Pernod Ricard Group International Strategy

4014 words (16 pages) Essay in International Business

23/09/19 International Business Reference this

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Pernod Ricard Group International Strategy

 

 

Introduction

From the Era of 1950, the growth in the international trade and exchange has been more than the domestic growth. Technology has enabled the growth and expansion of the international business. Hence combining international and domestic business would lead to more opportunities of progression, development and income as compared with only the domestic business. Through internationalization we can attain a flow of capital, ideas and skills across the world (Kang, 2011). The outcome is that innovations take place, Human capital resource is shared and financing is taken care of. For a company like Pernod Ricard group this provides an opportunity for acquiring a wide range of products with respect to quantity and quality. For a country this leads to development and utilization of skills, Knowledge transfer and provision of employment opportunities for professionals.

International business can be defined as transaction carried out across the national borders to fulfill the purpose of individuals, businesses and organizations. Initially international business was carried out through foreign direct investment and import & exports. Later it was carried out through forming wholly owned subsidiaries or joint ventures. (Johanson & Wiedershem, 1975)

When Pernod Ricard Group (PRG) decided to go international, the policy makers and executives were able to translate the business into success when they were able to incorporate the different characteristics of the international business into their plan and strategy. (Czinkota, Ronkainen and Moffett, 2011)

The firm has to consider the international adversities and issues and answer the questions like:-

-          Would the product or service correspond to good business in the international market?

-          How should the firm enter the market for instance through investments or trade?

-          The supplies need to be obtained domestically or should it be imported?

-          What would the adjustments be required for product to be locally accepted?

-          What threats would be faced from the global competitors and how to counter these threats.

FDI (Foreign direct investment) is the key foundation of the EU- US economic association. It is estimated that almost half of the world’s FDI from US is dispensed into EU whereas almost two third of worlds FDI from EU dispenses into the US. It was confirmed by the US department of commerce that an estimate of US$326 Billion of FDI was conducted between US and the EU in 2005. (Czinkota, Ronkainen and Moffett, 2011)

China has implemented a policy of open doors and trading across borders after becoming a member of WTO since 2001 which helped open its market towards the foreign trade.

The goal of any firm including Pernod Ricard Group remains the same which is to sell the product for profit in foreign markets and with countries opening their borders for trade this provided an opportunity for Pernod Ricard to enhance their business and profit margins.

 

Pernod Ricard decision to conduct international business

When a firm decides to move across borders they might be seeking to obtain one of the below mentioned opportunity or advantage

Seeking resources: In eighteenth and nineteenth century most if the FDI was an outcome of firms seeking unique natural resources.

Factor advantages: Cheap labor or human resources are an incentive for firms to move across the border. This advantage is merged with the resources needed for production.

Seek out Knowledge: Firms strategize to gain technical and viable skills possessed by other firms through acquiring them.

Obtaining security: firms globalize for obtaining political security

Penetrating markets: This is the most prominent reasons for firms to expand, having access to markets which would enhance their growth potential. (Czinkota, Ronkainen and Moffett, 2011)

In case of Pernod Ricard it entered different markets seeking different opportunity or advantage For instance it pursued countries either seeking knowledge through acquisition as in case of Great Britain for acquiring Seagram spirits , Sweden for acquiring V&S(absolut), Penetrating markets as in case of European nations like Belgium, Austria, Croatia etc. Seeking resources or factor advantage as in the case of China & India

Pernod Ricard’s decision of entering a Market

Theory of Absolute advantage: A company like Pernod Ricard deciding to enter a market could be based on the theory of absolute advantage which states that certain countries basis the skills of their workers or owing to the superiority of their resources could produce the same goods or commodity as compared to other in lesser time. This state of efficiency is known as absolute advantage. As compared to earlier times through industrialization the production is split into various stages which are termed as division of labor. Smith (1776) then stated that every country would specialize in a product which was best suited for providing it a unique value. Later it was developed by David Ricardo that even though a country possessed absolute advantage still it would further differentiate itself by being more efficient than another country which would develop its competitive advantage. Hence this country would then specialize in one or two products (Seretis and Tsaliki, 2016). For instance India is encouraging foreign direct investment and manufacturing in the country, this could stand as an absolute advantage for Pernod Ricard considering the low cost labor. Hence PRG has developed manufacturing facility in India for more than 30 bottling plants.

