Analysis and Overview of the Global Brewing Industry - Essay Example

Global Brewery Industry Michael E. Porter’s five forces model is widely used to assess and analyze the competitive strength and position of a corporation or business. According to porter, there are five forces that influence whatever happens within an industry. These five forces are: existing competitive rivalry between existing firms, bargaining power of buyers, threat of new market entrants, threat of substitute products (product and technology development), and power of suppliers. Every force has several other determinants. It “provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position, as might be used when creating strategy, plans, or making investment decisions about a business or organization.” (Porter’s Five Forces Model.) (Michael E Porter’s Five Forces of Competitive Position Model, 2005). Porter model has a few limitations. It was basically designed for analyzing industrial business strategies. However, it is not able to cope with interdependencies and synergies with the portfolio of large organizations. Care should be taken while using this model for not underestimating the importance of the strength of the organization. Moreover, it is possible to create a new market for business instead of selecting from the existing one. Beer is one of the largest consumer good categories in the world. It is, probably due to rising living standards, increasing disposable income, and greater levels of foreign investments, and increasing consumption in the developing markets such as china and Russia. But in the markets of America, Australia, Western Europe and parts of Asia Pacific, brewing industry find it difficult to achieve growth. Among the countries, China ranks first in beer consumption followed by United States, Germany, Brazil, Russia, Japan, United Kingdom, Mexico, South Africa and Spain. The global brewery industry faces a cut throat competition as the top 10 brewers keep striving for the number one position. In order to survive in the market, mergers and acquisitions have become norm of the day. It is very essential to study about the leading players in the brewery industry in order to analyze it using Porter’s 5 forces model. The leading players in the brewery industry are In Bev, SABMiller, Anheuser-Busch and Heineken International. In Bev, the world’s largest brewery company is headquartered in Leuven in Belgium. In Latin America, it has a strong presence in the soft drinks market. In Bev was formed after the merger of Belgian company Interbrew and the Brazilian company Am Bev in 2004. It has breweries in over 30 countries and sales in over 130 countries. Some of its famous brands are Antarctica, Alexander Keith, Absolute Cut, Hoegaarden, Bass, Beck’s etc. In brewery industry, SABMiller stands second after In Bev. It was formed consequent on the merger of Miller Brewing and South African breweries. Though it is headquartered in London, its areas of dominance are North America, Eastern Europe, and Africa. It is listed in the London stock exchange. Anheuser-Busch companies stand third in beer industry after In Bev and SABMiller. It is the largest brewing company in United States. The company’s headquarter is situated in St. Louis, Missouri in United States and it operates 12 breweries there. Some of its famous brands are Budweiser, Busch, Michelob and Natural light. Small specialty beer also it produces. Heineken international, which is a Dutch brewing company was established in 1864 by Gerard Adrian Heineken has more than 130 breweries spreading across 65 countries some of its important brands are Cruzcampo, Zywiec, Tiger, Starobrno, Birra Moretti etc. It stands in the forth place in the brewery industry. Porter’s 3 forces model involves a relationship between potential entrants, customers, suppliers, substitutes, and industrial competitors. Let us discuss how porter’s 5 forces model be used to analyze global brewery industry. Substitute products When a substitute product enters the market, it forces the producers of existing goods to put a ceiling on the prices. For example, in the beer market, when a substitute brand of beer enters, the leading players in the beer market such as In Bev, SABMiller, Anheuser-Busch and Heineken International will be forced to put a ceiling on the prices. Unless the leading companies upgrade the quality of beer or otherwise distinguish their beer from the new entrant, there is a possibility of low growth rate in sales and there by profits. The competition from the substitute will result at least some people switching over to the substitute if it maintains standard and quality. This would reduce the market base of all existing brands. Power of suppliers For all the leading players in the brewery industry, raw materials are provided by the suppliers. If the suppliers form a group, it will increase their bargaining power resulting in an increase of cost of production. When raw materials are very important for companies or when no other suppliers are there to provide for company or companies the demand of raw materials increases, and so does the price. This provides leeway to the supplier to drastically increase the price. The potential entrants Some of the barriers to potential entrants in the beer market are economies of scale, capital requirements, brands preferences, customer loyalty, government actions and policies. When new company overcomes these barriers and enters the brewery industry, the competition in the market intensifies. This results in major players like In Bev, SABMiller, Anheuser-Busch and Heineken International taking some positive measures to retain their customer base, by either reducing their price, or increasing the quality or offering product diversification. Bargaining power of customers The bargaining power and influence of customers on brewery industry are enormous. Some of the situations such as when customers purchases in large quantities and they are in few numbers, or when the purchase forms a large percentage of the selling industry’s total sales, or when it is economically profitable for customers to purchase it from different companies’ beer, or the item which the customer purchases is not important, will give greater power to customers. The industrial competitors At present there is a cut throat competition in the brewery industry as business in areas such as North America, Australia, Western Europe and parts of Asia Pacific is stagnated. Rivalry between the leasing brewery companies increases as the competitors keep on increasing and they try to become more equal in capacity by merger and acquisition. Conclusion Porter’s 5 forces model deals with a relationship between potential entrants, customers, suppliers, substitutes, and industrial competitors and is widely used to assess and analyze the competitive strength and position of a corporation or business. At present, beer industry faces a cut throat competition as volume of sales are not going up in areas such as North America, Australia, Western Europe and parts of Asia Pacific. Mergers and acquisitions are some of the better methods to survive in the market as it reduces the chances new competitors entering in the area of dominance and at the same time it enables companies to enter new market with less capital investment. Works Cited Porter’s Five Forces Model. Michael E Porter’s Five Forces of Competitive Position Model and Diagrams. Businessballs.com. alan chapman 1995-2005. 8 May. 2007. . Michael E Porter’s Five Forces of Competitive Position Model. Businessballs.com. alan chapman 2005. 8 May. 2007. . Read More