Chapter 11- Diversification

In this post I want to briefly hit on some areas where diversification realized at Sam Adams.

Sam Adams (BBC) falls into the single business area of the limited diversification title.  Sam Adams makes beer and that is it.  They stick to what they do best.

Sam Adams realizes their economies of scope and exploits them through their employee's.  President Jim Koch, often mentions how he has the best employees in the business.  He feels that "happy employees make better beer (those were not his exact words but very close).

By realizing the importance of his employees, Jim has realized and exercised a key diversification strategy that is hard to imitate in the brewing industry.

My thought is "happy workers"+"happy business"= "good future"

This video backs my reasoning.

Chapter 10- Vertical Integration

In this posting we will be looking at Sam Adams (BBC) and their opportunities with vertical integration.

Sam Adams, as we know, is the manufacturing company in the value chain.  On the bottom end, we see they buy most of their ingredients from Europe (Bavarian Germany) and have them sent back to the United States.  From there, they brew the beer, send it to the distributors and the distributors place it into stores, bars and restaurants.

Reading up on what ingredients are used in Sam Adams beer, I see there is only a few select locations (they call it the "hop belt" or 48th latitude) were hops can thrive and give off the bitterness that is needed in beers.  By taking over this part of the process, Sam Adams could have full access to the ingredients in the beers that they produce.  The question is why they would want to do this?  It just does not sound cost effective.  The people over there have been working on perfecting this farming technique since the 1000 A.D. and with Sam Adams coming in, nothing would change.  Keeping this part of the chain independent is best.

The distribution part has been approached by Jim Koch at board and industry meetings.  Ultimately, Jim is looking to make the current process more efficient.  He knows that there are small businesses out there that need help with cutting costs, not being took over by manufacturers.  This discussion is talked about in earlier posts.

The only place that I can see vertical integration working for Sam Adams is in the bar or restaurant side.  They have a brand name known for its American tag lines.  Demographics show that more people are drinking craft brewed beers every year.  With these positives, Sam Adams can use a forward integration strategy and venture into the retail side.  More details would have to be stamped out, but the bones of this plan sound good.

Chapter 9- Tacit Collusion: Cooperation to Reduce Competition

In this chapter, we look at how companies in look to gain a competitive advantage by contending with other firms to reduce competition.

I have not or do not see any cases where Sam Adams (Boston Brewing Co.) has engaged in any of this activity.  The only mention that I have seen of this is in other blogs and opinions by writers.  The hint that Sam Adams has grown to a size that pushes them out of the "craft brewery" segment and should be classified as a "large brewery" has stirred, but I see no validity to this argument.

Since I have no subject matter for this post, I will put up a few movies that I found interesting or fun to watch:

Chapter 8- Flexibility: Real Options Analysis Under Risk and Uncertainty

In chapter 8 we look at how companies look at how they can minimize risks and uncertainty in the markets that they participate.

One specific example of how Sam Adams is trying to minimize uncertainty is in the distribution channel.

Throughout the last few years, the United States has seen many distributors fall on hard times and become a little inefficient with their practices.  President and CEO Jim Koch proposed in an industry meeting, that the economic atmosphere has put many distributors in a bad situation and the inefficiencies could hurt the brewers.  He proposed  "such unconventional ideas as having competing distributors in the same city use a single warehouse and fleet of trucks to deliver their respective brands to bars and stores." With this distribution set-up, the brewing industry could cut costs of up to $2.5 billon and help distributors slash 20% from existing cost structures.

With this type of distribution, Jim is looking to alleviate the risks entailed in the distribution side of the business.

Read more here:  http://online.wsj.com/article/SB125384534262939939.html

Chapter 7- Product Differentiation

With Sam Adams approach to product differentiation, they separate themselves from the competition featuring: product features and product reputation.

In the beer or brewing industry, as we have mentioned before, there are thousands of brands and labels to pick from.  With all of these decisions, brewing companies need to find a niche or strategy that makes them unique or top of mind in the customers decision making process.  For example, Budweiser or Bud Light, in the United States, has been the champion for top of mind marketing with their unique commercials and tag lines (King of Beers.)  Sam Adams has the identity of a quality, craft beer with seasonal selections to enhance the customers drinking experience.

Each season brings new harvests and ingredients to select from.  Sam Adams (in my opinion) champions this process by putting out the best mix of seasonal beers on the market.  This type of brand reputation gives loyal customers options outside their flagship Boston Lager to choose from.

Chapter 6- Cost Leadership

As we look at cost leadership as a company that seeks to gain an advantage in their market(s) by lowering their economic costs below its competitors, Sam Adams (BBC) has a unique strategy.
To explain this situation we need to look at the way the brewing industry is segmented.  In the brewing industry there are 6 (5 of which are craft related) segments that are differentiated by: barrels produced, who produces the beer, where it is sold and the ingredients that they use as a majority of their beer production volume.  Broken down the segments are: microbrewery, brewpub, contract brewing company, regional brewery, regional craft brewery, and large brewery.

