-sized companies and institutional clients, such as those
from the government, health and education sectors, international organizations, and
embassies. In 2006, the number of branches has reached 198 branches and its income was
488.20 million PNS (BBVA).
The third industry heavyweight is Banco Internacional del Peru, which is more widely
known as Interbank. Its principal products are credit cards, mortgages, personal loans,
automobile loans, retirement accounts, and core deposits. It also operates a distribution
network comprised of supermarket banking services, electronic banking services and has
a direct sales team. It owns and operates Interfondos, an asset management company as
well as Intertitulos, a company that structures asset-backed securities. The Bank's alliance
with Supermercados Peruanos S.A. allowed it to issue 240,000 VEA credit cards and to
install 21 Money Markets banking services shops in hypermarkets Plaza Vea and
supermarkets Vivanda in 2006. Its annual income in 2006 was 160.87 million PNS
(Interbank).
Strengths
The Peru-United States Free Trade Agreement is a key to improving the overall business
climate in Peru, including that of the financial industry. The agreement will make it easier
for Peru to generate employment, increase workers’ income as well as attract foreign
investment. Because of the decreasing unemployment rate due to additional economic
growth associated with free trade with the United States, the increased incomes of
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citizens will enable them to invest in financial assets and increase the demand for banking
services. Because major financial institutions are mostly local companies, they clearly
understand people’s behaviors, needs, and culture background, a necessity for every
business. For example, Interbank is focusing on customer service since it helps
differentiate it from other Peruvian banks. It has pioneered an innovate method to
winnow candidates who want to work for the bank. Of the 15,000 applications it receives
every year, Interbank ends up only hiring 800. The human resource needs of banks can
easily be met from a pool of very strong candidates. Finally, Lima is growing and many
construction projects as well as the booming housing market depend on banking services.
Being local Peruvian-owned bank helps when negotiating loan agreements and contracts
since trust and personal relationships are particularly important when doing business in
Peru.
Weaknesses
The banking system is not widely used by the Peruvian population; most prefer using
cash instead of using credit cards or checks. As a result, banks face challenges in
changing the attitudes toward the formal banking systems. Moreover, expansion
throughout the country is difficult since most business takes place in the coastal areas of
Peru, in an around Lima and other big cities. In rural areas, not only do people barely use
cash, but they also lack modern technological infrastructure. Many of the financial
institutions’ organizational structures are not strong when comparing to international
companies like Citicorp. This makes it harder for Peruvian banks to compete with
international banks, which tend to enter the market at a later time.
Factor Conditions
The economy of Peru is on the upswing with positive GDP growth over the past several
years and 8% growth in the most recent year (2006). “Peru is attractive to bankers for a
variety of reasons, principally its record of economic success. For the past five years,
financial and monetary stability has been maintained and the economy has grown an
average of 5.5% a year.” (Banker.Com). Due to the poor shape of the Peruvian economy
in the 1990’s and the economic meltdowns in Brazil and Asia, Peru’s government has
taken a strong supervisory role that increases banker confidence. “Peru’s supervision was
not only rated the best in Latin America by the IMF in 2005, but it also received the
highest rating ever since such IMF evaluations started in the region” (Banker.com). The
economic surge has not gone unnoticed; Peru is on track to be awarded an investmentgrade credit rating. “The increasing credibility of the country’s monetary authority has
helped to develop domestic debt markets and modestly reduce the high level of
dollarisation in the economy” (Financial Times).
As companies maximize their potential customer bases in other areas, Peru has become a
hot bed for firms to invest in and increase their global market share. As the global market
continues to take interest in Peru, with firms coming in and construction projects in full
swing, the Peruvian financial sector is in a unique position of growth and development.
Due to the fact the Peruvian economy is still in its early stages, the banking industry as a
whole is small. This is not necessarily a negative. “Another reason why the banking
market holds interest for bankers is because it is so small, comprising just 14 banks plus
20 municipal and rural savings banks, which specialize in micro-finance. Their total
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assets, $18bn, represent 24.5% of Peru’s GDP. It is also a highly concentrated banking
industry. Four banks – Peruvian-owned, Banco de Crédito del Perú (BCP), the largest
private bank with the biggest branch network; BBVA Banco Continental, 50% owned by
Spain’s BBVA in second place; Canada’s Scotiabank, third; and Peruvian-owned
Interbank, fourth – account for more than 70% of deposits” (Banker.com).
