ADOPTING CORPORATE STRATEGY FOR PROFITABILITY IN THE NIGERIAN BREWING INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND TO THE STUDY

A cursory look at business organisations would reveal that some are very successful, others only moderately  or  even  marginally,  while  still  others  fail  altogether.  The  answer  lies  in  an organizational equivalent of the biological concept of the “survival of the fittest.” Charles  & Dan,

2002; 1 have observed that “over the long run, organizations that survive are those that serve the needs of their societies effectively and efficiently; that is, that provide the benefits demanded by society at prices sufficient to cover the costs incurred in producing them.” (Charles & Dan, 2002). Organizations reflect this truism very clearly and they survive only so long as they produce goods and services that generate revenues exceeding the costs incurred in producing them, that is, only so long as they make a profit.

Unlike living things, however, organisations, including businesses, can plan and implement fundamental or structural changes although it is clear that not all do so. Such changes can be of two types: (1) those that affect the relationship between the organisation and its environment, and (2) those that  affect  the  internal structure and operating activities of the  organisation. Typically, environmentally related changes affect the organisation’s effectiveness to a greater degree than internally oriented changes, which usually have greater influence on its efficiency.

In general system theory, effectiveness is defined as the degree to which the actual output of the system correspond to its desired output, while efficiency is defined as the ratio of actual output to actual inputs. In most organisations, much of management’s time and attention is placed on internal efforts designed to make day-to-day operations as efficient as possible. One of the principal reasons for this is that inefficiency can seriously retard the overall performance of the organisation.

However, organisation depend much more for their long-run success and survival on improvements in their effectiveness (that is, on how well they relate to their environments) than on improvements in their efficiency. Peter Drucker stated this most eloquently when he suggested that it is more importantly to do the right things (improve effectiveness) than to do things right (improve efficiency). Thus, if an organisation is doing the right things wrong (that is, is effective but not efficient), it can outperform organisations that are doing the wrong things right (that is, are efficient but not effective)

A classic example of these ideas is Consolidated and Crown breweries of the 1980s and early

1990s in Ogun state of Nigeria. At that time Crown breweries was by far the most efficient brewery producer in Ogun state and some part of Oyo and Ondo state.   However, the two did not see the changes occurring  in  the  marketplace that  Nigeria Breweries, and  Guinness Nigeria Plc  did. Consequently, in spite of their superior efficiency in the local market, they lost the battle for supremacy in their locality to Nigeria Breweries, and Guinness Nigeria Plc.

In Crown-products’ case it lack the ability to adapt to new technology of the industry.   Thus, even though the total demand for breweries products increased, the demand for Crown-Product ltd decreased as a result of change in taste. Consolidated survived, however, because it eventually responded appropriately to the change, while Crown-products failed as entity because it could not, or at least did not, respond effectively to the changes in its environment. We have called such changes strategic changes because they altered the conditions for effectiveness.

Profitability is a must for any organisation through which it generates surplus for its continuity of operations (Sukul & Mishra, 2003). Companies which are strategically managed usually have profitability as one of their objectives as it is through profits alone that they can survive. Higher profit also means efficient and effective working of an organisation. Companies, which cannot

make the desired profit, find it almost impossible to survive. Due to fierce competition the profit margins shrink as customers become more aware of return on investment, hence companies will have to gear themselves for efficient management of their resources to generate profits.

Clearly, organisations need to focus on external environmental changes and on being effective in order to survive. While this is true, the successful practice of management is unfortunately not quite that simple. The top management of organisations is saddled with the critical aspect of matching organizational competences with the opportunities and risks created by environmental changes in ways that will be both effective and efficient. The basic characteristic of the match an organisation achieves with its environment is called its strategy (Charles & Dan 2002). According to Mc Gugh (1985) in Oyedijo defines strategy is the mediating force between an organisation and its environment, that is, between the internal and the external context. Glueck (1980) defines strategy as  “a  unified,  comprehensive, and  integrated plan designed to  ensure that  the  basic objectives of the enterprise are achieved”.

