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17 D. E. Smith and H. S. Solgaard, “The Dynamics of Shifts in European Alcoholic Drinks
Consumption,” Journal of International Consumer Marketing, Vol. 12, No. 3 (2000): 107.
18 “O Mercado Nacional “ O Whisky Domina o Mercado de Bebidas Espirituosas em toda a
Europa do Sul,” Revista dos Vinhos (Novembro 1998).
19 Pierre Spahni, The International Wine Trade (Cambridge: Woodhead, 1995): 204“14; Hurst
et al., “Swedish Government Ready to Relax Alcohol Restrictions,” Alcoholic Beverage
Taxation; Drinks International Bulletin (6 March 2000).
50 Global Brands

12,000.0


10,000.0
Africa
Asia
8,000.0
Australasia
6,000.0 Central Europe
South America
4,000.0
North America
Europe
2,000.0


0.0
1961 1967 1973 1979 1985 1991 1997 2003
Fig. 3.4. Evolution of alcohol consumption worldwide
(Amounts stated in millions of liters).
Source: Per capita consumption, World Drink Trends (Henley-on-Thames: NTC Pub-
lications, 2005); Estimates of midyear population by country, United Nations, Demo-
graphic Yearbook (New York: UN, 2005).

consumption, at least in the industrialized world. Several changes took place,
including rising incomes, changes in lifestyles and tastes of consumers, and
the “re-creation” of a global economy.20 As in other industries, these changes
led to an increase in the consumption of alcoholic beverages, and had a strong
impact on the development of multinational activity, in particular the growth
and survival of ¬rms.21
In the 1980s and 1990s, per capita consumption of alcoholic beverages lev-
eled off in the Western world. The rise of consumption in emerging markets
such as India, China, Thailand, and South America partially compensated
for this. For example, in Thailand, where either water or beer was normally
consumed with meals, the economic boom of the early 1990s led to a very fast
growth in wine consumption (although this fell away following the ¬nancial
crisis that began in 1997). These countries are not considered in Figure 3.4,
however, because of the lack of systematic data from 1961.
While between 1988 and 1996, consumption of alcoholic beverages in
the forty-six countries considered in Figure 3.4 grew at an average rate of
0.8 percent, in those emerging markets not included, consumption incre-
ased at an average of 6 percent a year.22 The maturing of markets in the
20 Sydney Pollard, The International Economy Since 1945 (London: Routledge, 1997).
21 Teresa da Silva Lopes, “The Impact of Multinational Investment on Alcoholic Consump-
tion,” Business and Economic History, Vol. 28, No. 2 (1999): 109“22.
22 Compound average annual growth rates estimated using per capita consumption by coun-
try, World Drink Trends (Henley-on-Thames: NTC Publications, 2005); and estimates of
midyear population by country, United Nations, Demographic Yearbook (New York: United
Nations, 2005).
51
Growth and Survival
Western world was associated with changes in the legislation on drinking
and driving and also with the higher levels of education by consumers, who
became more concerned with the quality of the beverages they were drinking,
with their own ¬tness, and with other side effects related to addiction and
health.
In the emerging markets, several factors contributed to the rise in consump-
tion from the mid-1980s. Stagnation of consumption in the Western world
had led the leading multinationals to internationalize “ that is, to intensify
their investments in those markets, increasing the availability and diversity of
branded drinks. In many of these emerging markets, statistics on consump-
tion and production only started to be reliable after these investments by
multinationals. Rapid technological strides in transportation and telecom-
munications also led to an unprecedented migration from rural areas to
urban regions, particularly in former colonies and other developing coun-
tries. People living in the cities acquired more westernized lifestyles, owing
to the growth of elites with high purchasing power.23
Although countries such as the United States and Canada ¬gure among
the largest absolute consumers of alcohol in the world, the biggest markets
in per capita terms are found in a cluster of Western European countries.
Figure 3.5 illustrates this situation for some of the most important markets
from 1961 as well as their evolution. I distinguish two periods: 1960“1969
and 1980“2003.
This ¬gure shows a trend away from culture-speci¬c consumption pat-
terns. In Northern Europe, where people traditionally consumed beer, there
was an increase in wine consumption. For example, in the United Kingdom,
wine consumption grew progressively from the 1960s. This growth re¬‚ected
evolving social trends, such as the increase in holidays abroad and the glob-
alization of tastes, the growth of eating out as a leisure activity, the increase
in home-based entertainment, and also the increasing economic participa-
tion of women as consumers, as they started to learn more about wines and
developed new habits.
The slower, but ultimately similar, evolution of beer trade in Southern
Europe emphasizes the overall trend toward homogenization and global-
ization proposed here. Although by the beginning of the twenty-¬rst cen-
tury, wine still accounted for the majority of alcohol consumption in France,
Italy, Portugal and Spain, beer consumption had increased very rapidly from
the 1970s. The previously mentioned increase in travel, the rise of foreign
direct investment, and alliances in distribution formed between competing
alcoholic beverages ¬rms, explain this trend. These changes led to the emer-
gence of a more pan-European cultural identity associated with the growing
strength of the European Community and more homogenized patterns of
consumption.24

23 Cavanagh, Clairmonte, and Room, The World Alcohol: 4“5, 10; Lopes, “The Impact.”
24 Tim Unwin, The Wine and the Vine (London: Routledge, 1991): 359.
USA



Average Southern Europe


Spain
Portugal

Italy
Greece
France



Average Northen Europe


United Kingdom
Switzerland

Sweden
Norway
Netherlands
Republic of Ireland

Germany
Finland
Denmark
Cyprus

Belgium
Austria

0 20 40 60 80 100 120 140 160 180
180 160 140 120 100 80 60 40 20 0


Beer Wine Spirits
Fig. 3.5. Average annual per capita consumption of alcoholic beverages in Europe and the United States, 1960“1979 and 1980“2003
(Amounts stated in liters of pure alcohol).
Source: Based on data from Wendy Hurst, Ed Gregory, and Thomas Gussman, Alcoholic Beverage Taxation and Control Policies (Ottawa:
Brewers Association of Canada, 1997); World Drink Trends (Henley-on-Thames: NTC Publications, 2004).
53
Growth and Survival
The level and patterns of consumption were particularly important in the
growth and survival of ¬rms before the 1980s, when they were still culturally
speci¬c. For example, in the United States the relatively low level of per capita
consumption can in part be traced to Prohibition and the temperance mindset
that has always existed among a signi¬cant part of the population. Combined
with the large size of the country, this indicated there was potential demand
that ¬rms could create, giving them the possibility of growing very large by
concentrating essentially on the domestic market.
The need for ¬rms to create ownership advantages before going abroad
explains in part the low level of foreign direct investment by alcoholic bev-
erages ¬rms and, consequently, their lack of international experience. This
became crucial for their survival from the 1980s. In the United Kingdom, the
changing drinking patterns from the 1960s, where beer consumption started
to stagnate and spirits consumption increased, also illustrate the transfor-
mations that were affecting the growth and survival of ¬rms. Brewers such
as Allied Breweries and Grand Metropolitan were forced to diversify into
spirits to meet consumers™ preferences, offering a greater choice of drinks
sold through a wider variety of outlets.25
Consumption patterns are also re¬‚ected in the type of beverage business
that served as the basis for the development of the world™s largest multi-
nationals of alcoholic beverages. It is in countries such as Denmark, the
Netherlands, the United States, Japan, and the United Kingdom where beer
was the most important alcoholic beverage and the level of per capita con-
sumption was high that the world™s largest beer ¬rms developed.26 From the
1980s, in order to survive, ¬rms had to be able to stimulate consumption.
Those ¬rms with the most “portable” products tended to internationalize
¬rst. Consequently, spirits ¬rms tended to be the ¬rst to become multina-
tional and wines ¬rms the last.27


International Competition
International competition, another industry-speci¬c determinant, increased
in the 1960s, after the economic health of the European nations was fully
restored and Japan started to undergo rapid economic growth.28 The changes
in the political and economic environment during that period were distinctive

25 Tony Millns, “The British Brewing Industry, 1945“1995,” in Richard Wilson and Terry
Gourvish (eds.), The Dynamics of the International Brewing Industry Since 1800 (London:
Routledge, 1998): 154.
26 This situation should not however be overgeneralized. Germany had the highest consumption
of beer in the world and yet did not develop leading multinationals.
27 Again this situation should not be overgeneralized. Only some spirits ¬rms were able to
internationalize and become large.
28 Alfred D. Chandler Jr., “Organizational Capabilities and the Economic History of the Indus-
trial Enterprise,” Journal of Economic Perspectives, Vol. 6, No. 3 (1992): 98.
54 Global Brands
from those seen in the late nineteenth century in several ways. These included
an increase in the propensity to spend on consumer products in the Western
world, deeper cross-border transactions, and the dissemination of electronic
information systems. With the globalization of economies from the 1980s,
competition intensi¬ed even further, and was now played out at a multimar-
ket level.

