Question

Evaluate Heineken’s corporate-level and international strategy using concepts and tools from the course.  How has the entries into new product and geographical markets created value for the company? What are some problems with its diversified global operations and how can these be addressed?

Answer 1

1. Introduction

Heineken was founded in 1864 by Gerard Adriaan Heineken, who had bought the Haystack Brewery in Amsterdam. After nine years, the name of the brewery was changed to Heineken Brewery and with this change officially began the production of Heineken beer. The original brewery was used until 1988 and today it is a museum called “The Heineken Experience”. The company was focused on brewing beer until 1933 when they started exporting their product to other countries, such as the United States. Once they had gone global, Heineken turned their focus towards acquiring other brands, such as Brand, Scottish & Newcastle, FEMSA, Lagunitas and their biggest rival Amstel. This was part of their global expansion strategy which resulted in the company being one of the world leaders in the beer industry today (The Heineken Company, 2017). Heineken is active in the beverage industry, specifically the brewing industry. Today, Heineken is an independent global brewer, active in 178 countries across the world, with operations in over 70 countries and a total of 85.000 employees. The company is the number one beer brewer in Europe and the number two beer brewer in the world. The product portfolio consists of more than 250 beer brands, with brands such as Desperados, Amstel and Sol. The brand stands for quality of the product and the company aims to be a leading brewer in all of the markets they operate in. Furthermore, the company’s aim is to have the most prominent brand portfolio in the world (Heineken N.V., 2015). Some key figures from 2016 include an increase of organic revenue of 4.8%, with revenue per hectoliter up to 2.2%. Furthermore, the operating profit grew by 9.9% and the overall Heineken brand grew by 3.7%. Heineken wants to further grow and expand their brand through innovation, acquiring existing breweries, investing in key developing markets, and building new breweries (Heineken N.V., 2017). The main question of this report is: “Does Heineken have a good strategy?”. The sub-questions are: “Are there some risks in their strategy?” and: “How can they improve their strategy?”. T

he practical goal of this report is to evaluate and implement the Entrepreneurial Formula in a correct way, to better understand the success of the company and if the need to improve their strategy exists.

2. Analysis of the entrepreneurial formula

2.1 Competitive system

The competitive system in which a company operates is very important to evaluate and reevaluate in order to ensure a company retains their competitive advantage. Factors such as target markets, competitors, rules of competition and the condition of the industry itself are all factors that need to be evaluated in order to gain an understanding of the environment a company operates in. Therefore we begin our analysis of the Entrepreneurial formula of Heineken by analyzing the competitive system in which they operate.

Target Markets: Heineken owns 17.7% of the global market share, owns more than 250 brands and is present 4 in more than 70 countries. Depending on the region, the performance of Heineken differs. In 2016, the Africa – Middle east division the company performed very well despite the macroeconomic issues that occurred in these areas (rising inflation and currency pressure weighed on performance). During the same year, the American division experienced a strong growth and now represents 24.3% of regional revenues as a percentage of the total. Moreover, the Asian-Pacific division experienced an overall growth due to the increase in consumption in Sri Lanka, Vietnam, Cambodia and Malaysia. The strategy to invest in company’s brands, premiumization and innovation, combined with a strong focus on operational excellence, is paying off (The Heineken Company, 2017). The company also focuses on a large segment: all adult consumers. Their main market consists of men aged between 21 and 34 years old, which make up 63% of their consumer base. Most of these men are sports fan, have a college education background and belongs to the class with mid to high income (Heineken Annual Report, 2016). Naturally, their expectation about the product varies according the country we are referring to, but an overall trend can be identified. Since the target group appertains to the so-called “millennial”, their needs are evolving and becoming more and more complex. According to the central Piedmont Community College, these customers have a complex personality, are confident and progressive and able to navigate any social situation (CCPC, 2016). Due to this, they demand top quality product with a reasonable price, a differentiation in tastes and a beer conform the every situation.

