Organization Structure of International Brewing Industry Groupe Danone and Brasseries Kronenbourg - Case Study Example

INTEGRATED CASE STUDY - THE INTERNATIONAL BREWING INDUSTRY GROUPE DANONE AND BRASSERIES KRONENBOURG EXAM NO: Table of Contents Page/s Executive Summary 3 List of Tables 2 List of Figures 2 List of Charts 2 Aims/Terms of Reference 4 1. Introduction 4 1.1 Structure of the Danone Group 4 2. Planning Process and Leadership Style 6 2.1 Targets set for Brasseries Kronenbourg by Danone 6, 7 2.2 Profitability of the Danone Group Subsidiaries 7 3. Brasseries Kronenbourg - "Key Success Factors" 8, 9 4. Brasseries Kronenbourg's Marketing Strategy 9 4.1 Life Cycle 9 4.2 Product, Place, Promotion, and Price (4P's) 9, 10 5. Overall Assessment of Group Danone's Strategy 10 6. Conclusions 11 7. Recommendations 11, 12 Bibliography 12 List of Charts Chart 1: Sales of Danone Group by divisions, 1992-1994 7 Chart 2: Operating profit of Danone Group by divisions, 1992-1994 8 Chart 3: Operating profit margin of Danone divisions, 1992-1994 8 List of Figures Figure 1. The structure of Danone Group 5 Figure 2. Alternative 1: Vertical structure on the example of Danone 5 Figure 3. Alternative 2: Independent structure on the example of Danone 6 List of Tables Table 1. Product, Place, Promotion, and Price 10 Table 2. SWOT Analysis 10 Table 3 Certainty/Impact diagram 11 Table 4. PESTLE Analysis 1 Executive Summary This report describes the organization structure of the Danone Group, and comments critically on the planning process and leadership by which the targets for the year were set for Brasseries Kronenbourg by Danone. An analysis of the profitability of the Danone Group subsidiaries has been completed, and has identified the contribution that the beer sector made. The report has evaluated Brasseries Kronenbourg's "key success factors" and has commented on the financial management of Brasseries Kronenbourg in the period leading up to 1995. The report has assessed Brasseries Kronenbourg's marketing strategy, using life cycle analysis and the 4-Ps. SWOT (Strengths, Weaknesses, Opportunities, Threats) and PESTLE (Political, Economic, Social, Technological, Legal, and Environmental) analysis has been completed to comment critically and conclude on Danone's strategy in future activity in the beer sector. The recommendations advise that the Danone Group should refrain from significant investments in Brasseries Kronenbourg, and monitor the performance, as to see if there are any improvements in closing the gap on their financial weaknesses and able to move out of debt over a period of time. Aims/Terms of Reference The following report has demonstrated a knowledge and understanding of the range of techniques and concepts introduced in the Certificate in Management Studies programme. The Integrated Case study is based on the International Brewing Industry, Danone Group and Brasseries Kronenbourg. 1. Introduction 1.1 Structure of the Groupe Danone The structure of a business group is largely dependant on the strategy it follows. (Chandler, 1990) There are business groups with large degrees of autonomy among departments, and there are businesses with strict vertical management. The structure of Danone Group is observed below. Organizational structure of Danone Group allows certain degrees of autonomy to its departments/subsidiaries. The 'Premier Rond' only determines general objectives, which must be achieved, but all the local operating decisions are left to general managers of departments/subsidiaries. These companies are restructured only if their management fails to achieve the objectives determined by the 'Premier Rond'. Restructuring activities as well as monitoring performance of 'Troisieme Rond' are performed by division managers or 'Deuxieme Rond'. In this way Danone Group achieves a certain degree of autonomy at the same time having the hand of the board management on the pulse of the company. (See Figure 1.) Not every business group is structured in the same way. Most often, organizational structure of a business conglomerate is dependant on and follows its strategy (Chandler, 1990). For instance, if Danone wished its departments/subsidiaries to follow strictly the general strategy developed by the board management, functions of the division managers would have been different. In this case 'Deuxieme Rond' would have been giving strict instructions on operating decisions to 'Troisieme Rond', which in turn would reported not to board managers but to regional managers - a strict vertical structure (See Figure 2.). If there was no general strategy of the Danone Group, the 'Premier Rond' would have been used mainly for financial rather than operating activities (Berg, 1977). In this case, the 'Deuxieme Rond' would not have been necessary: general managers of departments/subsidiaries followed only their individual strategies reporting financial performance to board management (See Figure 3.). Current structure of Danone Group means that its strategic view is to impel managers at all levels to see the whole picture and operate autonomously but with in correspondence with the rest of the group. Figure 1. The structure of Danone Group Figure 2. Alternative 1: Vertical structure on the example of Danone Figure 3. Alternative 2: Independent structure on the example of Danone 2. Planning Process and Leadership Style The case study of Brasseries Kronenbourg illustrates how Danone managed its departments/subsidiaries. While, the board did not intrude into operational levels, general decisions such as acquisitions and mergers were taken by the 'Premier Rond'. 