Chapter in Theory essay ch 8

May 2, 2019

BUS 442 / Meilich

Chapter 08 TiP – Zany Fifth Transformation

: Alcoholic Beverage Industry

Analysis and Application of the Chapter’s Concepts

The Zany Fifth Transformation company is an alcoholic beverage maker that specializes in making fun and whacky alcoholic beverages. They focus solely on customers who drink hard-alcoholic drinks. In order to keep their alcohol zany, they receive different type of crops from all over the globe like corn, rye, potatoes, fruits, barley, and blue agave. Mixing these different fruits, vegetables and plants gives their alcohol a unique flavor that cannot be experienced anywhere else. They outsource all of the crops from different farmers, they create and bottle the alcohol in-house, and they sell the finished goods to independent retailers.

Vertical Integration Strategies

· Zany’s current suppliers and buyers have significant power over the company. Due to the fact that they outsource their crops and sell to independent retailers, Zany’s suppliers and buyers have leverage over the firm. In order to eliminate some of the leverage, Zany must use both forward and backward integration. The firm must adopt the idea of backward integration by purchasing land in multiple countries that provide their desired crops. This will allow for Zany to create subsidiaries that provide key inputs to making alcohol such as blue agave, potatoes, corn, and rye. This move will help Zany avoid being hurt by suppliers holding out for higher prices or providing materials of inferior quality. This backward integration could pose a risk for Zany because they would be entering a completely new industry, the agricultural industry, and they would need to be skilled in that area in order for the integration to be successful.

· In order for Zany to capture more profits, they need to pursue a forward integration strategy. This means that instead of Zany selling its finished goods to retailers, they need to create their own brick and mortar locations in order to obtain the profits that are currently being enjoyed by other companies. Plus, employees at the brick and mortar locations will be able to provide customers with hands-on knowledge about the alcohol being sold compared to employees who are not familiar with the products. However, This process is not cheap and it is not simple. Zany needs to make sure that they have the skills and expertise in this new industry and enough capital to cover the expenses of vertical integration.

Diversification Strategies

· If Zany wants to diversify its company then they need to adopt a related diversification strategy because it is more likely to succeed when compared to an unrelated diversification strategy. The non-alcoholic beverage industry has significant similarities to the alcoholic beverage industry and it would be a good choice for Zany to diversify and create non-alcoholic brands that will go hand-in-hand with their alcohol products. Zany could use all of their exotic fruits and herbs to create an array of crazy and flavorful drinks that are non-alcoholic. They could even sell the idea of buying Zany’s hard alcohol and mixing it with another Zany’s drink.

Three Tests for Diversification

· Entering into the non-alcoholic beverage industry could be good and also risky for Zany. However when talking about industry attractiveness, the non-alcoholic beverage market is expected to grow by 5.8% from now until 2025. Despite the health concerns related to carbonated soft drinks, the market is growing because functional drinks are becoming more and more popular (Nonalcoholic, 2017). This still could be risky for Zany due to the fact that there are major players in this industry already, Coke and Pepsi, and those competitors can squash new entrants easily.

· Zany will suffer major expenses if they were to diversify their business. They would have to buy stores or land to build stores, a wide range of different ingredients needed for different non-alcoholic beverages, and new machinery to create and bottle the finished product. If they were to acquire different non-alcoholic beverage making companies, it would still be very costly for them to enter into this new industry because they would have to pay millions of dollars to buy their way into establishing a foothold within that industry.

· I believe that Zany would be better off not diversifying its business because neither their alcohol nor their non-alcohol segments would benefit from this. It would be very expensive for Zany to successfully enter into the non-alcoholic beverage industry and it would be even harder to convince customers to drink unhealthy non-alcoholic beverages and alcoholic beverages at the same time, especially when people are getting more concerned about the health related issues that accompany drinking these drinks.

IRMe

This reminds me of the Cola Wars case because Coke and Pepsi both used diversification and vertical integration. When Coke and Pepsi’s rivalry started to heat up, they both diversified into the non-carbonated drink industry by buying companies like Gatorade, MinuetMaid, and Aquafina (Coke, 2016). Even to this day, both companies strive to be the leader in both the carbonated and non-carbonated drink industry. This case also reminds me of the Trader Joe’s case because Trader Joe’s would create their own low cost brand of foods instead of buying them from outside suppliers. This is a perfect example of backward integration because Trader Joe’s moved back along their value chain and entered into their supplier’s business.

References

Coke launches non-carbonated drink Aquarius. (2016, December 27). In The Economic Times. Retrieved from https://economictimes.indiatimes.com/industry/cons-products/food/coke-launches-non-carbonated-drink-aquarius/articleshow/56203326.cms

Nonalcoholic Beverage Market Analysis By Product, By Distribution Channel, And Segment Forecasts, 2018 - 2025. (2017, October). In Grand View Research . Retrieved from https://www.grandviewresearch.com/industry-analysis/nonalcoholic-beverage-market

1. Backward integration strategy involves a firm _____ _____ along the value chain and entering a _____ _____.

a. moving forward; buyer’s business

b. moving forward; supplier’s business

c. moving back; supplier’s business

d. moving back; buyer’s business

2. Which one of these is NOT a test for diversification?

a. How attractive is that industry?

b. How high is the number of suppliers in that industry?

c. Does one side or the other gain competitive advantage?

d. How expensive will it be to enter the industry?

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