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Case 5 Reinventing San Miguel Corporation

Analysis Prepared by Group 5:

Espinosa, Melissa Katherine Magtibay, Roxanne
Francisco, Marvin Nito, Orenz
Importante, Marlyn Rosapapan, Jennifer

Synthesis

Established in 1890 as a brewery company, San Miguel Corporation (SMC) is
Southeast Asias largest publicly-listed food, beverage, and packaging company.
Beer is the flagship product of SMC. However, the success of SMCs main liquor
brand has also become its main challenge. With its large market share, San
Miguel Beers volume sales were expected to continually post a slower growth
rate of just four percent per annum in the near term.

In 2007, during the annual stockholders meeting, Eduardo Cojuangco, the chief
executive officer (CEO) of SMC, made an announcement that the company
would reverse its international expansion plans and would shift its strategy to
diversify into non-allied businesses in the Philippines. This diversification strategy
includes investment in the energy, mining, infrastructure, and public utilities
industries. SMC then sold its international assets and acquired shares in power
distribution firm Meralco and oil firm Petron. SMC also forayed into
telecommunications industry. SMCs management termed its acquisitions as
reinventing, but its new vision did not appease the analysts. This has resulted
into a decline of the companys stock price. By the end of 2009, SMCs
reinvention remained far from complete. The companys successful acquisitions
masked its numerous failed attempts to expand and acquire other companies. As
CEO of SMC, Cojuangco now needs to evaluate whether or not SMCs
aggressive diversification strategy into non-allied businesses was indeed the
right step for the company.

Point of View

SMC chief executive officer Eduardo Cojuangco.

Statement of the Problem

What business strategy should SMC use in order to continuously increase its
market share and growth?

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Statement of Objectives

1. To revisit SMCs goal and ensure that it continues to reflect the companys
overall business strategy.
2. To assess and reinvent SMCs overall business strategy, enhance and
continue vertical diversification athwart its interest for the growth of their market
share.
3.To expand SMCs market share, multiply its current scope, grow its products-
services portfolio, and increase its sales.

Areas for Considerations and Assumptions

Strengths

1. Expertise in the local market.
2. Vision is strong and aggressive to
venture into new markets.
3. With good reputation in the
business industry and with existing
partnership with some big
companies in the Philippines and
other countries.
4. With enough capital to acquire
different businesses as much as
they want.
5. The company is strict with the
quality of its products.
6. SMC is an ISO 9000 accredited
company(Worldwide Quality
Standards)
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Weaknesses

1. Expected slow growth rate.
2. Venturing on new types of
business that the management is
not familiar with.
3. Vulnerable to the changes in the
political environment and dynamics
in the country.
4. Unprepared to increase its
international operations.
5. High exposure to sectors that are
capital intensive market with low
profit margin.
6. Would have to adapt to the
different culture of its international
partners.
Opportunities

1. Expansion of international market
share in various Asian countries as
well as to the European market.
2. The management team has good
relationship with the Philippine
Threats

1. Near market saturation for
alcoholic beverages due to new
social trends, including healthy
living mindset.
2. Availability of new international

1
BCA ISO 9000 Certification Scheme, available at: http://www.bca.gov.sg/Professionals/IQUAS/ISO.html, last accessed on July 01,
2013.
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government, particularly top level
officials.
3. New corporate strategy will lead to
a more valuable and higher-
yielding business.
4. Its expansion will motivate its
employees, especially the young
managers.
5. Expanding in other Asian countries
is less risky, more or less have the
same business conditions with the
Philippines and hence will not
require drastic adjustment.
liquor brands in the local market.
3. Lack of knowledge regarding newly
acquired businesses.
4. New aggressive player in the local
market for beverages, packaging,
and food industries.SMC
employees are increasingly getting
younger, more aggressive, and
less reverent toward the company
as an institution.
5. Will accumulate debts as SMC
finances its business expansion.
6. Global financial crisis possibly
affecting the local economy.
7. Government interventions and
policies may pose market strategy
uncertainties.

