Corporate Strategic Analysis Report.

Most importance: Assessments must be submitted via Turnitin, and the similarity must below 20%.

The module is assessed (100%) by an individual Strategic Report (maximum 3,000 words) involving an in-depth, strategic analysis of a large organisation. The subject of the report will be decided by the module convenor but students will be able to choose from a list of 6 varied examples.

Instructions for assessment

The Strategic Report should strictly NOT exceed 3,000 words and demonstrate clear report style with relevant Harvard references. It is to be a unified whole that answers three questions (see below) focused on the selected organisation. Formative work in weekly seminars will guide students through analytical techniques and processes required to complete the task.

For the selected organisation, assume you are an outside consultancy reporting to the Chief Executive. The Strategic Report should:-

1). Identify 3 key strategic issues facing the organisation with a clear explanation of why they are “strategic” (20%).

2). Analyse fully the resources and key capabilities of the organisation plus key factors that give the company its competitive advantage. (40%)

3). Assess the extent to which the organisation’s competitive strategy

addresses its strategic issues, and suggest improvements where they

might be justified. (30%)

A further 10% is available for clarity, structure, grammar, correct Harvard referencing and overall professional presentation showing clear report style.

Best answers will draw explicitly on strategic concepts and analysis from the module and apply them to the organisation. Clear referencing (Harvard system), professional presentation with appropriate diagrams/tables are required.

Again note the report should not exceed 3,000 words. Appendices are allowed outside this limit but NO MORE than 6 pages.

How will your work be assessed?

Your work will be assessed by a subject expert who will use the marking scheme indicated below. Feedback will be given in the Turnitin/Grademark system with script comments plus overall points. When you access your marked work it is important that you reflect on the feedback so that you can use it to improve future assignments.

In this Strategic Report, high marks come from using strategic concepts and analysis from the module clearly applied to the organisation. Harvard referencing, a professional report style plus appropriate diagrams/tables are also required. Outline marking expectations are as follows:-

Q1: (20%) After a short introduction, we expect 3 key Strategic Issues with explanations and knowledge of why they are “strategic”. The 3 environments (PESTLE, 5 Forces & internal) should be used as a guide.

Q2: (40%) We expect strong course knowledge, clear industry CSFs plus the organisation’s resources & unique capabilities well analysed. Also how unique capabilities link to advantage & CSFs, and their Porter generic strategy.

Q3: (30%) We expect an evaluation of how their strategy addresses their issues using the three SAFe tests – plus how it might be improved. A short overall conclusion completes the report.

PRESENTATION: (10%) We expect a professional report with clear report style (not an essay) e.g. frontsheet, contents, clear sections, tables & diagrams and relevant Harvard referencing. The word count should not be exceeded by more than 10%.

(In addition to marker feedback, a full marking rubric will be available within the Turnitin submission system for student consideration.)

Assignment submissions.

The Business School requires a digital version of all assignment submissions. These must be submitted via Turnitin on the module’s Moodle site. They must be submitted as a Word file (not a pdf) and must not include scanned in text or text boxes. They must be submitted by 2pm on the given date. For further general details on coursework preparation refer to the online information via StudentZone

If you cannot submit a piece of work and wish to submit Mitigating Circumstances, the University Mitigating Circumstances Policy can be found on the University website

How will we support you with your assessment?

There will be weekly references to the assessment task in seminars and weekly activities in those seminars will be helpful in creating “scaffolding” for eventual submission. An assessment worksheet will be provided in Wk4 to assist the development of ideas.

The formative mini-casework in seminars will be of direct help in the application of relevant strategic tools. There will be regular Q&A sessions linked to the assessment report and in the final weeks of teaching there will be an opportunity to review and reflect upon work from previous cohorts.

The 6 cases (with initial links) from which you should choose are:-

Case study

Online links for more information

Johnson et al.

H&M in fast fashion: continued susses?

http://www2.hm.com/en_gb/home.html

Ed. 10: p.575 Ed. 11: p.576

Megabrew: creating an undisputed global brewing champion?

http://www.ab-inbev.com/investors/combination-with-sabmiller.html

Ed. 11: p.639

Ed. 10: p.647 (SAB Miller)

All change at Teva

http://www.tevapharm.com/about/profile/

Ed. 10: p.634

Ed. 11: p.690

Mondelez International: Are you going to stick around Irene?

http://www.mondelezinternational.com/investors

http://ir.mondelezinternational.com/sec.cfm?DocType=Annual&Year=&FormatFilter

Ed. 10: p.686

Ed. 11: p.695

CRH plc: leveraging corporate strategy for value creation and global leadership

http://www.crh.com/

Ed. 11: p.705

Ed. 10: p.639

Flight Centre Limited: competing to provide the lowest air fares

https://www.flightcentre.co.uk/about-us/our-story

http://www.fctgl.com/our-brands/

http://www.fctgl.com/investors/annual-reports/

Ed. 11: p.636

Ed. 10: p.676

How will your work be assessed?

Your work will be assessed by a subject expert who will use the marking rubric provided on Moodle. When you access your marked work it is important that you reflect on the feedback so that you can use it to improve future assignments.

Referencing

You MUST use the Harvard System.

Tips for how to do make a good start:-

Tip 1: Read the Assessment Brief to understand clearly what is required.

Tip 2: Use web links to initially research each of the 6 organisations.

Tip 3: Choose your organisation with the assessment task in mind.

Tip 4: Assemble material from a wide range of research sources.

Tip 5: Focus on knowledge & application of relevant module concepts.

Tip 6: Participate in module seminars & draw lessons for your Report.

Assessment: Strategic Analysis Report.

Choice of Companies & Tips on How to Proceed.

Most importance: Assessments must be submitted via Turnitin, and the similarity must below

he module is assessed (

00%) by an individual Strategic Report (maximum

,000 words) involving an in-depth, strategic analysis of a large organisation. The subject of the report will be decided by the module convenor but students will be able to choose from a list of

varied examples.

Instructions for assessment

For the selected organisation, assume you are an outside consultancy reporting to the Chief Executive. The Strategic Report should:-

1). Identify 3 key strategic issues facing the organisation with a clear explanation of why they are “strategic” (20%).

2). Analyse fully the resources and key capabilities of the organisation plus key factors that give the company its competitive advantage. (

0%)

3). Assess the extent to which the organisation’s competitive strategy

addresses its strategic issues, and suggest improvements where they

might be justified.

(30%)

A further 10% is available for clarity, structure, grammar, correct Harvard referencing and overall professional presentation showing clear report style.

Again note the report should not exceed 3,000 words. Appendices are allowed outside this limit but NO MORE than 6 pages.

How will your work be assessed?

In this Strategic Report, high marks come from using strategic concepts and analysis from the module clearly applied to the organisation. Harvard referencing, a professional report style plus appropriate diagrams/tables are also required. Outline marking expectations are as follows:-

Q1: (20%) After a short introduction, we expect 3 key Strategic Issues with explanations and knowledge of why they are “strategic”. The 3 environments (PESTLE,

Forces & internal) should be used as a guide.

Q3: (30%) We expect an evaluation of how their strategy addresses their issues using the three SAFe tests – plus how it might be improved. A short overall conclusion completes the report.

(In addition to marker feedback, a full marking rubric will be available within the Turnitin submission system for student consideration.)

Assignment submissions.

If you cannot submit a piece of work and wish to submit Mitigating Circumstances, the University Mitigating Circumstances Policy can be found on the University website

How will we support you with your assessment?

The 6 cases (with initial links) from which you should choose are:-

Case study	Online links for more information	Johnson et al.
1	H&M in fast fashion: continued susses?	http://www2.hm.com/en_gb/home.html	Ed. 10: p.5 75 Ed. 11: p.576
2	Megabrew: creating an undisputed global brewing champion?	http://www.ab-inbev.com/investors/combination-with-sabmiller.html	Ed. 11: p.639 Ed. 10: p.647 (SAB Miller)
3	All change at Teva	http://www.tevapharm.com/about/profile/	Ed. 10: p.634 Ed. 11: p.690
4	Mondelez International: Are you going to stick around Irene?	http://www.mondelezinternational.com/investors http://ir.mondelezinternational.com/sec.cfm?DocType=Annual&Year=&FormatFilter =	Ed. 10: p.686 Ed. 11: p.695
5	CRH plc: leveraging corporate strategy for value creation and global leadership	http://www.crh.com/	Ed. 11: p.705 Ed. 10: p.639
6	Flight Centre Limited: competing to provide the lowest air fares	https://www.flightcentre.co.uk/about-us/our-story http://www.fctgl.com/our-brands/ http://www.fctgl.com/investors/annual-reports/	Ed. 11: p.636 Ed. 10: p.676

How will your work be assessed?

Referencing

You MUST use the Harvard System.

Tips for how to do make a good start:-

Tip 1: Read the Assessment Brief to understand clearly what is required.

Tip 2: Use web links to initially research each of the 6 organisations.

Tip 3: Choose your organisation with the assessment task in mind.

Tip 4: Assemble material from a wide range of research sources.

Tip 5: Focus on knowledge & application of relevant module concepts.

Tip 6: Participate in module seminars & draw lessons for your Report.

Criteria

Outstanding

(

100

-90)

100

Excellent

(80-89)

Very

Good

(70-79)

Good

(60-69)

Satisfactory

(50-59)

Adequate

(40-49)

Marginal

Fail

(30-39)

Fail

(20-29)

Not Done

Q1). (20%) Identify 3 key strategic issues facing the organisation with a clear explanation of why they are “strategic”.

Work of outstanding quality that is fluent, extremely well structured & question focused. A concise but very clear introduction to the report & the company using relevant facts. An outstanding grasp of 3 strategic issues using a clear definition plus knowledge & outstanding application of relevant PESTLE, 5 Forces & Internal aspects. Overall a strongly knowledge driven section.

High quality work with a clear introduction to the report & company. An excellent grasp of 3 strategic issues supported by a definition & knowledge plus a strong application of PESTLE, 5 Forces & Internal aspects. Overall a focused & robust section.

Quality work with a sound introduction to the report & company. A very good grasp of 3 strategic issues with reference to a definition plus a very good application of PESTLE, 5 Forces & Internal aspects. Overall a sound & robust section.

Sound work with a fair introduction to the report & company. A good grasp of 3 strategic issues with possible reference to a definition plus some application of PESTLE, 5 Forces & Internal aspects. Overall a sound section.

Fair work with a less effective introduction to the report & company. A patchy grasp of 3 strategic issues without much reference to a definition. Some application of PESTLE, 5 Forces & Internal aspects. Overall a fair section.

Basic work with a minimal introduction to the report & company. Only a common sense grasp of 3 strategic issues without much depth or any reference to a definition. Superficial application of PESTLE, 5 Forces & Internal aspects but lacking depth. Overall only a basic section.

Inadequate work without a clear introduction to the report or company. A weak choice of 3 strategic issues without using a definition. Little relevant knowledge or application of PESTLE, 5 Forces & Internal aspects. Overall, a weak section.

Obviously poor work lacking an introduction to the report or company. Incomplete inclusion of 3 strategic issues & no definition used at all. No relevant knowledge or application of PESTLE, 5 Forces & Internal aspects. Overall, an obviously failing section.

No attempt to include any relevant material

Criteria

Outstanding

(100-90)

100

Excellent
(80-89)
85

Very Good

(70-79)
75

Good
(60-69)
65

Satisfactory
(50-59)
55

Adequate
(40-49)
45

Marginal Fail

(30-39)
35

Fail
(20-29)
25

Not Done
0

No attempt to include any relevant material.

Q2). (40%)

Analyse fully the resources & key capabilities of the organisation plus key factors that give the company its competitive advantage.

Work of outstanding quality that is fluent, extremely well structured & question focused. A fully reasoned definition of the relevant industry plus first class understanding of its CSFs. The organisation’s resources clearly analysed using Grant’s three types with unique capabilities identified & analysed using Value Chain, VRIN & other tools. An outstanding grasp of links to advantage by comparing capabilities with CSFs & a correct choice of Porter or Strategy Clock generic. Overall an outstanding demonstration of knowledge & analysis.

High quality work with a clear industry definition plus excellent understanding of CSFs. Resources clearly analysed using Grant with unique capabilities identified & analysed using Value Chain, VRIN & possibly other tools. A full grasp of links to advantage via capabilities & CSFs. The Porter or Strategy Clock generic correctly chosen. Overall a complete demonstration of knowledge & analysis.

Quality work with a sound industry definition & understanding of CSFs. Resources well analysed using Grant with unique capabilities identified & analysed using Value Chain & possibly VRIN & other tools. An informed grasp of links to advantage via capabilities & CSFs. The Porter generic correctly chosen. Overall a focused & robust analysis.

Sound work with a fair industry definition & understanding of CSFs. Resources fairly well analysed using Grant with unique capabilities identified. Value Chain & other tools possibly used. Some grasp of links to advantage via capabilities & CSFs. The Porter generic correctly chosen. Overall a sound section.

Fair work with a fair industry definition & some understanding of CSFs. Resources basically analysed using Grant with a patchy attempt to identify unique capabilities. Value Chain & other tools possibly missing. Only a basic grasp of links to advantage via capabilities & CSFs. The Porter generic superficially chosen. Overall a fair section.

Basic work with a superficial industry definition & common sense understanding of CSFs. Resources basically analysed possibly using Grant with some attempt to identify unique capabilities but lacking Value Chain or other tools. Weak grasp of links to advantage via capabilities & CSFs. The Porter generic superficially chosen. Overall only a basic section.

Inadequate work with a poor industry definition & little grasp of CSFs. Resources weakly analysed without Grant & only a poor attempt to identify unique capabilities. No Value Chain or other tools. No links to advantage via capabilities & CSFs. The Porter generic superficially chosen. Overall a weak section.

Obviously poor work with no clear industry definition or CSFs. Resources superficial plus a poor attempt to identify unique capabilities. No depth of knowledge or analysis. No thoughts on advantage. The Porter generic superficial chosen. Overall an obviously failing section.

Criteria

Outstanding
(100-90)
100

Excellent
(80-89)
85

Very Good
(70-79)
75

Good
(60-69)
65

Satisfactory
(50-59)
55

Adequate
(40-49)
45

Marginal Fail
(30-39)
35

Fail
(20-29)
25

Not Done
0

Q3). (30%)

Assess the extent to which the organisation’s competitive strategy

addresses its strategic issues & suggest improvements where they

might be justified.

Work of outstanding quality that is fluent, extremely well structured & question focused.

There is an outstanding analysis of how strategy addresses strategic issues identified earlier. The suitability test links strategy clearly to the environment & strategic position. The acceptability test identifies key stakeholders with the Power/Interest matrix & examines their needs. The feasibility test justifies the strategy & shows sustainability. The tests are used with outstanding knowledge & insightful discussion. Improvements are strongly focused on resources, capability & advantage with a concise conclusion.

High quality work with an excellent analysis of how strategy addresses the issues. The suitability test links strategy clearly to the environment. The acceptability test identifies key stakeholders & their needs. The feasibility test justifies the strategy & shows sustainability. The tests are used with strong knowledge & points whilst Improvements address resources, capability & advantage with a concise conclusion.

Quality work with a sound analysis. The suitability test uses sound links to the environment. The acceptability test identifies key stakeholders & some of their needs. The feasibility test shows sustainability. The tests are used with sound knowledge & some points. Improvements fairly address resources, capability & advantage with a concise conclusion.

Sound work with a fair analysis. The suitability test uses some links to the environment. The acceptability test identifies key stakeholders but limits their needs. The feasibility test shows some grasp of sustainability. The tests are used with sound knowledge. Improvements are fair but lacking clarity on resources, capability & advantage. There is a fair conclusion.

Fair work with a reasonable analysis. The suitability test uses one or two links to the environment. The acceptability test identifies key stakeholders without their needs. The feasibility test shows only a fair grasp of sustainability. The tests are used with reasonable knowledge. Improvements are fair but lack depth. There is a short, general conclusion.

Basic work with only a superficial grasp of analysis. The suitability test uses one or two links to the environment. The acceptability test identifies key stakeholders without their needs. The feasibility test shows only a fair grasp of sustainability. The tests are used with some knowledge. Improvements are fair but limited. There is a short, general conclusion.

Inadequate work with a poor grasp of analysis. The suitability test is not linked to the environment. The acceptability test identifies shareholders only & the feasibility test is probably not understood. The tests are used with little knowledge. Improvements are only common sense. There is no clear conclusion.

Obviously poor work with no grasp of the three tests. Suitability, acceptability & feasibility are not understood. Improvements are poor common sense & there is no conclusion.

No attempt to include any relevant material

Excellent
(80-89)
85

Very Good
(70-79)
75

Good
(60-69)
65

Satisfactory
(50-59)
55

Adequate
(40-49)
45

Marginal Fail
(30-39)
35

Fail
(20-29)
25

Not Done
0

Criteria

Outstanding
(100-90)
100

Presentation. (10%)

Clarity, structure, grammar, correct Harvard referencing & overall professional presentation showing clear report style.

An outstanding example of a professional report with frontsheet, contents, clear sections, tables & diagrams plus strong Harvard referencing. The word count is respected & there are suitable appendices with a full references section.

A high quality, professional report with frontsheet, contents, clear sections, tables & diagrams plus relevant Harvard referencing. The word count is correct & references given.

A quality report with frontsheet, contents, clear sections, tables & diagrams & sound Harvard referencing. The word count is correct & references given.

A sound report style used with frontsheet, contents, clear sections. Limited tables & diagrams with patchy Harvard referencing. The word count is correct but references limited.

A fair report style used with frontsheet, limited contents & patchy sections. Generic diagrams with weak Harvard referencing. The word count is not accurate & references limited.

A basic & scrappy report style used with no frontsheet, limited contents & patchy sections. Limited diagrams & poor Harvard referencing. The word count is not accurate & references very limited.

A sloppy essay style used with no frontsheet, limited contents & patchy sections. No diagrams & no Harvard referencing. The material is under length & lacking references.

An obviously inadequate report without contents or question clarity. No attempt at sections or Harvard referencing. The material is unacceptable as a business report..

There is no submission relevant to the task.

H&M IN FAST FASHION: CONTINUED SUCCESS?

africa and India. Despite these aggressive expansion

)lars, analysts had some doubts=

‘There are fears that the product is not good enough,
brand appeal is fading or that prices have been
undercut by an even cheaper competitor. These are bi

Including Inditex (Zara), Gap and H&M, continued to be
the market leaders (see Table 1). An example of the new
and vibrant smaller players was the Japanese company,
Uniqlo, which had started to expand aggressively.
Moreover, fashion is, by its very nature, unpredictable
and fickle trends are prone to sudden changes, which
makes competition uncertain. End consumers have an
enormous selection of garments to choose from and will
quickly adopt new trends. In the ‘fast-f ashion ‘ category
they are also extremely cost conscious and will seek out
bargains.

Some of the players in the industry are both produc-
ers and retailers. For example, Gap Corporation and Indi-
tex both manufacture their own products and sell them
in their own stores. Other retailers have a multitude of
suppliers to choose from. As international trade liberal-
ises, the number of suppliers increases and competition

CASE H&M in fast fashion: continued success?
STUDY Patrick Regn6r and H. Emre Yildiz

questions-
Adam Cochrane, analyst at UBS3

This case examines the role of resources and capabilities in building competitive advantage and the ke.
issues to consider while evaluating the sustainability of competitiveness. H&M has enjoyed a leading pog ‘
bon in the global fashion and apparel market thanks to its unique concept, business model and ability to
combine elegant designs with affordable prices. Key competitors, however, have challenged that position
and H&M needs to evaluate the sustainability of competitive advantage derived from its resources anil
capabilities. The case explores the areas and functions in which H&M has enjoyed advantage vis-a-vis
competitors and how, if at all, this advantage can be sustained in the long term.

The apparel industry

The total market size of the global apparel retail industry
in 2014 was $1,317bn (£856bn, €1,014bn),’ but with
an annual growth rate of just 3.8 per cent for the period
2010-14.s This slow growth increased competition.
which was further intensified by a large number of small
players, although the large international incumbents,Introduction retailer by market capitalisation, based on Zara’s rapid

expansion, particularly in emerging markets The
increased competition, and the fact that margins had
started to erode due to increased cotton prices and
rising production costs in Asia, put the H&M high-
fashion/low-price formula and aggressive expansion
under scrutiny. Investors had come to trust H&M’s

model that relied on a set of unique resources and
capabilities, but Zara’s success questioned the sustain-
ability of the formula.

The increased competition for consumer spending in
the fast-f ashion business was further intensified by the
poor economic situation. With 70 per cent of shareholde

voting rights controlled by the company’s founding

Persson family, H&M’s chief executive Karl-Johan
Persson tried to calm investors and emphasised the long-
term view:

The apparel retailer H&M has made an incredible journey,
from a single store established by the founder Erling
Persson in Sweden in 1947 to a pioneering ‘fast fashion ‘
business with 3700 stores in 61 countries and more than
132,000 employees worldwide. ‘Fast fashion ‘ refers to a
quick response to new trends and fashion items that are
made available in stores immediately thereafter. By the
time Persson’s 34-year-old grandson Karl-Johan Persson
took over as CEO in 2009, H&M had become global
leader in the ‘fast-fashion ‘ segment with a distinctive
business approach that challenged most competitors. The
business model, commonly referred to as ‘cheap-and-
chic’, emphasised high fashion at prices significantly
below those of competitors, with the fundamental prin
ciple being ‘Fashion and quality at the best price ‘.

As the CEO of the company, Mr Persson emphasised
the importance of maintaining the company’s growth
based strategy, as he stated in the 2014 annual report:

Table I H&M and its multinational competitors

g
K
0

H&M

Positioning and segments Business model Key figures Financials

H&M is a retailer of fashion apparel,
cosmetics, accessories and shoes for
women, men, teenagers and children.
Collection of Style(COS) otters
customers a combination of
timelessness and distinctive trends, for
both women and men. The /Monk/ stores
provide innovative collections and an
inspiring fashion experience
characterised by playfulness and
colourful graphic design. Week(/ay sells
its own brands but also commissions
design collaborations with independent
fashion labels. The Cheap /Won(iay
stores combine influences from street
fashion and subcultures with a catwalk
vibe. The latest addition is the luxury
store concept & Other Sto/bs.

The business is operated
from leased store
premises, through internet
and catalogue sales and
on a franchise basis.
H&M does not own any
factories. Production is
outsourced to
independent suppliers.
H&M’s growth target is to
ncrease the number of

stores by I0-15% per
year, and at the same
time increase sales in
comparable units. This
growth is entirely self-
financed. The collections
are created by 140
in-house designers
With an in-house design
and a tightly controlled
factory and distribution
network, the company has
the ability to take a
design f rom drawing
board to store shelf in
just two weeks. That
enables Zona to launch
new items every week,
which keeps customers
coming back again and
again to check out the
latest styles. The
company also has a policy
of zero advertising and
instead invests its
revenues in opening up
new stores.

At the end of 2014, the
company had 3261
H&M stores.114 COS
stores. 92 /Wor7k/ stores,
22 Weekday stores and
f\ve Cheap Monday
stores as well as 130
f ranchise stores. The
group outsources
product manufacturing
to 700 independent
suppliers through its 16
local production offices
in Asia and Europe. The
company employs more
than 132,000 people

The company recorded
revenue of $20,137m
in the fiscal year ending
November 2014. an
ncrease of 3.84%

compared to fiscal
2013. lts net income
was $2,691m in fiscal
2014, representing a
slight increase
compared to a net
income of $2,620m in
the preceding year.

‘We have great respect for the economic climate. In
this situation it is extra important to have a long-term

perspective and to always make sure we give the best
combination of fashion and quality for money in every
market.’l

2014 was a very good year for H&M, with strong sales
and profitability. We are continuing to add value for our
customers and to invest for an even stronger H&M. We
will open a net total of 400 new stores and nine new
online markets in 2015.’

Inditex (Zara) The flagship brand of the company is
Zona. Zara also operates /

Zane is present in 87
countries. with a
network of 1991 stores
located in major cities
throughout the world.
Pull and Bear has
opened 853 shopsin
the main streets and
shopping centres of
63 countries. /Mass/mo

Du#7 operates 665
stores in 63 countries.
The fiershka sales
format has 954 stores in
66 countries. There are
currently 858
Stead/uadus stores in 56
countries. There are
currently 549 0ysho
stores in 39 countries.

The corDpany recorded
revenue of $20.480m
in the fiscal year ending
January 2015, which
represents a decrease of
about 10% compared to
fiscal 2014. lts net
income was $2,826m
during 2014, compared
to a net income of
$3.212m in the
preceding year.

we are investing for the future and we always have the
customers in focus. Despite increased purchasing costs,
we have continued to strengthen our customer offering –
for example, by not raising our prices to customers-”

H&M continued to emphasise the long-term view in its
expansion strategy. For 2015, 400 new stores were
planned, with China, the USA and the UK expected to be
the largest growth markets. They also planned to enter
new markets including Taiwan, Peru, Macau South

H&M opened another 379 new outlets in 2014 with the
addition of flagship stores in key locations such as
Milan, Munich and New York, as well as expansion into
new markets like Australia and the Philippines. However,
H&M was being seriously challenged by Zara, the prime
retail brand of Spain’s Inditex, which had already over-
taken H&M to become the world’s biggest fashion

This case was prepared by Patrick Regn6r and H. Emre Yildiz of the Stockholm School of Economics. It s intended as a basis for
class d scussion and not as an illustration of good or bad pactice. © Patrick Regn6r and H. Emre Yildiz. Not to be reproduced
without permission.

jcontinued)

576 577

H&M IN FAST FASHION: CONTINUED SUCCESS? H&M IN FAST FASHION: CONTINUED SUCCESS?

