SABMiller: Strategic Action Over the Years - Case Study Example

Introduction: In a highly globalised world an effective competitive strategy is essential for survival and growth of any organization. This paper is an assessment of competitive strategies of the multinational corporation SABMiller, a company that is engaged in the business of producing high quality beverages, especially beer. The focus will be on the following four areas. The first task will be to identify the corporate logics (strategic action) that SABMiller have adopted over the course of the case. The second one will be an explanation of strategic position that South African Breweries (SAB) finds itself in 2007. South African Breweries had acquired Miller Brewing Company in 2002 and had become SABMiller. The third task is to explain the implications of its current strategic position for the future of SABMiller. Finally the paper will recommend the strategies that South African Breweries (and SABMiller) should follow in the coming years. Background of SABMiller: South African Breweries was started in 1895 mainly to cater to the growing mining population in Johannesburg, what is now South Africa. Throughout the existence of the company, it has recorded consistent growth through entry into new markets and acquisitions. The company could also survive the turbulent period of the two World Wars and the eventual abolition of apartheid. In 1962, the company found a new domestic market segment when the government lifted a long lasting prohibition of alcohol consumption by blacks. The company had also entered into other diverse fields such as safety matches, glass making, hospitality, gaming, and textiles. The company also followed its strategic plans by rapidly expanding into Eastern Europe and other developing economies in Asia like China and India. It has presence in markets located in Africa, Asia, Latin America, North America and Europe. SABMiller has more than 200 types or brands of beer and employees nearly 60,000 by the parent company alone. Its breakup of revenue according to markets and type of business is given below. (Company snapshot: Actual EBITA contribution 2008). Competitive Strategy: According to the famous management theorist and author, Michael Porter every large organization will have two sets of strategies. One is for expansion of its business referred to as competitive strategy and the other for the survival and growth of the organization as a whole referred to as corporate strategy. (Porter 1998, 117). Competitive strategy is easy to conceive in the mind but difficult to define, because of the sheer diversity in different forms of businesses, markets and the type of leadership or managerial behavior. According to one perception, an effective competitive strategy should have the following components namely, excellence in operations, product leadership, and intimacy or closeness with customers. Porter says that a company should have cost leadership, product differentiation, and focus. (Bernus, Nemes and Schmidt 2003, 350). A relationship can be observed between these two perspectives. In order to have cost leadership without compromising on quality, a company has to have operational excellence. With so much competition in the market, products should be differentiated so that it stands apart from what is offered by competitors. Product differentiation can result in product leadership as shown in the first perspective above. Companies often bring this into practice by the concept of brand image. Finally the focus should be on intimacy with customers. Competitive Strategy can be represented through the following diagram. (Bernus, Nemes and Schmidt 2003, 351). Corporate logics of South African Breweries and SABMiller: SABMiller takes its competitive strategies seriously and identified four core areas where it will focus in the coming years. The first one is related to expansion and the intention is to create an ‘attractive global spread of businesses’. This is mainly through acquisitions of other domestic and international brewers in the market. Success of most beverages is dependent on taste and beer is no exception. Moreover, different markets have different perception of taste. Hence the second strategy is to create strong brand image with an ideal product portfolio suited for each market. The strategy is to have brands that are acceptable in each market instead of going in for a uniform taste. The third strategy is also a micro level one and focuses on improving performance of the company’s different units and subsidiaries around the world. Leveraging is a crucial way to control costs and improve operations and the fourth strategy is to use its global scale to achieve both the above aims. Strategic action over the years: South African Breweries was started much before the Republic of South Africa came into existence. It has survived and grown many of the political and social storms that have affected the areas over the years. For an organization to achieve this growth it must be imperative that competitive strategies have been implemented over the years. Some of the most important ones are mentioned here to show the competitive edge the company has developed which helped it to grow during its existence for more than 100 years. SAB was founded as a shareholding company in 1895 by issuing shares and debentures worth nearly 300,000 pounds. The company even managed to pay a dividend in the very next year. By 1902, the