Diageo Ltd.: Strategic Financial Management

Introduction

Currently, Diageo plc specializes in the following areas:

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  1. Production and distribution of alcoholic beverages;
  2. Sale of bitters and liquors;
  3. Hospitality industry1 (Diageo, 2009). Certainly, the primary focused is placed on the first aspect.

The company operates in 180 markets across the globe in particular North America, Europe, Asia Pacific and so forth. The list of countries includes the United States, Canada, the United Kingdom, France, Russia, China and many other states (Duncan, 2009, p 9). This corporation is a holding that comprises many other firms and brands. SBU (Strategic Business Units) can be subdivided into several groups:

  • Production of alcoholic beverages:
  1. Beer: Tusker, Guinness, Red Stripe, Kalibar
  2. Vodka: Smirnoff, Popov
  3. Scotch Whiskey: Johnnie Walker; Gilen Ord, Glen Elgin
  4. Wines: Sterling Vineyards, Chalone, Rosenblum
  • Distribution of bitters and liquors: Zwack, Jose Cuervo,
  • Hospitality Industry: the Gleneagles Hotel (Drinks Business Review, 2009)

Judging from the abovementioned, it is quite possible to argue that the major source of revenue is the distribution of alcoholic drinks. It is a critical factor for the success of Diageo plc. Apart from that, the company earns its revenues from licensing third parties who want to use Diageos brands.

Financial Analysis

In order to make the financial analysis of Diageo performance, we need to pay attention to such parameters as:

  1. Net turnover: ROCE (return on capital employed);
  2. Net and gross margin; gearing and interest cover (Helfert, 2001). The findings of the analysis can be presented in table format.
YEAR NET TURNOVER ROCE Gross MARGIN Net MARGIN GEARING INTEREST COVER
£ Million PERCENTAGE
2005
2006
2007
2008
6, 677
7,260
7,481
8,090
41,25
43,66
51,77
53,31
60,43
59,56
59, 85
59,88
42,79
47, 10
48,21
45, 94
257. 466
309, 351
351, 359
459,357
8. 10
8,69
7,73
5,75

On the whole, these findings indicate the financial performance of Diageo is quite stable. Its turnover and ROCE increase on an annual basis, which means that the management is able to make full use of its investments. However, there are aspects that require close attention: namely, the companys interest coverage is declining: which means that the debt burden becomes heavier. This can lead investors to the belief that the profitability of this enterprise leaves much to be desired. Apart from that, its profit margin has dropped. This decline can be explained by internal inefficiencies and the high cost of production.

Marketing Analysis

In order to analyze the marketing strategies of Diageo, we may use the model, which is called the four Ps: Product, Price, Place, and Promotion (Kotler et al, 2008). This method enables us to get a better understanding of the companys policies and future prospects.

Product

A diverse range of alcoholic beverages (wines, whiskey, vodka beer; liquors) and bitters

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Price

Pricing policies of Diageo vary depending on the particular business unit or division of the company. Some of them, for instance, Smirnoff, position themselves as luxury brands and their products are not easily affordable to a wide audience. In contrast, some trademarks like Guinness are more accessible. Yet, it should be noted that none of Diageo’s division wages price wars. In part, this fact proves that their products still enjoy considerable demand in spite of the economic recession.

Place

Various sales outlets: super-and hypermarkets, malls, small shops, drugstores and supply depots, if we are speaking about wholesales purchases.

Promotion

Advertising in mass media: (mostly television and Internet); branding, word of mouth, discount to wholesale buyers; bonuses.

Overall, Diageo is a company with extremely diversified marketing strategies: it consists of multiple branches with various products, pricing policies, and branding. In fact, their products no longer require advertisement as their names of trademarks have been established long ago. The only point which requires addressing is that the company has to deal with a great number of mediators in order to sell its goods: In this case, we need to mention supply depots which stand between Diageo and small shops or supermarkets (Diageo, 2009).

Human Resources Management Analysis

The cornerstone of Diageos continuous success is effective human resource management. At present, the companys CEO is Paul Walsh, who strives to improve every part of the production process and emphasizes the importance of skilled personnel. The management of this organization strives to achieve the following objectives:

  1. Attract and retain the most talented candidates
  2. Give a chance to the employees to take a financial stake in order to make them more motivated (Duncan, 2009)
  3. Include workers into the decision-making process
  4. Provide an adequate monetary reward to the staff
  5. Avoid restructuring and delayering in the organization

The major peculiarity of Diageo HRM policies is that almost every subdivision of this holding is an enterprise with long-standing traditions and an untarnished reputation. This is why the employees are extremely proud of being a part of this firm (Diageo, 2009). This provides a powerful incentive to them to be more efficient and meet the production standards, set in this organization.

Operations Analysis

Diageo strives to support and elaborate on the organizational processes, which can be subdivided into several groups.