Table I H&M and its multinational competitors (conf/needy able 2 comparative financial data

Positioning and segments Business model Key figures Financials H&Mi Inditex (Zara)2 Gape UNIQL04

Gap Under the Gap brand, the company
offers an extensive range of apparel at
moderate price points. £3anan.a Repuh//c
was acquired by the company in 1983.
This brand offers sophisticated,
fashionable collections at higher price
points than the Gap brand. The Old
Navy brand was launched in 1994 to
address the market for value-priced
family apparel. The brand ,4fh/efa offers
customers perf ormance-driven women’s
sports and active apparel and footwear
for a variety of activities.

The company operates
through two segments:
stores and direct. The

stores segment includes
the results of the retail
stores for each of the

company’s brands: Gap,
Banana Republic,
Old Navy and Athleta.
The direct segment
includes the results of
the online business for
each of the company’s
web-based brands.

By the end of fiscal year
2014,Gap had 3280
company-operated and
429 f ranchise stores. Of
the company-operated
stores. 1398 were
operated under Gap
brand. 1022 run with
O/d /VaW label, 650
stores sell £3.an.ana

Repuh#c branded
apparels and the
remaining 103 stores
se\\ Athleta, Plperlime
and /nte/mfx brands.

U/V/QLO Japan operated
a network of 852 stores
at end of August 2014.
U N IQLO Internationa
has a total of 633
stores. Of that total.
374 stores are located
in Greater China
CMainland, Hong Kong
and Taiwan). 133 in
South Korea, 80 in
Southeast Asia and
Oceania, 42 in the USA,
9 in the UK. 8 in France
and 8 in Russia
L//V/QLO has around 70
partnerfactories, and
roughly 75% of L//V/QZ.O
products are made in
China.

increase of 1.7%

glH$.
=t::’;i=;:ii:;:P”

Icky figures (thousand USD)

i frat ng revenue (turnover)
Income before tax

Net income

Cash flow

Total assets

shareholders’ funds

Price earning ratio
Number of employees
profitability ratios

Return on equity (%)
Return on capital employed (%)

Return on total assets (%)
Profit margin (%)

Gross margin (%)
EBITDA margin (%)

OBIT margin (%)
Cash flow/turnover (%)

Structure ratios

Current ratio (x)

Liquidity ratio (x)
Shareholders’ liquidity ratio(x)
Solvency ratio (%)

Gearing (%)

iAs of 11/30/2014 and for 12 months.
2As of 01/31/2015 and for 12 months.
3As of 01/31/2015 and for 12 months.
4As of 08/31/2014 and for 12 months
Source: Mint Global, Bureau van Dijk.

20,398,901
3,488,529
2,691,132

20,480,750 13,382,00
1,332,0003,668,241

2,826,871
3,849,846

17.383,705

16,435,000
2,013,000
1,262,000
1,836,000
7,690,000
2,983,000

13.83

791,000
1,028,000
9,568,000
6,133,000

3,370,785
lO,184,295
6,945,534

23.36
93,351

11,834,871
32.57

137,054 141,000
n.a

30,448

38.75
36.16
26.42

23.89 12.90
11.50

UNIQLO The company is a retail chain operator
specializing in in-house designed casual
clothing for men and women. The
company operates stores under the
name of L//V/(2Z.O. The company is the
leading clothing retailchain in Japan in
terms of both sales and profits. UNIQLO
is a member of Fast Retailing Group,
which also operates other chain stores
under the franchise names Theo/y
(fashionable basic clothes that suit a
contemporary I ifestyle), Compfo/r Des
Cordon/ers (the brand nurtures a sense
of natural authenticity and flattering
femininity), Pdncesse fam.fam(corsetry.
lounge wear and swimwear brand) and
G.U. (an entirely new business mode
for a company offering extremely low-
priced clothing in the Japanese market).

L//V/QZ.O has established a
SPA (Specialty store
retailer of Private label
Apparel) business model
encompassing all stages
of the business – f rom
design and production to
final sale. By continuously
refining this SPA model,
L//V/QZ.O differentiates
itself from the
competition by developing
unique products. The
company quickly makes
adjustments to production
to reflect the latest sales
environment and
minimise store-operation
costs, such as personnel
costs and rent. This is
how L//V/QLO provides
such high-quality clothing
at such reasonable prices

The company recorded
revenue of $13,382m
by the end of August
2014, an increase of
13% compared to fiscal
2013. lts net income
was $791m in fisca
201 1, compared to a
net income of $2,088m
in the preceding year.

21.59
42.31

16.26
17.91
57.33
22.69
17.70
18.80

24.51
16.41 8.27

9.96
50.78
11.02
9.25
7.68

i I I I I I
17.10
59.19
20.23
16.90
16.52

12.25
41.70
16.05
12.55
11.17

1.15

13.79
68.20
7.25

1.90
1.40
9.03

68.08
11.95

1.93
1.09
1.21

38.79
83.61

2.63
1.81
7.66

64.10
13.06

Sot/nce: Company websites. buying and selling’7 with the essence of ‘tradesman-ship ‘.
This was also maintained at the core of the company’s
culture when his son Stef an Persson took over as CEO in
the 1980s. Even after Karl-Johan Persson took over in
2009, the leadership style and organisationalculture still
relied on Erling Persson’s basic values and beliefs, based
on his strong business acumen and characterised thrift,
no-nonsense decision-making and delegation of respon
sibility. These are fundamental ingredients of ‘the spirit
of H&M ‘, which retained the shared and tacit under-
standing of how the company does business. It is under-
lined by seven codified core values:8

Another aspect of the H&M spirit is the extraordinary
focus on employee involvement. This participatory
management philosophy is one of the reasons why H&M is
seen as a company where experimentation, trial-and-error
learning, fast decision-making and willingness to take
initiatives and try new ideas define the basic pillars of
organisational culture. Another key ingredient in the
culture of H&M is the active encouragement of this spirit
at all organisational levels.9 Trying new things is also
encouraged among purchasing managers, but while trying
something new and making mistakes is acceptable, it is
important that the same mistake is not repeated.

Experimentation is also present at the store level,
where interior decoration, lighting, colours, clothes
displays and even locations are swiftly changed depending
on sales and customer preferences. However, the range
within which new Ideas can be tried is clearly bounded
by H&M’s core ideas and values. In a memo to its
employees, H&M specifies this as follows: ‘Our employees

among manufacturers in low-wage regions intensifies.
Switching from one supplier to another is not difficult,
although it entails the risk that choosing low-cost sup
pliers may imply a more extended supply chain, less
able to cope with sudden fluctuations in demand as the
industry reacts to changes in fashion. There is also a risk
that low-cost suppliers may not be up to the required
quality standards.

The spirit of Hennes & Mauritz (H&M)
H&M is an abbreviation of ‘Hennes’ (the name of the first

women’s apparel store opened by Erling Persson in
1947) and ‘Mauritz ‘ (a later acquisition of a men’s
clothing store). The company has undergone a tremen-
dous transformation from having lust one store and a
domestic focus to become one of the world’s largest

fashion retailers. As argued by one of the few journalists
that has access to the company; ‘The story of H&M does
not really concern clothing, but from the beginning one
man’s vision or rather unbreakable stubbornness, devo-
tion to a goal and knowledge of human nature.’s

Not unlike IKEA in furniture, the H&M philosophy is to
make fashion affordable for everyone: ‘Fashion and
quality at the best price.’ The roots of the H&M ‘spirit ‘
can be traced back to the 1940s. when Erling Persson
started to conduct, what he calls, ”the primitive trade of

Entry to the retail industry does not require a large
capital outlay: setting up a single independent retail store
is within the means of many entrepreneurs and there are
plenty of suppliers to choose from. However, on a globa
scale, a few large corporations account for a major share
of total industry revenues. Their size and economies of
scale (see Table 2) enable them to build brands in
multiple retail outlets, and exploit their greater buying
power when negotiating with suppliers.

We believe in people
We are one team

Straightforward and open-minded
Keep it simple
Entrepreneurial spirit
Constant improvement
Cost-consciousness

578 579

H&M IN FAST FASHION: CONTINUED SUCCESS? H&M IN FAST FASHION: CONTINUED SUCCESS?

all contribute to making H&M what it is today. We have
a strong corporate culture the spirit of H&M that is
based on simplicity, a down-to-earth approach, entrepre
neurship, team spirit, straight lines, common sense and
a belief in individuals and their ability to use their
initiative.’io

Swedish national values also play a role including a
humble, informal and non-hierarchical management style
combined with the ‘democratisation of fashion ‘. Creative
advisor Margareta van den Bosch comments: ‘We’re a
very democratic society [in Sweden] . . . We keep what
we do simple and we think it’s wrong that fashion should
be the preserve of the rich.’::

Despite this humility, results are central, something
which is emphasised by Erling Persson’s early focus on
fakfen ‘ or ‘the pace ‘, which still remains a fundamental

practice at all organizational levels. It is a straightfor-
ward and persuasive weekly list that includes sales and
other key figures compared to the previous day, month
and year. On this list each manager can clearly see
exactly how much has been sold of each individual
product. The buyers use this information to reallocate
production or shipments, reducing potential over-
stocking problems. This itemized report also allows
buyers to maintain a high level of turnover, keeping the
apparel on the sales floor up to date. Allemployees are
also made aware of these results and if sales are up
from the day before the sales figures are applauded
during store morning meetings.

Limited attention to titles and job descriptions is also
a characteristic of H&M: ‘At H&M we do not have any job
descriptions. It provides considerable freedom, but it
also makes it more difficult to blame someone else and
claim that something is not part of your duties. Some
love it, but others leave after a few weeks.’i2

In line with this emphasis on informality, independent
decision-making is celebrated and decentralisation is
encouraged within the limits of the organizational
culture. However, central functions like buying and logis-
tics also have a considerable influence and the organisa
bon is in a sense ‘a peculiar mix of strong centralisation
and delegation’.i2 it has been a challenge to preserve the
flat and simple organisational structure during H&M’s
tremendous growth. The company has a matrix country/
function organisation with each executive management
team member being responsible for a function and for
the results of work within their function in each country.

i:!:!:::l:liilliF sili$i
inviting and inspiring; strengthening the brand and
offering local customers the best possible shopping
experience. ‘

Instead of owning retail properties. H&M Opts for
renting store premises, which increases flexibility and
adaptability. By renting space, the company is able ta
adapt more quickly to the changing demand patterns and
location attraction in its key markets.

The window display where the customer meets
H&M – is perhaps the most important ingredient of the
stores. Guidelines for store design and display windows
are created centrally based on a large ‘test store ‘ in
Stockholm. Every two or three years a completely new
interiors programme is created. Although centrally
guided, every store is unique as it showcases different
items in the window display, although they may come
from the same collection. Displays, both in windows and
inside stores, are changed frequently. This way,
consumers are continually attracted to visit the stores to
keep up with the latest collections.

In line with H&M values, decision-making is decen-
tralised and store managers have considerable autonomy.
The shop manager runs the business like an entrepreneur
and is authorised to take independent decisions within

the overall guide lines; essentially like running their own
business. This increases employee loyalty and commit-
ment to the organisation and is a great motivator.

H&M spends around five per cent of its revenues on
advertising.
” in addition to conventional channels, H&M has also

established a strong social media presence. The company
aims to become part of its customers’ daily lives, through
HS pages on Facebook, Twitter, Instagram, Google+ and
Youtube, as well as the Chinese social networks Youku
and fina Weibo. Each network is updated on a regular
basis. Through social media, millions of H&M followers
share ideas and opinions and get quick answers to their

queries New fashion videos and reports are uploaded
onto Youtube weekly and have had millions of hits.
Through the H&M apps customers can explore the latest
collections and campaigns, find out what’s new at H&M
and locate stores. At its launch in August 2010, the
phone app was the most downloaded application in
a most all of H&M’s markets.

inspiration from everywhere, but the most important thing
is to make it your own way. Quality means carefully testing
everything bef ore it hits the shops, from jeans to lipstick.
But it also means H&M is a fashion house in its own right,
with its own trends. We do not copy.’i ‘

Apart from size adjustments, for example in the Asian
market, no special changes are made to to adapt the
collections for specific countries. H&M argue that: ‘It is
important that H&M keeps its own personality in each
country, and fashion has become more global, more
international’.i5 Similar trends are appearing the world
over. Of course this is also driven by economies of scale
in buying and manufacturing

Buying, local production offices and corporate
social responsibility (CSR)

11! H&M does not own any factories. Instead, manufacturing
is primarily outsourced to low-cost countries with some
70 per cent of production in the Far East and South Asia
and the remainder in Africa, Europe and the Middle East.
With the focus on economies of scale, including low wage
and high-volume production, the company maintains low
Input costs and often has the latest trends in its stores
within a month of the initial design.i6 H&M also
constantly redefines its production and distribution in
response to changing market and production conditions
to ensure that they continuously improve the efficiency of
the production flow. This way, H&M has been able to
reduce lead times by 15 20 per cent in recent years.:’
In 2011, H&M worked with 900 independent suppliers of
which 150 were considered long-term strategic partners.
Buying is centralised in Stockholm and has always had a
central role in H&M. Managers within this function have
often been the best paid in the entire organisation

To reduce lead times, the 50 production offices are in
direct contact with suppliers and report back to central
procurement in Stockholm. They mediate between the
large network of independent suppliers and the central
purchasing office, to identify the right suppliers to place
orders with, to optimise time and cost decisions, and to
ensure that decisions comply with H&M’s CSR policies.
Each supplier owned or subcontracted multiple factories;
globally 1652 factories were approved for making goods
for H&M. H&M conducted a total of annual 3623 audits
of suppliers in 2014. CSR has increased in importance
for H&M. Being a high-profile and visible player in the
textile and apparel industry, the company is under
constant scrutiny in terms of working conditions and
wage levels in the overseas suppliers they work with.
Being fully cognisant of this, H&M pays particular atten
bon to CSR and takes several actions throughout its
value chain to keep its brand name away from the usual

Design

Design is centralised at the Stockholm headquarters and
ncludes a team of almost 200 designers and about 100
pattern makers. The centralisation of design allows for
minimum time-to-market and the design team has direct
contact with the production offices around the globe.
This allows for a rapid-response manufacturing process to
capitalise on design trends immediately. The design team
works intensively with new trends, materials and colours
from what is popularly known as the ‘White Room ‘ and is
supported by the 50 production offices around the world.

Much effort is put into researching and predicting
emerging market trends. H&M designers hold customer
surveys, dialogue sessions and focus groups, and pick up
trends from employees in the global stores and then add
their own particular features. They need to have an up-to
the-minute fashion feedback focus and be conscious of
the very latest trends. According to Ann-Sofie Johansson,
head of H&M design department: ‘We try to look out for
trendsetters, what’s popping, vintage looks, what’s
happening at music festivals. The internet is getting more
important as are catwalk shows, but these are more of a
confirmation of what we know is out there’.i3

She and her team pick up inspiration in several ways:
notes from travels, fashion classics offered by Paris,
Milan, New York, London and Tokyo, textile fairs, street
fashion and exhibitions: ‘Celebrity inspiration is also
rnportant, as well as what bloggers are saying and
)Id-f ashioned sources such as music. magazines, movies
3nd costume dramas’.n

However, H&M always adds its own touch to the design,
reating collections that strike a good balance between the
:st trends and the basics. Margareta Van den Bosch,

creative adviser and former head designer says: ‘We get

Marketing and social media
H&M’s strong brand image is associated with value and
stylish collections. In addition to 200 in-house collabora-

tions with famous designers, there is a unique approach
employed by H&M over recent years. This has included
signature collections designed by Stella Mccartney in
2005, by avant-garde Dutch designers Viktor & Rolf in
2006, by Madonna in 2007, by the Italian designer
Roberto Cavalli and Kylie Minogue in 2007, by Sonia
Rykiel in 2009, by Versace in 2011. by Italian fashion

label Marni in 2012, by Isabel Marant and Beyonc6 in
2013 and by American designer Alexander Wang in 2014

Highlighting the high level of brand awareness, H&M
was ranked 21st among the top 100 most valuable global
brands according to Interbrand in 2015, with a brand
value of US$22bn. In comparison, Zara ranked 30th
with US$14bn, and neither Gap nor Uniqlo made it. into
the top 100 list. H&M’s superior brand value vis-i-vis I

H&M IN FAST FASHION: CONTINUED SUCCESS? H&M IN FAST FASHION: CONTINUED SUCCESS?

criticisms aimed at the textile industry. H&M also
produces a special collection (Conscious Collection)
using sustainable materials. The company has formu-
lated seven commitments called ‘H&M Conscious
Actions’. These include adopting ethical practices,
improving working conditions and using natural resources
responsibly. Other projects include community invest-
ments.i8

: Hrllil EI : :::: : responsibility and decision-making, and are capable of
ending A love of fashion combined with a focus on
sales is perceived as a major advantage.

store in 1947 to 4000 in 2015. In 2016, H&M planned
to open another 400 stores and to pursue aggressive
growth in its new luxury label format of stores called ‘&
Other Stories’. However, fashion-retailing history is full of
companies that have confidently expanded into new inter-
national markets but later been forced to retreat and
drastically curtail their growth. e.g. Marks & Spencer,
C&A, Benetton. The question for H&M and its third-gen-
eration leader Karl-Johan Persson is to what extent will
H&M’s resources, capabilities, practices and knowledge
be enough to keep up with the competition, including
vigorous new players? Will these entrants be able to repli-
cate H&M’s success?

‘lts centralized logistics and warehouse System, close
coordination of the procurement staff with the produc-
tion offices, intelligent use of ICT [information and
communication technologies] tools, purchasing flexi-
bility and overall a central governing model, has
incredibly reduced the lead time and improved logistics
to have lightning-f ast turnaround speed of just 20 days,
making it a truly unique supply chain innovator.’2i

Internationalisation and expansion
While H&M’s skill in providing fashionable and elegant
clothes at affordable prices and catering for the dynamic
tastes and preferences of customers can broadly be iden-
tified as the main drivers of its success, perhaps their
unique advantage lies in their ability to replicate the same
business concept and ‘spirit ‘ across time and space.
Since the 1990s, international expansion has been
aggressive and the company has moved into Eastern
European markets, the Middle East, Asian markets and
Russia. By 2005, H&M had already expanded into more
than 20 countries with more than 1000 stores.

Continuous growth by replicating the same business
model and store concept thus defines the core of the
company’s expansion strategy. Prior to moving to a new
country or city, H&M first conducts a thorough evaluation
of market potential. This is done according to factors like
demographic structure, purchasing power, economic
growth, infrastructure and political risk.

H&M’s policy is to recruit local people wherever they
open a new store. H&M looks for those who have the ‘right ‘
personality and potential to understand and adopt the core
values of the organisation. Another element is to use
formal training programmes, as well as on-the-job training,
to socialise employees into this culture and make sure that
they understand and act according to the company’s core
values. These socialization mechanisms are the means by
which H&M successfully adopts a ‘mental franchising ‘
model, in which the ownership of each and every store
remains in the hands of H&M whereas the shop managers
often run their shop as if it were their own.

All of these initiatives are essential elements of H&M’s
constant growth strategy, where the ambition is to create
and re-create businesses that reflect the basic and
fundamental values and the overall H&M spirit. To this
end, the company keeps formal rules and procedures to
a minimum and prefers to equip its employees with tacit
skills via experiential learning in the field. This way, H&M
makes sure that those who work in new outlets are
exposed to and infused with the original spirit. Combining
this with the values of initiative-taking and entrepreneur-
ship, H&M has been able to stay ahead of its competitors
by moving fast and reaching large markets based on
applying a simple business modeluniversally, yet making
Subtle modifications and adaptations at the local level.

H&M’s growth to become one of the largest global
fashion retailers is an incredible success story from one

Logistics: distribution, warehousing and IT

Buyers and production offices are closely integrated
throughout the value chain with distribution centres,
warehouses and the stores around the globe. To reduce
poor buying decisions and to increase flexibility in
allowing stores to restock quickly during the season with
best-selling products H&M made sure not to place orders
too early. H&M puts more emphasis on economies of
scale in its supply chain set-up compared to Zara’s focus
on flexibility and speed:

Human resource management(HRM)

Key to the recipe of H&M’s success is its ability to
establish a strong corporate culture with well-defined
values, and to make sure its employees understand
and internalize these values in their job. One impor-
tant element to ensure that this culture continues ta
be integrated into HRM is the recruitment process
and training.

Internal promotion and job rotation are two central
ingredients in the HRM policies, and experience, loyalty

and continuity are highly regarded. These two aspects
are central to cultivating and disseminating the H&M

spirit and culture throughout the organisation. The
company’s steady growth has been providing ample
opportunities for employees to take on new challenges in
another store, department, role or country. Aligning

corporate and individual goals with development and
growth strategies are essential for H&M:

Notes and references
1. As quoted in C. MacCarthy, ‘H&M continue aggressive expansion

F7nancia/ 7]1nes, 29 September 2011
2. As quoted in M. Stothard, ‘H&M to launch new line of stores’, Franc/a/

77mes, 29 March 2012.
3. As quoted in M. Stothard, ‘H&M defend strategy as margins fall ‘,

Hr7ancM/ 77mes, 26 January 2012.
4.$1 : £0.6 : €0.75
5. Marketline, Industry Profile: Global Apparel Retail, ID:MTLN5577521,

6. B. Pettersson, }/annie/smdnnen, Manpocket: Stockholm, 2001, p. 21

8. H&M website: http://about.hm.com/AboutSection/en/About/Facts-
About- H M/About- H M/Business-Conde pt-and-G rowth.html .

9. B. Pettersson, 2001, p. 91
10. http://about.hm.com/en/About/facts-about-hm/people-and-history/

working-at-hm/values.html
11. As quoted in J. Craven, ‘H&M: meet the brains behind fashion’s mega-

brand’, Da/&’ /14a/f/Ma// On#ne, 23 February 2010.
12. Jan Jacobsen as quoted in B. Pettersson, 2001, pp. 261-2.
13. As quoted in P. Kam, ‘High street label H&M serves up inspiring fash-

ion at affordable prices’, The Star on//ne, 20 September 2012.
14. As quoted in N. Mehta-Jasani, ‘H&M: from the inside ‘, Ch/r7ada/boom,

29 June 2007.
15. Margareta Van den Bosch, creative adviser as quoted in N. Mehta-

Jasani, ChinadaiMcom, ‘H&M: from the inside ‘, 29 June 2007.
16. K. Capell and G. Khermouch, ‘Hip H&M: the Swedish retailer is rein-

venting the business of affordable fashion ‘, Bus/ness Week,
11 November 2002.

17. ‘Industrial change in the textiles and leather sector ‘, EMCC, http:.//
www.eu rofo u nd .eu ropa .eu/sites/defa u it/files/ef.files/emcc/
pu blications/2004/ef 0465en.I. pdf.

18. http://about. h m .com/en/About/susta ina bility/com m itments/
strengthen-commu nines.html.

19. T. Kih16n, On Lc2gisdcs /n the SfnateW of the F7/m, Link6ping University,

20. H&M Annual Report 2011
21. R. Pal ‘Identifying organizational distinctive competence by business

mapping in a global textile context ‘, ./oc/rna/ of Zex#/e and ,4X)X)ane/

Technology and Management, 7(4), 20LL
22. H&M Annual Report 2008

2015

7. Ibid

‘Lead-times vary from two to three weeks up to six
months. The different lead-times reflect differences in
the nature of the goods. The trick is to know the right
time to order each item. A short lead-time is not always
the best, since the right lead-time is a matter of
bringing price and quality into balance.”9

H&M controls virtually alllogistics internally except for
external contractors handling transportation. The inte
grated logistics function is a key business process for
H&M that supports cost efficient supply of goods and
generates economies of scale: ‘H&M can offer the best
price by avoiding middlemen, buying the right product
from the right market, being cost-conscious at every
stage and having efficient distribution.’20

This integrated direct distribution channel ensures that
H&M stores receive new shipments daily, giving the
company further control over supply and demand shifts.
Store-keeping of merchandise is minimised and individua
stores do not have backup stocks; they are replenished as
required from a central warehouse. They also shift
merchandise around internally depending on demand. For
example, if a particular fashion proves exceptionally
popular to men in a particular region, but not in another,
they can shift inventory from the first region to the second.
The distribution set-up also enables H&M to respond to
market segment changes within a country.

