The Market Position of Anheuser-Busch Companies - Assignment Example

?Executive Summary The project deals with competitive analysis of a business firm. The market position of the firm will be analyzed in the project. The success or the failure of the firm in the recent years and how they can make optimal utilization of their resources will be analyzed. The most important part of the project is the process of value creation of the chosen firm. Discussions of factors driving value creation will be included in the project. The strategies that the firm takes in order to gain competitive advantage will be discussed later. Introduction The company selected for the project is Anheuser-Busch Companies, Inc. It is a brewing company of America and operates in 13 breweries in the country. The company is based in St. Louis, Missouri. Apart from packaging and brewing operations, the company also engages itself in agricultural operations, recycling operations as well as manages subsidiary owned property. The company supplies its products through a network that involves 500 independent wholesalers as well as 13 wholly state owned enterprises (Anheuser-Busch, 2012). The successful business organizations understand the purpose of value creation for the existing employees, customers and the investors. They are also aware that the interests of the groups are inter-related. Sustainable value should be created for all the three groups simultaneously. From the point of view of the customers, value creation means availability of products and services that are useful to them. From the perspective of the employees, value creation means treating all employees in a respectful fashion and involves themselves in the decision makings while value creation for the investors means obtaining high returns on their investments (Holland, 2001, p. 3). The mission of a certain company should be defined in terms of the primary value adding activities. Therefore, it is of utmost interests for the managers to devote time to analyze the dynamics of value creation. But managers tend to take decisions that systematically reduce the long term possibility of the firm to create value. They tend to define the interests of the organizations narrowly and this view was reinforced by the financial accounting systems (O'Malley, 1998). It is possible for business to create value in the following ways: reducing the transaction costs (for consumers / producers) reducing the costs of producers changing the perceptions of perceived benefits The firms offer some advantages where the transaction costs are lower. Market transactions involve the use of real resources such as time and search costs as well as drawing up and enforcing contracts. Economies of scale can also crop us if the market transactions involve the use of real resources. The common ownership of the resources of production are sometimes less costly than a series of arrangements with independent contractors when there are specialized assets and expertise involved (Forbes, 2012). The factors driving value creation The history of the selected company is one of success as well as innovation. There has not been any real growth in the product market of the company in the time period under consideration in the graph above but the company faired particularly well in the stock market. In the last decade the domestic demand for beer went flat. The year 1996 marked the year where the company was able to create substantial value. In that year only 55 of the total produced in the company were sold outside United States. In the two year period of 1996 to 1998, the invested capital of the company grew by about 1.9 billion dollars. The enterpris3 value of the company grew by around 13.4 billion dollars (Arnold and Shockley, 2002, pp. 1-6). The estimated enterprise value of the company is shown in the graph below. The value of the company’s assets in place grew only slightly over the excess of capital invested. This indicates low growth of the existing market. The real value creation can be observed in the generation of 10 billion dollars worth of growth options for the company. In the mid 1990s, the manager of the company decided to sell some business. The decision was made with the view to focus on the core products of the company. A major part of the strategy was to purchase minority concerns involved in the brewing markets. The company invested a few million dollars in the foreign markets in exchange of small stake in equity. The company would collude with local companies who would brew and distribute the products. The joint venture will be directed by Anheuser-Busch and would promote the product. The strategy of joint venture was a technique in order to create real options on huge volume of investments in the foreign countries. The creation of these options paved the way for creating 11 billion dollars value. The company turned towards the markets where the demand for beer is speculated to grow. One of the other options that were available to the company was to build a brewing system in the foreign country. The company ignored the options as that would involve huge capital investments as well as risks. The demand for the product of the company is associated with the tastes of the consumers and the prevailing economic conditions. The company innovated a way so as to downside the associated risk. By engaging in the joint venture the company could gain knowledge about the beer markets of the foreign countries. This learning was helpful before the company committed huge sums of money. In other words the joint venture provided the management of the company to refine the understandings on the market structures. In the year 1996, the company was allowed to taste the existing market structure of Argentina. Therefore the company could decide whether investments in Chile or Argentinean market would be more fruitful from the point of view of the company. The ex-ante net present value was negative in 1995 in Argentina and in Chile. However the flexibility in productions led to value creation much more than the original costs. It is evident