Notes on Pyramid Analysis - Capstone: Strategic Management - SR | BUSA 499, Exams of Introduction to Business Management

Download Notes on Pyramid Analysis - Capstone: Strategic Management - SR | BUSA 499 and more Exams Introduction to Business Management in PDF only on Docsity! LEGO Analysis Pyramid Analysis Chase Averill Bryce DePew Joe DiPietro Kelly Totten BUSA 499 Professor Lee May 21, 2007 2 2 Executive Summary The beer industry is unlike many other major industries because of the power assumed by three large companies. This makes it more difficult for smaller beer manufacturers to penetrate the already saturated market. Pyramid is one of the small companies that has experienced success and has gained a strong customer base that remains loyal to their innovative product offering. Even with the success, the firm still has areas that could be improved upon. A closer examination of the firm’s operations and future transactions will help to portray a clearer outlook. 5 5 A. External General Environment Generating and developing successful strategies is our main goal, and in order to do so it is important to apply the six categories of Pyramids General Firm Environment to gain a better understanding of the external environment in which they operate. Although beer and technology don’t seem to go hand in hand, this could not be any less true. Technology has had an amazing impact on the beer industry in recent years. It can be found in every aspect of the industry, from the production line, to labels that change color when the beer is at the “appropriate temperature” to drink. Most importantly, technology has allowed the beer industry to become much more efficient through the implementation of Supply Chain Management systems. These systems have cut costs by automating the actual production line and reducing labor costs. However, SCM systems have allowed for breweries to become linked with their distributors and suppliers via the internet, creating a very Just in Time like system. Today, a bar owner can go to its’ distributor’s website, put in an order which goes to the distributor and if need to the brewery. Although an innovative company when it comes to beer flavors, Pyramid is still, like almost everyone, playing catch-up to technology. Many of the systems have been automated and SCM systems incorporated, however their Portland Brewery is very old and continues to require many technological upgrades, while their Berkley brewery is very advanced and handles the brunt of their brewing. 4 As previously mentioned, Pyramid is known for their innovations throughout their beer flavors. In their daily product offering they provide an apricot wheat beer, as well as a caramel flavored beer. It is this dedication to innovation and flavor that has generated most of Pyramid’s International recognition. Although they are a domestic company, Pyramid participates in many different international beer festivals and competitions and has won many awards over the years. Maybe this is because of the beers they offer? Indian pale ale, is flavored after the beer sent to India while under British rule, while Curve Ball is a traditional German Kölsch style beer. 5 Being a domestic company can make the legal environment less opposing by not having to cater to international laws, but nonetheless, the laws governing the production of beer are substantial at the Federal, State and local levels. This is a barrier Pyramid has to deal with and work around. Pyramid is governed by many different regulations on many levels. There are regulations regarding the Alehouses, dealing with anything from liquor licenses to sanitary requirements. The act of brewing and selling beer also requires many different licenses and permits. Another huge regulation is the federal taxation of alcoholic beverages, which taxes pyramid seven dollars per barrel for the first 60,000 barrels produced in a calendar year. Pyramid is also subject to State taxation on alcohol too, which varies from state to state. 6 Regulations on producing alcoholic beverages is one part of the rule book Pyramid must follow, their Berkley brewery is in a class five earthquake zone and requires extremely tedious upkeep and structure requirements also, making it very expensive to operate within Berkley. 7 Laws and regulations make the beer industry challenging to enter, and raise costs, but 4 Pyramid Podcast. (2007). In PLU School of Business [Podcast]. 5 (2007). Pyramid Breweries., from Pyramid Breweries - Award Winning Beer Web site: 6 (2007). Pyramid Breweries Inc., from SEC Info Web site 7 Pyramid Podcast. (2007). In PLU School of Business [Podcast]. 