Diageo and Its Predecessors
Table 3.1 below illustrates for the case of Diageo and its most important
predecessors “ Guinness, Grand Metropolitan, International Distillers and
Vintners (IDV), and Distillers “ and the tendency for ¬rms to become increas-
ingly committed to international markets and simultaneously to compete and
collaborate. Several indicators are used to measure this pattern of evolution
in each decade: percentage of sales by markets (where sales in the country
of origin are separated from sales in the major continents), percentage of
foreign to total mergers and acquisitions, and the number of international
alliances in production or distribution (which include joint ventures, distri-
bution agreements and licensing agreements, among others).
This table illustrates the general patterns and directions of growth followed
by each of the major ¬rms that preceded the formation of Diageo. There was
a very fast rise in the average sales from one decade to another. Most ¬rms
grew through mergers and acquisitions rather than organically, with Grand
Metropolitan being the most striking case. This rise in the number of mergers
and acquisitions re¬‚ected to a great extent the internationalization strategies
of ¬rms. The total number of mergers and acquisitions in production and
distribution by alcoholic beverages multinationals reached its peak in the
1980s and decreased in the 1990s. While by the end of the twentieth century
and early twenty-¬rst century these mergers and acquisitions tended to be
across countries, in the 1960s and 1970s, they essentially involved domestic
¬rms, signaling strategies of consolidation in the home markets.
Over time, there was also a trend toward diversi¬cation in terms of geo-
graphical markets. Until the 1980s, the predecessor ¬rms of Diageo tended
to sell essentially in their countries of origin or in the United States and
the British Commonwealth. This high concentration of sales can in part be
explained by fairly distinctive national consumption patterns in the other
countries of the Western world (especially in Continental Europe) and also
by barriers to trade. From the 1980s, there was a dispersion of sales to Con-
tinental Europe and to markets in other continents that had not been part
of the British Commonwealth.
Alliances in the form of joint ventures, distribution agreements, licensing
agreements, and also minority investments in production and distribution
were always an important alternative for growth. This approach reached a
peak in the 1990s. Those ¬rms that did not follow these patterns of growth
Table 3.1. International evolution of Diageo and its major predecessors, 1960“2000
Sales by Markets
Total Number of % of Foreign to Total Number of Alliances
Total UK Country of North America Continental Other New Mergers Total New Mergers With International
Firm/Decade Average Sales Origin (%) (%) Europe (%) (%) and Acquisitions and Acquisitions Partners
Grand Metropolitan
1962“1969 332 92 2 6 0 0 0 0
1970“1979 4.553 91 1 5 2 3 33 4
1980“1989 9.182 64 27 5 4 13 77 15
1990“1996 12.076 20 55 17 8 15 100 18
IDV
1963“1969 517 29 56 4 12 6 50 32
1970“1974 962 72 8 4 16 5 60 0
Guinness
1960“1969 1.049 1 100 17
n/a n/a n/a n/a
1970“1979— 1.551 78 4 3 15 0 0 13
1980“1989— 3.100 66 10 8 16 16 88 22
1990“1996 6.212 40 16 35 9 7 100 31
Distillers Company
1960“1969 3.146 57 28 0 14 3 67 0
1970“1979 2.721 53 13 7 24 3 33 0
1980“1985 2.261 43 17 12 28 4 100 0
Diageo
1997“1999 18.533 14 41 21 25 1 100 0
2000“2004 15.649 14 26 15 48 5 100 1
Total
1960s 1.261 59 29 3 9 10 54 49
1970s 2.447 73 6 5 14 11 32 17
1980s 4.848 58 18 8 16 33 88 37
1990s 12.274 25 37 24 14 23 100 49
2000s 15.649 14 26 15 48 5 100 2

Note: Sales values stated in millions of constant US dollars (2000 = 100). n/a “ not available.

Sales by geographical region for Guinness from 1970 to 1979 only include data from 1979 as the information for the years 1970“1978 is not available. Information on mergers and acquisitions
and alliances by Guinness during the period 1970 and 1989 was only available for the years 1970“1975 and 1983“1989.
Sources: The information in table 3.1 and 3.2 draws on the companies™ archives and annual reports. The data on total number of mergers and acquisitions only include ¬rms merged or acquired
within the alcoholic beverages industry. New companies formed and new of¬ces or warehouses acquired or built are excluded. Minority interests are considered as alliances, apart from joint
ventures, licensing agreements, and distribution agreements. Alliances with international partners include both alliances in the United Kingdom and abroad.
56 Global Brands
were restricted in their process of growth and less likely to survive. Distillers
Company had become one of the most internationalized ¬rms in the world
since its last big amalgamation in 1925. However, its number of new foreign
direct investments and alliances (both in production and distribution) from
the 1960s was very low when compared with that of other leading ¬rms such
as Grand Metropolitan.29 This evolution in part explains the failure of this
¬rm to survive independently from the 1980s.
Schenley is yet another case of a ¬rm that did not follow the general pattern
that made for growth and survival. This U.S. ¬rm relied almost exclusively
on the domestic market. A large number of the brands in its portfolio were
obtained through alliances (in the form of distribution contracts). Its lack of
international experience, as well as limited ownership of successful brands,
is to a great extent associated with Prohibition, which led it to diversify into
other businesses such as chemicals and biochemicals; this impeded the ¬rm
from acquiring new marketing knowledge in alcoholic beverages.
The average growth rate in sales for Schenley, which was slower than that
of leading multinationals such as Guinness and Grand Metropolitan, also
re¬‚ects the ¬rm™s passive strategy in a period of concentration and globaliza-
tion. Failing to grow, this ¬rm became vulnerable to a takeover by Guinness
in 1987.
Table 3.2 provides a detail of one of the columns from Table 3.1 about the
total number of alliances. It distinguishes alliances by type of activity (dis-
tribution only or production and distribution) and by type of partner (direct
competitor, or partner with a complementary activity).30
There is an apparent correlation between the type of alliances formed by
¬rms and the type of beverages they produced. For example, gin and beer
¬rms tended to form more alliances in production and distribution. These
beverages, such as whisky, are not dependent on speci¬c natural resources
available only in certain locations. Hence, International Distillers and Vint-
ners (IDV), with a major interest in gin, formed many alliances involving
both production and distribution. Similarly, Guinness, before the mid-1980s,
when it was still essentially a beer business, found multiple alliances, a strat-
egy suited to a business with high transportation costs.
Table 3.2 also makes clear the importance of alliances with competitors.
The alliances recorded there involve ¬rms operating within the same business
activity (wine, spirits, beer, or a combination of the three). The ¬rms included
are leading multinationals or at least leading players in their domestic

29 Ronald B. Weir, The History of the Distillers Company, 1877“1939 (Oxford: Oxford Uni-
versity Press, 1995); idem, “D.C.L.: Acquisitions and Major Shareholdings, 1877“1940”
(mimeo, 1990); idem, “D.C.L. Acquisitions, 1940“1986” (mimeo, 1999).
30 Diageo had no new alliances until between 1997 and 2000 owing to the fact that it had just
been formed and because it was in the process of rationalizing its operations. At the end of
2000, however, it made a major acquisition with Pernod Ricard of the alcoholic beverages
business of Seagram.
57
Growth and Survival

Table 3.2. Number of alliances formed by Diageo and its predecessors,
1960“2000

Type of Activity Type of Partner
Total
Distribution Production and Complementary Number of
Firm/Decade Only Distribution Competitor Activity Alliances

