The South African Breweries (SAB) has been operating since 1895 and holds 98% of the market share in the South African beer market.

 

• Convergence in consumer choice-consumer choice for beer around the world is converging. Consumers tastes have shifted from bottles to cans and consumers are choosing lager instead of ale. Taste, packaging, and delivery channels are all determinants in the overall success of a beer. 
• Easier access to consumers-lower tariffs and partnerships between local brewers and foreign brands are allowing consumers and multinationals to access the same markets. SAB’s plan for global expansion can now target new and growing consumer populations in which terms of flavor, packaging and preference for location of beverage consumption (for ex: in a pub, restaurant or at home).
• Specialization in high-value areas of industries that were previously vertically integrated-by this specific advantage SAB was enabled to gain a greater market share making them a dominant player nationally and overseas.
• Benefits of intangible scale-competitive advantage are what every industry strives for.  The were five basic drivers that ABN-AMRO analysts outlined as intangible scales, the five basic drivers are the following:

1. GROWTH SCALES-
2. U-CURVE THEORY-
3. DOMESTIC CONSOLIDATION-
4.  ADD A LINE OF PREMIUM BRANDS
5. COST CONTROL + RELATIONSHIP MARKETING

With these strategies in mind, South African Breweries will now examine the management team.  They will then decide whether they need more help in achieving a global status. They will also focus on their strong points as well as viewing their past performance in the brewing industry.

Management Resources and Skills

SAB Executive Directors-Strategic Management Team

This management team is well suited to direct SAB presently and into the future as well. They have a strategic plan in place where they identified two core challenges the company faces. The first deals with continuing to make incremental operation improvements in the short term, while making fundamental changes by SAB, in order to be successful in the long term. The second deals with balancing the demand to become international and to be perceived as a leader by South African society.

After conducting a major strategic review in 1989-90 the team realized two things: first they didn’t think it was appropriate for SAB to enter the first world market, they felt there was little growth and major competition from large well-established brewers. Secondly they felt the skills learned in southern Africa would serve SAB best in emerging markets. They had the experience in Africa, many years of operations and had become nationalized in some African countries. As they saw privatization coming to Africa SAB felt they would be able to re-establish its presence. Especially since they were familiar with the market, competitors, and had resources readily available.

As far as emerging market regions SAB felt Eastern Europe would provide opportunities to buy positions, use their skills in production, in sales and distribution, and would create a sensible operation over time. Another opportunity appeared to be China.  With these strategies in mind this Strategic Management team has and would continue to evaluate their strengths and weaknesses while looking at possible solutions. One example is whether the consideration of merging with other brewers will help SAB reach their strategic goals.

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Current Goals and Objectives

Profitability & Growth

According to SAB’s 2000 annual report:

• Sales and adjusted earnings grew.
• EVA (economic value added) of $220 million (US) during the year.
• Earnings per share were 56.6 cents (US)
• Dividends per share for the total year were 25.0 cents (US).  
• Total sales of beer and other beverages rose (5 to 77 million hectolitres.
• Volumes in Poland & China were both up over 30%.

Market Share  

SAB currently holds 90% of the lager beer market and 98% of the entire beer market in Africa.  

Social Responsibility  

SAB has a social responsibility to address the “Greenhouse Gas” challenge.  They can accomplish this by:

• Reducing carbon dioxide emissions
• Reduce water consumption
• Reduce effluent
• Reduce energy consumption

There are two main ways in which it is possible to reduce the CO2 emissions from SAB’s energy use by:

• Reducing direct emissions by lowering fuel consumption or changing to more efficient fuel (see process below E-1)
• Have a clear beer brewing process which involves:

1. Installing new and more efficient heat exchangers, which will reduce electricity consumption.

2. Purchase improved power factor correction equipment and a new refrigeration compressor, which will again reduce electricity consumption.

