SAB Miller Analysis - Case Study Example

Table of Contents Strategic position of SAB Miller 2 (SABMiller acquires Topvar Brewery in Slovakia, May 2005) 3 PESTEL Analysis 6 SWOT Analysis 8 Strength 9 Weakness 9 Opportunity 10 Threat 10 Power/Interest Matrix 10 Implications of its Current Strategic Position for the Future of SAB Miller 12 Ansoff's Matrix 12 Evaluation of the use and limitations of the tools applied in the analysis 14 Conclusion 16 Ehmke C., Fulton J., Akridge J., Erickson K. & Linton S., September 2004, Industry Analysis: The Five Forces, Purdue University, [Online], Available: http://www.ces.purdue.edu/extmedia/ec/ec-722.pdf [17 April 2009] 18 SABMiller acquires Topvar Brewery in Slovakia, May 2005, SAbMiller Plc - About Us, News, [Online], Available: http://www.sabmiller.com/index.asppageid=32&newsid=500 [17 April 2009] 18 Bibliography 19 Gupta S., October 2007, Swiss Resolution Merger Unresolved, University of Minnesota London, [Online], Available: http://blog.lib.umn.edu/devau002/mgmt6033/mergers_acquisitions/ 20 Kane S., October 2007, Molson Coors and Miller Beer Announce Merger, The Daily Cardinal, [Online], Available: http://www.cardinal.wisc.edu/article/653 20 Strategic position of SAB Miller SAB, since its incorporation in South Africa in 1970, has gone through a vast growth both in terms of organic as well as through strategic alliances and acquisitions. SAB was renamed as SAB Miller in 2002 following its acquisition of the American brewery Miller. In order to identify SAB Miller's current strategic position it is recommended to track the growth of the organization over the years and how it chose to go about it under different political and economic scenarios. Organic Growth Acquisitions Strategic Alliance Entering local fragmented markets and entering into partnerships by lending expertise with the aim of consolidation; from mid-1990s Miller (American Brewer);2002 Grupo Empresarial Bavaria(South America);2005 Greenfiled Brewery (Dongguan);2006 Brewery in Heilongjiang (in Harbain);2006 Dreher (Hungary, Central Europe);1993 Acquisitions to be market leader in Swaziland, Lesotho, Rhodesia and Botswana; by 1979 Lion Match Company;1978 Topvar Brewery (Slovakia);2005 Tie-up with local distribution partner (Vietnam);2005 Strategic alliances by obtaining licenses Diversification through Joint Ventures; Sun city casino resort; 1978 JV with Tanzanian government, Zambia, Mozambique, Angola; 1994 Joint Venture in India (SABMiller acquires Topvar Brewery in Slovakia, May 2005) From the above tabular form, it is apparent that more than pursuing organic growth, SAB Miller has concentrated on consolidation and expansion; the latter achieved through acquisitions and strategic alliances. To understand the strategic position of SAB Miller, it is important to analyze the competitive market and situation that the business operated in. Porter's Five Forces Porter's five forces model helps in analysing the forces or aspects that influence an industry. This analysis, however, is relevant for a particular industry and not in assessing the performance at the company level. This model thus helps in studying the effects of the external factors that drive a company's performance and output in terms of the other elements operating in the same industry. The five forces constituting the model - competitive rivalry, threat of new entry, bargaining power of suppliers, bargaining power of buyers and threat of substitutes. All these forces ultimately affect the profitability of the company. However, these forces that affect the profitability of a company make up the business environment of any organization and are beyond the sphere of influence of the company's control. So, it is important for the company to develop and adopt tactics to combat these competitive forces and keep a tab on them to foresee the upcoming trends and accordingly brace themselves with suitable strategies. Following are the forces described individually. (Ehmke C. et al, September 2004) Competitive Rivalry- The main competitor of SAB Miller was Anheuser-Busch. However SAB Miller acquired a number of strategic target companies to build up a potent portfolio, .For combating the threat of local products, SAB Miller forged several partnerships and strategic alliances to win over brand loyal patrons of local brands towards their favor. Also, the company developed a brand portfolio to cover all price bands. Threat of New Entry- SAB Miller has always attempted to introduce newer and more extensive channel of distribution. Also, the company concentrated on increasing its output for attending economies of scale. SM pursued very aggressive growth measures as well as quality enhancement to create high entry barriers. Bargaining Power of Suppliers- Bargaining power of suppliers is usually low in this industry. There has been a prominent market trend where bigger players have adopted backward integration strategies by taking over brewries.SAB miller has instead adopted a symbiotic strategy where it has trained over 6000 taverniers in superior business practices, thereby ensuring itself a steady source of quality raw material. Bargaining Power of Buyers- SAB Miller has had always made investments and drained efforts