Analysis of Diageo Public Limited Company as a Business Unit within the Beverage Alcohol Industry

External Analysis

An organization’s ability to provide goods and services depends on a series of factors in its marketing environment. According to Jobber and Ellis-Chadwick (2016), a business’s macro-environmental factors determine how it will handle its customers within a competitive terrain. The factors outside the business affect its performance as a business unit within the larger industry and influence the internal factors. The external environment of a business consists of its Political, Economic, Social, and Technological factors, abbreviated as PEST. In this section, the PEST analysis will be conducted to indicate the business’s issues to remain ahead of its competitors, such as William Grant and Son and Bacardi. The PEST analysis below details the macro-environmental factors that are likely to influence Diageo’s resources and capabilities.

Political Political stability and the significance of the Food and Beverage industry to the country’s economy. Level of corruption in the regulation of the consumer goods sector Legal framework for contract enforcement Intellectual Property protection. Taxation (Tax rates and Incentives)Brexit	Economic Exchange rates and economic stability of the host country. Labor costs and productivity. Prices of raw materials. Customer expenditure
Social Leisure interests and lifestyles of customers. Educational levels and standards.	Technological Recent technological advancements by competitors Impact of social media and E-commerce.

Political Factors

The politics of the environment from which a business has its physical and virtual locations play a significant role in determining a business’s profitability and competitiveness. Diageo Plc operates in the food and beverage industry, which is highly regulated by the government. It may have life-long impacts on its citizens’ health and longevity. One of the political factors influencing Diageo’s long-term profitability is the UK’s economic stability and the significance of the food and beverage industry to the country. According to the Food and Drink Federation (FDF) (2019, p. 2), the industry is the fourth fastest growing industry in the United Kingdom as it accounts for approximately 17% of the government’s revenue. To this end, the government is concerned about the players in this industry and is likely to promote it using subsidies and tax holidays. The UK is stable enough to promote the organization’s long-term profitability.

The level of corruption within the regulatory framework of consumer goods affects the final prices of goods and customers’ willingness to continue buying. According to Bahaudin G, Mujtaba, and colleagues (2018, p. 11), the Bribery Act of the UK provides for transparency in instituting controls on consumer goods. This factor makes it easier for the organization to obtain quality assurance and controls, reflecting its efficiency in serving its customers.

Contract enforcement costs have significant impacts on the value chain because, as they increase, the final product’s cost also tends to increase. Arias, Maquieira, and Jara (2019, p. 2213) argue that the government has been trying to reduce contract enforcement costs to encourage startups and existing businesses. This will have the overall effect of ensuring that the value chain remains intact, promoting business profitability for Diageo.

Intellectual property protection entails businesses’ security as their inventions cannot be used by their competitors to promote their businesses. According to Murthy (2014, par. 2), there arose a dispute between the Indian Alcoholic Beverages Company, House of Khodays, which shows a likelihood of Intellectual Properties infringement. Infringement on IP rights leads to businesses making money out of others’ trademarks, which could spell the loss of profitability for Diageo Plc.

Taxation and tax rates in any given country determine whether a business will thrive in the environment or not. According to Oxfam (2018, p. 11), the tax rates have been rising for some companies, including Diageo. The organization’s management stated that between 2013 and 2017, they experienced extra tax charges that increased the ratio of tax payments to profits. This poses a threat to the business’s long-term profitability, a factor that the government may need to consider.

Brexit is one of the factors that has worried many businesses since the UK announced that it would be leaving the European Union. According to the Herald (2019, par. 3), Diageo is not worried about Brexit because, since the announcement, the business has been recording a significant increase in shares and profitability. Diageo still has access to the European markets, making it easy for the business to penetrate other territories and increase its long-term profitability.

Economic Factors

The external environmental factors such as savings rate, foreign exchange rate, and inflation affect the aggregate demand and investment in the economy. Diageo can use the positive economic factors of the UK to improve its product and service offerings. The economic growth rate and the growth of the food and beverage industry in the UK are some of the indices that the organization may use to forecast the industry’s and business unit’s growth trajectory.

Among the most significant economic factors affecting Diageo’s profitability include the host country’s exchange rate and stability. Diageo offers its products such as John Walker and Guinness worldwide, which means that some countries’ economic crises may affect their profitability. The country’s stability in which the organization sells its products determines whether the company will continue exporting alcoholic beverages and importing raw materials. The company has experienced a relatively stable exchange rate in most countries, making its economic performance predictable.