3. Sourcing of improved quality coal and monitor their boiler efficiency that will reduce the amount of fuel used

4. Install electrode boilers that will lower direct CO2 emissions.

 E-1 process retrieved from

                                                                South African Breweries

Website www.sab.co.za

SAB has taken into account the issue of water conservation in all of their operations.  The use of hot water recovered from the brewing stream cooling process provides the necessary upstream hot water requirements.  SAB has also taken additional initiatives to reduce water consumption and they include:

• Accra Brewery, Ghana – water cooling tower installed to recycle pasteurized cooling water
• Botswana Breweries - pipe reticulation implemented
• Lesotho Brewing – bottle washer rinse water recycled to the crate washer
• Alrode Breweries, South Africa – installed a water recycling plant to reduce its water to beer ratio.

In all SAB sites, effluent is manager upstream generally by removing a large portion of the organic pollutants such as yeast and inorganic loading from the chemical cleaning processes.  Where municipalities cannot manage the effluent loading, treatment plants have been built to take the loading down by at least 75%.  

SAB operations take into account the issue of energy conservation.  This includes:

• Zambian Breweries – state of the art meters installed
• Kaluga Brewery, Russia – additional power factor correction equipment installed.
• Kompania Piwowarska, Poland – lighting controller installed in main production building.
• In their major soft drink bottler, ABI – installation of monitoring and control equipment.

 

Environmental Audit

Geography and History

South Africa is located at the southernmost tip of the African continent, and borders Namibia, Botswana, Zimbabwe and Mozambique. South Africa was governed by Holland from 1672 to 1810, and then as two British colonies plus several independent republics until 1901. It then became a self-governing member of the British Commonwealth 1910 to 1961, and finally in 1961 South Africa became an independent republic.

The country is divided into nine provinces and 367 magisterial districts. National Departments, Provincial Departments, and Local Government at the district level represent the government. Environmental issues are the responsibility of the government at each of these levels.

Population

South Africa's population was estimated to be 40.6 million in the 1996 census, with roughly 50% living in urban areas, and 50% in rural areas. The population growth rate is 1.9%, and although this has been declining steadily over the last few years, the total population will continue to increase. The government's Reconstruction and Development Program aim for 2.1% fertility by 2010, 1.9% population growth, and stabilization of the population at 80 million by 2100.

Environmental Laws

The recently completed South African National Land Cover Data Set estimates the largest land use to be agriculture (86%). Urban and industrial land uses 1.4%, forestry compromises 1.5%, and conserved areas 6%.

The Constitution of the Republic of South Africa, Act 108 of 1996, is confirmation of the government's commitment to the environment, and sustainable use of natural resources.  In 1996, there were 422 protected areas, made up of national parks and provincial reserves. Excluding the two largest national parks, only approximately 4% of the surface area of South Africa is formally protected.

Economy

The currency of South Africa is the Rand (approximately R 6.10 = US $1). The economy has grown steadily since 1992, although the rate has slowed. The government’s target was 3% p.a. for the period 1994 – 1996.  Inflation is approximately 6%, and just under half the population are living below the poverty line.  The economy was originally built on natural resources, with mining and agriculture the mainstays of the GDP. Recently, however, there has been a shift from production towards manufacturing, with the secondary sector currently contributing about 33% to GDP.  (Please see Exhibit E-2, page 18)

Trade and Industry

Since the first democratic elections in South Africa in 1994, the Department of Trade and Industry (DTI) has focused on reintegrating South Africa into the global economy after decades of isolation. This has required new policies, the consolidation of existing programs and the introduction of new policies and programs.

After the elections of 1999, the DTI moved from a period of learning to transformation. This involved the development of an organizational structure that is more suited to the economic needs of the country and the challenges of globalization. The DTI seeks to:

• Attract higher levels of domestic and foreign investment;
• Increase market access for South African products worldwide; and
• Create a fair, efficient and competitive market place for domestic and foreign investors, business and consumers.

The Commission for International Trade Administration (CITA) is responsible for the administration of tariffs and trade remedies, a function formerly performed by the Board on Tariffs and Trade. These functions are also linked to structures in the South African Customs Union. Its functions include:

• Tariff adjustments for South African industries to enable them to become more competitive
• Reconfiguration of industrial policy and strategy in line with Growth Economic And Redistribution (GEAR) strategy
• Pro-active investigations on disruptive trade practices such as dumping and unfair industry subdivisions.

Political Dimensions

South Africa has a vibrant multi-party political system, with 13 parties represented in Parliament. The African National Congress is the majority party in the National Assembly, and also controls seven of the country’s nine provinces. The opposition parties, however, are robust and vocal. This makes it more difficult for business to be conducted due to the large system and complicated policy.  