6 6 Pyramid offers a premium craft beer product, which allows them to charge a higher price. Cultural and Demographic trends help this as well. As mentioned earlier, the beer industry as a whole has reached a standstill, however the consumer’s preference has shifted to a more flavorful craft beer preference. While this is at the surface a great thing for Pyramid the shift in consumer demand also poses many problems for Pyramid as well. The shifting demand has caused the “Big Three” beer companies, Anhauser Busch, Miller and Coors, to shift their strategies as well. They have become very interested in the craft beer industry and altered their product offerings accordingly. In doing this, as explained by the problem statement, the big three have caused the distribution channels, most of which they own, to consolidate, making it harder and harder for Pyramid to expand and actually get their product to consumers. 5 Forces Model of Environmental Threats • Threat of entry- High/Moderate The Pacific Northwest is regarded as the most developed craft beer segment in the United States on the criteria of number of brewers and consumer awareness. Because of this distinction, there is a considerable threat of entry in this industry. The overall beer industry has not grown much in the last 3 years; however Pyramid’s volume of craft beer shipments has increased by roughly 9-12% each year due to increased market penetration on the West Coast. 8 This growth will undoubtedly attract “late comers” to the industry who want to sell their homebrews to a wider audience. This industry growth has also caught the attention of the big 3 beer giants: Anheuser-Busch, Coors, and Miller, as evident through their introduction of premium craft beers, and purchasing of small craft breweries. This threat of entry in the craft brew industry will attract more competition and will eventually lead to excess capacity in the craft beer market. For long-term sustainability, Pyramid must introduce a new and innovative strategy to protect market share and profit margins. • A barrier to entry- The beer industry has a few barriers to entry. Without a product differentiation strategy or the resources to implement a price leadership strategy, survival will be minimal for a start-up company. Because of the diversity in the general beer industry, there are formidable barriers to entry. There are large corporations that have the manufacturing infrastructure to achieve economies of scale. There are also smaller regional breweries that have differentiated themselves through seasonal and specialty beers. The most promise for this industry is to specialize one’s product offering and to let the big 3 fight amongst themselves for low cost and low taste beer. Pyramid’s defense to new entrants is in the heavily appraised wide product line offered. The flagship product is the Hefe Weizen, which accounts for over half of Pyramid’s beer shipments. 9 Pyramid also has a strong grasp on high quality. They only use the highest quality ingredients and never sacrifice taste for cost. This distinction enables Pyramid to charge a premium price and improve the customer’s perceived value on the product. 8 (2007). Pyramid Breweries Inc., from SEC Info Web site 9 (2007). Pyramid Breweries Inc., from SEC Info Web site 7 7 • Threat of Rivalry- High “Competition within the craft beer market is based on product quality, taste, consistency, freshness, distribution, price, ability to differentiate products, promotional methods and other product support.” 10 In the United States, there are over 1,400 brewers producing on average 2,000 barrels a year each. 11 As competition in the Pacific Northwest tightens through the maturation of the industry and the entrance of small and large firms alike, rivalry in the craft beer segment will increase. Regional brewers are working to increase their distribution, distributors are merging in an effort to cut costs, and the major national brewers are introducing specialty craft brews; the rivalry in the near future is guaranteed. • Threat of Substitutes- High/Moderate There are substitutes for Pyramid products on a few levels depending on the specific customer need: the need for beer, alcohol, and thirst. For the general need of beer, there are many alternatives to a Pyramid product. There are many other small breweries, pubs, home brewers, and even large national brands competing in the craft beer segment. There are the main three domestic brewers: Anheuser-Busch, Coors, and Miller who compete more on price and are who are now expanding their product line to include specialties beers. There are also imported beers from Europe, Mexico, and South America. For the general need of alcohol there are many alternatives to a Pyramid product. There is the wine category that includes: champagne, red wine, white wine, etc. There is also the hard alcohol segment that includes rum, whiskey, vodka, tequila, etc. For the general need of thirst there are many alternatives to a Pyramid product like water, juice, and soda; all of which are huge industries. There are many substitutes for a Pyramid product, the substitute depends on the specific need of the customer segment that is buying the product. • Threat of Suppliers- Low The products and supplies needed for brewing Pyramid beer include hops, barley, malt, and various other agricultural ingredients. Due to the size of the beer industry, there are many suppliers available. The determinants of supply in this industry include levels of crop production, export demand, governmental regulations, and market price. • Threat of Buyers- High The threat of buyers is high. Consumers have a large variety of products to select, and from a large variety of providers. The product is differentiated by brand, taste, quality, distribution, freshness, and promotions. It is reported that there are roughly 25 different styles of beer, each with subtypes and special ingredients depending on the brand. Because of the variety and availability of the product, Pyramid is subject to the demands of the consumer as specialty craft beer is an elastic good. If one craft brewery wants to increase prices, the general consumer will change to another brand. 