Instructors Manual

CASE TEACHING NOTES

SABMiller
Aidan McQuade and Gerry Johnson

1. Introduction
This case study provides students with the opportunity to consider how the corporate logic of a business has evolved in response to the pressures of stakeholders in the external environment and to consider what are the strategic options facing the business now. It provides extensive extracts from the companys reports and website, charting its historical development and reviewing its activities around the world. Students can use this material to gain insights into SABMillers strategic decision-making and corporate logic over the years and to consider what are the strategic issues and options facing the company now.

2. Position of the case

This case provides the opportunity for a consideration of options development in relation to corporate strategy, and to reflect upon how such options are developed from matching external threats and opportunities with internal competences and capabilities. It is probably suited to the middle to later stages of a strategy course.

3. Learning objectives
The prime purpose of the case is to exemplify how the external environment and internal competences of an organisation influence the formulation of strategy in a corporation. It shows how the external environment influenced the evolution of corporate logic in the organisation and how internal competences have both influenced and been affected by the choices of corporate logic. Further given the position that the company finds itself in now the case allows students to consider where the business should go from here and discuss the implications of a range of strategic options. Study of the case should involve students in understanding aspects of macro environmental influences, competitive structures of markets (chapter 2 of ECS), organisational competences (chapter 3), and stakeholder expectations (chapter 4). They should find that the insights from such an analysis may raise conflicting forces at work on the organisation. In turn, they should consider how strategic options are formulated to respond to such demands (chapter 7), and the role and importance of environmental scanning (chapter 2) and organisational flexibility (chapter 8) in ensuring business survival and growth.
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4. Teaching process
This case study could be taught in a variety of ways. For example: Student groups could be briefed to consider the different aspects of the strategy process. For example, consideration of the competences required to manage the survival and growth of the organisation from the apartheid period, or the competences required to manage a multi-business corporation in developing countries compared to western countries. As a straightforward class discussion orchestrated by the instructor around analysis of the strategic development of the organisation and its future options, or in comparison with another major brewer such as Southern and Newcastle, or Anheuser-Busch.

5. Questions
1. Identify the corporate logics that SABMiller have adopted over the course of the case. 2. a) Explain the strategic position that South African Breweries finds itself in 2004. b) Explain the implications of its current strategic position for the future of SABMiller. c) On the basis of your analysis, recommend the strategy that South African Breweries should follow

6. Case analysis
6.1 Corporate logic SABMiller has shown a remarkable flexibility in its organisation and operations since its inception. Its establishment in the Johannesburg gold fields was the result of the recognition of the huge market potential that the mining communities provided to the company. Over the subsequent decades it came to dominate the beverage industry in South Africa and establish a very strong position in Southern Africa. Parts of the development during this period showed a synergy management logic acquiring wineries and glass manufacturers for example. Yet, as growth was further constrained by the external environment, particularly by the sanctions campaign against apartheid, this reduced the purely synergetic investment opportunities for the business both regionally and globally. Consequently a shift from a corporate logic of synergy to one of portfolio management occurred with SAB acquiring the ownership of businesses as diverse as furniture and safety matches. With the ending of apartheid a range of new growth opportunities opened up and initial opportunities were taken up in Southern Africa, markets which SAB already had
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considerable knowledge of. The 1990s therefore saw SAB shift its corporate logic again to one of parental development and a renewed focus on the brewing business. 6.2(a) Strategic position The case provides an opportunity for students to consider the strategic position for SABMiller in terms of its capabilities and competences, the business environment it faces, and stakeholder expectations. A good deal of this is fairly explicit in the case study but needs pulling together; in addition some of the important factors will require students to make judgements beyond that which is written in the case. However, they might come to a view that can be summarised as follows:
Business environment

In terms of business environment, SABMiller is now operating worldwide. As noted above, its origins are in developing countries and its growth has come through entering developing markets, acquiring businesses and brands, and growing them. Clearly the market conditions and potential for growth vary considerably by market; however, the strategy has seemed to yield healthy growth in the past in most of the markets in which it has entered.
South Africa

