Hudepohl Case Study Final
However, there were varying degrees of firm capabilities found within vive cost components: raw materials purchasing, production, labor, packaging, general and administrative expenses. As a result, firms had different abilities to add value by significantly decreasing supplier opportunity cost. Firms had to account for wide fluctuations In prices for brewing Ingredients, but there were significant volume discounts for major packaging material purchases.
The majority used batch size and similar technology for production.
A conservative culture and primacy of quality control precluded use of automation, but large breweries were able to make changes tit installation of expensive computers. Cost of labor was impacted by a norm of consistently higher wages compared to other manufacturing employees, powerful unions, and production efficiencies created by technological improvements. Finally, economies of scale allowed for a decrease in unit costs, and thereby, more funds to buy expensive equipment and attract better management.
Industry Competitive Trends
New marketing strategies were being implemented by large breweries due to changing consumer profiles, growth of convenience stores changing where beer was purchased, and a less roll regulatory environment. By 1978, total beer sales In percentage terms by market segments reported greatest decline In popular beers and greatest increase in super premium beers.
Consequently, almost all large breweries had plans for premium products and strategies to increase consumers’ willingness to pay.
This shift to redefine the industry and capture a new market would intensify rivalry, but the brewing industry remained very attractive. It would not cost more to make premium beer, and capability to cut labor costs and improve 2 production efficiencies was only Increasing for large breweries.
Bob Pool was tasked tit competitively positioning Huddle to become profitable within this brewing industry environment. Huddle problems impeding competitive advantage I en company trotter Twelve products along Walt a new align Deer entrant, out teen were not unique when compared against competitors.
Furthermore, a lack of technological improvements and standard production activities very similar to other commercial beer makers mitigated value creation. As a result of not adding value, Huddle cannot claim greater value or competitive advantage. Production inefficiencies and distribution were significant problems for Huddle. For example, the current overall operating rate was well below the industry 80% breakable standard.
There was also excess capacity in the system as noted that available tanks not in use in 1980 could provide another 3845 barrels per cycle.
Furthermore, limitations upon interchangeability of workers due to skill requirements and available shifts coupled with necessity for numerous quick changes to accommodate different package types resulted in low capacity rates, such as 40% in the bottle shop. After production, Huddle was using some independent distributors which was not cost effective nice they had high local market share in Cincinnati. Costs could have also been decreased by modifying the incentive compensation structure since the average driver was delivering almost double the amount of cases per week needed to earn more.
Pool had Just implemented changes to the marketing strategy in 1979.
Until then, advertising dollars had been distributed randomly across products even though it was only three along with the new light beer that accounted for majority of sales. However, the message was targeted in being mostly splattered and aimed at urban blue collar workers. The new plan as outlined by Pool would be to try and capture the premium beer market. It would appear that Huddle will forfeit any potential competitive advantage if they do not more effectively analyze and define the scope of their consumer, products, and geographic market.
Huddle has also Just experienced disappointing performance results in operating and net income. A less than healthy financial position was a problem for future growth plans, but it is their organization that 3 posed the most significant hindrance.
Pool was Just appointed general manager after only five years experience in marketing. Also, nepotism was part of the company culture. For example, all the board members were descendants of the founder. They made final decisions on major expenditures, but did not take an active role in the day-to-day business operations.
It was perceived the board was too conservative, but Pool was seen by some as too aggressive in changes he was implementing in decentralization the way managers and functional areas reported. This inconsistency in goals and mission bred low morale amongst some employees.
It might be said it was also making Pool blind to the company’s greatest asset, which was their loyal customers. Huddle lacked a competitive advantage because it’s products and activities were not unique or valuable, and the organizational structure was weak.
The result was an inability to exploit the company and industry most attractive Treasures. Industry Changes and Problems for Huddle The industry has changed over time as labor has been able to demand and receive higher wages with the help of unions. The larger breweries have been okay with offering higher wages as they had invested in capital intensive equipment making it so they did not need as many employees as the smaller breweries still needed. Industry distribution practices also changed as the larger breweries only distributed a small percentage of their beer directly to retailers.