To support the swift and efficient flow of goods, H&M
logistics is dependent on effective information sharing and
the latest IT systems that are continuously developed.
These systems permit optimal supply and demand deci-
sions, whilst also providing valuable information for under-
standing customer needs and the placement of products.

‘The key words for continual growth are responsibility
and commitment. We have committed employees and we
are prepared to delegate responsibility at every level.
I tell employees. if you do not grow, neither will H&M.’

Head of HRM, Pdr Dare::

A participative culture is thus central to the spirit of
H&M and the leadership philosophy emphasises straight-
forward and direct relationships with employees The
HRM policies emphasise the core value – ‘We believe in
people ‘ -and the open-door policy, granting allemployees
the right and possibility to discuss any work-related issue
directly with management.

Consequently, H&M values personal qualities much
more than formal qualifications; great school grades
and all the university credits in the world are no guar-

Flight Centr

Kenneth Wiltshire

Limited: competing to provide the lowest air fares

ed (FLI) is one of the world’s largest
IP

, with more than 30 brands

and

crate and wholesale businesses in l

5. FLT achieved a record revenue of
it before tax of A$256.5m continuin

trend that FL] has established over

finally based in Australia, FU’s rapidly
k now extends throughout Australia.
USA. Canada, the UK, South Africa,
China, Singapore and the United Arab
)n, the company’s global travel manage
M Travel Solutions, extends to more

ntries through strategic licensing agree-
endent local operators. The company
n 15,000 people globally, and actively
?rowth. FLT is a successful entrepre-
at became established and grew rapidly
ble industry and government obstacles.
highly competitive environment requiring
lon. with a staff- and client-focused
odd. However, it constantly faces signif-
in an intensely competitive industry

wing capacity for clients to make their
:ements online. Having become a major
questions arise as to whether Flight
lue to operate with one business opera
11 regions and cultures.

Source: Kumar Sriskandan/Alamy Images

double decker buses to take tour groups around Europe.
Despite harrowing experiences with bus breakdowns,
;.ani.; .ffi.i;ldi. i” “;-y c.u-t’i.;, ;h”!;g. o ‘
working capital and back-breaking hours for the
founders /drivers/operators, the tours proved very
popular and the number of buses and tours grew. Along
this journey the entrepreneurs, who had no experien.ce
in the industry, had to engage in improvisation, rule-
bending, fudging and originality in marketing with no
formal strategy.z However, the lessons learned stood
them in good stead when they decided to explore the
gap they perceived in discounted air travel and founded
Flight Centre in 1981.

This turned out to be a formidable challenge. The
practice of flight discounting was virtually unknown in
the cosy travel industry in Australia, which was charac-
terised by intensive government regulation of airlines
which had long-established relations with existing travel
agents. The industry was immediately hostile to these
new upstarts, and they had to turn first to lesser known

)73 when a few young Australians living
e inspiration to begin a travel company
ck Tours’, using old refitted London

LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

-“‘-‘;..«, ««:”:li;’i=:: .’:ii ‘ lz!:l

!ms and arranging local partnerships

y monitorsoperof trnvel .paokages Strategy and the business model
s around the world, stepping in when When the company decided to float in I
; occurred on a few occasions when was largely based on a desire to facilil
ive maQe poor decisions. Described ownership in the organisation in or

;=,’.:!’::=* J::=1′ R:. H; ‘-,. ‘:!?-‘«.#.,. “‘*’:::

emselves in some tight personal financial
fund expansion or acquisitions along the
share buy-back scheme was attempted in

nly because the directors felt that the share
:n well below the true value of the company
of external conditions. Flight Centre h

ed with a small Board of Directors four or
comprising the original founders for most

iny’s history.
element of the strategy is the price guar-

3dvertising slogan originally said ‘Lowest Air
xnteed ‘ because the company’s policy is to
ler lower published price for a fare. But this
hth objections from regulators and today the

:s the slogan ‘Lowest Airfare Guarantee ‘. This
caused plenty of headaches and additional

:times over A$10m the total cost of
}r fares submitted by clients. It is made

nous because of the airlines who now offer
to the public themselves. However, Flight
tuck religiously with this pledge and it is now
!nched part of the brand and the culture.
iamentals of Flight Centre’s strategy are
organic growth and in this it has been highly
Some buy-outs have occurred and some

)rslfication (e.g. hire of bicycles), but the
firmly grounded in the travel business and its

(pansion into corporate and student travel as
more up-market luxury products has all been
!hind the retail presence is an engine room of

tivity as deals are negotiated with a plethora
Most travel agents operate their own whole-

as which arrange deals and contracts with

flight, accommodation and ground travel package opera-
tors. and then make these deals available to their own
retail agents. In an effort to achieve cost efficiencies
through internal competition, Flight Centre introduced a
purchaser provider approach whereby their retail stores
could opt not to choose to buy from the company’s own
suppliers if they could do better elsewhere a cost-
centre concept which was fiercely resisted at first and
caused some morale problems, but has gained accept-
ance and introduces healthy intra-company competition.
However. more in-house transactions are now happening
than ever before. The FCL ‘replicable small business
model ‘ contains six elements (see Box I)

The business model is followed by a list of rules for
running a project which are process-oriented. Perhaps
the most interesting one is ‘Perfection is banned near
enough is good enough. We want action and progress
not perfection.

!oPle. In essen
and

d motivate
like tO Wail

ire was mod

family ‘ is a tear
even people;th
3Phic fame

is a maxims
1le tribalident
nd interact

form a natlor
ncouraged
ny acted upon.
ry few special

parking. and
ier himself
:e.) Indent
:ration is mad
lch can be ven
the option of
scheme. The

: produced
elatively short
fter ‘prize 8RI

‘ormanc
t gala confw.
fave access to
ial we
more for shek
e of the trw
iat those wl

None of
ade union

reed taloin
looking aftl

A challenging business environment

The company has faced some major challenges, many of
which were very threatening to the travel business,
including wars, natural disasters, global health epidemics
and the global financial crisis. The sudden collapse and
liquidation of Australia’s Ansett airlines caught the
company off guard because of loss of over-rides, super
over-rides, plus credit card reversals. The closure of
Heathrow Airport in December 2010 owing to its inability
to cope with snow and bad weather with days of flight
cancellations is an interesting case in point, where Flight
Centre’s own emergency helpline gave its customers
up-to-the-minute information and the certainty that
someone was looking af ter them, by comparison with the
lacklustre performance of the airlines and the airport in
this respect. Customer loyalty was further entrenched
Indeed the company has always been prepared to sustain
extra costs to retain customer loyalty and return business.

l
ll

g
l

‘he FCL global ‘replicable small business model ‘

lgrowth(organic, acquisitions and start-ups)
level of the business.

!m-based and decentralised decision-making

and local ownership by individuals with
)les and responsibilities.
ial rewards/incentives on individual outcome
fully relevant, consistently measured and

The team leader works in the team with the same
technical job as the rest of the team.
All business team and support teams operate
under the ‘one best way ‘ brand guide, business
systems and operating systems (the Systems
/Wanda/). In FCL we have one set of values, one
culture and one set of philosophies.s

the decisis
greater staff
to enhan

course. th
sting owners

FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

Maintaining a healthy level of cash reserves has been an
Important element of risk management in a precarious
industry

Throughout the whole of its history, Flight Centre has
had to deal with a great deal of inflexibility and intransi-

gence from government officialdom. In the beginning,
this applied particularly to gaining licenses to operate in
almost all countries they wanted to enter. Innovative ways
were found around this including using less popular
airlines, operating under licenses of associates. and even
occasionally beginning operations before licenses were
obtained and adopting a ‘crash through ‘ approach which
involved severe risk taking. This has usually been
successful in the end, although initial attempts to
operate in Vietnam were given up at considerable cost in

the light of bureaucratic inertia. The company has
baulked at bribery and corruption suggestions from offi-
cials in some countries.

+ Brand and specialization
specialize in
customer

+ Unique product.
exclusive Flight

simply lust selling
tagline ‘Our product

e Experts not agents:
ndprqtandingexperts in

that they
readily available

+ Redefining the shops
and retail spaces reflect
people are retailers
workers. (This
ration in Flight
bench row seating
to individualized circular
enjoy a more
vidual

+ Blended
always available
and buy Flight

onlinewant

evolving brands which truly

specific areas of travel and have clear
value propositions.

making, combining and sourcing
Centre Travel products, rather than

supplier’s products using the
– not just someone else’s’.
ensuring each brand’s people are

the brand’s specialty and

in turn are backed by ‘travel gurus’ who are
if additional expertise is required.

ensuring corporate, wholesale
the fact that Flight Centre’s

first and foremost, and not office
is most observable in the new configu-

Centre stores with a change from
of consultants to face customers,

tables for each consultantto
direct and personalised space with indi-

customers.)
access: ensuring Flight Centre’s brands are

to customers. They can touch, browse
Centre products when and how they
offline, shop, email, chat, phone or

Legalissues

In a very significant twist in 2012, the company was
investigated by Australia’s Competition Regulator for
allegedly trying to collude with airlines in fixing prices
and anti-competitive behaviour. This was because of an
attempt it made to have an airline reveal a cheap air fare
which it was offering directly to the public, and which
was lower than Flight Centre had been offering for the
same fare. The regulator accused Flight Centre of ille-
gally fixing prices of international flights on six occasions
between 2005 and 2009 with Singapore Airlines.
Malaysia Airlines and Emirates. The Federal Court in
2013 ruled that Flight Centre had competed with airlines
for the retail or distribution margin on the sale of interna-
tional fares and had sought to stop them from undercut-
ting it on these fares. The issue involved the airlines
offering cheaper fares on their own websites than it made
available to Flight Centre agents through its global distri-
bution system. Because of Flight Centre’s ‘lowest price
guarantee ‘ a key element in FLC’s business model it
was forced to match the cheaper fares even though this
inevitably meant selling at a loss. The case hinged on the
question of whether travel agents are a retail extension of
an airline or competitors of airlines. Clearly this ruling
would have significant repercussions for accommodation
and ground tour operators as well.

The initial court decision went against FLC which
experienced a small dent in its share price and then had
to face a strategic decision as to whether to appeal.
Given the crucial importance to the business of its
Lowest Price Guarantee ‘ policy Flight Centre mounted

an appeal; a costly and time-consuming exercise lasting
over five years. In 2015, the company won the appeal

SMS

Underpinning
the company, information
‘patterns’ and ‘predictions
and marketing machine

these five journeys is the belief that for
is power through ‘profiles’,

. It also encompasses a sales
that is more agile, personalised

The complexities of competition

The highly competitive nature of the airline and travel
industry was highlighted in an incident in 2015 when the
company issued a profit warning as it had lost some
market share to internet companies like Airbnb and
Booking.com and experienced weak growth in leisure
travel in Australia. The share price slumped 17 per cent.
The episode had a key business analyst asking whether

Flight Centre’s business model had been cracked by its
giant online global competitors.7 Turner was open in
conceding that this competition was a fact of life, stating
that travel has become more commoditized and it has
increasingly gone online where the only point of differ-
ence is price. However, the Flight Centre model is a
hybrid or ‘omni-channel ‘ model with an extensive phys-
ical retail network complemented by its online offer. It is
in the midst of another evolution, producing its own
products together with its ability to offer person-to-

person advice and service to create unique and higher
margin products. lts physical presence through its inter-
national network of businesses is a differentiator.

In the event, the incident proved to be just a glitch.
with the market recognising the resilience of Flight

and relevant.9

A dynamic business model
The increasingly competitive travel industry environment
has seen Flight Centre constantly re-orient its business
model to acknowledge and accept the trends which are
occurring, especially the growth of self-booking of travel,
and offer services that enhance and enrich that experi-
ence and blend with it. This is achieved by offering more
client-f ocused and personal attention, unique products
and services. guaranteed backup and instant access for
customers through a wide range of modern and tradi-
tional communication and contact modalities

In recent times, Skroo Turner has identified one big
strategic challenge for the company as achieving greater
pro(juctivity per employee. A number of approaches are
being taken in this regard, including revision of support
to the shopfront, clever use of ICT and an improved data-
base, and introduction of more realistic performance
measurement. Another is the creation of more hyper-
stores in some markets where various teams performing
in different parts of the company will be accommodated

636 637

FLIGHT CENTRE LIMITED: COMPETING TO PROVIDE THE LOWEST AIR FARES

together in the one location on different floors. The
Oxford Street branch in London has been a prototype.
This will be a seven-day-a-week operation. The ‘village
ladder will be in the one place. There is also a vertical
integration strategy to overcome the problem that occurs
when the purchaser-provider principle does not fit
because one part of the company cannot choose whether
to purchase from another part because the margins are
not suitable or the product unavailable elsewhere. The
goal here is better and faster service to the customer.
The pay and incentive structure for consultants has also
been remodeled.

The full year net profit for 2015 was A$256.5
million, up 24 per cent from the previous year. Revenue

mbed 6.8 per cent to A$2.4 billion, but the company
said it faced higher costs in Australian operations owing
to a new more generous and incentivised salary struc-
ture for consultants.io Currently, Australian business
accounts for 56.5 per cent of the company’s total trans-
action value but 81.3 per cent of its earnings before
interest and tax, meaning that, despite ongoing growth
in its overseas business, it remains heavily leveraged to
Australia. Turner has said he would like that mix to shift
over time so that overseas businesses accounted for
around 30 40 per cent of EBIT (earnings before
interest and taxation), at the same time as the
Australian division continues to grow. The company’s
sights are set for more overall organic growth, having

already achie

and
as

!est

red

lily,

Dne

CASE
STUDY

Megabrew: creating an undisputed global brewing champion?
Duncan Angwin

Notes and references
1. A$1 ; £0.52 : $0.74 – €0.66

EEi$1H13 l:lln=ZS.=’£.:E
Mar dy Johnson family I/f/cage Lr7be. rhe Slow of F7@hf Cenfn Lirnlfed.

E::=T:”:=:’:::=’ E:slat .'””'” ‘-‘ -‘,”” “””-~.. ,,
6. ,4t/sfxa/ian Dn.ance/ R’ev7eW 1-2 August 2015.
7. Bt/sAess Specfa&oC 24 June 2015
i. Sydney Morning Herald, 2 ]\J\N 20\5.
). Flight Centre Annual Report, 20L5

10. Cot//for /Wa//. 28 August 2015.
11. ,4t/s/xa//an £3t/sheds /?Chew 23 September 2015.

production

Draf t and Grolsch along with local country brands such
as Aguila, Castle Lager, Miller Lite, VB, Snow and Tyskie.

Despite these successes, the dramatic consolidation in
the brewing industry continued. In the early 1990s, the five
largest brewing companies accounted for lust 17 per cent of
global beer sales. By 2014, the largest four brewing compa-
nies accounted for 45.7 per cent of sales and analysts
estimated they had captured 80 per cent of the $33bn
gk)bal profit pool. Moreover, three of SABMiller’s main global
competitors, Anheuser Busch, Interbrew and Ambev, had
merged in 2008, to form AB InBev, to claim market leader-
ship with a consolidated 25 per cent of global market share,
although that had fallen to 20 per cent by 2014.

In September 2014, SABMiller launched a surprise
takeover bid for Dutch counterpart and third placed rival,
Heineken. Charlene de Carvalho-Heineken and her
husband Michel de Carvalho are head of one of the
richest families in Britain, with a combined fortune esb
mated at more than £6bn. The family controlled more
than 50 per cent of Heineken and their response was
swift and unequivocal. They rejected the bid and said
they intended to ‘preserve the heritage and identity of

Source: Douglas Carr/Alamy Images

Heineken as an independent company ‘. This dealt a blow
to SABMiller’s ambitions and there was little point in
returning with a better offer as the family wasn’t moti-

vated byrmoney ‘ consider their position, ‘

SABMiller

re-examined its four strategic priorities set out in 201

(see Table 1). This can be seen as a synthesis of the
learning the company had developed over its history, first
weathering the political crises of twentieth-century South
African history, then building its operations in emerging
and mature markets, where it gained a reputation as ‘a
turnaround specialist ‘ and subsequently an acquirer of
major breweries in mature markets. These strategies had
served the company well as SABMiller has shown
sustained good performance compared with the London
Stock Market Beverage index (see Figure 1).

ss discussion and not as an illustration of good or bad

6393638

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

Table I SABMiller’s strategic priorities
Emerging

1993

onto the global market
SAB made its first acquisition outside Africa,

Hungary’s largest brewery, Dreher, describing
move ‘ into Central Europe. So began

explained in the 1998 annual report: ‘SAB’s
focus has been on countries in which it

it could use its expertise, which has been gained

years in South Africa, to develop beer markets
economies.’

of developing brewing capabilities in
beer markets continued through the

SAB established operations in China in 1994,
a joint venture with China Resources Enterprise

China’s biggest beer brand, Snow, to its port-
There followed further acquisitions in Eastern

including Lech (1995) and Tyskie (1996) in
acquisitions in Romania, Slovakia, and the Czech
and in 1998 SAB entered into Russia by estab-

a ‘greenfield ‘ brewery in Kaluga, near Moscow.
s strategy was spelled out in the 2000 report and

this logic prevailed up until AB InBev’s bid:

‘In the less developed world, Africa and Asia and much
of Europe, brewing remained highly fragmented, with
beer drinkers supplied by breweries which were never
more than small-scale and localised, often producing
low-quality beer . . . This fragmentation presented the
opportunity for SAB from the mid-1990s to create a
profitable and fast-expanding business in emerging
markets with huge potential. This opportunity involves,
generally, taking a share in a brewery with a local
partner and, transforming the business while retaining
the brand, given drinkers have fierce attachments to
their local brew. Transformation starts with upgrading

quality and consistency to create a beer for which
people are prepared to pay more and which can give us
a healthy profit margin. Then comes improvement to
marketing and distribution and improvement to produc-
tivity and capacity. In each country we have begun by
acquiring an initial localstronghold from which we can
advance into regions beyond the brewery’s original
catchment area. We then build critical mass in the
region and progress, over time, to a national basis. This
is often achieved by acquiring further brewing busi-
nesses and focusing the brand portfolio. An optimum
brand portfolio gives us a better overall marketing
proposition, increases total sales and delivers
economies of scale in production and distribution.

This process demands, on one level, great political
sensitivity in dealing with governments, partners, local
communities and our workforce and, on another level,

the deployment of expert operational management

skills learnt in South Africa . . . Our management struc-
ture is de-centralised, reflecting the local nature of
beer branding and distribution.

Our businesses do not all advance at the same
speed. or have the same potential. It is characteristic
of emerging markets that growth can be variable. and
we are accustomed to temporary setbacks. However,

the spread of our international businesses provides a
‘porta alia effect ‘, thereby reducing the impact of
setbacks in one or two individual countries.’

1. Creating a balanced and attractive
global spread of businesses

Our acquisitions in recent years have given us a wide geographical spread with
emerging markets without being over-reliant on any single region. This allows
growth in developing markets and “value” growth as consumers around the
economy to mainstream and premium brands. We also look to identify and
for growth within our existing business portfolio. This can involve a
entering into local joint ventures or partnerships, to buying or
local brands to help shape a full, local, brand portfolio.

Our aim is to develop an attractive brand portf ono that meets consumers’ needs
markets. In many markets, growth is fastest at the top end, as shown
of our international premium brands. Another rising consumer trend is
fragmentation. Affluent consumers are varying their choices and
speciality brands, craft beers, foreign imports and other subdivisions of
And a third trend is the growing importance of female consumers.’
‘In order to raise our performance, we need to become more efficient.
manufacturing processes. Efficiency is part of our day-to-day
commodity costs compels us to do whatever we can to counteract the
All SABMiller operations strive to improve our products’ route to
ensure that the right products reach the right outlets in the right condition
As a global organisation we are constantly seeking to use the benefits of our scale While
recognising that beer is essentially a local business and that local managers are in the
position to identify and exploit local opportunities. Our aim is to generate maximum
advantage from our size without becoming over-centralised and losing our relevance
responsiveness in each market.:

us to
capture new

world trade

build

2. Developing strong, relevant brand
portfolios in the local market n each of Ourby th

popularitythe
hprnm ng more interested in

he premium segment.
SAB’s history of buying local companies with strong

market positions had worked very well for the group. The
most successful acquisitions had domestic leadership
positions in under-developed beer markets. CEO Graham
Mackay commented that: ‘We acquire reasonably priced
assets, often severely neglected under public ownership
in growing markets; establish market leadership and
build local mainstream brands.

The way in which SAB could be successful with these
acquisitions was through ‘Operational improvement and
efficiencies – to distribute beer more efficiently and drive
down costs.’ This could be achieved reliably through the
use of seasoned leaders with deep experience from the
South African business. They would parachute into new
acquisitions, drawing upon SABMiller’s long-standing
strengths and capabilities in operational excellence in
the beer industry and its distinctive people/performance
management.

Analysts had also recognised, however, that SAB had
been less successful with its acquisitions in developed
markets. where it seemed to have less strength. This
focus on local improvement was echoed in Mackay’s
comments that: ‘We are not top down. We are very locally
driven.

This reflected a strongly held view in the group that
beer is a local taste and that SABMiller can create
winning brands that tap into deep local insights and win.
One way in which SABMiller had been particularly effec-
tive in boosting local sales was the development of a
‘shopper ‘ marketing capability, where they worked along-
side local beer retailers to help them grow their beer
category, helping SABMiller sales. Amongst its major
competitors, SABMiller saw itself as the most local of
global brewers. –

3. Constantly raising the perf ormance
oflocal businesses

especially in our
management and the rise in

squeeze on ourrnargins.
marko o remove costs and to

4. Leveraging our global scale

best
value and
and

Source: SABMiller.

5000
4500

3500

2500

2000

1500

1000

500

Background

South African Breweries (SAB) predated the state of
South Africa itself. It faced the challenge of doing busi-
ness amidst the upheaval the country experienced during
the twentieth century, including the ‘apartheid ‘ regime
(1948 1994). Worldwide opposition to apartheid
included a campaign for economic sanctions on South
Africa, aiming to restrict international business from
investing in, or trading with, South Africa and restricting
South African business from trading with international
markets. In 1950, SAB moved its head office from
London to Johannesburg and southern Africa became the
focus of its business expansion during the subsequent
four decades.

In this time, SAB responded to business restrictions

by focusing on dominating domestic beer production
through acquisition of competitors and rationalisation of
production and distribution facilities. By 1979, SAB
controlled an estimated 99 per cent of the market in
South Africa and held commanding positions in
Swaziland, Lesotho, Rhodesia (now Zimbabwe) and
Botswana. In 1978, SAB also diversified into hotels and
gambling by acquiring the Sun City casino resort.

The establishment of a multiracial democracy in
South Africa in the 1990s eased SAB’s expansion

through the rest of Africa. By 2000, SAB’s market domi-
nance in southern Africa provided a serious deterrent to
potential competitors, but there remained little space for
it to expand locally, particularly in alcoholic beverages.

9/12/11 9/12/12 9/12/13 9/12/14 9/12/15
Year

ller FTSE100 rages sector

Figure I Five-year SABMiller share price vs FTSE

100

and Beverages indexes(rebased)

While SABMiller was pondering its options in 2015.
rival beer giant AB InBev announced a formal offer to buy
them for $107bn. The combined group would control
58 per cent of the global profit pool, dwarfing next rival
Heineken with just 11.6 per cent and Carlsberg with only
4.6 per cent. Tense private talks between stakeholders
followed until 13 October 2015 when a tentative deal
was announced. There was some way to go, however, to
complete the deal, scheduled for late 2016. with formi-

dable obstacles to overcome, not least dealing with regu-
latory interests around the world. In the meantime, the
question was whether the deal was the best strategic
option for SABMiller?

Going global
In 1999. SAB decided to list on the London Stock
Exchange (LSE), justifying it in terms of=

Giving the group greater access to world capital
markets and providing it with financial resources and
f[exibi[ity ‘ [so as to] ‘enhance the ability of SAB to take

640 641

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

advantage of increasing consolidation in the interna-
tional brewing industry and to compete with other
international brewers for development opportunities
throughout the world.’

:lb’l :::RS UP:
:$111HiHgH$!
ie $1RWRg
on improving weaker performers. Th s was a considerable
change from Miller’s previous system of performance

1 2 Main acquisitions, joint ventures and brewery investments 2001-15 (conf/need)

Builds
new £3m research breweryEstablishes a

China with acquisitionCR Snow continues expansion in

ienxms=nlinlnHT rnnnaiu-nui :n inunwillHiMSABMiller
SABMiller

Strategic
Invests

Unsuccessful attempt to acquire

Africa, with The Coca Cola Company and Gutsche Family

a new brewery in Nigeria.
in the UK

of remaining equity interest in Hangzhou Xihu Beer and Huzhou Brewery
with China Kweichow Moutai Distillery Co. Ltd

for Turkey, Russia, the CIS, Central Asia and the Middle East.
acquires Foster’s Group. the number one brewer in Australia for A$1 1.8bn

alliance with Castel to takeover running of Nigerian businesses.
in doubling capacity in Uganda.