South Africa still provides a substantial proportion of the sales and profits of SABMiller. However, the students will see that despite the companys positive views about their position here, there are some very real threats in terms of macro environmental trends, not least of which is the HIV/AIDS pandemic in the country and the threat that poses both to the operations of the company itself and also to the wider economy. So the home market is under threat.
The rest of Africa

The rest of Africa has also been something of a success story for SABMiller but is clearly a somewhat volatile set of markets. This is one of the reasons, presumably, why it has sought growth outside Africa. Certainly, however, the competences learned in the marketing of its products and developing markets was honed in African countries and has proved most useful elsewhere. Students may wish to debate the extent to which these markets will provide substantial growth in the future. They might also wish to consider the potential risks and returns associated with doing business there and consider if the company is over-exposed or if the breadth of its operations across so many countries offers some risk protection for the firm.
Asia and Eastern Europe

The common characteristic of both of these regions is the underdeveloped nature of the beer market. The markets remain fragmented in terms of competition, with indigenous breweries being relatively inefficient. This has provided SABMiller with a major
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opportunity for growth, which it has taken. Arguably the competences learned in Africa, both in terms of trading in developing markets and in terms of acquisition of breweries, have proved especially useful here. Efforts at expansion in China in 2004, through a proposed hostile takeover of Harbin Brewery, had to be abandoned in the face of fierce competition with Anheuser-Busch, though analysts are puzzled that both offered so much cash for a brewer in a market, which, while the worlds largest beer market by volume, is known for its tiny margins. Perhaps both Anheuser and SABMiller are banking on margins improving as the Chinese economy develops further and this being a critical long term market to be in.
Western markets

The principal problem with the approach focusing on emergent markets thus far has been that much of the companys profits have been in soft currencies leading to shareholder concern about the overall robustness of the business. It would appear that stakeholder expectations, in terms of the institutionalised investors the company is now dealing with following its London listing, seemed to be push it towards a re-focus on Western markets though this may have been pushing an open door with SAB. The expectation appeared to be that it needed to retain its overall world position by developing in the West, and this through a major acquisition. The acquisition of Miller can be seen as an effort to offset these questions regarding the firm. Unfortunately Miller has had to be subject to significant turnaround efforts, appearing, at time of writing, to have succeeded in part because of a new health fad in the US for low carbohydrate diets leading to a boost in sales of Miller Lite. Whether success can be maintained remains to be seen. The beer markets in Western Europe and America are very different from those in developing countries. The markets are more concentrated and saturated in terms of consumption. So while the business formulae that have worked in developing markets may work here, it is possible that, due to the nature of the market, they will not work as profitably as they would in other parts of the world. With such a large part of SABMillers operation now in the highly competitive US market to satisfy the demands of money markets this has created medium term problems for SABMiller and leaves a longer term question: has this perhaps distracted, and will it continue to distract, from focus on more profitable growth in other less developed markets?
Strategic capability

In terms of the companys resource base and competences, students might emphasise the following: Since its inception SAB has demonstrated particular competences in environmental scanning and developing strategic options to respond to an extremely difficult external environment. The moving of corporate headquarters from London to Johannesburg in 1950, the introduction of a non-discriminatory code of employment

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in 1978, and the preparation of complex defensive investment structures for deployment in 1985 in response to economic sanctions, indicate not only a sophisticated appreciation of the contemporary competitive and contextual environments, but also an appreciation of and preparation for a range of possible futures. From the introduction of apartheid in the aftermath of the Second World War until its dismantling SAB may be seen to be making strategic choices aimed at ensuring its survival and with maximising its potential for growth into the future. The shifting of primary listing back to London is a further example that this competence still pertains. With a shift in strategic focus from surviving as a South African firm to growing as a global one the firm had to move to a location where it could raise the funds it needed to facilitate this. However, as noted above and demonstrated in the case, this has brought with it a whole new set of stakeholder expectations. The emergence of the company onto the global market, particularly with the acquisition of Miller, has led to a reframing of what it means by parental development from seeing itself as adding value in emerging markets (Julie Corkish, 2002) to a turnaround specialist (Graham Mackay, 2004). This indicates a competence that the company has had to develop as it moves forward into the 21st century improve its abilities to manage the Western money markets, by putting its competence in terms that are understood in New York and London, and acquiring businesses in markets that interest it more. A further competence that the company displays is a culture of flexibility amongst its managers. Some would argue that the sort of managerial initiative that would hire a local fire brigade to ensure beer production during a breakdown in water supply is typical of a business that developed in the trying physical and political environments of Africa. As is also discussed in the previous section SABMiller executives have faced a range of challenges from micro to macro levels. As a result they are unlikely to be fazed by the challenges of emerging markets and have maximised return on this competence and reinforced it within the business by their ventures in Eastern Europe and Asia.