The cost of labor as a macro-economic factor, coupled with the workforce’s productivity, determines what proportion of the income the firm will have a profit. According to Choi et al. (2013, p. 1265), increasing labor costs harms a business’s financial performance. In the same breath, the labor force’s low productivity leads to firms incurring costs without experiencing the proportional results for expenses. Labor dynamics are different across borders, which calls for Diageo to adapt to the dynamics accordingly.

Prices of raw materials determine how much profit an organization will derive from the final product. Increased raw materials prices are likely to cause diminishing returns on alcoholic beverages, and the converse is true. The company needs to conduct market research to ensure that its value chain produces as much profit for the quality of products they offer (Ton, 2008, p. 4). Related to this is customer expenditure, which determines how much customers will purchase from the company and is related to other macroeconomic variables. In the current Covid-19 era, customer spending has been lower, which may negatively impact the company’s sales and profitability.

Social Factors

Social factors significantly impact Diageo’s profitability as an alcoholic beverage business, as it has to communicate its image effectively to the population for it to sell. Leisure interests and lifestyles of the population are crucial to any given business’s long-term profitability, and the increase of social drinking may raise the consumption levels. However, the current pandemic has restricted social events, which may lead to lower consumption levels. The levels of education in the environment are crucial determinants of consumption. Depending on the population’s enlightenment regarding the products, the company will either experience profits or losses.

Technological Factors

The advent of new technology has significantly impacted the profitability of many businesses. One of the most trends in the adoption of social media/E-commerce in product promotion. The explosion of social media has led to the rise of increasing interaction with customers. Diageo has to improve its social interactions to stay ahead of its competitors. Another technological factor is the recent adoption of advanced technology by Diageo’s competitors. To become more profitable, Diageo needs to explore the technology people are using and reach them using it.

Task Environment

Market Analysis

The market analysis is a part of the global environmental analysis as it details the attractiveness of a business in the industry. The analysis includes aspects such as the current and prospective customers, market size and trends, market growth rate, profitability, and distribution channels. A market analysis is crucial as it helps the company obtain valuable insights into the changes in competitors, ongoing market trends, characteristics of customers’ expenditure, and changes in the economy. The analysis is an essential component to help organizations such as Diageo with all the relevant information required to make wise business decisions.

Market Size, Current and Future Markets

The organization is the largest producer of spirits and other alcoholic beverages globally. The company enjoys approximately 25% market share, and it enjoys immense benefits as a major player in the global food and beverage industry. The organization is approximately 45% larger than its closest rivals in the Alcoholic Beverages industry, making it beneficial to its marketing and production activities. Famed for its phenomenal alcoholic drinks such as Johnnie Walker and Smirnoff Vodka, the company sells its products to more than 180 countries globally. The organization is looking forward to expanding into the remaining countries and providing distinct beers to an expanded global market.

Market Trends

In the fiscal year 2019, Diageo was celebrating a 6% increase in sales, the highest increment for the last decade. However, Woodard (2020, p. 5) states that while the trajectory for the alcoholic beverages industry is unpredictable given the Covid-hit world, Diageo recorded a 4% reduction in sales by the end of the first half of 2020, and sales have slumped by approximately 23% in the second half of the year. However, it is expected that the organization will stand on its feet once the social restrictions are lifted. The invention of newer products is also expected to revolutionize the market by increasing sales to at least 3%.

Market Growth Rate

The liquor market has been significantly increasing over the years, as the most developed alcoholic beverage producer in the world. The company’s more than two-centuries existence has seen an increase in the expansion into new territories. The market has especially been growing due to the introduction of new products favorable to the consumers. Although the company has recorded a 0% growth rate this year due to the Covid-19 pandemic, there was a projected 4% increase in market penetration. Scotch Whisky and Johnnie Walker are some of the premium products the business could use to increase its market growth rate.

Distribution Channels

To effectively take hold of the market, the business has used conventional and emerging distribution strategies to enhance its profitability. One of the business’s strategies to increase its customer reach is partnering with distributors with industry outsiders, and a move meant to more efficiently and effectively deliver the products. For instance, the organization ditched Concha y Toro, their long-term distribution partner, for Coca-Cola Bottlers in a move to reach the untapped markets (Erika et al., 2019, par. 3). The company has intimated on using established distribution partners to penetrate the smallest of markets. According to the United States Securities and Exchanges Commission (2012), Diageo Plc predominantly uses acquisitions and sustainable distribution channels to market its goods.

