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Beer is one of the world's most consumed alcoholic drinks. Nelson (2005) stated that it is the most popular drink after water and tea. There are lots of brewing companies though emphasis will be made on Carlsberg in this instance.
The Carlsberg Group is the world's fourth largest brewery group. The Group is distinguished by a high degree of variety of brands, markets and cultures. Its activities are centred on markets where the Group has the strength and the right products to secure a leading position. Due to the variation of the markets, the contribution to growth, earnings and development within the Group differs, both at present and in the longer-term projections (Carlsberg, 2012).
In countries where Carlsberg has no breweries, the Group sells its products through exports and licensing agreements. It aims to establish and develop strong market positions for their international premium brands through dynamic partnerships with licensing, export and duty-free partners around the world. The Carlsberg beer portfolio includes more than 500 brands. They differ significantly in volume, price, target audience and geographic penetration. (Carlsberg, 2012).
Carlsberg International Strategy and Prospective Partners
The company operates using an international strategy which implies that it takes the beer first produced for its domestic market and sells them internationally with only low local customization. This highlights that the beer it sells meets a worldwide need and at such do not face substantial competitors which implies that it is not confronted with pressures to cut down its cost structure. It tends to centralize the beer development functions such as research and development in its home country and establish manufacturing and marketing functions in each country it operates. Carlsberg chose an international strategy for the following reasons:
To increase sales and profit growth by entering new markets and also selling in existing markets (Hill, 2009). This is achieved because it exports its products to destinations like South America where it has no breweries and in some cases through licensing agreements like it did with Charrington and Tetley in Britain by giving them right to brew and bottle Carlsberg beer and in return get a royalty fee. It also formed joint ventures with Scottish & Newcastle and a brewery in Honk Kong which it now fully owns. The Group also formed mergers with Danish rival, Ruborg and Orkla of Norway which it later owned fully. From the case study, it is very obvious that they go into these markets at a slow but cautious pace by using the services of the partners and this is to avoid information costs and risk and some other uncertainties such as trade barriers associated with foreign involvement. It also gets to learn about the foreign market in cases where it formed joint ventures and mergers and later take full control of the company.
Another reason is to protect Carlsberg's home market share because operating in foreign countries takes away business from its competitors by offering customers other choices and it lets the competitors know that they would face the same response if they attack the home market (Rugman & Collinson, 2009).
Furthermore, it is a tactics that Carlsberg could use to diversify themselves against the risk and uncertainties of the domestic business cycle (Rugman & Collinson, 2009). This implies that by operating in other countries it can often reduce the negative consequences of economic swing such as recession in its home country.
Despite Carlsberg seemingly predatory instinct for 100% control and ownership, prospective partners engage with Carlsberg because of the following reasons:
They will benefit from its intangible properties (Hill, 2009), like in the case of licensing where the licensee has the right to Carlsberg's intellectual properties such as patents, processes and trademarks. This also applies to joint ventures as the partner gets to know about its processes as well.
They would be able to offer their clients a wider range of products and services (Mcpheat, 2010). For example in licensing where Carlsberg gives them rights to its intellectual properties, the partners tend to take advantage of more market opportunities (newly identified demand) as they will not only sell their own products but also that of Carlsberg, which means that their customers have variety of products to choose from.
They might also have an opportunity to get endorsed into Carlsberg's advertisements (Mcpheat, 2010). That is Carlsberg might support their products in its advertisement in cases where it forms a merger or joint venture with partners.
They share fixed costs and financial risks with Carlsberg which implies that they can succeed in dealing with failure to meet a certain standard or lack of resources (such as land, labour or capital). An example of an instance where this occurs is in joint ventures.
Cooperating with Carlsberg creates room for pooling ideas and generates more creative solutions to problems (National Association of Conservation Districts, 1994). This is applicable when partners form joint ventures and mergers with Carlsberg. Thus, customers will be happier as their problems would be solved at a faster thereby improving customer service experience (Mcpheat, 2010).
Potential acquisitions targets and strategic responses to acquisition bids
According to the case study, Carlsberg has a global share by volume of 7.5% making it the fourth largest brewing corporation after AB Inbev and its market capitalization was over 80 billion Danish Kroner (Dkk). Its sales in 2009 were 59.4 billion (Dkk) on which it achieved 15.8% operating profit margin. This makes it a potential future acquisition target for other brewing groups such as AB Inbev for the following reasons:
The larger brewing group would want to increase their company's portion of sales within the market in order to increase pricing power (Campbell et al., 2003). "If a company doesn't have much pricing power then an increase in their prices would lessen the demand for their products" (Investopedia US, 2012).
Carlsberg has knowledge and marketing expertise about the local markets in which it owns breweries and so other brewing groups would want to acquire it as entry mode to these markets. Besides it would be a quicker way for them to make their presence known in these markets.