And at the corporate level the company has developed competences in the acquisition of breweries that allow it to exercise the business-level competences that it has. SABMiller has demonstrated strong value-adding parenting capabilities. These have been particularly apparent, as in reducing inefficiencies in operations, including changing work practices in Miller; but there has also been value addition in marketing. The delicate balance between brand loyalty and choice is demonstrated in Southern Africa, for example, by the retention of existing brands in the breweries the company has acquired in the region. Namibians can still buy Windhoek lager; Zimbabweans can still buy Zambesi. Many of these products are available across the region with the faade of choice thinly veiling SABMiller market dominance. However, the reduction in Miller brands on the US market demonstrated SABMillers appreciation that the development of brand loyalty required some reduction of choice.

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SABMiller has much less experience or expertise in Western markets, either at the business level in terms of competing in such markets, or at the corporate level in acquiring major firms operating in the Western market. However, its executives seem to bring with them a flexibility and tough mindedness which they feel is applicable in any circumstances. The acquisition of Miller has led to significant difficulties for the company associated with trying to turn the business around. It is worth considering if it has been distracted from the most profitable use of its competences by the demands of stakeholders to undertake such a high profile acquisition of a Western brewery rather than continue their focus on emerging markets. 6.2(b) Strategic options and evaluation The analysis of the strategic position of the case therefore leads to a set of strategic options that the students can evaluate using standard criteria. In so doing they are likely to find there is no easy answer. Traditional competences seem to point to solutions in one direction; shareholder expectations seem to point in another and perhaps environmental/market opportunities to yet another. The summary chart in Figure 1 suggests as much. (Of course, students should not be allowed to get away with simple ticks and crosses as here; they are merely used here as shorthand.) Consolidation: i.e. reducing the risks associated with the more developed markets South Africa, Europe and the US while ensuring as firm a base as possible in emergent markets (reducing risk in vulnerable regions/markets, improving efficiency further, etc.). This would certainly seem feasible particularly given SABMillers competence in developing efficient operations, but may negate the advantages of past competences which have been developed in response to obtaining business success in risky markets. There are some further problems here. The many risks associated with HIV/AIDS in South Africa as well as the rest of the developing world are out of the control of SABMiller. Furthermore while it is undoubtedly possible to improve the companys position in developed markets these improvements may be quite marginal. Now that SABMiller has made its major Western acquisition it is not clear what further growth pressures may be put on the business by shareholders, though the risk would remain that if it fails to grow itself it may become a target for takeover.
Figure 1
Suitability Past success Options * Consolidation X (but ? in SA) X Future growth Feasibility Acceptability

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* Product and development * Market development Africa Asia/E Europe * Western markets * Diversification * Joint venture * Sell

? X ? ? ? ? X

? ? X ? ?

