A Strategic Case Study Of Coors

Published Date: 23 Mar 2015 Last Modified: 01 May 2017

The U.S. brewing industry produces beer and other malt beverages from agricultural inputs, and sells the end product to wholesalers and retailers. (IBISWorld, 2010) The modern history of the industry began with the repeal of Prohibition in 1933 (IBISWorld, 2010). Fewer than 1000 breweries reopened for operation. Only two-thirds of those businesses were still in operation by 1939. After 1945, the industry encountered strong growth, and was rapidly approaching maturity by the 1980's. During this period, the industry went through extensive consolidation and integration. By 1985, six major brewers dominated the industry, with about 75% of domestic market share (Gemawat, 1992). Those six key players are (by market share) [1] :

Anheuser-Busch: 36.9%

Miller: 18.3%

Coors: 8.3%

Stroh: 6.7%

Pabst: 2.8%

Heileman: 2.0%

B. Segments

The brewing industry may be segmented by any number of factors, including product offerings and company size. By company size, the industry includes major producers, which hold the majority market share, and a growing number of craft brewers. Craft brewers are facilities that produce less than 2 million barrels of beer annually (Brewers Association, 2010). The primary product of this industry is beer, which may be segmented by retail price (popular, premium, superpremium, and ultrapremium) or alcohol content (regular, light, low, and high).

This paper will focus on the strategic performance of Adolph Coors. Along the way, it will also touch on the following topics:

Why the US brewing industry consolidated.

Coors's historic strategy.

Why Coors' performance deteriorated since 1977.

What Coors should have done differently.

Whether Coors should build a brewery in Virginia.

C. Caveats

This case analysis is being written from a bird's-eye view of the past. We already know that Coors did not build a brewery in Virginia (it kept it as a packaging facility) (Alabev, 2009); that the Teamster's Union was not successful in entering the Virginia facility (Kelleher, 1988); that the industry continued to consolidate (Answers, 2010; FundingUniverse, 2010); and that Coors and Miller eventually joined forces to form MillerCoors to better compete against Anheuser-Busch (MillerCoors, 2010).

Therefore, this paper is written with the following caveats:

Some data will be unavailable due to the passage of time.

Where data is unavailable, an attempt will be made to find comparable data from modern-day sources.

Modern data may be vastly different than 1985 data.

Current knowledge may introduce bias to the report.

II. Socio‐Economic Factors

A. Governmental or Environmental Factors

Brewers in the U.S. are faced with strict regulation from both the Federal and state level. Federal regulation comes from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and the Federal Trade Commission (FTC). State regulations vary widely, particularly in regards to craft breweries. This segment has seen major growth since the repeal of the ban on home brewing in 1978 (IBISWorld, 2010). Excise taxes occur at both the Federal and state level. Regulation is increasing in this industry.

B. Economic Indicators

The U.S. economy is in the final stages of pulling out of an economic recession that began during the 1970's. According to an IBISWorld industry report, households with a higher disposable income are more likely to consume alcoholic beverages. The report also states that beer is most popular in the 21-35 year old age group (IBISWorld, 2010). The first wave of the baby boomer population is now over 35 years old. Input costs are on the rise.

III. Porter's Five Forces

This section will examine the competitive environment of the industry, using the model that Michael Porter developed in 1979, and expanded upon in his 2007 article Understanding Industry Structure (Porter, 2007).

A. Threat of New Entrants

The threat of new entrants is Low, with some caveats.

1. Economies of Scale

Cost of production for the industry decreased from 1977 to 1985, even as volume increased (See Appendix). This is an indicator of economies of scale. Most of the major players focus on mass-market products. This implies the need for large breweries and high fixed costs (Datamonitor, 2009a). Production costs are about a quarter of major brewer's net revenues and include brewing and packaging (Ghemawat, 1992). Minimum efficient production scale was 4-5 million barrels per year in 1985 (Ghemawat, 1992). Doubling brewery scale would cut these costs by 25% (Ghemawat, 1992). The economies of scale evidenced here decreases the threat of entrants.

2. Working Capital Requirements

Based on industry figures cited in the case, working capital requirements per barrel of capacity were at an industry average of $40.25 in 1984, or about 60% of gross revenue per barrel (Ghemawat, 1992). This decreases the threat of entrants.

3. Proprietary Product Differences

Coors ages its beer longer and uses a different process than most major brewers (Ghemawat, 1992). Neither of these would be difficult to imitate. This increases the threat of entrants.

4. Absolute Cost Advantages

The majority of brands are trademarked (IBISWorld, 2010). Coors owns several patents related to production and technical operations (Coors, 2009). Coors also uses proprietary strains of barley to produce its own malt (Ghemawat, 1992). The major players in the brewing industry have advantages including access to cheaper raw materials and cheaper manufacturing costs due to economies of scale (Ghemawat, 1992). This decreases the threat of entrants.

