Case 5 Reinventing San Miguel Corporation

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1 Case 5 Reinventing San Miguel Corporation Analysis Prepared by Group 5: Espinosa, Melissa Katherine Francisco, Marvin Importante, Marlyn Magtibay, Roxanne Nito, Orenz Rosapapan, Jennifer Synthesis Established in 1890 as a brewery company, San Miguel Corporation (SMC) is Southeast Asia s largest publicly-listed food, beverage, and packaging company. Beer is the flagship product of SMC. However, the success of SMC s main liquor brand has also become its main challenge. With its large market share, San Miguel Beer s volume sales were expected to continually post a slower growth rate of just four percent per annum in the near term. In 2007, during the annual stockholders meeting, Eduardo Cojuangco, the chief executive officer (CEO) of SMC, made an announcement that the company would reverse its international expansion plans and would shift its strategy to diversify into non-allied businesses in the Philippines. This diversification strategy includes investment in the energy, mining, infrastructure, and public utilities industries. SMC then sold its international assets and acquired shares in power distribution firm Meralco and oil firm Petron. SMC also forayed into telecommunications industry. SMC s management termed its acquisitions as reinventing, but its new vision did not appease the analysts. This has resulted into a decline of the company s stock price. By the end of 2009, SMC s reinvention remained far from complete. The company s successful acquisitions masked its numerous failed attempts to expand and acquire other companies. As CEO of SMC, Cojuangco now needs to evaluate whether or not SMC s aggressive diversification strategy into non-allied businesses was indeed the right step for the company. Point of View SMC chief executive officer Eduardo Cojuangco. Statement of the Problem What business strategy should SMC use in order to continuously increase its market share and growth? 1

2 Statement of Objectives 1. To revisit SMC s goal and ensure that it continues to reflect the company s overall business strategy. 2. To assess and reinvent SMC s overall business strategy, enhance and continue vertical diversification athwart its interest for the growth of their market share. 3.To expand SMC s market share, multiply its current scope, grow its productsservices portfolio, and increase its sales. Areas for Considerations and Assumptions Strengths 1. Expertise in the local market. 2. Vision is strong and aggressive to venture into new markets. 3. With good reputation in the business industry and with existing partnership with some big companies in the Philippines and other countries. 4. With enough capital to acquire different businesses as much as they want. 5. The company is strict with the quality of its products. 6. SMC is an ISO 9000 accredited company(worldwide Quality Standards) 1 Opportunities 1. Expansion of international market share in various Asian countries as well as to the European market. 2. The management team has good relationship with the Philippine Weaknesses 1. Expected slow growth rate. 2. Venturing on new types of business that the management is not familiar with. 3. Vulnerable to the changes in the political environment and dynamics in the country. 4. Unprepared to increase its international operations. 5. High exposure to sectors that are capital intensive market with low profit margin. 6. Would have to adapt to the different culture of its international partners. Threats 1. Near market saturation for alcoholic beverages due to new social trends, including healthy living mindset. 2. Availability of new international 1 BCA ISO 9000 Certification Scheme, available at: last accessed on July 01,

3 government, particularly top level officials. 3. New corporate strategy will lead to a more valuable and higheryielding business. 4. Its expansion will motivate its employees, especially the young managers. 5. Expanding in other Asian countries is less risky, more or less have the same business conditions with the Philippines and hence will not require drastic adjustment. liquor brands in the local market. 3. Lack of knowledge regarding newly acquired businesses. 4. New aggressive player in the local market for beverages, packaging, and food industries.smc employees are increasingly getting younger, more aggressive, and less reverent toward the company as an institution. 5. Will accumulate debts as SMC finances its business expansion. 6. Global financial crisis possibly affecting the local economy. 7. Government interventions and policies may pose market strategy uncertainties. Theoretical/Conceptual Framework 1. BCG portfolio framework The BCG Matrix was developed by Boston Consulting Group in assessing an organization s corporate business portfolio on the basis of their related market share and industry growth rates. In other words, it is a comparative analysis of business potential and the evaluation of environment. The BCG Model is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long term value creation, a company should have a portfolio of products that contains both high growth products in need of cash inputs and low growth products that generate a lot of cash. It has two dimensions; market share and market growth. The basic idea behind it is that the bigger the market share a product has or faster the product s market grows the better it is for the company. 2 The BCG Matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate (see diagram 1). The midpoint of relative market share is set at 1.0. If all the Strategic Business Units are in same industry, the average growth rate of the industry is used. If all 2 Value Based Management.net, Product Portfolio Management: Summary of the BCG Model, available at: last accessed on June 30,

4 the Strategic Business Units are located in different industries, then the midpoint is set at the growth rate for the economy. Relating it to the BCG Portfolio Framework, SMC can easily evaluate which type of business they should start to venture in or which they should maintain or let go. This would help SMC to assess the status of their businesses with an ultimate goal of maintaining and keeping their market value. The group made a matrix of SMC in relation to BCG Model. Diagram 1 STARS > Food Business > Oil Refiner / Retailer Business > Infrastructure Business CASH COWS > Brewery/Beer Business > Power Generation and Distribution Business > Beverage Business > Packaging Business QUESTION MARKS > Telecommunications Business DOGS > Mining Business 2. Porter's five forces of competitive position analysis The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have 4

