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Strategic Management

Module :MG4908 Lecturer: Elaine Berkery


Questions answered on the case study Wimm Bill Dann 15 years in business Shane Gaughan 5/4/2013 Student ID 0173061

Question 1
Introduction
Strategy can be defined as the determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resource necessary for carrying out these goals Chandler (Berkery, 2013) which means it is the scope and direction of an organisation over the long term. Its purpose should be to seek competitive advantage, fit within the business environment and utilize the organisations resources and competences to identify the strategic capability and it should reflect the values and expectations of its stakeholders. Any strategy chosen will often be complex in nature and be made in uncertain times. It affects operational decisions and requires an integrated approach both inside and outside of the organisation and will involve considerable change. The different strategies pursued by Wimm Bill Dann from its foundation in 1992 up until 2007 at corporate, business and international level are described and explained based on the case study Wimm Bill Dann 15 years in Business.

A New Russia
Wimm Bill Dann (WBD) was founded in the beginning of a social, political and economical revolution with the fall of the Soviet Union in 1991. (William, 2011) The collapse of the communist state presented an opportunity to many entrepreneurs in Russia. WBD entrepreneurial founders were no different in this respect. As the country moved from a command structure to a market structure, the restriction on consumer goods prices were removed in early 1992 on 90% of products as part of economic restructuring measure more commonly known as Shock Therapy. (William, 2011). In late 1992 WBD began production and distribution of fruit juices. WBD had to determine what competitive strategy1 to employ for them to gain competitive advantage. They launched their first products with a western style branding of J7. WBD strategy for this product would be considered a differentiation strategy. Differentiation strategy is defined as seeks to provide products and services that offer benefits that are different from those competitors and that are widely valued by buyers (Johnson Gerry, 2008, p. 259). The brighter modern packaging and western style branding was attractive in comparison to old soviet products and could be seen as a perceived benefit by Russian consumers based on appearance alone. The products were launched without a

Is concerned with the basis on which a business unit might achieve competitive advantage in its market

price premium. The strategy was successful as the J7 brand became a benchmark for any domestically produced juice in Russia. (Wimm Bill Dann 15 years in Business, 2007). Expansion As stated earlier price restriction on 90% of consumer goods were lifted in 1992, the remaining 10% were raised remained centrally controlled. These included energy and food staples such as bread, sugar, vodka and dairy products, the restrictions on dairy were removed in 1994. (William, 2011). The entrepreneurs at WBD seized another opportunity and acquired Lianozovo Dairy in 1994, which is stated in the case study as one of the largest in Europe at the time. WBD had made its first acquisition2 and began a diversification strategy which is defined as a strategy that takes an organisation away from both its existing markets and its existing products (Johnson Gerry, 2008, p. 262) which made this the first corporate strategy developed by the company. WBD motive behind this was taking advantage of the change in the environment with this acquisition and speed of entry into this market could be considered critical.WBD continued this strategy with further acquisitions in 1996 and 1997 of Baby Food plant and a further two dairies in Moscow making it the market leader in dairy in the Moscow region. The success of these acquisitions saw WBD acquire 12 further enterprises throughout Russia. . Dairy farms were also acquired through lease agreements initially and then investing directly in the acquisition of the farms (Wimm Bill Dann 15 years in Business, 2007). WBD also opened or acquired trade branches in 26 cities and distribution in 40 cities in Russia to complete their market penetration.3 In 2000, WBD made its first international acquisitions, with majority stakes in dairies in the Ukraine, Bashkortostan and Kyrgyzstan. (Wimm Bill Dann 15 years in Business, 2007) These acquisitions can be considered a Strategic Fit4 (Berkery, 2013) in that they complemented existing business and further strengthened the companys position in becoming a national dairy producer. It is not made known if these acquisitions were or were not an Organisational Fit5. But considering the transition from controlled to free market, one could

2 3

(taking over the ownership of another) (Johnson Gerry, 2008, p. 357) Where a company gains market share (Johnson Gerry, 2008, p. 258) 4 Does the target firm strengthen or complement t he acquiring firms strategy? (N.B. It is easy to over -estimate this potential synergy). 5 Is there a match between the management practices, cultural practices and staff characteristics of the target and the acquiring firm?