5. Brand Identity

Brand identity is important. Marketing expenses as a percentage of sales increased from 3.3% in 1973; to 4.5% in 1980; and to 10% in 1985 (Ghemawat, 1992). Increasing saturation in the market will require increased advertising expense to differentiate brand identities. Economies of scope are vital here. The launch of a new product line costs $20-$30 million in initial advertising, and $10 million in maintenance advertising (Ghemawat, 1992). This decreases the threat of entrants.

6. Access to Distribution

The primary markets are wholesale and retail outlets. Wholesale outlets are the largest source of distribution (IBISWorld, 2010). It is becoming difficult to find wholesalers that will carry anything other than Anheuser-Busch or Miller as their lead brand (Ghemawat, 1992). Transportation to wholesalers is usually by truck or rail. The median cost of shipping for the industry is about $0.00375-$0.0667 per mile at a median distance of 300-400 miles (Ghemawat, 1992) [2] . Access to distribution decreases the threat of entrants.

Coors has access to 569 independent and 5 company-owned wholesalers (Ghemawat, 1992). Transportation to these wholesalers is usually by truck or rail. Almost half of Coors' truck shipments are done by a Coors subsidiary.

7. Expected Retaliation

Historically, the two primary methods of retaliation include introducing a similar product offering or acquiring the company (EH Net, n.d.). This decreases the threat of entrants.

8. Conclusion

The above barriers to entry show that the threat of entrants is Low. A decision matrix is provided below to visualize this conclusion. One caveat to this is that some of the categories above are dependent on scale. For example, a microbrewery could do well, even without the benefit of economies of scale, by charging a higher price premium.

1. Supplier Concentration

Barley growers are numerous (Datamonitor, 2009a). Furthermore, the case implies that there are more suppliers than there are firms in the industry, and states that large, efficient markets exist (Ghemawat, 1992). This limits supplier power.

2. Presence of Substitute Inputs

Substitutes exist; the degree to which they affect supplier power is debatable. The primary inputs are agricultural and packaging (Ghemawat, 1992). Different grains can be used for brewing, and aluminum can be a substitute for glass bottles or vice versa. The effect of this varies depending on brewer needs, and has the potential to increase or limit supplier power.

3. Differentiation of Inputs

Some differentiation exists, as products of high quality are needed (Datamonitor, 2009a). However, the vast majority of inputs in this market are raw commodities. This lowers supplier power.

4. Importance of Volume to Supplier

According to the case, a brewer with a large, efficient plant could buy inputs on the best terms possible (Ghemawat, 1992). This implies that the brewing industry buys a large volume of inputs, lowering supplier power.

5. Impact of Inputs on our Cost or Ability to Differentiate

Raw materials account for over half of net revenues (Ghemawat, 1992). This increases supplier power.

6. Threat of Forward or Backward Integration

There is no evidence for forward integration by suppliers. However, most large brewers integrated backward in order to combat rising costs (Ghemawat, 1992). This lowers supplier power.

7. Access to Capital

Both net income and consecutive data from 1980 to 1985 is unavailable. This section will use numbers from 1977 and 1985; operating profit will be substituted for net income. Using these numbers, average profitability for the industry decreased from 11.6% in 1977 to 9.1% in 1985. Inflation was 6.5% in 1977 and 3.6% in 1985 (InflationData.com, 2010). The 9.1% is a reasonable income; however, the trend indicates that debt financing may get more expensive.

8. Access to Labor

Access to labor exists on somewhat favorable terms. Unions exist in every major company in the brewing industry, except for Coors (Ghemawat, 1992). Highly skilled workers are not required. This reduces supplier power.

9. Conclusion

The above factors show that the power of suppliers is Low. A decision matrix is provided below to visualize this conclusion.

Category

Comments

High

Low

Attractiveness

Supplier Concentration

More firms than suppliers.

Y

Y

Presence of Substitute Inputs

Some substitutes.

Y

Y

Differentiation of Inputs

Supplies commoditized.

Y

Y

Importance of Volume

Industry buys large volumes.

Y

Y

Impact of Inputs on Cost

Costs equal half of revenues.

Y

Threat of Integration

Firms integrating backwards

Y

Y

Access to Capital

Decrease in profits and inflation.

Y

Y

Access to Labor

Highly-skilled workers not required.

Y

Y

Supplier Power & Attractiveness:

Low

High

C. Buyer Power

The power of buyers is Medium. Buyers in this market are retail and wholesale firms. Wholesale firms make up the largest percentage of buyers (Ghemawat, 1992).

1. Buyer Concentration

There are more buyers (4,500) than firms in the industry (Ghemawat, 1992). This reduces buyer power.

2. Buyer Switching Costs

Buyers must spend $500,000 to $2 million on market development for a new brand (Ghemawat, 1992). This reduces buyer power.

3. Buyer Information

There is no data to indicate how much buyers know about the industry. However, it is unlikely that they do not know much. If this is true, it would increase buyer power.

4. Threat of Backward Integration

Buyers are very unlikely to backward integrate. This is for two reasons: (1) barriers to entry are high, and (2) regulations provide a certain amount of limitations for retail buyers (IBISWorld, 2010). This reduces buyer power.