Corporate strategy is top management’s major tool for coping with both external and internal changes. Corporate strategy can  be classified  into  three- growth strategies, defensive strategies  and  exit  strategies.  Growth strategies  are  designed  to  maintain  the  firm’s  existing competitive position in very rapidly expanding markets (Philip Kotler 2003).

The main intended outcome of strategy (at least for all commercial enterprises) is the successful positioning of the company in the market place – including satisfactory market share possible market leadership, adequate profitability and so forth

1.2       STATEMENT OF THE PROBLEM

Recently, there has been growing concern about the frequent collapse and poor performance of industries in our country. Business organisations are becoming more complex due to rapid changes

in the environment. It is increasingly becoming difficult to predict the environment accurately. Many organisations have faced the problem of how their businesses would survive in the face of unstable government policies and external threats such as the influx of Chinese products into the markets. As firms have to provide alternative infrastructural facilities to run their businesses, they are forced to carry high cost structure which reduces efficiency and results in loss of competitiveness for their products.

Many business organisations are collapsing. A lot  of manufacturing industries notably textiles industries have collapse. The brewing industries are not exempted for example, Top beer has disappear from the market. The factories of theses manufacturing concerns has now being turn to churches, especially in Lagos. However, few of these industry have survived. The question now is those owns that survive how are they able to cope and those that did not what did they do wrong? This  might  be  related  to  the  adoption  of  appropriate  corporate  strategy  that  can  promote profitability and growth. One of the strategies that have been used is merger and acquisition. It would be pertinent to find out how corporate strategy can be used to enhance business growth and survival by investigating the effect of merger and acquisition on market share and profitability and determine if joint venture contributes positively to return on investment, and whether corporate restructuring impacts positively on return on capital employed would go a long way in helping organisations survive in  hard times. Specifically, the research seeks to  examine the effect  of corporate strategy on profitability in the Nigeria brewing industry

1.3      OBJECTIVES OF THE STUDY

The objectives of this research are as follows:

(1)       To  find  out  the  extent  to  which  different  corporate  strategies  contribute  to  the profitability of our manufacturing brewing industry.

(2)       To evaluate the effect of merger and acquisition on the market share in the brewing industry

(3)       To show the contribution of joint venture on returns on investment in the brewery industry.

(4)       To examine if there is any relationship between exit strategy and profitability in the brewing industry.

(5)        To  evaluate  the  relationship  between  retrenchment  and  restructuring  on  return  on investment.

1.4      RESEARCH QUESTIONS

In order to achieve the objectives of this research, the study will attempt to provide answers to the following questions.

(1)       Is there any relationship between corporate strategy and profitability of a  business organisation?

(2)       To what extent do merger and acquisition influence market share in brewing industry in

Nigeria?

(3)       Does joint venturing have an effect on return on investment?

(4)       To what extent does exit strategy  affect profitability in the brewing industry?

(5)       To what extent do restructuring and retrenchment affect return on investment in the brewing industry?

1.5      RESEARCH HYPOTHESES

To provide answers to the above stated research problems, the following hypotheses were tested.

1          HO:     There is no significant relationship between corporate strategy and profitability in the brewing industry.

H1:     There  is  high  level  of  significant  relationship  between  corporate  strategy  and profitability in the brewing industry.

2          HO: There is no significant relationship between mergers, acquisition and manufacturer’s market share.

H 2:    There is significant relationship between mergers, acquisition and manufacturer’s market share.

3         HO: There is no positive relationship between joint venturing and return on investment.

H 3:    There is positive relationship between joint venturing and return on investment.

4          HO: There is  no  significant relationship between exit  strategy and  profitability  in the brewing industry.

H1 4: There is significant relationship between exit strategy and profitability in the brewing industry.

