In today's increasingly global economic world, it is hard to find a company focused only on its own national market and single product. The key word for global companies is diversification. Specialized newspapers such as The Financial Times abound with news of company takeovers, rumors of mergers, and analysis of how companies managed their growth.
As an example of this trend, the OECD published a document1 on June 2006 reporting that the Foreign Direct Investment into OECD countries jumped by 27% to reach USD 622 billion. Global companies are competing in international markets and as a result they are investing worldwide. At the same time, major global companies have recorded some of their best financial results.
- Example: companies featuring on the French CAC40 Index had a 34% increase in turnover in the first semester of 20052.
So, does a company churn out more profits as it becomes more global and diversified? Is it just to increase their financial results that companies diversify their activities? Is it a sustainable strategy?
To gain a better understanding of such an issue, it is easier to overlook this macroeconomic point of view and focus instead on a single market. The beer market is a very interesting and aggressive market. The five major players have adopted different strategies in a bid to increase their market share and stay one step ahead of the competition. Their presence in international markets is complemented by their diversification of activities. Not only are these companies competing with their products or marketing campaigns but also with their acquisitions and their growth strategies. In the current scenario, these companies are struggling in their domestic markets. SabMiller, Heineken, Carlsberg, AnheuserBusch and Interbrew are all more or less dependent on the sales in their domestic market which is mature, saturated and not growing fast enough. So, in order to improve their growth ratio and revenue they have to expand internationally.
[...] The acquisitions provided the company with a strong third market position in Russia. Heineken Russia employs over 9500 people. What was the strategy behind those acquisitions? What prompted Heineken to extend its network in Russia? - Increasing market power: thanks to those breweries, Heineken now controls around 20% of the market shares in Russia and has become the third biggest brewer in this country. - Sharing Infrastructures: With the help of local breweries, Heineken is now able to deliver fresher beers to the market quickly. [...]
[...] The reason to diversify is clearly to find synergies within businesses to create more value by managing them together in a single company than just owning them separately. Forms and Means of Diversification According to Miller, there are three forms of diversification: - Vertical integration: integrating in one company the various steps of converting raw materials into finished goods. Applied to Heineken this, would mean owning companies which integrate activities from brewing to packaging and delivery of beer to the consumer. [...]
[...] Heineken has to increase its presence and maximize its investment. - Sharing infrastructure: Heineken is building a network of companies in different regions of China. The way it manages its breweries and their production capacity will allow the company to reduce its costs of production. For example, by producing its international premium brand Heineken directly in China, the company can save logistical costs as it will become unnecessary to import this product from another producing country. By increasing the production capacity of the breweries with the help of Heineken technologies, it will be able to generate economies of scale. [...]
[...] - Capitalizing on core competences: After having bought new breweries, Heineken is transferring its knowledge into those new production areas, i.e., it passes on its knowledge regarding qualitative brewing to the acquired Russian brewery. This enables more efficient production as well as an increase in production volumes. Furthermore, its affiliation to the Heineken group will open new avenues of opportunities and support systems for the brewery such as logistic help, commercial knowledge (increased power in negotiations with suppliers, for example). [...]
[...] Furthermore, it's an excellent opportunity for the Heineken brand to benefit from DaFuHao's distribution network in the Nantong region for further growth." So let's examine again the reasons behind this Chinese diversification according to Miller's studies: - Maintain growth: Investing in a fast growing market such as China is a way for Heineken to boost its sales volume. With the acquisition of local brands and local brewers with high producing capacity, Heineken is trying to move from its original saturated European market and to maintain an increasing growth ratio. [...]
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