5. Pull Through

Pull through exists, as demonstrated by the increase in advertising expense as a percentage of sales. As demonstrated above, advertising expenses as a percentage of sales increased from 3.3% in 1973; to 4.5% in 1980; and to 10% in 1985 (Ghemawat, 1992). This decreases buyer power.

6. Brand Identity of Buyers

According to the case (1992, p. 3) companies other than Anhueser-Busch and Miller had trouble finding wholesalers to carry their brands as lead products. This implies that the brewing industry impacts the brand identity of buyers. This reduces the power of suppliers.

7. Price Sensitivity

Declining return on sales for buyers as exhibited in the case implies that buyers will be price sensitive (Ghemawat, 1992). Furthermore, industry practice dictates that brewers absorb the cost of shipping the product to buyers (Ghemawat, 1992). This increases buyer power.

8. Price to Total Purchases

There is no data available for this question. However, many buyers choose or are forced to carry only one brand (Ghemawat, 1992). This decreases buyer power.

9. Conclusion

The above factors show that buyer power is Low. A decision matrix visualizes this conclusion.

Category

Comments

High

Low

Attractiveness

Buyer Concentration

More buyers than firms.

Y

Y

Buyer Switching Costs

High switching costs.

Y

Y

Buyer Information

No data.

No Data

Threat of Backward Integration

Not likely.

Y

Y

Pull Through

Advertising creates demand.

Y

Y

Brand Identity of Buyers

No data.

Y

Y

Price Sensitivity

Brewers absorb shipping costs.

Y

Price to Total Purchases

No data.

No Data

Buyer Power & Attractiveness:

Low

High

D. Substitute Products

The industry is unattractive because the threat of substitute products is High.

1. Relative Price/Performance Relationship of Substitutes

Substitute products include wine, liquor and spirits, and imported beers (IBISWorld, 2010). Switching costs are low, and alcohol content is higher in most categories. The price of spirits is lower per unit-volume, due to their higher alcohol content (Datamonitor, 2009a). There may be a prestige factor involved when drinking substitute products such as wine or certain spirits. This increases the threat of substitute products.

2. Buyer Propensity to Substitute

IBISWorld reports that households with higher disposable incomes are more likely to consume alcoholic beverages. The report also states that an increase in income and living standards increases the likelihood that consumers will switch to substitute products (IBISWorld, 2010). The U.S. economy recently recovered from a recession during the early 1980's. This may indicate that disposable income and living standards will increase. This increases the threat of substitute products.

3. Conclusion

The above factors show that the threat of substitute products is High. This reduces the attractiveness of the U.S. brewing industry.

E. Rivalry

Rivalry in the brewing industry is Strong. This reduces the attractiveness of the industry.

1. Degree of Concentration and Balance among Competitors

The industry is highly concentrated and unbalanced. The top six firms control about 75% of the market share (Ghemawat, 1992). This increases rivalry and reduces attractiveness. No. 1 firm Anhueser-Busch controls about 36.9%; the next closest competitor Miller comes in at 18.3% (Ghemawat, 1992). This reduces rivalry and increases attractiveness.

2. Diversity among Competitors

The major firms in this market appear to be following very similar strategies. They all expanded or are expanding nationally, have increased their number of product lines and advertising, and pursued similar production efficiencies (Ghemawat, 1992). This increases rivalry and reduces attractiveness.

3. Industry Growth Rate (Past and Projected)

Demand grew at a rate of 1% from 1980 to 1985. The same rate of growth is predicted for 1985-2000 (Ghemawat, 1992). Inflation is expected to stay at an average of about 3% (InflationData, 2010) This increases rivalry and reduces attractiveness.

4. Fixed Costs to Value Added [3] 

Fixed costs in this industry are high, as discussed previously. Value added increased from 22% in 1977 to 32% in 1985. The overall effect on rivalry and attractiveness is medium.

5. Intermittent Overcapacity

Industry capacity is in the normal range, at 83%. However, capacity has dipped below that in the recent past (Ghemawat, 1992). This increases rivalry and reduces industry attractiveness.

6. Product Differentiation

Firms differentiate their product lines by segmentation, advertising, and packaging (Ghemawat, 1992). These efforts are limited by the presence of similar offerings among most of the major brewers. Depending on their effectiveness, this increases or reduces rivalry and attractiveness.

7. Growth of Foreign Competition

Foreign producers account for 4% of demand (Ghemawat, 1992). Projected growth data is unavailable; however, recent data shows that this number grew to 9% by 2010 (IBISWorld, 2010). This increases rivalry and reduces attractiveness.

8. Corporate Stakes

Industry data is unavailable; however, the case states that Coors gained 84% of its revenues and over 100% of its operating income from its brewing division. This increases rivalry and reduces attractiveness.

9. Exit Barriers

Exit barriers are medium. As previously discussed, fixed costs are high. However, firms may convert their operations to non-beer related products, although they would probably suffer from reduced demand and economies of scale. The most likely form of exit would be through a merger or acquisition, due to increasing industry concentration. The overall effect is determined to be medium.

