People:

Focus on retaining and recruiting highly competent and diverse people, as well as providing training opportunities is a top priority for the company. Furthermore, Carlsberg does a lot to foster innovation and talent recruitment, as it is seen as one of the major things the company will be able to compete with in the future. Carlsberg does also have policies to protect employees against discrimination and harassment, while they also incentivize the sales employees with the use of commission based salaries.

5.5 Efficiency:

Carlsberg has always had a strong focus on effecting and improving their processes, utilizing their economics of scale and implementing lean production methods. Western China, they have 20 brewery plants and 5000 employees, while in Russia the company have 10 factories (Carlsberg, 2021).

Within the beer industry, being market leader is always the most profitable, and consequently, to merge with international and local breweries. Carlsberg ownership structure was a main obstacle to a financial expansion. A mandatory ownership of 51% of The Carlsberg Foundation prompted the fast access to capital for acquisitions that obstructed the potential mergers with large international companies and, consequently, its international competitiveness. In May 2007, after a change in the charter of the Foundation to a mandatory ownership of 25%, the company had more financial freedom and space to act, for example, in 2008, with the acquisition of Scottish & Newcastle (Shareholders of Scottish & Newcastle approved a takeover of the company by Heineken and Carlsberg, 2008).

5.6 Products and Innovation:

Carlsberg has a strong portfolio of brands to satisfy customer preferences, meeting the market’s local requirements. The Chinese market is characterized by local and regional beer brands within poor provinces, as the company targets the exclusive segments through its successful Chinese designed brand – Carlsberg Chilli. Furthermore, in 1992 Carlsberg introduced Baltika, the leading beer brand in Russia that made remarkable developments in the Russian beer market. They manage to be a customer focused business, through their international and local portfolio of products. Carlsberg’ products and innovation processes are considered to be one

35 of the main reasons they can call themselves an successful global beer and beverage company today. They have invested heavily in production and innovation facilities whilst investing in other brands, giving them a completely diversified product portfolio accommodating to all types of consumer needs.

5.7 Sub conclusion to Carlsberg’s competitive strategy

Carlsberg has in recent years focused around creating value by entering other markets in different continents. It became clear, as they tried to retain and constantly expand by increasing profitability through streamlining processes. Throughout investments and M&A’s, the company was able to gain market shares on a global scale with speed seldom seen before (Shareholders of Scottish & Newcastle approved a takeover of the company by Heineken and Carlsberg, 2008). Carlsberg was able to gain strategic market positions in several markets with a product specialization focus and with a long-term strategy perspective.

The reason that Carlsberg is one of the beer companies that has grown the quickest is that it has been able to successfully merge and acquire other brewing brands in local markets. In China, Carlsberg did a joint venture with the company Chang Beverages in 2000 to penetrate the Asian market. In Russia, Carlsberg has had an aggressive M&A strategy since the early 2000’s. Those mergers and acquisitions have been an fundamental part for Carlsberg to achieve the market position they now have in those markets.

External analysis

To understand the current value of the industry and to grasp its long-term potential, it is needed to assess the external environment. The maximum value of the industry proves where the firm is battling. For Carlsberg, the main users are primarily located in West and East Europe, as well as China, Russia, and India. The primary rivals in a global context are InBev, SABMiller, Anheuser-Busch, and Heineken. Nonetheless, substitutes also consists as a dangerous threat to beer consumption (Mintel, 2018).

Firstly, to understand the forces that shape rivalry within the beer sector will necessitate conducting a 5 (+1) competitive forces analysis. Because the industry is highly secured due to high entry barriers and with only five main companies, the rivalry is fiercely. Cooperation

36 becomes harder because of this. However, the power of price rivalry is medium high because some companies differentiate not on the price, but on the product (Porter, 1985). Substitute products present a major danger, in particular in Russia with vodka and China with the traditional wine Huanjiu. Furthermore, due to the increase of different products and healthy lifestyle trends, the risk of alternatives is significant. Because there are various obstacles for market entrances, the threat of new entrants is restricted (Porter, 1985). The initial money needed to establish a company within this industry may scare most companies away from entering.

A PESTEL analysis was conducted afterwards to determine the dangers and opportunities in the macro-environmental surroundings (Euromonitor International , 2015). In terms of political affairs, additional taxes, and regulations on substitutes, it may result in an increase in Carlsberg's costs, particularly in China. In terms of the economy, deficient expectations of rising living standards and income, particularly in China, may lead to a deceptive sense of future demand. In light of social risks, changes in consumer preferences toward healthier products, such as non-alcoholic beverages, may have an effect on Carlsberg’s future demand (Du, 2010). In some countries, religious predilections and cultural complexities may also play a role in sales failure. Carlsberg, on the other hand, must continue to invest in new equipment in order to keep costs competitive (Aguillar, 1964). Carlsberg's rapid growth may be hampered by regulatory barriers to the purchase of enterprises with the goal of increasing market share.