Demand Conditions
The drive to secure and increase the financial industry in Peru is driven by the fact that
Lima is growing. Construction projects, which require financial backing, are
everywhere. From 2000-05, 100M new homes were developed (Jorge Gil Presentation).
The increase in home construction has led to a booming mortgage industry. In order to
acquire these new homes, citizens need capital. Our group had the opportunity to meet
with Rudy Wong, who is heading the state sponsored program for mortgages, FONDO
MIVIVIENDA. The program is designed to assist Peruvians in obtaining a mortgage with
private sector bank with support from the government, which gives confidence to the
lending bank. The program has been successful in reaching the A&B sectors of the
Peruvian population and is now in the process of being expanded in order to meet the
needs of the citizens who fall into C and D categories.
Another area that is driving the increased need for banking is that most of Peru’s
population does not use the banking system. Raising capital through equity is not
currently viable so firms are required to work with the financial industry to obtain loans
or sell bonds. “By far the biggest change in the sector is that most bankers agree there is a
need to broaden their client base away from a traditional, almost exclusive, focus on
high-income groups, where the market is now saturated, to middle and low-income
groups, where only 50% and 20% respectively of the population have any kind of contact
with a bank” (Banker.com).The government is also very interested in getting people to
start utilizing banks because there is a very large informal market (as high as 70% of the
population (US Embassy Briefing). Through the use of banks, government can tax these
funds, take credit for this market, and increase educational opportunities. While this is
certainly not something the local vendors care about, it certainly is going to drive the
government to support the use of savings and checking accounts.
Related and Supporting Industries
Based on the demand factors that have been identified for Peru’s financial sector, the
industry is reliant on continuing growth in construction projects. These large projects
require sizable capital investments, and the banks can provide the loans to support these.
Additionally, the government oversight of the industry helps to buoy investor confidence
both domestically and internationally. As indicated earlier, the Peruvian government’s
oversight is seen as the best in the region. Marketing is a key industry as well, especially
given that it has been estimated that 80% of the population is still does not have a bank
account. In order for firms to reach these people, popular and creative campaigns have to
be developed in order to encourage bank use. This will be a challenge for the industry as
much of the population is comfortable putting money under the mattress, literally.
Lastly, the education field will play a strong role in the development of the banking
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sector. The banks require a highly educated workforce that can support the demands of
investors and consumers.
Firm Structure, Strategy and Rivalry
Rivalry in the banking sector is very intense. Within Lima, Peru, there are several banks
competing for the consumer sector, most notably Banco de Credito, Interbank,
Scotiabank and Banco Continental. With such intense rivalry, the market is being pushed
to be more consumer friendly with an emphasis being placed on the banking experience
and recruiting good employees. Our visit to Interbank provided us with insight into one
of Peru’s leading banks. Their organizational structure has undergone a dramatic change;
shifting from state-owned, top-heavy pyramid model to a private model where employees
outnumber management. The shift was driven by the fact that Interbank wanted to be
serve consumers. Interbank has successfully implemented this strategy and is rated as
one of the top 5 places to work for in Peru. Its HR department reports directly to the
CEO, helping ensure that customers’ banking experiences are positive, making them
want to return. We learned of one customer who had her wallet stolen while shopping at a
grocery store. The grocery store had an Interbank office, and the bank tellers worked with
her to cancel her cards and then arranged for a ride home for her. This is the type of
service that Interbank wants to be known for and believes will help it to attract more
customers.
Cultural Dimension
Peru can be broken down into three main geographical regions: the western coast, the
Andean mountains, and the Amazon basin. Of these three regions, close to half the
Peruvian population lives within the western coastal region. Peru is a country that has
been influenced by different ethnic backgrounds which have intertwined themselves with
the Peruvian culture. An examination of Peru’s cultural dimensions show that there is
need for instituting laws and policies that reduce the uncertainty about the future, which
Peru has experienced a fair amount of through the years. Within the last fifty years, Peru
has alternated between military junta’s and free democratic elections with the pendulum
swinging from a state-controlled economy to a more free market model under the current
president.
Prof. Geert Hofstede’s study of various countries shows that Peru’s index score (out of a
possible 100) for uncertainty avoidance is 87 versus 46 for the US. (A graph comparing
US and Peruvian scores is included in Appendix A.) This high index denotes a desire for
certainty and is influenced by the Roman Catholic faith, to which a majority of Peruvians
belong. Peruvians are more likely to insist on stricter rules, policies and laws with dire
consequences for anyone who defies them or questions them. This sort of society does
not make room for embracing the unknown or the unexpected. In the United States on the
other hand, uncertainty avoidance was marked by the below the average score because it
is a society that is more lenient with the cultural or religious beliefs of its citizens. The
unexpected is generally viewed in America as an opportunity and not as a threat.