The way that these segments are broken down can get confusing and have a lot of grey area that, honestly, is hard to decipher.  So to make things simple, lets look at volume as the key indicator.  As defined, a craft brewery, whether it be a small, independent, or traditional, is a brewer that produces less than 6 million barrels of beer annually.  Anything above that is a large brewery.

In Sam Adams situation, they are considered a independent craft brewery by producing 1.8 million barrels in 2010 (the nearest craft brewer is Sierra Nevada with 700,000 barrels.)  With this, they carry a 20% market share of the craft brewing industry with the nearest competitor (Sierra Nevada Brewing Company) at 8%.  In the industry, as a whole, they own somewhere just below 1% market share.  This is a stark difference when it comes to the level of brewing segments.

To apply the cost differentiation strategy to this subject, Sam Adams would be considered a titan in the craft brewery industry.  With this they can leverage their brewing operations to lower their economic costs and sell their beers at a lower prices compared to other craft brewers but not lower than larger companies.  This unique position because Sam Adams is the pacesetter in the pricing of craft beers in the United States not having to compete with the larger breweries.

Chapter 5- Evaluating Firm Strengths and Weaknesses: The Resource-Based View

In evaluating a companies strengths and weaknesses there are many theories as to how value or strength is measured.  When meshing all of these theories together the Resource-Based Model is formed to give a better understanding of a companies costly-to-copy or imitate effectiveness from a resource view.  When looking at resources from this model there are 4 certain areas that encompass a firms resources: financial, physical, human and organizational capital.  From there the VIRO framework is applied to identify the level of competitiveness a company has.

Sam Adams' VIRO Framework application:

Q: Value?  Yes,  Sam Adams is a company that values their employees and being a small craft brewer producing less that 2 million barrels annually, they are a giant in the small, independent, and traditional craft brewing segment.  The type of quality and coordination that they put into the value chain is yet to be rivaled by any one in their segment.

Q: Rarity? Yes, As mentioned above, Sam Adams fits into the craft brewers segment of the beer industry.  The resources and experience that they carry exceed all other companies in this segment.  Although there are a few other companies that are surfacing, Sam Adams has a strong foothold on the leadership in the craft brewers market.

Q:Imitability? Yes...One would say that there are many other brewing companies that could imitate what Sam Adams does and obtain the same resources.  The answer is that they could... but according to the Brewers Association less than 25% of the Craft Brewery is owned or controlled by an alcoholic beverage industry member who is not themselves a Craft Brewer.  This makes Sam Adams' model hard to duplicate or substitute.    

Q: Organization?  Yes. Sam Adams and their management let the customers and employees know upfront that they are a company that values innovation and a growing knowledge of their trade.  With all of the experience Sam Adams carries they are able to exploit the advantages that they carry in the Craft Brewers market.

Being able to satisfy all of the questions with a "yes," Sam Adams carries a "strategic advantage" in the market that they participate in.




  

Chapter 4- Evaluating Environmental Opportunites

When evaluating environmental threats, Sam Adams has focused on neutralizing and making some of those obstacles opportunities.

Through product differentiation, cooperation, supplier diversification, and new customer focus, Sam Adams has placed themselves as a model for 'craft' brewers throughout the world.  

Sam Adams culture focuses on unique quality, product knowledge and employee value.  Bringing all of these qualities together makes them a company that produces some of the best beer in the world.  

Sam Adams has a standard of their own.  They do not necessarily focus their attention on the competition but it is put into the practices that they adhere to with their business plan.  They differentiate their product to handle threats of entry, rivalry and substitutes. They work with multiple suppliers throughout the world to get the best ingredients for their beer and believe that only the 'best' will do.  Finally, to grow their company they seek new customers with regular promotions and charities to bring about public awareness of their product.  To give an example of this last point, I thought this might help...

Brewing the American Dream

In June of 2008, Jim and The Boston Beer Company launched a program called Samuel Adams Brewing the American Dream® to provide low and moderate income food & beverage small business owners (typically employing between 1-5 people) with the financial support and mentoring they need to achieve their dreams even when the odds are stacked against them. Jim has not lost sight of his humble beginnings or forgotten how hard it was in the early years, which is why he felt it was important to give back to other passionate small business owners. In launching the program, The Boston Beer Company partnered with ACCION USA, the domestic arm of Boston-based ACCION International, a global microfinance nonprofit. The Boston Beer Company committed an initial $250,000 to establish the Samuel Adams Brewing the American Dream Loan Fund, providing much needed capital to lower and moderate income small business owners whose businesses would not be approved for a bank loan. The microloans offered through Samuel Adams Brewing the American Dream range from $500 - $25,000 with an average loan size of $7,000.

