Strategic Management - Southcorp as One of the Largest Wine Industries in Australia - Case Study Example

Running Header: Strategic management Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Executive summary Southcorp began brewing in 1888 when the South Australian Malting, Brewing, Spirits and Wine Company came to establishment in Adelaide the capital of Australia. The company development over the years resulted into vertical integrations with spirits and wines wholesaling, brewing interests, hotel operations and retailing interests. The Company later came to be known as South Australian Brewing Holdings (SABH) which made dominance in the Australian market and gaining positional advantage. It was in 1980s the SABH grew through capital investments and acquisitions (Hanson, Hitt, Ireland & Hoskisson 2011). At the time the Australian capital markets were comparatively inefficient and numerous corporations including SABH did exploit these market imperfections by increase in their earnings per share through consecutive acquisitions and the reward was growth in stock market. SABH’s acquisitions in dissimilar businesses were mainly opportunistic, backed by cash flows and debt funded from operations of brewing. Table of Contents Running Header: Strategic management 1 Table of Contents 3 Introduction 4 Analysis 4 Graham Leadership 5 Transformation of Southcorp 7 Trends of Southcorp 8 Case study questions 10 Conclusion 11 Introduction Southcorp started its brewing in 1888 when the South Australian Malting, Brewing, Spirits and Wine Company came to establishment in Adelaide the capital of Australia. The Company later came to be known as South Australian Brewing Holdings (SABH) which made dominance in the Australian market and gaining positional advantage. It was in 1980s the SABH grew through capital investments and acquisitions. Analysis Ross joined the SABH in 1987 in management division and he transformed the company by timely investing the share portfolio of $268 million before the market crash in 1987 which helped the SABH to have cash to initiate further growth. Ross also set the framework for adopting a new strategy to expand the one which was a provincial brewer to a considerable industrial company strong to endure the coming up of two national brewers. The main goal of the strategy was to set up three major businesses in beverages and food, household appliances and packaging i.e. businesses that could attain sustainable market management in all services and products. Using the same strategy in the early 1990s SABH made a number of acquisitions in water heaters and appliances, wine and packaging which turned out to be a big contributor to the company’s income. Traditional manufacturers viewed exporting as a risky affair and as a way to get rid of excess production of goods that would not be sold locally but Ross made the executives to see the exports as the main key that will make the company to succeed instead of seeing it as a sideline. In the late 1980s the SABH was ranked as one of the largest company’s in Australia having a market capitalization of 1.01 billion and 40 percent annual profit growth. Ross was given the credit for making clear strategies and having made strong decisions on critical matters such as restructuring, acquisitions and debts (Hoskisson 2088, p.180). A new control system was introduced in 1988 of remunerating by performance of a group and as a unit. Southcorp also acquired the wine industry which it owned iconic Penfolds Grange and becoming part of the food and beverage division. The growth of the company in 1990s slowed down as a result of recession after the 1987 market crash. From 1980s SABH was very active finding out any opportunities to spread out its brewing activities and implement its approach of becoming the top industry in the beer business nationally. In the year 1992 Ross came up with plans to enable international brewing business and form a merger with Foster’s. The Foster’s declined the mergers because they argued that the merger was offering minimal synergies and its plans were not fit for a single purpose international brewer. Later there was acquisition of US hot water Company which brought more problems to the company. The investment community response to the acquisition brought the prices of the shares down and Ross paid much to the assets, made some incorrect decisions on packaging investments and lost a key canning contract with CUB. Ross left the company in 1994 after a strong opposition and his position was taken over by Graham who was from the Pacific BBA. Graham Leadership When Graham joined the company the water heaters groups and packaging had lost some of the major accounts because of the conflicts between the major customers and senior executives. The appliances group was part of the warranty and price among the competitors. The water heater venture was losing business in United States. The business of packaging also did not have any exposure for crucial growth sectors of the industry. Graham had to continue with the strategy of growth through acquisitions but the step was to divest noncore businesses and manage the portfolio actively. Southcorp did focus on businesses with very powerful competitive advantages in market positions, scale, technology and brands that could be easily expanded overseas through foreign direct investment or exports (Hoskisson & Filatotchev 2007, p. 96). The main goal of the strategy was to continue with Ross