presume that WBD organisational practices would be imposed on the new acquisitions and an Absorption6 (Berkery, 2013) method would be applied. In this period of expansion a number of other external factors occurred which affected WBD. The ability to make acquisitions was helped by the effect of privatisation in the years 1992 to 1994 where 85% of small enterprises and 82,000 Russian state enterprises were privatised between 144 million Russian citizens who received coupons valued at a nominal 10,000 roubles. (William, 2011) The effect of this though was many companies starved of capital for modernisation. In the case study it states that WBD modernised the acquisitions which given the investment needed were possibly purchase at an attractive price, giving poor inexperienced shareholders option to redeem coupons, and adding the financial motive of Financial efficiency7 (Berkery, 2013) to the acquisitions. It is unknown what method of financing was use for the acquisitions or modernisation programs. Another external effect which helped WBD was the 1998 Russian crisis or Russian Flu (BBC News, 1998). The Russian currency lost 75% of its value pushing up domestic prices. Importers into Russia were badly affected, whereas WBD as a local producer was able to increase sales and so keep ahead of their competitors. Change of Strategy After the 1998 crisis, Russian consumer disposable income was at its lowest in 1999 and then began a constant upward trend year on year. (Adomanis, 2012) With Russians now becoming wealthier, WBD changed their strategy to reflect this with the development of Russias first dairy and juice umbrella brand Ginger Up. Similar to the J7 brand but with vitamins added and aimed at the more health conscious with a 10% premium price in comparison with J7. Other products of higher value, such as mousses, fruit flavoured milk, puddings and fruit flavour cheeses were added in the dairy line. A new line of health orientated enriched products (Wimm Bill Dann 15 years in Business, 2007)branded Neo which were fruit and milk cocktails enriched with vitamins and live bacteria were also produced with a 25% price premium above average retail prices. (Wimm Bill Dann 15 years in Business, 2007). There is a change in the competitive strategy to Focused Differentiation which is defined as a strategy that provides high perceived product/service benefits, typically justifying a substantial price premium, usually to a selected market segment (or niche) To pursue this
6

Strong strategic interdependence and little need for organisational autonomy. Rapid adjustment of the acquired companys strategies, culture and systems 7 A company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt).

focused differentiation strategy into other market WBD began a series of acquisitions outside of its core business of juice and dairy. In 2000 WBD began acquire breweries across Russia, a market described as saturated (Wimm Bill Dann 15 years in Business) the breweries were later formed into a separate company, possibly for the purpose of a flotation. In 2003 WBD entered the mineral water market with the acquisition of Healing Spring Ltd and Geyser Ltd. This market was also saturated and had dominant competitors. It also entered the upper medium cheese market in 2003, which had been dominated by importers in the premium and upper medium market. Although all these products are different, the common theme with all of them is that their respective markets were experiencing significant growth according to the case study. The reason for move into these markets may have been to also try and get some Synergy8 between the ranges of products by using the existing distribution network to complement these new acquisitions, although a weak argument.

Effect of expansion through acquisitions & diversification


Heading into 2004, WBD operating costs had spiralled across support departments. Net profit was down 40.6%. Juice sales were down while the market itself was up. And 10 years of expansion and modernisation of plants and cost intensive promotion of new products had led to a reduction in profitability. WBD profitability margin fell while its competitors increased in the same periods markets had increase. WBD was in need of restructuring to streamline its operations and reduce its operating costs across all business units. The focus on cost reduction paid dividends in a within a short period of time.

Conclusion
15 years in business is such a short time considering the breath and rate of expansion and diversification pursued by WBD. The strategy seems to have been working until the turn of the century and the turning point can be attributed towards the following issues. Prior to 2000 WBD focused on expansion and diversification within it market, building upon its core business of juice and dairy. The cost of expansion and modernisation of acquisitions was significant and was compounded by managements failure to streamline departmental costs and achieve synergy across their business units. The change of strategy into focused differentiation and into sectors outside of the core business weighed heavily did not provide the growth expected and the acquisitions in the other sectors were already saturated. It could be questioned as to whether WBD actual had a strategy for the organisation and were more opportunistic in their approach towards the development of the company.

refers to the benefits that are gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts (Johnson Gerry, 2008, p. 263)

Question 2
Year Acquisition / diversification What happened Effect New market due to liberalisation. Company able to compete with importers with lower costs same quality. Company new and product new, need to gain 1st product of business customers Expansion of product range, with similar 1st acquisition/Diversification packing requirements Does it make sense New era. Domestic products low quality. Opportunity to provide high quality low cost. Prices controls removed on dairy

1992 1994

Juice Lianiozovo Diary

Acquisition of dairies in Moscow and baby food 1996 -97 plant

Introduction of new products to the market, yoghurts, milk, deserts

Modernisation to achieve efficiency and scale, dominant player in Moscow market. High risk purchasing businesses. Moscow big market. Additional spend required to modernised Privatisation program the plants offers great opportunities Begins to become a national producer. The 1998 Russian crisis help boost market share and conditions for takeovers. Importer competitors negatively impacted by crisis