Success Factors

Diageo Plc has projected growth rates, which can only be achieved if it optimizes several factors within its operations. Some of the most critical success factors determining the company’s growth include its economies of scale, access to essential unique resources, technological progress, and access to newer and emerging distribution channels.

Competitor Analysis

Today, the market is increasingly competitive, which calls for understanding the industry and market players well before coming up with strategic plans. Current and potential competitors determine how the business conducts brand awareness to remain ahead of the game or even overcome competition. Due to the range of current and potential customers, the forms of competition that Diageo Plc needs to consider within the market-based analysis include industry competition, generic competition, brand competition, and product competition. The following table and graph detail Diageo Plc’s most prolific competitors, their market cap, and their five-year dividend growth rate.

Company	Valuation ($ billion)	5-Year Dividend Growth rate (%).
Diageo Plc	79.24	5.3
Gordon’s	12.5	3.5
Tanqueray	9.4	2.4
Pernod Ricard SA	43.8	6.8
Bacardi	20.2	4.5
Carlsberg	18.6	4.6
Morson-Coors	35.6	3.2
Brown-Forman	7.6	7.2
Heineken	53.3	5.5
Constellation Brands	35.1	0
Table 1: Diageo’s Competitors

In terms of valuation and market share, Diageo Plc needs to optimize its capabilities to competitively beat the pressure from other industry players, such as Bacardi, Heineken, Pernod Ricard, and Constellation Brands. Regarding the five-year dividend growth rate (2013-2018), Diageo needs to strategize to overcome such competitors as Heineken, Pernod Ricard, Constellation Brands, and Morson-Coors.

Competitive Analysis

The competitive intensity and attractiveness of a business depend on factors that work around the buyers, new entrants into the markets, substitute products, suppliers, and rivalry among the existing competitors. To understand the competitive terrain of Diageo Plc, Porter’s Five Forces Theory, which entails the factors mentioned above, is used.

According to Fitzpatrick (2015, p. 54), Porter’s Five Forces Theory is crucial as it provides a holistic perspective of the external factors that affect or threaten autonomy and profitability. This analysis focuses on how the organization can build a sustainable competitive advantage over its identified competitors. Using this analysis, the organization can explore profitable openings in the consumer goods sector.

The threat of New Entrants

New firms in the industry include those dealing with wines and distilleries. The businesses have brought with them innovative ways of doing things and could compete with Diageo through such strategies to reduce the costs of reduction and, therefore lower pricing. To safeguard its competitive edge, Diageo Plc may need to employ such strategies to build capacities by training its employees and investing in research and development (R & D). other strategies the company may employ include becoming innovative and building economies of scale.

Bargaining Power of Suppliers

Suppliers are very influential to the value chain as they may either increase or reduce the margins of a customer’s earnings. Some of Diageo’s suppliers are in dominant positions as they have supplied the company since its inception more than a century ago. Such suppliers may extract higher prices for the raw materials they provide the company with. The primary effect of a highly significant supplier bargaining power is that it lowers the firm’s profitability. To overcome challenges associated with a bargaining supplier, Diageo could build a database of suppliers who positively impact the value chain. Also, the firm may have a business design where a product may be made from a variety of raw materials, such that when the prices of one are high, Diageo can use another one.

Bargaining Power of Buyers

Buyers would want to pay the minimum price for a commodity, which may be detrimental to the business. Diageo could reduce the negative impact on its profitability by coming up with new and attractive products with favorable prices. This would increase sales while discouraging the loss of customers. The business could also build a strong customer base that it will be able to control, prove their quality, and hence reduce their bargaining power.

The threat of Substitute Products

Products that serve the same purpose as those produced by Diageo may lead to loss of profitability. New products that offer a higher value proposition pose a serious threat to the organization. This may be addressed through steps such as being service-oriented and customer-centered such that consumers will purchase from Diageo courtesy of their service delivery.

Rivalry among Existing Competitors

Diageo Plc operates in a significantly competitive terrain, which may negatively impact on its profitability. This is because the firm has to lower its prices at times to match those of the competitors. Diageo could use the grand strategy of cost leadership to offer high-quality products at customer-friendly prices to increase the customer base, hence the business’s profitability. The business could also differentiate its products so that it can compete more effectively.