Gains of trade: Trade is established by a nation or an organization so that it could achieve and gain consumption stage which would be greater than what it could achieve domestically.

Further an organization depends on the economies of scale which could be classified as either internal economies of scale or external economies of scale.

Internal economies of scale states that the bigger the firm the greater will be production at a lower cost whereas external economies of scale states that a country can gain economic advantage even if it does not have one big firm but many small firms which would work together for creating a competitive advantage for instance France has many small wine producers thus gaining external economies of scale.

Each nation will have a different pattern of competitiveness which would enable the country to flourish in a particular industry. Porter defined four dimensions for obtaining national advantage.(Porter, 1990)

Factor condition: This determines the nation’s suitable factor of production in a market for obtaining competitive advantage.

Demand Condition: Firms which survive and thrive in their domestic markets would gain a competitive edge. For instance Pernod Ricard Group can take advantage of growth in the Wine market in Europe (Marketline, 2016)

Related and supporting Industries: A firm which flourishes by maintaining close working relations with its supporting industries like suppliers enables it to obtain timely knowledge and product flows.

Firm strategy structure and Rivalry: Porter establishes that there is no fixed strategy for achieving competitive edge. Success of a firm depends on what works for it in which country and the accuracy of the timing. As seen in the case PRG adapted different strategies for entering different markets. It adapted acquisition for entering developed markets whereas Greenfield investment for penetrating into emerging markets. (Jensen & Zamborsky, 2018)

 

Decision making for FDI

Competitive advantage of Firm

 

 

Use existing competitive advantage

Modify existing competitive advantage

 

 

Production abroad

Exporting after producing in Home

 

Control assets abroad

Licensing management contract

 

Forming joint venture

Wholly owned subsidiary or company

 

 

Greenfield investment

Acquisition

The concluding decision of a firm is between the Greenfield investment which is building a firm from the ground or to purchase an existing firm. In reference to the case it is observed that PRG condensed acquisitions in more mature markets whereas concentrated Greenfield investment in emerging markets. This could be subject to the fact that in emerging economies certain assets are government held. However the cost of Greenfield investments in higher than the acquisition route. In case of a joint venture Pernod Ricard would share its joint investment with another firm like the Cuban joint venture of Havana club.

Classification

PRG obtained industrialization through Regional strategies, Ghemawat (2005) states that international trade has been achieved through increasing the regionalization. Regional strategies could be broadly classified into five stages which are

1)      Home Based strategy: This stated that usually companies start their internationalization by operating in their neighboring countries from their home base. This means mostly companies start their expansion through exporting

2)      Portfolio strategy: Through this strategy the company sets its operation in foreign markets where they report back to the home markets.

3)      Hub strategy: through this strategy regional hubs are created which provide various resources for the local function. This strategy is adapted by considering that economies of scale would be achieved through cross country standpoint. (Ghemawat, 2005)

4)      Platform strategy: Although through hub strategy the fixed cost could be spread across the hubs, through platform strategy it is attempted to spread the cost across region. This leads to higher level of standardization.

5)      Mandate strategy: Through this strategy certain economies are awarded specialization, through this a mandate is passed for supplying a particular product to the whole organization. (Ghemawat, 2005)

Companies implementing portfolio strategy often have to deal with competitions from the non home regions.

A firm makes strategic decisions for a competitive strategy based on whether it wants cost leadership or differentiation. A firm can obtain cost leadership if it offers a similar product at a lower cost that is via economies of scale. Adversely a firm could charge higher cost for its product provided the product is differentiated in the market.

The portfolio planning for entering into a country is done based on two factors – internal strength and country attractiveness. The country attractiveness is specified based on the market size, growth rate in the market, the number of competitors, government policies and economic stability. Whereas internal strength is based on access to resources, product fit and market presence of the firm in the country.

