An Introduction To The Strategic Management Commerce Essay

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Important factors in the environment of beer production in China (as well as globally), are among others, the customers, suppliers, competitors and the regulations.

The market

China now has the largest market for beer consumption in the world. The Chinese beer market has overall grown at an astounding pace in recent years, spurred on by the massive levels of foreign investment in the market. Also, the rise in the level of disposable income has led to greater levels of consumer spending in China, thanks to the economic reform policies of the government.

Industry revenue was forecast to reach $14.17 billion in 2008. This was an increase of 9.7% from 2007. (Beer Manufacturing in China, 2008)

Customers

Ultimately, the end customer of beer products may be everyone above the legal drinking age in China, which is 18. However, according to an ACMR-IBISWorld analysis in 2008, the Chinese breweries themselves sell to different outlets accordingly:

40% of beer products sold through wholesalers, some of which the manufacturers themselves setup near cities, some of which they sell the beer to. The wholesalers have the responsibility of distribution to the market.

25 % is sold through supermarkets and restaurants

30 % is sold through liquor stores

5 % is sold through bars, clubs, airlines etc.

Suppliers

Beer is made from natural ingredients like barley and hops that can be grown.

Nonetheless, to ensure a stable supply and because agriculture is not the core competence of breweries, establishments within the beer manufacturing industry in China typically purchase barley, water, yeast, malt and other ingredients to produce beer, and various brewing and malt products. (Beer Manufacturing in China, 2008)

China actually imports great amounts of barley, among others from Australia.

Key Competitors

China is currently dominated by domestic brews such as Tsingtao, Yanjing and Snow Beer. They have the largest market share, while foreign beers have been struggling to make their mark in China since the 1990s.

However, 55% of the entire Chinese beer industry is seems to be composed of ''other'' breweries, most likely smaller local establishments of which no one has above 1,5% market share in China. (Beer Manufacturing in China, 2008) It is mainly in this area we wish to compete.

Major Player Market Share Range

China Resources Snow Breweries 17.8% - 18.4% (2007)

Tsingtao Brewery Pty Ltd 14.0% - 14.5% (2007)

Beijing Yanjing Beer Group Company 9.8% - 10.3% (2007)

Guangzhou Zhujiang Beer Co., Ltd. 1.2% - 1.6% (2006)

Budweiser (Wuhan) International Beer Co Ltd 1.3% - 1.5% (2006)

Other 53.7% - 55.9% (2006)

The very interesting thing about the Chinese beer market however, is that despite the large market share of the bigger breweries, competition is still very regional. There are no dominant national or international brewers. One brand may be strongly dominating the others, but only in particular provinces or regions.

As such, there are actually markets in China only dominated by smaller local beer manufacturers.

Regulations

The brewing industry in China is subject to several government regulations (Beer Manufacturing in China, 2008). Some of the most visible include:

Beer State Standard GB4927-91 - All beer manufacturers have to reach the state standard requirements, that specifies requirements for beer quality, density, smell, taste, sanitation standards, guaranteed quality period etc. This standard is the most general standard for the Beer Manufacturing Industry in China.

Standard for Water Use in the Beer Manufacturing Industry GB/T18916.6 - Regulates the use of water in beer

SARFT (China's State Administration of Radio, Film, and Television) comprehensively governs all of China's radio and television advertising market. It prohibits misleading advertising, requires advertising to be consistent with socialist principles, as well as only allowing for a specific amount of time for advertisements. Shares on mature beer markets are typically won through advertisement, so this is an important regulation also.

(SARFT Regulation 17 and ChinaMediaUpdate.com)

Apart from these general regulations, the local and provincial authorities are given much power in China, and may have their own restrictions to prevent outsiders from getting entry.

1.1.2. Technical environment

Many domestic breweries in China, have historically had older plants, lower quality and weaker marketing capabilities compared to the big Western breweries. However, when many of these breweries tried and failed to enter the Chinese market in the 90's, much of the modern equipment from the West was sold for a low price to the bigger Chinese breweries. While many breweries still lack in technology, more and more local manufacturers have begun modernizing, getting better equipment, improving quality and taste.

Beer ingredients barley, water, yeast, malt, hops etc. are being produced in China, but the prices of raw materials are increasing at the moment.