Environment: To determine the environment in which Heineken operates we have chosen to perform a PESTEL analysis to analyze the key components of the environment. From a political and legal point of view, Heineken meets heavy regulations regarding the restrictions on drinking ages and all the governmental anti-alcohol campaigns, which could affect the company. To adapt to these regulations Heineken has chosen to work in tandem with local governments on this issue. In fact, Heineken participated in a lot of campaigns concerning responsible drinking in order to increase awareness of the problem in their youngest consumers. The economic side of the environment is experiencing a slowdown due to the lack of growth in income of middle class consumers and the huge amount of beers available on the market. Moreover, the price of raw materials is fluctuating as these materials are becoming scarce. Heineken is already working in order to overcome these issues by creating new networks of suppliers worldwide. The social-cultural aspect of drinking is changing its conception. Indeed, there is an increasing awareness regarding alcohol and its effects on humans. People are following a healthy lifestyle and trying to avoid “cheap and unhealthy” beers and instead they are starting to appreciate premium and craft beers. Heineken has been investing a lot in the last years in order to strengthen their customer relationship (by offering new products and rewards). The company is also facing a technological revolution since innovative techniques are being introduced in beer production. Furthermore, they developed software that is able to interact digitally with customers. Nonetheless, Heineken is not losing sight regarding the environment regulations and the eco-friendly processes and materials used in their products.

Competitors: According to Birritalia 2016/2017, the current leader in the Italian brewing industry is Heineken (with 28% of the market share), followed by Peroni (19%) and AB InBev (8,7%). These companies not only compete with each other for control of the Italian market, but they also compete with approximately 682 other active brewing companies in Italy. The greater number of companies all competing for a greater market share drives down the profitability of the industry as a whole. Due to the low switching costs and the perishability of beer, there tends to be a greater price competition between competitors (Economics Online, N.D.). Relatively small costs of changing products and the variety of possible substitutes for beer are the main causes that determine the level of competitiveness. The solution to beat its main competitor, Ab InBev, is to keep on with the acquisition process of small breweries worldwide in order to acquire a larger market share. Heineken should not care too much about future competitors since the brewing industry has high levels of brand loyalty, meaning that customers are more reluctant to change. Due to this, new competitors will have to significantly advance their brand value in order to compete effectively and convert customers to their brand.

Rules of Competition: Regarding the rules of competition, Heineken follows very high standards and it’s proud to share and communicate its values. First of all, the company goes out of its way to avoid capturing the attention of minors. In fact, they avoid displaying content that could be associated with schools or children’s media and use restrictions on social networks. Heineken ensures that its practices are always legal, ethical and truthful. The company is proud of their brand identity and tries to communicate a key message for their success: drink responsibly. One example given by Heineken is the fact that the brand is never associated with antisocial behavior or overconsumption (Heineken, 2016).

Key success factor: A key success factor for a trade, profession or industry is something that a business must do to be successful. It is a necessary condition for success. The key success factors that drive Heineken are: differentiation, marketing, premium quality, cost, customer experience. In each market that they enter, Heineken creates a strong brand and introduces different beers to better serve the tastes of each individual market. As for marketing, Heineken’s marketing strategy is constantly changing and updating to capture the interests of their consumer base. Due to huge investments made within the last few years, Heineken built a brand image capable to gather all the consumers within the target group. As for premium quality, Heineken has the highest quality beer brands. To ensure their products quality, Heineken uses a superior brewing process, high-quality materials, and checks the quality of the taste of the beers they produce. Even though they are using a premium price strategy, their products are the perfect quality-price tradeoff so the cost of their products is a key success factor for them. Last but not least, the Heineken Experience has been an integral component of their success. Heineken is trying to embrace moment 6 marketing by giving to the customer the perception of beer associated with our best moments and it can also be the indulgence for the consumers’ premium moments. Moreover, Heineken has different programs to reward their customers. For example, they are the principal sponsor of the UEFA Champions League, so in Europe they have promotions where you can win tickets from some games, and also the final match. In some events around the world, they always have a station where they give out gifts, such as speakers, cup holders, shirts, souvenirs, etc. In conclusion, Heineken believes that corruptions must eliminate from society. Heineken decrease and avoid the fraud and conflict between business benefits (Heineken, 2016). As mentioned above, one of the key characteristics of the brewing industry has always been the rivalry among competitors in the industry. Heineken is in competition with Ab-Inbev and Carlsberg Group for gaining the greater market share possible worldwide. But due to the low switching cost among the beer industry, this competition drives down the overall profitability. In order to overcome the competition, Heineken should keep on acquiring more national breweries globally (to expand their already consolidated global presence) and increase advertisements in multi-language toward young people. From the production point of view, the company should try to make its own ingredients and develop a strategy for recycling glass. Moreover, Heineken could try to diversify their offer and push to develop new low carb (low calories) beers in order to meet the needs of all the customers.