Grand Metropolitan
1962“1969 0 0 0 0 0
1970“1979 3 1 3 1 4
1980“1989 11 4 15 0 15
1990“1996 15 5 4 14 18
IDV
1963“1969 4 28 32 0 32
1970“1974 0 0 0 0 0
Guinness
1960“1969 3 14 15 2 17

1970“1979 7 6 8 5 13

1980“1989 22 0 17 5 22
1990“1996 5 26 29 2 31
Distillers Company
1960“1969 0 0 0 0 0
1970“1979 0 0 0 0 0
1980“1985 0 0 0 0 0
Diageo
1997“1999 0 0 0 0 0
2000“2004 1 0 1 0 1
Total
1960s 7 42 47 2 49
1970s 10 7 11 6 17
1980s 33 4 32 5 37
1990s 20 31 33 16 49
2000s 2 0 2 0 2



markets. The complementary partners, by contrast, are ¬rms that produce
alcoholic beverages but are of small size and do not have a leading position
internationally or domestically. They can also refer to ¬rms that operate
in the alcoholic beverages industry but specialize in distinct activities such
as distribution, or to ¬rms specializing in unrelated activities such as the
distribution of all sorts of other products.
The high number of alliances in distribution formed by Guinness in the
1980s re¬‚ects the ¬rm™s wide-ranging alliance with Mo¨ t Hennessy. The two
e
multinationals formed seventeen distribution alliances covering markets all
over the world, some of which also included other partners, such as Jardine
Wines and Spirits in Japan and Irish Distillers in Eire.
58 Global Brands

2.5
Logaritmic Index of Growth (1961 = 100)



2 Sales

1.5


1


0.5
Consumption

0
1961 1967 1973 1979 1985 1991 1997 2003
Fig. 3.6. Indexes of growth in consumption of alcoholic beverages and in sales by
the world™s largest multinationals in 1960.
Source: Database; World Drink Trends (Henley-on-Thames: NTC Publications,
2005); and population by country “ United Nations, Demographic Yearbook (New
York: United Nations, 2005) “ estimates of midyear population.


Industry Structure
A third industry-speci¬c determinant is industry structure. The patterns of
growth of the world™s largest ¬rms in alcoholic beverages from 1960 (through
mergers and acquisitions, alliances, or organic expansion), in particular those
in the beer and spirits businesses, led to the concentration of the industry by
a small group of large ¬rms.31 As there are no robust estimates on the size of
the industry, Figures 3.6 and 3.7 provide alternative approaches to analyzing
the evolution of industry structure. Showing the world™s largest ¬rms in 1961,
and assuming that in the long run the evolution of consumption corresponds
to that of sales in the entire industry, Figure 3.6 illustrates that there was a rise
in the index of growth in sales at constant prices by the world™s largest ¬rms.
The increase was higher than the index of growth in consumption of alcoholic
beverages, indicating a higher level of concentration in the industry.32
Figure 3.7 illustrates the evolution in the volume of sales by the world™s
largest ¬rms between 1960 and 2004, and the total number of ¬rms consid-
ered in the database in each year. It also con¬rms the trend toward a higher
degree of concentration in the industry. In particular, it illustrates that during

31 Terry Gourvish, “Economics of Brewing, Theory and Practice: Concentration and Technolog-
ical Change in the United States, United Kingdom and Germany Since 1945,” Business and
Economic History, Vol. 33, No. 1 (1994): 256; idem, “Concentration, Diversity and the Firm
Strategy in European Brewing, 1945“90,” in Wilson and Gourvish (eds.), The Dynamics of
the International Brewing Industry, 81, 85.
32 Statistics on the evolution of the number of ¬rms in the global industry and of trade and
consumption of alcoholic beverages are not very robust.
59
Growth and Survival
200,000 40

Number of firms

150,000 30



100,000 20
Total sales


50,000 10



0 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Fig. 3.7. Evolution of sales by the leading multinationals in alcoholic beverages.33
Sales in millions of constant US dollars (2000 = 100)

the 1960s, new large ¬rms developed but their sales rose slowly. In the 1970s,
sales started to rise at a faster rate and the number of ¬rms decreased. From
the 1980s, when competition became global, there was a sharp rise in the
volume of sales and at the same time the number of ¬rms decreased and then
leveled off.
These four sets of factors “ consumption, competition, institutional envi-
ronment, and industry structure “ were very distinct among countries before
the 1960s, having an important impact on the growth and independent sur-
vival of ¬rms, especially when the resulting environment was adverse. By
the beginning of the twenty-¬rst century, they had become less signi¬cant.
With the globalization of the industry, the capacity of ¬rms to deal with
country- and industry-speci¬c factors had become a necessary, but not suf-
¬cient, determinant in their growth and survival.
Nonetheless, industry-speci¬c determinants still had a very important
impact in the wines business. By the beginning of the twenty-¬rst century, it
was still fragmented, and the performance of the ¬rms was strongly in¬‚u-
enced by the institutional environment of their country of origin. Consump-
tion was still culture speci¬c, and competition was essentially played at a
domestic level. There were, however, some signs that the industry was start-
ing to concentrate and globalize. Technological developments had allowed
¬rms to improve the quality and predictability of their products. That is
why many multinationals, like Foster™s Brewing from Australia, changed
the nature of their businesses. From 1996, Foster™s Brewing embarked on
a series of acquisitions of wines ¬rms and became more than a multi-
national brewer.34 Allied Domecq™s acquisitions of leading wine ¬rms in

33 This ¬gure only takes into account those alcoholic beverages ¬rms from the database for
which there exist consistent and systematic data for every year from 1960 to 2005.
34 In 2001, after acquiring International Wine Accessories, the ¬rm changed its name from
Foster™s Brewing Group to Foster™s Group Limited; Financial Times (3 and 5 July, 2001).
60 Global Brands
New Zealand, Argentina, and California in 2001 provide another illustra-
tion of a leading multinational seeking a large presence in the global wines
business.35 This pattern of concentration was not only occurring in the wine
regions of the new world but also in the old world.36


Firm-Speci¬c Determinants
This set of determinants looks inside the ¬rms and establishes what led to
their different patterns of evolution over time. Each of the isolated determi-
nants is insuf¬cient to ensure growth and long-term survival of ¬rms, and
at each moment in time some determinants are more important than oth-
ers. Firm-speci¬c advantages also have to be constantly created or rebuilt,
adapted to the economic needs and opportunities in the environment.37 Of
particular importance in assessing ¬rm-speci¬c capabilities are brands, dis-
tribution networks, the capacity of ¬rms to acquire and transfer market-
ing knowledge, ownership structures, and the entrepreneurial capabilities
of management. Given the importance that each of these factors had in the
growth and long-term survival of ¬rms, they will be analyzed in more detail
in the following chapters. In addition, there were other ¬rm-speci¬c deter-
minants, including organizational structures, economies of scale and scope
at various levels of activity, ¬rst-mover advantages, and ¬rm technology.38
Chandler and Nelson and Winter suggest inverse relationships of causality
between the organizational structure of the ¬rm and its strategy. Chandler
proposes that structure follows strategy, and Nelson and Winter that strategy
follows from structure.39 Both deal with the issue of how ¬rms explore
economies of scale and scope, given the existence of bounded rationality.40
The evidence from the alcoholic beverages industry seems to support
both cases. However, when competition accelerated beginning in the 1980s,
¬rms most frequently adapted their organizational structures to their new
strategies, a la Chandler. An example is Allied Lyons, which changed its