for maintaining and opening up new distribution channels. Since primary buyers of this industry are the distributors, it is very important to have multiple and redundant distribution channels. Additionally, consolidating it distribution channel and restricting new competition (by creating high entry barrier) has helped SAB Miller restrict the buying power of buyers. Threat of Substitution- The threat of consumers switching to substitutes is higher unless there is a strong brand loyalty towards the respective brand. Also, the switching cost is almost nil in the beverage industry. From the manufactures' point of view, profit margin is higher in making wine than brewing beer; hence, there is a threat of increased competition in the beverage industry which in turn enhances threat of substitution. Soft drinks could also act as substitution threat. (Boeing L. et al, April 2008) PESTEL Analysis Porter's five forces as well as the PESTEL analysis are tools to carry out an external analysis for a business. While Porter's five forces model helps a decision maker assessment the particular industry the business operates in, PESTEL helps examine the macro environment which includes study of the political, economic, social, technological, environmental and legal aspects of the company. Political- SAB operated in a time of the great political upheaval of 'Apartheid'; the racist institution and the movement against it that started way back in 1948. This affected the company's investment in other countries. Many stringent laws were introduced post institutionalization of racial discrimination which made it difficult for SAB Miller for its operation as well as expansion plans. (The History of Apartheid in South Africa, n.d.) But in the 1990s, with the re-establishment of the multiracial democracy, SAB was free to embark on an extensive expansion as well as investments in development of breweries. Economic- 'Apartheid' restricted all South African companies, including SAB Miller, from trading with the international market. This held back SAB Miller from expansion beyond South Africa. The following excerpt describes the economic condition of South Africa even post apartheid- "South Africa embraces two entirely different economies. One competes in global markets and bears comparison with the 'first world' economies of the OECD. The other is largely undeveloped and informal, comprising the 'third world' environment in which most blacks still live. In short, there are two South Africas, one white and rich, one non-white and poor." (Economic Realities, 2001) Post 1990, with the onset of multiracial democracy, SAB Miller went on with their expansion plans in emerging economies through both organic growth as well as through acquisitions and joint ventures or partnerships. The rationale behind SAB Miller's strategic move to foray into the emerging economies was backed-up by the observation that in such economies, amount of beer consumption is directly proportional to the level of disposable income at the consumer level. Also, the fact that SAB Miller earned most of its profits in soft currency and with the depreciation of the value of rand in the year 2001, there was a possibility of decreased value in hard currencies which could, in turn affect the share prices. The decision to get listed on the London Stock Exchange (LSE) in 1999 allowed SAB Miller to be exposed to the world capital markets. This move provided the company with financial resources required for its extensive expansion plans. However, SAB's share price lost 15.55% in the LSE and 2.68% in the domestic stock exchange in the year ending 2000 which was attributed to SAB's inability to acquire any major brand as of that time. The steady decline in the share prices even post the acquisition might be due to the rising cost of key raw materials -energy and aluminum. Even under such circumstances, the company showed profits which can be attributed to the result of steady investments made by the company for 3 years in expanding its portfolio of brands. Following the merger with Bavaria in 2005, the group's earnings increased from 25.2% to 52.1%, thereby encouraging decision makers to invest in newer acquisitions. SAB Miller's portfolio balances the overall earnings; for example Botswana's underperformance due to difficult economic conditions was rebalanced somewhat by Uganda, Tanzania and Mozambique doing well. Social- The preferential treatment towards the whites during the period when racial discrimination was institutionalized in South Africa affected the social balance to a great extent. This was defied by SAB for the first time in 1978 when the company published a code of non-discriminatory employment. Multiracial democracy was established once again by 1990 which encouraged SAB to go forward with its growth plans. (You will also have to add to how social factors added to more business for SAB miller) Technological, Environmental, Legal- These aspects are self explanatory and are not much in connection with the present study. SWOT Analysis To understand the strategic position of a company it is important to carry out an iterative assessment of the external environment of the business as well as the internal performance. While tools