Reference no: EM133087662

Please review the case and answer the three questions.

What challenges does San Miguel face as the company diversifies into unrelated industries?

Is it possible that the strategic issue of diversification is different between developed and developing countries?

Is organizational structure influenced by the culture, the level of economic development, or other factors found in the country? Explain.

Case 13:

San Miguel Corporation From Beer to Planes, Trains, and Roads

San Miguel Corporation has grown into one of the largest and most diversified companies in Southeast Asia. One of the most popular and well-known brands of beer in the Philippines and throughout Southeast Asia, San Miguel, has been brewing beer for well over one hundred years. The company's brewing business produces such well-known and popular brands as San Miguel Pale and Red Horse. The company also owns Ginebra San Miguel distillers, San Miguel Pure Foods, and San Miguel Packaging. The company has a vertically integrated structure in the food and agriculture industry, ranging from breeding to canning, to retail branding. Recently the company has moved aggressively into many unrelated industries. The company has become an extremely diversified firm with holdings in many unrelated businesses. Questions have arisen as to whether this form of diversification is a wise strategic move for the company.

San Miguel Corporation began as La Fabrica de Cerveza de San Miguel in 1890, operating in Manila under a royal charter from Spain. The company was incorporated in 1913, and in the 1960s changed its name to San Miguel Corporation (SMC). Early in the company's existence, it began a process of backward vertical integration in which it acquired barley fields, and later expanded into other agricultural products. The company eventually expanded into soft drinks, spirits, and packaging operations. San Miguel has the distinction of being the first foreign bottler of Coca-Cola, acquiring the franchise in 1927. Today the company is the largest food and beverage business in the Philippines, as well as all of Southeast Asia. The company operates over 100 facilities in the Philippines, Southeast Asia, China, and Australia.

San Miguel controls approximately 90 percent of the beer market in the Philippines and significant shares of the processed meat and poultry markets. San Miguel is attempting to leverage its management and business skills into high-growth industries. Domestic beer sales are not expected to increase significantly and the company wants to diversify into any industry that provides high growth potential. As company chairman, Eduardo Cojuangco stated, "We want to be in industries that have the scale and will grow, and we are determined to build leadership positions in key areas where important trends are driving future growth, not just for San Miguel but for the Philippines too." San Miguel has moved into areas that are important to the economic growth of the Philippines such as power generation. The demand for electricity in the Philippines is expected to continue to grow, and forecasts show that the current supply will soon be insufficient to meet public demand. San Miguel feels that the company can capitalize on the privatization of electrical services in the Philippines. Many of the power generating facilities in the Philippines are twenty-five years or older, and supply isn't always dependable. Some feel that the government-owned service is poorly managed, and traditionally has operated as a drain on the Filipino government budget. As such, San Miguel has purchased three power-generating units and expanded into mining operations.

In addition to being in the electricity business, San Miguel has purchased ownership of Petron, an oil refinery and marketing business. The company has begun to build toll roads to reduce the traffic congestion found in major parts of the Philippines and has even purchased an airport and a 49 percent stake in the flagship carrier, Philippines Airlines. In addition, San Miguel has become a housing developer and is creating new communities in certain parts of the country. With a rapidly growing population and rising incomes in the Philippines, there is an increased need for more and better housing. San Miguel has also bought into public rail transportation, owns a bank and insurance brokerage company, and several telecommunication companies.

In 1982 Tom Peters and Robert Waterman published the now-classic book titled, In Search of Excellence, in which they advised firms to "stick to the knitting." The strategy of focusing on your core competencies was also the message of Michael Porter's research and publications. Porter found that diversification can lead to lower returns as a firm moves into unrelated businesses. He proposed that the competitive advantage of a firm is difficult to leverage across unrelated businesses. The acquisitions and diversification have raised the revenue of San Miguel. In 2011 the company reported sales of $12.2B and by 2015 sales were $14.3B. Net income, however, decreased from $399M in 2011 to $264M in 2015. Diluted EPS decreased during the same time period from $.11 to $.05. It appears that San Miguel is attempting to diversify into industries that are helpful to the growth of the Philippines and fulfill its social mission core value. The wisdom long-term of such excessive diversification is yet to be determined.