To: Senior Management of Heineken Company
From: Management Consultant
Date: February 6, 2013.
Subject: Current Situation and Recommendations
Summary of the Situation
Several changes in the beer market industry have prompted Heineken to make several changes in its strategic plan. These changes include decline in beer consumption due to various restrictive laws and the increased competition due to globalization. As a result of the changes in the beer industry, Heineken organizational structure has undergone changes with the reduction of the executive board, executive committee and formation of a supervisory board. Moreover, the company has taken a major step in having a CEO with no Dutch roots to lead it. Other changes in the organizational structure include the formation of five management positions in charge of five regions and positions in nine functional areas. One major strategic decision the company had undertaken is embarking on a worldwide acquisition of other organizations to increase its market share.
Organizational Structure Change
An organization structure is a framework that describes how an organization is structured in terms of leadership, decision making and execution of duties (Baligh and Helmy, 25). One of the issues in the Heineken case is the change of its organizational structure. Initially, the organization structure was very tall. A tall organization structure hinders decision-making and makes it tedious. This results in delayed decisions, which can deny an organization competitive advantage. Heineken flattened its organization structure by reducing executive board members from five to three, executive committee members from 36-13. Consequently, the company has chances of performing better than before because the few leaders left have clearly defined responsibilities and authority. Quick decision making that arises from a flat organization structure provides the organization with competitive advantage. This advantage arises from the organization’s ability to take advantage of new opportunities faster than competitors.
The creation of five management positions for the company’s five operating regions decentralizes decision-making. This provides the various regions to make unique decisions that match their specific markets. This can provide the company with the ability to build a loyal customer base by being able to satisfy the needs of consumers.
Over the years, Heineken has relied on the good performance of its premium brand to fetch good revenues. However, at some point, the premium brand started becoming obsolete to consumers. Consequently, its consumption went down. Heineken decided to diversify its products. This diversification includes marketing and promoting other brands. The competitive advantage gained through diversification is reduced reliance on only one brand. When one brand faces low performance, the company can remain profitable. One such diversification was the introduction of Amstel light, which has already dominated the United States market. Moreover, diversification provides the company with a wider market share through other brands that are marketed as specialty brands in different localities.
Acquisition as a strategy has helped Heineken to penetrate local markets with ease since it utilizes the already established distribution channels owned by the acquired organizations. This is a competitive advantage compared to competitors who may try to enter new markets directly (Sherman and Hart, 109). To understand the reasons for acquisitions, it is important to evaluate Heineken’s competition using Porter’s five forces.
Heineken is facing threats of substitutes such as wine. The continued growth of wine preference by consumers has taken a considerable share of customers from the beer industry players. Since Heineken is a major player, it is affected by this threat.
Threat of new entrants is unlikely because breweries have limited alternative uses. If a new entrant fails, it may have no use for the brewery. Moreover, since the end of Second World War, no new entrant has ever outperformed the three major players, Heineken being one of them.
Bargaining power of buyers is evident in the beer industry. There are no loyal customers to a particular brand. Heineken witnessed this when its brand became obsolete in the eyes of its customers. The customers sought for alternative brands.
Bargaining power of suppliers is also evident in the beer industry. The rising cost of commodities such as glass, grain and aluminum empowers suppliers to possess great bargaining power.
Rivalry of established competitors is fierce in the bear industry where Heineken is a major player. Approximately 86% of United States’ beer market is held by the top five players, which include Heineken.
Heineken should further decentralize its decision making to the different localities within its operation. The rationale for this recommendation is that the localities have unique needs that are only understood by managers at the local level. Empowering this manager will ensure more customer satisfaction. However, more decentralization of decision-making is likely to reduce the top management’s control over the organization.
To counter the bargaining power of suppliers, Heineken can integrate horizontally with its suppliers. The rationale for this recommendation is that such a move will ensure that the company has the means of production and will have a competitive advantage over other industry players. The disadvantage of this move is that it will tend to monopolize the industry since there are few suppliers already. The move may push competitors out of business due to scarcity of raw materials.
Heineken can focus on making the leading local brands in other different markets apart from the United States to have the biggest market share. The advantage with this move is that the company will be able to lead other industry players in all its markets. However, the local brands may consume the preferences of the premium brand, making it lose its market share.
Baligh, H. Helmy. Organization Structures: Theory and Design, Analysis and Prescription. New York: Springer. 2005. Print.
Sherman, J. Andrew and Hart, A. Milledge. Mergers and Acquisitions from A to Z. California: AMACOM Div American Mgmt Assn. 2006. Print.
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