Product development, i.e. new beer products and transference of beer products and brands between markets. This builds on what the company has been doing so far. It has been launching new varieties of beer and developing existing varieties. It has also been transferring brands across different markets and regions, for example selling different brands of southern African beer across the region. It could carry on doing so and it could expand using existing channels to introduce brands from across the world to new markets. However, this too may not provide the company with the sort of growth that is now being expected of it and it may underestimate the importance of brand loyalty across the world. Market development/Africa, i.e. entering further countries and extending the penetration in existing countries. This certainly builds on past competences and success, and is likely to be feasible. But it is not clear how well this might meet expectations for growth. Once highly promising markets such as Zimbabwe are looking extremely depressed now, and the threat of HIV/AIDS to economic growth and political instability in Congo and Nigeria may also cause continent wide economic disruption. Market development/Asia/Eastern Europe, i.e. developing further the strategy already under way to enter developing markets outside Africa. This builds strongly on the strategy that has been followed over recent years. It seeks to apply the competences built up in African developing markets to developing markets elsewhere. It has been largely successful because it provides an opportunity to improve efficiencies and introduce better brand marketing. Arguably it is a strategy that can be continued and developed. The extent to which it can provide the sort of growth expected of SABMiller is unknown. China, while the biggest beer market in the world by volume, is infamous for the tiny margins on sales. Investment in this area may be critical for long term growth, but may require a great deal of patience before it rewards investment. An interesting question is, even if it could, would it satisfy the expectations of shareholders and particularly institutional investors, following their insistence on the need for hard currency growth? Is it possible that the firm could convince such investors that it would be more sensible to focus on developing rather than saturated markets? With a presence in the new countries of
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the European Union, Eastern Europe could provide an alternative access route to the markets of Western Europe over buying Western brewers. This would be a different business strategy to the one followed by SABMiller until now, of development of local breweries. Market development: Western markets, i.e. developing further presence in Western Europe and America. While heavy expectations were put on SABMiller following its listing on the London Stock Exchange to acquire a major Western brewer, the initial foray into the US market has been perhaps more trying than all anticipated. While it appears at the time of writing that the company has succeeded in a turnaround of Miller, it is questionable whether it or its shareholders would wish it to invest the same effort in acquiring new presences in Western markets for the returns that could be expected. Diversification: i.e. a move away from a reliance on brewing towards, for example, distribution and retailing (the company is already operating in hotels). This is not the strategic thrust of the firm as it stands, though that is unlikely to worry it in itself as it has a history as a much more diversified corporation. In recent years it has consolidated more and more around brewing, so diversification may be regarded as a shift back towards a corporate logic of portfolio management. As noted above this flexibility in adoption of corporate logic could be regarded as a competence of the firm. However, it is questionable whether the firm would want to go back towards an approach that was essentially forced upon it by outside events. Nevertheless, it might be tempting in terms of future growth requirements, though it is a strategy that was followed by many brewers in the 1980s with little success. They would certainly seem to have the resources available to allow them to do this, but it could confuse their investors, who would see them slipping down the path of unnecessary diversification in areas where they have little competence. A joint venture with a major Western brewer. There is a case to be made for a joint venture with an established Western brewer. The logic of such a joint venture, presumably, would be that SABMiller could bring to bear its expertise and position in developing markets to the benefit of the Western brewer, and the Western brewer could bring further entry points for SABMiller brands into Western markets. Clearly this would build on existing competences and resources. However, having gone through the pain of acquiring Miller and turning it around it may be of less advantage now to SABMiller than before it made a major Western acquisition. Students may further ask to what extent this would achieve the growth objectives of the firm and therefore satisfy investors; and they may also be concerned at the extent to which, in the end, it may risk SABMiller being taken over by a joint venture partner, who may well still know its way around Western capital markets rather better than SABMiller. Sell, i.e. be acquired, presumably, by one of the other major brewers. Unlike most of the other major brewers (all Western), SABMiller offers a market presence to them and a set of competences that they do not have. It would be a significant opportunity for a major brewer to obtain a substantial position around the world. It might also be

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attractive to investors, who would see SABMiller realising a healthy return for its shareholders. However, it is questionable whether it would be acceptable to the existing management. 6.2(c) Recommendations There is, of course, no right answer to this case study, but the whole point is that students should be required to discuss and debate the various options. The instructors role should be to get them to persevere with relating their analysis to those options and perhaps whittling the list of options down to a few. The options are, of course, not necessarily mutually exclusive; so students may come to the view that a mix of options is the most sensible way forward. After all, they might argue that it would be very unwise for SABMiller to jeopardise its skills or position in developing markets. But it does seem to need to gain a greater presence in the West.

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