10. Conclusion

The above factors show that rivalry is Strong. This reduces the attractiveness of the U.S. brewing industry. A decision matrix is provided below to visualize this conclusion.

Category

Comments

High

Low

Attractiveness

Degree of Concentration

Highly concentrated, maturing.

Y

Y

Diversity

Similar strategies.

Y

Industry Growth Rate

Slow growth.

Y

Fixed Costs to Added Value

High fixed costs, value added.

Y

Y

Y

Intermittent Overcapacity

Past overcapacity.

Y

Product Differentiation

By three factors.

Y

Y

Y

Growth of Foreign Competition

Increasing.

Y

Corporate Stakes

Based on Coors' data.

Y

Exit Barriers

Medium barriers.

Y

Y

Y

Rivalry & Attractiveness:

High

Low/Medium

IV. Conclusion

According to the factors outlined in Industry Analysis: The Fundamentals, this industry is an oligopoly (Grant, 2005a). The most likely reason that the brewing industry consolidated was to take advantage of economies of scale and scope.

Entrance or investment is a risky prospect, depending on scale. Buyer and supplier power are favorable for entry, but only when entering on a large scale. However, the massive capital outlay required to compete at the level of major brands is prohibitive. Barriers to entry are high, substitutes are prevalent, and rivalry is strong. The brewing industry is determined to be unattractive for large-scale entry. A decision matrix is provided below to visualize this conclusion.

Category

Comments

High

Low

Attractiveness

Threat of Entrants

Depends on size.

Y

Supplier Power

Commoditized products.

Y

Y

Buyer Power

Many buyers.

Y

Y

Substitute Products

Many substitutes.

Y

Rivalry

High degree of rivalry.

Y

Overall Attractiveness:

Low

A. Critical Success Factors

The following Critical Success Factors will determine the success or failure of a firm in the brewing industry:

Economies of Scale: To control costs.

Capacity Utilization: To take advantage of efficiencies.

Economies of Scope: To absorb costs of advertising.

Strong Brands: To differentiate products.

Efficient Distribution: To reduce costs and increase sales.

B. Prognosis

Industry growth is likely due to the recent economic recovery, [4] assuming that it leads to higher disposable income. As the industry continues to mature, it will likely continue to see increased levels of consolidation in order to take advantage of economies of scale and scope. Larger players will squeeze out or acquire smaller firms such as Heileman, Pabst or Stroh. Marketing will play a larger role as firms seek to differentiate their products.

Opportunities for entry are limited to small craft and regional breweries, so long as they can charge a price premium for their product. Opportunities for existing breweries include controlling costs, increased marketing, product line development, and acquisitions.

Part II: Firm Analysis

I. Current Situation

A. Brief Firm History

Adolph Coors is one of the six largest companies in the U.S. brewing industry. It became immensely successful following the repeal of Prohibition through the mid-1970's. Contributing to its success were huge economies of scale resulting from having the industry's largest brewery, focused on one product, with high capacity utilization, and the fastest packaging lines in the industry (Ghemawat, 1992). It enjoyed tight control over its distribution network, often being the only brand their distributors carried. The company's historic strategy was focused differentiation, as evidenced by its high quality standards and limited distribution area.

The company's performance has deteriorated since then. Competitive pressures forced the company to move from one product package to 320, reducing the economies of scale that it had previously enjoyed. The Appendix showcases their lower than average cost reductions from 1977 to 1985. Competitive pressure also forced Coors to undertake a national rollout of its brand. Because it is the only company out of the major six to operate just one production facility, the company must pay 2-4 times the industry average for shipping. The company does not have the same control over its distribution network in the new markets. Finally, their brewing facility is running at up to 92% capacity, and management is concerned about the company's ability to handle increased demand that will come with completion of the national rollout (Ghemawat, 1992).

B. Strategic Posture

1. Current Mission

An actual mission statement for the Coors is unavailable. The company is currently focused on successfully completing their national roll out, increasing their performance, and gaining market share.

2. Current Generic Strategy

According to the factors discussed in Differentiation Advantage, Adolph Coors focuses on a differentiation strategy (Grant, 2005b). This is shown by their emphasis on product quality, which is gained from superior ingredients and their brewing process (Ghemawat, 1992). Historically, the company had a focused strategy of selling in only eleven states. However, the company is now shifting to a national, broad-market strategy. It currently distributes in 79% of the U.S. market (Ghemawat, 1992). A visualization of their present strategy is below.

3. Generic Strategy Model

Based on Porter's Generic Strategies model and class notes from 4/8/2010 (Fitzmartin, 2010).

Commodity/Low Cost

Innovation/Differentiation

Everyone/

Broad Focus

A Few/

Niche Focus

II. External Environment (Opportunities and Threats)

A. Socio‐cultural

The company faces threats from unions, increased regulation, and low demand. It has succeeded so far in keeping unions out of its facilities (Ghemawat, 1992). It faces a regulatory minefield as it enters new states. The economy is in recovery from a recent recession, but demand growth is projected to remain low at 1% (Ghemawat, 1992).