Internal Analysis

Identification of the Organization’s Capabilities and Resources, and its Sources of Competitive Advantage

The Strategic capabilities and unique resources of a business are the strategies they use to remain ahead of their competitors. According to Johnson et al. (2016), the sources of a company’s competitive advantage are those things it can do so well at their competitors’ expense. Organizations in a competitive environment often invest in R & D to develop production secrets that are highly guarded. One of the capabilities and resources is its significant market penetration.

The organization sells its products in more than 180 countries, a feat that not so many of its competitors have managed to attain. Secondly, Diageo has diversified product categories that help them gain more customers, with brands such as Johnnie Walker and Scott Whisky penetrating deeper markets than others. Marketline (2018) records that by the year 2017, the organization had approximately 145 production facilities globally, which allowed them to produce more than 180 million equivalent units. Compared to other competitors, Diageo has a range of production, brewery, packaging, and maturation equipment in Scotland, Ireland, and England.

Another competitive advantage source is a reliable supply chain within the UK, which reduces the costs of importing raw materials. The business’s value chain is effectively designed to ensure that the product offering happens with a lot of precision and quality, a factor that is conspicuously missing in other businesses. This has continued to ensure that Diageo thrives at the expense of it has competitors, who have not optimized their tangible and intangible resources effectively.

Corporate Structure

An organization’s corporate governance plays a significant role in promoting its interests and giving guidelines on improving its services. Diageo Plc is headed by Ivan Menezes, who is the Chief Executive Officer. The corporate leadership consists of the CEO, Kathryn Mikells, the Chief Financial Officer, Regional Presidents, corporate relations director, General Counsel, Company Secretary, and the Chief Human Resources Officer. This board has appointed several committees to help it serve its mandate, as highlighted in the figure below.

Through the meticulously selected board and committees, the organization can seamlessly communicate and execute its purpose. The committees and regional presidents ensure that every intricate detail regarding the organization’s daily operations is communicated to the respective authorities for action. This corporate and strategic communication culture has effectively served the purpose of ensuring that tangible and intangible resources are effectively exploited. With the development of committees, the organization management aims to develop its people’s social and leadership capabilities, an approach that ensures the company will always have experienced management to take it through the stiff competition it is likely to experience.

Strategic Factor Analysis (SWOT)

The SWOT analysis is an essential strategic planning tool used by an organization’s leadership to show the Strengths, Weaknesses, Opportunities, and Threats that the business faces in its current business environment. As one of the leading business units in the food and beverage industry in the UK and globally, Diageo Plc has managed to carve a niche for its brand uniqueness, quality, and special prices. The following table highlights the various aspects that are covered within the SWOT analysis of Diageo Plc.

Strengths Market Leadership Top Brands Geographical Reach	Weaknesses Poor presence in wines Brexit High costs
Opportunities Retail Consumption Growing Awareness	Threats Regulatory Framework Stiff Competition

Table 2: SWOT Analysis of Diego Plc

Strengths

Diageo is a leading brand in the global liquor industry, with approximately 28% market share in the UK. It leads to the alcoholic beverage market by producing top brands attractive to the diverse customer base. The company’s beverages are famed for maturation and good taste, an aspect that continues to conquer territories for Diageo. Also, the firm has a wide geographical reach as it operates in approximately 180 countries globally. With such penetration, the business unit can optimize its profitability.

Weaknesses

In some markets such as Europe and the United Kingdom, the demand for wine is significantly higher than for any other alcoholic beverage type. However, Diageo has not ventured into the wines business, which makes it lose some territories it could have conquered. Brexit led to many business-related restrictions, which saw to it that Diageo does not export as huge amounts of brands such as Scotch Whisky, whose more than 25% market was in countries outside the UK. Managing costs is one of the challenges that face the business unit because of the bureaucratic processes followed in obtaining licensing and procuring its supplies. The high levels of financial investment may strain the business.

Opportunities

Unlike in the previous eras where drinking alcoholic beverages was a social activity that involved going to the bars, there is a change in trend as customers buy alcohol to drink from home. Diageo could utilize this opportunity to enhance its image. Secondly, consumers are now more aware of brands, and they buy famous brands in the market. With the name that Diageo has made for itself over the years, it stands to benefit because its brands are widely known.

Threats

Stringent regulatory requirements regarding alcohol sale and consumption exist in many countries, impacting the company negatively. Also, competitors such as Bacardi, Carlsberg, and Heineken are coming up strongly, which may threaten the autonomy of Diego Plc if they are unable to cope with the intense pressure from competitors.  

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