As stated in our case, the year 2000 brought forth devastating floods to Southern Africa. A civil war was ongoing in Angola, and political instability wracked Zimbabwe. With wars in the Democratic Republic of Congo, Ethiopia/Eritrea, and Sierra Leone, Africa was once again being portrayed in the international media as “the lost continent.” The South African rand and other regional currencies plunged against the US dollar. High political risk and volatility were attached to these emerging market economies, and SAB’s ratings on the international financial markets were inevitably affected.

(Exhibit E-2) South Africa – Statistics Overview

Self Audit

Environmental Threats and Opportunities 

SAB’s competitive advantage is focused on two core areas: value-adding capability and cost leadership.  These two areas specifically focus on:

• Maintaining and enhancing product quality and brand equity.
• Strengthen new product development capabilities.
• Pursue differentiated customer service and trade marketing.  

SWOT Analysis

Strengths/Opportunities:

By focusing on these core competencies SAB strengths have emerged as:

• Understanding developing world conditions
• Understanding how to utilize assets
• Cost management
• Delivery of a product that was both high quality and low cost
• In tune with South African environment
• Responsive to local issues
• Depth of experience

According to Norman Adami, managing director of Beer South Africa emphasized that in terms of competencies such as brand building, low-cost operations, people management and development, and managing reputation, “SAB remained close to customers and its own performance.”  Mike Simms, SAB Executive Director, highlighted the company’s unique capability: “One strength has certainly been the ability to make things work.”  

Weaknesses/Threats:

• Yet to establish itself in developed countries or to create international brands
• Vulnerable to takeovers and other market forces
• Challenge to raise sufficient capital
• Loss of confidence in emerging markets
• SAB was slow to transfer best practices
• Slow to master global business issues
• SAB acknowledged that it could not replicate the success factors underlying its achievements in Africa and in other markets, particularly in Europe.
• The rand’s never ending decline
• High political risk and volatility

Assumptions

1. The assumption can be made that SAB is company that wants to achieve global market growth within its industry.
2. The assumption can be made that SAB needs to make decisions on how to achieve this global growth, whether by merger with another company, acquiring another company, or continuing the same practices it currently uses.
3. SAB has a goal of entering merging markets and expanding its market share and profit potential.
4. SAB has the potential to expand its brand portfolio and reach a larger consumer market.

Alternative Courses of Action

Alternative One

1. The Option to Merge

South African Breweries could merge with a major developed country brewer (one that complements SAB’s competencies & geographical strengths such as Coors or Miller). This could firmly entrench SAB in the top tier of premier international brewers.

2. Explanation of the Alternative

This Course of action would best be related to “Convergence in consumer’s choice”—a topic touched on earlier in the report.  As stated on C456, Consumers preferences for different tastes are emerging—from the ingredients to the packaging that it arrives in.  Both Coors and Miller could offer SAB a domestic product line , these domestic products are sold in kegs, bottles, cans and most recently, plastic bottles.  

3. Advantages and Disadvantages

1. Advantages include:

1. Increase the global potential for SAB
2. Brand loyalty
3. Increased profitability
4. Quality product and strong brand equity
5. Growth in sales
6. Secure a dominate market share

2. Disadvantages include:

1. Most domestic companies are striving to reduce delivery distance
2. Shipping costs
3. Ability to raise sufficient capital for merging
4. Practicing the same philosophy that SAB practices

4. Evaluative Summary

The ideal partner needs not be the market share carrier of the industry—it does however, need to compliment SAB’s strengths and weaknesses in order to together attain the future position that SAB is striving for.  So again, we approach the problem—how can South African Breweries become a focused beer company while trying to reach the same growth in hard currency and still compete with global competitors?

 

By merging with a domestic company such as Coors or Miller, South African Breweries will engage in the opportunity to move into the global sector of Brewers.

This will also contribute to the increase in the present market share because the expansion of current products is still focused; yet more diversified.  In hindsight, we believe that the ideal company philosophy that South African Breweries practice is:

• Emphasizing fine quality through the products they produce
• And the desire to be among the top three brewers in the world

In addition, we hope that our values of respect for the countries we provide beverages to be shared with the company we plan to merge with.