B. Task Environment

The company faces threats from strong rivalry and substitute products. The industry is consolidating rapidly, and the six major brewers follow similar strategies. Foreign competition is growing. The low rate of demand growth means that companies are fighting for the same customers. The ability to differentiate brands is vital in this environment. Coors' opportunities include controlling costs, expanding its facilities, raising brand awareness, developing new product lines, and making alliance or acquisitions.

III. Internal Environment (Strengths and Weaknesses)

A. Management

1. Board of Directors

a. Board Size and Composition

The board consists of nine members. Four are members of the Coors family. The other five are company insiders (Ghemawat, 1992).

b. Skills and Functions

There is no data available for this question.

c. Percentage of Stock Owned

There is no specific data available for this question. However, it must be noted that the Coors family, four of whom are on the board, holds 100% of the voting and 20% of the total stock (Ghemawat, 1992).

d. Level of Involvement in the Oversight of the Corporation

There is no data available to answer this question.

2. Top Management

a. Chief Characteristics

The Coors company recently came under new management. The new managers are committed to increasing their marketing, and to working with minorities (Ghemawat, 1992).

b. Organizational Structure

There is no data available to answer this question.

c. Culture

Information in the case implies that the culture is one of unanimous agreement among top brass. It is notable that Peter Coors cast the first dissenting vote in the company's history in 1976 (Ghemawat, 1992).

3. Conclusion

The Management function is assessed to be a weakness due to the high involvement of family and company insiders.

B. Marketing

1. Product Mix

Coors offers six product lines under the following brands:

a. Premium:

Coors Banquet, Premium

Coors Light, premium light

b. Superpremium:

Coors Extra Gold,

George Killian's Irish Red ale,

Herman Joseph's

c. Ultrapremium:

Masters III

The only segment it does not currently operate in is the lower-priced Popular beer segment. The case states that the Popular category accounts for a 24% share of the market (Ghemawat, 1992, p. 16). According to Exhibit 6 in the case study (1992, p. 16) top competitor Anhueser-Busch is the only other competitor with six product lines, with three in the Light category and one each in the Popular, Premium, and Superpremium segments. Anhueser-Busch's Premium Budweiser brand has 25.8% market share; Miller's Miller Lite Light brand has 10.5%. The Coors' brands listed in Exhibit 6 of the case have under 5% market share each (Ghemawat, 1992).

2. Pricing

The average wholesale price per barrel sold for $67 per barrel (Ghemawat, 1992). An examination of the numbers in Exhibit 9 of the case (1992, p.19) reveals that Coors sold 14.7 million barrels at an average price of $73.40. This shows that the company is able to command a price premium for their product.

3. Distribution

Coors has three weaknesses in their distribution system:

(1) Coors ships its products a median distance of 1500 miles (Ghemawat, 1992). Using the figures detailed in the industry analysis, this would equal shipping costs of $5.62-$10.00 per barrel, which eats away at their price premium.

(2) Almost half of Coors' trucking volume is done by a subsidiary of the company. The subsidiary does not operate as efficiently as independent trucking companies, which increases costs by 10-15% (Ghemawat, 1992).

(3) The company has 574 wholesalers, but is currently expanding its territory. As detailed in the industry analysis, it is becoming increasingly hard to find wholesalers to carry brands other than Anheuser-Busch or Miller as their lead products. This is a weakness.

4. Promotional Efforts

Coors began its advertising efforts later than its competitors, having previously relied mostly on word of mouth (Ghemawat, 1992). According to Exhibit 4 of the case (1992, p. 14), Coors spent $165 million on advertising in 1985, which is lower than the industry average of $200.6 million. Their spending equaled $11.20 per barrel, or 15.3% of sales, which is higher than the industry averages of $6.78 and 10.05%, respectively. Their first successful ad campaign, for Coors Light, is credited with increasing the product's market share from 1.4% in 1980, to second place at 3.4% in 1985 (Ghemawat, 1992, p. 16). The company's market share is still low, indicating that the company needs to raise brand awareness in its new markets.

5. Conclusion

Coors' Marketing function is a strength, but weaknesses exist. Coors offers a diverse product offering, but the lack of a product in the Popular category may be a weakness. It is able to command a higher price premium per barrel than the industry average. Coors' distribution is a weakness due to the longer distances it must ship its products. The company has initiated successful ad campaigns, but needs to create brand awareness in its new markets. A decision matrix is provided below to visualize this conclusion.

Category

Comments

Strength

Weakness

Product

Diverse offering, lacks a Popular beer.

Y

Y

Price

Commands a premium.

Y

Place

High transportation costs.

Y

Promotion

Increased market share, entered late.

Y

Y

Final Assessment

Strength/Weakness

C. Operations/Production

1. Capital Spending

Coors has above average backward integration (Ghemawat, 1992). However, the capital spent here is not producing returns for the company; the brewing division accounted for over 100% of operating income in 1985. Its productivity has also been reduced (see Appendix). However, it still operates the largest brewery in the country, and owns most of its supply chain.

