External Environment and Internal Strategic Capabilities - Grand Metropolitan Companies - Case Study Example

Grand Met case, on horizontal integration Table of Contents Introduction 3 External Environment and Internal Strategic Capabilities 3 Strategic Choices 5 Impact of the Strategies 6 Feasibility of the Strategies 7 Conclusion 9 References 10 Introduction Grand Metropolitan Companies included an array of luxury products or brands and also companies around the world. So GrandMet simultaneously maintains the assets from varied industries such as tobacco, liquor, etc. This report aims at identifying the strategic direction of GrandMet in future. The present business environment is highly dynamic and competitive. It has intensified more with the advent of globalisation in the world market. So it is becoming more important for the business managers to redefine the strategies based on the situations in the market and direct the company to attain great success. GrandMet integrated horizontally and also diversified their business by merging with several companies that are either related or not related to the business. That was done in order to acquire the strategic resources that were important for the smooth operation of GrandMet. In this study the strategic choices of Max Joseph and his team would be analysed from the inception of GrandMet, so that the approaches applied for making the strategic decisions can be understood. Apart from this the reasons for choosing the strategies would also be evaluated and scrutinised so that the feasibility of the strategies can be discussed and decisions can be taken regarding the capabilities of Max Joseph and his decision making abilities. External Environment and Internal Strategic Capabilities In order to make strategic choices in the increasingly competitive environment, the firms have analysed the threats and opportunities according to the strategic management process. An analysis of the economic environment which includes the direction and the characteristics of the economy in which the firm is operating or competing has to be analysed. As far as the macro environmental aspects are concerned, GrandMet engaged themselves into the business of fast moving consumer durables (FMCG), which customers required everyday and the rate of repurchase in such cases are also high. So it can be said the choosing the FMCG market was due to the huge potential in this sector (Hitt, Ireland, and Hoskisson, 2012, p. 13-15). However, the fact remains that the FMCG market is dominated by few major players, who are considered to the best brands and they have also got well established distribution channels or supply chain, corporate system, are financially stable and have a sustainable position both economically and strategically. These features of the major players, such as Pepsi Co., or Bread Inc., in the FMCG industry were a major threat for GrandMet. Moreover, the FMCG market is extremely competitive and the customers have various choices, substitute products, and complementary products, which also gives the customers high bargaining power. This also leads to the increase in competitiveness and reduction of the profit margin of the companies or marketers. Customers are also afraid or reluctant to change or try out new products, which are an aspect of psychology or consumer behaviour, so it is also difficult to make the customers switch to a different brand. Only when the company can make sure, as to how the preferences or the taste of the customers’ changes and how it can be changed, the objective of offering new products or services would be successful (Bamford, and West, 2010, p. XVI). The market share of GrandMet was high and the sales figures of the company were higher among the global operations in the industry. In the year 1991, the sales of the company were around $14.771 billion, while the asset value was $17.648 billion. There were around 13.8 million employees in the company. On the basis of the sales report of 1991, GrandMet was in the 5th position among the British companies and 78th among the large corporations in the world. Apart from this, the CEO of the company Max Joseph had immense goodwill and fame in the city because of his special talent of closing deals efficiently. So GrandMet has both the capability of generating revenue and utilising those for investing skilfully in diverse brands. However, the adverse case was that GrandMet had a high lending ratio, so the cash flow of the company tightened and it also posed as a threat of bankruptcy for the company. The cost of imitating the products and services of GrandMet was high for its competitors because the resources utilised were rare and the company provided high quality products. However, this competitive advantage was temporary because it is not impossible to imitate the products and disturb the sustainability of the company (David, 2011, p. 70). Strategic Choices After war the CEO of the company, Max Joseph started purchasing hotels. The first hotel that he purchased was Mandeville that he brought in the year 1947. After this he purchased Washington in the year 1950 and also Mount Royal. These are few major purchases which Joseph purchased during the early years. Since Joseph learnt the important of property business during the World War II, he made these purchases to utilise his learning and continue the prosperity of the property business. After this Max Joseph bought another Intercontinental hotel for 500 million. These were similar business that GrandMet was in. The two acquisitions made it quite clear that GrandMet followed horizontal integration in business. The non-hotel acquisition of GrandMet started in the 1960s. Few major acquisitions in this section were namely Express Dairy, Chef & Brewer pub restaurant and Mecca (Henry, 2008, p. 15-17). Max Joseph believed that these businesses could be the supporting businesses for the hotels acquired by GrandMet, so they can generate revenue as well as assist the hotels in generating income. Then Max Joseph purchased Truman Hanbury, Buxton, a brewer because he had a perception that brewers often prove to be profitable in the cities. After this Stanley Grinstead, who was hired as an accountant in 1960s for strengthening the financial position of the company, begin the acquisition of the Liggett Group and Paddington Corporation. Those Max Joseph was not sure regarding this idea of Grinstead, but Grinstead finally completed the acquisition in1981. Though these acquisitions were different but they were related to diversification motives of GrandMet. Stanley Grinstead assumed that GrandMet should have a broader business base and he also foresighted that the service industry would grow faster than the manufacturing industry. This is the reason why he started acquiring different businesses such as Pearle Optical, Children’s world, and Quality Care. These businesses were however not related to the other businesses of GrandMet, so this was an unrelated diversification strategy which GrandMet chose under the leadership of Stanley Grinstead (Hitt, Ireland, and Hoskisson, 2008, p. 135-137). Impact of the Strategies After studying the case study and analysing the strategy of GrandMet, it can be clearly understood