Wilson’s approach of becoming number one or number two or leave the industry. In 1995 the Southcorp had performed poorly and some critics were arguing that the company was suffering a capital market distrust of conglomerates along with other Australian diversified industrials. It was in the year 1996-1997 that Graham regained the equity market assurance with remarkable rapidity, reflecting Southcorp’s Consolidation and refocusing its major businesses with acquisitions customized to improve the existing synergies. Southcorp’s wine group strengthened its place as a global supplier of premium wines. The appliance group had grown and enjoyed a more successful year in 1997 which was facilitated by the demand growth because of improvements in housing starts and the lower Australian dollar. The packaging group did an expansion of its operations in Australia and Asia and it was marketing itself in areas with stronger growth prospects. In 1996 Southcorp launched a new advertising campaign by the name ‘the name behind the brands’ to more strengthen Southcorp’s corporate image. Graham contended that the stock presented investors with the proper group of businesses in terms of their experience to noncyclical and cyclical means of domestic economy as well as geographical participation and diversification in wine. Graham also worked very hard to redefine the incentive system for the managers who are senior so that their individual performance is measured alongside the performance of each division and business within each division. There were monthly operational board meetings with the managing director and the Southcorp’s senior management did also had a meeting biannually to communicate, network and share ideas to meet the organization objectives. It was in 1999 that the Southcorp organized an innovation conference which encouraged proposal generation for the future growth. There was also a recruitment program for the graduate that did run both the corporate and division levels which did include the two year rotation through out the company. Transformation of Southcorp Graham retired in 2000 and Tom Park who was the general manager of Southcorp took over from him. Tom had a very successful international career with Kraft Foods International. When Tom joined the Southcorp he tried to achieve the dominant position in packing business which failed and he opted to sell the Australasian and Pacific assets worth $800 million to Visy industries which was paper and packaging company. Tom Park believed that the merger was completely consistent with Southcorp’s vision of becoming the leading branded wine company and the provision of good strategic fit (Hoskisson &Kim 2005, p.280). The merger made the Southcorp’s to increase its market capitalization to $4 billion which gave access to premium wine brands and created the world’s biggest braded wine company. Tom short tenure effectively ended with the merger and Keith Lambert of Rosemount assumed leadership of the company that was merged. The acquisition was share-based so the Oatley family became the largest shareholders of Southcorp Keith continued the divestiture program. As result of divestment of the cash flow generating packaging and water heating businesses, gathering money in the equity markets could be expansive and problematic unless the company could develop a winning global wine strategy for much growth, wine business high-risk wine business and demonstrate solid financial. Trends of Southcorp The whole of 1990s, Southcorp’s wine business had maintained the leading in the domestic market and led the reorganization of the wine industry through quick consolidation, both the Wilson and Graham had been instrumental in moving the wine business from being a very strong notional player to become the global business. In the early 1993 is when the value of the wine business started to be realized. When the Southcorp’s had new management, intensive cost-cutting measures were initiated, wine companies had merged, retrenchment of the employees, trimming of the stock levels and earning before interest and tax to sales margin lifted (Grossman & Hoskisson 2005. P.50). Strategies that were Export driven were complemented with investment through joint ventures in California, Moldova and France. Southcorp did achieve considerable success in establishing its brands and building its own distribution network international markets. Much success of the Southcorp was attributed to its flagship brand penfolds Grange which was acclaimed the best wine of the year in 1995 by one of the influential magazine of the United States by the name Spectator. Vintage Grange was named as the best top 12 wines of the century. Lindermans which was the second Southcorp second brand with global potential also received much acclaim. In the early 2000s Southcorp became one of the top ten wine companies in the world with 50 per cent exportation of its production. Southcorp wines formidable export success throughout the failed in 1990s but to translate into a very big financial performance in the late 1990s to early 2000s.Before Tom Park taking up the leadership the return on investment fell to 10 percent. Despite the fact that the division was still the biggest wine company in Australia it was small compared with the other alcoholic beverages companies and was considered unproductive and too diversified by international investors. The merging with the Rosemount which was a commitment to become a pure wine