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7928IBA-CSD-58999.pdf o 0 0 000 0 0 0 0 0 000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Five Star Beer - Pay for Performance Brian Golden and Tom Gleave In June 1997, Tom McMullen (President - Alliance Brewing Group) and Zhao Hui Shen (General Manager - Five Star Brewing Co. Ltd) met to discuss the "pay for performance" systems which Zhao had been implementing at Five Star's two breweries over the past several months. McMullen needed to determine whether or not these incentive systems were properly designed to ensure that the breweries would produce higher quality beer at progressively lower costs. If not, he needed to consider how he might suggest that these and other systems be changed in order to achieve Alliance Brewing's cost and quality objectives. Five Star's ASIMCO Connection The majority owner of Beijing Asia Shuang He Sheng Five Star Brewing Co. Ltd (Five Star) was the Beijing-based investment group, Asian Strategic Investments Corporation (ASIMCO). The primary shareholders of ASIMCO were Trust Company West, Morgan Stanley-Dean Witter Reynolds and senior management. The senior management team consisted of the following people: Jack Perkowski (Chairman and CEO) - a former investment chief at Paine Webber (New York City) and graduate of both Yale University (cum laude) and the Harvard Business School (Baker Scholar). I Tom Gleave prepared this case under the supervision of Professor Brian Golden solely V~'y to provide material for class discus~ion. The authors do not intend to illustrate either L effective or ineffective handling of a managerial situation. The authors may have dis- guised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction. storage or transmittal without its written permission. This material is not covered under authorization from Can Copy or any reproduction rights organization. Copyright © 1998, Ivey Management Services. s2702584 Text Box Lane,Henry W; DiStefano, Joseph J & Maznevski, Martha L. (2000) International management behavior : text, readings and cases. 4th ed. Oxford ; Malden, Mass. : Blackwell Business. Golden, Brian & Gleave, Tom. "Five star Beer - pay for performance", pp. 348- 359. IMPLEMENTING STRATEGY, STRUCTURE, AND SYSTEMS 349 Tim Clissold (President) - a physics graduate from Cambridge University who turned accountant with Arthur Andersen in the 1980s. Clissold had worked in England, Australia, China and Hong Kong for Andersen before entering London's School of Oriental and Asian Studies where he became fluent in both spoken and written Mandarin. Michael Cronin (Chief Investment and Financial Officer) - also worked as an account- ant for Arthur Andersen throughout the 1980s in Australia, the UK and Hong Kong. Previously, Cronin had worked for over five years at 3i, Europe's largest direct investment organization. Ai Jian (Managing Director) - a Chinese native and graduate from Northwestern Poly technical University in Xian, China. Ai's previous working experience included senior posts in the foreign relations department of China's Ministry of Foreign Trade and Eco- nomic Cooperation. He was a native Mandarin speaker and also fluent in English. The motivations underlying ASIMCO's investment in the Chinese beer industry were twofold. First, the industry was experiencing high, sustainable growth rates. This high growth was spurred by the increasing levels of disposable incomes in China, to the point where it was expected that the Chinese beer market would become the world's largest (~vertaking the U.S.A) within the next several years. Second, the industry was highly fragmented and was undergoing a significant restructuring. This high degree of frag- mentation was a consequence of China's legacy of central planning. Given its increasing adoption of market-driven mechanisms, China's central government was encourag- ing (or passively allowing) the rationalization of certain industries, including the beer industry. The industry consensus was that the number of breweries was expected to be reduced from over 800 to less than 600 nationwide over the next several years, while managing to steadily increase overall beer volume. This meant that surviving firms would need to seek economies of scale, maintain high-quality production and ensure development of strong management teams as the competition intensified. ASIMCO's investment strategy was to identify Chinese companies that had the poten- tial to be globally competitive and to support these firms with capital, Western manage- ment skills and leading-edge technologies. The partners they sought were expected to be aggressive, profit-oriented and industry leaders. Whenever a potential opportunity was discovered, ASIMCO would marshal its skills and international resources to perform due diligence, negotiate contracts, and obtain necessary approvals. ASIMCO would subsequently provide capital, Western management expertise, and technological know- how to the joint venture and devise an exit strategy designed to realize the value created. ASIMCO viewed itself as an agent of change in helping to transform formerly ineffi- cient state-owned enterprises into market-driven and export-ready competitive firms. By June 1997, ASIMCO had entered into 13 automotive parts manufacturing, two auto- motive parts distribution and two beer manufacturing joint ventures. The sum total of these investments, all of which were majority positions, was about U.S.