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  1. The development of supply chain: the management has established long-term partnership with the supplies of raw materials, necessary for the production of alcoholic beverages. They include cream, neutral spirits, glass, grapes and so forth.
  2. Manufacturing process: this holding has a great number of brewing facilities in the UK, Cameroon, and Malaysia. Furthermore, Diageo allows various third parties to use their brands according to license agreements, for example, Guinness is brewed by many small companies in Europe, the US and Asia.
  3. Delivery of the products to the customers: currently, the company conveys alcoholic beverages to the customers through such channels as supermarkets or hypermarkets, retailers, or on-trade.

It would not be an exaggeration to say that their operations meet the highest standards. The only exception is delivery: in such countries as Russia, Germany and India, Diageo has to resort to the help of numerous mediators (Duncan, 2009, p 34). They have no sales outlets of their own. This eventually increases their marketing expenses.

Strengths and Weaknesses

  1. Strengths:
    • impeccable reputation of the companys brands;
    • skilled personnel;
    • access to a great number of markets (Diageo operates in more than one hundred countries);
    • diversity of their products;
    • flexible pricing policy
  2. Weaknesses: lack of networks in such countries as Russia, India, Germany. In other words, Diageo should establish its own sales outlets in these regions.

Pestel Analysis

At this point, we need to conduct the so-called PESTLE analysis in order to gain a better understanding of those factors which may shape the performance and strategies of Diageo.

Political Factors

  1. Efforts of many governments to reduce consumption of alcohol. In such cases, the state raises the price of alcoholic beverages by imposing high customs duties.
  2. Protectionist policies, which aim to shield local manufactures from foreign companies. Normally, these policies are pursued by establishing import quotas.

Economic Factors

The most crucial economic factor is the ongoing economic recession which has significantly affected the purchasing power of many customers throughout the globe. The key problem is that the majority of Diageos business units style themselves as luxury brands. People, who consume alcohol, would have to switch to less expensive brands.

Social Factors

When speaking about social drivers of performance, we should mention that in modern communities, especially in Western Europe or North America, people place begin to place more and more value on a healthy way of life, which is almost incompatible with alcohol (Culyer & Newhouse, 2000). This is one of the reasons why the sales rates of Diageo can drop.

Technological

In theory, technological factors can constitute a threat to the performance of Diageo. The thing is that some business units of these holding employ technologies which have already been outdated, especially in wineries. In this way, they try to adhere to the long-standing traditions of this industry. However, other firms modernize their production. So in this way, they can get a competitive advantage over Diageo.

Ecological

The necessity to employ eco-friendly technologies, which are normally more expensive;

Legal

Legal factors are closely associated with political ones: in several countries like Finland, the distribution of alcohol is illegal nowadays.

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Judging from this discussion we can argue that the most serious source of risk for this organization is the policy of the state, which takes a negative stance towards the production and distribution of alcohol. The thing is that the company cannot possibly affect or interfere in the decision-making of the local governments.

Porters 5 Forces Analysis

The model of Five Forces, developed by Michael Porter, is a useful tool that enables to the assessment of the industry environment of an enterprise. In this case, we need to focus on such parameters as:

  1. The threat of substitute products: the threat of substitute products is rather unlikely because the clients of alcoholic beverages pay special attention to the production methods. Moreover, we should speak about their strong brand affiliation to Guinness, Smirnoff and other trademarks of this holding.
  2. The threat of the entry of new competitors: the probability of this risk is rather slim because there are multiple entry barriers to the newcomers. As it has been noted before, the Brand affiliation of Diageo customers is very strong. Secondly, unlike Diageo, they are not able to organize mass-scale production of alcoholic advantage. In sharp contrast, Diageo has already developed infrastructure.
  3. The intensity of competition: at the given moment, the firm’s competitors cannot outpace it. Yet, significant problems can arise if they begin to merge with one another.
  4. Bargaining power of suppliers: Diageo is extremely dependent on the manufactures of raw materials: neutral spirits, cream and so forth. The company signed long-term contracts with them, but when these contracts will expire the situation will drastically change: the producers of raw materials will be able to dictate terms to Diageo.
  5. Bargaining power of customers: the buyer’s behavior can have a profound effect on the performance of Diageo: the current economic crisis has diminished their purchasing power and some of them have to select less luxurious brands.