Heineken International.
operation for non-alcoholic ready-to-drink beverages, Coca-Cola Beverages

This will account for 40% of all Coca-Cola sales in Africa

Initially SAB’s share price lost over 15 per cent rela-
tive to the FTSE 100 as analysts argued this reflected a
failure to make a major acquisition of a first-world (devel-
oped country) brand and its over-reliance on its devel-
oping markets.

SABMiller

In 2002, SAB did succeed in acquiring a major brand in
a developed market: Miller Brewing Company, the second
largest brewery in the USA. SAB paid Philip Morris
Co. US$3.6bn in stock and assumed US$2bn of Miller’s
debt. The 2003 annual report claimed that this gave the
group access, through a national player, to a growing
beer market within the world’s largest profit pool, and at
the same time diversifying the currency and geographic
risk of the group.

SAB became SABMiller following the acquisition and
the second largest brewery by volume in the world.
However, the acquisition brought with it its own prob
lems. James Williamson, an analyst at SG Securities in
London, commented: ‘They didn’t buy it because they

Acquires Meantime Brewery in the UK

two brewer and making Latin America the largest contrib-
utor of profits in the group (32 per cent of EBITA, ahead
of South Africa). The area has performed very strongly
since the acquisition in terms of top- and bottom-line
growth. Reviewing the Latin American operations at that
Hme, the CEO confirmed that SABMiller saw these
markets as offering ‘exciting prospects for growth ‘ and
added:

‘Although the Bavaria businesses are well managed and
profitable. we plan to create further value by applying
SABMiller’s operating practices and management
skills. The best opportunities lie in brand portfolio
development, creating good relationships with distrib-
utors and retailers, and improving merchandising at the
point of sale. The Bavaria acquisition brought very
strong leader positions in its markets, with 90%
market share – a huge advantage in a scale-driven
industry.’

In 2008, a joint venture, Miller Coors, was formed
between Molson Coors and the SABMiller business in the
USA for scale advantages and productivity improvements
of $500m in the face of increasing cost pressures and
improved logistics across the North American market.
The complementarity of brands was to enable more
effective competition against the dominance of Anheuser
Busch in the USA. Commentators viewed the joint
venture as a way of gaining market share in the profitable
ight beer category that accounted for 40 per cent of
total US beer sales. The joint venture’s profit perfor-
mance has been robust.

At the group level, in 2009 profits dropped; however
lsee Appendix Ifinancialsummary), this did not diminish
top management interest in making further M&A. As CEO
Graham Mackay stated via Bloomberg:2 ‘Nothing is stop-
ping us from the right acquisition . . . There is money
available even if we have to raise capital. We think our
shareholders would agree with it if it was the right acqui-
sition.’ He added. however, that; ‘The right acquisition

means something very different in an emerging market
where a brewer can capitalise on growing volumes, than
it does in the developed world where cost cuts and
selling more premium beer is key.

In 2011, SABMiller made a major acquisition in
Foster’s Group in Australia for A$11.8bn3. Some industry
observers were not convinced it was the right move as
Foster’s, the number one brewer in Australia, was
competing in a mature market and its beer volumes
profits and market share were all in decline compared
with its main rival Anheuser-Busch InBev. In the year
ended March 2012, Foster’s volumes of beers were down
four per cent on the year when SABMiller group saw an
overall rise. Analysts worried that SABMiller’s Foster’s
deal mirrored its Miller purchase in 2002 when SAB
bought into an effective duopoly in the low-growth US
market and gave the brewer a long-term headache. As
one investor remarked; ‘SABMiller has turned around
difficult situations before but those have of ten been from
dominant market share positions.

As an analyst at the time remarked, ‘they have to be
very careful how they play their hand. SAB’s big deal
record hasn’t been great.’2 The Miller acquisition took
longer than expected to repay the cost of capital and
analysts believe the turnaround of Foster’s would take
some time.4 However, the CEO Graham Mackay was
reported to say that he would ‘sweat the assets’ and
‘make the numbers work’.s The board also acknowledged
that there were few brewers remaining that could be
acquired and would really make a difference to the
company going forwards.

Continued acquisitions and international development

There followed a series of acquisitions (see Table 2).

In 2005, there followed a merger with Grupo
Empresarial Bavaria, the second largest brewer in South
America, consolidating SABMiller as the world number

Table 2 Main acquisitions, joint ventures and brewery investments 2001 15

2001 Takes a majority stake in the Sichuan Blue Sword Breweries Group in China.
Pan-African alliance with Casted for investing in promising African countries.
First international brewer to enter Central America when it acquired Honduran brewer, Cerveceria Hondurefia.
Acquires 100% of Miller Brewing Company and changes name to SABMiller plc. Now the second largest brewer (by volume) in
the world.

Acquires majority interest in Birra Peroni S.p.A. developing Peronias a global premium brand.

SABMiller associate, China Resources Breweries Limited, acquires two Chinese breweries.
Buyout of joint venture partner in India, Shaw Wallace & Company.
Acquires 71.8% of Colombian Grupo Empresarial Bavaria, the second largest brewer in South America. for $7.8bn.
Acquires the Foster’s business and brand in India and in South Vietnam.
Joint venture with Vinamilk to establish a brewery in Vietnam.
SABMiller and Coca-Cola Amatil form Pacific Beverages Pty Ltd, a joint venture to market, distribute and sell SABMiller brands
n Australia.

IO-year partnership with Foster’s Group to brew Foster’s lager in the USA.
$170m invested in a new brewery in Moscow.
Pacific Beverages buys Australian premium brewer Bluetongue Brewery.
Acquires Royal Grolsch NV for €816m ($1.2bn).
Acquires the Vladpivo brewery in Vladivostock (Russia) and Sarmat brewery in the Ukraine.
Joint venture with Moulson Coors Brewing Co., named MillerCoors, to pool US interests.
Acquires Bere Azuga, Romania.
Acquires the remaining 50% interest in the Vietnamese business and remaining 28% in the Polish business.
Acquires three further breweries in China.

Investment in new plant in Juba (South Sudan), Russia, Tanzania, Mozambique and Angola.

Acquires Cervecerfa Argentina S.A. lsenbeck (‘CASA lsenbeck ‘), the third largest brewer in Argentina, from the Warsteiner GrouP-
Builds US$34m brewery in Namibia
A new US$105m brewery begins operations in New South Wales. Australia.
Southern Sudan Beverages Ltd (SSBL) is doubling the size of its existing brewery operations.

2002

2003

2004
2005

2006

2007

2008

2009

The state of the world brewing market to 2015

Global beer volumes (excluding China) recovered to about
a two per cent growth rate after the trough of 2008 10
but well below the four to five per cent achieved in
2006-7. The growth rate by region varied considerably
(see Table 3). Going forwards analysts expected flat beer

2010

tcontinued

642 643

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

Table 3 Compound annual growth rates (CAGR) by
volume, by region (2013 2017)

on each one. Carlsberg was struggling due to a recession

in its core Russian market, tighter regulations and conflict
in Ukraine. Although it turned profitable for the first time
in India in 2016. it announced a profits warning and a
strategy review which could include an intention to acquire
in growth markets such as Asia (see Table 5 for competitor
share of global profits).

Potential new competitors, including global Spirits
companies, were also increasingly encroaching on beer
competitors’ markets with greater focus on the same
consumer occasions and needs, e.g. alcopops and
ready-mixed drinks. Companies such as Diageo, previ-
ously focused on developed markets, were now very
active in growing rapidly through M&A in key emerging
markets. Some media commentators predicted this
would lead to convergence in the wine and beer market
and pointed towards increased innovation in mixing
beers with spirits and flavours. Heineken’s flavoured
beer ‘Desperados’ reflected an increased consumer
demand for more sophisticated beverages at mixed

gender occasions.

Global beer consumption by
region (%) in 2013

Oceania

Annual beer consumption by
region 2004-2013

Region CARR (2013-2017F) ] .2% Middle East0.6%
7000

g 6000
8 5000

Africa
Asia
Austra lasia
East Europe
Latin America
Middle East North Africa
North America
West Europe

5%
4%

o%
3%
4%
1%

; Asia

; Europe
South America

Asia
34.8%

a)
E
3
0
>

E3
C0
c)

4000

3000

2000
1000
0

–+- North America

; Africa

=:: Oceania

Sot/nce: Based on http://www.canadean.com/news/africa-to-become-fast-
est-growing-bee r- ma rket- in -the-world- by-2017/.

Middle East

.+ (b nb A .b na .s .\ .D .5

volumes in North America and Europe with decline in key
markets such as Germany France and UK. The per capita
consumption by Germans for instance, some of the
world’s biggest aficionados of beer, had fallen due to
demographic change, alternative beverages such as
health drinks, wine and cider, tighter regulations and
global economic slowdown. There was significant growth,
however, in Latin America. with China, India and Africa
offering the best long-term volume prospects given their
large populations and low per capita consumption.
Table 4 gives market profitability estimates by region. In
particular, Africa’s growth rate was estimated to be
44 per cent from 2014 25, nearly three times the fore
cast global growth rate.

Against this backdrop of regional variation in sales (see
Figure 2), the large brewing companies also faced changes
in the nature of demand. There was intensifying competi-
tion in premium beer segments where high profit margins
made it easier for niche providers to compete successfully.
In many European countries there was a substantial
increase in new beer products on retailers’ shelves and in
the US craft beers were making substantial inroads.

In this context, SABMiller’s main competitors, focused
on various geographies and had different strategies.
Heineken was increasingly centralizing its brands in order
to have a global brand design that they could then license,
allowing global advertising and the use of a mass premium
model. They were determined to retain their independ-
ence. AB InBev remained focused on cost reduction
through a few very large acquisitions and had generally
managed to achieve between 10 and 15 per cent margin

Figure 2 Global beer consumption by region
bounce: www.kirinholdings.co.jp, Kirin Beer University Report Global Beer Consumption, 24 December 2014

Going Flat
Anheuser-Busch InBev’s volumes have declined in the USA in recent years as craft and
imports have risen.
(a)(b)

Craft Hlmports BAB Bother -Craft -Imports -AB

The AB InBev bid

The AB InBev bid, dubbed ‘Megabrew ‘ by analysts,
would result in the world’s largest consumer-staples
maker by earnings, with profits around $25bn.6 The
enlarged brewer would be number I or number 2 in 24
of the world’s 30 biggest beer markets. Analysts believe
AB InBev made the bid in order to continue growing as
its own growth rate was forecast to slow down over the
following five years. In the US market. which accounted
for 34 per cent of group revenue, its market share had
already fallen from over 50 per cent to 44 per cent
largely due to the rapid growth of craft brewers (see
Figure 3). lts attempts to create its own craft beers such
as Bud Lime had had only limited success.

Historically, AB InBev had a strong position in
Latin America with 78 per cent market share in
Argentina, 68 per cent in Brazil and 58 per cent in
Mexico. This accounted for 30 per cent of group
revenue in 2014 (see Table 6). It was an attractive
area as there were low labour and raw material costs,
economies of scale and production was near to
market. Together with Mexico, Latin American revenue
at $18,849m accounted for over 40 per cent of AB

100% 180%

160

140

120

100

173.6%-7

32.1% +

44.7% -+
15.0%’l

5.79

’05 ’06 ’07 ’08’09 ’10 ’11 ’12 ’13 ’14 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13’14

Figure 3(a) Beer market shares in the Figure 3(b) Change in pattern of beer
USA, 2006 2014 shipments, 2005 2015
Source: Beer Marketer’s insights. Source: The Wall Street Journal.

Table 4 Market profitability estimates (2010)

Brazil NorthAmerica S.Africa OtherLatinAmerica Europe Russia OtherAfrica OtherAsia China

$31/hl$31/hl$24/hl$20/hl$17/hl$13/hl$10/hl$10/hl

$2/hl

India

$2/hl

bounce: Merrill Lynch report

644 645

MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION? MEGABREW: CREATING AN UNDISPUTED GLOBAL BREWING CHAMPION?

Table 5 Competitor share of
global $33bn profit pool(2014)

A bid of such magnitude triggers regulatory concerns
as it might create monopolistic conditions in some coun-
tries. In the USA there were concerns that a very dom.
nant company might hurt the craft beer industry and
reduce consumer choice. The US regulator uses a rela-
tive market share measure, the HHI index, to determine
the concentration of competitors in an industry. As a rule
of thumb. the regulator prefers a score for the industry to
be below 2500. With the passage of AB InBev’s bid for

SABMiller, without taking into account any restructuring
and disposals, the new group would have 68 per cent
market share and a HHI score of 5366 post-deal –
significantly up from the pre-acquisition level of 2696.
There were also concerns that a very dominant company
might distort the market for supplies such as barley, hops
and aluminium cans. In order to gain regulatory approval.
the bid stated that Molson Coors Brewing Company
would acquire SABMiller’s 58 per cent stake in Miller
Coors, the CR Snow business in China would need to be

.nld, as would the Peroni and Grolsch brands in Europe.
su’d. an important bottler for Coca-Cola’s drinks in

Africa, this partner would be lost as AB InBev already
worked with Pepsico in Latin America.

AB InBev aimed to cut annual costs by $1.4bn, about
g per cent of SABMiller’s sales. As an acquisition driven

mpany, AB InBev had a successful track record of
cutting costs, e.g. by 19 per cent when it bought
Anheuser-Busch in 2008 and a 21 per cent cost reduc-
tion at Mexico’s Modelo in 2013. AB InBev has an
impressive operating profit margin of 33 per cent
compared with other competitors who struggle to reach
that level. An estimated one third of savings from the
SABMiller acquisition might come from overlapping
head-office roles. The rest would come from restructuring
although those details had not emerged at the time of
writing. Some analysts even believed that AB InBev cost
cuttings were being underestimated. However, others
pointed out that SABMiller was already a lean operation,
and its operations were dispersed, which might not
provide many opportunities for amalgamation. They also
pointed out that whilst AB InBev had been excellent at
cutting costs on acquisition, their track record for gener-
ating subsequent organic growth was lacking.

market seemed to have fewer opportunities for expan
dion: large transformational deals were hard to find and
with lower prospects of high financial returns. The other
global brewers were increasingly looking for growth
from emerging markets as beer sales slowed in more
developed consumer markets. Heineken was pursuing
growth in Africa and Carlsberg aimed to expand into
Asia. Japanese brewers were also becoming increas
ingly active in the Asian market. The added complica-
tion of the economic recession had also impacted on all
beer markets, albeit with different degrees of severity.
For all companies there were questions about the
emphasis placed on ‘local vs global ‘ brands in their
portfolios. Should they consider entering more profit-
able beverage segments? Could there be yet another
‘market changing ‘ deal that could be shaped to win the
battle in beer?

Company Percentage share

AB InBev
SABMiller
Heineken
Carlsberg
Asah i
Molson Coors
Others

39.9
17.9
11.6
4.6
3.1
2.9

20.0

InBev’s group revenue, greater than North American
sales. SABMiller also had a strong presence in Latin
America although not in Brazil, Argentina and Mexico
where AB InBev was dominant. SABMiller’s focus
upon premium branding allowed it to achieve 33 per
cent higher revenue per unit volume in this region
than AB InBev. The combination could increase AB
InBev’s Latin American volumes by 30 per cent. In
developed countries AB InBev was already strong.
accounting for 47 per cent of revenues (see Table 6).

AB InBev needed to make an acquisition in order ‘to
move the needle ‘, to make a difference in terms of its
earnings. The bid was 50 per cent above SABMiller’s
closing share price of £29.34 on 14 September 2015.
Stock markets welcomed the news as SABMiller shares
rose 1.9 per cent in London and AB InBev gained 2.2 per
cent in Brussels.

A4.a/n sot/feces: T. Buckley, ‘SABMiller buoys case for AB InBev takeover as
Africa sales gain ‘, Bloomberg.com, 21 January 2016. Lhe Economist, ‘The
beerhemoth – SABMiller is AB InBev’s toughest takeover yet. It may not be
its last ‘. Economist.com, 17 October 2015. J. Fontanella-Khan, A
Massoudi and S. Daneshkhu, ‘Anheuser-Busch InBev eyes takeover of
rival SABMiller ‘, FT.com, 16 September 2015. E. Holodny, ‘A Budweiser:
Miller brewing company would be a monster ‘, uk.businessinsider.com, 16
September 2015. P. Jarvis and T. Buckley, ‘AB InBev buys SABMiller for
$107 billion as U.S. deal agreed ‘, www.bloomberg.com, ll November
2015. T. Mickle, ‘AB InBev defends SABMiller buy to Senate: questions
asked about deal’s potential impact on craft brewers, rival beer makers’,
www.wsl.com, 8 December 2015. Trefis Team, ‘Anheuser-Busch InBev:
what the SABMiller acquisition could mean ‘, Forbes.com, 18 September
2014. Trefis Team, ‘How the potentiaIAB InBev-SABMiller dealfocuses on
Africa ‘, Trefis.com, 14 December 2015. E. Rutishauser, S. Rickert and F.
Sanger, ‘A perfect storm brewing in the global beer business’,
Mckinseyonmarketingandsales.com, June 2015.

What next?

SABMiller had agreed to the takeover by AB InBev but
whether this was the best strategic option for the
company was not clear. It was also important to consider
other options in case the bid failed to close due to regu-
latory hurdles, of which there was approximately a
27 per cent chance, and SABMiller remained inde
pendent. Nonetheless, assuming the bid did close, both
SABMiller and AB InBev had to consider what a
successful bid might mean for the combined business
going forwards. How might SABMiller be integrated effec
lively into the new group? Would the integration strategy
destroy valuable SABMiller heritage or enhance its value?
How would the new company compete in the future?

Whilst SABMiller and AB InBev wrestled with satis-
fying regulators and planning for integration, the beer

Notes and references
1. B. Marlow and N. Thomas, ‘Billion dollar beer war is brewing ‘, The

ne/egnaph, 20 September 2014.
2. A. Cleary, ‘SABMiller chief says he’s ready for M&A, predicts slow

recovery ‘, Bloomberg.com, ll August 2009.
3. AUD$1.00 : £0.52 – $0.74 ; €0.66
4. D. Jones, ‘Analysis: SABMiller faces long haul to turharound Foster’s’,

Reuters, 31 May 2012
5. N. Hue, ‘SAB fosters beer brands in Australia ‘, FT.com, 26 May 2013
6. Exane BNP Paribas, quoted in Bloomberg news, ll November 2015.

Source: www.ab-inbev.com Annual Report 2014

646 647

I uie u D lilnev revenue ana gross proTtt tusbm; ana volumes Dy region (nlm)
2014 2013 % change

Group Revenue 47.063 43.195 8.9%
Gross profit 28,307 25,601 l0.6%
Volume 458.801 445.786 2.9%

NorthAmerica Revenue 16.093 16.023 0.4%
Gross profit 9,702 9,504 2.1%
Volume 121. 150 122.1 18 -0.8%

Mexico Revenue 4.619 4.669 9.9%
Gross profit 3,245 3,099 4.7%
Volume 38.800 38. 185 1.6%

LatinAmerica Revenue 14.230 14.279 0.03%
Gross profit 9.409 9,518 -o.Ol%
Volume 162.244 157.345 3.1%

Europe Revenue 4.865 5.021 0.03%
Gross profit 2,784 2,749 1.3%
Volume 44.278 47.030 5.6%

Asia Revenue 5.040 3.354 50.3%
Gross profit 2.489 1,469 69.4%
Volume 82.529 65.787 25.5%

Globalexportandholdingcompanles Revenue 2.216 2.138 3.6%
Gross profit 678 589 15.1%
Volume 9.800 15.323 36%

ALL CHANGE AT TEVA

Expansion under Eli Hurvitz and Shlomo Yanai

After a series of consolidations within the Israeli home
market, in 1976 the company became Teva Pharmaceutical
Industries Ltd, Israel’s largest healthcare company, and
appointed EliHurvitz as the first CEO and President, a role
he was to keep until 2002, when he took on the role of
chairman until his departure from ill health in 2010.
Under Hurvitz’s control Teva’s revenue would grow from

$30m in 1976 to $16bn in 2010, strongly focused on
generic pharmaceuticals. Hurvitz identified the huge
opportunity for generic medicines in the USA and Europe
when the USA passed laws in 1984 encouraging the sale
of generic drugs after patents had expired, if the manufac
turer could prove they were equivalent to the origina
molecule. This rapid growth was achieved through a series
of European and US acquisitions focused on generic phar-
maceutical companies, moving Teva away from domi-
nating the local lsraelimarket to eventually becoming the
uvorld’s largest generic pharmaceutical company.

In the 1980s, a series of collaborations with Israeli
university research departments, saw Teva beginning to
develop non-generic or branded pharmaceuticals. By the
mid-1990s, Teva’s first non-generic drug, Copaxone® for
the treatment of multiple sclerosis (MS), was approved in
Europe and in the USA. Copaxone® still accounted for
around 20 per cent of Teva’s turnover and 50 per cent of
profit in 2015. One of the cornerstones for the successfu
expansion strategy was a strong focus on cost savings
and the very rapid integration of acquired companies.

In April 2002, Hurvitz took on the role of Chairman
and appointed another Teva insider, Israel Makov, who
had joined Teva in 1995, as CEO. Although some acqui-
sitions were made by Makov, it was a period of relative
quiet for the company albeit with rumours of board
room disagreements between Hurvitz and Makov.
According to the journalist Mina Kimes, Eli Hurvitz still
has a significant influence over Teva: ‘. . black and
white portraits of him hang on the walls. Employees
quote his favoured aphorisms, such as, “It’s better to get
a speeding ticket than a parking ticket.” The company
maintains an empty office in Hurvitz’s memory at lts
Jerusalem facility.’:

following the resignation of Israel Makov in 2007, Teva
recruited a high-ranking member of the Israeli defence
forces, Shlomo Yanai. as Teva’s President and CEO.
Working with Hurvitz as Chairman. Yanaistated that Teva’s
aim was to achieve a sales revenue of around $33bn by
2015. Together they oversaw a doubling of sales revenue
In lust three years, from $8bn in 2007 to $16bn in 2010.
This was achieved by a dual approach of aggressive acqui-
sition of competitor generic companies and diversifyin

the company into over-the-counter (OTC) medicines and
looking for branded pharmaceuticals to replace the aging
Copaxone®. Aggressive growth in generics was accom-
plished by the acquisition of Barr in the USA, Ratiopharm
in Europe and Taisho and Taiyo in Japan. The company
also announced an OTC joint venture with Procter &
Gamble.

CASE
STUDY

All change at Teva
Justin Boar and Sarah Holland

Purchase of Cephalon and share price collapse

Af ter a period of ill health, Hurvitz stepped down in 201

and the first non-Israeli Chairman, Philip Frost, a
US-based billionaire, was appointed in his place. In May
2011, af ter a short bidding war, Teva successfully
trumped a rival hostile bid from Valeant Pharmaceuticals
to acquire Cephalon, a research-based pharmaceutical
company of around 4000 employees located in
Pennsylvania, USA, in a deal worth $6.8bn.

Cephalon posted sales of$2.76bn in 2010, up 28 per
cent, and adjusted net income of $657m, an increase of
40 per cent. Growth was driven by the sleep disorder
drug Provigil® and its follow-up long acting drug
Nuvigil®, the cancer drug Treanda® and the cancer
painkiller Fentora®. Cephalon also boasted a large
research portfolio in several key areas central nervous
system (‘CNS’), oncology, respiratory and women’s
health, the most promising but highest risk being its
proprietary stem celltechnology.

Valeant, an aggressively acquisitive Canadian pharma-
ceutical company, had seen in Cephalon’s established
products an opportunity for further revenue growth and
increased profitability, and had bid $5.7bn, but had
discounted the value of the therapies in development.
The takeover by Teva was welcomed by the board of
Cephalon, which saw Teva as an organisation that valued
their pipeline and would support their ambitious research
and development plans. As Cephalon CEO Kevin Buchi
said at the time: ‘Teva shares our strong commitment to
R&D, and we believe our pipeline will thrive under their
leadership.’3 Mr Yanai added;

Introduction

After less than 18 tumultuous months as the head of
Teva, the world’s largest generic pharmaceuticals
company, in October 2013 Jeremy Levin stepped down
as CEO. He had been brought into the company in
January 2012 to change Teva’s strategy from that of the
outgoing CEO and President Shlomo Yanai. a former
high-ranking army officer, when it seemed clear that the
target of achieving global sales of US$D 33bni by 2015
was no longer achievable, and the share price had subse-
quently collapsed. lts third CEO within two years was
appointed in 2014: Erez Vigodman, a company insider.
who announced that Teva would introduce its third new
global strategy in three years with a focus on product
rationalisation, organic growth and cost saving.

a
0
>\

g
Teva in a nutshell

p World’s number one generic company
e 15th largest pharmaceutical company
e Sales of $19.7bn in 2015
e Product portfolio of over 1000 molecules
e Active in 120 countries
e 73 manufacturing sites
B 45,000 employees

Teva’s operating results for the years 2011-2015 are
shown in the Appendix at the end of the case.

Sot/nce: Clynt Garnham Medical/Alamy Images.

