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The Foster’s Group is an international beer manufacturing company engaged in brewing activities, making of wines and producing other varieties of soft drinks. It is the main brewers of the internationally recognized foster lager. It is one of the companies listed in the Australia stock exchange with its headquarters at the Melbourne city in Australia. The company has its current CEO as the Trevor O’Holy. It has annual revenue of appropriately $3.9 billion and an employee capacity of 35,000 (Mark, 2007).
The history of its foundations is dated back in 1886, by William and Ralph in Melbourne. Since its foundation, the company has continued to expand internationally. The company is comprised of three subsidiaries namely the Carlton & United Beverages, Matilda Bay Brewing Company and the Foster wines Estates. Its big volume can be attributed to its ten brands of beer which are internationally recognized and fifteen wines brands highly placed in the market place. In Australia the company faces competition from; the Hardy Wine Company, the Drageo Australia Ltd & the Lion Nathan Limited. (Seiler, 2002).
However, the operational structure of Fosters Group is characterized by a divergence in its overseas expansions where diversity in the results of these expansions has let the investments either value creating or value destroying. With value creating, these ventures were profitable to the company, competing in the market and had high economies of scale in its productions. (Warner, 2001)Elsewhere, value destroying ventures to this company are however associated to a loss in profit mark up, low rate of competition and an inadequacy in the structural capacity leading to the companies overall loss in such ventures. Foster’s Group is comprised of three distinct subsidiary companies working under full affiliation of the company. Value destroying investment ventures can be looked as the ventures engaged by the company which has led to a reduction in its annual revenue. In such cases, the most contributing factors to such value reducing has been high market competition that has led to low revenue against high cost of production, different cost variable that have led to a high cost than the profit revenue, corporate governance weaknesses whose through their poor structures have resulted to weakness in the venture management and even various external shock risks like political influence and the market forces of demand and supply instabilities.
Perhaps the biggest value adding venture by Foster Company was in start-up of a subsidiary in Russia which was an affiliate subsidiary of the Carlton and United Brewers. This took place in 1996 after an arranged management start-up by the Carlton and United Brewers. This start-up comprised a fully commissioned subsidiary company under the Fosters Group. As an affiliate subsidiary venture to the mother company the Fosters Group, it fully commissioned this new venture to the operational structure of the Fosters Company which could now operate under the corporate governance of the Fosters Group. (Mitchell, 1951) At that time the group was doing terribly well. With this new venture, its operation was to perform well and fetch high levels of profit turnover. Perhaps, this was due to the good preparation, assessment of the political risks and the analysis of the Russian market conditions.
The start-up was after an integrated scanning of the market conditions in relation to the establishment of this venture. In a research that the company had made, different macroeconomic indicators had showed the vulnerability and success of the company. The political status within the Russian governance was stable and there were no probable external political shortcomings that would negatively affect its performance. However, study had showed that, in its manufacturing function, the management half allowed an error term, which was to cater for any possible external shock waves from its operating environment. Due to the good political sceneries, company law and corporate laws were favorable to a good manufacturing micro-climate which either gave the company an adaptation to exploit further its contemporaries. Either, with the good political system the operating environment of business community would have been good, hence the company could prosper well in this environment. (Write, Robbie, 1999, Sundem, Stralton, 2006).
Either, the demand and supply situation at the market in Russia was adequately viable for the venture. After a close scan into the market environment, the competition status of the brewing industry was highly recommendable. In a study of the market situation parameters, the company sought to make this start-up in correspondence to the active state of the market forces of demand and supply. The supply of the brewing products within Russia was slightly low especially due to the poor performance of the other brewing companies which were the chief competitors to the foster group at the moment. (Beer, Katz, 2003, Kirkegaad, 1997).
During the booming economic period in Russia in the mid 1990s, the Russia experienced a high purchasing power to its currency. As an international trade requirement, a strong national currency favors external trade with other countries. To Russia, this rule was not an exception and the establishment of this new venture was to seek a refuge form the improving international trade interlinkages of the state with the outside globe. To the company, it would thus capture the then increasing demand of Russian products in the international market. With the manufacturing economies that the company had, it thus figured of its adaptation abilities to the brewing industry, which had less market competition and a higher local and international demand and could thus foster high sales turnovers in the involvement to this industry. (Blackman, 2000,Belkaoui, 1992).
However, with its long prevailing tradition of a good market place scenario, the company however faced a threat of operating losses through its value-destroying venture in China. This was the establishment of the joint venture that the Carlton and United Breweries had gone with as an affiliate subsidiary of the Guangdong and Tiangin in 1993. This was a long trailing overseas expansions scheme by the Fosters Company which was to foster an improved growth to the company. (Clark, 1997, Seiler, 2002).
To the Foster Company, forming a joint venture with the Guangdong and Tiangin was a further expansion of its activities. The venture was to be an affiliate expansion of the Carlton and United Breweries, which is a subsidiary company of the Foster Group. Like any other, joint venture, the company structural adjustments of expanding the company were general to achieve some manufacturing benefits to the company in China. Throughout China, the business industry was doing well though the situation risks compromised by various economic disequilibria (The Birmingan Post, 2006, Fosters Group Limited, 2007).
However, in its move to establish this joint venture, the company had not fully considered the market condition that defines customers’ tastes and preferences for the brewing products. Since the late 1990s China has been faced with a booming economic growth which is perhaps the biggest motivator to businesses and industries. However, this economic state has been accompanied by various market disequilibria’s which has led to high competition by industries for their survival. The market system in China comprised of perfectly competitive systems, which defined, of a price determination by the interactive forces of demand and supply. (Western Mail, 2006) This competition however called for their survival through high business performance activities. In all cases, high quality was not compromised, which would only be safeguarded by use of highly technical methods of productions, economies of scale, product positioning and subsequent optimality in the costing system of the business venture. (Wright, 1947).
In China therefore, operating cost was high, with varied inconsistencies within the market. Quality of production never compromised use of high technology material and labor purchase was too high. Perhaps, this was what led to the venture trade at a loss in 2004. In china, competition was terribly high due to the infrastructural facilities that helped the businesses prosper well in the market. Therefore, as a whole, the market was unstable and unfavorable for business. Either, the political shocks never compromised a stable business environment in Russia. (Quinn, Hillmer, 1995, The Journal, 2004).
To the company, the choice of involving in a joint venture with Guangdong and Tiangin was out of the then existing strength of the Chinese currency with the outside world.
The strong Chinese currency purchasing power offered it a good place for business survival in the world market. To the Carlton and United Breweries, its mission was therefore to capture the good environment of the brewing products in China. However, such visions were outweighed by the loss in operation of its joint venture in china in 2002, when the venture traded at a loss. Study showed that stiff competition together with high cost of production outweighed its revenue benefits. (Barass,2002, Gutterrman, 1994).
However since the value destroying venture was allied to inconsistencies in the market conditions and high cost of production. The company should have monitored the operational costs at china and strategies on possibilities of optimal costing systems. Either, due to the high competition in the environment, customer satisfaction required high quality products that could give more competition in the market. Broadly, strategies to capture this weakness were to be allied to strategies commensuration with the requirements that would produce high quality product that competes successfully in the market. (Bjerke, 1999).
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