Carlsberg is a valuable brand and as such is a target for other bigger groups as they would want gain its intellectual property such as "patents, trademarks, production processes, databases that are difficult to re-create, and research & development laboratories with a history of successful product development" (Bragg, 2012).
Its being the fourth largest brewing corporation in the world makes it is a major competitor in the brewing industry and in order to reduce competition a brewing group such as AB Inbev may want to purchase it.
Furthermore, it is difficult to get costumers to change brands because customers are fiercely loyal to local brands and the only way of tapping into these markets is by purchasing the brewery (Rugman & Collinson, 2009). For example in countries where Carlsberg markets its products that the larger groups haven't entered yet, they could tap into these markets by purchasing the brewery since the customers are familiar to Carlsberg's products.
The larger brewing group will want to gain preferential access to Carlsberg's sales and distribution channels. By acquiring it, they can use it to distribute its own products. Some of examples of sales channels they would benefit from are telemarketing or a well-trained-in house sales staff (Bragg, 2012).
However, there are some barriers that a brewing group such as AB Inbev might face if they sought to acquire Carlsberg this could be:
Clash of culture between both groups in terms of high management turnover which may possibly be as a result of Carlsberg's employees not liking the acquiring group's way of doing things and may decide to leave the company. This can materially harm the performance of the brewery because management talent and expertise will be lost and as such Carlsberg might reject an attempt to be bought (Hill, 2009).
Integrating with other companies is difficult as a result of differences in management philosophy and company culture. This tends to slow down the integration of operations. National culture differences could even worsen these problems (Hill, 2009). For example language barriers between Carlsberg (owned by a Danish speaking company) and AB Inbev (a Dutch speaking company) may make Carlsberg decide to reject a bid.
Also, Carlsberg is a big company as well and might reject an attempt to be bought because it doesn't want to lose its identity. They could go as far as responding to any acquisition bids by purchasing other breweries as a form of defence. Due to its having good market shares purchasing other breweries will make its shares bigger that it cannot be bought within the brewery industry without anti-trust (this refers to specific laws protecting trade and commerce from unfair business practices (Merriam-Webster, 2012)) thereby making it difficult for companies like AB Inbev to acquire it (Bragg, 2012).
Global brand portfolio management and consolidation
A global strategy that sustains 500 brands cannot possibly be right because this strategy focuses on increasing profitability and profit growth by reaping the costs reductions that come from economies of scale and learning effects in other to have a low-cost strategy on a global scale. This implies that this type of strategy suits where there are strong pressures for cost reductions and demand for local responsiveness are low. Carlsberg has 500 brands and they customize their product a bit to meet local conditions and this customization involves shorter production runs and the duplication of functions, which tends to raise costs. They won't reap the benefits of economies of scale as there won't be reduction in the unit cost achieved by producing different product in large quantities. Also, they won't be able to save costs that come from learning by doing in terms of producing the same brand over and over again i.e. their labour productivity may not increase over time as it is not easy for individuals to learn most efficient of performing tasks when a large volume of different products is involved. Hence, production cost will increase due to a decline in labour productivity and management efficiency, which might decrease the firm's profitability (Hill, 2009).
Carlsberg should rationalise its facilities and focus on far fewer brands because it would be much easier to control and manage fewer brands and also implementing a global strategy would be easier compared to when it has 500 brands. By doing this they would be able to benefit from a bit from economies of scale and learning effects. Furthermore, the cost of advertising so many brands is relatively expensive. The customization of the brands would even make it more expensive if they have different advertisements for different brands in different countries. So they might want to consider focusing on fewer brands because the fewer the brands the lesser the price of advertising.
Individual Reflection and Self-Analysis
Expectations: I had always wanted to learn more about the world of business and management and as such my expectations for this module prior to beginning was to gain knowledge about business and management in an international context as the key to a successful business is how well the business is managed. This expectation has been met because I have gained the preliminary knowledge on how firms or organisations carry out their operations internationally for example the strategies on how firms enter a foreign market. It has also given me an introductory knowledge on how to identify a good business opportunity, have good plan of action to run and also manage a firm successfully.
Challenges: I had some challenges during the module and this was because I studied Electrical/Electronic Engineering in my first degree and knew almost nothing about business. Having to do case studies wasn't something I had done in my previous degree and so I struggled with how to critically analyse and answer the questions that usually follow suit. I wouldn't say I have completely overcome this challenge as there are still some cases where I'm still not able to comprehend a case but I know reading ahead of the lectures and paying attention during lectures has helped me to a certain extent.
Preparation for Masters: I feel prepared to begin a Masters level programme and this module helped me prepare for it. This is because, I have learnt the basics of international business and management and also how to do extensive researches and structure a report, and my referencing skills have improved as well.