Founding of Teva

Teva was founded in 1901 in Jerusalem as a small drug
wholesale business that distributed imported medica-
tions. It moved to manufacturing pharmaceuticals in the
1930s and had a considerable boost in the Second World

War supplying allied troops with medical supplies. By
1951, it was being listed on the lsraelistock exchange.

‘0ur newly-expanded portf ono in CNS, Oncology,
Respiratory and Women’s Health along with our robust
pipeline of more than 30 late-stage products truly
cements our position as a leader in specialty
pharma. . . . We are welcoming many of Cephalon’s
talented employees into the Teva family. The combina-
tion of our two winning teams will position Teva to
create maximum value for our patients and customers.”+

This case was prepared by Justin Blag an

of good or bad practice. © Justin Boag and Sarah Holland 2016. Not to be reproduced ar quoted without permission. -‘”‘

Teva and Cephalon executives said they saw particular
potential in a stem cell therapy for congestive heart failure
under development with Mesoblast Ltd, in reslizumab

690
691

ALL CHANGE AT TEVA ALL CHANGE AT TEVA

for asthma and in the lung-cancer treatment obatoclax.
Ori Hershkovitz, a partner at Sphera Global Healthcare
Fund in Tel Aviv commented in an interview at the time:
‘Teva’s making four or five shots on goal with a very high-
risk, high-reward kind of profile. If they pull off the stem
cell product, they’re in the clear. But if they pull off two
or three of the others, it would also be a very good deal.’s

The company, however, had a number of significant chal-
lenges: the rapid inorganic expansion in generic pharmaceu-
ticals from 2007 10 meant that the manufacturing base
was not consolidated, with over 100 manufacturing sites
spread across a large number of countries. Supply chain and
quality-control issues had also meant that, in the USA,
crucial supplies of two generic drugs had not been made in
2009. The patent protection on Copaxone® was nearing
expiry and, ironically for a generics company, around 20 30
per cent of the sales revenue and a significant amount of
profit was at risk in the next two to three years of generic
erosion with no obvious replacement in view.

The share price began to slide and a number of
shareholders called for a significant reduction in costs
and expressed dissatisfaction with the decision to
purchase Cephalon. In response to this criticism and
the falling share price, Philip Frost accepted the resin
nation of Shlomo Yaniv and appointed Jeremy Levin, a
South African born, UK-educated pharmaceutical
executive with a highly successful track record at two
major pharmaceutical companies. For the first time
since its creation, Teva was headed by two outsiders.
both non-Israeli citizens and with no previous experi-
ence of Teva.

actively seeking new products as a replacement for
Copaxone®. This strategy it was claimed would reshape
the company into ‘the most indispensable medicines
company in the world ‘ and provide significant value to
shareholders.7

Teva began a series of rationalisations and econo.
mien. aimed at reducing costs by around $2bn per
year, involving around 700 job losses in Israel. With
the CEO working alongside the new Chairman it
appeared the company had moved into a new era. As
Philip Frost stated: ‘Teva also must act like a global

pharmaceutical company. There’s a lot of nostalgia for
the good old days when it was a family company and
the board got together for a little lunch. That’s not
what Teva is nowadays.” Levin said Teva would sustain
‘profitable growth ‘ but confirmed that the company
would not achieve the ambitious previous target of
$33bn revenue by 2015.

Key elements of the new strategy included:

. Tailoring the product offering to address regional
needs. With its diversified portfolio, Teva was well
placed to focus on high-value generics in the USA and
Japan, but consumer OTC products in Latin America
and Russia, for example.

e Rationalisation of the marketed generic product port-
folio. Less profitable products were to be culled, while
price increases were implemented for others.

e Globalizing key functions to streamline operations and
gain economies of scale, cutting costs by $1.5 to
$2bn per year.

. New R&D focus on high-value generics. Teva planned
to leverage its huge portfolio of over 1400 medicines,
and its extensive formulation and drug delivery exper-
tise. to create new combination products that would be
harder to imitate than traditional generics. These would
offer medical value through improved efficacy or
compliance, or reduced side-effects, in order to justify
higher prices. For the first time, Teva would incorporate
formal medical input to its generics business.

. Ref ocusing the R&D pipeline, with a strong emphasis
on CNS and respiratory products. The oncology product
obatoclax developed by Cephalon was discontinued.

. Formation of a drug discovery network comprising all
the academic centres in Israel.

The announcement did not meet with shareholder

approval and the share price dropped by nearly seven per
cent. Cost cutting and consolidation continued, mostly

without major workplace disruption, except in Israel
where a number of sites threatened strike action. ,

lilt :l£l=«£: jill ‘ It ‘;:. ‘:=w
management team. Dispute apparently came from two

directions:

. The Israeli board members who felt that the new CEO
working alongside the Chairman failed to understand
the unique culture of Teva.

p Rumoured disputes between Frost and Levin over the
size and speed of cost cutting.

The relationship between board and directors was often
challenging and at one point there were even stories that
Levin had hired a private detective agency, which had
used a polygraph test on board members to identify the
source of boardroom leaks to the press.9

worked with Teva in the past. In July 2014, Teva
announced a new commercial structure, effectively
dividing the company into two business units, the Global
Specialty Medicines group and the Global Generic
Medicines group. They stated that this would bring a
heightened focus on profitable and sustainable business,
driven through organic growth of it two business units
and in defending Copaxone® from generic competitors
by launching a new higher dose formulation. They also
stated they would increase their focus on key markets
and on key products. The company stated that it would
continue its cost-saving drive but would also look for
appropriate business development opportunities

In April 2015, Teva launched a $40bn hostile bid to
buy Mylan, a Netherlands-based rival generic pharma-
ceutical manufacturer. The combined companies would
have a turnover of around $30bn and a profitability of
around $8bn. Teva argued that cost-saving synergies of
around $2bn could be achieved by the acquisition. Teva
believed that: ‘The combined company would leverage its
significantly more efficient and advanced infrastructure,
with enhanced scale. production network, end-to-end
product portfolio, commercialization capabilities and
geographic reach ‘.:: Mylan rejected Teva’s offer and took
the unusual step of publishing the text of a letter sent
from its CEO, Robert Coury, to Teva’s Erez Vigodman,
saying that he hoped Teva’s culture would change and
they would have more credibility in their future business
dealings but that the Mylan board did not want to inflict
Teva’s problems on Mylan’s shareholders. Coury went on
to say:

Levin departs and Teva enters a new era
n October 2013, following further press speculation and

a press story that the management team had sent a memo
to the controlling board asking them not to intervene so
heavily in management decisions, Jeremy Levin left Teva
and the Finance Director was appointed as temporary
CEO. The already-lowered share price reduced by a further
seven per cent. In an investor call shortly af ter Levin’s
departure, Philip Frost stated; ‘Since Levin’s arrival, the
board and management saw eye to eye when formulating
the strategy. . However, differences of opinion arose
between us as to how the strategy will be implemented. In
the last few weeks we had talks with Levin and decided
that it would be better for our ways to part.’:o

Other insiders reported that the problems for Levin
ran much deeper, not least a failure to understand the
unique lsraelicharacter of Teva. As Eldad Tamir, from an
Israel-based investment group stated:

g
$

©:

%
$

Levin’s short tenure ‘Levin entered a difficult situation. The need for a
cultural and communicational connection to Israeli
society is critical for Teva. This company is among the
cornerstones of the local industry and its products can
be found in every home. . . . Teva had an open relation-
ship with its investors, employees and Israeli society.
Instead of continuing the cultural tradition they brought
in someone else, and it didn’t work. There was no conti-
nuity for the rootedness. Everything became cold and
alienated. Teva needs a local leader.’n

‘Since 2007, your Board has churned through three
different Chief Executive Officers, running the only one
with the global pharmaceutical experience, which we
think is critical to the position, out of town within 18
months of being on the job. Any investor should be
gravely concerned that an experienced lead executive
could be dismissed over “slight differences” of opinion
with the Board. We believe that these rapid changes in
a short period of time have left the company with a
complete lack of long-term strategic focus. While I
recognize that you are fairly new to your position, I
cannot ignore the fact that you were present on Teva’s
Board during some of the company’s most turbulent and
“dysfunctional” times. . . . Ten years of acquisitions
and a flip-flopping strategy have left Teva with a smat-
tering of assets in specialty, generics, biotech and
consumer. You claim to want to “redefine the generics
industry”, but what faith can we have that you have any
clear vision for the industry at all? And how can inves-
tors be assured this “redefinition” will not be aban-
doned for yet another new strategy?”’

On the announcement of his appointment, Teva’s share
price increased, major shareholders seeing Levin’s strong
pharmaceuticalbackground as a good fit for the company.
Levin told journalists on his appointment;

& ‘Teva is a company with a unique culture. In the time I
have been here, I have had the opportunity to meet the
leadership and talent that has made Teva the successful
company that it is today. In my experience, Teva has
some of the best people in the industry with a level of
drive, determination and innovation that is second to
none. . . . We will continue to be innovative by focusing
not only on how we commercialize but also on how we
discover, develop and manufacture – all of which start
from the same point – world-class R&D.”

Erez Vigodman: a new/old strategy for Teva?
After an extensive international search, a local leader, the
Israeli turnaround specialist Erez Vigodman, became
Teva’s President and CEO in February 2014. He had
joined Teva’s Board of Directors in 2009. Shortly after-
wards, following rumours of disagreements with the new
CEO, Frost resigned and a new Chairman was appointed
in his place: Yitzhak Peterburg, an lsraelicitizen who had

ALL CHANGE AT TEVA

The board of Teva replied that they rejected many of
the statements in the letter and reiterated their interest
in the purchase of Mylan.

Teva’s strategic future?

I :i:i: zl * ilu;nile’::E:i+
expansion in generic pharmaceuticals through aggressive
acquisition of competitor manufacturers, as originally
laid down by Eli Hurvitz. With closely cooperating lsraeH
Chairman and CEO, and a stock market eager for further
growth, further inorganic growth in the coming years was
anticipated. Time will tell, however, if Teva is able to
follow the other part of Hurvitz’s former strategy: rapid
integration of new companies and consolidation and
rationalisation of the manufacturing capacity.
Notes and references
1. $1 – £0.6 : €0.75.

2. M. Kimes, ‘Teva returns to roots after outside CEO faces “nuthouse”
B/oomherg, 4 March, 201

3. Teva, ‘Teva to acquire Cephalon in $6.8 billion transaction ‘, press
release, 2 May 2011

4. Teva, ‘Teva completes acquisition of Cephalon ‘, press release, 14
October 2011

5. N. Kresge and R. Langreth, ‘Teva bets on stem cells, cancer in $6.

billion bid for Cephalon ‘, £3/oom6eng, 3 May 2011

6. S. Griver, ‘Meet Jeremy Levin, the new head of drugs firm Teva ‘, ./ew7sh
Ch/on/c/e, 17 May 2012.

7. B. Berkrot, ‘Teva CEO promises to reshape, refocus company ‘, /?eufen.
11 December 2012.

8. D. Wainer, ‘Billionnaire doctor prescribes small Teva deals for Israeli
giant ‘, £3/oomheng, 5 March 2013.

9. T. Staton, ‘Teva’s ex-Ceo reportedly forced polygraph tests on board to
plug media leaks’, f7encePh.am?a, 5 November 2013.

10. A. Weisberg, ‘Teva chairman: “the company is stronger than ever”‘, 30
October 2013, http://www.jerusalemonline.com/finance/teva-chair-
ma n -the-com pa ny-is-stronge r-tha n-eve r-2 162 .

11. N. Zommer, ‘Can foreign CEO make it here?’, Hnefnews, ll March.

12. Teva. ‘Teva proposes to acquire Mylan for $82.0C) per share in cash
and stock ‘, press release, 21 April 2015.

13. Mylan, ‘Mylan board unanimously rejects unsolicited expression of
interest from Teva ‘, press release, 27 April, 2015.

14. M. de la Merced and C. Bray, ‘Teva pharmaceuticals to buy Allergan’s
generics business’, /VeK ‘ Honk 77mes, 27 July 2015.

15. Teva, ‘Teva to acquire Allergan generics for $40.5 billion dollars creat-
ing a transformative generics specialty company well positioned to win
in global healthcare ‘, press release, 27 July 2015.

201

CASE
STUDY

Mondeliz International: ‘Are you going to stick around, Irene?’
Acquisition, de-merger, divestment and governance in the
growth strategy of Mondeliz International
Eric CassellsE

Teva buys Allergan’s generic business

In a surprise move in July 2015, Teva announced that
they were dropping the attempt to buy Mylan, as they had
instead entered into a definitive agreement to acquire
Allergan’s global generic pharmaceuticals business for
$40.5bn, with Allergan receiving $33.75bn in cash and
$6.75bn in Teva stock. Under the agreement, Teva would
acquire Allergan’s globalgenerics business, including the
US and international generic commercial units, a third
party supplier, global generic manufacturing operations.
the global generic R&D unit, the international over-the-
counter (OTC) commercial unit (excluding OTC eye-care
products) and some established international brands.
The acquisition would mean that around 70 per cent of
future turnover would be from the sale of generics.

The deal, the largest in Israel’s corporate history. was
generally welcomed by shareholders and stock market
analysts: ‘Allergan’s business is more high-end [than
Mylan]. It’s a more interesting business . . . a profitable
business and it’s well managed,’ said Gilad Alper, an
analyst at brokerage Excellence Nessuah.i4

Yitzhak Peterburg said:

This case explores corporate strategy as it emerges over time, through the example of Mondeliz International.
The origins of Mondeliz lie in the long-term growth strategy to create a global snacks business within what was
the Kraft food group. The case focuses on the initial major acquisition of Cadbury PLC by Kraft as a means to
achieve scale and global coverage in snacks, the subsequent de-merger from Kraft’s slow-growing grocery
business, and the divestment of the more volatile coffee business into an equity alliance (‘JDE ‘) to allow the
creation of a focused Mondeliz snacks business. All of these events occur against the backdrop of pressures to
deliver against corporate forecasts built on expectations of growth in a volatile marketplace, and the pressures
on the corporate managers dealing with activist and short-term investors is also considered in some detail.

The ChicagoBusiness.com line on 6 August 2015 was
attempting to put Irene Rosenfeld in play, with the ques
lion: ‘Are Monde16z CEO Irene Rosenfeld’s days
numbered?’ it followed a period of market speculation
over whether Pepsico (or another competitor) would
acquire Mondelaz, and the announcement of a 7.5 per
cent stake acquisition in Monde16z by ‘activist ‘ share-
holder William Ackman and his Pershing Square Capital
Management on 5 August. Come 23 December, Irene
was very much stillin place at Mondelez, and CNNMoney
nominated her as one of their top ten ‘Best CEOS of the
year ‘ for ‘coping with activists’. A few days earlier in the
UK. the arena of her bitter acquisition of Cadbury in
2009 10, the /ndepe/7dent newspaper profiled her as
‘the ( . . . ) chocolate boss with a hard centre ‘.

entire Kraft group. In 2011, Kraft announced it would
de-merge, with its North American grocery business
retaining the Kraft name, and its larger international
snacks and confectionery business being named
Monde16z. Irene Rosenfeld chose to stay as the CEO of
Monde16z.

Ms Rosenfeld is recognised as a powerful business-
woman (ranked 17 in 2014 in Forbes’ annual list of ‘The
World’s 100 Most Powerful Women ‘). Less welcome
recognition, perhaps, is her honourable mention in 2013
in F7columnist Lucy Kellaway’s annual business Golden
Flannel Awards, in the Chief Obfuscation Champion cate
gory. Her profile in the /ndependenf (December 2014),
however, notes her ‘legendary ‘ reputation for attention to
detail, an ultra-competitive streak derived in part from a
sporting background, her boldness in making brave
moves, and her willingness to ‘face off . . formidable
foes.’ it also reports views that she can be ‘remote and
clinical ‘.

‘This acquisition will result in significant and sustained
value creation for our stockholders, reinforces our
strategy, accelerates the fulfilment of a new business

model. strongly supports top-line growth and opens a
new set of possibilities for Teva. Together with Allergan
Generics, Teva will have a much stronger, more effi-
cient platform to achieve our goals – both financially
and strategically – with the right platform for future
organic and inorganic growth.”5

The rise oflrene Rosenfeld

Born in 1953, Ms Rosenfeld spent the first decade of her
career accumulating degrees (including a PhD in
Marketing and Statistics) from Cornell University. Af ter a
brief spell in advertising. she joined General Foods, at
the start of a 30-year plus career in the food and
beverage industry. In time, General Foods was acquired
by Kraf t, and Ms Rosenfeld has largely stayed within this
one evolving group ever since. Arguably, her key career
break came on the one occasion she ventured outside
the Kraft group in 2004, to become chair and CEO of
Pepsico’s large snacks business – Frito-Lay. By June
2006, Kraft had wooed her back to become CEO of the

APPENDIX: Teva’s operating data Transforming Kraft
PLC

the acquisition of Cadbury

For the year ended 31 December Prior to the de-merger of the Kraft Corporation in 2011.
Irene Rosenfeld was at the centre of one of the most
controversial hostile acquisitions of recent decades.
Between August 2009 and February 2010, Kraft fought
a hard battle to acquire the UK confectionery giant,
Cadbury PLC, eventually acquiring it for f11.5bn
(€13.8bn, $17.3bn).: Cadbury was a pillar of the British

2015 2014 2013 2012 2011

US$m (except share and per share amounts)

Netrevenues
Cost of sales
Gross profit
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Impairments, restructuring and others
Legal settlements and loss contingencies
Operating income

The case was prepared by Eric Cassells. of the Business and Management Department at Oxford Brookes University Business
School. UK. It is intended as a basis for class discussion and not as an illustration of good or bad practice. © Eric Cassells. 20

Not to be reproduced or quoted without permission.

Source: 2015 Annual Report of Teva Pharmaceutical Industries Ltd.

694 695

19.652 20,272 20,314 20,317 18,3

8,296 9,216 9,607 9,665 8,797

11,356 11,056 l0,707 l0,652 9,515
1,525 1,488 1,427 1,356 1,095
3,478 3.861 4,080 3,879 3,478
1,239 1,217 1,239 1.238 932
1,131 650 788 1,259 430

631 (1 1 1) 1,524 715 471
3,352 3.951 1,649 2,205 3,109

MONDELEZ INTERNATIONAL: ‘ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE?

Table I
cited that: ‘The Kraft takeover of Cadbury has proved to

be an event which is likely to shape future public policy
towards takeovers and corporate governance.’3 The report
was highly critical of the behaviour of Kraft, and bloggers
gleefully described MPs as ‘fighting each other to lay into
Kraft.’ MP Lindsay Hoyle, at one point queried whether
Kraft is ‘remote, smug, and . . . duplicitous’.

The more measured tones of the Committee’s report
focused on two issues primarily:

1. Kraft made a promise (made during the takeover
battle) to reverse Cadbury’s recent announced decision
to close its Somerdale factory and move that produc-
tion to Poland. The promise (to reverse the closure) was
subsequently withdrawn by Kraft less than three weeks
after it took control of Cadbury, and production moved
to Poland regardless. The Committee’s formal conclu
sign was measured but damning, opining that: ‘Kraft
acted both irresponsibly and unwisely in making its
original statement . . . (and) has left itself open to the
charge that either it was incompetent in its
approach . . . or that it used a “cynical ploy” to improve
lts public image during its takeover of Cadbury.’:

2. The Committee also expressed their ‘disappointment ‘
that: ‘Irene Rosenfeld, the Chairman and CEO of Kraft
foods Inc. did not give evidence in person. Her
attendance at our evidence session would have given
an appropriate signal of Kraft’s commitment to
Cadbury in the UK and provided the necessary
authority to the specific assurances Kraft have now
given to the future of Cadbury.’:

Neither that refusal to attend, nor the manner of it
reflected well on Kraft . . . ‘4

Kraft strategic priorities The importance of the Cadbury acquisition

Focus on growth categories to transform Kraft into a leading
snack, confectionery and quick meal company.
Expand its footprint and scale in growing developing markets.

:::=i:’£E:?:’ £!::’ b 7:a=;- ‘-: ..-‘..-:.-;i;=’
Cadbury oilers Kraft a complementary presence in developing
markets, with Kraft strength and channels in Brazil, Chinaand
Russia, and Cadbury in India, Mexico and South Africa.

Kraft’s strength lay in traditional grocery channels, whereas Caan….-
was well placed in ‘instant consumption ‘ channels. ” ””duly

The Cadbury acquisition as part of a longer-term
strategy

Warren Buffet reduced his holding in Kraft from 9.5 per
cent to nearer 6 per cent in the immediate aftermath of
the bid. His comments at the time reflected the belief
that bidders of ten overpay to the detriment of their share-
holders, and that Kraft would suffer the ‘winner’s curse
(of having paid too much for synergies that would take
much longer to deliver, or of ignoring the real costs of
post-acquisition integration).

On the release of Kraft’s fourth quarter results for
2010, commentators believed that shareholders were still
‘wondering whether they bit off more than they could chew
when they put up f11.5bn for Cadbury last year.’5 Net
profits had fallen 24 per cent to $540m in the quarter,
reflecting the scale of integration costs, and a ‘disap
pointing ‘ 2.2 per cent rise in Cadbury’s like-f or-like sales,
well behind the 5 per cent sales growth that Cadbury had
posted in its last period of independence. The deal had
certainly not yet shown itself to be the transformational
move that Ms Rosenfeld staked her reputation on. Kraft’s
next move to transform itself was less expected.

When interviewed on Bloomberg TV on 16 September
2010, Ms Rosenfeld re-affirmed that Cadbury was ‘a
critical piece of the puzzle we have been trying to
complete.’ On 4 August 2011, Kraft announced its inten
bon to split into two separate corporations, and the crit-
icality of the Cadbury acquisition became more obvious.

Kraft said these two businesses, ‘differ in their future
strategic priorities, growth profiles and operational
focus.’s The lower-growth North American grocery foods
business was to include brands such as Kraft cheeses,
Maxwell house coffee and Capri Sun, with revenues of
$16bn. At the same time, a more focused but globally
spread snacks and confectionery business (including
Trident gum, Oreo cookies, Milka chocolate and Cadbury)
would have estimated revenues of $36bn, with over
100,000 employees in 80 countries. This snacks busi-
ness was poised to take advantage of the perceived shifts
in consumer behaviour towards snacking, rather than
cooking two or three meals each day.

Within the confectionery arm of that global snacks
business, Cadbury brands represented over 80 per cent
of revenues. The rationale for the global snacks business
remained that which drove the Cadbury acquisition; to
move into higher growth segments as a ‘snack, confec-
tionery, and instant consumption ‘ company, and to
increase footprint and ‘white space ‘ synergies for ‘iconic
brands’ in fast-growing emerging markets.

Increase presence in ‘instant consumption ‘ channels as they
continued to grow relative to traditional grocery channels in the
established US and EU markets.

Pursue margin growth, through improved portfolio mix, reducing
costs and investing in quality.

The higher exposure to confectionery of a post-acquisition Kraft
would provide Kraft shareholders with an improved portf ono of
higher-margin growth products.

business establishment and had a history as a benevo-
lent employer, noted, for example, for pioneering
employee pensions. The company was rooted in the
communities it operated in (notably at Cadbury’s head-
quarters in Bourneville, south of Birmingham, where a
model village was constructed after 1893 to show how
employees could be better housed in the factory age).

Kraft’s rationale for acquiring Cadbury was laid out in
its bid offer documents (see Table I).

Kraft’s bid did not attract the uniform support of its
own investors. The largest shareholder in Kraft was
Berkshire Hathaway, led by the prominent investor
Warren Buffet, arguably the most influential and best-
known investor in the world, and a favourite of the US
financial news channels. On 16 September 2009, Buffet
warned that Kraft must not ‘overpay ‘ for Cadbury,
expressing concern at the offer to Cadbury of an ‘attrac-
tive’ EBITDA multiple of 13.9 times. Buffet was a long-
term supporter of the Kraft corporation, holding 9.4 per
cent of shares. More provocatively, perhaps, on
Bloomberg’s business news channel on 19 January,
whilst describing Kraft CEO Irene Rosenfeld as a ‘good
person ‘, Buffet described the increased final takeover
offer as a ‘bad deal ‘. He dismissed the potential synergy
benefits identified in Kraft’s offer document, saying he
was distrustful of unrealized benefits. He stated that, ‘If
I had a chance to vote on this, I’d vote no ‘. Referring to
the proposed acquisition of Cadbury, he concluded, ‘l
feel poorer ‘. Kraft’s shares fell two per cent on his inter-
vention.2 Irene Rosenfeld was asked about Buffet’s inter-
vention on Bloomberg TV. Refusing to be drawn, she
stated that she believed Buffet was evaluating the deal
from the basis of existing cash flow and that he was
ignoring the potential transformational synergies that
were at the heart of the strategy to acquire Cadbury.

In addition to the ‘transformational ‘ rationale put
forward by Kraft for the deal, the offer documents iden-
tified potential cost savings of $625m. The $625m was
to come from savings and scale economies in procurement.

manufacturing, customer service, logistics and R&D
($300m), generaland administrative costs($200m), and
marketing and selling costs ($125m). These savings esti-
mates were in line with historic transaction experience
for the sector at 6.5 per cent of revenues.