2. Growth Emphasis

According to information in the case, Coors has "…diversified into several businesses, including porcelain, food products, biotechnology, oil and gas and health systems…" (Ghemawat, 1992, p1).

Coors also emphasizes product development for growth. As detailed above, it has six product lines.

3. Operating Leverage

Costs per unit have fallen since 1977, but the trend has not been as good as competing firms (see Appendix).

4. Research and Development

No data available for R&D spending.

5. Conclusion

Coors' Operating function is a Weakness, primarily due to escalating costs per unit. A decision matrix is provided below to visualize this conclusion.

Category

Comments

Strength

Weakness

Capital Spending

Reduced productivity.

Y

Growth Emphasis

Diversified offering.

Y

Operating Leverage

Cost savings under industry standard.

Y

Research and Development

No data.

Y

Category Assessment

Weakness

D. Finance

There is insufficient data to properly complete this section.

1. Trends

Insufficient data.

2. Performance Comparison

Insufficient data.

3. Capital Asset Pricing Model

Insufficient data.

4. Capital Structure Decision

Insufficient data.

5. Conclusion

According to the case, Coors has returned dividends of $2.79 per share through 1985 (Ghemawat, 1992). Shareholder equity was equal to $26.46 per share, and the company had a target of 10% Return On Equity. Costs have increased, and the company's proposed expansion would have to be paid for by issuing debt. This does not present a pretty picture of the company's financial status. For this reason, the Finance function is assessed to be a weakness.

E. Human Resource Management

Coors has a weak image concerning its treatment of workers, particularly minority groups.

F. Management Information Systems

This section is not applicable.

IV. Critical Success Factors

1. Economies of Scale

Coors has the largest brewery in the U.S., which gives it access to large economies of scale. Recent increases in the variety of packages it runs has reduced this advantage.

2. Capacity Utilization

Coors is running at 92% capacity, which is well above the industry average of 83%.

3. Economies of Scope

Coors has just begun to advertise. Its diverse number of brands contribute to greater economies of scope in marketing and distribution.

4. Strong Brands

Coors has a strong differentiating promise in the quality of its products, but needs to get its message out.

5. Efficient Distribution

Coors lacks an efficient distribution system. It pays 2-4 times the industry average for shipping.

V. Strategic Problem

Management has failed to ensure the long‐term survival of Coors because it took a reactionary stance rather than one of active waiting (Sull, 2005). It waited until things happened, then tried to respond. In doing so, the company failed to be proactive in the face of reduced cost efficiencies, increased competition, the need for marketing, and human resources problems.

Coors would be better off if it had acted earlier. The company's strength prior to 1977 was its cost leadership through economies of scale, low transportation costs, and little need for marketing. Competing firms eroded these advantages when they entered Coors' primary markets. Coors failed to play hardball [5] , and did not take the appropriate steps to fight back. According to Porter in What is Strategy?, "A company can outperform its rivals only if it can establish a difference that it can preserve." (Porter, 1996, p. 7). Coors failed in this respect.

VI. Strategic Alternatives

A. Strategic Alternative One

Coors should implement phase two and add a new brewery to its packaging facility in Virginia.

1. Advantages

This will increase the efficiency of Coors' distribution system by locating a facility nearer to its eastern wholesalers, allowing the company to reduce costs. It could also increase economy of scale efficiencies by allowing the company to run low-volume production runs at a lower capacity facility. It will also position the company to take advantage of future market growth.

2. Disadvantages

This will cause the company to go into more debt. Return on investment is questionable. Also, this option does not address product development.

B. Strategic Alternative Two

Coors should incrementally increase capacity at its Golden plant to meet current demand, and seek to acquire or ally with an existing competitor.

1. Advantages

This strategy allows Coors to increase its capacity as demand increases, therefore reducing the risk of investment due to the competitive environment. Acquiring or allying with a competitor would give the company more breweries and product lines. This could give the company access to the Popular beer segment while allowing Coors to maintain its premium image and pricing.

2. Disadvantages

The company could be caught unprepared if its market share on the east coast expands rapidly. The cost of transportation remains high. It may not be easy or possible to acquire or ally with any except the smallest competitors.

VII. Recommendation

Coors should focus on incrementally increasing its capacity at it Golden facility, and search for a competitor to acquire or ally with. This is a better option for several reasons:

If Coors built a new brewery, its capacity would be underutilized. Demand is only forecast to grow by 1% through the year 2000. In 1985, Coors shipped 3.1 million barrels to the eastern market. Not including any other growth measures, 1% growth per year only represents an increase of 500 thousand barrels in the eastern market by the year 2000.

With the completion of phase one (building a new packing facility), shipping costs will be reduced from $5.62-$10.00 per barrel to $3.12-$7.50 per barrel, a savings of $7.8 million at current volume levels. Adding phase two (brewery) would cost $500-600 million, while only saving $7.8 million per year in transportation costs.

