Foreign Market Entry and Diversification: Grupo Modelo - Case Study Example

I. Introduction This paper aims to analyze the case about Grupo Modelo and its international business operations. By analyzing the global beer industry—looking at barriers to entry, the strengths of the competitors and different trends in the market, possible effects on the strategy that Grupo Modelo has adopted are looked into. Grupo Modelos decision to enter a market through strategic alliances instead of direct entry or acquisition of subsidiaries is also delved into. Lastly, recommendations are given as to whether Grupo Modelo should diversify or not. Considerations like risks and returns are assessed, while the final recommendation is to pursue economies of scale by replacing the international with the global strategy, in order to increase the companys market scope and production capabilities. II. Body A. Clearly identify and discuss the trends in the global beer markets and the impact to its strategy. Since the fourteenth century, the global beer industry has been characterized as cluttered. Because of the limitations in terms of transportation, brewing beer is limited to domestic or national operations. However, with the advancement of technology, the global beer industry, with the smaller breweries around the world opens up a consolidation as a major strategy for players to grow. Higher capital requirements in the form of plants and technological infrastructure require big players to focus on expanding their economies of scale in order to achieve high profitability. By consolidating the industry through mergers and acquisitions, big players are able to capture the local markets as well as the production facilities of their smaller domestic competitors. Growing inorganically has been the major trend over the years in the global beer industry. These mergers and acquisitions do not only lead to players increase in their production abilities, but these consolidated players have larger access to financing and can better utilize leverage which is a very huge advantage over Grupo Modelo. This trend is a major threat to the company; so while Grupo Modelo does not have the adequate resources to compete in the same way that competitors expand by acquisitions, the companys strategy in order to enter markets is by strategic alliances, instead. B. Discuss the international expansion trends and how Modelo’s international expansion was made possible through strategic partnerships with experienced distributors in local markets. The major players in the global beer industry have expanded internationally through acquisitions. The first one to adopt this strategy was Interbrew, a Belgian company which has acquired small breweries in 20 countries while it has expanded its sales in 110 countries through these local acquisitions. Later on, Interbrew has merged with Ambev, a Brazilian brewery which is fifth largest in the world resulting in the largest merger in the global beer industry. This trend however was not followed by Grupo Modelo in terms of expanding globally. Instead of penetrating the international markets by acquiring domestic players, the company has focused on building strategic relationships and alliances with carefully selected local distributors within the geographic market. The major justification of Grupo Modelo for this strategy is to capitalize on its partners experiences and expertise in knowing the local tastes and needs, which is crucial to be successful. In order to expand to the United States, Grupo Modelo has forged a strong partnership first with Barton Beers, Ltd, a Chicago-based distributor. Barton Beers is strategically fit for Grupo Modelos goals because Barton Beers is the largest distributor of imported, premium beers in the 25 western states of the country. This strength of Barton Beers in the form of knowledge of the local market has helped Grupo Modelo to conceive the big marketing idea of “fun in the sun” which has enabled its major brand Corona to become the number one imported beer in the United States. In order to penetrate the rest of the country, Grupo Modelo has entered an agreement with another distributor, Gambrinus, Inc., which is in charge of distribution for the other 25 states. According to the companys agreement with the distributors, Gambrinus, Inc. and Barton Beers have autonomy in terms of decision-making as regards their efforts on marketing and selling the beers—all except production. However, when it comes to decisions concerning the companys brand-image, it still has the final say. Because of the extensive network of distribution of the two distributors in the United States, the company has been able to penetrate bars and different distribution channels in the country. The Corona brand has also become a viable, available alternative when the primary choice of beer is not available in a certain establishment. C. Identify and discuss the next foreign market that Modelo should enter and with what strategy. (150) Grupo Modelos success lies not in the taste of the beers, but with its marketing campaign and extensive distribution network. Among the key markets for beers, China has the largest beer market for the current. This seems promising to Grupo Modelo; the returns look high. However, although the returns are high, the risks are very huge as well. Grupo Modelo cannot employ the same strategy it has used in the United States. Although the US has a lot of cultural differences with the host country where the company is in—Mexico, beer consumption is very popular in America already as included in its history. For China, however, these differences are larger. The Chinese have different cultural beverages. Therefore, emphasis not on the brand, but on introducing beer consumption should be the major effort of the companys marketing. Also, the success of the company in the US is reliant on its distributors long experience in selling imported premium beers. In China, the company will need to find a distributor which is very knowledgeable in the local market, but is receptive to foreign products. The issues on local operations, negotiations due to huge differences in the cultures need also be addressed in the process. Doing business in China is definitely different