Alternative Two

1. The Option for Acquisition

South African Breweries could find a large emerging market brewer to acquire.

2. Explanation of the alternative

This strategy involves acquiring and developing beer operations in selected international markets. One example is the significant investments SAB has made in many South African countries.

3. Advantages and Disadvantages

1. Advantages include:

1. Benefits of supporting South African government’s policy of assisting and promoting economic development in this region.
2. Securing a major strategic position in Central Europe
3. Securing significant advances in China, one of the fastest growing beer markets
4. SAB’s businesses are of a size and strength to support these entries into other developing markets
5. SAB is the largest brewer in Africa (producing 2/3’s of all beer consumed on the continent.
6. Delivery of long-term shareholder value which includes:

• Additional volumes, margin expansion and cash flow generation in the South African businesses, where SAB is fully committed to supporting further growth and development in the economy

• Optimizing and expanding SAB established positions in other developing markets, by growing organically and by acquisition to complement and support the existing operations

• Seeking larger investments in both developing and established markets where value-adding capability can be demonstrated, for example, in economies of scale or brand portfolios.

2. Disadvantages include:

1. Inflation causing little economic growth/consumer economy deteriorating
2. Rand interest rates rising

4. Evaluative Summary

According to SAB’s 2000 annual report, worldwide total beverage volume rose 9% to 77 million hectoliters. Adjusted earnings were up 8% (or 14% at constant exchange rates) and adjusted earnings per share were 56.6 cents (US) compared with 54.0 (US) in the previous year.

Despite the difficulties SAB has seen by inclement weather or floods in Southern Africa, civil wars or political instability in various countries of Africa. SAB has continued to achieve success despite these difficulties. By acquiring another large brewer (for example Heineken) SAB would avoid the most urgent problem of consolidation or being acquired themselves. By taking the initiative to acquire they can expand and grow in a much wider economic circle with more resources, capital, and knowledge at hand.

Alternative Three

1. Focus on Emerging Market Growth Opportunities

South African Breweries could focus on emerging market growth opportunities by building critical mass and rounding out its portfolio of beer brands. They would do this by—staging small acquisitions when opportunities arose.

2. Explanation of the alternative

This overall strategy is to achieve profitable growth in the global beverage market by driving volume and productivity in South Africa or other international markets.  By SAB also seeking major value-adding investments such as brand portfolio opportunities this would increase opportunities.

3. Advantages and Disadvantages

Advantages include

1. Drives volume and productivity into South Africa
2. Growth over long term
3. Stronger competition qualities in both global and international scale
4. Brand recognition
5. Increased total sales
6. Delivers economies of scale in production and distribution
7. Advancement into greater geographical areas
8. Progress to a new national basis
9. Better overall market proposition

Disadvantages include

1. Ability to raise capital for expansion
2. Growing too big too fast
3. Brand recognition may be costly in advertising and marketing
4. Acquiring too many businesses without the expertise to manage them

4. Evaluative Summary

The increasingly stable macroeconomic environment provides a significant opportunity for SAB to grow volumes over the long term.  Sound economic policies, which create wealth and higher employment, also result in consumer spending.  SAB has worked hard to increase market share in the entire South African liquor market by making beer the drink of choice by channel segmentation, distribution and promotions.  By acquiring an initial local stronghold from which SAB can advance into regions beyond the brewer’s original area—critical mass can then be built in each region, thus progress over time to a national basis.

This plan can be accomplished by acquiring further brewing businesses as needed and focusing on the brand portfolio. An optimum brand portfolio contributes to the future of SAB’s market position.  In addition, this also will increase total sales and deliver economies of scale in both production and distribution.  

By marketing and promoting selected premium brands that are brewed locally or imported (i.e. Castle Lager), name recognition becomes commonplace.  By focusing on brand portfolio SAB answers the problem:  “How can South Africa Breweries become a focused beer company while trying to reach the same growth in hard currency and still compete with global competitors?”  Increases in sales and profitable growth will be accomplished with critical mass increased—in turn, the creation of hard currency is rendered and the ability is present to compete with global competitors.