such as Porter's and PESTEL generate an understanding of the external business environment, SWOT is perhaps a critical step for all organizations to understand the internal health of the organization vis-a-vis its external environment. SWOT is the coined acronym for Strength, Weakness, Threat and Opportunity. Following is the SWOT analysis for SAB Miller as derived from the case study. Strength 1. Marketing and distribution abilities 2. Product portfolio 3. Train taverniers for superior business practices 4. Superior product quality Weakness 1. Aggressive expansion by inorganic growth 2. Reliance on licensed partners (non-owned breweries) 3. Fluctuating share price- possibility of being taken over Opportunity 1. Practice forward integration to avoid bargaining power of suppliers 2. Target global markets 3. Increase market share Threat 1. Failure to consolidate the units brought under the group by acquisitions and strategic alliances 2. Intense competition might lead to losing market share 3. Possibility of being taken over Power/Interest Matrix The power/interest matrix shows the extent of power that the stakeholders possess in determining or influencing the decisions and strategies adopted by the company and also the level of interest that they show towards the organization's activities. (Stakeholder Mapping, n.d.)The two parameters that are used in order to quantify this degree of involvement are respectively power and the level of interest. According to the power/interest results, the company prioritizes the kind of relation they should be maintaining with the individual stakeholders. Mapping the various combinations four kind of possibilities are obtained- Low power with low level of interest- In this case minimal effort is required from the company to maintain a relationship with stakeholders falling in this category. Low power with high level of interest - Stakeholders in this category play a major role in influencing other stakeholders. For a company like SAB Miller, the employees of the organization, the debtors and creditors constitute this category. These people can easily influence the other stakeholders both in a positive as well as in a negative way. However, the case study reveals that SAB Miller mostly goes for acquisitions to meet up its capital requirements as well as for public funds by enlisting itself in the South African as well as the London Stock Exchange. High power with low level of interest - Stakeholders in this category are the suppliers, the labour unions, and the institutional bodies who are otherwise more or less passively interested in the strategies adopted by the company but they have a tendency to move to the quadrant of stakeholders where both the power and level of interest are high if need so arise. These stakeholders should ideally be kept satisfied by the company. High power with high level of interest - The stakeholders in this category are very powerful as well as highly interested in the activities of the company and the strategies adopted by them. For SAB Miller, these stakeholders are the distributors, consumers, and most importantly the shareholders of the company. These people also ideally are the primary stakeholders of any business. (Stakeholder Interests, n.d.) Implications of its Current Strategic Position for the Future of SAB Miller After defining SAB Miller's strategic position, it becomes imperative to analyze the company's business growth opportunities and its future aspects. As known from the case study provided, SAB Miller diversified with its investments other than the brewery business. SAB Miller diversified by investing into non-brewery industries like.. Most of which was done from inorganic growth rather than organic. The future trends, as mentioned by the company reports, concentrate on consolidation rather than further acquisitions, as has been the usual SAB Miller way. The current strategic position of the company confirms the fact that it has established its dominance in the domestic market and made its presence felt in its international ventures. Hence the obvious point that arises is to understand the implications of the strategic moves that the company made over the years that will in turn influence the future of SAB Miller both in its domestic as well as the foreign markets. The tool used to understand this is the product/market matrix which is otherwise known as the Ansoff's matrix. Ansoff's Matrix The matrix depicts a plausible combination of new/current product and market and hence throws light on the strategic diversification of business adopted by the companies at the strategic level. (Diversification and Synergy, n.d.) The four strategic alternatives are discussed below in lieu of the case being discussed currently. Market Penetration- A company is said to go for the market penetration strategy when it operates with its existing product in the current market. SAB Miller, prior to the apartheid period and institutionalization of racial discrimination and the accompanying laws introduced that restricted companies from trading with international markets, took up the strategy of market penetration when it extended its operation of beer production within the domestic country only by acquisition of