5 affirmed that different industries can sustain different levels of profitability; part of this difference is explained by the industry structure. 3 Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates. (See Diagram of Porter s Five Forces) 4 Structural Analysis using the Five-Forces Model A. Threat of New Entrants - LOW - The industries in which SMC operate poses high barriers to entry such as economies of scale, brand identity of established SMC products, government regulation, and sizeable capital requirements. B. Intensity of Rivalry among Existing Competitors - MIXED - Rivalry in the Beer, Food and Beverages, Power Generation, and Retailing businesses are low given that SMC is one of the market leaders and has established itself as one of the main players. - The Telecommunication, Food, Packaging, Oil, Infrastructure and Mining Industries pose high intensity of rivalry given that industry growth rate has slowed down, the market is saturated by the main providers, and SMC is disadvantaged for being the late entrant in many of the said business. C. Bargaining Power of the Buyers - LOW - The consumers have no power to change the price of SMC commodities. - The deregulation of the Electric, Oil and Telecommunication industries have significantly lowered the bargaining power of users. D. Bargaining Power of Suppliers - MIXED - Both Electric and Oil businesses are characterized by high bargaining power of suppliers since power generators in the country are only a handful, while oil is largely obtained from the Middle East market. - All other industries exhibit low bargaining power of suppliers given that there are many providers and vendors that can provide SMC s requirements. E. Threat of Substitute - MIXED - The Beer, Packaging, Mining, and Electric businesses poses low threat of substitute given that San Miguel Beer is the nation s choice beer, switching costs in the Mining and Electric industries are high, and MERALCO has the monopoly franchise for electric distribution in Metro Manila. 3 QuickMBA, Porter s Five Forces: A Model for Industry Analysis, available at: last accessed on June 30, Id note 3. 5

6 - High threat of substitute is recognizable in the industries of Food and Beverage and Telecommunication given that switching costs are very low and buyers are inclined to find alternatives should they find the products unsatisfactory. Alternative Courses of Action (ACA) 1. SMC will continue its current business strategy of diversifying into non-allied businesses in the Philippines and at the same time pursue those which complement their current businesses. Pros >Higher margin, higher growth industries will bring about growth in earnings. >Related diversification will allow SMC to optimize its earnings and stretch its growth in the Food and Beverage industry. >Spread risks among different industries. In this way, not all businesses will be affected by a seasonal slowdown. Cons >Risk that newly-acquired businesses may not generate expected income. >Highly capital-intensive businesses may affect the competitiveness of traditional product lines. >Company may stretch itself too thin administratively speaking by participating in various industries. 2. SMC should further enhance its core products and continue to penetrate the international market and this time with their comprehensive strategy. Pros Cons 6

7 >SMC can introduce local food and beverage of the Philippines to the international market. >SMC can be the first Filipino multinational company. >Needs high capital and no guarantee of positive revenue for new player in the international market. >High risk to accumulate debts as SMC needs to finances its business expansion abroad. >Fails to adopt international culture. 3. SMC should divest company shares with small or minimal profit and continue to diversify in the same industry of food, beverage, and packaging through regional acquisitions and integration and eventually move globally. Pros >Reduction of company s total profit loss. Cons >Laying-off particularly those employees with good record which would be a disadvantage on the part of SMC. >San Miguel might experience hardship in attracting high potential customers instead of taking care of existing ones. Recommendation The group recommends the first alternative course of action; that is, for SMC to continue its current business strategy of diversifying into non-allied and complementary businesses in the Philippines. By pursuing a strategy involving diversification into non-allied businesses, the company will be able to expand into industries that are deemed highly prospective (high margin and growth). This will allow the company to establish its presence in these industries, and at the same time, increase its overall company revenues which should come from these industries. Additionally, by pursuing a strategy involving diversification into complementary businesses in the Philippines, the company will be able to revitalize its current business interests (Beverage, Food and Packaging) and push for its continuous growth. This will also allow the company to present a more comprehensive and consumeroriented diversification since they will be able to offer complementary products and services. More importantly, pursuing this diversification strategy into complementary businesses will allow the company to streamline and rationalize its financial and manpower resources. 7

8 Recommending the first alternative course of action naturally will expose SMC to a number of risks. The group, however, believes that the risks posed by a business strategy focusing on diversification into non-allied and complementary businesses in the Philippines are expected, accepted, and manageable. The risk pertaining to income is expected since this diversification involves entry into businesses that the company management has no prior experience. The risk pertaining to capital-intensive business is accepted since this diversification involves massive financial investment and consequently requires the company to explore its financing options. The risk pertaining to management s administrative capability is manageable since this diversification involves a certain level of management specialization, which other company executives (besides Eduardo Cojuangco) can be able to cover. Having said these, all our set objectives will be met fully. Implementation Plan In lieu of fervently supporting SMC s diversification strategy, Mr. Cojuangco shall call for Board and Shareholders Meeting to - first, provide an update on current performance of the company both allied and non-allied operations to include market share, growth versus previous meeting, projected sales and growth paths (short and long term); second, to present future plans on acquiring or investing to other complementary and non-allied businesses and how these future acquisitions will benefit the company and its shareholders; lastly, to immediately communicate plans to stakeholders. Learning Points Strategic Management is a continuous process involving review of vision and mission of an organization, analysis of internal and external weaknesses, formulation of strategy, and implementation of strategy. The preceding statement requires patience and full understanding to come up with good planning strategies. Yes, the group admits that thinking appropriate intendance for a certain corporation is very challenging because it encompasses so many different aspects of management. We learned that if we become managers in the future, we are already aware and equipped that one of our functions is to analyze opportunities and strengths in the external environment in light of an organization s internal strengths and weaknesses. This will lead us to achieving certain organization s goals. It will also uncover areas where to capitalize on and will discover areas in which expansion may be unwise. 8

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