Strategic Alliance: Innocent Meets Coca-Cola - Assignment Example

Section A Innocent Meets Coca-Cola Answer 1: Alternatives to Strategic Alliance Innocent Drinks, a London-based smoothie maker sold 10-20 percent of its business to Coca-Cola for £30m. Innocent has several reasons for raising capital, including building on the company’s strengths, achieving economies of scale, speed to market, improved agility, and access to new customers. According to Lynch’s expansion method matrix, alternatives for expansion include merger, joint venture, acquisition, franchise, turnkey, and licensing. Coca-cola or another corporation could have acquired Innocent, which would have allowed Innocent to leverage on Coca-Cola’s resources and brand. A merger with another company would have allowed Innocent to share resources with the merging entity and scale their operations. A joint venture would have allowed Innocent to undertake the economic activity of producing smoothies with another entity, and share expenses, revenues and control of the enterprise based on their contributing equities. Innocent and the joint venture partner could share strategic goals such as sharing synergies, transfer of skill, and diversification. Innocent, as a franchisor could grant independent operators rights for distributing its smoothies for a royalty fee and percentage of revenues. Advertising, training and other support could be made available by Innocent. Innocent is ideally positioned for franchising as they have a profitable business, built around an unique concept, have a wide appeal, easy to operate and could be replicated easily. Use of technology could allow Innocent to turn to turn-key business operations, where a significant portion of the operations could be automated, and delivered through specific retailers. The turn-key operations could be expanded by the use of licensing agreements. Other methods for raising capital include private equity, ipo, and debt. Any of the alternative method must add value to Innocent’s operations in order to justify costs. Answer 2: Advantages of the Strategic Alliance From 1999 to 2007, sales of smoothies rose from £400,000 to £113m from 11,000 outlets in Britain and Europe. Innocent, with 72 percent market share is Britain’s best-selling smoothie brand. According to the co-founder, Richard Reed, the alliance would help them reach more people in greater geographical locations. Coca-Cola will help Innocent expand in Europe from the current 13 countries. Industry analysts consider the deal a marriage of convenience, as Coca-Cola’s Minute Maid struggled in the UK and sales was down 19 percent in the year 2008. Following its launch in 2008, PepsiCo’s Tropicana Smoothies grew 17 percent, while Innocent lost more that 20 percent sales. According to Gareth Helm, former marketing director, Innocent needed resources to grow the brand and gain momentum and Coca-Cola would benefit from a stake in such a well established brand. Melanie Skotadisv, consultant for Coca-Cola believed that success of previous mergers between small scale and corporate brands, such as Ben and Jerry’s with Unilever, will continue to inspire future alliances. The Coca-Cola-Innocent alliance has specific advantages including, an improvement of cash flow, access to capital, facilities and technology, access to expertise, access to creative resources, speed and flexibility in the delivery of new products, cost savings, easier distribution of products, diversification into more countries in Europe, enhanced manufacturing capabilities, reduction of risk, improved knowledge and know how, access to state of the art technologies, access to relationships with important suppliers and loyal customers, and the ability to stay focused on core competencies. Answer 3: Disadvantages of the Strategic Alliance Jim prior, managing director of The Partners believed that little consideration has been given to brand fit, and was critical of the deal. He opined that the deal was a business deal, and had to do with making money rather than achieving a strategic fit between the brands. Specific disadvantages of the Coca-Cola-Innocent alliance include sharing of profits, foreclosure of other opportunities, barriers for future opportunities in financing, distractions, and unexpected disappointments from the partner. A 10-20 percent stake sale to Coca-Cola also cedes a significant control of management decisions to Coca-Cola. Coca-Cola has very different business objectives and revenue and profit targets, and would sooner or later try to align Innocent’s business objectives with those of its own. This could mean leaner processes for Innocent, greater synchronization with Coca-Cola’s marketing channels, and participation in activities or programs for achieving higher sales targets. There could be reorganization of personnel, and business processes which could be painful for Innocent. Also, the current downturn might cause Innocent to undertake painful cost cutting measures as the demand for smoothies decline. Answer 4: Ethical Stance and Likely Effects Innocent has been committed to making only natural products that are healthy, use of better, socially and environmentally aware ingredients, packaging and