from doing business in the US. Instead of export and strategic alliances, the companys strategy can employ joint ventures with local company in order to have a more direct control on the operations, at the same time capitalizing on the knowledge of the other partner. This way, the companys investments will be more controlled, at the same time the local partner will have enough room to have its way. While foreign direct investment is seen as the more advantageous in terms of controlling the operations in the country, the lack of knowledge of Grupo Modelo in doing business in China will only set the investment into failure. Joint venture can be the best strategy employed in China for foreign expansion. D. Discuss the challenges that Modelo faces from its competitor InBev, and how it might respond strategically to the industry giant. InBev, with its large scope and its large asset base, definitely poses a lot of challenges to Grupo Modelo. One of these include its ability to invest in marketing dollars if it ever wishes to enter the US market and compete head to head against Grupo Modelo. Because of the economies of scale that this industry giant has, it can lower down its price and use price as the grounds for competition. However, no matter how large this industry giant is, it also has certain limitations. Because of its diverse operations, it has a lot of markets to defend which robs it focus on a certain market. Therefore, Grupo Modelos best response is to intensify its focus on its current market by constantly delivering their needs and exceeding their expectations. Grupo Modelos major strength is its marketing prowess through its distributors, as well as the extensive distribution networks of Barton Beers and Gambrinus, Inc. The company can use these strengths to craft a strategy. What Grupo Modelo must do is to transform its international brand into a global one and invest in building a strong brand recognition across the globe. The strong global brand will enable it to enter into strategic partnerships in other markets it wishes to enter, while taking advantage of economies of scale. Adopting a global strategy will enable it not to lose focus on the needs of the local market through its local distributors, but will enable it to expand its reach in different markets across the globe (Levitt 1983). A global strategy will also enable it to expand in order for it to grow even without growing inorganically. E. Discuss whether or not Modelo should diversify its business. If so, what business should it enter and why? Discuss the diversification elements. (411) The decision to whether diversify or not entails various considerations, some of which include how high is the risk, as well as the return that is required to compensate undertaking that risk. Diversification is entering a new market with another product or service, this is the part where the risk is the highest. The competition in the global beer industry is international, not global. Grupo Modelos strategy vary from each country. Its success in the US is dependent on its fun in the sun campaign, which is its positioning in that market. As a global brand, it does not take a global positioning strategy that would distinguish it from competitors. FEMSA on the other hand is consistent with Heinekens global positioning strategy—which makes them good partners. The major strength of Grupo Modelos international strategy is that it is through to the heart of the consumers; it answers an insight. Its weaknesses include the lack of uniformity for it to be known for something as a global brand; this is more costly for the company because it does not benefit from the economies of scale that a global strategy can bring, like those of its rivals. Carlos Fernandez should first consider adopting a global approach to doing business. That means, defining a strong positioning strategy for the brand, as well as identifying global market segments for its products. By utilizing a global positioning strategy, the company can benefit from economies of scale especially in the field of advertising (Levitt 1983). With a well-defined global target market profile, the company can find similar markets in terms of culture that could best respond to the image that it offers in its marketing efforts. That way, it can earn a lot more revenues abroad, while keeping the costs down, and having huge retained earnings amount that could influence its long-term performance in the future. If the company can also resort to other cheaper modes of entry other than export, such as foreign direct investment especially if the market is too big like in the US, benefits would be greater too (Hout, Porter & Rudden 1982). A global strategy, which requires it to treat the different markets interdependently in terms of production and marketing activities, depending on their respective strengths and opportunities will also enable Grupo Modelo to increase its production capacities. III. Conclusion Instead of diversifying, Grupo Modelo should first consider adopting a global approach to doing business. That means, defining a strong positioning strategy for the brand, as well as identifying global market segments for its products. By utilizing a global positioning strategy, the company can benefit from economies of scale especially in the field of advertising. With a well-defined global target market profile, the company can find similar markets in terms of culture that could best respond to the image that it offers in its marketing efforts. That way, it can earn a lot more revenues abroad, while keeping the costs down, and having huge retained earnings amount that could influence its long-term performance in the future. If the company can also resort to other cheaper modes of entry other than export, such as foreign direct investment especially if the market is too big like in the US, benefits would be greater too. References Hout, T., Porter, M., & E. Rudden. 1982 September-October. "How global companies win out." Harvard Business Review 92-108. Business Source Premier, EBSCOhost (accessed February 18, 2010). Levitt, Theodore. 1983 May-June. "The globalization of markets." Harvard Business Review 92-102. Business Source Premier, EBSCOhost (accessed February 18, 2010). Read More