Asahi Breweries Ltd.

Contents

1.Please analyze the environment for brewing industry in Japan. Name three most important factors that lead to the success in the industry. (max. 1,5 pages 10 points)....................................................................................................................1 2.Please analyze Asahi (since Murai till 1988). What are the factors that may lead to sustainable competitive advantage and what are the factors that can create barriers in future development of the company? (max 1,5 pages 10 points).........4 3.What Asahi shall do in the nearest future? Evaluate investment plan in brewing and packaging capabilities taking into consideration financial, marketing and organizational factors and suggest what Asahi shall do? ( 30 points, max of 3 pages plus 7 4.Attachment : Exhibit 1........................................................................................10 attachments)

1. Please analyze the environment for brewing industry in Japan. Name three most important factors that lead to the success in the industry. (max. 1,5 pages 10 points)
In the beginning, the brewing industry had only two companies, Dai Nippon and Kirin, and two major kinds of beer, a richer tasting lager beer and a draft beer. A third company came later: Suntory. After the Second World War, Dai Nippon was divided into two smaller companies: Sapporo and Asahi. The first was considered to be the leader followed by Asahi and Kirin. However, the trend rapidly changed and Kirin became the leader thanks to a better coverage of the country and a wellidentified market trend. The consumers in Japan didn't change their taste preferences very quickly. And so a kind of conservatism reigned in the customers' consumption which obliged companies to be conservator with the taste of their products as well. That was the first most important factor in the industry.

DEFLANDRE Quentin (ERASMUS student) First, it led first Kirin to the success which established itself as the leader in the lager beer market and allowed competitors to do business with their own beers. At the same time, beer consumption took place in commercial market and restaurants whereas home consumption was more or less abandoned. Then, there were a trend of change in the fact that consumers preferred another taste for their beer. Small competitors of Kirin could enter a new market in which they could be a leader. Then, the trend of packaging and product image differentiation came into the industry and a lot of different bottles were born. Draft beer was considered by consumers as a summer-and-beer-hall-only product and bottled/canned draft as a not-real-draft beer. That not-covered segment allowed brewing industry to create a new market: the home consumption. From this point in time, companies, especially Asahi by the way, launched new beers since consumers preference had changed. The first important factor which leads to success in the industry was the distribution system. Indeed, there were two kinds of distributors, on the one side general distributors and exclusive distributors, and on the other side retailers. Both of them were licensed by the Government. That system of distribution tended to work as a barrier against new entrants because the beer producers created a close relationship with their distributors. Thus, a kind of trust was generated between producers and distributors which made it impossible for new entrants to develop their business in the beer brewery market. The leadership of Kirin generated some problems: its ability to monopolize the industry and to cause the bankruptcy of small competitors. The Government was aware of that ability of Kirin and wanted to maintain a particular competitive level in the industry. That is why it fixed a policy towards the beer market in Japan. Its first interest was to collect money by taxing beers. Its second and most important interest was to regulate, trough the Ministry of Finance, the beer industry by fixing the retail price at a uniform level. That phenomenon is the second most important factor in the industry. Concerning the third factor, the traditional segment was a commercial market where beers were sold in commercial locations and restaurants. And 2

DEFLANDRE Quentin (ERASMUS student) companies focused all their efforts on selling in this way. But there still was an unexploited market: the home consumption. Indeed, people loved beers and drank it in bars and restaurants. Why wouldn't people drink beers at home? Kirin was the first in coming up with that idea and wanted to operate in this new market. Moreover, the rising incomes and the development of refrigerators allowed Kirin to reinforce its idea. That is why it invested in advertising and developed an extensive distribution network. People began loving this new kind of consumption and sales of beers- at-home grew rapidly. We can say that Kirin allowed its competitors to discover a new market. In conclusion, we can analyze the most important factors that lead to the success in the industry by developing the Porter's analysis model. In the brewing industry, there were four determinants of barriers to entry: the economy of scale thanks to the development of large outdoor tanks, a certain level of brand identity by spending a minimum level in the advertising and the distribution system which covered a lot of areas. Then, there one main determinant of buying power: the brand identity because those who had the most recognized product could take advantage of market share. The same factor can easily suit to a rival determinant because if you don't hold the brand identity, one of the competitors holds it.