production techniques, and donating money to charity. Innocent’s launch and growth has been an inspiring story of providing incredible value to customers, and being sensitive to the needs of the impoverished. However, the deal has raised questions among its loyal customers about its commitment to ethical values upon which the brand has been built. Analysts believe that the cultural values of the two organisations do not match, and Innocent would cede some of it in the process of cultural change post alliance. There has been a lot of speculation in the media, including the Sunday Times, on Innocent’s future commitment to its values. This includes its close contact and attention to loyal customers, society and environment, packaging style, contributions to charity and corporate values. However, Innocent has reaffirmed its commitment to its values and has released a book. Analysts, customers, businesses and media will be closely watching Innocent’s future moves. In the near future, not much is expected to change in terms of sales or customer behaviour, and the recent momentum is expected to continue. The most significant changes in consumer behaviour would be determined by Innocent’s future moves and the kind of value they offer to customers. References Agence France. (2009, 04 07). Coca-Cola Buys Stake in Britain's Innocent Drinks. Retrieved May 31, 2009, from IndustryWeek Web site: http://www.industryweek.com/articles/coca-cola_buys_stake_in_britains_innocent_drinks_18863.aspx Corporate Partnering Institute. (2009). The Advantages and Disadvantages of Partnerings and Alliances. Retrieved May 31, 2009, from Corporate Partnering Institute Web site: http://www.corporate-partnering.com/info/strategic-alliances-advantages-and-disadvantages.htm Marketing Magazine. (2009, 03 10). Coca-Cola's interest in Innocent splits opinion. Retrieved May 31, 2009, from Marketing Magazine Web site: http://www.marketingmagazine.co.uk/news/888583/Coca-Colas-interest-Innocent-splits-opinion/ Steiner, Rupert. (2009, 04 07). Innocent smoothies over Coca Cola deal. Retrieved May 31, 2009, from thisismoney.co.uk Web site: http://www.thisismoney.co.uk/markets/article.html?in_article_id=481997&in_page_id=3 Section B Answer 2: Suitable, Feasible and Acceptable Framework Evaluation of Strategic Options for the Innocent Drinks Expansion Plan.  A firm has to build several options after an assessment of external and internal issues facing the organisation for taking the strategy forward. These options are based on market direction, competitive advantage, and strategic growth. The Suitability, Feasibility and Acceptability provide a framework for this assessment. This allows selection of options that are most likely to succeed based on the firm’s risk/reward profile. Suitability refers to the fit of the strategy with the situation. Feasibility refers to the practical possibility of the strategy, and whether the resources are available. Acceptability is about whether the stakeholders would accept the strategy. Strategic options available to Innocent Drinks have been assessed from a suitability, feasibility and acceptability framework. After nine years of spectacular growth, in the year 2008 Innocent was at a critical juncture in its path forward. The financial downturn was causing consumers to cut costs, and introduction of Tropicana Smoothies by PepsiCo was shifting consumers away from Innocent. This resulted Innocent losing greater than 20 percent in sales. According to Richard Reed, one of the cofounders, Innocent had to raise capital and reach more consumers in greater geographical locations. Besides raising capital Innocent had to consider strategic options to seek sustainable growth opportunities. Common methods of raining capital include debt, ipo, or private equity. Innocent could raise capital from a financial institution based on specific terms, and its loan repayment capacity. Equity markets allowed Innocent to raise capital by an initial public offering. Innocent being a privately held company that had been growing steadily would be valued attractively and favourably by the investing community. An ipo would have been fully subscribed. Private equity would have been another alternative for raising capital. Private equity capital is actively on the lookout for investing opportunities, thereby allowing Innocent to raise capital based on specific terms of private equity investment. A loan would not have provided Innocent with other resources, technology and skill to enhance its operations. As equity markets have been at its lowest levels in several years, ipo would not receive the valuations it would during bull markets. Also, other resources such as technology or skill would have been unavailable. Companies like Innocent that have independent values, and social concerns usually have to undergo changes when acquiring private equity capital. In addition to raising capital, Innocent had a strategic outlook for building on the company’s strengths, achieving economies of scale, speed to market, improved agility, and access to new customers. Innocent had alternatives for expansion including alliance, merger, joint venture, acquisition, franchise, turnkey, and licensing. Being acquired