company’s invested capital was the highest for any company apart from mining ones. Its first international expansion came about in 1910 into Rhodesia (Zimbabwe). Its competitive strategy was evident even during that time when it supplied free seeds to farmers in the country to grow barley and also agreeing to buy their produce when it was time to be harvested. This can be dubbed as a competitive strategy because availability of cheap raw materials is essential for cost leadership. In 1917, the company took over the nearly bankrupt company, Union Glass to keep up the supply of bottles needed for bottling. Postwar depression in 1918 found the company being forced to close down some of its breweries. Its first major expansion strategy was the buying a stake in the well known Schweppes brand. The company tried joint hop production with rival brewer Ohlsson’s in 1935 and eventually acquired the company (along with Chandler’s Union breweries) in 1955. SAB also jointly promoted the growth of the barley industry with the above mentioned company. In 1960, the company acquired Stellenbosch Farmers Winery. In 1964, the company got the license to brew one of the most famous brands in the world, namely Ireland’s Guinness which was first in the world. Till that time the brand was produced solely in Ireland. By 1966, beer became the most highly taxed commodity in South Africa forcing the company to look for other areas of business. As a result the company (from 1966 to 1970) made its foray into food, coffee, hospitality, hard liquor and tea industry. South Africa went through difficult times due to international sanctions due to its refusal to abolish apartheid from the early 1970s onwards. SAB fought against this situation by aggressive expansion and marketing within the domestic market which resulted in having a market share of 99% by 1979. Lack of room for expansion within the country (because of sanctions it could invest in many of the countries of the world) again forced the company to look into other areas of business. It invested in casinos in Sun City and even bought the leading safety match manufacturer in South Africa. The early 1990s saw its international expansion strategies seeing light because of the abolition of apartheid. It first expanded into other countries in Africa which included Zambia, Mozambique and Angola. By this time, the company strategy was to focus on expansion to emerging East European countries and later to Asia. According to the company, its experience in South Africa was ideal for expansion in such economies. It started operation in earnest in Hungary in 1993 by the acquisition of Dreher as a first step into Eastern Europe. It started operations with another company in China in 1994. In 1995 SAB got President Nelson Mandela to open the SAB Centenary Centre on the outskirts of Johannesburg. In another strategic move to focus on its core competence, the company began selling off most of its business acquisitions from other sectors. In order to be seen as a major multinational, SAB got its name listed in the London Stock Exchange in 1999. The rationale according to the company was to be able to raise international funds to enable the company expand aggressively into newer markets. But the expected positive reaction did not come and the company share value lost nearly 16% in a period of one year. According to financial experts the lack of interest in the company was mainly due to the fact that it was seen as a South African entity rather than as a major multinational. It was felt that SAB’s presence was mainly in emerging economies and also that it had not yet acquired a major player that operated in developed economies. This eventually led to the acquisition of Miller Breweries of the United States in 2002 and company was renamed SABMiller. Here again, the company found its market share falling and in another major strategic initiative, called for bringing down the number of brands from fifty to eleven. This was for better management and promotion of its more popular brands. The company expected its market share to go down even further before making a turnaround. The strategy was a success in America because it concentrated on Miller brands rather than its own South African brands. It was only later when the strategy succeeded that it began to introduce new brands in the premium market like Miller Genuine Draft and Miller Urquell. By 2006, the company was performing well in all its markets and has now turned its attention to building market share in China and India. Its focus was mainly on China by the acquisition of several large Chinese breweries. Position in 2007: The international expansion of SABMiller had paid off especially in East European countries and China. The company has also made its presence felt in the United States and Italy. In China, SABMiller’s joint venture efforts have now made them the largest brewer in the country. In India, it has now become the second largest brewer by taking over the Foster’s brand in the country. The company has the right to import popular brands manufactured by Coca Cola Amatil into Australia. It has also a joint venture in Vietnam to start an environment friendly brewery. The current position is that it is quite strong in China in Asia. But it has not succeeded up to expectations in India. The most successful market outside South Africa is the East European markets. It has also a modest presence in Italy. Its presence in the United States