10 (2007). Pyramid Breweries Inc., from SEC Info Web site 11 (2007). Pyramid Breweries Inc., from SEC Info Web site 10 10 Market Position – Distribution Pyramid’s current position in the distribution network will not sustain future growth. Pyramid offers a high quality, high premium specialty item and is stuck distributing in a specialty market. The ideal position to fend off competitors and to stay autonomous is to shift into the ‘widely available’ side of the distribution axis. The specialty market on the West coast can be saturated more, however the future of this market cannot be profitable forever, and the players flooding into this market will divide up market share even more. The key to sustainability and competitive advantage in this industry is to spread one’s influence larger using larger distribution networks. The ideal position for Pyramid at this time is to offer a unique specialty item and offer it to a wide national audience utilizing new distribution strategies. B. Internal SWOT Analysis Since 1984 Pyramid Breweries has had to rely on continued innovation to survive in the craft beer industry. Now, more than ever before, that strength is being put to the test by the ever- increasing threats that Pyramid faces. With the increase in competition in the craft beer industry, companies like Pyramid are seeing their weaknesses become magnified. In order to be successful in today’s market, Pyramid has to build on their strengths, and constantly be on the look-out for opportunities. 11 11 The first strength Pyramid has going for themselves is their established brand. In 2006, they were ranked as the fourth largest craft brewing company in the United States. Having started the company in the Northwest, Pyramid has stayed true to their roots and has created a loyal customer-following from Washington through California. To compliment this strength, Pyramid focuses on local sales and marketing strategies to build their brands. Rather than use mass-media advertising or promotion, they use targeted advertising and promotions, event marketing, sponsorships, public relations, and local fairs and festivals to assist in developing their marketing presence. A second major strength for Pyramid is their product offering. Pyramid prides themselves in producing quality beers. They firmly believe that quality is supremely important to success in the craft beer segment and consumers are willing to pay for quality. Therefore, they avoid using less expensive ingredients and continue to use traditional brewing methods. Pyramid has not gone unrewarded for their attention to quality. Since 1984, Pyramid has won 33 medals at the prestigious Great American Beer Festival, as well as several medals at the World Beer Cup. Pyramid’s diverse product line has also served as a strength. They offer four year-round beers, two seasonal, and a few select Alehouse exclusives. The range of styles within their portfolio enables Pyramid to obtain better market penetration through greater shelf space for their packaged products in retail stores and additional tap handles in draft beer outlets. In addition to its beer offerings, Pyramid is the exclusive manufacturer for Thomas Kemper Soda. Pyramid has two glaring weaknesses that continue to be major problems for them. The first of these weaknesses is their older and out-of-date production facilities. Pyramid has a goal to reduce costs. Unfortunately it is difficult for them to obtain that goal with their inefficient facilities. The second weakness they have is their outsourced distribution system. Pyramid distributes their products through a network of selected independent distributors who deliver directly to local grocery stores, convenience stores, restaurants and taverns. They believe this type of distribution system is best suited for developing local distribution of Company products, particularly in draft beer accounts where there are important sampling and brand building opportunities. Pyramid selects the distributors in each market that they believe will best promote their draft beers. One problem with this is the fact that most of the independent distributors distribute for other beer companies, in particular national brewers. These national brewers have higher influence over the independent distributors they use than Pyramid does. Another problem with this distribution system is