DEFLANDRE Quentin (ERASMUS student)

2. Please analyze Asahi (since Murai till 1988). What are the factors that may lead to sustainable competitive advantage and what are the factors that can create barriers in future development of the company? (max 1,5 pages 10 points)
By the late 1970s, Asahi was in a downward spiral. Indeed, three main problems existed : First, employees saw that Kirin's sales people sold more than Asahi sales people. Second, The management control system malfunctioned. Third, there was a contradictory effect of the productivity index. Some advantages allowed Asahi to recover itself. Other factors created barriers. Sustainable competitive advantages In 1982, when Tsutomu Murai became the president of Asahi, he discovered a rigid and vertical organization. Therefore, he decided to follow the four recommendations from a report prepared by McKinsey and Company. Indeed, Murai decided to create two groups: The Corporate Identity Introduction Team (CI) and the Total Quality Control Introduction Team (TQC). The first dealt with the customer satisfaction and the scientific use of data and the second dealt with improving the image of the company with the public. Thanks to those groups, Murai discovered that consumer preference was changing. Customers wanted now a beer with a more refreshing "sharper" taste. At this time, Asahi was in an uncomfortable situation and had to make some efforts for maintaining the company into the market. That is why the management committee decided to implement a drastic change in the trademark and a major revision in taste. They wanted to meet the customer needs around sharpness and keep the conservative attitude regarding the richness. "Asahi draft" was born. In 1986, when Hirotaro Higuchi succeeded Murai as president, he tended to continue the launching of the new "Asahi draft". He took three policy decisions: the recalling of all the beer in the distribution channel with the old label in order to cancel their previous image, the choice of a high quality raw material and significant spends in advertising and promotion in order to introduce the brand to consumers. In the summer 1987, a new plan was accepted by Higuchi. This plan proposed to create a new "Super Dry" beer. Therefore, Higuchi decided to invest 70 billion yen to expand Asahi's capacity by 50% by 1988. That was something 4

DEFLANDRE Quentin (ERASMUS student) mad when we know that an increase of 30% was already a very aggressive expansion plan. Asahi increased its sales by 33% that year. At the same time, Vice Chairman discovered that people became more and more old and wanted something new. The creation of "Super dry" and the changes in packaging Asahi's beers allowed it to be its successful. We can notice that Murai and Higuchi showed a high innovative spirit between 1982 and 1988. I would define that strategy as a "cheek strategy". Indeed, they dared to take risks in order to salvage Asahi Company. They invested a lot of money which could have led them to bankruptcy. All those factors which I called "cheek strategy" allowed Asahi to obtain sustainable competitive advantages. Barriers In 1985, when the trademark and the revision in taste were reviewed, results didn't follow. The sales didn't grow anymore and many distributors didn't accept working with Asahi. In 1987, Asahi wanted to launch the "Super Dry" beer and therefore increased its production capacity. In order to do that, this capacity expansion needed a license from the Government, especially from the Ministry of Finance. The Ministry refused the license delivery because it wanted to regulate the industry capacity. Actually, the Government saw that Asahi was very ambitious, maybe too much. An increase of 30% was already considered to be aggressive. An increase of 50% was a suicide mission. That why Asahi was not granted the license. When Asahi created its "Super Dry" beer, competitors decided to do business with their own dry beer. There was no product differentiation. Indeed, they used the same package with the purpose of taking over the dry market. Asahi's response was direct: they changed their packaging and concept statement. And it worked because customers were loyal towards Asahi's beers. Since the dry beer was becoming a stable segment and was a success in this particular market, competitors decided to burgle dry beers in order to recapture other markets. First, they tried to boost their strongest beers. Then, they tried to

DEFLANDRE Quentin (ERASMUS student) develop their own projects that would be potentially the best on the market. Every brewing competitor became allies against Asahi for dethroning it. At the same time, Asahi was facing some internal problems: they needed sales and administrative staff because of their growth. Moreover, during the summer 1988, Asahi couldn't service all orders. It led to the loss of some orders and the dissatisfaction of distributors which didn't receive the items they expected. In addition, Asahi held close relations with its small distributors which were happy about the growing sales. However, it put a certain pressure on them because they were afraid of not meeting the need. They needed very rapidly new funds to increase their physical capacity. Thus, Asahi had to cope with a dilemma : increase their relationship with their current distributors or changing them for new ones. That decision was decisive for future development of the company. Despite the different barriers that existed, Murai and Hoguchi could force its way through the market. They focused on customer satisfaction, employees' morale, a high innovative spirit, the differentiation compared with its competitors and its brand loyalty. Those sustainable competitive advantages are crucial. If Asahi knew the barriers at which it could face, the company could get around it.