Competitive Advantage: A competitive advantage is a condition in which a company has some strength - compared to the rivals - that let it: serve the customers better and realize higher margins. Concerning the competitive advantage for Heineken we are focusing on some drivers that the firm adopted in order to perform well in most segments. Heineken has core competencies that allow the company to perform well in most segments by impacting positively on the different key success factors.

Cost advantage: Even though the company is using a premium price strategy, it is able to offer a product or service similar to the one of the main competitors in terms of features and performances but at a lower price. This is possible by reducing costs compared to their rivals. It is necessary that the company costs are lower than any other competitors; otherwise competitors will be able to reduce prices, gaining customers. Heineken does just this within the premium beer market. Although they market themselves as a premium product, Heineken is able to use this strategy to better position themselves against other beer brands that also market themselves as a premium quality beer.

Product and process innovation: Heineken will invest €50 million in Italy for the next three years for the creation of a new production line. The investments aim to enhance technical, security and environmental improvements. In order to foster these sustainable practices, the company has invested €25 million in the last five years. Sustainability-related processes will be getting funds in the form 7 of €11 million investment for security, €7 million investment to enhance productive efficiency and €3 more million for environmental protection. The new production line will cost €15 million: a big portion of the production will be shipped abroad and towards their new Chinese breweries. They will be making a competitive product, leveraging their economies of scale to lower the price without sacrificing the quality. When it comes to innovation, Heineken’s leading Italian brand Birra Moretti has truly stood out. Birra Moretti has experienced resounding success in Italy and has become the leading brand of Heineken Italia spa. Birra Moretti capitalizes on the differences between regions in Italy by differentiating its flavors by region. Depending on the region, the recipe for the beer will change in order to include regional ingredients. As of now there are 4 regional beers brewed from regional ingredients in Friuli, Tuscany, Sicily and Piedmont (IlSole24Ore, 2015). This constant investment into product and process innovation allows Heineken to retain their competitive advantage by exploring different possibilities for products that better meet their consumer needs.

Technological innovation: In order to keep their competitive advantage, Heineken keeps their thumb on the pulse of technological innovation. They are quick to update and invest in new machinery for their breweries and packaging plants to ensure that they optimize their production. One example where they have successfully utilized new innovations is in the Massafra packaging plant in South Italy. After the opening of the new establishment in Massafra, Heineken created a new packaging line called “Combi 4”. This new line allows the company to produce packaging with more flexibility and automation, which allows the plant to produce and fill more bottles of beer faster. In fact, the implementation of this new packaging line increased production in this facility from 300.000 hl to 2 million hl of beer per year. Among the most innovative elements in the establishment we can find a “filling machine”, completely automated, which allows to fill all the different types of bottles only by changing the software’s parameters. Furthermore, the machine is linked to 3 robots with the function of palletizing/depalletizing of the crates. With only 200 employees, the Massafra establishment works on several brands of the Heineken group and manages to be one of the most efficient plants for Heineken. The institution of technological innovations such as the ones they implemented in Massafra allows Heineken to create a better quality product for their customers while lowering their costs. This helps Heineken realize higher margins and contributes to their financial success.

Strong brand identity: Sustainable growth requires that the firm acts according to their values of respect and passion. These values guide how Heineken works and conducts their business each and every day. The firm works with “personal integrity”, commercial identity and company identity in order to ensure the preservation of their good reputation and the capability to operate in confidence with all the stakeholders. They operate showing their respect for people and for the society (The Heineken Company, 2017).

Key partnerships: In order to boost the international marketing, Heineken has sponsored a lot of entertainments activities all around the world. For example, Heineken is a major sponsor of tennis championships such as “Wimbledon” and is an official partner of the “Uefa Champions League“, the world's most prestigious club football competition (The Heineken Company, 2017). Partnerships like these, benefit Heineken by helping them get their name out to potential consumers as well as reinforce their brand image. These partnerships contribute to their competitive advantage by not only helping to reinforce their brand image but by providing their loyal customers with unique experiences through these partnerships. For example, Heineken will provide their customers an opportunity to win free tickets to UEFA matches. This opportunity contributes to the ‘Heineken Experience’ and raises the brand image in the eyes of their target market.