Coors' Golden facility can increase capacity up to 30 million barrels, which is nearly double its current capacity. According to the case, doubling brewery scale would cut per unit production costs by 25% (Ghemawat, 1992).

Acquiring or allying with a competitor will add capacity, brands, and products. Capacity underutilization would be less of a risk, because the acquired or shared facility would already be producing outputs.

This strategy does not try to solve all of Coors' problems at once. Rather, it focuses on two of Coors' key problems: cost and efficiency. It is a safer investment, because it allows the company to scale production as demand increases. It allows the company to utilize its capacity more efficiently, rather than risk underutilization at a new brewery. A stepped plan such as this one gives the company time to focus on other areas where it is struggling. Finally, if demand grows at a much higher rate than forecasted, then the company can revisit the idea of building a separate brewery.

VIII. Implementation

A. Specifics

Management: Management will be responsible to identify potential acquisitions or alliances.

Marketing: Marketing will manage distribution costs and increase promotions to fill any underutilized capacity.

Production: Production will focus on increasing capacity at the Golden plant.

Finance: Finance will manage the financial performance and cost savings of the strategy. Their goal will be to search out financial options for buying out or joining a competitor.

B. Turning Weakness to Strength

Management: The new management team at Coors is willing to try new things. Acquiring or allying with another company could build on this by bringing in new, non-family management with differing perspectives to the Coors team.

Marketing: Marketing built a strong ad campaign for Coors Light. They will capitalize on this to promote Coors' other brands, with the goal of building brand awareness and demand.

Production: Production is vertically integrated and has the ability to achieve large economies of scale. The combination of increased capacity and shifting some of its packaging to the Virginia facility will help to achieve these scale economies.

Finance: This plan will bolster the financial function by cutting costs.

C. The Core Competencies of Coors

In Analyzing Resources and Capabilities, a core competence is defined as one that makes "…a disproportionate contribution to ultimate customer value, or to the efficiency with which that value is delivered…" (Grant, 2005c). Coors' core competencies are product quality, and historically, efficient production.

D. Pro Forma (Optional)

This section was optional, and so remains incomplete.

E. Conclusion

Implementing this strategy will go a long way towards dealing with Coors' problems. Many problems remain to be solved, however. They must repair their poor employee relations image. They need to examine and get rid of underperforming businesses in their portfolio. They might consider entering the liquor, wine, and spirits industry to protect themselves from the threat of substitutes. As the industry continues to consolidate, alliances will become increasingly important to deal with rivalry. This strategy does not fix everything, but it does put Coors on the road to success.

IX. Bibliography

Alabev (2009). The Coors Story. Birmingham Beverage Company, Inc.. Retrieved April 19, 2010, from http://www.alabev.com/coorstry.html

Answers.com (2010). Molson Coors Brewing Company: Definition from Answers.com. Answers.com: Wiki Q&A combined with free online dictionary, thesaurus, and encyclopedias. Retrieved April 19, 2010, from http://www.answers.com/topic/adolph-coors-company

Brewers Association. (2010). Craft Brewer Defined. Brewers Association. Retrieved April 19, 2010, from www.brewersassociation.org/pages/business-tools/craft-brewing-statistics/craft-brewer-defined

CPI Inflation Calculator. (n.d.).Databases, Tables & Calculators by Subject. Retrieved April 21, 2010, from http://data.bls.gov/cgi-bin/cpicalc.pl

Coors. (2009) Annual Report 2008. Denver, CO: Molson Coors.

Datamonitor, Inc. (2009a). Beer in the United States: Industry Profile. New York, NY. Retrieved April 19, 2010, from the Datamonitor Company Profiles Authority Database.

Datamonitor, Inc. (2009b). Carbonated Soft Drinks in the United States. New York, NY. Retrieved April 21, 2010, from the Datamonitor Company Profiles Authority Database.

EH.Net Encyclopedia: A Concise History of America's Brewing Industry. (n.d.).EH.Net | Economic History Services. Retrieved April 21, 2010, from http://eh.net/encyclopedia/article/stack.brewing.industry.history.us

Fitzmartin, J. (2010). Lenovo: Building a Global Brand. In-Class Handout, April 8, 2010, 1-9.

FundingUniverse (2010). Adolph Coors Company -- Company History. Connecting Angel Investors and Entrepreneurs. Retrieved April 19, 2010, from http://www.fundinguniverse.com/company-histories/Adolph-Coors-Company-Company-History.html

Ghemawat, P. (1992). Adolph Coors in the Brewing Industry. Boston, MA: Harvard Business School. (Original work published 1987)

Grant, R. M. (2005a). Industry Analysis: The Fundamentals. Contemporary Strategy Analysis (Fifth Edition ed., pp. 66-99). Hoboken, NJ: Blackwell Publishing.

Grant, R. M. (2005b). Differentiation Advantage. Contemporary Strategy Analysis (Fifth Edition ed., pp. 123-168). Hoboken, NJ: Blackwell Publishing.

Grant, R. M. (2005c). Analyzing Resources and Capabilities. Contemporary Strategy Analysis (Fifth Edition ed., pp. 123-168). Hoboken, NJ: Blackwell Publishing.