(Yüksel, 2012).

37 6 Porters Five Forces

Michael E. Porter proposed the Porter Five (5) Forces Model in 1979. The goal was to study and evaluate corporate organizations’ competitive positioning and strengths. The model includes three horizontal competitive forces which are the threat of substitute products or services, threat of new entrants, and rivalry among existing enterprises. The two vertical forces consists of threat of new entrants and rivalry among current firms (Du, 2010).

With this approach, Carlsberg will be able to assess how appealing the industry is, as well as its competitive position in the market. To secure Carlsberg's long-term existence, the analysis can also be utilized to make strategic decisions that could boost the company's success.

This model helps the company assess the nature of an industry’s competitiveness and develop corporate strategies accordingly. The framework helps to identify and analyze the important forces that determines the profitability of an industry (Porter, 1985).

6.1 Threat of new entrance

In today’s market, there is true change in the fact that smaller breweries have entered the beer industry, as the barriers to enter the market is low if the brewery can accept only producing small quantities and losing profit in the transportation costs (Next Generation Customer Experience, 2018). In order to become profitable, a brewery needs to focus on economies of

38 scale and sales volume, otherwise the margins will be swallowed by production and transportation costs. This reduces the threat of new entrance. Furthermore, as Carlsberg already has a strong and powerful brand, it becomes even harder for new companies to enter. Hence, it can be concluded that overall is the threat of new entrances extremely low.

In order to enter a capital heavy market like the beer industry requires sufficient capital. Also, there must be a level of differentiation in the product and the branding, if consumers are to shift from the well-known brands, they have already consumed endless times. Another major risk lies in the fact that new players are obligated to follow the strict controls, procedures and demands from governments, as the beer industry is complicated due to governments focus on its population health and minimizing beer consumption. For new players, it is difficult and resourceful to understand and follow such complicated procedures (Porter, 1985). Nonetheless, as a concluding note, the barriers of entry are too high to impose a risk for Carlsberg, as it requires heavy capital to truly compete with the big players, that has already established a brand with loyal consumers.

6.2 Threat of substitutes

Although soda and juices are not alcohol infused, they are the most compelling substitutes for beer. Soda, like beer, is considered a casual drink, however unlike beer, you can drink soda wherever you choose. Other alcohol-based alternatives, such as wine and hard liquor, are more compatible with beer because they all include alcohol and serve the same goal (Nielsen, 2015).

The demand for beer influences people's personal tastes, which can be altered through marketing. As a result, because there are numerous substitutes for beer, the threat of substitutes in the beer sector is considerable. A risk lies in when a substitute product or service is offered from another industry that is offered at a cheaper price, the switching costs increases and that imposes a risk to Carlsberg.

Consumers are not able to obtain the same value in terms of flavor from substituting brands, as the price of substitutes are often higher than Carlsberg’s products, which ensures the customers are not switching over (Porter, 1985).

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6.3 Threat of rivalry

Existing enterprises in the beer market are fiercely competitive. During this and next year, Carlsberg anticipates increased revenue and demand for its products. That is not to say that businesses will not fight tooth and nail to retain existing clients and attract new ones (PWC, 2015). Royal Unibrew and Heineken, both based in the Netherlands, are Carlsberg's primary competitors in the Danish market. That means your success in this industry will be determined by your ability to hit your competitors. As a result, competition is raging, and rivalry is said to be the most powerful power within the framework.

As there are only a few companies in the Asian market, competition among current enterprises is lower in developing markets than in West Europe (Hollensen, 2004). The beer sector in developing countries are growing quickly, wherefore new brands may be able to grow with the large markets. Nonetheless, amongst the large competitors, each of them targets different consumers, which hereby lowers the competition. Unfortunately, as the industry is characterized by extreme price sensitivity, the brand loyalty is non existing if prices increase too much due to local tariffs. Therefore, the competition may become fiercer.

Similarly, there are various elements that effects Carlsberg's rivalry in emerging markets among established enterprises. It is considered a known fact that when a larger number of competitors are trying to market towards the existing consumers, there is inevitably going to rise a fierce competition within the industry (Next Generation Customer Experience, 2018).

As the beer industry is characterized by a high price sensitivity, a price way could become an unpleasant, yet possible outcome for the companies in their attempt to win over customers.

This will especially affect competitors who have the same size in terms of revenue and who are selling products very similar to each other. Those reasons should make Carlsberg be aware of possibly rivalry situations in local markets.

