Diageo Case Study

Executive Summary

This is a strategic options case regarding Diageo, PLC. Diageo is a conglomerate focusing on premium alcoholic beverages.

The firm originated in 1997 with the merger of Guinness and GrandMet. The company began with the mission to be the strongest premium alcoholic beverage producer worldwide. To that end, they have acquired a majority of premium brands in the spirits industry and a large portfolio of premium wines, while at the same time divesting itself of those companies not in line with its new goals. The major satellites in the food industry were Burger King and Pillsbury, which Diageo managed to sell in 2002 and 2001 respectively. Today they are the controlling producer of spirits in the US and UK, and compete globally in both wine and spirits.

Major issues facing the firm include an inability to completely divest itself of the food industry, and the reliance on a poor long-term growth strategy. Diageo must find a way to better utilize its synergistic resources in order to develop lasting competitive advantages.

Page

I. General Industry and Competitor Environments 3

II. 5-Forces Model 4

III. Key Factors for Success 5

IV. Corporate Strategy 5

V. Business Strategy 6

VI. Functional Strategies: 6

VII. Tangible and Intangible Resources 7

VIII. SWOT Chart 7

IX. Financial Ratio Analysis 9

X. Conclusions and Recommendations 10

Bibliography 11

I. General Industry and Competitor Environments

a. Economic: Moderate impact. Diageo is placed in the premium end of the wine/spirits industry. Considered a luxury, consumption of these products decreases as the economy declines and there is less cash to splurge.

b. Sociocultural: Strong impact. Alcohol consumption varies significantly in type and quantity depending on the cultural segment considered. The types of alcohol consumed varies widely from culture to culture. Also, there is a strong lobby of anti-alcohol groups due to the effects of alcohol on health and public safety.

c. Global: Moderate impact. The world market is leaning towards worldwide normalization due to the effects of globalization. However, the industry is still in the early stages of said normalization. Shipment is cost prohibitive though, so companies must establish production facilities in foreign countries.

d. Technological: Moderate impact. Wine is largely an agricultural product, and any increases in production technology would have small impact on the quality of the wine. Spirits however, do benefit from increases in production quality.

e. Political/Legal: High impact. Alcohol is a highly regulated industry, with many permits and licenses involved in sales, production and transportation.

f. Demographic: High impact. There is a minimum age in most countries for one to consume alcohol. In addition, the types of alcohol consumed vary widely between age categories. The majority of wine is consumed by adults between 35 and 60, an attractive demographic.

Conclusions

The sociocultural and legal aspects of the industry make it a tricky prospect. That said, there are strong possibilities for growth. Productivity improvements and high industry-wide capacity utilization in the spirits sector allow for increased operating profits. With a recovering economy and attractive demographics, prospects are good for wine producers as well. In America, the wine industry was largely domestic in the mid 90s. Today, the US is able to export nearly 20% of its wine production.

II. Industry Environment Analysis - The 5-forces Model

a. Threat of new entrants: Low. Startup is capital intensive and governmental regulations limit new entrants. However, in the wine industry, there is still opportunity for small brands to do well in certain niche markets.

b. Bargaining power of buyers: Moderate. There are many competitors offering similar products, both domestically and from imports. Plus, due to the regulation of the industry, wine and spirits must pass through wholesalers, who have a strong hold over their producers.

c. Bargaining power of suppliers: Low. Grapes and other agricultural products are the main supplies needed in the production of wines and spirits. These items are commodities which are easily attainable from a variety of sources, lessening the power of suppliers.

d. Threat of substitute Products: Moderate. Wine and spirits are beverages, of which there are many substitutes. However, alcohol could be considered its own category, due to the nature of its consumption in relation to other beverages.

e. Rivalry among competing firms: High. The market is mature, so any gains in market share must come from competitors. Wine has traditionally been strongly imported, but the vineyards in California and the north west have created a strong domestic presence. Globalization has only intensified the rivalry between competing firms.

Conclusions

This is a highly competitive industry, where any gains in market share are coming at the expense of other firms. There are more producers of wine than any other beverage product, and increasingly, producers all over the world are able to compete in the US and European markets. For a company to succeed consistently, they will need strong competitive advantages. There is a strong trend in the industry towards consolidation, with companies like Allied Domecq and Diageo acquiring buying up independent wineries and premium spirit brands from other conglomerates, while at the same time divesting satellite businesses that diverted resources from their core beverage businesses. While Diageo is on the forefront of this trend, others are following suit quickly.

III. Key Factors for Successfully Competing in the Firm's Industry

a. High quality vineyards and distilleries are required to create the best wines and spirits.

b. Strong supply chain management is needed to connect the producers, the wholesalers and local retail businesses. It is also important in order to take advantage of economies of scale present in consolidating most of the premium