the increase in distributor consolidation. Distributors have recently begun to consolidate in an effort to improve profit margins. This means that Pyramid has fewer distribution companies to choose from. Furthermore, continued consolidation amongst independent distributors, and the actions of national brewers that use those distributors could effectively work to deny Pyramid access to a market or markets. Pyramid’s weaknesses directly coincide with their threats. At this point, Pyramid’s most notable threat is the entrance of national brewers into the craft beer segment. While the beer industry as a whole has been stagnant for the last few years, the craft beer segment has seen unmatched growth. This growth has caused all of the national domestic brewers to introduce their own full-flavored beers. The national brewers have many advantages over Pyramid, and they can use these advantages to gain a substantial market share in the craft beer segment. With all the threats, strengths and weaknesses, however, come opportunities. Because of their already established presence in the Northwest, Pyramid has the opportunity to be the supreme beer in the Northwest, and even the entire west coast. By firmly establishing themselves as the number one beer in the Northwest, they could deter the national brewers from trying to gain a foothold in that area through craft beers. Another opportunity Pyramid has is to 12 12 improve production and distribution. Since these two areas are Pyramid’s most costly parts in the process of selling their beers, Pyramid could greatly improve their situation if they can figure out how to better develop their production and distribution. A final opportunity for Pyramid is the development of their alehouses. Pyramid’s alehouses have become popular and are a significant source of revenue. However, Pyramid only has five alehouses with no plans in the near future to develop more. Pyramid’s alehouses are focal points for marketing, creating brand awareness, and generating sampling opportunities for their products. Pyramid could further develop and diversify their image if they put more effort into creating quality alehouses. VRIO Framework For the most part the beer industry can be considered a mature industry. There are three main players within that industry which are Anheuser - Busch, Miller and Coors. These three companies have been around for roughly 134 years and control much of the market. Recently there has been a shift from this large broadly distributed beer, to smaller brews that allow customers to feel a sense of ownership. One of these firms is Pyramid. An examination into the internal capabilities of the firm will provide a much clearer picture of the firm’s future. • Value One tool in examining the internal capabilities of a firm is the VRIO framework. This theory allows individuals and firms alike to gauge their performance and the ability to improve. The first part of the VRIO framework is value. The question at this point is whether resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat? 12 One of the strongest areas for Pyramid is the perceived value of customers. Unlike many other beers that can be found continually throughout the year or in any area, Pyramid can be seen as a specialty item that is unique and different from the norm. Due to the shift from the traditional three beers to a more personal or handcrafted beer, the worth of Pyramid products by the consumer base has dramatically increased. This drastic shift is complemented more by the seasonal products that Pyramid offers. These different brews allow customers to feel in touch with the products and assume a sense of ownership not found in other beers. • Rarity The next aspect of the VRIO framework is the question of rarity, meaning how many competing firms already possess particular valuable resources and capabilities. 13 Although Pyramid’s product offering may be seen as something rare, the reality of the situation is that there are many other forms of beer available to consumers. On an even larger scale, there are many different options available for those looking for something to drink. Consumers have the ability to buy things from bottled water to fruit smoothies in order to satisfy their needs. When speaking directly of the beer industry, it is clear that there are also many other alternatives for beer drinkers. Due to the recent growth and success of small regional breweries there has been a dramatic increase in the amount of this type of beer making. Currently there are approximately 12 Barney, J., & Hesterly, W. (2006). Strategic Management and Competitive Advantage. New Jersey: Prentice Hall. (Pg. 83) 13 Barney, J., & Hesterly, W. (2006). (Pg. 86) 15 15 While some of Pyramid’s die-hard customers may feel the company would be “selling- out” if they formed an alliance, it would ultimately be the best thing for Pyramid. Even then, it is doubtful those particular die-hard Pyramid customers would stop drinking their beer. V. Recommendations and Action Plan The recommendations section gives suggestions