In addition to providing loans, the Samuel Adams Brewing the American Dream program also seeks to assist hundreds of other microentrepreneurs through coaching and mentoring workshops offered to local small business owners. Through educational opportunities like Speed Coaching workshops developed by Samuel Adams employees, the program provides an opportunity for local entrepreneurs to meet one-on-one in 20 minute intervals with Boston Beer employees to get advice and ask questions about web development, marketing, packaging, design, publicity, pricing and sales & distribution for help in starting their own businesses.

   

Chapter 3-Evaluating Environmental Threats

With Sam Adams competing in the brewing industry they face many environmental threats that can dictate their performance and how the go to market.  The industry that Sam Adams performs in is considered a monopolistic competition type featuring thousands of breweries world wide with a heterogeneous make-up of the product and a low cost of entry.  To battle these competing firms Sam Adams has to use product differentiation to separate themselves from other breweries and give themselves a competitive advantage.

As far as the 5 Forces Model of Environmental Threats, Sam Adams environment looks as the following:
-Low-Moderate Cost of Entry- the making of beer is quite simple and can be done with a simple kit from home but turning a small outfit into a moderately sized company can be quite difficult.  With this said we have seen many small brewers start small and grow to a size that can be competitive.
-High level of Rivalry-  throughout the world there are thousands of micro-breweries and hundreds of large beer producers.  When it comes to beer labels, many of us can sit around and name off multiple companies.  With so many companies in the market the market share is hard to gain and no one company has the lions share of the pie.
-Moderate Power of Suppliers- Making beer is quite simple but the ingredients that you put into beer is what makes your product unique.  There a number of ways to make beer, but Sam Adams has a select number of suppliers that they buy from and many of those sellers are located outside the United States.  This is where the threat comes from.  Buying from outside the United States has problems in the fact that the countries they are buying from might be facing different economic and environmental problems.  Uncontrollable price fluctuations, supply shortage, bad crop yield and cost competition are some of the threats that can give suppliers power.
-High Power of Buyers-  When a customer sits down at a bar or goes to the store to buy beer they have different motives to buying.  Some are looking for quality, some are looking at the price and some are looking at where the beer was made. With this, the customer has the ultimate buying power being able to select from a number of products.
-High Threat of Substitutes-  As mentioned before, brewing is a easy process.  I can make my own beer from home.  If that works out, I can obtain a license and start selling locally to bars.  The process is a little more difficult than what I just explained but we see this happening everywhere.  Small operations are popping up throughout the world and access to customers are ample.

Overall, Sam Adams functions in a very diverse and dynamic industry where the large compete with smaller companies.  Product differentiation is the strategic plan when working in an industry like this and Sam Adams does a good job of doing this.

Chapter 2- Firm Performance and Competitive Advantage

A competitive advantage is the strategy that a company designs where their product or service has a distinct  edge or created more economic value over the competition in the area that they focus in.  The value of having a competitive advantage is paramount to businesses that operate in all industries because of the nature of competition.  When a company has the competitive advantage over rivaling companies, they focus on the customers perception of what they value most, whether it be service, product, goodwill, or the overall message that they send out in their companies beliefs.

Sam Adams sends this perception out to their customers by delivering a product that has the best ingredients and craftsmanship in the business.


Higher Standards

Samuel Adams sets superior standards for quality, hand crafted beer. Insisting that only the world's finest all natural ingredients make the best beer, Jim and the brewers at Samuel Adams travel the world to hand select the finest ingredients. Their hands-on involvement ensures the highest standards for the best ingredients needed to make quality beer. In fact, on Jim's annual hops selection trip to Bavaria the hops farmers always comment on how Jim doesn't just sniff the hops, he 'dives' into them.

Each batch of Samuel Adams® beer is brewed with hand-crafted care and attention to detail to ensure fresh, quality beer. So that consumers enjoy only fresh Samuel Adams®, Jim pioneered consumer readable freshness dating in 1988. Today, Samuel Adams is the only brewer with a cooperative program with its distributors to buy back its beer when it's past its peak freshness date.   --http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol-homeprofile


http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol-homeprofile

With this dedication, Sam Adams forms a separation from the competition that fosters a sustained competitive advantage that is yet to be copied domestically.

Here is a link that supports the quality that is perceived in the industry:

http://www.americasmostproductive.com/2009/companies/samuel-adams.php    

Boston Beer Company Inc. Chapter 1

The company that I will be following this semester is The Boston Beer Company Inc.



The Boston Beer Company is the parent company for Sam Adams which is the largest brewer of handcrafted beers in America but only make up less than 1% of the United States Beer market.

Founder and now chairman Jim Koch started Sam Adams with the idea that he could find a niche market in the beer industry that gave customers a full flavored drinking experience.  Jim's expectations are strict when it comes to what is going in his beers but he is also not closed to pushing the envelope.

Sam Adams has been around since 1984.  It is traded on the NYSE under the ticker symbol: SAM

To read up more on The Boston Beer company go here or here.




Facebook:  Sam Adams - for the love of beer!

First blog

Today is January 16th and I am posting my first blog EVER.  I am in my final semester of my MBA and ready to finish strong.