$360 million. All minority positions were held by various Chinese partners. The Five Star joint venture was ASIMCO's largest single investment in its portfolio with a total capital outlay of U.S.$70 million for a 63 percent stake in the company. The minority interest partner was the First Light Industry Bureau (FLIB) with a 37 percent stake. The FLIB was a division of the Beijing municipal government and had ownership interests in many diverse business activities. ASIMCO's other joint venture in brewing was a 54 percent 350 INTERNATIONAL MANAGEMENT BEHAVIOR EXHIBIT 1 ASIMCO's Ownership in Brewing Joint Ventures Company US$70 million (63%) US$23 million (54%) US$19.5 million (46%) interest in the Three Ring Beer Company, an investment valued at U.S.$23 million. Both of the brewing joint ventures were formalized in January 1995 (See Exhibit 1). Alliance Brewing Group Alliance Brewing Croup (ABC) was a management services group which was specifically established to provide support to both of ASIMCO's brewery joint ventures. This gave ABC the mandate to support three different, yet related, brewing facilities. These breweries were as follows: Brewery Owner Annual Capacity Shuang Sheng Five Star 90,000 tons Huadu Five Star 180,000 tons San Huan Three Ring 130,000 tons (Total production for the three breweries was currently running at about 250,000 tons per year.) ABC was organized into separate corporate-level support functions which included mar- keting, brewing and quality control, operations services, financial control, and new business development. The President of ABC was Tom McMullen, an American expatri- ate who formerly worked in the consumer packaged goods business in the U.S. after graduating from the Wharton School of Business (See Exhibit 2). The overall goal of ABC was to help both brewing companies realize their return on invested capital targets. With respect to Five Star, this was expected to be accomplished through the achievement of five key objectives, which included (in order of priority) the following: IMPLEMENTING STRATEGY, STRUCTURE, AND SYSTEMS 351 EXHIBfT 2 Alliance Brewing Group - Partial Organization Chart I President I Tom McMullen Administrative I Project Assistant Manager I 1 1 I J I New Business Financial Operations Brewing and Marketing Technical Development Services Services Quality Control Services Director Cheng Nan Ian Ronayne Don Bebout Hans Bilger Brian Gansert William Porter Cheng I I I I I I Regional Controllers Directors (2) (2) Assistant Assistant Analyst Assistant I I Analysts (2) Accountants (3) 1. Improved product and packaging quality. 2. Reduced production costs in an effort to gain better margins. 3. The development of professional sales, marketing and distribution systems. 4. The development of a system which rewarded good performance and punished bad performance. 5. An increased understanding between Five Star's two breweries that separate produc- tion facilities did not mean separate companies. Rather, they were part of the same brewing company. According to McMullen, one of the more meaningful signs of progress that ABG was able to make over the past year was the development of rational and integrated financial reporting systems. These new systems took more than one year to develop but eventu- ally allowed both Chinese and expatriate managers to "talk from the same page." As evidence of the importance of the need for reliable and timely financial information, particularly with respect to the need for Chinese management to understand the import- ance of meeting budgeted targets, ABG had installed its own financial personnel at both of its beer companies. Five Star's Recent History Five Star was one of the oldest brewing companies in China, with its origins dating back to 1915. Like most breweries in China, Five Star originally served its local markets, the 352 INTERNATIONAL MANAGEMENT BEHAVIOR main one being Beijing and the surrounding Hebei province. This focus on local markets developed as a consequence of competing interests from local governments which, in turn, led to the industry's fragmented structure. Over the years, however, Five Star was able to gain some market share in areas beyond the immediate region. This market penetration was accomplished through the establishment of licensing agree- ments between Five Star and other regional brewers throughout the country. Prior to the early 1990s, the company enjoyed a ma:iority share of the local Beijing market. This market position had developed because Five Star had a lengthy history in the region and, as a state enterprise which was wholly owned by the Beijing municipal government, was conferred special privileges. For example, in 1957, Chinese Premier Zhou Enlai decreed that Five Star was to be the exclusive beer supplied at all State banquet .. , thus bringing the company name to national promipence. By the early 1990s, Five Star's market position began to deteriorate as it found itself competing in the same territories in the Beijing area with one of it., largest licensees, Three Ring Beer. In 1993, Five Star entered into a licensing agreement which allowed Three Ring to produce and market Five Star beer for sale in specific territories on the northeastern outskirts of Beijing. However, Five Star soon found that Three Ring was "stealing" sales by deliberately encroaching on Five Star's exclusive territories within the core areas