Alternative Four

1. Achieve cost advantage through organization effectiveness

SAB focus could remain on improving organizational effectiveness, rending operations even more cost effective in order to increase efficiency and profits.

2. Explanation of the alternative

The course of action the improve organization effectiveness is highlighted throughout chapter five in Strategic Management Concepts and Cases. Achieving a cost advantage and beginning the process of achieving organizational effectiveness is initially quite expensive yet highly complicated, nonetheless—effective. The first assignment a company must focus on is “what are the cost drivers in this organization?”

3. Advantages and Disadvantages

Advantages include

1. Increased productivity
2. Improved capacity utilization
3. Better distribution
4. Enhanced pricing opportunities
5. Ability to achieve a cost advantage

Disadvantages include

6. Restructuring the value chain, thus costing SAB time and money
7. Large initial investments in technology
8. Results are unlikely to surface until
9. Inability for management team to work together to achieve a cost advantage may be difficult to come certain agreements

4. Evaluative Summary

In order to begin a focused strategy, such as cost effectiveness, South African Breweries must first address what the controlling cost drivers are of the organization.  In addition, management must also ask—are we as efficient as we can be?  To achieve a cost advantage, firms cumulative costs across the value chain must be lower those competitors’ cumulative costs (p. 153 in 12th addition book).

Ultimately, there are several areas of interest that SAB can focus on where the value chain is concerned, such as:

        

• Purchasing and procurement activities
• Product R&D activities
• R&D technology activities
• Manufacturing activities
• Logistic and distribution activities
• Marketing, sales and customer service activities

The key is to combine these six plans together, creating the “right fit” which will then contribute to the overall organizational effectiveness.

After careful consideration of information provided to group H within the case study, as well as, outside information retrieved on the Intranet—we feel strong to advise South African Breweries to review the following objections, actions and rationale in the next section.

Recommended Decision

Future Objectives to implement

1. South African Breweries is trying to have a solid emerging market business while continuing to build.  The ultimate goal is to become first in the world’s position where investments will be synergistic with international operations—whether geographically in production or sales and distribution or through enhancement of brand portfolio.  SAB’s long-term strategy is to participate in consolidation and growth opportunities as well as in emerging markets.

2. How much SAB would like to accomplish depends upon the added benefits of consolidation and acquiring the market share of the brewer acquired.  According to C-464 exhibit 12, Anheuser Busch was the largest brewer in the world.  They controlled 46% of the U.S. beer industry (Miller carried less than 20% and Coors 10%).  The ideal share of the global market that SAB is striving for would be between 15-20%.

3. SAB would like to accomplish this goal within three years of acquiring another brewer.  This would be accomplished by having a strategic plan in place.  The strategy making process of the five interrelated managerial tasks must be utilized in this task, they are:

• Forming a strategic vision as to where the organization is headed
• Set objectives
• Craft a strategy to achieve desired outcomes
• Implement and execute that strategy
• Evaluate performance and make changes as necessary

4. How SAB is measured will be decided on the efforts against the ranking of the top 10 Brewers by volume.

Primary Actions Recommended

We recommend that South African Breweries merge with a domestic global beer brewer. This course of action will give SAB the strength to compete against competition, increased profitability, quality product, strong brand equity, increased global potential in sales and a dominant market share. We feel that SAB should merge with another brewer because of the climate of consolidation it now faces in the beer brewing industry. The current pressure to acquire or be acquired is eliminated by the decision to merge and become a dominant player.

Rationale for Recommendation

South African breweries decision to merge with another domestic global beer brewer is based not only SAB’s own strengths but also the value added strengths of the domestic brewer. One of SAB’s greatest strengths lies in the fact that it has 98% of the market share in South Africa. This not only relates to the fact that SAB knows how to utilize its assets but also has a strong cost management strategy in place that works. SAB currently keeps prices low, which in turn keeps their low cost strategy effective. With 98% of market share competition has not been able to match SAB’s prices. By focusing on two core competencies: value-adding capability and cost leadership SAB has achieved competitive advantage.