The second cultural dimension examined within Hofstede’s dimensional framework is
individualism. Peru has an index score of 16, indicating a collective culture which draws
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upon the family and the strong relationships that are built within social groups. Families
in Peru display a high degree of unity, purpose, and integration through generations, as
seen in the nuclear family unit. Many children continue to live with their parents until
they get married. This frame of mind also fosters the desire and commitment to take
responsibility for groups and society as a whole. The culture in Peru provides a society
which is more readily available to one another. The Peruvian people are encouraged to
build long-lasting relationships with each other. They are brought up mostly with
extended families around them for longer lasting periods of time, so early on in life they
are accustomed to having a solid supportive structure of friends and family.
Peru’s ranking in the individualism dimension is a strong contrast to the US index of
value of 91. This is by far the largest spread between US and Peruvian scores of any of
the four cultural dimensions Hofstede’s model encompasses. The high US index score
reflects the quintessential American ideals of self-reliance, hard work, individual
achievement, independence, and nonconformity that have defined America since its
founding. People are more likely to lean on themselves for support and not look to family
members or friends for support. American society does not allow enough time to
continuously socialize with the same set of people. Instead there are many opportunities
to meet new people on a regular basis, so there is little or no chance to form bonds with
the same people from the start.
With an index score of 64 in the dimension of power distance, Peru shows a more
tolerant attitude toward the formal and unequal distribution of power within society. This
translates into a larger number of hierarchical organizations and shows a level of comfort
with a “top-down” management approach. In Peru, there is a reliance on the established
organization structures and procedures that govern how work and management are
completed. Peru’s relatively high score in the power distance dimension reinforces the
notion that Peruvians prefer certainty and structure in their companies so that it is clear
who is in charge at every level of the corporation. The US index score of 40 for the
dimension of power distance is lower and can best be explained by the longstanding
respect and admiration for achievement as opposed to position or titles. Thus, Americans
dream of succeeding, no matter what their economic or social circumstances may be. The
uniquely American “rags to riches” road to success stories are predicated on the belief
that everyone can have an equal chance of succeeding and that opportunities are not
foreclosed solely due to a person’s position or lack thereof. In Peru this is not the case.
Many governmental institutions like the judicial system are known to be corrupt. Less
powerful segments of the Peruvian population seem to more or less accept that inherent
power distances exist.
A fourth index examined by Hofstede is the masculinity or femininity of a country. This
index reflects the values of the country and the relationships among its people. For Peru,
the index score was 42, which denotes a feminine society versus the more masculine US
culture which had an index value of 62. Peru’s score of 42 is consistent with the
collective and caring bent of a society that puts a premium on relationships and less
emphasis on the individual. The US is an opposite society; it stresses individual
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achievement and career success over that of a particular group or society as a whole. In
this regard, Peru is definitely a more feminine country.
Potential Problems
The fact that Peru is a developing can be considered a weakness that may strain any
alliances or partnerships formed with a Baltimore-based firm. As a foreign investor
unfamiliar to the country, the connotation of developing brings with it negative
stereotypes that may lead to the absence of Peru for consideration as a potential country
for investing, despite Peru objectively being one of the safest Latin American countries to
invest in. The difference between economic classes is significant, in particular between
the upper and lower classes. The freewheeling nature of commerce (taxi cabs have no
meters) and the large presence of private security forces may make first-time US visitors
to Peru uncomfortable.
Different Organizational Structures
There are major differences in the ways in which companies in the United States and
Peru are run. Companies in Peru are generally organized in a more hierarchical fashion.
The management at the top of the hierarchical pyramid is usually the decision maker, and
gives instructions to employees and expect them to be followed with little questioning or
complaining. In the United States, however, a growing number of companies are giving
employees the opportunity to add their input into decisions that are important for the
operation of the company as a whole. American business school graduates who are
familiar with flatter organizations may find it difficult to convince their Peruvian
colleagues that a more decentralized management style is appropriate. Even if Peruvian
managers can be convinced that this approach has value, it may not yield the same
dividends it would in the US because Peruvian employees have been taught to follow
directions and rely more on instructions than thinking independently how to solve
problems. An exercise that brings together managers from both countries and has each
group explain how they would deal with a hypothetical situation would shed light on how
different management practices really are and help to start a dialogue about how these
gaps can be bridged.
