Strategic Business Management Group 1 CASE STUDY 7 Haroon Nasir 16110221 Fiza Liaqat 16110061 Maha Abubakr 16110047 Minahil Waqas 16110046 Ramsha Farrukh 16110254 Fakhar ul Hasan 16110160 Executive Summary: The Adolph Coors Brewing Company (Coors) has been a regionalized brewer with in the United States, specializing in high-quality beer through by virtue of its source water selection, stringent production standards, and cold filtered brewing approach. As the company expanded its distribution to new markets within the U.S. in attempt to gain market share, it made a strategic decision to maintain a majority of its brewing operations at its primary production facility in Golden, Colorado. This decision was based upon the desire to preserve its core production strengths through close family control. The competition is fierce as more brewers are competing within a global market with extended product lines and decreased profit margins, as seen by the on-going consolidation of top brewers within the beer industry. While organic augmentation is the traditional mode of company expansion within Coors, the harsh reality is that the company must seek external-based initiatives (e.g., joint ventures, acquisitions) to gain market share within the low market growth industry. However, several opportunities exist as three core markets are witnessing increased volume consumption: Russia, China, and Latin America/South America. Several of the top breweries have already implemented joint venture and/or acquisition strategies within these regions. In light of the situation, Adolph Coors needs to come up with a viable strategy to deal with its competitors effectively and maintain its position as the market leader. For a thorough analysis, Porter’s Five Forces Model was employed which lay the foundation for alternative strategic recommendations. The evaluation of these alternatives resulted in prioritizing the focus on Coors distribution channel and marketing activities. Beer Industry Analysis: The beer industry is competitive industry, constituting some major players that dominate this industry with their well established and positioned brands. The beer industry is comprised of companies that manufacture beer and malt beverages. There are many different types of commercial beer that are produced regionally and globally, including pilsner, lager, ale, stout, light, malt liquor, dry, ice-brewed, bottled draft, and non-alcoholic. Within the United States, the industry has been consistently dominated by three major breweries: Anheuser-Busch (A-B), Miller, and Coors. Facing low prospects for volume growth in mature, developed markets and increased competition, brewers continue to seek growth through acquisitions of other brewers or by aggressive participation in developing markets. The effect of consolidation through mergers and acquisitions continues to reshape the global beer industry, as seen by the increasing market shares of the industry leaders. Of the available growth in the United States, most is attributed to a rising taste for superpremium products and products that adhere to lifestyle considerations. In attempts to gain market share, manufacturers are focusing product preference and advertising within this age demographic. On a global basis, considerable market growth is being experienced within the developing markets as a result of increased buying power and consumer demand. The general environment of the industry provides some advantages and disadvantages for the companies. The young consumer segment, proliferation of television and technological advancements are among some positive aspects of the beer industry. However, companies have suffered gravely due to the backlash from the court and a few economic and global factors have affected the sales negatively. There are several key companies that dominate the industry. The threat of new entrants is low because of extremely high barriers to entry which showcase beer industry as an unattractive venture for new competition. Rivalry among the existing competitors is strong. Moreover, buyers have moderate power as they can lessen the profitability of the large and small companies. Since, suppliers cannot influence the firms, they have relatively weak power compared to the other forces. In addition, substitutes such as other beverages possesses moderate power. There are several driving forces crucial to succeed in the beer industry. The most important key factor is differentiating products through marketing, segmentation and packaging. Creating brand image for new products and maintaining the image for the existing product is extremely important. Relationship with brewer’s wholesaler is a vital factor for its continued future. Porter’s five forces analysis: To understand the industry and put forth recommendations for Coors, firstly we need to conduct situational analysis using Porter’s five forces analysis. Threat of new Entrants: Threat of new entrants for the industry is very low. Most of the big companies operating in the market are centuries old and it is very difficult for new companies to penetrate in this market. The reasons are as follows; 1. As the companies operating have centuries of experience and their distribution channel is well established, thus it is nearly impossible for new companies to establish a huge network to compete with the existing giants. Also these companies pay a lot of money to their wholesalers to market their products and to carry no other brand, so for a new company it will raise the cost considerably. 2. Cost to establish production facilities is enormous. And a high fixed cost industry poses a low threat to entry. The big companies have achieved economies of scale through mass production, but a new entrant would not be able to achieve this without investing heavily which makes the industry less prone to new entrants’ threat. 3. Strong brands exist in the market, so for a new entrant to introduce a brand it will have to market its product heavily. The new entrant can do so by introducing new packaging, targeting more segments through differentiation and most importantly advertising to attract new customers to try their product. These activities will require the new entrant to incur huge costs. Even the established companies incur huge advertising costs to retain their customers. Coors for example incurs $11.20 per barrel. For a new company to establish its brand image, it will have to incur even greater costs. So all these factors increase the cost considerably for a new entrant, thus making the industry less attractive for the investors. Power of Suppliers: Power of suppliers is low. The Suppliers market is huge and so is brewers’ market. This gives high power to the industry and low power to suppliers for the following reasons; 1. Brewers industry can easily integrate backward, as Coors did as well. This makes the power of suppliers very low. So the suppliers can’t charge high margins to these companies or else they will integrate backwards and these suppliers will lose their huge clients. 