PRG strategy Overtime

Two of sizable France’s prime liquor suppliers merged in 1974, this was the commencement of Home based strategy. This corporation then started expanding by acquiring small manufacturers of liquors. Due to stagnation in the marketplace in France Pernod Ricard moved into portfolio strategy, starting to look into expansion beyond its borders for business growth hence it started vertical expansion by integrating with the overseas distributors like the JR Parkington Company and the Austin Nicholas who has distributed the products for Pernod in UK and the US. (Hennessy, Frazzano and Meagher, 2017)

Pernod Ricard resumed their expansion through 1980’s as they sustained their global position in liquor production and distribution through Greenfield investments, acquisitions and joint ventures. In the later period of 2000 Pernod Ricard purchased Seagram spirits from Vivendi Universal which then made it the third largest producer for Liquor in the world, thus Bringing in the Glenlivet Whiskey, Martell Cognac and the seagram gin brands. The remaining 61% of this Canadian distiller was acquired by Diagio of UK, who was a competitor to pernod Ricard. In 2014 Pernod acquired Domeneq Bordegas (Thailand) (Hennessy, Frazzano and Meagher, 2017)

PRG chief marketing officer Martin riley stated that they don’t want people to drink more but to enjoy what they are drinking. Hence PRG strategized itself as a market differentiator through premiumisation of its products. (Lucy, 2013)

Taking advantage of economic integration in Europe, USA and Africa, PRG would have planned their strategy of penetrating various markets in different continents.

Economic Amalgamation of Europe

In 1957, The European Economic Community was founded. In 1958 a merger took place between the European Economic union(EEU), European coal and steel community(ECSC) and the European atomic energy community which united to form the European community. Through EEC the barriers for movement of goods and products was eliminated. The founding member countries were France, West Germany, Belgium, Italy, Netherlands and Luxembourg. In between 1973 – 1986 other members like Great Britain, Ireland, Denmark, Greece, Spain and Portugal Joined.  The poorer countries of EU that is Greece, Spain and Portugal joined the EU in 1980s. (Vranakova, 2018)

However in the common standard approach the member for EU were being compelled for negotiating the terms for thousands of products, at times unsuccessful. For instance because of difference in the tastes for Beer or sausage many a times mutual agreements were not obtained. Hence in 1987 with the mutual agreement approach coming into place, instead of the long wait for products to meet the specifications countries could directly export and customs would be the final decision makers. Hence various policies came into place through attainment of capital goods within EU, which included that there would be a common currency amongst the countries in the EU, there would be coordination between the financial institutions and lastly that mergers and acquisitions would have been controlled by EU and not the individual nations.

PRG was founded in 1974 after the foundation of EEC. PRG by taking advantage of the policies favoring EU, started implementing its portfolio strategy by setting up operations in the neighboring markets like Belgium, great Britain, Ireland, Netherland , Austria and other countries. Few of the initial expansions in EU was undertaken as Greenfield operations, PRG set up one of its first subsidiary in Germany in 1960 since Germany had a potential market for premium and exotic brands which PRG could offer like the Havana club. In the EU, PRG got involved in acquisition of small companies with growth potential. For instance it acquired Monkey47 in Germany which was a Premium craft Gin Brand. Similarly it acquired Irish distillers in Ireland. Seagram spirits in Great Britain in 2001 which added premium Scottish whiskey and Captain Morgan Rum to PRG’s portfolio. (Jensen & Zamborsky, 2018)

PRG made a strategic move of investing in one of the biggest acquisition in their history by acquiring V&S group, who had a dominant position in the Nordic spirits market. Fiurther PRG decided to retain then CEO of V&S for combined management of the region.

Implication

Through the integration in EU firms would benefit in multiple ways for instance Pernod Ricard’s operation in one country would enable it to freely expand its business into the other countries. Firm’s growth would be stimulated through the economies of scale. There would be lower transactional costs incurred. On the top of it the capital can now freely flow across the borders moreover hiring and recruiting skilled labor would now be easier. By maximizing on the trade and customs benefits PRG could secure a steady market share in the EU region.

US Canada Free Trade Agreement

The US Canada Free trade agreement took place in 1989, although these countries were practicing free trade agreement in some sectors. For instance, through this agreement there was an elimination of 4.9- 22% duties on the trade of whiskey.

The North American Free trade agreement (NAFTA) was established in 1991 between Mexico, Canada and USA. (Woldu, Alborz &Myneni, 2018)

A quarter of sales for the PRG products are achieved through Americas. It also contributes in one third of the profits for the company. This is being achieved through various brands like Jameson, The Glenlivet, Avion and Altos tequila. Thus taking advantage of its presence and success in US market, PRG could penetrate into the Canadian and Mexican Markets. In 2014 PRG acquired a majority stake in a Maxican Tequila company, Avion Spirits. The company then utilized its distribution network to expand into 11 international markets. Also, owing to success of the Tequila brand in US, overall sales of Tequila increased by 9%. This acquisition led to a major advancement in the regional strategy for expansion in Latin America and Western Hemisphere. 