35 ˜Lion Nathan Wine bid hit by NZ Watchdog Ruling™, Financial Times (17 July 2001); ˜Allied
Buys Argentina Winemakers™, The Independent (5 July 2001).
36 Interview with John de Lucca, President of the California Wine Institute, San Francisco, 20
March 2001; Interview with Colin Campbell, Director at Mo¨ t-Hennessy, Paris, 22 November
e
1999; Cavanagh, Clairmonte, and Room, The World, 54. Tony Spawton, “Development in
the Global Alcoholic Drinks Industry and its Implications for the Future Marketing of Wine,”
European Journal of Marketing, Vol. 24, No. 4 (1990): 49.
37 Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge,
Mass: Harvard University Press): 35.
38 Chandler, The Visible Hand, 8. For a de¬nition of economies of scale and scope, see Chandler,
Scale and Scope: 17“18.
39 Alfred D. Chandler Jr., Strategy and Structure (Cambridge Mass: The MIT Press, 1962);
Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change
(Cambridge, Mass: Harvard University Press, 1982).
40 Oliver Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985):
45.
61
Growth and Survival
organizational structure in the early 1980s due to transformations in its strat-
egy.41 As a result, while in 1985 Allied sold US$6,431 million (at constant
prices 2000 = 100), 27 percent of those sales being generated by subsidiaries
operating in seven different, essentially European, countries, in 1990 sales
had risen to US$8,878 million, 40 percent being generated by subsidiaries
based in twenty countries from different continents.42 Allied Lyons, now
renamed, was by this time a truly global multinational.
As most of the world™s largest multinationals were long-established, they
tended to have been ¬rst movers in their markets of origin and in their
beverages categories. There were, however, some “challengers,” who relied
on the management of successful brands that they had obtained through
mergers with or acquisitions of long-established ¬rms. In all cases, these
¬rms had created cost advantages related to learning, reputation, and brand
image.43 However, since during the period of analysis most beverages had
long achieved maturity in their life-cycles, ¬rst-mover advantages were no
longer suf¬cient to sustain growth and secure independent survival. For
instance, Distillers and Arthur Bell, two ¬rms that had been ¬rst movers in
scotch whisky, had not rebuilt new ¬rm-speci¬c advantages after the 1960s,
and ended up being acquired in the 1980s.
Technology had been an important ¬rm-speci¬c determinant in the beer
sector until the 1960s. Since then, it had become less important. Some gen-
eral technological developments, such as refrigeration and containerization,
allowed ¬rms to obtain economies of scale and scope, which translated into
more effective distribution across regions.44 Improvements in information
systems and logistics were also important in increasing the availability of
beer to consumers and enhancing communications and decision taking by
the ¬rms in this part of the industry.
In wines, some of the major innovations included improvements in the
quality of grape varietals, new systems of mechanization, the creation of
pressure tanks and coolers, better control of the temperature of fermenta-
tion, and a new ability to ¬t grape varieties to the climate. These scienti¬c
methods and techniques in wine production allowed ¬rms to make consis-
tent, high quality wines and permitted mass branding strategies.45 Branded


41 Interview with Michael Jackaman, former Chairman of the Wines Spirits and Soft Drinks
Division, and also former Chairman of Allied Domecq, Somerset, 8 December 1998.
42 Allied Lyons, Annual Reports and Accounts (1985, 1990).
43 Glenn R. Carroll and Michael T. Hannan, The Demography of Corporations and Industries
(Princeton: Princeton University Press, 2000).
44 Gourvish, “Economics of Brewing”: 255.
45 David John Collis, “The Value Added Structure and Competition Within Industries” (PhD
dissertation, Harvard University, 1986); James Espey, “A Multinational Approach to New
Product Development,” European Journal of Marketing, Vol. 19, No. 2 (1985): 5“18; David
Merrett and Greg Whitwell, “The Empire Strikes Back: Marketing Australian Beer and Wine
in the United Kingdom,” in Geoffrey Jones and Nicholas J. Morgan (eds.), Adding Value:
Brands and Marketing in Food and Drink (London: Routledge, 1994).
62 Global Brands
wines also offered an accessible starting point for new drinkers, providing
some sort of guarantee that they would get what they paid for from different
outlets and from one year to the next. For the companies, they offered the
prospect of creating consumer loyalty and hence higher sales volumes and
pro¬t margins, and lower risks (such as those associated with unexpected
changes in climate).


Analytical Framework: Patterns of Growth
and Survival
Although no two ¬rms can ever be exactly alike, it is possible to identify
some general patterns in their processes of growth, particularly among those
which tended to focus their activities in the distilled spirits and brewing
businesses.46 Table 3.3 provides an analytical framework for the patterns of
growth and survival of the world™s largest multinationals. It considers three
different phases between 1960 and the beginning of the twenty-¬rst century.
In each phase, some ¬rms survived independently and others merged or were
acquired. The table also re¬‚ects three levels of analysis “ country, industry,
and ¬rm “ related to three sets of determinants. At the level of country-
speci¬c determinants, which affect all the ¬rms operating in a given system
of corporate governance equally, conditions are always adverse for ¬rms
operating in “outsider” systems of corporate governance. This is due to the
characteristics of capital markets and the high likelihood that ¬rms will be
subject to takeovers. In contrast, conditions in “insider” systems of corporate
governance are considered to be benign at an initial phase, as capital markets
are not as developed, and ¬rms are not publicly quoted, and therefore not
subject in the same way to mergers and acquisitions.
Like country-speci¬c determinants, industry-speci¬c determinants are con-
sidered to affect growth and survival of ¬rms depending on whether they are
benign (+) or adverse (“). In Table 3.3, country- and industry-speci¬c deter-
minants are considered to be adverse (“), either when both determinants
are adverse, or in situations where only one is adverse (e.g., when the ¬rm
is from an “outsider” system of corporate governance, but the industry-
speci¬c determinants are benign). Firm-speci¬c determinants vary in their
relative importance in determining the ¬rms™-speci¬c advantages.
As Table 3.3 shows, in Phase 1, in the 1960s, consumption was culture-
speci¬c, the relevant level of competition for ¬rms and the institutional envi-
ronments that affected their activities were local, and the industry was still
fragmented. So, as long as industry-speci¬c determinants were relatively

46 As already mentioned, the world wines business, by contrast, remained relatively fragmented
until the beginning of the twenty-¬rst century. There are some exceptions, including Mo¨ t-
e
Hennessy, Gallo, and Constellation Brands, which developed from their beginnings in the
sparkling wines and still wines businesses.
Table 3.3. Patterns of growth and survival of ¬rms in the alcoholic beverages industry

Phase 1 Phase 2 Phase 3

System of corporate Outsider: (-) adverse
Outsider: (-) adverse
Outsider: (-) adverse
Country governance Insider: (-) benign
Insider: (-) benign
Insider: (+) benign

Homogenised
Culture specific Culture spec./homogenised
- Consumption
Regional/Global Global
Local/Regional
- Competition/Inst. Environ.
Industry
Transitory Period Concentrated
Fragmented
- Industry structure

benign: (-) adverse (-) adverse only (-) adverse only

Firm specific advantages? Firm specific advantages? Firm specific advantages?
Country/Industry
Survival
Survival Yes
Yes
specific determinants?
No
No
Survival Exit
Exit
+
Firm Patterns of
Yes
growth and Survival
Survival
Yes Yes
survival -
Survival
No No
Exit
Exit

Survival
Survival Yes
Yes
Survival
+
No No
No Exit
Exit
-
Exit
64 Global Brands
benign, it was possible for ¬rms to grow and survive independently even
without constantly rebuilding their ¬rm-speci¬c advantages. An example
is Distillers Company, which had built ¬rm-speci¬c capabilities before the
1960s by achieving economies of scale and scope in production. It also devel-
oped a complex and heavily bureaucratic organization structure, with lots
of duplication of activities (which obviously increased costs); it was not suf-
¬ciently internationalized when compared to its competition, and also was
not adequately investing in marketing. So long as the environment was rel-
atively benign, Distillers Company was able to survive independently. From
the 1980s on, as competition became global and the industry concentrated,
Distillers Company, by not rebuilding ¬rm-speci¬c capabilities, was not able
to survive independently.47
Phase 2 is a transitional period (a shakeout period around the 1980s) when
¬rms started to become global and became used to dealing with a multitude
of institutional environments, competitors, and consumers.48 Consumption
patterns across markets became more homogenized and the industry con-
centrated. Firms were able to grow and survive only if they created or rebuilt
¬rm-speci¬c advantages.49 An example is Mo¨ t Hennessy, which was able
e
to rebuild the necessary capabilities by remaining a family-controlled ¬rm
after merging with another family ¬rm and hiring a professional manager to
run the business.
Finally, in Phase 3, in the 1990s, the industry became very concentrated
and truly global. Here, ¬rms could only survive as long as they created
or continued to rebuild their ¬rm-speci¬c advantages. The merger between
Guinness and Grand Metropolitan in 1997, which led to the creation of
Diageo, is an example. This merger allowed the new ¬rm to obtain economies
of scale and scope at various levels of activity and, in particular, in marketing
and distribution.
These phases differed according to the type of alcoholic beverages business,
whether wines, spirits, or beer. For beer and spirits ¬rms, benign industry-
speci¬c determinants had a signi¬cant impact on the growth and survival of
¬rms until the 1980s, at which point businesses encountered more adverse
conditions related to the globalization of the industry. They then had to sum-
mon new ¬rm-speci¬c capabilities to grow and survive. In the wines business,


47 Chandler, Scale and Scope: 378; Ronald B. Weir, “Managing Decline: Brands and Marketing in
Two Mergers ˜The Big Amalgamation™ 1925 and Guinness DCL 1986,” in Jones and Morgan
(eds.), Adding Value.
48 Steven Klepper and Kenneth L. Simons, “Innovation and Industry Shakeouts,” Business and
Economic History, Vol. 25, No. 1 (1996): 81“89; Richard N. Foster and Sarah Kaplan,
Creative Destruction (London: Doubleday, 2001): 54.
49 Alfred D. Chandler Jr., “The Enduring Logic of Industrial Success,” Harvard Business Review
(March“April 1990): 140.
65
Growth and Survival
due to its asset-speci¬c nature, industry-speci¬c factors still determined ¬rms™
growth and survival at the beginning of the twenty-¬rst century.