is also satisfactory. Implications of its current strategic position: Even though the company has done well in most of the markets it has entered, there are certain strategic implications as to the company’s future growth and direction. It faces stiff competition from local manufacturers in Asia. In India, the domestic Kingfisher is extremely popular and hence will be a tough task to become the number one brand in the country. Moreover, most of the emerging markets are price sensitive and its pricing in those countries will be crucial. In the USA, its main competitors are Boston Beer Company, Anheuser-Busch, Inc, and Molson-Coors Brewing Company. The level of competition in such markets will be a tough challenge to overcome. Another problem area is the rising interest in wine in many developed and emerging markets. The concept that wine is good for health may also prove a challenge in the future as more and more people may turn towards this drink for health reasons. Hops and barley are required in large quantity for the manufacture of beer and availability of these raw materials is also crucial in all the markets. Rise in packaging and energy costs will also make its products costlier which are detrimental to a price sensitive market like those ones found in Asia. The company now “shows a change in emphasis, stressing the need for consolidation rather than acquisition.” (Where from here?). (Provided by student). The company feels that it is now ‘geographically balanced’ and hence should concentrate on developing the current markets. Once this is done, plans for further expansion can be pursued. Moreover the challenges faced are complicated by the fact that it operates in diverse economies. Due to this different market strategies and products have to be designed for each type of market. A premium brand may not have many takers in a developing market. The customers may prefer to go in for wine instead. Statutory controls on alcohol and beer are more stringent when compared to other beverages. Taxes also tend to be high. Recommendations: SABMiller is a multinational company with a long history of manufacture of beer. Moreover this experience was mainly in a turbulent and underdeveloped market. It also had its share of unfriendly national and international policies. The high tax on South African beer (at one time) and the international sanctions against the country due to apartheid are examples. But there are many challenges ahead that have been mentioned in the previous section. Competition from within the industry and from other beverages is rising. Health concerns may also reduce the popularity of beer. What SABMiller should do is to move into these sectors as well through acquisitions. This is especially true in the case of wine and soft drinks. In the former case, pedigree is very important and the acceptance of a new entrant by connoisseurs will be low. There is every chance that wine will be the preferred mode of an alcoholic drink other than hard liquor. This is mainly due to the health benefits attributed to the drinking of wine everyday. The soft drink industry is dominated by companies like Pepsi and Coca Cola and only acquisitions of other popular brands will be effective. The company should move into new areas in the existing markets. It can also look into its earlier strategies of moving into totally new areas of business like hospitality. It should follow the same strategy it adopted in South Africa by providing free seeds for cultivation of barley. Then it will have a secure and adequate supply of raw material. It can also give the company, a cost leadership over its rivals. New product innovation has also to be looked into seriously. It has many brands, but the addition of new products will give it product differentiation. It can also use economies of scale because of the large nature of its operations. The strategy of bringing a common product portfolio may not be effective, since beer is accepted according to tastes and certain flavors may not be accepted in certain markets. But whatever may be the case, the company has the experience, the resources and the aggression to succeed in any market it enters. They only have to introduce the right competitive strategy to become successful. Bibliography Bernus, Peter., Nemes, Laszlo., and Schmidt, Gunter. 2003. Definition of competitive strategy. Handbook on Enterprise Architecture. 350. http://books.google.co.in/books?id=LTR93xiadtEC&pg=PA350&lpg=PA350&dq=%22definition+of+competitive+strategy%22&source=web&ots=uTBrQFgFzi&sig=lqXrJIH0ln5cn86ecbKx2ZHiDAw&hl=en&sa=X&oi=book_result&resnum=9&ct=result#PPA350,M1 (accessed February 6, 2009). Bernus, Peter., Nemes, Laszlo., and Schmidt, Gunter. 2003. Definition of competitive strategy. Handbook on Enterprise Architecture. 351. http://books.google.co.in/books?id=LTR93xiadtEC&pg=PA350&lpg=PA350&dq=%22definition+of+competitive+strategy%22&source=web&ots=uTBrQFgFzi&sig=lqXrJIH0ln5cn86ecbKx2ZHiDAw&hl=en&sa=X&oi=book_result&resnum=9&ct=result#PPA351,M1 (accessed February 6, 2009). Company snapshot: Actual EBITA contribution. 2008. SabMiller. http://www.sabmiller.com/files/companysnapshot/SABMiller_company_snapshot.pdf (accessed February 6, 2009). Porter, Michael E. 1998. From competitive advantage to corporate strategy. On Competition. 117. http://books.google.co.in/books?id=Yw5BkQFWUMsC&pg=PA117&dq=%22competitive+strategy%22&ei=MLWGSZySO5bskgTYv8zlBQ#PPA117,M1 (accessed February 6, 2009). Read More