The Chinese Beer industry furthermore suffers from underdeveloped distribution systems, that has hindered foreign companies from getting a foothold in the country as well as being troublesome for domestic brewers. Several distribution problems are caused by local protectionism in a specific area or province. Furthermore, distribution regions for many distributors are considered too large, affecting beer producers' control over a defined market.

On top of all that, the infrastructure and weather itself has been a problem in mainland China. Regular floods blocking road and rail, worn down roads, winters at -35C freezing the beer in the draft piping, all contribute to making the distribution a headache for beer companies.

1.1.3. Institutional environment

Despite the many capitalist tendencies, China is in many ways still a communist country where the government has great power over private firms. Furthermore, great power is also given to the individual provincial authorities, which means that many laws and regulations depend on the specific province that you're doing business in.

Beer is subject to taxes and regulations, as well as government policies on marketing and under-age drinking, drunk driving and other alcohol abuse.

The authorities may be interested in getting Western investments, but may also be protective of the local market. Breweries may also be government supported, making them a potentially powerful player.

As such, it is vital to stay on the friendly side of the authorities.

1.1.4. Trends

The Chinese beer market has been even more segmented with many regional beer manufacturers having very localized sales. Recent years the market has seen a lot of consolidation where players are forming partnerships and merging to form fewer and larger breweries. This is done to utilize economies of scale and capture a wider market than the local. In 1995 there were 800 breweries in China, by 2006 there were around 300. (Fermentation in the China Beer Industry, 2006)

The price of raw material ingredients have risen dramatically during the last couple of years, and so the price of beer is expected to increase as well. (MarketWatch.com)

As the Chinese people's disposable income has increased over the past years, premium beer now has the largest growth rate, compared to regular beer. There is also a beginning trend towards product diversification and individualization as new low-alcohol beer, alcohol-free beer, low-carb beer, ciders, stouts, etc. are expected to satisfy niche markets.

In Japan, an interesting upcoming trend is the advent of the beer-like alcoholic beverages that have come to be grouped together under the name of "third beer". This is due to the fact that they fall into neither the regular nor low-malt beer category, using such alternatives as pea protein, soy protein, or soy peptide. In Japan, this makes the raw materials cheaper, as well as the taxation.

1.1.5. Context analysis

The previous sections show, that if a small to medium sized brewery were to establish itself in China, it would face a number of challenges as well as opportunities. The following is a SWOT analysis for typical firms in this line of business.

SWOT Analysis:

(The SWOT Analysis in this paper, is based on the assumption that the company is indeed an established Western beer manufacturer)

Strengths

Weaknesses

Huge market, huge workforce

Modern production facility

Marketing and Brandbuilding capabilities

May require large output to be profitable (Size)

Lack of network with suppliers and distributors

Cultural barriers when doing business and marketing

Opportunities

Threats

Continued growth potential

Acquisition Strategies

Government Control

Strengths

There is a population of 1.3 billion people in China, with a 800 million person workforce, making it a huge market for beer production and selling.

In terms of production optimization and management, a Western firm will most likely have a superior facilities to reduce costs more so than smaller local breweries, as well as achieve higher quality.

A Western company is also likely to be equipped with strong competencies in marketing and brand-building, that far exeed that of local Chinese.

Weaknesses

The same facilities and equipment that may give the company an edge in terms of better production and distribution optimization, may also be a drawback if it requires a certain output in order to be profitable

Using Regional market makes reaching economies of scale difficult and as a result multinational firms have trouble adequately diffusing fixed costs and attaining desirable profit margins.

A Western Company is at a serious disadvantage by not having relations with existing suppliers and distributors

Cultural boundaries will make trading, contracts, marketing and negotiations more difficult

Opportunities

There is a continued growth potential. Low per‐capita consumption is a sign that the market has plenty of room to grow & high population means the market could grow significantly. (Beer Manufacturing in China, 2008)

A great number of local brewers means that the environment may lend itself to an acquisition strategy. Multinationals would likely benefit from acquiring a local brewer with favorable market share and strong supply and distribution chain alliances.

Threats

China is still a communist state and, as such, can potentially exercise complex regulatory controls favoring certain industries. Instability is always simmering beneath the surface and fast growth often means significant growing pains.

1.1.6. Industry dynamics

To get a better understanding of the industry dynamics, Porters Five Forces analysis will here be constructed, with respect to the beer industry in China.