Conclusion
This chapter has sought to cover a wide range of issues related to the
growth and survival of the world™s largest multinationals in the alcoholic
beverages industry. Several of these issues will be analyzed in more detail
in the following chapters. Here I developed data on three sets of determi-
nants: country-speci¬c, industry-speci¬c, and ¬rm-speci¬c. Although they
were always important in the growth and survival of ¬rms, their relative
signi¬cance varied over time and also differed for the various beverages.
When country- and industry-speci¬c factors were benign “ that is, when
consumption patterns were culture-speci¬c, competition and the institu-
tional environment were principally domestic and the industry was frag-
mented “ it was possible for ¬rms to grow and survive without constantly
rebuilding their ¬rm-speci¬c advantages. Once these country- and industry-
speci¬c factors became adverse, however, it was no longer possible for ¬rms
to grow and survive without constantly creating or rebuilding ¬rm-speci¬c
advantages.
An adverse setting does not necessarily prevent growth and survival.
Indeed, globalization merely demands that ¬rms learn to deal with multi-
ple markets. Such a multiplicity of markets can make the industry-speci¬c
determinants under which ¬rms operate adverse, even if they are benign
at the level of particular market conditions. In such circumstances, coun-
try- and industry-speci¬c determinants become a necessary but not suf¬cient
condition for ¬rms to grow and survive. At this stage ¬rm-speci¬c factors
become increasingly important. These include brands and marketing knowl-
edge, ownership structures, and distribution networks, among other ¬rm-
speci¬c factors.
The different patterns of growth followed by leading ¬rms from these
different sectors were heavily dependent on product category (wine, beer,
or spirits). In beer and spirits, benign industry-speci¬c determinants signi¬-
cantly determined the growth and survival of ¬rms until the 1980s. At that
point they encountered more adverse conditions related to the globalization
of the industry and had to summon new ¬rm-speci¬c capabilities to grow
and survive. In the wines business, which is less global due to its asset-speci¬c
nature, industry-speci¬c factors still determined ¬rms™ growth and survival
at the beginning of the twenty-¬rst century.
By deepening the level of analysis from Chapter 1, this chapter shows
that the study of this industry needs to be disaggregated. It remains to be
seen whether these ¬ndings about the impact of the country-, industry-, and
¬rm-speci¬c determinants on the patterns of growth and survival of ¬rms
66 Global Brands
over time can also be applied to the study of smaller ¬rms in the alcoholic
beverages industry that operate at a global level. Such a study would require
more rigorous analysis, but it would also indicate the possible generality of
my argument with regards to the evolution of other non“science-based indus-
tries that, like alcoholic beverages, are characterized by a high level of com-
petition, concentration, and globalization, and produce globally branded
products with long life cycles.
4

Family Ownership and Managerial Control




Introduction
When we look at corporate governance of ¬rms a number of questions come
to mind. Does the country of origin matter? Has the level of concentration of
ownership in¬‚uenced the growth and survival of ¬rms? Who manages these
¬rms? How has their ownership and control evolved over time? This chap-
ter analyzes these questions, focusing on the evolution of the predominant
governance structures of the leading multinationals in alcoholic beverages.


Country of Origin
As we noted before, the leading ¬rms in the world originate both from “out-
sider” and “insider” systems of corporate governance. Table 4.1 uses this
classi¬cation to aggregate those ¬rms with published accounts into these two
groups. The United States, United Kingdom, Canada, Australia, and South
Africa are grouped as “outsider” systems. Continental Europe, Japan, and
South America are grouped as “insider” systems of corporate governance.1
This Table provides, for each ¬rm, the average sales in each decade: 1961“
1970, 1971“1980, 1981“1990, 1991“2000, and 2001“2005.2
In the 1960s, the number and size (measured by sales volume) of ¬rms
originally from the outsider systems was much higher than that of ¬rms
from insider systems. This is what one might expect from a neoclassical per-
spective. Open systems should make for more competitive ¬rms. In contrast,
by 2004 the number of ¬rms from outsider systems was similar to that of
¬rms from insider systems. Firms like National Distillers (which had been

1 Tim Jenkinson and Colin Mayer, “The Assessment: Corporate Governance and Corporate
Control,” Oxford Review of Economic Policy, Vol. 8, No. 3 (1992): 1“10.
2 Amounts stated in U.S. dollars (2000 = 100). To convert the data into constant US dollars,
several indicators were used. First, original currencies were converted into current US dol-
lars, using the average annual exchange rates for Australia, Belgium, Canada, Denmark, the
European Union, France, Japan, the Netherlands, South Africa, and the United Kingdom.
Second, the export unit values for the industrial countries™ index was used to convert the data
from US dollar current prices into US dollar constant prices: unit value prices in terms of US
dollars of 2000.


67
Table 4.1. Average annual sales by decade for the world™s leading ¬rms in alcoholic beverages, 1960“2005a
Year of Year of
Foundation / Merger /
1960“1969 1970“1979 1980“1989 1990“1999 2000“2005
Last Merger Acquisition

Outsider Systems
United States and Canada
1852 1.634 2.973 7.410 10.389 12.864
Anheuser-Busch
1870 513 699 1.225 1.482 2.200
Brown Forman
1945 55 128 651 2.646
Constellation Brands/ n/a
Canandaigua
1933 1.057 1.284
E. & J. Gallo n/a n/a n/a
1864 5.824 7.985 8.765 7.418 5.646
Fortune Brands
1847 1995 356 1.084 2.471 3.340
John Labbatt “
1875 1987 857 2.464 2.488
Heublein “ “
1926 1986 1.861 1.804 3.005
Hiram Walker “ “
1873 1980 2.045 1.763
Liggett & Myers “ “ “
2004 4.019
Molson-Coors “ “ “ “
1924 1986 3.083 2.953 1.983
National Distillers “ “
1920 1971/1987 1.703 2.176
Schenley “ “ “
1924 2001 3.695 4.008 3.401 7.210
Seagram “
2.157 2.542 3.431 4.507 4.776
Average
1.663 2.124 2.832 3.822 4.245
Standard deviation
United Kingdom
1799/1961 2005 1.956 3.502 5.700 7.336 4.578
Allied Domecq
1825 1985 164 303 501
Arthur Bells “ “
1777 2000 1.390 2.852 4.533 6.655
Bass “
1997 18.533 15.615
Diageo “ “ “
1877 1986 3.146 2.721 2.261
Distillers Company “ “
1962 1997 234 4.553 9.182 12.076
Grand Metropolitan “
1759 1997 1.049 1.551 3.100 6.212
Guinness “
1962 1972 517 962
International Distillers “ “ “
& Vintners
1749/1960 978 1.094 1.338 3.289 5.986
Scottish & Newcastle
1971 191 239
Truman n/a “ “ “
1958 1972 1.197 1.338
Watney Mann “ “ “
1742 2000 922 1.554 2.335 5.195
Whitbread “
1.067 1.879 3.619 8.471 8.726
Average
886 1.363 2.798 5.188 6.007
Standard deviation
Australia and South Africa
1888 1.731 2.352 6.442 4.364 2.357
Foster™s Group / Foster™s
Brewery / Elders IXL
1895 266 1.663 3.509 5.666 6.824
SABMiller / South Africa
Breweries
998 2.007 4.976 5.015 4.591
Average
1.036 487 2.074 921 3.158
Standard deviation
Average (US, Canada, UK, Australia, and South Africa) 1.354 1.991 3.444 6.437 6.039
Standard deviation (US, Canada, UK, Australia, and South 1.359 1.700 2.658 4.537 4.552
Africa)
Insider Systems
Japan
1889 550 626 1.644 7.120 11.497
Asahi Breweries
1907 1.694 3.100 6.799 7.761 9.371
Kirin
1876 888 1298 2457 4646 4339
Sapporo
1899 631 2.395 4.454 5.858 6.402
Suntory
1.071 2.264 3.838 6.346 7.902
Average
523 1.105 2.300 1.382 3.164
Standard deviation
Continental Europe
1847 911 1.336 1.595 2.697 4.678
Carlsberg
2004 10.288
Inbev “ “ “ “
1988/2004 1.265 2.072 5.212
Interbrew “ “
1864 252 1.390 2.785 5.620 8.793
Heineken
1743 1971 69
Mo¨ t & Chandon
e “ “ “ “