By taking the upper hand and merging with another brewer SAB maintains control of its company and its product. By focusing on the emerging market, a merger would allow SAB to continue to build its position and reaching its goal of being first in world position. It has already established itself in the delivery of a product that has both high quality and low cost. Another core advantage is that SAB’s distribution skills are second to none in South Africa. They have already attained the strategic position of being the fourth largest brewer in the world by volume. According to their annual highlights from 2000 total lager beer volumes were up by 10% to 53 million hectoliters. Profits were rising and underlying margins had improved in all divisions.

The added opportunities for growth in emerging markets have also shown strong performance according to the annual report of 2000. In Poland volumes were up 33%, which showed an improved market share. In China, sales rose by 38% to 8.4 million hectoliters, with capacity increasing to meet demand. As SAB has shown an understanding of developing world conditions it continues to expand and grow in new emerging markets. They have also utilized marketing strategies in each emerging market that lets each consumer choose their own local, emotional, passionate brand.

With a strong management team, the depth of experience, and with the skills learned in southern Africa, SAB’s future in emerging markets with the added benefit of a merger spells success. Their depth of experience includes being familiar with the market, competitors and having resources readily available.

SAB is also in tune with South African environmental and social responsibilities. The have addressed the “Greenhouse Gas” challenge in the way and manner in which they process beer. They have accomplished reducing carbon dioxide emissions, reducing water consumption, reducing effluent, and reducing energy consumption. They have had to be in tune with local issues whether political or environmental. With South Africa having several political party systems, SAB has had to keep abreast of all environmental laws, trade and industry issues, government policies, economic developments and had to keep in touch with the local consumer’s needs and desires.

By merging with another brewer SAB, answers the most urgent problem of “whether to consolidate with other breweries or be acquired by another brewer.” By taking the initiative or control of the situation and using the strengths that they have developed over the years SAB can maintain control of their company and their product by choosing whom they will merge with. They also answer the major problem of “How can South African Breweries become a focused global beer company while trying to reach the same growth in hard currency while competing with global competitors?”  The merger will bring added growth in profits and knowledge but also in additional regions globally and locally. By merging this creates the advantage of complementing SAB’s competencies and geographical strengths. This could firmly entrench SAB in the top tier of premier international brewers. By joining forces with another brewer not only would SAB reach the same growth in hard currency but also could surpass its current growth.

The advantages of the merger could include:

• Acquiring key personnel
• Increased profit margin
• Increasing purchasing power
• Greater geographic reach
• Expanded product lines
• Heightened industry recognition
• Increased customer base
• Financial clout
• Reduction in overhead

Implementing Recommendations

To implement the strategy of merging with a major developed country brewer SAB would have to:

• Identify, qualify and prioritize its candidates that complements SAB’s competencies & geographic strengths
• Contact them directly to determine level of interest
• Provide detailed analysis of SAB operations
• Research candidates operations and financial situation
• Conduct site visits
• Facilitate negotiations processes
• Determine and attain capital as needed
• Control every aspect of the deal including timing

The current executive board of directors and strategic management team would facilitate this process. If necessary an outside merger and acquisition specialist group could be hired to facilitate the process, while still reporting to the executive board. Professional expertise and knowledge could make the process easier and bring about a more effective outcome.

“How” the task of merging could be accomplished should include the following:

• Develop a new strategic vision/mission to be accomplished by merger
• Set objectives to be achieved by merger
• Craft a strategy
• Execute and Implement the strategy
• Evaluate the strategy (ex: by benchmarking)

This process should be initiated immediately with a long-range plan of implementation to take part in stages within a three-year period. The first stage would be the research & development stage. The second stage would be the execution and implementation stage. Lastly, the final stage would include the evaluation of the entire process.

Conclusion

The case of South African Breweries was, indeed, a very complicated assignment—however, it taught the authors of this paper a unique lesson.  The lesson being, in order to make premeditated decisions in any organization, one must have a full visualization of where the company’s actual position is in every major functioning area.  The actual revelation must then be compared with the “written vision statement”.  Once that process is completed, the next step is to create a road map to the future destination of the company.

We believe that we have made the first steps in crafting a strategy for South African Breweries by gathering the information necessary and putting it into a logical order.  As armatures, it is unknown if our suggestions are focused in the proper direction—but we feel strong about the assumptions stated and the ways to implement those assumptions.

Thank you for your direction in this class and have a nice summer!