would have been the least preferable option for Innocent, since that would involve complete restructuring of its business. A merger would not have been suitable either, since there were no companies that shared the synergies and values of Innocent. The loss of 20 percent in sales in the earlier year had dented the balance sheet of Innocent, and putting stress on the cash flow of innocent. In such a scenario, franchising, turn-key and licensing would have met with scepticism. As the length of the financial downturn was unknown, Innocent needed more than cash to boost its operations. Under normal economic circumstances, franchising, turn-key and/or licensing would have been attractive options. An alliance with a company that had the resources and the capability to withstand the downturn was the most suitable alternative that Innocent had. With £113m in sales 2007, Innocent has been attractively positioned for future growth, and having the resources for raising additional capital in a variety of ways. Seeking an alliance with a partner for raining capital would require Innocent cede some equity in the company. Media has reported a sale of 10-20 percent for £30m. Also, the partner would seek management rights including a seat on the board. Media has speculated that there might be changes in the values and business principles of Innocent. Considering giving up some management control, and reviewing some of its business practices in exchange for cash for expansion and access to technology, expertise, distribution channels, and links with distributors and retailers, the deal was attractive for Innocent. A successful and well established partner, such as Coca-Cola had an established track record of creating alliances with regional players and having done well over the long term. The prospect for Innocent was similar to deals that were done decades ago by Coca-Cola in several emerging markets. There has been a lot of media speculation about the deal regarding brand fit, and corporate values. Coca-cola and Innocent have been extremely positive about the deal. The founders have reiterated that there would be no change in any of their exiting values, and concerns for its loyal customers, the environment or impoverished communities. Such clear communication of the strategic objectives is necessary for gaining confidence of all stakeholders. Innocent has released the book titles "innocent - our story and some things we've learned," as a part of its endeavour to being transparent and sharing its story, and illustrate the development of its business and cultural values. Once the objectives are clear to all stakeholders, and Innocent continue to provide the values upon which the brand has been built on, acceptability among stakeholders is assured. Though there is not a great deal of similarities between the businesses for Coca-Cola and Innocent, both brands have been built on strong consumer confidence. The possibility of both business complementing each other and attaining desired objectives is much greater than falling out, and could be considered as a “marriage of minds” rather than “marriage of convenience.” References Innocent Drinks, (2009). a book about innocent: our story and some things we've learned. Retrieved June 1, 2009, from Innocent Drinks Web site: http://www.innocentdrinks.co.uk/bored/library/we_wrote/our_story/ Prime Minister's Strategy Unit. (2004). Strategy Survival Guide . Retrieved June 1, 2009, from Strategy Survival Guide Web site: http://interactive.cabinetoffice.gov.uk/strategy/survivalguide/site/intro/introducing.htm Answer 3: Analysis of Porter’s Generic Strategies versus Ansoff’s Growth Vector Matrix, and their Usefulness in Strategy Development.  Attractiveness of the industry of operation is a primary determinant, and its position within the industry is a secondary determinant. An optimally positioned firm could generate superior returns, though the industry might be having below average profitability. A firm could position itself by leveraging its strengths. Cost headings and differentiation are a firm’s primary strengths. The application of these strengths results in three generic strategies; cost leadership, differentiation, and focus, which could be applied at the business level. The strategies are not firm or industry dependent, so they are called generic strategies. According to the cost leadership strategy, a firm could be a low cost producer for a certain level of quality in an industry. The products could be sold at average industry prices enabling the firm to earn higher profit than its rivals, or below average industry prices for gaining market share. When the industry matures and prices decline, firms producing at a cheaper rate would remain profitable over a longer period of time, as the target for cost leadership is a broad market. Improving process efficiencies, gaining access to large source of materials at lower cost, optimal outsourcing and vertical integration decisions, or avoiding certain costs are some methods for gaining cost advantages. The firm could gain and sustain a competitive advantage based on cost leadership, when competing firms are unable to lower costs. Internal strengths of firms succeeding in cost