2.1 Targets set for Brasseries Kronenbourg by Danone Brasseries Kronenbourg was given a large degree of freedom in the Danone Group. Operational strategy was developed by Kronenbourg top management, while the 'Premier Rond' of Danone set objectives for the whole group. Of course performance of Brasseries Kronenbourg was monitored and sometimes Danone intruded into company's operations with restructuring plans (e.g. merger of Kronenbourg and Kanterbrau in 1986). General objectives of Danone - strengthening the leadership in European growing markets, accelerating international extension, and innovating and strengthening corporate image - were close to the objectives of Brasseries Kronenbourg. Danone group acted like provider of investment capital for Brasseries Kronenbourg. Despite the freedom in operations, it must be stated that key decisions on acquisitions of Brasseries Kronenbourg were held by Danone. Such participative approach has more benefits than drawbacks. It is almost impossible to demand creativity and originality in authoritarian way (McShane, Von Glinow, 2004) Centralized decision making is quick and decisions can be implemented quickly but it generally fails to utilize the human capital of the subsidiaries (Davimann, 1995). Meanwhile, Brasseries Kronenbourg had specialists with great knowledge of the beer industry. Therefore at operational levels, Danone provided freedom to Brasseries Kronenbourg so that they could perform along with their strategy, while the 'Deuxieme Rond' of Danone Group was controlling the local strategy to be in line with the general one. Danone used human capital of Brasseries Kronenbourg top management effectively, creating awareness of the group strategy and promoting responsibility and commitment. 2.2 Profitability of the Danone Group Subsidiaries Overall, the 1993 was the year with the worst financial performance for Danone among three years: 1992-1994. Although 1994 report higher sales than 1992, at the same time it has lower operating profit than in the past. This means the company has paid more non-operating costs. The largest share of Danone turnover is created by its dairy products division, although its sales have fallen slightly from 1992 FF23,041m to FF22624m. The same picture was seen in divisions of biscuits and packaging. Pasta, beer, and mineral water on the contrary have increased in sales through 1992-1994. The most significant increase was in mineral water division. International sales have grown significantly from FF3,605m in 1992 to FF7,804m - more than twice. Overall sales have grown from FF70,840m in 1992 to FF76,820m in 1994 with a slight downfall in 1993: FF70,108. Overall operating profit has fallen from FF7,117m in 1992 to FF6,832 in 1994. In 1993 it was even lower: FF6,351m. By divisions, dairy products, epicerie, biscuits, and packaging have reported a decrease in profits. Only beer and mineral water increased profits in 1992-1994. It is important to use relative measures combined with absolute in the analysis. Operating profit margin is calculated by dividing operating profit by sales. The operating margin is a measurement of management's efficiency, showing how efficient are sales. (Anonymous, 2006) While dairy products, epicerie and biscuits are the largest divisions of Danone by sales they have the lowest operating profit margin. The highest operating profit margin belongs to mineral water and beer. Operating profit margin for international sales is even lower than for biscuits. This illustration shows that while beer sales are rather small in the scale of the whole Danone Group, this division is still important to the conglomerate as it is the second most efficient after mineral water division. Chart 1: Sales of Danone Group by divisions, 1992-1994 Chart 2: Operating profit of Danone Group by divisions, 1992-1994 Chart 3: Operating profit margin of Danone divisions, 1992-1994 3. Brasseries Kronenbourg - "Key Success Factors" Top management of Brasseries Kronenbourg identified three vital success factors for their company: (i) Managing high level of investments with a tight control of debt/equity ratio; Achievements of economies of scale - the high level of fixed costs required a focus on lower production costs through larger units to cover bigger geographical areas (up to 1,000 km for mass-market beer); (ii) Improvements in productivity and quality through effective human resource management to keep up with new techniques (e.g. automation and quality control); (iii) The analysis of progress on achieving these factors follows. Debt/equity ratio of the Brasseries Kronenbourg has been constantly increasing for three years from 1992 to 1994. In 1992 it was 1.74, in 1993 debt 1.81 times dominated over equity, and in 1994 debt/equity ratio equaled 1.94. From this trend we can conclude that while Brasseries Kronenbourg was managing high level of investments it failed to control debt/equity ratio. Higher debt/equity means that a company uses more capital from the outside, which in turn brings more risk and at the same time promises extra earnings. (Investopedia, 2006) Indeed the company's assets increased from FF6,015.11m in 1992 to FF6,416.359m in 1994. Nothing can be said about earnings but the net profits of Brasseries Kronenbourg also increased from FF428.942m in 1992 to FF496.038m in 