Buyers are assumed to be end customer who consumes the beer. Likewise, suppliers are assumed to be the manufacturers of the beer itself, and not 'raw ingredient suppliers'.

Threat of Substitues

The alcohol market is very large. Other beer brands, wine, spirits, ciders can potentially substitute the company's beer brand. The type of substitutes will depend much on the tastes and preferences of each local area or province. Nonetheless, the biggest problem is that the switching costs are basically non-existent. In order to obtain a sustainable competitive advantage with regards to substitutes, one would have to develop brand loyalty.

Beer however is a very popular drink, and other alcoholic beverages may just as well act as supplements rather than substitutes.

Threat of New Entry

The threat of new entry is very small due to three important characteristics of the Chinese beer manufacturing industry.

Size The legal costs, fixed costs, low profit margins and the strong competing on price, all require a certain size and economies of scale for a beer manufacturer to succeed and grow, strongly preventing new entrants.

Market Shares In addition, barriers to entry in a Chinese local market are the strong market shares of the regional major beer manufacturers. Some of which can be seen as near monopolies.

Preferences There are also strong local preferences by the people, and even large foreign beer brands have failed to combat these regional network effects, despite advertisements and marketing.

The barriers to entry are overall quite big, and thus the threat of new entrants is small.

Bargaining Power of Buyers

Since there is great number of competitors and substitutes in the alcoholic beverage industry, the buying power is really in the hands of the buyer. As said, switching costs are largely non-existent. The main approach to sway the consumers buying behaviour is through advertising and marketing. Overall the buyer power is very high, which is also shown by the small profit margins.

It should however be noted, that although China is moving forward economically, particularly in the major cities, the average Chinese beer consumers are poor, live in agricultural heartland, and are extremely price conscious. As such, despite the largely non-existing switching costs, they will still have to settle with beer brands (or substitutes) in a price category they can actually afford.

Bargaining Power of Suppliers

Since switching costs to substitutes and competing beer brands are non-existent, the supplier holds very little power over the buyer. A beer manufacturer may increase the price, but the consumer can just choose a different brand, unless the supplier has captured and dominated certain channels (much like how one only sees Coke vending machines in one place, and only Pepsi in another place)

If anything, the beer manufacturer is usually subject to both the fluctuation of the raw ingredients prices, as well as the consumer demand.

Internal Rivalry

The rivalry among existing competitors in the beer market is typically very strong. The rivalry between the breweries in China however is on a national level quite limited. Although the brewers are big and influential, they are most of all still regional.

Thus the rivalry will depend on where to place the business in China, and will most likely constitute of few but powerful brewers in that area. On the other hand, these brewers may have very big shares in their particular market, thus making the internal rivalry within the local market, quite big.

All in all, the beer industry is not a very attractive business to move into in any way. Only the strongest survive. However, considering Chinas vast size, the population of 1.3 billion gives an enormous potential for profit, even on a regional level. If one manages to get into the industry itself and survive, the company doesn't have to worry about fast moving newcomers that will take over.

1.1.7. Generic and Competitive Advantage Strategies

The usual types of competitive strategies employed in the in beer industry is trying to either be as low-cost as possible or to differentiate the product.

Low Cost involves trying to gain low operating costs and selling the beer more cheaply than others, hoping to appeal to cost-conscious and price sensitive consumers. Because of the great buyer power, almost any major beer manufacturer tries to minimize his costs. As such, trying to be a cost-leader becomes increasingly difficult. Instead, companies try to differentiate their beer brand.

Differentaition: Beer manufacturers may try to differentiate themselves on the beer type itself, the color, flavor, strength, ingredients, production method, recipe, history, or origin of the beer. Of course beer manufacturers may also try to brew an entirely different beer, try to capture a specific niche and specialize in this area but because of the low profit margins, a certain economy of scale is often needed to survive. Nevertheless, much of the differentiation and specialization is done through advertisement and marketing, where certain strategies are employed.

Pricing strategy deals with the demand for beer, the psychological pricing tactics (such as premium pricing) and continuous price adjustments relating to competitors.

Product strategy deals with branding, labeling, packaging and to give the beer a certain image, targeting particular consumer groups.