1998

Begins expansion outside of Moscow

Further acquisition of 12 enterprises out to Far East, Siberia, Central and Southern Russia. Invested in farms to secure supply of milk

Acquisition of farms

Opened and acquired Trade branches/ distribution companies

2000

International Acquisitions

Insulated the company from supply shocks to its key raw material Has presences in areas where WBD has no production facility. Reach expanded In 26 cities opens trade across Russia and has extensive branches and distribution in 40 distribution network ahead of cities competitors. Expansion into foreign markets and access to rich resource regions which Acquisitions in Ukraine, supported supply. Also acquire new Bashkortostan and Kyrgyzstan. cheese capability High growth market. 16% pa Possibility to use existing distribution network. Highly competitive and saturated market. Many established competitors Importing products back into Russia Boost income in summer Premium Priced products. 1st domestically produced in Russia. High growth market

Natural to roll out strategy that worked well in Moscow Helps control raw material costs, especially a critical one Creates competitive advantage in have a distribution and sales network that beats competitors Access to rich resources areas to feed into raw material supply chain Reason, high growth and possibly acquisition prices attractive. Tough market to break though. Not enough details available Not enough details available Misjudged consumer preferences, poor return on investment

2000 2000 2000

Move into new product away Acquires Breweries from dairy and Juices Joint Venture With Globus New product range. Canned in Hungary foods Licensing agreements Ice cream Launches health orientated food/drinks for children Range of products, with added and adults vitamins

2001

2003

Launches production of mineral water

High growth market 23% pa. Boost income in Summer Possibility to uses distribution network. Highly competitive Purchases production, bottling and saturated market. Big players. Makes sense to increase and wells PepsiCo, Coca Cola and Nestle revenue in the summer. Market must have been dominated by importers for more reasons than given. Russia not good at high quality cheese? Percieved as low value

2003

Acquires cheese production company

launches medium to high quality processed cheese

Identifies a niche for domestically produced high quality cheese, although market dominant by importers.

Figure 1 Table of Wimm Bill Dann acquisitions and diversification 1992 -2003

Introduction
Diversification is defined as a strategy that takes the organisation away from both its existing markets and its existing products (Johnson Gerry, 2008, p. 262) The strategy has also being described as perhaps the most radical strategic direction that an organisation can take. (Johnson Gerry, 2008, p. 262) Given that, organisations need to consider the reasons for taking such radical move away from its core business. The table Figure 1 shows the acquisitions and diversifications undertaken by Wimm Bill Dann between the years 1992 to 2007 which will analysed for the reasons for their undertaking and evaluated as to whether it was the correct move for the company

Main Body
There are three potentially value creating reasons for diversification that can be used: 1. Efficiency gains where the organisation uses existing capabilities or resources to new markets or products 2. Stretching corporate parenting capabilities Help develop corporate ability to manage a range of different products or services which can be applied to businesses that do not share resources at an operational unit level (Johnson Gerry, 2008, p. 263) 3. Increasing market power Having a diverse business allows an organisation to cross subsidies business with one another in a way that competitors may not be able to do and in so doing maintain competitive advantage and possible drive out competitors. Between the years 1992 and 2000 WBD focus remained in the juice and dairy sectors where expansion was achieve through acquisitions. The diversification in this period could be described as Related Diversification. This is defined as corporate development beyond current products and markets, but within the capabilities or the value network of the organisation (Johnson Gerry, 2008, p. 265) It has been stated in the case study that acquisitions in this period were selected on the basis of technical capacity, access to local markets, and resource base and product specialisation of the dairies. The products used similar packing, were in same food groups and could use existing networks. The acquisitions were modernised boosting capacity capabilities of the group (efficiency gains).