2. The raw materials required for the industry are fairly common i.e. agricultural products so this diminishes the supplier’s power. The raw material providers are not providing any specialized or customized products so they lose the ability to charge high. 3. The companies can easily switch from one supplier to another as there are many suppliers in the market. Switching cost is very low for the brewers companies. So for suppliers to retain these big clients, they need to lower their prices and hence have lower power. 4. Labors accessibility is another factor in favor of these industries. Cheap labor is available for these companies even though the unions are common. As it was written in the case that Coors managed to meet their demand even after the strike. This is because they do not need any skilled labor so they can easily find new cheap labor. Power of Buyers: Buyers in this case are not end consumers. These companies sell their products to wholesalers and these wholesalers further sell to the retailers. The wholesalers market is huge and powerful. They usually sell only one brand and other wholesalers carry more but not all of the brands. Thus these wholesalers have enough power over the brewery companies for the following reasons; 1. Switching cost for the buyers is low. Brewery companies are competing against each other to find wholesalers who will only sell their brand. So these wholesalers can easily switch to other companies if they offer better margins and better deals. As the market is competitive, these wholesalers get better deals from these companies to sell their products as they are fiercely competing against each other to increase their market share. 2. Branding is very important for the brewery industry to attract customers. Customers can easily switch from one brand to another due to the brand image created by the advertisements. So here the brewery companies have low power and the buyers have greater power. 3. Buyers have not been able to lower the prices. This reflects brewery companies’ power to dictate prices. They have used premium products to charger higher. The buyers are ready to pay more for a quality product. So the power of buyers is moderately strong as they have not been able to influence prices. Rivalry: The brewing industry is highly concentrated. In 1985, 75% of the market share was controlled by 6 major players. The primary competitors for Coors that we identified were Anheuser-Busch, Pabst, Miller, Stroh and Heileman. There were high barriers to entry in the beer brewing industry due to which the threat of competition was low. Therefore, it’s was a favorable industry for existing brewers however there was strong rivalry amongst them. These companies used heavy marketing to differentiate and advertise their beer. 1.2 billion dollars were spent on marketing by these companies in 1985. Because of this, small brewers suffered. For a commodity like beer, the price elasticity of demand is low and there is a lot of price competition. Price discounting however was not advised as it may lower the image of their premium brands. 1) The 6 main players were operating at a capacity of 83% in 1985. Overcapacity issues have always been a problem with the brewing industry. Larger competitors have the advantage of launching new brands because they can afford it and can use their old brands to leverage it. There are around 60 brands in the market. Brewers use 3 major categories to differentiate amongst brands in the regular category which are Popular, Premium and Superpremium. In the light category, there is usually only one brand. Another way brewers use to differentiate their beer is through alcohol content. 2) The growth rate of the brewery industry was only 1% from 1945-1960 and 1980-1985 and this growth rate was further expected for the period 1985-2000. This makes the industry unattractive for all the players. There was also a lot of diversity amongst competitors. Anheuser-Busch and Miller both followed the strategy to charge higher- than-average prices. Pabst and Schlitz on the other hand lowered their prices which weakened their premium image. Substitutes: 1) The threat of substitutes which consumers have with a meal is strong. These include water, milk, wine soda or anything consumers have with a meal. A major disadvantage beer faces is that people under 21 cannot legally buy it so it is easily substituted with the products mentioned above. 2) The threat of substitutes as a thirst quenching drink is mellow. On a warm day, many people prefer a cold beer however some will also prefer soda or water. The threat of substitutes as a social drink is quite low. For many people above the age of 21, beer is the optimal choice when they go out socializing because its cheaper than other alcoholic drinks. Other substitutes in the social category include wine, soda, and mixed drinks. Recommended Strategies: Organizational Changes: In order to expand the company in overseas markets and acquire new market share, Coors must seek outside perspectives and leverage new management experts that are experienced in overseas expansion and operations. As the existing organizational structure heavy rely on Coors family control, this seems as a daunting task. The company must transcend from an environment that encourages a long and scrupulous development and growth culture to an environment that is able to quickly adapt to new markets. The existing organization must be able to relinquish control as it seeks joint ventures arrangements within developing markets (e.g., China, Russia, and Latin America). Communication and management channels should be restructured to promote these strategic objectives through a coherent manner that relays the vision of the company. Accordingly, the company should inculcate a defined succession management plan that is aligned with its growth objectives. Product Market Analysis Coors should determine product opportunities and fill gaps in product offerings. In addition, Coors should evaluate potential new product offerings. However, Coors should not sacrifice its existing U.S. reputation and image if it decides to develop new lines. It should also integrate a branding strategy through the leveraging of Coors’s strong U.S. brand name and image. International Strategy Based upon a need to broaden its market through product diversification and expanded marketing and distribution of existing products, Coors should review its strengths and weaknesses and begin to develop a strategy to expand into international markets. It needs to keep in mind that to meet its growth objective, the company will have to leverage its existing overseas operation, Carling/Coors Brewers Limited, in an attempt to gain market share within European markets. Thus, the international strategy should be communicated to both Carling and U.S. operations, and each group should mutually retain ownership in the strategic plan. Human resource relationships between the U.S. and U.K. should be formalized to establish a base for international expansion. Training will be required in preparation for strategy implementation. The international strategy should evaluate potential joint ventures and acquisitions within the large growth markets: China, Russia, and Latin America. Acquisition within China will be prohibited due to current governmental restrictions. The resulting strategic plan should provide a road map for the forthcoming five years of international expansion and growth.