1994. Achievements in economies of scale were also only partial. Although the company managed to bring down operating costs from FF5,111.258m in 1992 to FF4,814.146m, which is good the volumes sold by Brasseries Kronenbourg have also decreased from 11,571,541 hectolitres in 1990 to 10,274,000 hectolitres in 1994, which is bad. On the contrast, volumes sold by subsidiary companies of Kronenbourg SA increased from 13,047,000 hl in 1990 to 15,118,000 hl. Thus improvements in productivity and achievements of economies of scale have been only partial, and the company has been unable to control its debt/equity ratio while using larger amounts of investments. The company was leading on the French beer market in 1994 with over 40 per cent market share. Management made large investments in modernisation of production in 1994 however, the results of these investments are not clear. Overall, financial management of Brasseries Kronenbourg in 1990-1994 was extensively prodigal without making the real profit from investments made. 4. Brasseries Kronenbourg's Marketing Strategy 4.1 Life Cycle Analysis (LCA) Life cycle analysis of a product is a potent tool which uses known theory about evolution of a product on the market. In general theorists indicate four stages of product life cycle: introduction, growth, maturity and decline. Introduction of a product requires great efforts put in marketing to promote new product. Sales are low, mainly impulse or trial. The next stage is growth which is characterized by significant increase of sales and competitors emerging. When sales growth begins to slow down and some competitors leave the market a product enters a maturity stage. Only loyal customers will purchase it on this stage. Finally sales begin to fall rapidly indicating the decline stage. (Valuebasedmanagement.net 2006) Renewing the product requires a lot of efforts and changes in marketing policy of a company. Applying LCA to Brasseries Kronenbourg products one can say that they are bypassing its maturity stage and entering decline. Indicators are two: falling net sales and falling hectoliters of beer sold. To minimize this stage marketing of Kronenbourg uses product innovation. Several new products were launched in 1993, 1994 in order to 'de-banalise' beer. This may lead to higher sales in future. 4.2 Product, Price, Place, and Promotion (Four P's) The total offer can be defined s the right product or services, at the right price, delivered at the right place, at the right time and supported by the appropriate promotion. These four elements are known as the marketing mix or the four P's, Product, Price, Place, and Promotion. (Holmes 2000). Application of four P's analysis to marketing strategy of Brasseries Kronenbourg follows in Table 1. Table 1: Product, Price, Place, and Promotion Products: Brasseries Kronenbourg has a full range of beer products: bieres de luxe (mass market), bieres speciales and specialites (upmarket beer), non-alcoholic beer, low-alcoholic beer, and panaches (mixes of beer and lemonade). The most successful products are Kronenbourg (mass market) and Tourtel (non-alcoholic beer). The strong market share of Brasseries Kronenbourg indicates the success of its products. Price: Generally, in foreign countries beer of Brasseries Kronenbourg is viewed as premium quality - in response to brand image and the price. In France though, Kronenbourg occupies a significant share of mass market beer, and the pricing is less aggressive. Taking the positive brand image into consideration it is advised to increase margins on beers of Brasseries Kronenbourg. Place: The company uses two distribution channels: cafes and restaraunts, and food retailing for home consumption. The company invested into cafes and restaraunts on the base of long-term contracts to strengthen its marketing strategy. Additionally, unique merchandising system called "Pluton" that improved presentation of beers and adapted it to each retail chain, region, and season, which eventually turned into stronger partnerships. Promotion: French advertising has very strict rules on beer promotion. That is why Brasseries Kronenbourg focused its advertising on cafes and restaraunts, using any opportunity. Additionally, packaging of Kronenbourg beer also earns recognition to brand image of Brasseries Kronenbourg. Overall marketing strategy turned out to be successful for Brasseries Kronenbourg. Its strengths are: strong brand image, full range of quality products, well-organized distribution and adequate pricing. 5. Overall Assessment of Group Danone's Strategy SWOT analysis and PESTLE analysis are provided for overall evaluation of Brasseries Kronenbourg as a subsidiary of Danone Group. Table 2: SWOT Analysis Strengths: Strong marketing of Brasseries Kronenbourg has earned a well-respected brand image for the company throughout the world. Full range of competitive fine quality products can also be applied to strengths of the company. Its environment-friendly policy in production, and constant innovation allow the company to maintain its competitive advantage. Weaknesses: Financial measures of the company do not work well enough. A large debt/equity ratio makes the company risky from investors' side. Volumes of production decreased are also a threatening sign. Opportunities: If Brasseries Kronenbourg continues to expand overseas aggressively it can take a significant share of local markets with its high quality brand image recognition. Expansion is required