Cultural Differences
Cultural differences arise between the two countries for obvious reasons. The United
States is one of the world’s most multicultural societies whereas Peru has a more
homogeneous ethnic makeup composed mostly of mestizos (those of indigenous and
Spanish heritage) and the indigenous peoples, who reside mostly in the highlands and the
Amazon Basin in the eastern part of the country. Given the many different ethnic,
religious, and cultural backgrounds in the US, there is more likely to be a larger number
of opinions that have to be taken into account when a major decision is made than in
Peru, where over 90% of the population is Catholic and belongs to two main ethnic
groups. Conflict resolution is handled differently in Peru than in the United States. Due to
the higher power distance in Peru coupled with the hierarchical nature of firms, line
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employees are less likely to feel they can share their input than would be the case in
many US companies.
Synergies
Based upon Hofstede’s cultural dimensions, Peruvian society is built upon the creation of
strong relationships, which can make it easier to create new partnerships or joint ventures
between firms. The more collective nature of Peruvian society means that it intuitively
makes sense to a Peruvian to desire some type of collaboration, if possible, because his
society puts a premium on working together. This willingness to build trust-based
relationships can help foster the creation of new businesses by attracting foreign
investment capital to Peru. Through time, trust is built between corporate partners and
because receptivity toward collaboration helps to promotes long unions between
companies.
Diversity of Ideas
There is a great opportunity for people with different viewpoints to come together and
make decisions that are of better quality than a decision reached by only one group of
individuals who all share a common cultural and societal bond and thus tend to think
alike. Having people from the Peru and the US come together to work will draw out from
each person the unique experiences and insights that come from living in a particular
country. This is very beneficial and crucial when it comes to starting a venture in a new
country. A US multinational is unlikely to be able to gain the same insight into Peruvian
culture from reading research studies as it would if it decides to include local Peruvians
in its decision-making process. This is bound to benefit both the US and Peru because, in
the long run, both countries are looking to increase trade with one another and take
advantage of the unique market opportunities that exist.
Other Opportunities
Peru is at a stage in its development that provides the potential for global investors to
profit as the country grows. The climate in Peru gives it the unique opportunity to
produce avocados when virtually no other country in the world can produce them. Its
portion of the Amazon Basins is an ecological storehouse that has yet to be fully explored
by researchers who hope to find compounds useful in treating common life-threatening
ailments. The weak penetration of the banking sector and the low rate of home ownership
make Peru attractive to global financial players. A thriving soft drink industry and the
marketing savvy of firms like Kola Real make Peru a model for South American
beverage firms. This continued development within Peru ensures that the construction
industry will experience growth in the years ahead. The growth of other emerging
economies around the world leads to a higher demand for commodities and puts Peruvian
mining firms in an enviable position. These emerging competitive capabilities and
opportunities within Peru will lead forward-looking companies to invest into ventures in
all of these sectors in order to capitalize on, and gain, first mover advantages.
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Conclusion
In order to more fully address potential business relationships and synergies in Peru, we
would like to know if any Baltimore-based firms had existing relationships with firms in
Peru that failed. Understanding a potential failure can help us to better define what works
and what does not. We are also monitoring the failure of Congress to pass the Free Trade
Agreement (FTA) and wonder what consequences this will have for bilateral trading
relationships.. In order to gauge the potential impact of the FTA, we want to know which
export from Peru would increase the most if the FTA were passed. Are their adequate
distribution channels and infrastructure to get agriculture products from Peru to the US?
We believe that both the Peruvian beverage and the banking industry have excellent
prospects globally. The Peruvian beverage industry, led by Kola Real, has already proven
that it has a business model that can succeed in Latin America. There is no reason to
believe that this model couldn’t succeed in other developing countries like Thailand. The
banking sector in Peru is building the capability and consumer focus to bring millions of
people into the formal financial system. If firms like Interbank can succeed in signing up
thousands of new customers, they will be in an envious position of being skilled at
entering underserved markets. This could prove to be a boon in Latin America where
banking penetration is relatively low. A firm like Interbank that has a proven business
model and can attract new customers should be able to expand outside of Peru and use
the same methods in other Latin American countries. Other sectors that merit additional
research and seem to show global potential after cursory research are the agricultural,
mining, and construction areas.
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Appendix A
Comparison of Peru v. United States according to Prof. Hofstede’s Cultural Dimensions
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