Placing strategy relates to trying to capture and place the product in certain segments. This could be specific regions where the beer manufacturer would hope to create a customer preference, but also specific channels such as pubs, clubs, super markets and liquor shops, than the beer manufacturer would hope to land important deals with, to keep the competitor away.

Promotion deals with advertisement and marketing and is a strategy much employed by major beer labels today, in order to win market share.

1.2. Internal environment

1.2.1. Organizational form and structure

Major beer manufacturers are multinational and usually have a divisional structure where each organizational function is grouped into a division based on either product or geographical area. Matrix structure where employees are grouped by both function and geographical area/product is also a typical choice for major brewers. This is e.g. the case for companies like Anheuser-Busch, Snow Breweries (part of China Resources) Carlsberg or Heineken who have many different beer brands and even soft-drinks. The companies thus tend to be quite de-centralized.

Breweries like many process industries use continuous production and are characterised on the bottom level by machines doing everything, while humans just monitor the machines and plan changes. Consequently, compared to workers there is a relatively great number of managers and management levels, thus making the hierarchies and structures very tall.

1.2.2. Management model

Beer manufacturing today is characterised by few very big breweries that do continuous production, with small profit margins in the beer industry. Focus is on meeting demand, keeping costs low and gaining market share in existing as well as new markets.

The circumstances regarding beer manufacturing suggest that Process Management is likely a model used. The goal here is to meet the customer requirements, in price or quality, and much attention is given to each of the systems, skills, tools and techniques to accomplish that profitably.

Furthermore, the small profit margins require a streamlined process right from the raw materials producer, to brewing, bottling and distributing. Vertical Integration is a tool often used to achieve control. Thus, Supply Chain Management is also the point of interest for nearly all beer manufacturers.

1.2.3. Strategic management model/process

I assume management models and decision making is mainly focused on cost saving methods and getting market share.

Some breweries like Carlsberg have begun implementing lean to reduce costs in and eliminate waste. In mature markets, beer has a more stable demand; the lean production method with low inventories can potentially be applied with success.

Breweries typically use vertical integration to …..

2. Formulation

2.1. Define Objectives

The overall objective of this company is to establish itself as the leading low-cost beer manufacturer in China. This means having the most popular beer brand in the most regions and provinces. As such, the guiding objectives are:

Enter regional market and form partnerships or acquire major beer manufacturer.

Capture the majority of the market share in the particular region(s) within 3 years.

Expand to a new region no later than every 5 years, if the economy allows it.

2.2. Mission

We wish to provide a varied product range of low price beers, that will fit the tastes and preferences of all Chinese people.

2.3. Corporate strategy

We wish to enter the Chinese beer market by means of partnerships and acquisition and become the leading beer brand in most regions.

The company should deal with beer manufacturing in China, and focus on establishing itself in various attractive regions.

Because of the strong market share of the regional leading breweries, and the loyalty of the local population to the specific label, the company should not build its own new brands or breweries. Instead it should try to acquire, invest in or form partnerships with the existing regional breweries of importance, and from thereon slowly expand to bigger markets.

The long term strategy should be to expand its presence in China, however brewing for regional variations dependent on local culture differences and tastes, and maintaining brands.

2.4. Business strategy

We wish to aim at the low end of the market and sell cheap high quality beer, individual of each region.

In the specific region where the company has bought or partnered with a brewery, the business strategy should be as follows:

The company should aim at the low end of the market using the competitive strategy of cost leadership. Premium pricing and direct competing on quality should at first be avoided, because of the Chinese consumer's price sensitivity. However, in order to take advantage of economies of scale, other popular beer products from the same brand, e.g. premium beer should still be produced to some degree if it's profitable. This is to share activities such as promotion and distribution, thus lowering the average cost.

The focus should be on tight collaborations with the local partners, combining the company's technologic know-how in terms of production and distribution, with the local partner's expertise in the market and regional matters, tailoring the strategy to the each local market.

In addition, in order to stay cost competitive the company should look into making ''third beers'' variants of the existing beers, since raw materials such as wheat and hops are getting more expensive.

2.5. Functional strategy

The company should form alliances with local partners and distributors, hoping to land good deals, use their expertise in the regional matters and tailor the strategy to the market.

If however the distribution partner is too incompetent or ineffective, the company should use vertical integration and overtake thoese operations, if deemed profitable.