5.        HO: There is no significant relationship between retrenchments, restructuring and return on investment.

H1 5:   There is significant relationship between retrenchments, restructuring and return on investment.

1.6      SIGNIFICANCE OF THE STUDY

(1)       To the manufacturing organisation. This study is significant in that it can guide the management of any company in the identification of strategic method to adopt to actualize its objective or goals. It is expected to contribute theoretically and practically to the knowledge of strategy  for  profitability  in  the  brewery  industry  in  Nigeria  at  large  and  also  encourage management to be proactive.

(2)       Researchers:           Students and researchers will benefit immensely from the work, as it will be a useful research material.

(3)     Government

This study x-ray the challenges and prospects associated with merger and acquisition which can help  the  government  to  constantly provide  the  enabling  and  conductive environment  for  the organisation to flourish.

1.7     SCOPE OF THE STUDY

This research work is aimed at  examining the impact of various forms of corporate strategy (growth, defensive and exit) on profitability of the selected breweries in Nigeria (Consolidated Breweries, Nigeria Breweries, and Guinness Nigeria Plc.). It  measures different development strategies adopted by the organisations to survive between 2003 and 2008.

1.8     LIMITATIONS OF THE STUDY

This research work is not devoid of the problems associated with searching for materials on the

Internet- server breakdown, electricity outage, and bad flash disk and so on.

Time and money are also barriers for the study. A lot of money has been expended even before the commencement of the real study. A lot of travelling was involved in visting these organisations while  distributiing  the  questionnaire and  retriving  them  from the  respondents.  Also  a  lot  of secretarial work was required in typing, photocopying and duplicating materials. All these require fund to be accomplished

Another limiting factor is the problem faced by the researcher, which was the negative attitude of some respondents. Some of them claimed that they were too busy and refused to accept the questionnaire. Even some of those who accepted  refused to  fill the questionnaire, and some who accepted, did not return them, while others refused to answer certain questions in the instrument.

Worse still some answered the questionnaire arbitrarily- in order to get the researcher out of their way which resulted in expanding the population to include assistant managers and supervisors.

In all, however, we obtained responses, which we consider adequate for the study, we are also covinced that  the result  obtained  from the  study is  not  greatly diluted by the effects of the constraints.

1.9      PROFILE OF CONSOLIDATED BREWERIES PLC

Consolidated Breweries Plc is the product of the merger between Continental Brewery, Ijebu-Ode in Ogun State and Eastern Brewery, Awo-Omamma in Imo-State in 1990.

Until their mergers, the two Breweries functioned as regional giants both in the West and

Eastern parts of Nigeria.

The two Breweries had the trade mark of the French Brewery Giant (Brasseries et Glaciers

Internationals) to produce “33” lager beer.

With the increasing trend of competition, buy-over, mergers, acquisitions, foreign technical participation and above all globalization, for companies to meet up with increased and enhanced production, appropriate and modern technology, foreign capital injection and above all to tap from abundant local and  foreign markets, the two breweries had little choice than to merge and assume relevance in the Nigerian Brewing industry.

Since their merge to form Consolidated Breweries Plc, the company has not only added malt drinks to its range of products, but have also assumed the position of the third largest Brewery in Nigeria.

With its corporate headquarters at Iddo House   in Lagos, the brewery has two modern plants at Ijebu-Ode and Awo-Omamma and about twenty depots as well as over five hundred distributors across the nation.

Consolidated Breweries Plc’s firm commitment to Nigeria in the form of investment in new technology is seen in its recent acquisition of complete and automated Brew house and Bottling lines as well as expansion of existing facilities in the two plants.

With a staff strength of one thousand and fifty six, made up 5 expatriates,  53 Managers and 998 other  staff.    (According to  2007,  Annual Report  &  Accounts of C  B  Plc)  and  currently in partnership (Joint Venture) with Heineken Company ( a brewing giant in the world) Consolidated Breweries Plc, looks poised to play a major role in the Food and Beverage Industry in Nigeria.

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