Another change to the industry was that marketing strategies became more aggressive in a traditionally conservative industry. Traditionally marketing strategies were targeted at only two target audiences, males who drank popularly priced beers and males who drank premium priced beer. During the sass’s beer companies began advertising to women and premium priced beer. Draft sales dropped dramatically, and Sunday beer laws laced making it easier to sell beer from convenience stores on Sundays.
The brewery industry has become increasingly concentrated over time in part because of the economies of scale in the production, distribution and marketing of beer.
The larger breweries were able to produce more beer at lower costs because of the adoption of automation and new brewing practices. The distribution practices also favored large breweries making it difficult for the smaller breweries to compete as the breweries went away from distributing directly to retailers and working directly with distributors.
Marketing to a national audience was much more cost effective than marketing to the local markets, but the smaller breweries could not and would not want to market to the national audience also giving a competitive edge to the larger breweries. The major threats I see for Huddle is that they will find it increasingly harder to make a margin on their product if they did not invest in more automation within the brewing process. Another threat I foresee is that there beer is perceived as a cheap beer making their margins tighter.
The only way that they can improve the reception of their beer is by aggressively marketing a premium beer, which could alienate their most loyal clientele. Bob Pool should be cautiously optimistic about the future because they do have a nice market share within the Cincinnati region, and they could continue to carve out a sizeable market share within the state of Ohio. He should also be optimistic because they can potentially benefit from the more aggressive marketing strategies employed by other breweries.
Furthermore, Huddle is at a good time in their history to change their marketing strategy to either strengthen their current position or attempt repositioning. Value Chain Analysis The Huddle value chain analysis depicted in Exhibit 1 reveals that the company is neither organized to pursue a differentiated nor a low-cost strategy. Huddle brings a low-cost product to a largely blue-collar, loyal, Cincinnati market.
Operational processing systems are available, Huddle still relies on a scattered, under-utilized, over-paid employees.
Production includes both draft and bottled beers, despite the higher distribution, storage, and utility costs incurred and lower revenues generated by the former. Divided distribution of these products between Cincinnati, Hideout’s most loyal customer base, and other areas of Ohio incurs higher costs than would be necessary for distribution limited to within Cincinnati. Making the product more available via expensive distribution does not increase willingness to pay, but instead increases costs.
While advertising expenditures concentrate on Cincinnati, current promotions increase actual cost without improving consumer willingness to pay, thus detracting from value. In attempts to add value and gain 5 competitive advantage by increasing customer willingness with some activities while tagging supplier opportunity cost with others, Huddle essentially accomplishes neither.
A BRIO assessment reveals Hideout’s position as it relates to competitive advantage. The company’s value results from its low cost product, small brewery structure, and loyal customers.
Huddle comes up short in regards to rarity and immutability; its only advantage over other breweries is perhaps its brand image as a beer that should not be missed when in Cincinnati. Instead of focusing on exploiting its unique characteristics, Huddle, along with the most other firms in the industry, aims to imitate the growing trend of introducing premium beers. As an organization, Huddle takes no action to exploit its perceived strengths or competitors’ weaknesses.
This assessment reveals that Hideout’s resources are a weakly distinct and hardly sustainable competency.
Hideout’s primary activities – brewing, packaging, and distributing- incur a significant portion of total expenses driven by various factors. Cost drivers for the brewery includes plant location, capacity utilization, and the manufacturing of both draft and packaged brews. As demonstrated in Exhibit 2, Hideout’s Cost Components, these cost drivers can potentially have a significant impact on the current 27% of expenses. Cost drivers for packaging, primarily bottling, also include capacity utilization and inefficient scheduling.
Finally, distribution costs are driven by whether products are distributed inside or out of Cincinnati.
Other supportive activities such as high wages and compensation incentives drive costs for brewing, bottling, and distributing. As compared to other competitors in the industry, Huddle is at a cost disadvantage in both packaging and distribution. At suggested by its critical cost drivers, these sots could be mitigated by focusing efforts on the Cincinnati market and considering the effects of production of both draft and package beers on operating efficiencies. While Huddle is not as disadvantaged in terms of brewing, they are operating at a very low utilization.