leadership are access to capital for investment in production assets, efficient manufacturing processes and skill in designing products, high levels of expertise in manufacturing, and efficient distribution channels. Risks for the strategy include competitors lowering costs, and elimination of competitive advantage. Development of products or services offering unique attributes of value to customers, and perceived to be better by customers is called the differentiation strategy. A premium price could be charged for the value of the unique characteristic. The higher price will not only cover the extra costs, but also result in gains. Also, increase in prices by suppliers could be passed along to customers. Internal strengths of firms succeeding in differentiation strategy include access to scientific research, highly skilled and creative product development team, sales team that can communicate strengths of the product, and corporate reputation for quality and innovation. Risks associated with the differentiation strategy include imitation by competitors, greater differentiation by competitors, and changes in consumer tastes. According to the focus strategy, firms should concentrate on narrow segments and try to achieve cost advantage or differentiation within that segment. By focussing on the needs of the group, they could be better serviced. Firms employing the focus strategy often enjoy a high degree of customer loyalty, thereby discouraging competitors, and enabling passage of costs to customers. However, there are lower volumes and less bargaining power. Risks associated with this strategy include imitation, greater focus by competitors, competition by broad market leader, and changes in target segments. According to Michael Porter, long term success could be achieved by selecting one of the three strategies or creating separate business units for each strategy with different policies and different cultures (Porter, 2004). The growth vector matrix was drawn by Ansoff illustrating the combination of firm’s activities in existing and newer markets, with products or services that are new and existing leading to growth. Ansoff’s growth matrix is a technique for analysing product and market policies. The matrix could be used to identify existing growth strategies, or plan future growth strategies. By carrying out both activities, it is possible to identify successful activities in the past, and what might be needed to be done in the future. The Ansoff’s growth matrix has four options, including market development, diversification, market penetration and product development. Growth could be secured by market penetration of current products or services in current markets, development of current products or services in new markets, development of new products or services in new markets, and diversification of new products or services in new markets. Market penetration is the most common growth area for start up businesses. The emphasis is on selling a greater amount of existing products in existing markets. The growth is steady, and fewer risks are involved as the business has a great understanding of the product or services as well as the markets. Market penetration allows the firm to maintain or increase market share, secure dominance, drive out competitors, and increase usage by existing customers. Product development involves the development of new products or services for satisfying the needs of existing markets. There is a greater amount of risk than market penetration, as the product or service is relatively new and not well known. Product or service development forces competitors to innovate, and discourages new entrants to the market. Expenditure and risk are drawbacks of this technique. Development allows the firm to seek and access new geographical areas and export markets, differentiate products Market or services, develop new distribution channels, and create new market segments by differential pricing policies. Development involves selling existing products to markets that are new. During diversification, new markets are entered with new products. The strategy could be very risky as the firm is faced with several unknown factors. Entering a well established market would result in stiff competition, since product or service and market knowledge is great. A relatively newer market place where the firms are still learning provides better and easier opportunities. These include growth or investing surplus. Growth prospects are available for new products or services and new markets, which are not available in current markets. Surplus funds allow for diversification opportunities. A clear definition of gains to be expected from diversification is beneficial (BPP Learning Media, 2008). References BPP Learning Media. (2008). Strategic performance issues in Complex Business Structures. Retrieved May 31, 2009, from BPP Professional Education Web site: http://www.bpp.com/acca/downloads/sc/ATP57-Sc.pdf Porter, Michael. (2004). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Retrieved May 31, 2009, from Athens University of Economics and Business Web site: http://e-learning.dmst.aueb.gr/mis/Cases/7-Eleven/Case/Porter's_Generic_Strategies.pdf Read More