from the above figure that the company can involve itself in investing huge sum of money only if it appears for the company to do so. Prior to the decision making process the company could expect the demand for the product, the expected price it can offer in the market as well as the cost associated in running the business in that part of the globe. Therefore the future payoff of the company will look like the graph below: The learning strategy of the company can be viewed as the call option where the price is set equal to the required investment of capital. As the company invested in CCU, it can gain knowledge on the value of business for 2002 prior making the investment decision. The company in such ways could gain the right and not the obligation to invest a large sum of money in the markets of Argentina and Chile in 2002. So the value of the new strategy can be estimated by valuing the options that the joint venture created. Therefore it can be stated from the analysis that the company could increase the value creation by setting up deals with the small enterprises. The ranges of the enterprises included a wide range of brewers operating in the beer markets. The enterprises were situated in the markets that were speculated to attract huge demand for beer in future. The company exploited the options to expand as it gained the partial ownership rights in the breweries of foreign countries (Mongeau, 2009, p. 9). The following diagram shows the demand supply analysis of the chosen product. In this case it is assumed that the market is competitive and so the demand curve is horizontal. In this case a parallel shift in the supply schedule leads to lower demand. The quantity demanded has fallen to Q1from Q0. The price is remaining the same in the market. The following diagram provides a clearer picture. Analysis of the firm’s competitive position The company enjoys second largest market capitalization compared to all the other companies operating in the beverage industry. The company is listed as well in the Standard and Poor 500 index. Various subsidiaries constitute the company. The segments of the business consist of domestic as well as international beer, packaging systems and a group of real estate business. The concept of entertainment is also included in the business segments. The segment consisting of domestic beer manufacturing includes integration of rice and barley. In the packaging segment the processes associated with labelling, shipment of aluminium cans and the processes associated with recycling are included. The vertically integrated processes allow the company to enjoy competitive advantage at least in the segment of domestic beer. Moving on to the segment of international beer, the recent activity that occurred in this segment includes the acquisition of the largest brewer of China. It will not be wise to ignore competitors like SABMiller, Grupo Modelo, Diageo plc just to name a few. The company operates in a competitive industry. The company offered competitive prices in order to survive in the industry and it had been successful in acquiring a large capitalization of the market. The strategy that the company follows is reliant on more brand differentiation than the other competitors operating in the same industry. The company followed the policy of diversification by offering a new line of non-alcoholic beverages as well as utilized the efficiency of the company on packaging and entertainment. The company involves itself in investing money in the promotional activities as well as in brand recognition. Transparent reporting forms the base of the accounting strategy of the company. The accounting methodologies are in line with the regulations of GAAP (Morriss, 2008, p.3) . The company followed the policy of immense use of the financial resources available and low cost of capital so as to expand their operations. The calculations of the financial ratios of the company will witness the fact that it is fairly liquid. The gross profit margin is around 50%. The other indicators of profitability point to the higher end of the benchmark within the industry. The company is able to borrow money cheaply and the company is highly leveraged. It can be said that the company is on the strong growth path with significant opportunities of growth. The following table shows a picture of the rankings of the operating companies in the brewing industry. Due to high demand for beer, excess capacity is not a concern. The large scale economies discourage the entrant of new enterprises into the market. The company enjoys the first mover advantage and have been able to establish the brand name (Powell, 2004, p. 2). The costs are kept at an affordable level as it shares close proximity with the suppliers. The new entrants will face constraints to maintain relationships with the distributors. The selected company being a giant in the industry is able to maintain that relationship. The levels of higher taxation existing in the beverage industry are also a constraint for the smaller entrants. The entry into the industry involves huge capital. In spite of beer being the most common choice in the beverage industry there are certain substitutes like wine, malt beverages. The company offers a wide variety of beer at different levels of prices. It judges the tastes of the customers effectively. If the customer is looking for great taste, lower prices, the company covers all the fronts. The beer drinkers are mostly loyal towards the brand they drink. Since the company is operating in the business for such a long time it enjoys a huge consumer base who are unwilling to switch to other brands available in the market (Tech Investments , 2004, pp. 1-15). Strategy by which the firm can develop competitive advantage The term competitive advantage is used to define the advantages that a certain company enjoys by offering the consumers greater value. The offerings can be made in the form of lower prices or providing certain additional services that justifies the higher prices (Boeing, Casey, Colson and Cropenbaker, 2008, p. 1). There are mainly