Asia

The most notable establishment is the ASEAN (Association of Southeast Asian nations) in the region. Before 1991 there was no defined structure to this agreement, consent was reached through consultants. However in late 1991 the governments of the ASEAN countries which included ( Brunei, Indonesia, Singapore Vietnam, Thailand, Philippines, Malasia) made the customs union for authorizing free trade which became functional in 1992.

The Asia Pacific Economic cooperation (APEC) act was proposed by Australia in 1989. This proposal invited the ASEAN members to be united with Australia, New Zealand, Japan, China, South Korea, Hong Kong, United states, Canada and Taiwan.

A further Economic also occurred in the sub continent of India. South Asian association for regional corporation (SAARC) was launched in 1985 which comprised of seven nations (India, Pakistan, Nepal, Bangladesh, Bhutan, Maldives & Sri Lanka). EU has taken an interest in doing trade with the SAARC region. IN 1996 the secretariat of both these establishment signed a memorandum of understanding.

PRG entered into New Zealand through Greenfield strategy. PRG performed acquisitions in mature and well established markets like Australia, by acquiring one of the largest vineyards. This kind of acquisition where the countries are far away from each other geographically but are closer due to other factors can be attributed to Psychic distance. Psychic distance is changes based on trade, communication and other kind of social exchanges. (Johanson & Windershem, 1975)

In terms of volume sales and growth of PRG market China was one of the biggest market followed by India. However with Chinese government implementing strictness towards corruption and expensive and luxury gifts, sales has been declining.

The company forecasts that India would surpass China over the years owing to the increasing middle class and high income groups. PRG has also strategized Greenfield investment by expanding on the production facilities with approx 30 bottling plants.  PRG expects India to account for 9% global sales, it might be able to implement Mandate strategy for few of its products in India.

 

Emerging Economies

The emerging economies are the likes of India, China and Pakistan, other economies like Brazil, Malasia and Indonesia are catching up. The developed economies can achieve advantage through access to cheap labor, natural and human resources. Thus developed economies can take advantage of higher income, foreign direct investment and stable political structure in the emerging markets.

Africa  

Similar to other establishments West African Nations attempted to form custom union termed as Economic community of west African States (ECOWAS) in 1975. This Entity wants to attain greater market access to the North American and the European markets. PRG is forecasting growth in African countries in the coming years as sales in mature markets like the Nordic markets is on a decline.

 

Conclusion

With developed economies getting mature and extensive competition there is a possibility that volume of sales would decrease in the Europe and US region. Pernod Ricard could target the emerging markets like India & Africa through Greenfield investments by setting up manufacturing units. As there is economic growth in the emerging economies hence the volume of sales in these regions would increase. Taking advantage of low cost of labor and resources PRG could implement a mandate strategy for a few of its standardized products to be supplied to rest of the countries. Considering EU and SAARC are planning on a strategy for trade PRG would benefit by expanding into SAARC nations.

 

References

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  • Ghemawat, Pankaj. (2005). Regional strategy for gloabal leadership. Harvard business Review, 15(2), p.98-108.
  • Hennessy, J., Frazzano, R. and Meagher, E. (2017). Tartans in Thailand: Pernod Ricard’s Thai Whisky War of 2007. Kellogg School of Management Cases, 1(1), pp.1-17.
  • Johanson, J, & Wiedersheim-Paul, F 1975, ‘THE INTERNATIONALIZATION OF THE FIRM — FOUR SWEDISH CASES’, Journal Of Management Studies, 12, 3, pp. 305-322
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  • Morgan, R.E., Katsikeas, C.S., 1997. Theories of international trade, foreign direct investment and firm internationalization: a critique. Management Decision 35, 68–78
  • Porter, ME 1990, ‘The Competitive Advantage of Nations’, Harvard Business Review, 68, 2, pp. 73-93
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  • VRŇÁKOVÁ, I.(2018) How has the level of European governance changed since 2004? Trends and fault linesEastern Journal of European Studies., 9(1), p5-22.
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