Resistance to the deal in the UK was led by the trade
unions (concerned that up to 7000 jobs might be lost as

part of those ‘savings’). by the nationalist heritage lobby
(concerned by the impact on Cadbury’s communities.
and concern for national prestige with the loss of a large
global corporation headquartered in the UK), and by
Cadbury family members (concerned that a distinctive

‘values-led ‘ corporation would be destroyed). Local and
UK national governments also expressed their concern
that Cadbury’s base in the UK (including its R&D
centres), and its status as a global leader in confec-
tionery, might be subverted.

In the event, Kraft was forced to raise its offer for
Cadbury by over 12 per cent (Warren Buffet’s ‘bad deal ‘)
to secure the recommendation of the Cadbury board, and
concluded the deal in late January 2010. Their case may
have been helped in no small measure by the interven-

tions of short-term traders and hedge funds, increasing
their aggregate holdings in Cadbury from about five per
cent in August 2009 at the start of the bid, to an esti-
mated 40 per cent by the end. Cadbury argued that the
actions of these short-term arbitraging investors effec-
tively de-stabilised Cadbury’s defence. Concerns over
their behaviour and interests were also raised by UK
politicians during and af ter the acquisition.

8
$

g Indeed, during the proceedings, MPs simply demanded’where’s Irene?’ and lambasted Kraft’s senior represent-
ative at the hearing, Marc Firestone, as an ‘apologist ‘ for
her. calling her absence a ‘sizeable discourtesy’.3 The
Da/P ne/egraph newspaper quoted Ms Rosenfeld’s robust
response that: ‘Attendance would not be the best use of
my personal time.’

As to the commitments Kraft made to the BIS, in
December 2010 a plan to shed 200 jobs at Cadbury’s
Bourneville plant was announced. At the same time,
Kraft announced a £17m investment in research at its
designated sole global ‘Centre of Excellence for
Chocolate ‘, now located in Bourneville. The BIS
Committee revisited events in April 2011 to monitor
Kraft’s commitments. Concern was expressed at poor
engagement between Kraft and the trade unions, and the
perception that strategic decisions over the Cadbury
brands were being made in Kraft’s European headquar-
ters in Zurich. More personal criticism followed for Ms
Rosenfeld: ‘In a repeat of our predecessors’ experience,
Irene Rosenfeld (. .) refused to give evidence despite
repeated requests from us that she should appear.

$
@

}

MONDELEZINTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE?

The de-merger took place on I October 2012 when
the North American grocery business started trading as
Kraft Foods Group Inc., whilst the global snacks business
became Monde16z International, with Ms Irene Rosenfeld
firmly at its helm. Benefits from the Kraft de-merger
were to be ‘evident in the first year ‘.’ The Kraft Foods
Group commenced trading on NASDAQ, and gained 2.99
per cent in the day’s trading to reach $45.42. On the
same day, shares in Monde16z International opened at
$28.42, before softening to $28.01.

1:::=:’ £:lT; T= 1::i::,i\=’t:T-::-“-
.H£= =: “i:;: :$;=:*:J:J=: !:::=;”:::

analysts approved.:’ Particular comments were made on
Monde16z’s focus on emerging markets, with their three.
cluster priority strategy of targeting: first, the BRIC
markets, followed by ‘next wave ‘ markets (Indonesia
Middle East and Africa), and finally ‘scale ‘ market Oppor-
tunities in Australia, Japan, Mexico and Central Europe.
Whilst Cadbury had provided much-needed presence in
the Indian market, strength in the Chinese market carne
from the dominance of the Oreo cookie in the biscuit/
cookies market. In May 2013, it was reported that
$600m was to be channelled into advertising and supply
chain improvements in these markets over the following
three years.

Writing about the wider ‘packaged foods’ sector in
March 2014, Skelly:: noted that Monde16z (with 2.2 per
cent global maket share) faced strong competitors in
Nest16 (3.4 per cent), Pepsico (2.1 per cent), Unilever

(1.7 per cent), Danone (1.4 per cent), Mars (1.4 per
cent) and others such as Kraft Foods, Kellogg, Genera
Mills and Lactalis, all of which were aware of the impor-
tance of the emerging markets. MondelQz’s key strengths
were seen as; a more even global distribution of their key
brands (see Figure 1); owning nine globally recognised
‘power brands’ (see Figure 2); expertise and potential for
‘cross-branding ‘ to leverage those power brands and fil
in the market ‘white space ‘; a strong supporting network
of manufacturing and distribution facilities in Latin

14 +Oreo

=R 8
g
8

Halls+ + Nabisco

Trident+’ Milka

Mondeliz strategy after de-merger + Cadbury

The name ‘Mondeldz ‘ was coined by two of the compo
ny’s employees in response to a naming competition, a
composite of Romance/Latin words for ‘world ‘ and ‘deli-
cious’. It was chosen to evoke the global ambitions
needed to take on the ‘global titans’ of Pepsico’s
snacks business, Frito-Lay, and Nest16 SA. The name
was intended only as a ‘small print ‘ label, with the
famous brand names such as Ritz, Oreo, Cadbury and
Milka taking prominence for consumers. Despite the
intention that it was not to be a consumer brand, some
queried the failure to spend money to use a professional
naming agency, and others criticised the chosen name
as having meaning only in the Mediterranean Latin
countries of France, Spain, Italy and Portugal: ‘l doubt
that its connotations are going to be so obvious to
English, German, Japanese, or Chinese speakers . . . it’s
saving grace is that it’s lust a name for a corporate
entity.”

The two main strands of the Monde16z strategy were
laid out by Tim Cofer, European president at Monde16z
International, speaking in October 2012: ‘Forty-four per
cent of our revenue will come from the emerging markets,
benefitting from the growth there,’ with Europe accounting

4 + Philadelphia

2 +LU

+ Ritz

0 1000 2000 3000 4000 5000 6000 7000 8000 9000
Retailvalue sales 2014(US$ million rsp)

figure 2 Monde16z billion dollar brands: retail value sales 2014 vs percentage growth 2013
bounce: Skelly/fu/onion/toc 2014.

.14

America, Asia Pacific, Eastern Europe, Middle East and
Africa; and a strong position to exploit future biscuit
growth in India. Set against these competitive strengths.
however, they had weaknesses in the US chocolate
confectionery market (where the historic rights to manu-
facture Cadbury products lay instead with Hershey), a
virtually complete reliance on sweet (rather than savoury)
snacks, and greater exposure to volatile cocoa and coffee
commodity prices.

The Monde16z power brands in the ‘packaged foods’
sector were concentrated in the two categories, confec-
tionery and biscuits (see Figure 3). Monde16z was the

dominant manufacturer of biscuits in the world, with 18
per cent market share (six times larger than Kellogg in
second place), and with four of the top five labels (Oreo,
TUC, LU and Nabisco). With Cadbury, Milka and Trident,
it also accounted for the largest 14 per cent global
market share in confectionery

This narrowed product portfolio (by ‘packaged food ‘
sector standards) was, of course, the very result of the
de-merger, and in pursuing these higher growth busi-
nesses, Monde16z had arguably increased its depend
ence on the performance of the confectionery and
biscuits markets. Within these categories, the heightened

@
©

B
W
W

g
$

8
6
5

4
3
2

l
0

0
-‘+

0
CN
E

e Middle East and Africa

I Australasia 6EasternEurope

e Asia Pacific
4.0

S 3.00

6 2.0
8

1.5
0

Western Europe

100 200 300 400 500

Market size 2014 (US$ billion)

600 700 800
50.000 100,000 150,000 200,000 250,000 300,000 350.000 400,000 450,000 500,000

Market size 2014(US$ million rsp)
figure I Monde16z’s balanced geographic portfolio 2014 and growth 2014 2019 by region
/Vote: Bubble size shows company shares of region in 2014; range displayed 0.4-3.1%.

Source: Skelly/fu/onion/to/1 2014.

figure 3 Monde16z product category portfolio 2014 and growth prospects 2014-2019 by category
/Vote: Bubble size shows company share of category in 2013; range displayed 0.4–18.0%

bounce: Skelly/fu/oman/Zoc 2014.

@ 698 699

MONDELEZ INTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZINTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE?

cn 5
0q 4-‘+
E

8 1

Middle East and Africae Pressure CookerSnack-f ood maker Monde16z International, after its split from Kraft Foods, has been under pressurefrom two activist investors to im prove perf ormance.
$50 a share

81 ;* “«.,’; “; -;”
a : e~.{-‘-«.,”;

Eastern Europei

Austra lasia 2 Oct 2012:
MondelQz
Internationa
splits from

21Jan 2014
Nelson Peltz is
named a director in
return for dropping

5 Aug 2015: Pershing Square
Capital Management LP,
headed by William Ackman
discloses a 7.5% stake.

Western Europe

30,000 40,000 50,000 60,000
Market size 2014(US$ million rsp)

Figure 4 Mondeldz International Inc.: confectionery growth prospects by region 2014-19
/Vote: Bubble size shows region’s proportion of Monde16z % value share in confectionery from 7.5% for Asia Pacific to 33.2% for Australasia
Source: Skelly/funomon/foc 2014.

0 lO,ooo 20,000 70,000

importance of the emerging markets can be seen by, for
example, the market growth prospects by region for
confectionery (see Figure 4).

economic growth played directly against Monde16z’s
intended strategy and, for example, led to Monde16z’s

revenue growth from the emerging markets slowing ta
only 8 per cent in 2012, with operating income from
these markets down 22 per cent. Further difficult
years were recorded in 2013 and 2014, with Ms
Rosenfeld noting in February 2014 that, ‘frankly, we’re
very disappointed that our performance was below
what we and our shareholders originally expected.’i2
Michael Silverstein of Boston Consulting Group hinted
at this dilemma: ‘Everyone knows the growth is there,
but there is high year-to-year variability. One year of
turmoil does not really break long-term trends. No
company should be choosing to invest in developing
markets for a short-term bump. It’s about riding the
IO-year doubling, tripling of market size.’::

by Nelson Peltz, discloses
a 2.5% stake

20
2012 1’13 14 ’15

How did Mondeliz fare in the emerging markets? Figure 5 Monde16z share price performance, October 2012 December 2015
bounce: WSJ Market Data Group

The risks inherent in running an international business
had already been acknowledged by Kraft in September
2012, prior to the de-merger, where it was noted, for
example, that reported earnings in 2013 for Monde16z
would likely be lower than some forecasts due to the
strengthening of the US dollar (Monde16z’s reporting
currency) against a basket of other international curren-
cies. At the same time, Tim Cofer had suggested that
Monde16z was ‘well positioned to cope with volatile
commodity prices’.

Revenues from emerging markets had been soaring
by 23 per cent in 2011, as GDP in the BRICs countries
increased by 6.9 per cent. With US GDP growing at
only 1.8 per cent, the de-merger and divestment of
Kraft’s slow-growing North American grocery business
from Monde16z made ‘Ms Rosenfeld look genius’.:: The
growth rating that Monde16z was attracting has,
however, faltered in the short term, as emerging
market GDP growth dipped to 5.2 per cent in 2013
(recovering to 5.3 per cent in 2014, before dipping
once more to 4.4 per cent in 2015, with an estimate
of 4.9 per cent for 2016). At the same time, the devel-
oped world GDP (ied to some extent by the USA)
showed slightly enhanced growth in the 2.0 to 2.4 per
cent range.:; in addition, Mondeldz suffered from a
poor competitive performance with the failure of
expected sales growth in Brazil and Russia specifically,
and sales of the key Oreos cookies brand faltering in
2013 14 in China. This change in the balance of

and margin improvement, the company runs the risk of
becoming a target.’:’

These comments were not new for 2015. This pres
sure to improve operating margins and reduce overheads
has been a near constant after Monde16z’s de-merger
from Kraft was completed, since it became clear that
emerging market growth was more muted than expected.
Whilst Warren Buffet reduced his exposure to Kraft in the
wake of the Cadbury acquisition, one of the supporters of
that deal has proved more persistent. Nelson Peltz (and
his investment company, Trian Fund Management) liked
the idea of a global snacks and confectionery business so
much that on 17 July 2013 he announced his belief that
Pepsico should acquire Monde16z(which he criticised for
poor profit margins), merge it with its own Frito-Lay
snacks subsidiary, and divest its own slow-growing soft
drinks business (including its iconic ‘Pepsi ‘ brands).
Trian was a shareholder in both companies (at 2.5 per
cent, the fourth largest Monde16z shareholder), but the
initial reaction from the market and other Pepsico share
holders was less than enthusiastic.

The intervention was unwelcome to Ms Rosenfeld,
regardless, effectively underlining the questions about
Monde16z’s performance and seeking to put the company
‘in play ‘. Peltz’s campaign to persuade Pepsico to launch
a bid for Monde16z persisted until January 2014, when,

under pressure, Monde16z offered him a seat on the
board of the company. In exchange, Peltz dropped his
campaign, his threat of a proxy fight against the board to
put the company up for sale, and concentrated instead
on trying to persuade Pepsico to sell its drinks business.

The manoeuvre of offering Mr Peltz a seat on the
board seemed consistent with Ms Rosenfeld’s strategy of
trying to engage with activists without ceding authority to
them in her words, keeping them ‘inside the tent ‘. Mr
Peltz was not a ‘typical board member ‘, however, asking
for detailed information about company spending by
country, and interviewing Ms Rosenfeld about expected
return on investment (ROI) data on large investments in
global plant modernization.

Even as Ms Rosenfeld invited Mr Peltz onto the
board, others were lining up to pressure Monde16z

management into further cuts. In April 2014, for
example, Ralph Whitworth of Relational Investors LLC,
stated he was joining Trian in pressing for better
margins::5 ‘We’re working behind the scenes to try to
urge change there . Does the current management
have the ability to get the job done? That’s a question
mark. If they don’t, I think that you’ll probably see
some changes there.’ When asked in interview to
respond to Mr Whitworth’s threat, Irene Rosenfeld
responded that, ‘l run this company for the benefit of

Investor pressures to improve profit margins
Persuading all investors that a highly focused snacks and
confectionery business, geared to the growth of the
emerging markets, is a good investment, at the same
time as results deteriorate, has not been a straightfor-
ward task. According to data from the IVa// Sfneef Journo/
(see also Figure 5), Monde16z’s shareholders had seen a
68 per cent total return in the period from October 2012
(the de-merger) to December 2015. The equivalent
return for the Standard & Poor 500 index was 55 per
cent. and sector returns were even less at 52 per cent.
Investors looking to the promise of emerging market
growth that failed to materialise appeared to want more.
In a September report by Sanford C. Bernstein & Co.,
analyst Alexia Howard wrote: ‘If Monde16z fails to live UP
to the expectations of investors, or leaves money on the
table with respect to the potential for further cost-cutting

700 701

MONDELEZ INTERNATIONAL: ‘ARE YOU GOING TO STICK AROUND, IRENE? MONDELEZ INTERNATIONAL ‘ARE YOU GOING TO STICK AROUND, IRENE?

a[[ of our shareho]ders, [and] I am p]eased by the
progress we have made to date.’:;

Out of all this (including the weaker results from
emerging markets), Monde16z has, nevertheless,
embarked upon a series of efforts, inter alia, to improve
margin and shareholder value:

1. Introducing a share buy-back scheme, which has
gradually increased to a plan to buy $13.7bn of shares
by 31 December 2018.

2. Introducing a zero-based budgeting system, of the
type championed by 3GCapital, and intended to
produce $1.5bn of annual savings.

3. A further scheme to save $1.5bn through headcount
cuts and supply chain improvements.

4. Consolidating its headquarters in Illinois.
5. Selling the corporate jet.
6. A series of budget cuts in order to maintain and

increase advertising budgets.

Brands . . . and route-to-market capabilities to drive
sustainable revenue growth and improve market shares ‘
One of the examples of such incremental investment is
the acquisition in July 2015 of an 80 per cent stake in
Kinh Do, Vietnam’s leading snacks and biscuits business.
recognising the potential of the country’s 90 million
consumers.

Equally, it did not take long for some to propose
Mondelez as a potential target for the synergy-seeking
3G Capital, and imagine a proposed (and possibly ironic)
re-integration of its snack businesses with the wider
foods and grocery businesses of Kraft Heinz. By
12 August 2015, Kraft Heinz had announced the first
wave of synergies in its Kraft businesses, eliminating
2500 jobs from its 46,000 strong workforce in North
America, and downsizing Kraft’s Illinois headquarters.

margin more aggressively, reduce the number of
suppliers, reduce its portfolio of products, reduce prices
paid to retailers to stock product lines, and reduce adver-
tising from a planned ten per cent of revenue to eight per
cent. Ms Rosenfeld reportedly resisted the proposed new
wave cutting, and, in particular, the advertising cuts that
might impact revenue growth: ‘all of our investors, even
Nelson [Peltz], support an increase in advertising ‘.:’ Ms
Rosenfeld said that she ‘chafed ‘ at the increasing pres-
sure on her to further boost the stock price (share value)
and profit margins quickly, while she is simultaneously
trying to increase sales for the long term.and more investor pressure

shortly after Heinz’s acquisition of Kraft (on 7 August
2015), Bill Ackman of Pershing Square Capital
Management announced his 7.5 per cent stake in
Mondelez, purchased for$5.57bn. Ackman rapidly got to
work to further pressurise Monde16z’s management with
a reported agenda to either (i) grow revenues faster, (ii)
cut costs more aggressively, or (iii) sell itself to the
newly-formed Kraft Heinz or to Pepsico.

Within days of Pershing Capital’s stake acquisition
land its attempt to put a ‘for sale ‘ sign up on Mondelez),
Warren Buffett had, however, indicated that Kraft Heinz
already had a significant post-acquisition integration task
on its hands, and, more significantly, that poorer
margins or not the biggest hurdle to any takeover of
Monde16z is its ‘rich valuation ‘. According to Bloomberg,
in August 2015 Monde16z’s enterprise value was already
$92.4bn, with a value multiple of 17.1 times revenue.
making it difficult for another peer company such as
Pepsico, General Mills or Nest16 to contemplate a take-
over bid.i9

Which leaves Pershing Capital’s profit margin improve-
ment agenda. It was assumed that, like Peltz and Trian,
Ackman (or his nominee) would seek a seat on the
Monde16z board to push for margin improvement initia-
tives. According to Ackman’s colleague Ali Namvar::’ ‘We
think Mondeldz has by far the greatest cost saving oppor-
tunity among its peers – . we think the whole industry is
under change . . . 3G Capital is setting new benchmarks
for efficiency, organizational structure and profitability.’
The new benchmarks produced by 3G Capital’s methods
were believed by many to offer savings that could
increase industry margins by up to eight per cent (Peter
Brabeck-Letmathe, chairman of Nest16, quoted in FT.
com).n Alexia Howard of Bernstein credits 3G with
squeezing an extra seven per cent of margin out of Heinz
between 2013 and 2015, ‘more than twice Monde16z’s
own ambitions at the time.’ Some of the most ambitious
targets suggest Mondeldz could even pursue an oper-
ating margin of 20 per cent by 2020.

Ms Rosenfeld met Mr Ackman directly on 21
September, where he urged her to improve operating

Whatever happened to Kraft Foods? (.
is Warren Buffett up to?)

or, what
Managing the activist shareholders

Despite the resistance to Mr Ackman’s demands, Irene
Rosenfeld did respond by ordering deeper cuts for 2016
operating budgets, and by accelerating savings originally
planned for 2018. Responding to Mr Ackman’s request to
nominate a new board member to pursue his interests, she
agreed to look for a ‘proven cost-cutter ‘ who would be
acceptable to both Ackman and herself. Ms Rosenfeld now
claims to be on ‘speed dial ‘ for other CEOS learning to deal
with activist shareholders (keep them ‘inside the tent ‘ and
avoid proxy fights, is her main advice). She states that
dealing with the detailed concerns of her two principal
activist shareholders now takes up about 25 per cent of
her time as CEO, to the extent that she was looking to
appoint a new ‘Chief Commercial Officer ‘ in late 2015, to
focus entirely on the marketing and sales oversight she has
previously undertaken as CEO. She reportedly told her
senior management that she was ‘doing everything in my
power to handle the distractions so you can stay focused
on the business.’ She implies, however, that there is no
ceding of authority to the activists: ‘l’m frustrated by inves
tora ‘ fascination with activists. I’m successfully running
Monde16z for all shareholders without the activists
help’.i ‘ The activities of the activist do seem to have some
impact, however, as reported in the Wa// Sfneef ./ourna/’s
in-depth study of Monde16z. From interviews with senior
directors, they note the instance where, in seeking to hire
a new director with a proven record to revive the global
chocolate business, Ms Rosenfeld was told by the target
executive that there was a ‘cloud ‘ over Mondelez, and was

asked ‘Are you going to stick around, Irene?’

The de-merged North American grocery business of
Kraft found itself on the receiving end of an acquisition
bid from H.J. Heinz, and succumbed on 2 July 2015, to
become a major part of Kraft Heinz Co. This was a new
company with about$28bn of annual revenue, with eight
‘power brands’ (each with global revenues of over $1bn
each), and counting as the fifth largest food and beverage
company worldwide.

Familiar names play a part in this story, as Heinz itself
had earlier been acquired in 2013 by a consortium of
Berkshire Hathaway (Warren Buffett’s investment
company) and 3G Capital. Whereas Buffett has been wel
known in the US investment community over many years,
3G Capital has built up its reputation through a method-
ology of acquiring consumer brand corporations (such as
Budweiser and Burger King), and eliminating costs
through the introduction of techniques such as zero-
based budgeting, elimination of duplicate overhead
expenses, and other ‘synergies’. This joint investment
partnership repeated 3G’s pattern of margin Improve-
ment with Heinz from 2013 15, before launching the
larger deal to acquire Kraft Foods, promising potential
savings of $1.5bn of cost synergies. This deal (largely
based on a ‘paper ‘ offer of shares in the new Kraft Heinz
Co) would leave 3G and Buffett with a controlling 51 per
cent stake of shares, and majority control of the board.
Importantly, analysts also saw the potential to replicate
this model of applying Buffett’s financial engineering
skills in acquisition, with 3G’s ability to find cost-saving
synergies integrating businesses throughout the sector:

with Buffet’s cash-gushing Berkshire Hathaway as a
linchpin investor and financier to the combined company,
there’s no telling where 3G may strike next. In a foods
industry where companies like Pepsico, Campbell’s
Soup, General Mills and Kellogg are struggling and brand
conglomerates like Proctor & Gamble are divesting
assets, Kraft Heinz could emerge as an empire-building
consolidator.’i8

Selling coffee

While these actions might be more typical examples of
financial engineering, Monde16z has also moved deci-
sively with the divestment of its coffee business(including
such innovative brands as Milllcano) to form part of JDE,
a joint venture with JAB Holding’s subsidiary Douwe
Egbert. The coffee business accounted for approximately
11 per cent of Monde16z’s global revenues, and had Feta
tively high margins and growth prospects. The coffee
sector is potentially even more exposed to commodity
pace volatility, however, and predictions of world short
ages of coffee beans are potentially even more damaging
than possible cocoa bean volatility for the chocolate
business. In addition, it had been argued that Monde16z’s
global snacks supply chain would be more easily inte-
grated without the coffee business, eliminating parallel
activities and potentially leading to further cost savings.

This new venture created a clear number two pure
play coffee competitor to Nest16 globally, with $7bn
revenues, a number one market position in over 24 coun
tries, stronger synergies and purchasing economies of
scale. The deal with JAB Holding, provided $5bn in cash
to Mondelez, whilst allowing Mondeldz to retain a 44 per
cent equity interest in JDE. The transaction, intended to
produce a stronger competitor to vie with Nescafe, also
removes a ‘volatile asset ‘ from Monde16z’s balance sheet.
The dealwas announced on 7 May 2014, and Monde16z’s
shares rose 8.2 per cent that day.

Notes and references
1. £l : €1.2 – $1.5.
2. Z. Wood, S. Carrell and R. Wachman, ‘Buffett blasts Kraft bid for

Cadbury ‘. Guano/an, 20 January 2010.
3. House of Commons BIS Committee, ‘Mergers, acquisitions and take-

overs: the takeover of Cadbury by Kraft ‘, 9th report of session 2009-10,
London, Stationery Office, 2010

4. House of Commons BIS Committee, ‘ls Kraft working for Cadbury?’ 6th

report of session 2010-12, London, Stationery Office, 2011

MONDELEZ INTERNATIONAL: ‘ARE YOU GOING TO STICK AROUND, IRENE?

5. A. Webb and A. Wilson, ‘Was Cadbury a sweet deal for Kraft?’,
ne/egnaph,24 Apri12011

6. ‘Kraft to split into two companies’, BBC /Vows, 4 August 2011
7. E. Thomasson, ‘Demerged Kraft unit sees consumers hungry for

snacks’. Healers, 2 October 2012.
8. S. Strom, ‘For Oreo, Cadbury, and Ritz, a new parent company ‘, /VeK ‘

york ames. 24 May 2012.
9. S. Ahmed, ‘Emerging markets key to Kraft spinoff’s success’, C/VBC, 2

October 2012.
10. A. Nieburg, ‘Mantel analyst lauds Mondelez geographic choices’,

Confectionerynews.com, 13 September 2012
11. Skelly/funomon/toC ‘Mondelez International Inc. in packaged Food

World ‘. 2014.
12. L. Yue, ‘Mondelez gets a lesson global economics’. Chicagobusiness.

com, 15 February 2014.