DEFLANDRE Quentin (ERASMUS student)

3. What Asahi shall do in the nearest future? Evaluate investment plan in brewing and packaging capabilities taking into consideration financial, marketing and organizational factors and suggest what Asahi shall do? ( 30 points, max of 3 pages plus attachments)

In 1989, Asahi Breweries Ltd. had the chance to make an investment plan in order to assess whether they were able to achieve a huge production capacity expansion. On the one hand, Asahi was in a comfortable position in which it could benefit from its sales growth in a stable market segment. On the other hand, competitors formed a kind of coalition against Asahi by investing in their best product lines. In order to evaluate whether Asahi has start with this project, I will define step by step (from its production capacity to the advertising and promotion expense as it is showed in Exhibit 1) factors which could be right and factors which could be wrong, modified or improved. Firstly, we can start with the investment proposal according to which Asahi would expand its production capacity from 880.000,00 kilo liters in 1988 to 2.100.000,00 kilo liters in 1990. You can see in Exhibit 1 that Kirin's production capacity in 1987 is 2.886.000,00 kilo liters. We know that with this production capacity, Kirin had a 57% market share while Asahi, with a production capacity of 580.000,00 kilo liters in 1987, had a 12,90% market share. It means that, Asahi, with an evaluated production capacity of 2.100.000,00 kilo liters in 1990, which is close to Kirin 's production in 1987 (2.886.000,00 kilo liters), would be able to increase its market share from 12,90% to more or less 57%. We see that Kirin's market share decreases by 6,5% between 1987 and 1988 and Asahi's market share increases by 7,7% between 1987 and 1988. But as I said above, we can suppose that Kirin, with the aggressive sales of its best lager beer, will pick up more and more market share. From that point, was Asahi too much innovative? According to the financial director of Asahi, they don't have any fear with the investment because there are a lot of undervalued assets from securities and real estate that they bought a long time ago. According to the sales, while Kirin would have increased its sales by 50,5% (2338,4/1553,2) between 1988 and 1990, Asahi would have increased its sales by 83,5% (1000/545) between 1988 and 1990. Maybe there was an overvaluation of sales from Asahi. According to the financial director of Asahi: "If the expected sales 7

DEFLANDRE Quentin (ERASMUS student) do not materialize and we get stuck with excess capacity, there is no fear of bankruptcy". Moreover, Asahi didnt have a lot dividend to distribute because they didn't have a lot of shares outstanding. I would say that the sales are overestimated but Asahi did not run a risk and knew what they did. Financially, despite those high estimates which frighten, Asahi breweries Ltd. can endure the investment proposal. Secondly, we can notice two trends concerning the marketing approach. Indeed, on one hand, Asahi said that they had a "Super Dry" beer that would last because they thought that the "sharpness-richness-beer" taste side of consumers wouldn't change. In addition, they took place into stable independent segment. That is why they increased their marketing and promotion budget until 1988. They wanted to make people know the brand. But as showed in Exhibit 1, they stopped spending money in this area from 1989 on. What does that mean? Asahi showed a high innovative spirit but did not think about competitors' reactions. On the other hand, competitors talked about the "post-dry" era because they launched their own best beers and hoped beating Asahi. Then, they boosted beer projects under development in order to create new products and spent much money in advertising. Moreover, they thought that "dry beer was a fad product and that the taste was really not as great as Asahi claimed". Concerning the marketing approach, I would say that Asahi underestimated competitors' reactions and was too confident. It would certainly have faced some problems in following its competitors. Thirdly, concerning the organizational factors, we can point out 2 aspects : Asahi faced a need to hire new sales and administrative staff because of its sales growth. They planned to increase the number of permanent employees from 3200 to 4000 between 1988 and 1991. That number reached in 1990 is amounted to 3700, which seemed to be sufficient. But Asahi forecasted to add 2000 temporary employees to help increasing sales. From a financial point of view the total number of employees would have been higher than plan in 1988 than the plan. Also, in 1988, Asahi could only supply 70% of the orders placed. But the brewery seemed to want changing from smaller to bigger distributors in order to 8

DEFLANDRE Quentin (ERASMUS student) meet the sales growth. How would they have done this if they already could not supply all the products for smaller distributors? Concerning the organizational approach, I think that Asahi was not ready to meet the distributors' needs. But it was ready to sell its products. In conclusion, that investment plan was worth suggesting some ideas in order to solve some problems: The increase in the production capacity from 880.000 kilo liters to 2.100.000 kilo liters between 1988 and 1990 seemed to be too innovative because it was difficult to forecast such figures when we knew that competitors entered into a war against Asahi. The impatience of Asahi would have had to make away for the foresight. Asahi Breweries Ltd. did not count on allocating money anymore in advertising and promotion budget in 1989 and 1990. I think that the company should have continued that kind of expenses because products had to be recognized. Without advertising, the customers' loyalty could be lost. Even if Asahi owned a large sum of undervalued assets, I think it was unnecessary, financially and from the organizational point of view, to hire 2000 temporary employees on top of 3700 permanent employees in 1990. Concerning the problems faced by Asahi in supplying products to distributors, I think that there were two questions the company had to ask itself : Is bigger distributors necessary? If yes, am I able to supply them as well as possible? The answer to first question depended on the real goals of the company. The answer to the second question depended on the equipment owned and the organizational means put in place (stocks, supply chain, efficiency, ).

DEFLANDRE Quentin (ERASMUS student)

4. Attachment : Exhibit 1

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