that the firm should use to attack their weaknesses, and provides a course of action for how to go about doing that. Recommendations and Action Plan: Strategy Selection – Implement High Tech Strategy In order for Pyramid to continue to become a more powerful firm and to continue to broaden their customer base to other areas this option seems to be the best alternative for the firm. By creating a strategic alliance with one of the large three firms Pyramid will be able to broaden the distribution lines through the use of the existing ones in the large firm. Distribution is one of the weak points for the firm due to the fact that they currently outsource all of their distribution. In order for this type of relationship to exist between a large company and Pyramid, Pyramid must seek this type of backing and develop a plan to show their interest and still be able to maintain power within the firm. A strong research project should be developed to decide which of the three main firms would be the best fit for Pyramid and would allow them to stay true to what has proven to provide them with economies of scale. VI. Competitive Advantage This section deals with both the short-term and long-term competitive advantages the firm will enjoy from implementing the suggested strategy/strategies, and provides a way to measure the effects of the strategic plan. Temporary & Sustained Entering in to a strategic alliance with one of the “Big Three” beer companies will affect both Pyramid’s temporary and sustained competitive advantage. Understanding exactly how so, ensures this strategy a valid recommendation. By entering into a strategic alliance with one of the Big Three, Pyramid’s temporary competitive advantage is increased through the opportunities the alliance opens up, as well as the threats it immediately neutralizes, such as a hostile takeover. 14 This alliance will immediately open up new markets that were previously unattainable; the alliance will increase Pyramid’s temporary competitive advantage by giving Pyramid the funds and distribution network to reach those previously unattainable markets. The immediate competitive advantages of entering into a strategic alliance are easier to define, however, how will Pyramid’s alliance with one of the Big Three create sustained competitive advantage? The first way is what could almost be called a first to market. Although 14 Barney, J., & Hesterly, W. (2006). Strategic Management and Competitive Advantage. New Jersey: Prentice Hall. (Pg. 152) 16 16 there are many different craft beers out there, 1,400 to be almost exact, 15 by having the benefits of a major beer producers distribution network it would allow Pyramid to expand very rapidly and penetrate many markets which are new to craft beers and establish Pyramid in those markets. Also, in order to reach these markets and the needed increase in production, Pyramid will be able, through the alliance to use the partner’s production facilities which are already cutting back on production of domestic beers in response to customer demand. This allows for Pyramid to virtually eliminate the startup time, production costs and all of the other costs associated with building a new brewery and brewing beer, instead they will simply pay a fee for production. Just like Pyramid’s ability to access their new partner’s distribution networks created a temporary competitive advantage, it also creates sustained competitive advantage. As it initially allows Pyramid the “foot in the door” they need, it also makes it much easier for them to get future products to consumers down the road, as the distribution channels are already well established. Access to the established distribution networks is clearly the most important competitive advantage gained through alliance, as this poses the greatest problem to Pyramid, and gives Pyramid a great advantage over competitors. However, any small company who has been struggling to grow for the past 23 years is going to increase their competitive advantage by gaining access to the deep pockets of a major industry player, especially a company with the creative organization Pyramid posses. VII. Implications One thing that we were not aware of when we began this analysis was the distribution problems companies can have. A distribution system can be a major cost for a company if they don’t have an ideal system. Pyramid distributes their products through hundreds of different independent distributors. This has been effective for them for the most part, however many of these distributors are starting to consolidate to improve their own situation. This has negative effects on Pyramid. It was interesting for us to learn about these kinds of costs that come with selling a product. We also learned that Pyramid makes good beer. We all enjoy Pyramid’s seasonal, as well as year-round beers. We had a great time working on this case analysis and wonderful time learning in your class Dr. Lee. Thank you for everything you’ve taught us and we wish you the best. 15 (2007). Pyramid Breweries Inc., from SEC Info Web site