The product portfolio expanded from fruit juice to include yogurts, milk, baby food, baby milk, cottage cheese and deserts (Stretching corporate parenting capabilities). As result of the activities of WBD in this period the company became the market leader in the juice sector which was dominated 90% shared with three other companies, controlled the dairy sector with 34%. 15% of all raw milk was produced was in just 4 regions and WBD had production facilities in them. The company secured farms to protect its raw material supply of milk, fruit and vegetables. (Backward integration: development into activities concerned with a companys inputs) It developed an extensive distribution network (Forward integration: development into activities concerned with a companys outputs) ahead of competitors with trade branches in cities where it did not have production facilities and distribution centres in another 40 cities across Russia. (Increase market power). In 2000 WBD acquired several breweries across Russia. There does not seem to be any apparent efficiency gains from this move. It does however stretch corporate, but does little to increase market power. It is more likely to be a drain on other business units as this was a market that was saturated and contained well established competitors and would require significant marketing spend. The reason for entering into this market seems to primarily be on the bases of it being a growth market. The decision by the company to split the brewing business units off into a separate company could indicate that the business was not a strategic fit (Berkery, 2013) The joint venture with Globus, has virtually no information and therefore cannot be assessed WBD diversified their products further into health orientated products based on the change of consumer preferences that was being indicated in the market. These products were high quality and high price. These were essentially the same products with different branding and added vitamins. So there were efficiency gains achieved by this diversification. It did little to stretch corporate, but it did increase market power by increase the range of customers that WBD could cater to in the dairy and juice market from low to high spend. The move in 2003 into the mineral water sector seems to be similar to the move into beer. Similar market conditions, high growth, saturated and dominant players. No major efficiency gains apparent, possibly the distribution network would be used. Corporate does get stretched in this new market, but again similar with the beer market, heavy investment in marketing would be required to gain market share. The move does increase market power as it is a

revenue stream to level out summer revenues; however this could be negated and surpassed by the cost to gain a foothold in the market. The commencement of production of high quality processed cheese by WBD in 2003 is on the basis of a gap identified in the market. This is efficiency gain since WBD already has lower to medium quality cheese in production and the initial capabilities and resources can be drawn on. The high end market though has been dominated by foreign importers, and the low end by domestic producers, which raises some questions as to why this is. Possibly Russia is unable to produce a high quality cheese. The move does not stretch corporate but does add to market power as WBD can now cater to the full spectrum of the cheese market from low to high end.

Conclusion
WBD was successful with its diversification programme while working on its core business within the juice and dairy markets. Its move outside of the core business was into markets that were experiencing high growth. Rather than a clear diversification strategy, it is possible that WBD were simply opportunistic in their approach to the development of the organisation and the opportunities were not as clear cut as those prior to 2000 and the competitors faced in the new millennium brought many years of experience with them.

Bibliography
Adomanis, M., 2012. Forbes "Russias Transition from Communism in Figures. [Online] Available at: http://www.forbes.com/sites/markadomanis/2012/02/08/russias-transition-fromcommunism-in-figures-population-disposable-income-pensions-investment-and-inequality/ [Accessed 2013 04 24]. Anon., n.d. s.l.:s.n. BBC News, 1998. BBC News Russia Crisis. [Online] Available at: http://news.bbc.co.uk/2/hi/special_report/1998/08/98/russia_crisis/165646.stm [Accessed 25 04 2013]. Berkery, E., 2013. Strategic Management Powerpoint. s.l.:s.n. Berkery, E., 2013. Strategic Management. Powerpoint Mergers & Acquistions. s.l.:s.n. Hammonds, K. H., 2001. Fast Company. Michale Porters Big Ideas. [Online] Available at: http://www.fastcompany.com/42485/michael-porters-big-ideas [Accessed 15 04 2013].

Johnson Gerry, S. K. W. R., 2008. Exploring Corporate Strategy. 8th ed. s.l.:Pearson Education Limited. Johnson Gerry, S. K. W. R., 2008. Exploring Corporate Strategy. In: 8th Edition ed. s.l.:Pearson, p. 357. The Library of Congress, 2011. The Library of Congress. Russia Country Studies. [Online] Available at: http://lcweb2.loc.gov/frd/cs/rutoc.html [Accessed 22 04 2013]. William, C., 2011. Russia Country Studies. [Online] Available at: http://lcweb2.loc.gov/frd/cs/rutoc.html [Accessed 15 April 2013]. Wimm Bill Dann 15 years in Business (2007) Nadia Shchegrova.

Appendix 1

Political New democracy Money laundering Executive and legislative branches of governement have fundamentlly opposing views of Russias future

Economic Black market Western companies looking to invest further Self sufficient in fuels and energy production Unpredictable commerical conditions hinder growth Delay in wages payments common. Worse in privatised companies

Social 26% below poverty line Small Middle class Large population 149 million 57% of population working age

Technological Poor state communications infrastructure hinders growth. Dependent on foreign investment Air and rail main communication system. Roadsystem not well developed

Legal 70% of enterprises are estimated to be paying protection moeny to organized criminals Collusion between criminals and law enforcement officials

Environment Although it is largest country in the world by land mass, only 10% o fland suitable for agriculture Best land is at border beside Ukraine and Kazakstan. South east of Siberia

Figure 2 PESTLE (source (The Library of Congress, 2011)

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