company and subsequent adoption of the Rosemount model brought a positive effect on the share price. Rosemount had a truly remarkable performance record in the four years to 2001 which showed a compound revenue growth of nearly 40 per cent and a return on investment of 30 per cent and the margin was approximately 29 per cent. The finding of the new CEO Keith Lambert, Southcorp’s challenges included a production driven culture, an incapability of tracking the success and the failure of the wine brands and the products, the inefficient use of the capital and the slow release of wine to the market (Hill & Hoskisson 2005, p.335). The costs that came along with the implementing of the SAP computer system which resulted in the supply chain inefficiencies and Olympic sponsorship expenses exacerbated the situation. Keith’s first priorities were to begin market driven approach and implementing a material requirement plan in Southcorp wines, reducing of staff numbers and finalizing a joint venture contract with Robert Mondavi who was premium Californian wine producer Keith predicted initial synergies of $20 million, which in time would have translated into $50 million to $100 million a year. Keith did show unrelenting commitment to improving the merged company’s performance but some of his actions proved more controversial. Case study questions What is your assessment of the takeover of Southcorp by Forster’s? What is the strategic logic of this acquisition? And more broadly, what do you think about the wine industry consolidation? Foster’s and five other Melbourne brewers combined to form Caltex and United Breweries (CUB) which was an expansion of national reach acquisition of major competitors. Its distribution, brand building and technological capabilities and combination of economies of scale made it a success in exportation. In 1983 Caltex and United Breweries was acquired by Elders IXL which was dealing with finance, pastoral and trading company. Later Elders IXL lost all other businesses except that of brewing interest which was renamed Foster’s brewing group. At first Foster had a debt of up to $2 billion but it changed itself to being an expansive company with $15.4 billion of assets in entrepreneurial, agribusiness, brewing and finance business to the predominantly brewer (Hanson, Hitt, Ireland & Hoskisson 2011). The company was highly successful in the domestic market in 1990s where it showed double digit earning growth for many consecutive years. The acquisition of the foreign markets by Southcorp was not a success so the company decided to concentrate on the local markets. Foster diversified into wine where by it acquired the Mildara Blass which was a premium Australian wine producer. In the wine industry, in 1990s, Southcorp wine business had maintained control in the domestic market which led to reorganization of the wine industry by rapid consolidation. The strategy was to make the Southcorp dominate the market and become the sole producer. It was both the Graham Krache and Rose Wilson that played a major role in growth of wine business from being a strong national player to becoming an international business. There was an injection of $500 million to help in the growth capacity and modernized its wine making facilities. The wine industry was success such that the company established investment through joint ventures in France, Moldova and California. Wine industry consolidation brought about growth and success. Will Foster’s be a good corporate parent for Southcorp? How will value be added at the corporate level? Foster company was a good corporate parent for the Southcorp. Foster transformed itself to being an expansive company with $15.4 billion of assets in entrepreneurial, agribusiness, brewing and finance business to predominantly brewing group. Its domestic plan was based on product innovations associated to the consumer preferences, technical pre-eminence, product quality and national brand identity (Hanson, Hitt, Ireland & Hoskisson 2011). At first was with Victoria Bitter and then followed by Foster’s Light Ices and Carlton cold. Foster brought success in the domestic market. The value was added by diversification into wine industry and carrying out joint ventures and also the acquisition of the traditional producers. Conclusion Southcorp became one of the largest wine industries in Australia as a result of merger and acquisitions. The strategies really help the company to position itself in a very competitive edge. At the time the Australian capital markets were comparatively inefficient and numerous corporations including SABH did exploit these market imperfections by increase in their earnings per share through consecutive acquisitions and the reward was growth in stock market. References Filatotchev, I & Hoskisson, R 2007, Corporate restructuring in Russian privatizations: Implications for US investors. California Management Review, Vol.38, no.2 pp. 87-105. Grossman, W & Hoskisson, R 2008, CEO pay at the crossroads of Wall Street and Main: Toward the strategic design of executive compensation. Academy of Management Executive, Vol.12, no.1, pp.43-57. Hanson, D, Hitt, M, Ireland, R & Hoskisson, R 2011, Strategic Management competitiveness and globalisation, Cengage. Hoskisson, R 2008, Gianni Lorenzoni: An expert on strategic network organizations. Journal of Management Inquiry, Vol. 5, no.8 pp. 178-186 Hoskisson, R & Kim, H 2005. 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