Theoretical/Conceptual Framework

1. BCG portfolio framework

The BCG Matrix was developed by Boston Consulting Group in assessing an
organizations corporate business portfolio on the basis of their related market
share and industry growth rates. In other words, it is a comparative analysis of
business potential and the evaluation of environment. The BCG Model is based
on the product life cycle theory that can be used to determine what priorities
should be given in the product portfolio of a business unit. To ensure long term
value creation, a company should have a portfolio of products that contains both
high growth products in need of cash inputs and low growth products that
generate a lot of cash. It has two dimensions; market share and market growth.
The basic idea behind it is that the bigger the market share a product has or
faster the products market grows the better it is for the company.
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The BCG Matrix has four cells, with the horizontal axis representing relative
market share and the vertical axis denoting market growth rate (see diagram 1).
The midpoint of relative market share is set at 1.0. If all the Strategic Business
Units are in same industry, the average growth rate of the industry is used. If all

2
Value Based Management.net, Product Portfolio Management: Summary of the BCG Model, available at:
http://www.valuebasedmanagement.net/methods_bcgmatrix.html, last accessed on June 30, 2013.
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the Strategic Business Units are located in different industries, then the midpoint
is set at the growth rate for the economy.

Relating it to the BCG Portfolio Framework, SMC can easily evaluate which type
of business they should start to venture in or which they should maintain or let
go. This would help SMC to assess the status of their businesses with an
ultimate goal of maintaining and keeping their market value. The group made a
matrix of SMC in relation to BCG Model.

Diagram 1

STARS
> Food Business
> Oil Refiner / Retailer Business
> Infrastructure Business
QUESTION MARKS
> Telecommunications Business

CASH COWS
> Brewery/Beer Business
> Power Generation and Distribution
Business
> Beverage Business
> Packaging Business
DOGS
> Mining Business

2. Porter's five forces of competitive position analysis

The model of pure competition implies that risk-adjusted rates of return should be
constant across firms and industries. However, numerous economic studies have
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affirmed that different industries can sustain different levels of profitability; part of
this difference is explained by the industry structure.
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Michael Porter provided a framework that models an industry as being influenced
by five forces. The strategic business manager seeking to develop an edge over
rival firms can use this model to better understand the industry context in which
the firm operates. (See Diagram of Porters Five Forces)
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Structural Analysis using the Five-Forces Model
A. Threat of New Entrants - LOW
- The industries in which SMC operate poses high barriers to entry such as
economies of scale, brand identity of established SMC products, government
regulation, and sizeable capital requirements.

B. Intensity of Rivalry among Existing Competitors - MIXED
- Rivalry in the Beer, Food and Beverages, Power Generation, and Retailing
businesses are low given that SMC is one of the market leaders and has established
itself as one of the main players.
- The Telecommunication, Food, Packaging, Oil, Infrastructure and Mining Industries
pose high intensity of rivalry given that industry growth rate has slowed down, the
market is saturated by the main providers, and SMC is disadvantaged for being the
late entrant in many of the said business.

C. Bargaining Power of the Buyers - LOW
- The consumers have no power to change the price of SMC commodities.
- The deregulation of the Electric, Oil and Telecommunication industries have
significantly lowered the bargaining power of users.

D. Bargaining Power of Suppliers - MIXED
- Both Electric and Oil businesses are characterized by high bargaining power of
suppliers since power generators in the country are only a handful, while oil is
largely obtained from the Middle East market.
- All other industries exhibit low bargaining power of suppliers given that there are
many providers and vendors that can provide SMCs requirements.

E. Threat of Substitute - MIXED
- The Beer, Packaging, Mining, and Electric businesses poses low threat of substitute
given that San Miguel Beer is the nations choice beer, switching costs in the Mining
and Electric industries are high, and MERALCO has the monopoly franchise for
electric distribution in Metro Manila.

3
QuickMBA, Porters Five Forces: A Model for Industry Analysis, available at: http://www.quickmba.com/strategy/porter.shtml last
accessed on June 30, 2013.
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Id note 3.
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- High threat of substitute is recognizable in the industries of Food and Beverage and
Telecommunication given that switching costs are very low and buyers are inclined to
find alternatives should they find the products unsatisfactory.