out of Europe where Kronenborug is already well presented. Threats: Overseas expansion requires further increase of exterior investment. Siginficant capitals are required, and at the meantime the company's inability to control debt/equity can lead to bankruptcy. "In the certainty/impact diagram, the Weaknesses and Threats of each of the issues identified in the SWOT are categorized according to how likely they are to occur (certainty) and their potential impact if they were to occur" (Gardner, Ramsden, 2002) The event/certainty table below indicates two important issues that has a high certainty to occur and may also have a high impact on the assessment of the Danone's strategy. Table 3: Certainty/Impact diagram for the overall assessment of the Groupe Danone's strategy (Gardner, Ramsden, 2002) Event/Certainty Impact Debt/Ratio Equity Ratio Investors are unlikely to invest due to high debt and unlikely returns in investment. Decreased Volume of Production This shows lack of demand of the product or inability to reach production targets. Table 4: PESTLE Analysis Political factors: Further integration of countries into European Union, the movement of EU eastwards can open new markets for Brasseries Kronenbourg. Economic factors: Introduction of unified euro currency also improves international performance of Brasseries Kronenbourg due to stability and unification of euro. On the contrary, stable situation on the European markets makes it hard to improve the market position in saturated markets. Social factors: Numerous publications on beer alcoholism, and popular healthy lifestyle can decrease the consumption of the alcoholic beer an increase the consumption of non-alcoholic beverages. Development of economies of Eastern countries such as former Soviet Union and China can create new opportunities for Brasseries Kronenbourg. Technological factors: Recent developments in transportation, particularly in alternative fueling systems can make the transportation cheaper for the company, which actively uses innovations. Also IT solutions developed for business needs are able improve performance of Brasseries Kronenbourg. Legal factors Most of the countries are tightening advertising legislation for alcoholic products. This could create additional problems for entering new markets. Environmental factors: Additionally, environmental awareness can slightly improve the situation of Brasseries Kronenbourg. 5. Conclusions According to the Case Study the organization structure of the Danone Group allows a certain degree of autonomy to departments, while making sure everyone sees the general strategy of the group. This is illustrated in Figure 1. It also shows that Brasseries Kronenbourg has a large degree of freedom in the Danone Group, but Danone Group still has an overall influence over its whole group. It can be shown in the measure of Kronenbourg and Kanterbrau in 1986. Danone Group also acts as a provider in investment capital for Brasseries Kronenbourg. From the Case Study of Brasseries Kronenbourg it shows that they are an organization who has invested in their future. The Management has made large investment in the modernization of production. Brasseries Kronenbourg have a world record for low water consumption, and 80% use of recycled glass. This shows that their production is environmentally friendly. However, Brasseries Kronenbourg has some difficulties, which may present a threat if competitors put greater efforts into achieving leadership. Uncertain financial policy of a company along with strong marketing present a complex mix, making the future of Brasseries Kronenbourg hazy. 6. Recommendations The cautious approach of Danone to further investment into Brasseries Kronenbourg is well understood. On the one hand it has a traditional beer brewer with good looking brand image, and long traditions of quality. On the other hand are financial weaknesses and further movement into debts without significant profitability increases. At the meantime competitors like Heineken are becoming more and more challenging. Acting along with Danone strategy of becoming first or second in every product field, I would recommend to refrain from significant investments and to monitor the performance of Brasseries Kronenbourg, and then decide: should it stay with Danone or not. Bibliography Anonymous. (2006). Operating Income and Operating Profit Margin. Published by About.com. retrieved July 6, 2006 from http://beginnersinvest.about.com/cs/investinglessons/l/bloperincmarg.htm Berg, N. (1977). "The Conglomerate - Its Strategy and Structure." Business and Economic History, Vol. 6, pp. 36-51. Chandler, A. (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Harvard University Press, Cambridge, MA. Davidmann, M. (1995). Style of Management and Leadership. Retrieved July 6, 2006 from http://www.solbaram.org/articles/clm2.html. Gardner, J. and Ramsden. J. (2002) Managing Information, Published by the Centre for Management Development, University of York, Second edition, pp. 78 Homes, K. (2000). Managing The External Environment. London. FT Knowledge, pp. 49-50. Investopedia. (2006). Debt/Equity Ratio. Retrieved July 6, 2006 from http://www.investopedia.com/terms/d/debtequityratio.asp McShane, S. Von Glinow, M.A. (2004). Organizational Behaviour. McGraw-Hill, Canada. Valubasedmanagement.net. (2006). Product Life Cycle Analysis. Retrieved July 6, 2006 from http://www.valuebasedmanagement.net/methods_product_life_cycle.html Read More