four strategies that a business can follow in order to gain competitive advantage namely differentiation, cost leadership, differentiation focus and cost focus (Ehmke, 2009, p. 2). A strategy that can be followed by the company in order to gain competitive advantage is human resources. Human resources have no substitutes and can rarely be imitated. It is possible for the other competitors to imitate the competitive advantage that is obtained through better technology as well as products. But it is next to impossible to imitate a competitive advantage that is obtained through improved management of people. A causal relationship exists between the HR practices and the effectiveness of the organization. The perspective of customer satisfaction has direct relationship with the performance appraisals and opportunities to develop career further. Researchers are of the opinion that strategic practices in human resources are effective to contribute in the objectives of the organizations. The organizations must ensure that the employees add value to the productive processes. A motivated as well as flexible workforce will lay the foundation stone for proper management. The employees will get motivated to contribute in the best possible way. This will only increase the productivity of the company. There is need to take an assumption into account. The practices of HRM are linked with the strategies in such a way so that it impacts positively on personnel costs and on the productivity of employees. However it is difficult to identify the correct dimensions of the practices that will provide most effective impact on the performance of business. The competitiveness of the organizations within the beverage industry is determined by the ability of the organizations to satisfy its customers. Every organization is involved in the race so as to provide effective customer support cheaply. If the company can launch into some motivational activities with the aim to motivate the employees it will surely be able to generate sufficient gains in productivity that will pave the way for better customer support at much lesser cost. A sustained as well as committed analysis is required for the whole process to take place. The activities related to HRM are core to all the business activities that ate aimed to develop corporate value and allow the teams to develop their full potential for the benefit of the company as a whole. There are mainly three theories that are associated with the HRM practices namely strategic, normative and the descriptive. The descriptive theories address some of the existing inter-relationships and explain the HRM practices in a comprehensive fashion. The normative theory is more prescriptive in nature and is of the view that sufficient knowledge exists in order to prescribe the possibilities of best practices. The normative theory also states that if the practices of the HRM are applied then that would result in higher performance. The practices of HR form an invisible asset that has got the potential to create value when embedded into the operational procedure of the company (Balgobind, 2007, pp. 3-12). Conclusion The project considers one of the giants in the brewing industry. The process of creating value has been explained in the above paragraphs. The selected firm created value by following appropriate strategies so as to exploit the available opportunities in the market. The company went into joint venture with small and local firms operating in the same industry but in different countries. These approaches provided the opportunity for the company to gain knowledge on the existing market structure in the foreign countries. Therefore it was easier for the company to learn from the market and accordingly take the necessary steps without investing any capital for the purpose. The company analyzed the markets where rise in demand for beer was expected. Therefore the approach of the company towards attaining a significant foothold in the market deserves praise. The analysis of the competitive position of the company will reveal that the company is able to achieve strong market share. As demand for beer being relatively stable and the consumers being loyal towards the brand the company is in a stable position which is reflected by the financial ratios. The company is operating in the industry for some time now and so it has been able to enjoy the first mover advantage and brand recognition. There are spaces where the company can become more efficient and one such being the HR practices. A well defined HR practice will motivate the employees which tend to increase the productivity. Career development, sufficient incentives as well perks and loyalties are the steps that will lay the steps towards efficient practices of HR. Reference O'Malley, P. (1998). Value Creation and Business Success. Vol. 9, No. 2. Retrieved From: http://www.pegasuscom.com/levpoints/valuecreate.html. [Accessed:3rd September, 2012]. Anheuser-Busch. (2012). Our Company. Retrieved From: http://anheuser-busch.com/index.php/our-company/. [Accessed:3rd September, 2012]. Mongeau, S. (2009). Decision Support via Real Options Analysis Financial Products / Services Analysis (FPSA). Retrieved From: http://www.cygent.com/docs/sark7-scott_mongeau-rsm_mfm.pdf. [Accessed:3rd September, 2012]. Holland, J. (2001). CORPORATE VALUE CREATION, INTANGIBLES AND DISCLOSURE. Retrieved From: https://dspace.gla.ac.uk/bitstream/1905/136/1/2001-3%5B1%5D.pdf. [Accessed:3rd September, 2012]. Arnold T. and Shockley, R. (2002). VALUE CREATION AT ANHEUSER-BUSCH: A REAL OPTIONS EXAMPLE. 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Beer Brewers Industry Analysis. Retrieved From: http://www.nku.edu/~fordmw/mgt490projectbeer.pdf. [Accessed:3rd September, 2012]. Balgobind, P. (2007). The relationship between human resource management practices and organizational performance of the manufacturing sector of the beer industry in South Africa. Retrieved from: http://upetd.up.ac.za/thesis/available/etd-03202010-171358/unrestricted/dissertation.pdf. [Accessed:3rd September, 2012]. Read More