The company should try and capture and dominate channels to sell beer such as supermarkets and liquor stores where cheap beer is typically bought, compared to more expensive bars and pubs. They should also try and form lucrative agreements with the wholesalers, since 40% of beer is sold through this channel, so to push competitors out.

The beer should be advertised as the true loyal choice of the region, and without mentioning the foreign company behind it.

The finances needed to continue the acquisition strategy should come from earned profits as well as from investors.

2.6. Competitive Advantage strategy

The average western beer manufacturer has tried (and failed) entering China by introducing their state-of-the art production facility and competing on quality. They have taken their global brand and tried to push it to the Chinese people through advertisements and marketing.

The regional and local Chinese beer manufacturers have in turn had less modern equipment, and only sold to their own region because of taste preferences and loyalty.

This company's competitive advantage strategy is first and foremost to focus on cost leadership as a means of getting market share in several regions. Economies of scale can be achieved by sharing the regional activities of each brand such as promotion and distribution, across several regions.

Also, introducing certain newer and more effective production equipment will help improve quality and lower cost, as long as it does not require a bigger production to be profitable.

In the same way, if the distributor is too ineffective and it can be done more cheaply, vertical integration should be introduced, capitalising on the more effecient distribution technology that the company might have.

3. Implementation

In this section, a brief analysis of the aforementioned strategies is conducted in order to propose a basic implementation process for the firm. The analysis is based on the Hrebiniak and Joyce implementation model. Results are presented accordingly. Additional information relevant to the implementation process is also included.

3.1. Organizational Form

To implement the strategy, the company should have a matrix structure with employees grouped based on the specific region in China as well as their function, in order to achieve specialization in the trends and fashions of that particular market.

Although the entire company may be large, the hierarchy in each geographical area should be sought to be flat, with focus on visibility to the bottom level, so the top management has as much as possible contact with the local brewery partner, local distributor or suppliers, as well as the companies own employees.

This is done so that innovative ideas can be communicated to the top faster and changes in taste preferences and demand can be discovered sooner by people closer to the market.

However, in order not to suffer from incompetency from the local market, the company should emphasise on educating and empowering the people concerned with the production and distribution.

3.2. Implementation process

Hrebiniak and Joyces' model says that the different parts of the strategy and structure must be aligned, for the implementation to be realized successfully.

Divisional structure based on geographical region.

Clear hierarchy. Close contact with suppliers and distributors.

Enter the Chinese beer market by means of partnerships and acquisition and become the leading beer brand in most regions.

Share distributors and suppliers accross regions to achieve economies of scale

Aim at the low end of the market. Become cost-leaders and sell cheap high quality beer, individual of each region.

Tight collaborations with local partners, suppliers and distributors. Empower the local partners to react to changes in demand and new trends.

The main point of the corporate strategy is to capture specific regions in China and become market leaders on these.

This is aligned well, with having a divisional structure, where employees will be clustered together to work in that particular area, and thus gain experience and expertise.

It also fits the business strategy, which emphasises tailoring the beer production to fit the preferences of the region.

This low cost production of beer is in turn aligned with the operations structure, where distributors and suppliers should be shared, in order to to achieve economies of scale.

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SECTION 2: Strategic Management process

This section summarises the overall analysis of previous sections in order to present a simplified model for the strategic management system of a firm in the proposed line of business.

4. Model for Strategic management

[Please type here a description of your simplified model for the strategic management process of a firm in the proposed line of business]

Mission

Objectives

Situation Analysis

Formulation of Strategies

Application

Control

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SECTION 3: Strategic advice

This section presents the main conclusions and recommendation emerging from the proposal.

5. Conclusions

Although the beer industry is a tough business to be in, the Chinese market is growing offers such huge possibilities. The market itself is enormous, average consumption per capita is still low, and the competition is segmented and regional with smaller beer manufacturers dominating the local area. The following is a list of conclusions:

Largest beer market in the world and growing. Average consumption per capita is still low.

The Chinese consumers have specific taste preferences based on the region, as well as a loyalty to the local brand

The local Chinese breweries are likely to be technically inferior in terms of production and distribution facilities, as well as marketing competencies.

The distribution systems are underdeveloped in some regions, because of local protectionism and weather

6. Recommendations

[Please type here a brief introduction to your main recommendations followed by:

A list of your recommendations]

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