Alternative Courses of Action (ACA)

1. SMC will continue its current business strategy of diversifying into non-allied
businesses in the Philippines and at the same time pursue those which complement
their current businesses.
Pros Cons
>Higher margin, higher growth industries
will bring about growth in earnings.
>Related diversification will allow SMC to
optimize its earnings and stretch its
growth in the Food and Beverage
industry.
>Spread risks among different industries.
In this way, not all businesses will be
affected by a seasonal slowdown.
>Risk that newly-acquired businesses
may not generate expected income.
>Highly capital-intensive businesses may
affect the competitiveness of traditional
product lines.
>Company may stretch itself too thin
administratively speaking by participating
in various industries.

2. SMC should further enhance its core products and continue to penetrate the
international market and this time with their comprehensive strategy.
Pros Cons
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>SMC can introduce local food and
beverage of the Philippines to the
international market.
>SMC can be the first Filipino
multinational company.
>Needs high capital and no guarantee of
positive revenue for new player in the
international market.
>High risk to accumulate debts as SMC
needs to finances its business expansion
abroad.
>Fails to adopt international culture.

3. SMC should divest company shares with small or minimal profit and continue to
diversify in the same industry of food, beverage, and packaging through regional
acquisitions and integration and eventually move globally.
Pros Cons
>Reduction of companys total profit
loss.
>Laying-off particularly those employees
with good record which would be a
disadvantage on the part of SMC.
>San Miguel might experience hardship in
attracting high potential customers instead of
taking care of existing ones.

Recommendation

The group recommends the first alternative course of action; that is, for SMC to
continue its current business strategy of diversifying into non-allied and
complementary businesses in the Philippines.

By pursuing a strategy involving diversification into non-allied businesses, the
company will be able to expand into industries that are deemed highly
prospective (high margin and growth). This will allow the company to establish its
presence in these industries, and at the same time, increase its overall company
revenues which should come from these industries. Additionally, by pursuing a
strategy involving diversification into complementary businesses in the
Philippines, the company will be able to revitalize its current business interests
(Beverage, Food and Packaging) and push for its continuous growth. This will
also allow the company to present a more comprehensive and consumer-
oriented diversification since they will be able to offer complementary products
and services. More importantly, pursuing this diversification strategy into
complementary businesses will allow the company to streamline and rationalize
its financial and manpower resources.

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Recommending the first alternative course of action naturally will expose SMC to
a number of risks. The group, however, believes that the risks posed by a
business strategy focusing on diversification into non-allied and complementary
businesses in the Philippines are expected, accepted, and manageable. The risk
pertaining to income is expected since this diversification involves entry into
businesses that the company management has no prior experience. The risk
pertaining to capital-intensive business is accepted since this diversification
involves massive financial investment and consequently requires the company to
explore its financing options. The risk pertaining to managements administrative
capability is manageable since this diversification involves a certain level of
management specialization, which other company executives (besides Eduardo
Cojuangco) can be able to cover. Having said these, all our set objectives will be
met fully.

Implementation Plan

In lieu of fervently supporting SMCs diversification strategy, Mr. Cojuangco shall
call for Board and Shareholders Meeting to - first, provide an update on current
performance of the company both allied and non-allied operations to include
market share, growth versus previous meeting, projected sales and growth paths
(short and long term); second, to present future plans on acquiring or investing to
other complementary and non-allied businesses and how these future
acquisitions will benefit the company and its shareholders; lastly, to immediately
communicate plans to stakeholders.

Learning Points

Strategic Management is a continuous process involving review of vision and
mission of an organization, analysis of internal and external weaknesses,
formulation of strategy, and implementation of strategy. The preceding statement
requires patience and full understanding to come up with good planning
strategies. Yes, the group admits that thinking appropriate intendance for a
certain corporation is very challenging because it encompasses so many
different aspects of management. We learned that if we become managers in the
future, we are already aware and equipped that one of our functions is to analyze
opportunities and strengths in the external environment in light of an
organizations internal strengths and weaknesses. This will lead us to achieving
certain organizations goals. It will also uncover areas where to capitalize on and
will discover areas in which expansion may be unwise.