that GrandMet utilised diversification and horizontal integration as their foremost strategy. In the approaches that they undertook, acquisition was the most common strategic operation of GrandMet. The company started its acquisition journey in the year 1947. Max Joseph and his team of professionals acquired those firms or businesses which they thought would benefit their business and assist them to generate profits. The acquired businesses ranged from hotels, restaurants, retail businesses, catering firms, and many more. This has not only increased their market share but also their market power (Lynch, 2009, p. 17-19). Massimiliano (2010) has stated that gaining market power is useful because it not only gives the company, the capability to fit into the anti-competitive activities, but also profitably raise the price of the products or services much above the marginal cost of the company. It also gives the company to control the market and its trends. So the strategy of acquisition followed by GrandMet had also given the major market share, controlling power, and the competitive advantage of the company. Now random acquisition of diverse business also had few disadvantages. Due to the increasing size of the company, the employee base was also increasing, which was becoming difficult for GrandMet to control. So the probability of mass layoffs was also rising. The business framework and strategies of GrandMet was not focused towards a single business, and the resources which the company has were not so strong to skilfully handle all the diverse businesses with equal efficiency (Lohr, 1988). Feasibility of the Strategies The economic environment of Britain, UK was not stable and it gradually disoriented. The collapsing economy of the country affected the whole company negatively. In this situation, Max Joseph and his company took the decision to expand his business outside the country, so as to generate business from other sources, and also shift the total dependency of GrandMet’s revenue generation from UK’s economy to other parts of the world. In this context also GrandMet followed its strategy of diversification and horizontal integration for reducing of economic risk. In this process few strategies of the company were not enough successful and some even failed. One of the examples of such a failure was the acquisition of Watney Mann. Max Joseph spends about $435 million to acquire this property (Lynch, 2009, p. 400-401). This property also included IDV, which was set out as a separate business, but GrandMet was not successful in running this business. It failed miserably accumulating a huge debt for the company. This diverse investment was very risky and GrandMet paid the price for such an investment. A few other investments like the Watney Mann also met similar fate, and the increasingly unsustainable economic condition was another reason of rising failure. It also increased the level of debt for GrandMet. So this strategy of Max Joseph was a failure. Apart from this, another strategy of conducting separate business also had a double sided effect. This strategy would be helpful in reducing the risks associated with the different businesses, while also assist in sharing the resources, but on the other hand it mind lead to poor decision-making while choosing the target market and also increase the risk of taking wrong decisions. So the management team must take important decisions carefully. In this process, GrandMet tried to generate ample amount of trading profits for paying back its debts. It also took huge loans from banks for clearing its debts because if the debts were not cleared on time, there was risk of bankruptcy. Moreover, the failure of one business also can ruin the reputation of the other businesses of the company (David, 2011, p. 117-118). Acquisition is indeed a winning strategy for those companies who want to have the biggest share of market in the industry. Even in present days and in future this strategy would be critical for companies and their managements, but acquiring companies at random without constraining to few specific industries can be hazardous. This is what the case was with GrandMet. If Max Joseph wanted to conduct business in the hotel industry, then he would have acquired hotels and restaurants only, but he did not follow a line (Harrison, and John, 2009, p. 86-88). Rather he started acquiring companies from different industries and added them to his business. This became unmanageable because for businesses from different industries requires different skills, and expertise. The employee strength of GrandMet was increasing in size and it was becoming difficult to control. So diversification and horizontal integration were not strategically wrong ways of conducting business, but abnormal increase of business without the expertise and resources of managing them and holding them together can prove to be dangerous, which was seen in case of GrandMet. Conclusion GrandMet was one of the most innovative and dynamic companies. Max Joseph and his management have always followed the business environment of the country to plan and develop their business strategies, so that they can be the market leader and have the maximum market share. The company was designed on effective strategic decisions, but Max Joseph and his team lacked managerial expertise, which turned to be the major weakness for the company. GrandMet and its management got confused whether they want to continue horizontal integration for diversification and were also in doubt regarding the next leader who is going to help the company to come out of the difficult situation (Hill, and Jones, 2012, p. 20-21). Though GrandMet enjoyed competitive advantage, but it was short lived because many of its acquisitions failed to give the desired return. A company cannot be in every direction, so choosing the right strategic direction according to the changing situation and attaining sustainability through an effective competitive advantage would help GrandMet to recover from its difficulties and retain its market position. References Bamford, C. E., and West, G., 2010. Strategic Management. Connecticut: Cengage Learning. David, F. R., 2011. Strategy Management: Concept & Cases. 13th ed. New Jersey: Pearson Prentice Hall. Harrison, J. S., and John, C. H., 2009. Foundations in Strategic Management. Connecticut: Cengage Learning. Henry, A., 2008. Understanding Strategic Management. Oxford: Oxford University Press. Hill, C. W., and Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach. 10th ed. Connecticut: Cengage Learning. Hitt, M. A., Ireland, R. D., and Hoskisson, R. E., 2008. Understanding Business Strategy: Concepts and Cases. 2nd ed. Connecticut: Cengage Learning. Hitt, M. A., Ireland, R. D., and Hoskisson, R. E., 2012. Strategic Management Competitiveness & Globalization: Concepts and Cases. 10th ed. Connecticut: Cengage Learning. Lohr, S., 1988. The Global Strategy at Grand Met. [online] Available at: [Accessed 6th December 2012]. Lynch, R., 2009. Strategic Management. 5th ed. London: Prentice Hall. Massimiliano, V., 2010. The Ordoliberal Notion of Market Power: An Institutionalist Reassessment, European Competitive Journal, 6(3), pp. 689-707. Read More