(continued)
Table 4.1 (Continued)
Year of Year of
Foundation / Merger /
1960“1969 1970“1979 1980“1989 1990“1999 2000“2005
Last Merger Acquisition

1971 1987 502 1.168
Mo¨ t-Hennessy
e “ “ “
1987 2.785 5.181 12.254
Mo¨ t-Hennessy Louis
e “ “
Vuitton
1805/1975 933 1.512 4.783 3.989
Pernod Ricard “
1724/1991 1.031 858
R´ my Cointreau
e “ “ “
411 1.040 1.852 3.564 6.582
Average
443 413 740 1.883 3.996
Standard deviation
South America
2000 2004 2.706
Ambev “ “ “ “
1862 2.294 2.779
Bacardi n/a n/a n/a
1885 877 863
Companhia Antarctica n/a n/a “
Paulista
1888 1.724
Companhia Cervejeira n/a n/a n/a “
Brahma
1925 1998 2.622 2.751 3.860
Modelo n/a n/a
1.750 1.908 3.115
Average n/a n/a
1.234 813 646
Standard deviation n/a n/a
Average (Japan, Continental Europe, and South America) 684 1.285 2.000 3.240 5.732
Standard Deviation (Japan, Continental Europe, and South 576 1.025 2.001 2.925 4.390
America)

Note: Amounts stated in millions of constant U.S. dollars (2000 = 100).
Source: Based on companies™ archives, annual reports, and other published sources.
a
To create this table, annual reports that were available of all the ¬rms cited in the table were used. For those where annual reports were not available, other
sources such as the Hoovers.com database were utilized. n/a “ not available. For some ¬rms such as Constellation Brands, Heublein, Hiram Walker, Schenley,
Grand Metropolitan, Scottish & Newcastle, Whitbread, Foster™s Group, Asahi Breweries, Suntory, Mo¨ t et Chandon and R´ my Cointreau annual data is
e e
sometimes not available for the whole period covered. See Appendix 3 with Annual Sales in for Each Firm.
71
Family Ownership and Managerial Control
the world leader in the industry at the beginning of the twentieth century),3
and Schenley (another leading U.S. spirits ¬rm) had disappeared, having
been acquired by, respectively, American Brands in 1986 (renamed Fortune
Brands in 1997) and by Guinness in 1987. Other ¬rms listed in the table,
such as Seagram, disappeared. Large multinationals from insider systems
such as Pernod Ricard and Inbev continued to expand during this period.


Early Development of Leading Alcoholic Beverages
There are two arguments that explain the faster development of leading
alcoholic beverages ¬rms in the United States, the United Kingdom, and
Canada. One is speci¬c to the industry and concerns the type of alcoholic
beverages produced and consumed in each country. The other is of a more
general scope and is consistent with the national systems perspective, and
the Chandlerian explanations focused on the emergence and development of
large industrial ¬rms.
The Anglo-Saxon countries were the ¬rst to develop large ¬rms despite
the temperance movements and high tax restrictions that have affected pro-
duction and consumption of alcoholic beverages since the late nineteenth
century. These ¬rms mainly produced beer or spirits, two types of beverages
where it is possible to industrialize production and yet maintain the desirable
characteristics of the beverage. Consequently, in such ¬rms it was relatively
easy to obtain economies of scale and scope in production and also to create
branded products.4
In Continental Europe, in particular in the south, the trend was, by con-
trast, for wine production to develop ¬rst. And yet, in countries such as
France, Italy, or Spain, where wine is the most popular alcoholic beverage,
large wine ¬rms, if they developed at all, only developed recently. This is due
to the characteristics of wine, for which it is dif¬cult to obtain homogeneous
quality in quantity and which has been traditionally branded by region.
The ¬rms from these Southern European countries that developed as lead-
ing multinationals had their original base in the production of processed
wines or spirits based on wine, such as cognac or champagne. In France,
the creation of Mo¨ t Hennessy in 1971 is a good illustration of this pattern.
e
In Spain, a processed wine (sherry) and spirits (brandy and tequila) allowed
Pedro Domecq to develop into a relatively large ¬rm, with brands such as
Don Pedro, Presidente, and Fundador. By processing wine, ¬rms were able


3 Alfred D. Chandler Jr., Strategy and Structure (Cambridge, Mass: MIT Press, 1962).
4 This capacity of beer and spirits to be easily branded, and allow the ¬rm to obtain economies
of scale and scope, has not always existed. For a historical analysis of the evolution of pas-
teurization in beer and how it revolutionized trade, see, e.g., Terry Gourvish and Richard G.
Wilson, The British Brewing Industry, 1830“1980 (Cambridge: Cambridge University Press,
1994).
72 Global Brands
to mix wines from several producers and so overcome some of the limits of
terroir.
The emphasis on the region nonetheless makes the development and
expansion of branded wines dif¬cult, due to limitations to production related
to climate and the crop, as well as to the geography. Firms have more dif¬-
culty obtaining economies of scale and scope at various levels of their activity.
Nonetheless, Mo¨ t Hennessy has been very good at overcoming these limita-
e
tions, acquiring since 1960 vineyards in countries such as Argentina, Brazil,
Germany, Austria, United States, Spain, Australia, and New Zealand. The
¬rm does not use the word champagne for these products as that name is
legally protected and can only be used for wines produced in the demar-
cated region of Champagne. Instead, its subsidiaries produce and market
their sparkling wines from different countries using brand extensions such
as Domaine Chandon, very similar to that of the famous champagne brand
Mo¨ t & Chandon.5
e
Other explanations for the early development of these ¬rms ¬t with Chan-
dler™s arguments about big business in the United States, the United Kingdom,
and Canada. These countries were early industrializers, were the ¬rst to make
widespread use of modern management practices (such as the disclosure of
accounts), and were the ¬rst to create markets for corporate control. The
large size of their markets compensated for the relatively low levels of per
capita consumption of alcohol in relation to many Continental European
countries.6 The management practices and disclosure of accounts that ¬rms
in the United States and United Kingdom were required to follow, and the
ways by which the information was passed between market participants,
greatly improved the allocation of economic resources and the development
of large multinationals in these countries.7
Government regulation and the procedures for mergers and acquisitions
was another distinctive characteristic of these countries. The United States
instituted active anti-trust measures at an early date, only a few years after the
adoption of the Sherman Act in 1890. The United Kingdom took longer to
adopt a monopoly policy and did not converge on the American pattern until


5 “Mo¨ t-Hennessy™s Strategy” (14 November 1987), Mo¨ t et Chandon, “Mo¨ t et Chandon
e e e
Australia” (March 1989); “The Case of Domaine Chandon: California Wine Experience”
(May 1984), all from Mo¨ t & ChandonArchive, LVMH.
e
6 Chandler, Strategy and Structure; Leslie Hannah, The Rise of the Corporate Economy (Lon-
don: Methuen, 1976): 102, 189; Christopher Schmitz, “The World™s Largest Industrial Com-
panies,” Business History, Vol. 37, No. 4 (1995): 85“96; Fortune Magazine: The Largest
Industrials (1961, 1971, 1981, 1991, 2001, 2005); Wendy Hurst, Ed Gregory, and Thomas
Gussman, Alcoholic Beverage Taxation and Control Policies (Ottawa: Brewers Association
of Canada, 1997).
7 Eugene F. Fama, “Ef¬cient Capital Markets II,” Journal of Finance, Vol. 46, No. 5 (1991):
1575“617; Matthias Kipping and Ove Bjarnar, The Americanisation of European Business:
The Marshall Plan and the Transfer of US Management Models (London: Routledge, 1998).
73
Family Ownership and Managerial Control
after World War II. Then, in 1948 the United Kingdom created the Monopo-
lies and Restrictive Practices Commission, which was reinforced in 1956 by
the Restrictive Trade Practices Act. In continental European countries and
Japan, these changes only developed in the late 1950s and early 1960s, and
were, in the case of Japan, of little practical signi¬cance in changing the legal
setting.