13. ‘2016 Macroeconomic outlook ‘, Goldman Sachs, accessed 8 July 2016.
14. M. Langley, ‘Activists put Mondelez CEO Irene Rosenfeld on the Spot

bVa// SfreeZ’ ./oc/rna/, 15 December 2015. ‘

15.D.D. Stanford, M. Boyle and C. Perry, ‘Master blenders to buy
h/ondelez coffee unit for $5B ‘, B/oom&erg, 7 May 2014. ‘

16. L. Whipp and S. Foley, ‘Pressure on Mondelez to take a bit out of costs’.
F7n.anc/a/ 77mes, 6 August 2015.

17. S. Neuwirth, ‘Not so sweat: Cadbury owner Mondelez posts eighth
consecutive quarterly revenue decline ‘. C/ZIHH.A4., 28 October 2015

18. A. Gaia, ‘Why the Heinz-Kraft food merger is a rare kind of Warren
Buffett deal ‘, Hordes, 25 March 2015

19. R. Collings, ‘Mondelez too expensive for Nestle, General Mills to
acquire?’, TheStneef, 14 August 2015.

20. A. Gara, ‘Bill Ackman didn’t buy Mondelez just to dish it off to Warren
Buffett and 3G Capital ‘, Hordes, 13 August 2015.

CRH plc: leveraging corporate strategy for value creation
and global leadership
Mike Moroney

Corporate strategy can be the driver of value generation, growth and development, notwithstanding a chal-
lenging industry environment and a lean corporate centre. These issues are explored in this case study on
CRH, which places acquisition-led corporate strategy at the heart of its value creation model.

In March 2016, CRH plc, the second largest building
materials company in the world with a stock market valu-
ation over €20bn (£16bn, $26bn): released financial
results for 2015. Albert Manifold, Group CEO since the
start of 2014, could reflect with satisf action on the first
two years of his tenure. EBITDAZ was ahead strongly,
margins continued to expand across the Group and 2015
marked the second consecutive year of improvement
from trough levels of the severe global recession. In addi-
tion, in a spin-off deal following the merger of two of the
largest industry players, Lafarge and Holcim, CRH had
acquired certain assets with a value of €6.5bn (the ‘LH
Assets’), the Group’s biggest ever transaction.
furthermore, the Group had initiated a programme of
dynamic capital management, which had released almost
€1.4bn in capital in two years from targeted disposals to
fund future acquisition-led growth. Moreover, cost reduc
tian initiatives in recent years had yielded cumulative
annualised cost savings of over €2.5bn. At the same
time, Albert Manifold and his management team were
acutely aware of the many challenges that lay ahead in
the next phase of CRH’s development as the Group
sought to realise its ambition of becoming the world’s
leading building materials company. Success would
depend on CRH’s corporate strategy, leadership and
actions.

and architectural concrete products), ‘lightside ‘ building
products (for example, glass and glazing systems,
construction accessories, shutters and awnings, fencing
and network access products) and distribution (builders
merchanting and DIY). Industry outputs have their own
external, intermediate markets. However, building mate-
rials also serve as inputs to higher-level and final prod
ucts across integrated industry value chains. Sectors
served are residential, industrial/commercial and infra-
structure/public works. End-uses comprise new work in
the early phases of construction activity and repair,
maintenance and improvement (RMI) in later phases.

Core industry characteristics
Building materials are characterised by several distin-
guishing features. Cyc//ca//fy derives from the fact that
construction cycles reflect general economic cycles.
Construction/building materials cycles are longer in dura
bon and larger in amplitude, while their timing varies
between countries. In developing economies, construc
bon demand tends to lead GDP growth, in contrast to a
lagged relationship in mature economies. Cyclicality is
most pronounced for ‘heavyside ‘ prodt4cts such as
cement, aggregates and concrete products. These prod-
ucts involve intensive capital investment which is charac-
terised by long-term, large-scale commitments and
significant lead times, and for which additions to
capacity are sizeable and occur only periodically.

Building materials manifest a dual mata/e/ilynam/c
geographically based character. In developed markets
(North America, Western Europe and Australasia) where
the bulk of buildings and infrastructure is already in
place, construction is stable with modest growth and is
largely (late cycle) RMl-based. Population and public

The building materials industry
The industry involves the extraction, manufacture and
supply of building materials, products and services for
construction activity. These Include primary materials
lsuch as cement, aggregates, crushed stone, sand and
gravel), ready mixed concrete (RMC) and asphalt prod-
ucts), ‘heavyside ‘ buildi ng products(for example, structu ral

This case was prepared by Mike Moroney, Lecturer in Strategic Management at the J.E. Cairnes School of Business and Economics
National University of Ireland Galway. It is intended as a basis for class discussion and not as an illustration of good or bad prac
tice. © Mike Moroney, 2016. Not to be reproduced or quoted without permission.

704
705

CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP

investment are the prime drivers of activity.: By contrast,
in developing markets (Asia, Central and Eastern Europe.
Latin America) and in some Western countries’at an
earlier stage of economic development, construction
output is high growth and predominantly new build,
reflecting above average economic growth.

In general, building materials and products are
common/f/es, have long life cycles, are similar across
markets and largely stable over time, with price-based
competition predominant. Production processes are
standard. Technology is non-proprietary and, for some
products, relatively unsophisticated. Innovation focuses
on enhancing manufacturing processes, improving ease
of product use and installation, and providing value-
added services and solutions to customers.

Traditionally, the building materials industry is /rag-
menfed. Production is linked to the location of appro-
priate reserves, with proximity to the end market key.
Because building materials and products are character-
ised by a high weight to value ratio, high transport costs
rapidly outweigh scale economies, with the result that
the radius of economic activity and competition often
can be 150 kilometres or less. Moreover, many markets
are local in nature due to differences in building regula-
tions, construction practices and product standards.
Success is of ten determined by micro-market factors like
locality, quality, reliability of service and price.’ As a
result, the industry developed over time as a large
number of small/medium-sized firms, of ten family-owned
and run.

==1=:’u:l:l T; ( l”ai:;
household names) went out of existence, particularly in
the UK. A number of large, of ten global, players emerged.
especially in ‘heavyside ‘ markets. Rationalisation was
ongoing, as smaller, independent operators merged into
larger groups. CRH was a leader in these developments
Nonetheless, the underlying logic of fragmentation
prevailed. Notwithstanding corporate activity, globally
concentration ratios in ‘heavyside ‘ markets such as
cement, aggregates and asphalt were comparatively low.
while a significant proportion of capacity remained
privately held.

In 2016, the sector was recovering following the
severe global downturn from 2007, which was unprece-
dented since the 1930s in severity and extent and in its
synchronized nature. In general the outlook was positive.
US construction had enjoyed several years of growth.
with sector output expanding at six per cent p.a. Af ter six
years of consecutive declines6 European markets exhib-
ited modest volume growth of over two per cent in 2015,
although the picture was mixed across countries. In all
markets, recovery was from a low base, presaging signif-
icant upside potential. US construction output was still
depressed relative to GDP, new build markets in Europe
remained at trough levels7 and UK house-building and
mortgage approvals were considerably lower than sustain-
able demand.8 However, macro uncertainties continued
to prevail. Economic growth in China, the engine of the
global economy for two decades, was slowing. Recovery
was likely to be gradual, evidenced by expectations for
only modest rises in interest rates. Moreover, certain
structural trends were not favourable, such as the shift
to multi-f amily homes with lower building material

intensity.9

developed new geographic platforms in its core busi-
nesses while taking advantage of complementary product
opportunities. This has enabled the Group to achieve
strategic balance and to establish multiple platforms
from which to deliver superior, sustained performance
and growth. Since its formation in 1970, CRH has deliv-
ered annual Total Shareholder Return of 16 per cent. In
45 years of operation, the Group has undergone major
growth through several phases of development;

e organic market penetration in Ireland (from 1970);
. acquisition-led overseas expansion (from the late

1970s);
e product focus, larger acquisitions (from the late

1990s);
e developing value-based growth platforms (from the

early 2010s).

In general, change has been evolutionary, involving a
managed, learning process of building, augmenting and
layering competences.

(through builders’ merchants and DIY stores). CRH’s main
product concentration was in primary materials and
‘heavyside ‘ products (cement, aggregates, asphalt, RMC
and concrete products).

Geographically, CRH is a top two building materials
company globally and the largest in North America. The
Group has leadership positions in Europe as well as
established strategic leadership positions in the emerging
economic regions of Asia and South America. In the
long-term, CRH’s businesses were underpinned by a high
level of increasingly scarce reserves of materials totalling
20 billion tonnes. In aggregates, CRH’s reserves were
equivalent to over 80 years of production and were
among the highest in the sector.n in 2014, CRH had 700
quarries/pits in the US and 400 in Europe.::

CRH strategy13

CRH’s vision is to be the global leader in building mate-
rials. To achieve this vision CRH had developed a Group-
wide, integrated, multi-level strategy to create value and
deliver superior, sustainable shareholder returnsProducts and markets

CRH served the spectrum of construction activity, deliv-
ering superior building materials and products for use in
housing, buildings, roads, public spaces, infrastructure
and commercial projects. The Group manufactured and
distributed a range of building materials products from the
fundamentals of heavy materials and elements to construct
the frame, through value-added products that complete
the building envelope, to distribution channels which
service construction fit-out and renewal. CRH was engaged
in three closely related core businesses: primary materials
Init including steel and timber); value-added building
products (primarily ‘heavyside ‘ concrete-based, with
selected ‘lightside ‘), and building materials distribution

Value-based strategic imperatives (see Figure 1)

Reflecting long-standing core values, strategic impera-
tives guided Group action:

Continuous business improvement through operational,
commercial and financial excellence, as manifested in
return on net assets (RONA).

Disciplined and focused growth. Financial discipline
maintained through working capital management and
capital expenditure controls. Use of the Group’s strong
balance sheet, cash generation capability, active port-
folio management and focused allocation of capital to
achieve optimum growth

Strategic and cyclicaltrends
Structurally, consolidation was ongoing (particularly in
primary materials and merchanting) reflecting supply
side concentration and significant merger and acquisition
(M&A) activity. During the two decades to mid-2009,
there were 20 large corporate deals involving total
consideration of US$125bn at an average value to
EBITDA multiple of l0.3 times,s financed mainly by
borrowing. Major transactions largely ceased during the
severe sector downturn of 2007 13 as firms reduced
debt. However. there were several large deals involving
industry leaders and ambitious medium-sized players.
Over time, large international building materials compa-
nies, including CRH, had leveraged strong local market
positions and/or product competences to increase scale
and to expand into other regions and areas of activity.
There was also erosion of local differences between
geographic markets, driven by institutional harmonica
bon of regulations, standards and tendering, convergence
in building practices, consolidation of customers and
homogenisation of their needs.

$
8
g

Profile of CRH

Headquartered in Dublin, Ireland, CRH is a top two,
leading global diversified building materials group with
annual revenues of €24bn in 2015, employing 89,000
people at over 3900 operating locations in 31 countries
worldwide. CRH’s prominence is recognised by many
industry awards for corporate governance,” financial
reporting, investor relations, and excellence/innovation in
environmental and safety practices.

CRH plc was formed in 1970 through the merger of
two leading Irish public companies, Irish Cement Limited
(established in 1936) and Roadstone (established in
1949). At that time, CRH was the sole producer of
cement and principal producer of aggregates, concrete
products and asphalt in the country, with Group sales of
€27m, 95 per cent in Ireland. Since that time, CRH has

Expanding our balanced portf ono of
diversified products and geographies

Figure I CRH vision and strategic imperatives
Sot/nce:CRH plc.

$
M
$

706
707

CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP CRH PLC: LEVERAGING CORPORATE STRATEGY FOR VALUE CREATION AND GLOBAL LEADERSHIP

in greenfield projects and acquisitions. Criteria for
success included achieving vertical integration, adding to
reserves and expanding regional and product positions. In
developing regions, CRH sought premium entry platforms,
involving an initial local or regional position in primary
materials, backed by sizeable reserves. The acquired foot-
print was usually in cement and of ten involved partner-
ship with strong local established businesses, providing
valuable learning for a relatively low investment. CRH
targeted businesses with the potential to develop further
downstream into integrated building materials business
(often with national presence) capitalising on industriali-
sation, urbanisation and population growth.

advisors in each of the six regionally focused divisions

These resulted in highly innovative ideas and exchanges
of products, delivering significant synergies. There were
also long-standing Group-wide best practice programmes
(e.g. cement, development) in addition to more recent
initiatives, such as in procurement and commercial
excellence. Best practice was supplemented by bench.
marking exercises and common systems platforms
Divisions also sponsored formal systematic programmes
to improve operational performance and increase effi-
ciency in a range of areas, including health and safety,
recycling and energy recovery.

Informal mechanisms underpinned performance.
Corporate culture was nurtured and sustained constantly.
The supportive team orientation was evident in informal
mentoring, hands-on assistance and individual and team
coaching within and across entities. Flexibility prevailed
regarding hierarchy and job descriptions. Core values
were continually reinforced through corporate folklore
and subtle mechanisms including leading by example
and clear norms of acceptable behaviour. Strong informal
networks existed among managers, even between

far-flung regions of the Group’s activities, arising from
organisational mechanisms of interaction and from a
social dimension to formal events (such as the annual
Management Seminar).

time to assess suitability and strategic fit, and to know
management and their evolving needs. Much effort was
spent appraising the target of CRH’s strategy, manage-
ment, values and expectations, including up-front clarity
on post-acquisition priorities. It was not unusual for CRH
to walk away from a deal, on grounds of timing. price or
compatibility. Sometimes acquisitions were completed at
a later date.

To enhance best practice in deal execution, CRH had
codified, in a classified, proprietary document, the best
practice, knowledge and processes involved in making an
acquisition, gleaned from many years of experience. This
was full of collected wisdom and practical advice on
deal-making. An experienced operational manager guided
each acquisition team. At the appropriate time. a senior-
evel ‘ambassador ‘ was introduced to close the deal.
Before completion, each deal underwent rigorous evalua-
tion, including qualitative operational review, due dili-
gence, strict cash flow testing and Board approval.

Traditionally, CRH’s acquisitions shared many common
characteristics:

medium-sized, private, of ten family-run businesses;
geographic/product market leaders, with potential to
enhance existing Group operations, fill a gap or
provide a platform for growth;
careful structuring of deals, often involving initia
stakes with buy options (and/or joint ventures) in new
regions/product areas;
retention of owner-managers to ensure continuity and
maintain human capital.

Post-acquisition integration to boost returns was rapid
and well-practiced. RONA typically rose to the bench
mark level of 15 per cent within two to three years from
purchase.i9 Group financial, management information
and control systems were implemented immediately.
Revenue and cost synergies were captured through
benchmarking, best practice programmes and targeted
capital investment. The central expertise and coordina-
tion of CRH’s superstructure delivered procurement
economies of scale, enhanced customer access and
greater network density and synergies. Af ter three years,
a formal look back review was carried out. Although more
complex, the acquisition process for larger deals was
similar in principle.

capacity to become the second largest building materials
company in the world and the number two provider of
aggregates globally. Strategically, the acquisition provided
significant value creation potential and strategic fit with
CRH’s legacy businesses, providing four new regional
platforms for growth in cement, aggregates and RMC.
Moreover, the deal widened the Group’s global footprint
and was expected to have a considerable impact on
CRH’s future growth trajectory. Under the leadership of a
specific committee of the Board, CRH immediately put in
place a thorough plan for integration of the LH Assets.

In announcing its 2015 results, CRH reported consid-
erable progress in relation to the LH Assets. The integra
bon programme was largely complete, with both sales
and EBITDA ahead of expectations. Moreover, arising
largely from higher than anticipated process operating
efficiencies, the Group upgraded its expected synergies
over three years from completion of the acquisition from
€90m to €120m. Going forward, external commentators
estimated that €150m in synergy savings was within the
Group’s capability.:’

Corporate parenting

Senior management continually reinforced CRH’s busi-
ness model. Management training and meetings were
used to restate key messages, from the perfor-
mance-based ‘right to grow ‘ strategic mantra, to the
minutiae of operational best practice. Value-creating
performance was buttressed by formal and rigorous
measurement, evaluation and control processes, ensuring
early intervention and appropriate corrective measures.
Communications opportunities were exploited to the full.
CRH’s expertise in market and investor relations is repli-
cated internally. The CEO and senior management team
engage regularly with all employees through face-to-face
meetings and communications technologies Including:
emails, blogs, intranets, video, apps and other social
media with a constant focus on values, performance,
strategic priorities and knowledge share.

CRH operated a Group-wide management develop
ment system to ensure systematic requisite exposure to
the wide range of CRH’s operations, particularly when
managers were mobile, in their 20s and 30s. A key
element was the management database, on which the
core 500 managers in the Group were profiled formally.
In addition, there were a variety of development
programmes for managers, many of which involved
inputs and presentations on strategy from senior manage-
ment, including the chief executive. These included the
Management Seminar, Development Forum, Leadership
Development Programmes and Business Leadership
Programme. Promotion, rotation and mentoring were also
instruments of manager development. HR measures to
ensure greater cohesion and consistency of policies were
designed to foster coordination and a culture of interde-
pendence.

Divisional and Group-wide mechanisms facilitated
delivery of business model elements. Ongoing best prac-
tice and knowledge exchange activities involved meetings
by small teams of experts facilitated by technical

Outlook

For the first time in many years, the outlook for CRH for
2016 and beyond was favourable in a number of areas
The macro-economic backdrop boded well for ongoing
cyclical recovery and a return to peak levels of margins
and returns. Moreover, the ‘transformative ‘ Lafarge
Holcim deal reinforced expectations for robust earnings
growth arising from integration of acquired businesses.
synergies and increased development opportunities from
enhanced platforms. At the same time, financial disci-
pline and prudent financial management highlighted
CRH’s commitment to restore debt metrics to normalised

levels. Market expectations reflected a fall in the Group’s
net debt/EBITDA ratio from a post-deal high of 3.5x to
1.8x by 2016 year-end. Importantly, CRH retained its
firepower for further transactions, with an estimated
capacity to spend €12bn on acquisitions over five
years.zi Albert Manifold and his management team knew
that achieving the Group vision of global leadership in
building materials would require sustained delivery on al
fronts.

Acquisition-led expansion

Acquisitions were the engine of corporate growth and
development. Historically, acquisitions accounted for 70
per cent of CRH’s profit growth (with organic growth
contributing one quarter, and currency movements the
remainder).:’ Traditionally, CRH’s acquisitions were
bolt-on in nature (three to four deals per month at an
average value of less than €20m) augmented from time
to time with larger deals where there was compelling
value and a strong strategic rationale. In general, CRH
acquired on favourable terms, reflecting the Group’s
‘valuation discipline ‘. Purchase price/EBITDA multiples
ranged between 6 and 8.

CRH’s rigorous and comprehensive acquisition strategy
was singular in conception and execution and had
‘proven very difficult to replicate’.i8 For identification of
prospects, CRH resourced multiple development teams
spread across the Group seeking opportunities and main-
taining contact with an extensive database of potential
targets accumulated over 45 years. At any one time,
dozens of acquisitions were under active consideration,
ensuring a steady deal flow. Each purchase gave rise to
further opportunities, in other markets.

Courtship in these deals involved a patient and often
long process of familiarisation and coaching. CRH took

Notes and references
1. €1 : £0.8 : $1.3.
2. Earnings before interest, tax, depreciation and amortisation
3. J.P. Morgan Cazenove, ‘On the turn. We initiate on the sector ‘, 21 April

2011, P. 128.
4. Bank of America-Merrill Lynch, ‘Cement Handbook: Time for more

Corporate Strategy.

Week 4: Lecture

Analysing the Strategic Environment.

Environmental Analysis:
– introduction & explanation.
Far Environment & PESTLE Analysis.
– understanding & applying the tool.
Near Environment & Porter’s 5 Forces Analysis:
– competing in the near environment.
Learning Outcomes.

The business environment consists of all factors inside and outside the company, which influence the firm’s competitive success.
(Frynas and Mellahi, Global Strategic Management 3e, 2014)
The business environment can be divided into:
the external macro environment (or: far environment)
the external industry environment (or: near environment)
the firm environment (or: internal environment)
The Business Environment.

FAR
ENVIRONMENT
Little/no influence and no control
NEAR
ENVIRONMENT
Some influence, but less control
INTERNAL
ENVIRONMENT
Strong influence and control
Layers of the Business Environment.
Source: Frynas, J. G. and Mellahi, K. Global Strategic Management

The external business environment of the firm can provide both opportunities and threats to firms.
Opportunities refer to events or processes in the external business environment, which may help the company to achieve competitive success.
Threats refer to events or processes in the external business environment, which may prevent the company from achieving competitive success.
Opportunities and threats.

Strategy can be seen as the matching of the resources and activities of a firm to the environment in which it operates – known as “strategic fit”.
Strategic fit is about developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to take advantage of these.
Organizations, which do not possess minimum degree of strategic fit are bound to fail.
Strategic Fit.

Applied Corporate Strategy.
The Far Environment &
PESTLE Analysis.

Understanding PESTLE.
PESTLE categorises Macro Environment (or: Far Environment) factors into 6 main types:
Political, Economic, Social, Technological, Legal and Environmental.
It is a broad tool or checklist to help managers understand the far environment by identifying strategic opportunities, threats or issues.
A description of factors often given without analysing impact only does half the job. Impact of PESTLE factors is crucial.

The PESTLE Categories.

Political: – Government policies, regulatory rules, trade regulations, political risk.
Economic: – GDP trends, interest & exchange rates, real incomes, unemployment.
Socio-cultural: – demographics, lifestyles, culture & fashion trends.
Technological: – discoveries & technology, ICT innovations, R&D spending.
Legal: – competition, health & employment laws, licensing, laws on intellectual property rights.
Environmental: – green regulations, emissions, energy issues, global warming, waste & re-cycling

Using the PESTLE Framework.
Full PESTLE analysis should comprise:-
Identification – relevant impact factors.
Validation – focus on those factors that have a real impact on strategic issues.
Quantification – test impact & probability.
Projection – foresight and scenarios
Planning – respond to foresight and scenarios
Implementation – you should take action on key strategic threats & opportunities.

Using PESTLE : Factor/Impact.
“Factor/Impact” is key & context changes impact:-
(1). Single organisation effect: E.g Roehampton loses fee income from a political change – allowing for-profit Universities.
(2). More complex when PESTLE changes across many sectors & organisations. E.g. Brexit and the weak pound – positive for UK tourism and some export firms, but negative for retailers and some importers.

Using PESTLE for country selection at Baser Food
United States
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
What advice would you give to Baser Food on country selection for exporting olive oil?
Australia
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
Concern with diet (O)
China
Political:
Corrupt officials (T)
Regulations (T)
Political risk (T)
Economic:
High market growth (O)
Low per cap. income (T)
Trade/currency rates (T)
Social:
Little awareness of health benefits (T+O)
Baser Food was a Turkish company that produced olive oil. The company wanted to expand its exports of olive oil to new international markets.

Key Drivers of Change.
These are factors having a high impact on strategic success or failure. Typically they vary by industry or sector. For example:
Mediterranean cuisine familiarity (social) is a key driver in olive oil sector
The oil price (economic) is a key driver of profitability in the airline industry
ICT innovations and R&D spending (technological) are key drivers for technology companies such as Google

Forecasts versus scenario planning

Scenario is ‘a hypothetical sequence of events constructed for the purpose of focusing attention on causal processes and decision points’.
Scenarios explore possible future events by looking at particular causes and seek to understand and explain why certain events might or might not occur.
Scenario analysis does not try to predict what will actually happen – it tries to identify several possible futures (typically, 2-4 scenarios), each of which is plausible but not assured.
Scenario planning is used mostly (but not exclusively) in industries with long planning horizons.
Scenario planning.

Using Scenario Planning.
2014 EU-wide Banking “stress test”
scenarios were used on European Banks to test capital levels in potential future financial crises.

https://www.eba.europa.eu/-/eba-publishes-2014-eu-wide-stress-test-results
Shell and long-term investments
the global oil company was a pioneer of scenario planning. The link shows how they use it:
http://www.shell.com/global/future-energy/scenarios/40-years.html

Applied Corporate Strategy.
The Near Environment & Porter’s Five Forces.

The Near Environment.
Comprises industries & sectors, competitors & markets where the firm competes for resources & consumers.
Industry/sector structure a key element. Boundaries are fuzzy & can change through industry convergence.
Strategic Groups are relevant – industry competition is dynamic & can change rapidly.