Critical Success Factors

  1. Financial welfare of the clients
  2. The effectiveness of supply chain
  3. Support of local governments
  4. The excellence of production processes
  5. Distribution channels
  6. The favorable attitude of the public toward the consumption of alcohol
  7. The range of the target audience

Opportunities and Threats

Opportunities

  1. In the modern age of globalization Diageo plc has a unique chance to enter and explore many markets, which had previously been inaccessible to them, for example, China, India or Russia. The consumption of alcohol is extremely high in these countries (Duncan, 2009). In fact, alcoholic beverages are an inseparable part of their cultures.
  2. The growth of e-commerce.
  3. the development of new technologies, which enable to make the process of production more cost-effective;

Threats

  1. Intense competition in this industry;
  2. Great bargaining power of suppliers;
  3. On-going economic recession, which induces many customers to cut their expenses;
  4. Unfavorable stance of society towards alcohol consumption;
  5. Legal restrictions, imposed by the state and the policy of protectionism.
  6. Finally, we should not forget about the possibility of a merger of Diageos rivals.

At this point, we can argue that there are some risks, which the company is unable to address, especially if we are referring to political, social and legal factors. The strategies of this organization may be shaped by the forces which lay beyond the competence of the management. This is why their situation is quite precarious.

Strategic Position of the Organisation

The management of Diageo emphasizes the importance of diversification of its products, products, markets and pricing policies. Despite the fact that the firm previously positioned itself as the manufacture of premium brands, now they try to modify this strategy. Namely, it has acquired Seagram Lid, a Canadian distiller of alcoholic drinks (Duncan, 2009). Such acquisitions give an opportunity to enter the markets of other countries. The most peculiar feature of their approach is that their products are not associated with the name of the company. Very few people know that such brands as Smirnoff or Guinness belong to Diageo. These trademarks continue to remain popular. Apart from that, we should point out that Diageo strives to minimize its dependence on supplies. Nonetheless, it has to be acknowledged that the organizations strategy does not minimize external threats: 1) interference of the government and social risks.

Unresolved Issues

  1. Policy of protectionism
  2. Quotas on exports
  3. Negative attitude toward the consumption of alcohol
  4. Numerous legal restrictions (particularly, the illegal status of alcohol distribution in many countries)
  5. Increasing bargaining power of suppliers
  6. possibility of another economic recession

Proposed Future Strategies

Increase competitive advantage of the company by acquiring suppliers of the raw materials

  1. Diversify the companys products and purchase numerous local manufactures of alcoholic beverages
  2. Merge with the companies which style themselves as luxury brands such as Absolute, or Nemiroff2

Selection of Winning Strategy

Strategy Acceptability Feasibility Suitable Accept/Reject
1) The expansion of the supply chain would increase the competitive advantage of this company The firm possesses financial resources in order to put this plan into action. Neither government nor investors would object to the adoption of this plan Accept
2) This policy will open new markets to the company and attract new customers At the given moment; the company cannot purchase only several companies of this type. The desired effect will not be achieved The investors will not understand the advantages of this policy Reject
3) The acquisition of luxury brands like Nemiroff or Absolute will increase sales rates of the company and boost its profitability At the given, moment the above-mentioned firms are quite self-sufficient and Diageo may not find enough money to acquire them The adoption of this plan may not be accepted by the stakeholders because it would significantly diminish interest coverage of Diageo. Reject.

Recommended Strategy and Risk Assessment

Thus, the strategy, proposed in this report is the expansion of the supply chain and acquisition of those companies which manufacture raw materials. This strategy aims to address one of the most serious threats to which Diageo is exposed: the increasing bargaining power of suppliers. The success of the companies which produce alcoholic beverages lies in their ability to obtain high-quality raw materials at a reasonable price. The contracts, signed by Diageo with the partners will expire sooner or later and this organization will have to face numerous difficulties like the increased operations costs. This proposed strategy does not incur any considerable risks to the company. The most serious dangers are as follows: the unfavorable stance of the local government towards Diageo brands; a decrease of alcohol consumption. Their hypothetical impact will be ruinous for Diageo but these risks are highly improbable.

References

Campbell D. Stonehouse G & Houson B (2002). Business strategy: an introduction. New Jersey: Butterworth-Heinemann.

Cheverton P. (2004). Key marketing skills: strategies, tools, and techniques for marketing success. New York: Kogan Page Publishers.

Culyer A & Newhouse J 2000. Handbook of health economics. London: Elsevier.

Davies A. 2006. Best practice in corporate governance: building reputation and sustainable success. London: Gower Publishing, Ltd.

Diageo plc. 2009. Official Website. Web.

Drinks Business Review. 2009 Diageo: Company Profile. Web.

Duncan S. 2009 “ Is the Glass Half Full or Half Empty? – Future Prospects for Diageo plc” Greenwich University Business School, pp 1-45.

Helfert E. 2001. Financial analysis: tools and techniques: a guide for managers.

New York: McGraw-Hill Professional, 2001.

Kotler. P., Armstrong G & Saunders J. 2008 Principles of marketing. New York Pearson Education,

Stahl M & Grigsby D. 1997 Strategic management: total quality and global competition. London: Wiley-Blackwell.

Footnotes

  1. The company has acquired the Gleneagles Hotel.
  2. Manufactures of vodka, they are believed to be in the forefront of this industry.
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