Differences in Performance
There are clear differences between family and managerial ¬rms in terms of
their economic and ¬nancial performance over time. Table 4.2 shows, by
decade, these differences. It indicates the evolution of several indicators of
economic and ¬nancial performance of the world™s largest multinationals:
total sales, pro¬tability ratio (measured as the ratio of operating pro¬t to
total sales), and return on equity (ROE) (calculated as the ratio between net
earnings and equity). This table also includes an indicator of independent
survival that shows, for a population of seventy-¬ve ¬rms analyzed, ¬fty-one
were merged or acquired by other ¬rms.
In the beginning of the 1960s, family ¬rms had on average a similar level
of sales to that of managerial ¬rms and had higher pro¬tability and lower
return on equity. From the 1980s, this situation was reversed, with family
¬rms showing on average a higher return on equity, although a lower sales
volume and lower pro¬tability. This evolution suggests that the basic goal of
the managerial enterprise was growth and short-term performance. Such a
¬nding contradicts Chandler™s view about large industrial ¬rms that have an
advantage over family ¬rms because of their long-term orientation, which
contrasts with families™ demands for short-term income.8
The evolution of the indicators shown in Table 4.2 can also be connected to
the strategies followed by ¬rms. Family ¬rms tended to use more conservative
¬nancing policies, relying essentially on internal funds, and for that reason
grew more slowly than managerial ¬rms. They also tended to acquire ¬rms of
smaller size, usually also family owned. Nonetheless, this strategy generated
on average more income for shareholders (family members) in the long term,
con¬rming that they were not forces for conservatism and backwardness, but
rather that they could compete successfully on an international basis.9
There were more family ¬rms than managerial ¬rms that did not survive.
Of the total number of ¬rms analyzed “ twenty-six managerial ¬rms and
forty-nine family ¬rms “ 54 percent of managerial ¬rms and 75 percent for

8 Alfred D. Chandler Jr., “The Enduring Logic of Industrial Success,” Harvard Business Review
(March“April 1990): 138.
9 Roy Church, “The Family Firm in Industrial Capitalism: International Perspectives on Hypo-
thesis and History,” Business History, Vol. 35, No. 4 (1993): 17“43; Geoffrey Jones and Mary
Rose, “Family Capitalism,” Business History, Vol. 35, No. 4 (1993): 2.
Table 4.2. Economic and ¬nancial performance ratios of the world™s largest multinationals
in alcoholic beveragesa

Average Sales Average Pro¬tability Average ROE Merged or Acquired Firms
Managerial Family Managerial Family Managerial Family Managerial Family Firms
Decade Firms Firms Firms Firms Firms Firms Firms Firms Total

1.260 1.117 0.12 0.12 0.07 0.12 0 6 6
1960“1969
1.979 1.646 0.09 0.11 0.08 0.13 4 4 8
1970“1979
3.165 2.581 0.08 0.11 0.06 0.11 4 6 10
1980“1989
6.189 3.678 0.19 0.10 0.04 0.11 5 14 19
1990“1999
6.523 5.459 0.16 0,12 0,11 0.16 1 7 8
2000“2005
14 37 51
5 12 24
Independent survival
26 49 75
Total ¬rms

Note: Amounts stated in millions of constant U.S. dollars (2000 = 100). Pro¬tability ratio = operating pro¬t / sales; ROE = return
on equity = net earnings / equity.
Source: Based on companies™ archives, annual reports, and other published sources.
a The use of economic and ¬nancial indicators has the advantage of providing a clear view of the actual performance of ¬rms and

consequently of their evolution over time. However, considerable care should be taken, as these results might be distorted due to
differences in accounting systems, exchange rate variations, in¬‚ation rates in the countries concerned as well as considerable currency
movements.
75
Family Ownership and Managerial Control
family ¬rms did not survive. This is in great part related to the nature of the
industry, where family ownership has always predominated.
There is another apparent contradiction between the evidence provided
here, where family ¬rms predominate, and Chandler™s argument about their
lack of suf¬cient managerial resources and talent to manage the large com-
plex enterprises of the twentieth century. Chandler believed that the failure
to hand over control to professional managers inhibited both the growth
and the development of organizational structures and capabilities.10 The
main explanation for this apparent contradiction lies in the industry being
analyzed. Chandler was looking essentially at capital-intensive industries,
where the rationale for managing ¬rms is very different when compared to
non“science-based industries such as alcoholic beverages. In the alcoholic
beverages industry, which is not based on scienti¬c advantages and where
products have very long life cycles, although family members frequently keep
their position as CEO and chairman of the ¬rm, in fact their role is essentially
nominal and marketing-oriented, re¬‚ecting the character of the industry.
There are several differences between capital-intensive industries and non“
science-based industries, the strategic focus of ¬rms being the most impor-
tant. While in the capital-intensive industries the focus tends to be on the
short run because products have very short life cycles, in non“science-based
industries relying on heritage and tradition, the focus tends to be on the long
run.11
When competition accelerated and became global, family ¬rms that later
became leaders in the industry tended to hire new entrepreneurs with wider
horizons and capabilities in marketing and management of brands, execu-
tives who were able to rebuild the ¬rms™ capabilities, especially in adverse
periods of stagnation and rationalization. Frequently, as a result of global-
ization and of competition, ¬rms also merged with other family ¬rms. In
this process they often became publicly quoted, but families retained con-
trol of the ownership. This allowed them to raise capital and still impose
their own priorities on managers, such as keeping a long-term perspective.
This situation was not possible in managerial ¬rms, where the dispersion
of shares allowed managers to pursue their own objectives while protecting
their positions by striving for higher sales and pro¬tability and also a high
return on investment in the short term.
The tradition of entrepreneurship and trading skills established and nour-
ished by family ¬rms laid the foundation for the growth of modern-day


10 Roy Church, “The Limitation of the Personal Capitalism Paradigm,” in Roy Church, Albert
¨
Fishlow, Neil Fligstein, Thomas Hughes, Jurgen Kocka, Hidemasa Morikawa, and Frederic
M. Scherer, “Scale and Scope: A Review Colloquium,” Business History Review, Vol. 64,
No. 3 (1990): 704.
11 Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge,
Mass: Harvard University Press, 1990): 236“94.
76 Global Brands




Fig. 4.1. Industry systems of corporate governance.


managerial techniques in the food and drinks business.12 However, the
professional managers and the agents representing the shareholders hired
by these ¬rms had a fundamental role in changing the recent mindset in
the industry, which increasingly became oriented toward ¬nancial perfor-
mance.13


Combining Ownership With Corporate Control
Given the higher number and larger size of alcoholic beverages ¬rms from the
United States, United Kingdom, and Canada in the period 1961“1970, one
would expect the predominant governance structures of the leading multi-
nationals in alcoholic beverages in those countries to re¬‚ect the national
systems of corporate governance. Intriguingly, the predominant governance
structures in this industry were characterized in that period by insider own-
ership and personal control. By the beginning of the twenty-¬rst century,
however, while insider ownership still predominated, corporate control had
become “managerial.”
To explain this apparent contradiction, I analyze two dimensions “ man-
agement control systems and ownership structures “ to look at the pre-
dominant systems of corporate governance in global industries. Each of the
four quadrants of the matrix in Figure 4.1 offers an alternative combination
between management control systems and ownership structures.

