7928IBA-CSD-58999.pdf
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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
eweries
over the past several months. McMullen needed to determine whether or not these
incentive systems were properly designed to ensure that the
eweries 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 We
er (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 XXXXXXXXXX.
IMPLEMENTING STRATEGY, STRUCTURE, AND SYSTEMS 349
Tim Clissold (President) - a physics graduate from Cam
idge 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 spu
ed 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
eweries was expected to be
educed 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
e 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
ewing 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
ewing 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
ewery joint ventures. This gave
ABC the mandate to support three different, yet related,
ewing facilities. These
eweries 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
eweries was cu
ently running at about 250,000 tons per
year.)
ABC was organized into separate corporate-level support functions which included mar-
keting,
ewing and quality control, operations services, financial control, and new
usiness 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
ewing 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
eweries that separate produc-
tion facilities did not mean separate companies. Rather, they were part of the same
ewing 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
eporting 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
ewing companies in China, with its origins dating back
to 1915. Like most
eweries in China, Five Star originally served its local markets, the
352 INTERNATIONAL MANAGEMENT BEHAVIOR
main one being Beijing and the su
ounding 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
ewers 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 confe
ed special privileges. For example, in 1957, Chinese Premier
Zhou Enlai decreed that Five Star was to be the exclusive beer supplied at all State
anquet .. , thus
inging 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 te
itories 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 te
itories 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 te
itories within the
core areas