What industry are you in? Consider Ferrari and Ford
A focus on a broad industry may lead to inaccurate understanding of the market and the nature of competition. Indeed, using the word “industry” may be unhelpful because it is very broad.
Firms need to properly understand their industry, which can be achieved by identifying critical success factors and conducting a strategic group analysis.
Understanding your industry.

Industry Analysis.
Defining an industry involves knowing:-
a). customers & their needs
b). who the competitors are
c). the nature of competitive forces
The outcome is “attractiveness” i.e. how profitable the industry is for firms.
“The basic premise (of) industry analysis is that…industry profitability is neither random nor the result of entirely industry-specific influences, but is determined…by the systematic influence of industry structure.” (Grant, 1998)

Critical Success Factors (CSFs).
INDUSTRY factors customers particularly value. They answer: “What do firms in the industry have to do well to succeed?” Grant (1998) gives two keys:-
Industries have different CSFs (e.g. low cost airlines have punctuality & price, full service airlines are about quality of service).
Firms without competitive advantage based on key industry CSFs will not succeed.
What do our customers want?
How do we survive competition?

Strategic Groups.
Strategic group analysis is about identifying firms with similar strategies or those competing on similar bases.
It helps to understand the nature of competition and profitability within an industry sub-group and provides better information about where to invest or what type of strategic action to expect from competitors.
A good predictor of strategic groups are “mobility barriers”, which prevent other firms entering the strategic group and threatening the existing members.
Strategic groups can be mapped as “segments” & can be useful tools of analysis.

Example: Strategic Groups in the global car industry

Understanding Porter’s Five Forces.
Michael Porter suggested that managers must understand the underlying economic and technical characteristics of their industry or strategic group.
The Five Forces Model (1985) is still popular and assumes that industry attractiveness and the firm’s competitive position in an industry are influenced by five competitive forces.
The Five Forces model can be used to analyse a firm’s competitive position in a specific market segment or similar market segments.

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved
The Five Forces Framework.

Barriers to Entry.
Barriers to entry are obstacles, which potential newcomers would encounter when entering the market.
High barriers to entry help maintain a firm’s profitability.
Barriers to entry include:
Capital Requirements
Economies of Scale
Product Differentiation
Access to Distribution Channels
Government Policy
Expected Retaliation

Bargaining Power of Buyers and Suppliers.
Buyers push firms to sell products at the lowest possible price.
Suppliers push firms to buy at the highest possible price.
So both buyers and suppliers can reduce firm profitability.
Their bargaining power depends on:
Buyer/Supplier Concentration
Buyer Switching Costs
Product Differentiation
Price/Total Purchases
Threat of vertical integration
Buyer information
Impact on Quality/Performance
International expansion

Rivalry Between Competitors.
Rivalry encourages innovation, but it also reduces profits. In intensely competitive markets, firms are forced to lower prices or invest in new R&D, just to keep up with competitors; so intense rivalry leads to lower profits.
The intensity of rivalry is influenced by:
Concentration
Diversity of Rivals
Product Differentiation and Switching Costs
Industry Growth
Fixed Costs and Storage Costs
Exit Barriers
Excess Capacity

The Threat of Substitutes
Don’t confuse “Substitutes” with “Competitors”!
A substitute product is a good or service, which buyers regard as interchangeable. If substitutes are available, buyers will switch to substitutes when the price of the product increases (e.g. new plastic for steel; mobile phones vs. land lines).
The existence of substitutes provides a limit as to how much the seller can charge for a product, so the threat of substitutes ultimately constrains the profitability of a firm.
The the threat of substitutes depends on:
relative price performance of a substitute
2) switching costs for the buyer
3) buyer’s propensity to substitute

Issues in Five Forces Analysis.
Apply at the appropriate level – maybe not a whole industry. E.g. European low cost airlines rather than global airlines.
Note the convergence of industries – particularly in the high tech sectors (e.g. digital – phones/cameras/mp3 players).
Note importance of government actions in the near environment. Maybe a 6th force?

The Industry Life Cycle.

Session Summary.
Week 4 Seminar groups will use these ideas to examine the Competitive forces on RYANAIR.
We introduced Environmental Analysis, industry CSFs & Strategic Groups.
We explained the Far Environment, PESTLE analysis & Scenarios.
We explained the Near Environment & Porter’s Five Forces Analysis.

Corporate Strategy.
Week 4: Seminar.
Competitive Forces on RYANAIR.

Wk4 Seminar: Session Plan.
Today’s seminar uses ideas from our lecture to analyse Far & Near Environment issues facing RYANAIR.
Prepare by reviewing Wk4 notes plus Moodle resources on RYANAIR.
Again there will be class group work. Results should be kept for your assessment revision.

Wk4 Seminar: Session Brief.
The Brief:- (choose one question)
1. Define Ryanair’s industry. What are the key Critical Success Factors (CSFs) in that industry which Ryanair must address?
2. Undertake a PESTLE analysis on Ryanair in the current environment. Which are the most important Factors & Impacts?
3. Apply Porter’s Five Forces analysis to Ryanair’s industry. Which forces have the most impact on their business model?
Form groups (5/6) to answer the brief. You have 40 mins to produce a flip chart for class sharing.

Corporate Strategy.

Seminar Resources.

This handout contains reminders about industry CSFS, PESTLE analysis and Porter’s 5 Forces. Support material in slides and notes are in Wk4 plus RYANAIR resources. There are lots of web sources too e.g:

http://www.thedrum.com/news/2014/11/13/higher-plane-how-ryanair-refined-its-tone-voice-and-improved-customer-experience

Reminders: CSFs, PESTLE, & 5 Forces.

These three sets of ideas are relevant for the Wk4 seminar questions.

1). Industry Critical Success Factors (CSFs).

These are INDUSTRY factors customers particularly value and where an organisation must excel to prosper. They answer the question: “What do firms in this industry have to do well to succeed?” Grant (1998) links them to two key aspects:

i). What do our customers want? ii). How do we survive competition?

2). The PESTLE Categories.

· Political: e.g. Government policies, regulation, trade rules, political risk.

· Economic: e.g. GDP trends, interest & exchange rates, unemployment.

· Socio-cultural: e.g. population, lifestyles, culture & fashion.

· Technological: e.g. discoveries & tech developments, ICT innovations.

· Legal: e.g. competition, employment, health & safety, employment.

· Environmental: e.g. green rules, emissions, global warming, waste.

3). Porter’s 5 Forces.

Coursework Report Review: Worksheet.

Organisation:

Q1. Strategic Issues.

Issue 1: (PESTLE)

Issue 2:

(5 Forces)

Issue 3: (Advantage)

Q2. Strategic Capability & Advantage.

Industry?

CSFs?

Unique Resources

(what do they have?)

Unique Capabilities

(what can they do?)

Links to Advantage.

(map to CSFs?)

Q3. Evaluation & Improvement.

Which Porter Generic?

Evaluation – Suitable?

(to the environment)

Evaluation – Acceptable?

(to key stakeholders)

Evaluation – Feasible?

(is it possible?)

How to Improve the Strategy?

(Ideas?)

Corporate Strategy.

Week 6: Lecture

Analysing Strategic

Capability.

Resource-Based View:
– introduce what the RBV is.
Foundations of Strategic Capability:
– understand resources & capabilities.
VRIN Analysis & Advantage:
– see how VRIN tests capabilities.
Learning Outcomes.

Just as the external business environment is important (opportunities and threats), managers need to understand the the internal firm environment: the unique strengths and weaknesses of their firm relative to their competitors.
Internal Business Environment.

doing things
When Google entered the search engine market in 1998, there were many established rivals, e.g. AltaVista, HotBot, Lycos, Yahoo! etc.
But Google did not care much about competition. From the start, Google was happy to be different, i.e. different strategies & products.
From 2003, Google diversified into various industries such as Android phones, self-driving car project, Google glass etc.
Watch this video on Google history:

diFFerently

Strategic fit is about developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to take advantage of these.
Strategic stretch is about identifying and leveraging the resources and competencies of the organization to yield new opportunities or to provide competitive advantage.
The contrast between strategic fit and strategic stretch exemplifies different views on how firms should compete in global markets.
Strategic Fit versus Strategic Stretch.

Resource-Based View of Strategy.
The RBV says that advantage and superior performance stem from the distinctiveness of what firms can do.
Positioning View: the business opportunity should be the starting point for developing successful strategies.
Resource-Based View: unique firm resources should be the starting point for developing successful strategies.
The RBV suggests that firms differ in their bundles of resources and what they can do – their capabilities.

Firms have resources and capabilities.
Resources are all assets, capabilities, organizational processes, firm attributes, information, knowledge, patents, real estate etc. controlled by a firm.
Capabilities are complex bundles of skills and collective learning, exercised through organizational processes, that ensure superior coordination of functional activities.
The Components of Capability.

Competence as Tree Metaphor.

Resources versus Capabilities.

Threshold & Distinctive Capabilities.
Threshold Capabilities are those needed to meet necessary requirements to compete in a given market & achieve parity with competitors – ‘qualifiers’.
Distinctive (Unique) Capabilities are those that critically underpin competitive advantage & that others cannot imitate or obtain – ‘winners’.

Threshold & Distinctive Capabilities.
(Note this for our seminar analysing the James DYSON case!)

Identifying Resources & Capabilities.
Capabilities: different ways to identify:-
1). Kay (1993) – Architecture, Reputation, Innovation.
2). Functional Areas: e.g. Marketing, Distribution etc.
3). Value Chain: analyse through primary & secondary activities
How do we identify these for an organisation?
Resources:
1). Grant’s (1998) three categories of Tangible, Intangible & Human to analyse.
2). SWOT can identify resources too.

Managers must understand the economic value of the different activities that a firm performs.
Value added is the difference between the cost of inputs and the market value of outputs; it is the value that a firm adds to its bought-in materials and services through its own production and marketing efforts within the firm.
The Concept of Value Added.

Example: Product value of South African grapes
Source: Frynas, J. G. and Mellahi, K. Global Strategic Management 3e (Oxford University Press, 2014)

Value Chain Analysis.
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved
Value chain analysis depicts the main activities inside the firm and aims to reveal the relative value added amongst the different parts of the firm’s operations.
Undertaking a value chain analysis helps the firm to understand its cost position and to identify its competitive strengths.

Simplifed value chain for South African fresh fruit and vegetables

Core Competences.
Core competences (Hamel & Prahalad, 1990) are the linked set of skills, activities & resources that, together:
deliver customer value
differentiate from competitors
potentially, can be extended & developed as opportunities arise.

Understanding Advantage

Competitive Advantage is:
“The ability to outperform rivals on significant CSFs, thus earning superior returns.” (Grant, 2013).
Porter (1985): “There are two basic types of competitive advantage: cost leadership and differentiation.”
Kay (1993): advantage is delivered by distinct capabilities & strategic assets.

VRIN Analysis & Competitive Advantage.
4 criteria to assess capabilities as a basis of achieving sustainable competitive advantage are:
value,
rarity,
inimitability and
non-substitutability

VRIN Criteria for Testing Capabilities.

V – Value of Strategic Capabilities.
Strategic capabilities are of value when they:
enhance opportunities & neutralise threats,
provide value to customers
provide potential competitive advantage at a cost that allows an organisation to realise acceptable levels of return.
The question of value: Do a firm’s resources and capabilities enable it to respond to environmental threats or opportunities?

R – Rarity.
The question of rarity: Do capabilities exist that no (or few) competitors possess?
Rare capabilities are those possessed uniquely by one organisation or by a few others only.
(e.g. a company may have patented products, have supremely talented people or a powerful brand.)
Rarity could be temporary.
(e.g.: patents expire, key individuals can leave or brands can be de-valued by adverse publicity)

I – Inimitability.
The question of inimitability: Is a resource or capability difficult for competitors to imitate?
Inimitable capabilities are those that competitors find difficult to imitate or obtain.
Advantage can be built on unique resources – e.g key individuals – but may not be sustainable (key people can leave!).

N – Non-Substitutability.
The question of non-subsitutability: Is the risk of capability substitution low?
Competitive advantage may not be sustainable if there is a threat of substitution.
This can be product or service substitution from a different industry/market. E.g. postal services partly substituted by e-mail.
Competence substitution. For example, a skill substituted by expert systems or IT solutions

Example: Business model of the clothing retailer Zara
Source: Frynas, J. G. and Mellahi, K. Global Strategic Management 3e (Oxford University Press, 2014)
Zara’s success in achieving extremely fast product cycles was supported by in-house textile manufacturing subsidiary and close relationships with sewing workshops in Spain

Session Summary.
Week 6 Seminar groups will examine Strategic Capability at James DYSON – the British vacuum cleaner maker.
We introduced & explained what the Resource-based View of Strategy is.
We examined Resources & Capabilities plus how to identify them.
We explained VRIN analysis of capabilities & links to advantage.

Corporate Strategy.
Week 6: Seminar.
Resources, Capability & Advantage at DYSON.

Wk6 Seminar: Session Plan.
Today’s seminar uses ideas from Wk6 to analyse Strategic Capability at DYSON
Prepare by reviewing Wk6 notes plus Moodle (and your own researching) for DYSON case material.
Again there will be class group work. Results should be kept for your assessment revision.

Wk6 Seminar: Session Brief.
The Brief:- (choose one question)
1. What is Strategic Capability? Use these ideas to analyse the Threshold/Distinctive Resources & Capabilities at DYSON.
2. What are Strategic Resources? Use Grant’s 3 types to analyse DYSON’s resources. Which create most advantage?
3. What are Strategic Capabilities? Analyse DYSON’s Distinctive Capabilities & show where on the Value Chain these lie.
Form groups (5/6) to answer the brief. You have 40 mins to produce a flip chart for class sharing.

Corporate Strategy.

Reminders: Strategic Capability, Resources & Value Chain.

Strategic Capability.

RESOURCES

CAPABILITIES.

Threshold Capability:

Required to be able to compete in a market.

Threshold Resources.

Threshold Capabilities.

Distinctive Capability:

Required to achieve competitive advantage.

Distinctive Resources.

Distinctive Capabilities.

Resources

TANGIBLE

INTANGIBLE

HUMAN

· Financial

· Physical

· Technological

· Reputational

· Cultural

· Specialised skills & Knowledge.

· Communication & Interactive Abilities

· Motivation

The VRIN Model.

11/16

Corporate Strategy.

Week 3: Lecture

Organisational Purpose & Stakeholders.

Organisational Purpose:
– understanding vision, mission & objectives.
Governance and Corporate Social Responsibility (CSR):
– unpacking systems and non-economic influences.
Stakeholders – scope and analysis:
– links to strategy via power/interest.
Learning Outcomes.

Organisational Purpose & Objectives.
It’s tempting to focus on “How”, while minimising “What” – and “Why”.
Think of examples from Lecture 1:
Kodak – “How do we make better film for cameras?”
Nokia – “How do we make better mobile handsets?”
BUT as Peter Drucker observed:-
“That business purpose & business mission are so rarely given adequate thought is perhaps the most important cause of business frustration and failure”.
(from: Management: tasks, responsibilities, practices, 1973)

Pyramid of Purpose.
These can be extended i.e.“Management by Objectives” cascading down plus further links to strategy via “Balanced Scorecard” metrics & SMART tests at operational levels
(SMART = Specific, Measurable, Attainable, Relevant, Time-based)

Level 1: WHY?
Vision, Values,Mission
Level 2: WHAT?
Goals & Objectives.
Level 3: HOW?
Strategy & Action.
Level 4: WHO?
People, Systems & Resources.

The Vocabulary of Objectives.
Objectives are statements of specific outcomes to be achieved.
They can be expressed in: financial, market & increasingly social terms.
BUT – there can be confusion with Goals, Aims, Objectives, Targets. They should all be as SMART as possible!

Vision & Mission Statements.
Vision concerns the desired future state of the organisation; an aspiration to enthuse, motivate & stretch.
It’s question is: ‘What do we want to achieve?’
Mission aims to provide clarity on the overriding purpose of the organisation
It’s questions are: ‘What business are we in?’ ‘How do we make a difference?’ ‘Why do we do this?’

Some Tech Company Missions.
Facebook: to give people the power to share & make the world more open and connected.

Google: to organise the world‘s information & make it universally accessible & useful.
Microsoft: to enable people & businesses throughout the world to realize their full potential.
Skype: to be the fabric of real-time communication on the web.

Influences on Purpose.

Governance & CSR.
Corporate governance:
structures and systems of control holding managers to account to those who have a legitimate stake in an organisation
Corporate social responsibility (CSR):
‘the responsibility of enterprises for their impacts on society’ (official definition of the European Commission in Brussels)

Ownership structure Dispersed Concentrated, interlocking pattern of ownership between banks, insurance companies, and corporations Concentrated in either the hands of owner-mangers or the wider circle of employees in joint-stock corporations Highly concentrated; recent tendency to more dispersed ownership Highly concentrated in state-owned companies; fairly concentrated in private enterprises Highly concentrated ownership by family owned business groups; wave of privatization since 1990 has reduced state ownership
Ownership identity Individuals
Pension and mutual funds Banks
Corporations
State Owner-managers
Employees
State Families
Foreign investors
Banks State
Families
Corporations Family owned business groups
State
Changes in ownership Frequent Rare Frequent, but decreasing tendency Traditionally extreme rare, but recently changing Rare, but increasingly dynamic Rare
Increasing influence of foreign investors
Goals of ownership Shareholder value
Short term profits Sales, market share, headcount
Long term ownership Profit for owners
Long term ownership Long term ownership
Growth of market shares Long term ownership
Sales, market share Long term ownership
Profit for owners
Board controlled by Executives
Shareholders Shareholders
Employees Owner-managers
Other insiders Owners
Other insiders Owners
Party/the state Owners/
shareholders
Key stakeholders Shareholder Owners
Employees (trade unions, works councils) Owners
State Owners
Customers in overseas markets Owners
Guanxi-network of suppliers, competitors and customers (mostly) in overseas markets Owners
Customers in overseas markets

Anglo-American
Rhenish Capitalism
Russia
India
China
Brazil
Different Corporate Governance Systems.

purpose of the corporation to maximize shareholder wealth, underpinned by company law and corporate reliance on stock market financing
US stockholders: emphasize short-term transactions and dividends
clear link between earnings per share and stock prices
if managers fail to emphasize short term profits and stock prices fall, the managers loose personally
if companies are undervalued on the stock market, they are vulnerable to takeovers
Corporate Governance System in the USA.

Greater focus on stakeholders within the keiretsu
Japanese investors: less volatile than US investors
Companies do not pay dividends as % of profits
Japanese managers do not have stock options compensation plans
Consistent dividends reassure the Japanese stockholder of a company’s health
Stockholders are not the most important stakeholders
Lack of outside directors to look out for the welfare of the stockholder
Thus: a different strategy approach that allows long-term relationships
Corporate Governance System in Japan.

There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits.
(Milton Friedman)
Traditional view of business responsibility.

The idea of profit at any cost is something that is past its time.
Ralph Shrader, Chairman/CEO, Booz Allen Hamilton
In a 2008 McKinsey Survey of 2687 executives, 16% agreed with Friedman that high returns should be a firm’s only focus, 84% said that high returns to investors should be accompanied by broader contributions to the public.
In a 2013 survey of 1000 global CEOs from 107 countries by Accenture, 93% of CEOs believed that sustainability will be important to the future success of their business.
Is the traditional view past its time ?

In 1988, 18% of FTSE 100 companies had an ethical code of practice.
In 2006, 90% of FTSE 100 companies had an ethical code.
In 2002, 45% of Global 250 had a CSR report.
In 2015, 92% of G250 had a CSR report.
In 2011, 20% of India’s 100 largest companies had a CSR report.
In 2015, 100% of India’s 100 largest firms had a CSR report.
Growth of CSR in the UK and world-wide.

UK
key source of pressure: public opinion & NGOs
role of government: effective regulation and social welfare
little spending on CSR activities in UK
key issues: climate change, cultural sponsorship
Nigeria
key source of pressure: local communities & government
role of government: ineffective regulation and social welfare
hundreds of millions on social investments by oil companies
key issues: local communities, social investments, infrastructure
Example: UK versus Nigeria.

Example: China versus UK on animal rights.

The European Commission simply defined CSR as ‘the responsibility of enterprises for their impacts on society’.
It may be useful to think of CSR as an umbrella term for a variety of views and practices all of which recognize the following:
that companies have a responsibility for their impact on society and the natural environment, sometimes beyond legal compliance and liability of individuals;
that companies have a responsibility for the behaviour of others with whom they do business (e.g. suppliers);
that business needs to manage its relationship with wider society, whether for reasons of commercial viability or to add value to society.
Blowfield / Frynas CSR definition.

Responsibility in global supply chains

Stakeholders – Scope & Analysis.
Stakeholders: individuals/groups who depend on an organisation to fulfil their goals & on whom, in turn, the organisation depends.
OR:
Individuals/groups who affect, or are affected by, the operations of an organisation in achieving its goals.
Stakeholder Mapping: useful in analysing strategy – identifies stakeholder power, expectations & political priorities.

Stakeholders of a large organisation.

Key stakeholders for Shell International in London
What about subsidiaries of the multinational firm?
For example, the Shell subsidiary in the United States or Shell in Nigeria faces many different “stakeholders”.
CSR issues can differ widely between different subsidiaries of the firm.

Stakeholders of a large multinational firm.

Stakeholder Mapping Issues.
Whose expectations need to be prioritised?
Do actual levels of interest & power reflect the governance framework?
Who are the key strategic blockers & facilitators?
Should we try to reposition certain stakeholders?
Can levels of interest or power of key stakeholders be maintained?
Will stakeholder positions shift according to the issue/strategy being considered?

Stakeholder Mapping:
The power/interest matrix.

Session Summary.
Week 3 Seminar groups will use the stakeholder mapping tool to examine the BAE/EADS merger case.
We explained the importance and key elements of Organisational Purpose.
We unpacked Governance/CSR and their links to strategy development.
We examined the stakeholder idea and discussed mapping of relevant of stakeholders.

Corporate Strategy.
Week 3: Seminar.
Stakeholder Analysis at BAE/EADS.

Airbus website: http://www.airbus.com/

Wk3 Seminar: Session Plan.
Today’s seminar uses Wk3 ideas to analyse & map stakeholders plus their affect on the failed 2012 merger between BAE & EADS.
Prepare by reviewing Wk3 notes plus Moodle for case material.
Again there will be class group work. Results will inform your assessment task.

http://video.cnbc.com/gallery/?video=3000121186

Wk3 Seminar: Session Brief.
The Brief:- (choose one question)
1. Identify the key strategic issues facing BAE & EADS in their merger proposal. Why were they “strategic”?
2. Use the Power/Interest matrix to carry out a Stakeholder analysis on the BAE/EADS merger case. Identify & map the main players.
3. Use course ideas to establish the Strategic Purpose of BAE/EADS for its merger proposal. Which Stakeholders were opposed & why?
Form groups (5/6) to answer the brief. You have 40 mins to produce a flip chart for class sharing.

EADS and BAE Systems
– thanks to Vlad for these seminar slides.

Q1: Identify the key strategic issues facing BAE & EADS in their merger proposal. Why were they “strategic”?
Long-term
French and German governments’ loss of control
German job losses
UK relationship with USA
EADS: heavy reliance on Airbus
EADS: entry to US defence market
BAE: coming back to Airbus (currently heavily reliant on defence)
BAE might lose some work to Spanish companies (competitive position)
Complex (various governments involved)
Strategic importance for a number of governments (defence): US government concerns about German and French involvement with US defence contracts
Cost savings and synergies
Negative cycle for both civil aviation and defence sometimes coincide

Stakeholder Mapping:
the power/interest matrix.

Q2: Use the Power/Interest matrix to carry out a Stakeholder analysis on the BAE/EADS merger case. Identify & map the main players.
Competitors (Dassault & Thales)

EADS & BAE Shareholders
US government and Boeing

French government
German government
UK government
EADS Management
BAE System management
Trade unions

Low Interest High
High Power Low

Pyramid of Purpose.
These can be extended i.e.“Management by Objectives” cascading down plus further links to strategy via “Balanced Scorecard” metrics & SMART tests at operational levels.

Level 1: WHY?
Vision, Values,Mission
Level 2: WHAT?
Goals & Objectives.
Level 3: HOW?
Strategy & Action.
Level 4: WHO?
People, Systems & Resources.

Q3: Use course ideas to establish the Strategic Purpose of BAE/EADS for its merger proposal. Which Stakeholders were opposed and why?
Why? To compete with Boeing and to reduce reliance on Airbus (civil aviation)
What? Simplify the governance. Get defence contracts in USA.
How? Merger with BAE Systems
Who? Governments, EADS and BAE management and employees
Opposed stakeholders:
French and German government
BAE shareholders (Invesco perpetual)

BAE Systems
Vision: “To be the premier global defence, aerospace and security company”.
Mission: “To deliver sustainable growth in shareholder value through our commitment to Total Performance”.

Source: http://www.baesystems.com/en/our-company/about-us/our-culture

EADS (Airbus Group)
“We aim to remain a leader in commercial aeronautics and defence and space markets”.
Source: http://www.airbusgroup.com/int/en/group-vision.html

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