12 V. N. Balasubramanyam, “Entrepreneurship and the Growth of the Firm: The Case of the
British Food and Drink Industries in the 1980s,” in Jonathan Brown and Mary B. Rose
(eds.), Entrepreneurship, Networks and Modern Business (Manchester: Manchester Univer-
sity Press, 1993).
13 Interview with Michael Jackaman, former Chairman of Allied Domecq, Somerset, 19 June
2000; Interview with James Espey, former Chairman of Seagram Distillers and former Chair-
man of IDV-UK, Wimbledon, 23 February 2000.
77
Family Ownership and Managerial Control
Industries are considered to be “entrepreneurial based” when “personal”
control and “insider” ownership characterize the predominant forms of gov-
ernance. They tend to rely on the capabilities of the entrepreneurs, who
simultaneously own and manage the ¬rms. The entrepreneurs have supe-
rior judgment, which enables them to exploit new economic opportuni-
ties.14
The predominant governance structures of ¬rms in the alcoholic bev-
erages in the 1960s, when the industry was still fragmented and family
¬rms predominated, was entrepreneurial. It is also possible to ¬nd other
entrepreneurial global industries that are highly concentrated with a small
number of very large ¬rms. The consultancy industry is an example. Multi-
national ¬rms such as McKinsey, which ranks among the world™s leaders in
its industry, are in fact owned by the entrepreneurial partners that simulta-
neously manage and control the business.
Industries are considered to be “technology based” when their predomi-
nant governance structures are characterized by “managerial” control and
“outsider” ownership structures. Firms operating in this type of industry
commonly appear in the rankings of the world™s leading industrials such as
those in the Fortune 500 and are widely studied in business history. Chandler
in Scale and Scope traces the management control systems and ownership
structures of this kind of ¬rms to technological innovation. Examples of
leading industries that ¬t in this category are the chemical and automo-
tive industries, where Ford might be characterized as the exception to the
rule.
Industries are considered to be “information based” when their predom-
inant governance structures rely on “personal” control and have “out-
sider” ownership structures. An example is the high-tech industry, where
the founders of the ¬rms are often their managers and have control over
decision taking. However, as a result of their process of growth, the ¬rms
become publicly quoted and the entrepreneurs lose control over the owner-
ship of shares, which become spread among a large number of shareholders.
Nonetheless, as the most important input is human capital, the ability of the
founders to inspire loyalty and commitment has remained important well
after they surrendered ¬nancial control. For example, Apple and Microsoft
are each still led by some of the members who founded the companies. The
Apple case suggests that these are not simply ¬rst-generation effects in young
industries. Apple tried to go for a purely managerial system when Steve Jobs,
the founder, was replaced by John Scully as CEO. The subsequent collapse
of Apple™s fortunes, even when Scully was replaced, suggests the importance


14 Mark Casson, The Entrepreneur: An Economic Theory (Oxford: Martin Robertson, 1982);
idem, “The Entrepreneur as Coordinator,” in Martin Carter, Mark Casson, and Vivek Suneja
(eds.), The Economics of Marketing (Cheltenham: Elgar, 1998).
78 Global Brands
of the entrepreneur™s vision. Apple returned to prosperity only when Jobs
returned as CEO.15
Industries are classi¬ed as being “marketing based” when the predominant
governance structures are characterized by “managerial” control and yet
have “insider” ownership structures. The alcoholic beverages and cosmetics
industries at the beginning of the twenty-¬rst century where brands are often
linked with family ownership are good illustrations.
Figure 4.1 provides an essentially static picture as it categorizes the pre-
dominant systems of corporate governance of industries at a particular
moment in time. This ¬gure can, however, be used in comparative statis-
tics if applied to the study of particular industries at different periods. For
example, the alcoholic beverages industry from 1960 to the beginning of the
twenty-¬rst century evolved from being “entrepreneurial based” to “mar-
keting based.”16
Most industries that are “technology based,” “marketing based,” or
“information based” are usually in advanced stages in their evolution, having
started by being “entrepreneurial based.” However, as already mentioned,
“entrepreneurial based” industries may also correspond to advanced stages
in their development. These processes of evolution of corporate governance
do not, therefore, necessarily converge on one particular type, but re¬‚ect
adaptations to the different requirements in these industries.
Industries that became “information based” were able to grow by keep-
ing “personal” management control systems characterized by simple orga-
nization structures and centralization of decision taking. They changed
their ownership structures into “outsider” based, when they required high
capital investments. In contrast, the industries that moved from being
“entrepreneurial based” to “marketing based” developed complex organi-
zation structures as a result of their expansion in terms of business activities
and geographical scope of operations. They became “managerial based,” but
required relatively low capital investments when compared with “technology
based” industries. They were, however, able to keep “insider” ownership as
shares remained in the hands of a small number of investors.


Marketing-Based Industries
Despite the extensive literature, there are no systematic accounts of the
wide range of combinations of ownership and control that corporations
are increasingly forming, perhaps because the Chandlerian model tends to
assume all governance is converging. By focusing on “marketing based”

15 William Gates, The Road Ahead (London: Viking, 1996); Jim Carleton, Apple: The Insider
Story of Intrigue, Egomania and Business Blunders (New York: Times Business Books, 1997).
16 A similar analysis could be made for the predominant governance structures of other indus-
tries over time, but that is beyond the reach of this study.
79
Family Ownership and Managerial Control
systems of corporate governance, this book associates the evolution of own-
ership and control in the alcoholic beverages industry with the increasing
impact of marketing knowledge in the growth and survival of ¬rms.
At the early stages of the life of a ¬rm, marketing knowledge is essentially
“sticky.”17 For example, when the entrepreneur (or founder) has an idea such
as a new brand, the routines and procedures that he creates for its imple-
mentation are “sticky” to the ¬rm. It is important to distinguish between the
concept of “sticky” marketing knowledge from that of procedures. While
procedures embody the perception of the business problems and strategic
solutions of the entrepreneur, knowledge resides in the minds of particular
individuals (such as marketing managers or the CEO of the ¬rm). In con-
trast to procedures, knowledge is not as easily shared with other people in
the organization. Procedures and routines monitor and cope with short-term
volatility and enhance decision taking and organizational actions.18 Knowl-
edge represents a strategic response to long-term challenges.
As time passes, some of the routines become obsolete and if not abandoned
may threaten the brand. If the brand succeeds, it is necessary to acquire
marketing knowledge to keep the brand alive and rejuvenate it. The manager
needs to have the capabilities to update such routines, to adapt the brand
to changing consumer preferences. While the ¬rm is still small, it is possible
for the entrepreneur to centralize the management, ownership, and control
of the ¬rm.
Once organizational complexity and diversity increases, the entrepreneur
needs to acquire “smooth” marketing knowledge by hiring professional man-
agers. These professional managers have the credentials that will allow them
to update the routines and procedures developed by the entrepreneur, and
also deal with short-term volatility. On the other hand, the entrepreneur
can concentrate on long-term issues, such as building new routines if exoge-
nous shocks occur, making existing knowledge obsolete.19 He also has more
availability for valuing brands and looking at their future earnings.


Corporate Control
National systems perspectives tend to explain family control on the basis
of the existence of illiquid markets, and vulnerable businesses, especially in
adverse economic environments. However, in the global alcoholic beverages
industry, none of these reasons explains the predominance of family busi-
nesses even in countries such as the United States. There are other reasons not

17 See Chapter 1 for a de¬nition of “sticky” and “smooth” marketing knowledge.
18 They may include procedures for the procurement of raw materials, production process,
bottling, ageing distribution system, and sales and marketing of the brand.
19 Christiansen Clayton, The Innovator™s Dilemma (Cambridge, Mass: Harvard University
Press, 1996).
80 Global Brands
directly connected with ¬nancial interests that seem to explain such trends.
They include “private bene¬ts” such as the pursuit of dominance, the ambi-
tion to perpetuate the family name, and the search for recognition, honor,
and prestige rather than performance-related pay, factors usually mentioned
in studies on the endurance of ¬rms.20
These family ¬rms succeed in separating ownership from control by keep-
ing a position on the boards, where decisions that have long-term implica-
tions in the evolution of ¬rms are taken. This is evident in ¬rms such as
Bacardi and Heineken, which in the beginning of the twenty-¬rst century
remained owned by families. However, they had switched from using family
members as managers to hiring professional managers to run their busi-

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