competitors and aiming to attend economies of scale and also by strengthening its distribution channel. This strategy was followed by the company primarily in the period in between 1948 and approximately 1979. However, since this strategy is mostly applicable during the introduction and growth stages, with the increase of competition, the search of new markets become imperative. Market Development- SAB Miller ventured into new markets with the same products post 1979 when it started entering the Czech, European, Asian markets. Market development can be done by either venturing into new markets with the existing product or by introducing new brand names to the existing products. SAB Miller's strategy of partnering with local brands in order to capture the brand loyal patrons of those local brands was also a successful step towards market development. Also, the company concentrated on including premium brands under its umbrella in order to be capable to cater to the premium customer segment. Product Development- A company goes for product development to stay ahead in the competition when it is faced with the threat of having a narrowed product portfolio. SAB Miller utilized its surplus funds by diversifying its investments through joint ventures. Sun City casino resort in 1978 was SAB's first venture into the hotel and gambling business. In the same year, SAB became the leading safety match manufacturer after acquiring a leading manufacturer. Unrelated Diversification- this is a strategy where both the product and the market is new. The associated risk undertaken by the companies moving into unfamiliar market as well as new product remains unmatched. SAB Miller, as of yet has not taken up such a strategy wherein it has entered a new market with a completely new product. SAB Miller's future prospects on basis of its current strategic position seem to be promising. The above-mentioned matrix depicts the company's excellence in its product portfolio as well as both domestic and international markets. Evaluation of the use and limitations of the tools applied in the analysis While the tools used in the above study has assisted in understanding the overall industry as well as SAB Miller's company perspective, and helped in analyzing the strategic position of the company in the current scenario, it is imperative that the limitations of the same be discussed as well. Firstly, the models used for the analysis gives a qualitative understanding and do not suffice for a comprehensive quantitative analysis. Porter's five forces model considers a perfect market. Also, for a simple industry, while it is easier to define the five individual forces, the same becomes complicated for a complex industry. Also, the model is more apt for static market and poses as irrelevant in today's dynamic market scenario where everything is changing very fast. The same applies for PESTEL. More than often it so happens that it becomes difficult to define individual elements in a mutually exclusive manner. SWOT analysis sometimes tends to generate unrealistic results and also becomes irrelevant in a fast changing business environment and radical changes in the existing business models. Also, one of the major problems that arise with SWOT analysis is that more often than not does strength actually give way to an advantage for the company. And, it usually does not remain so simple to differentiate threat and weakness in complex businesses. Thus it is apparent that though these models are theoretically apt, when it comes to complex market scenarios, these models do not suffice to answer all queries regarding a business in a precise and all-encompassing manner. Conclusion From the above text, it can be inferred thus that post 1990, SAB Miller has gone for extensive international businesses and have accordingly built up an attractive portfolio and suitable distribution to capture a considerable market share. However some instances show that its major competitor, Anheuser Busch is still the market leader resulting in SAB Miller being a close follower. Even then the company under the study has managed to be a dominant market player in most of its places of operation. Difficult economies have not dampened the group's earnings as the extensive investments paid off and made up for the losses made at some places. Since trading for this industry is done in soft currency, (Rand in this case), the possibility of depreciating value of Rand could affect the earnings in hard currency, which in turn could affect the share prices of the company. SAB Miller at many times has experienced extreme volatility in its share price irrespective of some of its adopted strategies (like taking over Bavaria). This fluctuation tends to pose a threat of being susceptible for being taken over by some other company. Also, the fact that there is almost zero switching cost in this industry, the threat of substitutes (be it some other brand or another product category altogether) is a very imposing possibility. Hence, overall though it seems that SAB Miller is in a comfortable position, the competition dense market that it operates in, does not leave SAB Miller in a state of complacence. 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