IBISWorld, Inc. (2010). IBISWorld Industry Report 31212: Beer Production in the U.S. Washington, DC: Areeb Pirani.

InflationData (2010). Historical Inflation data from 1914 to the present. Welcome to Inflation Data.com. Retrieved April 20, 2010, from http://www.inflationdata.com/inflation/inflation_rate/historicalinflation.aspx

Kelleher, S., & Reid, T. (1988, December 17). Teamsters Defeated At Coors; Workers Soundly Reject Affiliation. The Washington Post. Retrieved April 19, 2010, from http://www.encyclopedia.com/doc/1P2-1295980.html

Maust, K., & Schlabaugh, H. (2010). Strategic Analysis Plan: Cola Wars Continue: Coke and Pepsi in the Twenty-First Century. Goshen, IN: Goshen College Printer.

MillerCoors (2010) Why MillerCoors. MillerCoors. Retrieved April 19, 2010, from http://www.millercoors.com/who-we-are/why-miller-coors.aspx

Molson Coors Brewing. (n.d.).Company Statements & Slogans. Retrieved April 21, 2010, from http://www.company-statements-slogans.info/list-of-companies-m/molson-coors-brewing.htm

Porter, M. E. (1996). What is Strategy? Harvard Business Review. November-December 1996, 1-20.

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Sull, D. N. (2005). Strategy as Active Waiting. Harvard Business Review, September 2005, 1-11.

Stalk, G., & Lachenauer, R. (2004). Hardball. Harvard Business Review, April 2004, 1-11.

X. Appendix: Cost of Production

The cost of production decreased from 1977 to 1985, even as volume increased. Note that Coors experienced significantly less reduction than its competitors. Data were unavailable for the other top six competitors. From Exhibit 9 of the case study (Ghemawat, 1992, p. 19).

Production Cost per Barrel

1977

Anheuser-Busch

Heileman

Coors

Barrels Sold*

36.6

6.2

12.8

COGS*

$ 1,340

$ 152

$ 371

Prod. Cost/Barrel

$ 36.61

$ 24.52

$ 28.98

Adjusted for inflation**

$ 65.00

$ 43.54

$ 51.46

1985

Barrels Sold*

68.0

16.2

14.7

COGS*

$ 3,524

$ 617

$ 727

Prod. Cost/Barrel

$ 51.82

$ 38.09

$ 49.46

% reduction in cost

20.27%

12.53%

3.89%

* In millions

**Source: CPI Inflation Calculator

Part III: Coors vs. Coca Cola Analysis

A. Strategic Problem Definition

According to Maust & Schlabaugh (2010), Coca Cola's problem is low profitability. The company manufactures a wide range of low-volume products, resulting in higher costs. The company is vertically integrating in an attempt to increase profitability (Maust & Schlabaugh, 2010).

Coors' problem can also be defined as low profitability. The company shares similar problems with having to produce many low-volume products due to outside competitive pressures. This reduces cost efficiencies. They also need to reduce their distribution costs.

B. Value Proposition

Coca Cola's value proposition is that it refreshes, inspires optimism, and creates happiness (Maust & Schlabaugh, 2010). They also offer a wide variety of products. This is projected in their promotions and advertising.

Coors' value proposition is that it offers a superior quality, more "drinkable" product. The product's quality comes from the premium ingredients used in the brewing process, and the brewing process itself.

C. Industry Description

The soft drink industry is highly consolidated with the top three companies holding almost 80% of the market (Datamonitor, 2009b) Coca Cola faces intense competition because of this, even though it is the top competitor (Maust & Schlabaugh, 2010).

The brewing industry is also highly consolidated. Competitive rivalry is strong. Unlike Coca Cola, Coors is facing that rivalry from near the bottom of the list. The two industries also share very similar Critical Success Factors.

D. Strategic Options

The strategic options for Coca Cola were to diversify its product lines or reduce the amount of packaging materials it uses (Maust & Schlabaugh, 2010).

The strategic options for Coors were to build a second brewery or expand capacity at its existing one.

E. Recommendation

The recommendation for Coca Cola was to reduce the amount of packaging materials it uses. The advantages of this are that it increases profit margins, which could provide additional capital for development and advertisement of new products. The disadvantages are that it will take time, innovation, and it may interfere with current attractive packaging (Maust & Schlabaugh, 2010).

The recommendation for Coors was to increase capacity it its current facility, and find a way to ally or acquire a competitor. The advantages of this are that it reduces cost and minimizes exposure to risk. It has the potential to add products and capacity without risking underutilization. The disadvantages are that the company may be caught unprepared if its market share expands more rapidly than predicted, and that allying with or acquiring competitors may prove difficult.

The carbonated drink and brewing industries share face many of the same issues. The most striking were the key success factors (not detailed here due to lack of space) and rivalry. Another key factor is the important role played by economies of scale and scope in both industries. One critical difference between the two, however, is that the brewing industry is more regulated.