Craft-beer-ship: breaking the barriers in beer industry

Boston Beer Company – Pioneering the Shoaling and Micro-brewery Strategy

 

Often industry forces favor the established large players by creating strong barriers to the small firms and new entrants. Large established firms enjoy high bargaining power against suppliers and buyers and reduce the threat from substitutes or industry rivalry through mergers and acquisitions, increasing market share concentration and asset consolidation, capacity building, cost leadership, price signaling, regulatory advantages, and so on. With sheer size and scale based advantages - giving the appearance of more consumer surplus - large firms tend to arm-twist the actors in the value chain to gain more advantage, and thus shall reduce the choices available to customers and can stifle the industry growth and innovation. The beer industry is one case where integration/consolidation is routinely pursued to grow as well as to ward off the problems of mature industry like intense rivalry, low-profits, and price wars. Such a consolidated scenario is neither good for customers nor society at large.

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More than anti-trust regulations, new entrants and industry revolutionaries can do a great favor to customers and the whole industry if they can break the barriers and change the rules of the industry through innovation in products or production and organization methods. Boston Beers is one such case of breaking barriers and pioneering industry transformation through several strategic innovations. Boston Beers has built a business model based on 'value-chain cooperation and shoaling' rather than consolidation or domination. This model is proven to be more effective in generating profits and sustaining growth than the traditional route of mergers.

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The Boston Beer Company is one of the most successful craft brewers in the USA, competing effectively on par with large mass-produced breweries. Founded by Jim Koch with a family recipe in 1985, “Boston Beer” entered the market with a crafted beer brand “Samuel Adams Lager”. This brand was initially brewed in small batches with an obsession for quality, freshness, and flavor. Samuel Adams beers have won numerous international awards and are still brewed using the time-honored, traditional four-vessel brewing process and are market positioned in the “Better Beer Category”. Samuel Adams is the only brewer practicing a cooperative program with its distributors to buy back its beer when it is past its peak freshness date. 

 

Samuel Adams brand boasts itself as high-quality hand-crafted beer made with the world’s finest all-natural ingredients purchased from Bavarian hops farmers. Instead of locking all the capital in production assets, Boston beer has grown primarily through microbrewery production methods and contracting with third-party packers and franchisees to produce all its brands. Boston Beer has launched more than 500 varieties, and released 25 new beers in 2012, and brewed another 55 in-house. 

 

With the strategy of operating in a decentralized and dispersed manner using a chain of contract brewers, Boston Beer was able to market its specialty crafted beers nationally without incurring shipping expenses. From 500 barrels per year during its inception years to brewing close to 4 million barrels per year now, Samuel Adams has grown to be the largest craft brewer with 1 percent of the total US beer market (www.bostonbeer.com).  Samuel Adams brand has become an inspiration and a catalyst to other small and microbrewers. The exemplary performance of microbrewers and specifically specialty craft brewers like Boston Beer Company serves as a testament to the effectiveness of the business strategy of disaggregation and dispersion of manufacturing, marketing, and distribution activities. Boston Beer's strategy illustrates how firms can operate profitably on a smaller scale disaggregating their core activities achieving variety, quality, uniqueness, and customization. And this shoaling strategy can be effectively replicated in a range of businesses and industries such as food processing, consumer durables, and construction for achieving innovation and growth. 

 

In addition to the cost and marketing-related advantages, there are several socio-economic benefits of disaggregating a firm’s value chain. Through disaggregation of operations, a firm can decentralize decision making and provide more autonomy, and thus in turn can develop a sense of ownership among employees and managers. Disaggregation allows for more product or design variations in manufacturing. Decentralized operation enables a simple and lean organization structure, reducing the power and salary distance between management and employees. Dispersed value chain allows unit and functional level managers to search for new opportunities resulting in diversification and growth. 

 

With the dispersed operation of the value chain, there is more opportunity for sharing or franchising the firm ownership with managers and employees, and thus reducing the cost of capital and investment risk. The dispersed arrangement helps firms to develop multi-pronged competitive strategies, that is, enabling the firm to develop a unique or optimal strategy for each rival it encounters in the respective market or region. In addition to achieving cost reduction, quality, and customer responsiveness, dispersed operations would help companies reduce the environmental cost and enhance the sustainability performance. Samuel Adams's overall success in terms of cost savings, quality, innovation, employee learning and productivity, and overall effectiveness in terms of financial and operational performance attests to the significance and consequence of scale reduction and dispersion of organization and production systems.