Despite these obstacles, perhaps the greatest disadvantage Huddle faces is an inability to exploit its strengths as a low-cost competitor. Ells Soul ere – Julian An owe- Emplace Dally – Patrick cannon – nee Dewey 6 Gross Profit Activity Contributions Table B shows total gross revenues based on 343,350 barrels sold in 1978. Exhibit 1 reflects that only 334,000 barrels were sold that year and gross profit is based on net sales. The reason for the difference of 9,350 barrels is unknown. There is also a difference of $235,379 in Cost of Goods Sold that is unaccounted for the purposes of this analysis, COGS in 1978 is presumed to be $10,204,000 for 334,000 barrels, yielding a gross profit of $2,866.000.
Using net sales to calculate gross profit provides a more accurate assessment of Hideout’s financial situation. Draft beer accounted for 23.32% of sales, while the remaining 76.68% was dad up of packaged beer sales. Based on the figures detailing Hideout’s financial summary and expenses in Exhibits 3 and 4, it is apparent that the packaging, or bottling and canning process, has the biggest impact on gross profit margin.
This correlates with packaged beer sales contributing the most to total sales revenue. The gross profit margins for draft and packaged beers averages 21.93%. Strategy Huddle currently faces several obstacles to success. In our opinion, their main issues are related to low sales, high costs and ineffective marketing. Huddle is facing a decrease in sales which we believe is related to the current growth strategy and recent changes that have been made by the executive leadership.
Huddle is also at a cost disadvantage, especially in the areas of distribution and packaging when compared with industry standards.
It appears that the high costs of distribution could be attributed to the low morale and inefficient scheduling of that workforce. Conversely, sales for the self-distributors seem to bring in the highest profit margin. Marketing has also been a major issue and has been mostly ineffective. Arguably, Hideout’s most effective marketing program, advertising rights at Cincinnati Reds games, has been lost to a larger industry leader. Both of these issues contribute to the loss of revenue and the less than stellar financial condition of the company.
Should Huddle make efforts to increase customer willingness to pay, as Bob Pool suggests, it will only drive up supplier costs. This action will decrease the value Huddle can extract from the industry and also negatively impact its greatest competitive advantage – being a low-cost firm. This strategy is, in 7 effect, no strategy at all. Rather than extracting their customers’ willingness to pay, Huddle must focus on cutting operational expenses incurred in brewing, packaging, and distributing activities.
In order to correct these major deficiencies and Nell Weapon Decode an Industry leader, we nave developed Tour suggestions which should work together to support our main strategic goal: position itself as the Home Brew of Cincinnati. To support this position, we suggest the following:
- Focus on the Cincinnati market instead of trying to be a regional brand.
Huddle does not have the sources needed to market and compete with larger national brands in a regional market. This would also allow a focus on self-distribution and increase profit. We have considered also eliminating draft beer. However, we have considered the implications of doing so and would prefer to offer incentives to draft drivers that are more in line with what bottle drivers receive.
- Aggressive Local Marketing – Huddle should consider re-branding its products to be more locally recognized.
Incorporating names that residents recognize and relate to would help Huddle gain more market share and create a loyal following. Instead of stretching costs across regional areas of distribution, Huddle can cut operational expenses by focusing solely on the Cincinnati market.
- Appoint Dedicated Scheduler – An operations specialist that can more efficiently schedule distributors should be appointed in order to curb current costs by increasing utilization and making more effective use of current resources. Improved operations will increase production and revenue and consequently decrease variable costs.
- Buying or Selling: Consider Purchasing Shingling – Purchasing a local competitor would potentially love many issues.
Distribution capability would be immediately increased. Purchasing another local brand would also increase market share.
Consider Selling to Hellman – A BRIO analysis suggests that Hideout’s competencies are neither a true competitive advantage nor sustainable. Instead, consider dressing the company up to be sold to Hellman by implementing the aforementioned strategies to decrease actual cost.
- Exhibit 1: Value Chain Primary and Supportive Activities
- Exhibit 2: Huddle Cost Components
- Exhibit 3: Huddle Financial Summary
- Exhibit 4: Huddle Operational Expenses