6.4 Power of suppliers

The supplies needed are hops, yeast, malt and water to produce beer. The hops are imported elsewhere, the yeast is produced by Carlsberg and the malt is bought from Danish farms (Carlsberg, 2021). Potential suppliers have barely any leverage, as Carlsberg is such a major customer that all suppliers would do anything to land a customer like that. Apart from the fact

40 that brewers are dependent on sellers, suppliers have some bargaining leverage. Other suppliers used by the beer business include bottles, cans, and aluminum providers. Overall, the beer industry's suppliers wield a moderate level of control (Carlsberg, 2016).

Suppliers' negotiating power would become a threat for Carlsberg if merchants are primarily in a specific geographical region. This factor brings value when the switching cost is higher, for example, due to predetermined agreements (Carlsberg, 2021). If there are few suppliers and short supply for their products, the suppliers' position against Carlsberg is reinforced. The incorporation of new suppliers therefore weakens Carlsberg's position because the number of competitors in the market is increasing.

High variation of products provided by suppliers in emerging markets comprising just a small portion of suppliers' overall sales, and unavailability of similar products are all factors that boost suppliers' bargaining leverage. Contrary, supplier negotiating leverage in developing markets will be restricted for Carlsberg if there is a lack of suppliers and the cost of switching is not much (Carlsberg, 2021). Differentiation will also be missing in the product if there are alternative items available.

6.5 Power of buyers

There are two types of purchasers in the beer market. They are wholesalers and retailers. The retailer must ensure that his product and marketing are of the highest quality possible. Known fact about the retailer-set prices, is that this element has a substantial effect on customers.

Because of the intense competition among retailers, consumer prices are continually being reduced (Hollensen, 2004). A wholesaler is a person or company who purchases massive quantities of items from numerous producers, stores them, and then sells them to retailers.

Buyers in general have a lot of options because there are so many companies offering beer which expands the customer's options, increasing the threat of buyer power (PWC, 2015).

Retailers and wholesalers have different levels of power, as retailers have less power than wholesalers.

Buyers' bargaining power is boosted by a larger consumer group which improves their negotiating power against Carlsberg. When there are fewer potential buyers, the buyer force will be solid, however if there are various sellers, the force will be lower. The costs of switching

41 being low is vital, as it gives consumers more bargaining control towards Carlsberg. In emerging markets, backward integration proves the buyers' ability to make their own products instead of purchasing directly from Carlsberg. Hence, the power of consumers relates to the price sensitivity in the respective market, the differentiation level of the products and the size and number of competitors within the industry. Therefore, if there are less consumers, and the price sensitivity is smaller and the brand loyalty is higher, the buyer’s bargaining power would be reduced significantly.

6.6 Sub conclusion to Porters Five Forces

The use of Porter's five forces in a practical business case facilitates the researcher to conduct relevant findings that can be used in the strategic recommendations. All five forces are uniquely impacting the outer environment of the company, which all impact and influences the profitability within a given industry.

Hence, combined with the PESTEL, the framework will deliver a comprehensive knowledge of the external environment will be analyzed and investigated.

In the case of Carlsberg, the target buyers are beer drinkers located in Western Europe and in the emerging markets of East Europe, Russia, and China. The main competitors are InBev, SABMiller, Anheuser-Busch, and Heineken in the global beer industry. The closest alternatives are other alcohol infused drinks like wine and cider. Vodka should be seen as one of the major threat of substitutes in Russia, whereas in China, wine is considered the biggest substitute threat of beers. The most important macro trend that could affect the success of the industry is the increase in healthy lifestyle choices, reducing alcohol consumption and hereby Carlsberg’s revenue. Furthermore, the exclusion of smoking in public places like restaurants also indirectly decreased the global beer consumption volume. Carlsberg was, in 2006, the fifth-largest brewery in the world in terms of beer volume produced (Carlsberg, 2021). The vast majority of the volume was still consumed in the biggest markets West and East Europe.

However, the emerging market uprise made sure that Carlsberg improved their operating margins with less invested resources.

Three areas are necessary to evaluate in order to grasp the industry's long-term growth potential. On the one hand, because of economies of scale and benefits of being first to the market, production cost is slightly decreased. On the other hand, increasing costs of the

42 materials used in the manufacture of beer increased overall costs of the company. Nonetheless, the total demand is expected to rise, particularly in China, where the population and income are expected to rise simultaneously (Perez-Cueto, 2018 ). Yet, as alternatives have become more preferred and nutritious tendencies have spread over the world, consumers lose their willingness to pay for alcoholic drinks, impacting Carlsberg’s sales (Schwabel, 2015). Second, the beer sales in West Europe is becoming saturated. The sector in East Europe is still growing, which turns into more sales and hereby more risk-free investment options for Carlsberg. The Asian market, particularly Western China, is considered to have substantial growth potential for beer sales volume, but limited revenue potential due to lower prices, pinpointing this market to still be considered in its early days.