Title Page
Executive Summary
Contents
1.0 Introduction
Diageo plc is a multinational manufacturer and distributor of alcohol products. They are the owner of many well-known brands such as Johnnie Walker, Crown Royal, Smirnoff and Guiness. Currently, Diageo is operating in approximately 180 countries in the world. (marketline 2015) This report will aim to explain and analyze the influences of external factors and their importance to the business of Diageo and provide some critical suggestions to the organization to improve its performance. 2.0 Task 1 - A brief overview of the main external factors
Diageo plc divides their international market into 5 main different segments base on geography: North America, Western Europe, Africa, Eastern Europe and Turkey, Asia Pacific, Latin America and Caribbean. In financial year (FY) 2014, the company has a significant loss to compare with FY2013: 9.2% in overall revenues, 19.9% in operating profit and 14.5% in net profit (marketline 2015). According to Ivan Menezes, chief executive of Diageo, the flop in revenues was the consequence of challenges from macroeconomics and market. (Eads 2014) The FY2014 annual report shows that there were significant declines of recorded sales in all 5 segments of the business. It is undeniable evidence that external factors create many difficulties for the business. Therefore, this report aims to explain the impact and importance of some main external factors such as economic factor, politics and social factor to the business of Diageo.
2.1 Economic factors
The economic environments include monetary policy, exchange rates, inflations, unemployment rate and government spending (Fee 2013).
As a multinational company, exchange rate is a frequent issue. Diageo has the head office in UK and their annual report uses pounds as the main currency. (marketline 2015) Therefore, they have to exchange every other currency to pounds. Any movement in the value of each currency also create a gain or loss which impacts directly on the profit of the company. For example, currently, 1 USD equals to 0.66 pounds. Assume that after a month the value of pounds raise and 1USD only equals to 0.6 pounds. Then for each 1 USD converts to pounds, they will lose 0.06 pounds after a month. Normally, the company needs to exchange millions dollars to pounds and the loss is result in a lot of money. In fact, for FY2014, exchange rate created a loss of £797 million of net sales and £300 million of operating profit. The most significant movements were Venezuelan bolivar, USD, Turkish lira and South African rand. (Malpure 2014) The loss or gain cause by exchange rate does not reflect the effectiveness of business activities but it impacts directly to the profit and sales which are stated in Income statement and Cash Flow statement. Investors may misunderstand the loss caused by ineffective activities of the business and stop investing in the company. As a result, the stock price will go down and the company will lose a lot of money. To prevent it happens, Diageo already puts a part about gain/loss as explanation along with Income statement.

2.2 Political factor
The political factors are all the actions of the government that have impact on the business of an organization. It includes the policies and their implications that affect on the business (Fee 2013)
The stability of the government is definitely one of the most concerned issues of the organization because it is the basis for a steady development of the business. In countries like Libya and Thailand which are facing wars and revolutions, the business nearly has no chance to develop. Firstly, alcohol industry is awfully damaged by wars and revolutions because the factories could be destroyed and the demand for alcohol rapidly decline. Secondly, it is too difficult to predict which party will take control of the nation and which policies they will apply so it is too risky to invest in. In fact, as consequence of political issues in Thailand, the sale of Diageo in this country had decreased by 24% which contributed significantly to a decline of 14.3% in total sales of Asia Pacific segment (Paskin 2014). On the other hand, in long peaceful country like Vietnam, the business has stable environment to develop with a predictable future.
Another popular political issue is government policies. Many government policies aim to impact the economy or government system but enterprises also need to take into account their broader implications which can create opportunities and threats. Diageo or alcohol industry in general may not be the target of some policies but they could have indirect impact on the business in which the enterprise needs to prepare. For example, China anti-extravagance measures affected significantly on the performance of the company. Shui Jing Fang is the most suffered brand with a 78% decrease in net sale which contributed mostly in the net sales of Diageo in China (Diageo 2014). The anti-extravagance measure was created to prevent corruption in China. How did it drown Diageo business? According to Oliver Duggan, in the past, businesses in China used to gift their guests with luxurious presents like watches, wines and foods which create an extremely big market for luxury firms like Diageo. After Chinese President Xi Jinping elected, he had many actions to prevent corruption such as announcing a long list of “do’s and dont’s” for state officials, preventing affixing authorised plates for government and military vehicles to luxury brand and a ban on advertising promoting the luxury gift-giving. As a consequence, 42% of enterprises reduced their spending on entertainment. The luxury drink market which used to make lots of money from gift-giving, had its profit reduce by 70%. Diageo was also a victim of China anti-extravagance campaign.

2.3 Socio-cultural factor
Socio-cultural environment contains a wide range of factors such as ethnicity, ethics and morals, religion, lifestyles and attitudes to different issues (Fee 2013)
One socio-cultural factor that the business need to concern is religion. There are many religious people not allowed to drink like Muslims and Buddhists. However, it does not mean that every country has a lot of Muslims and Buddhists is not a market for alcohol. For example, the main religion in Vietnam is Buddhism but Vietnamese also drink a lot. The reason is that religion is not the highest belief that controls the mind of Vietnamese people so they do not follow all the rules of Buddhism like becoming vegetarians. In some country like India, Indonesia and Middle East countries, religions and Gods are absolutely their ideal living. These people always believe and do what their Gods told them to do. If Muslims in these countries are not allowed to drink, almost all people do not drink. Hence, Diageo cannot make money in these markets.
Overall, in all external factors, Diageo should pay more attention to economic factors, political factors and socio-cultural factors. The company should clarify the gain/loss from exchange rate to avoid misunderstanding from financial information users, invest in countries that have long time stability, many incentives policies to the business and avoid investing in religious countries that prohibit drinks.

3.0 Task 2
Government regulations of the market is also an important factor relate to the ability to sustain the business in that country. As a company makes money in a country, Diageo must follow all the regulations to avoid penalties and reducing reputation. What is more, as a multinational company, Diageo also needs to cope with the change in different market regulations in different countries. It creates many opportunities and threats for the business. This task is aimed to clarify some main regulations that influence significantly on the business and how the company react. More over, this task will analyze what Diageo did right or wrong to find out which areas need to be improved and suggest suitable solutions.
3.1 Analysis
Alcohol has received lots of attentions from every government in each market it enters because of its effects cause to social life. Annually, there were approximately 88,000 people die and 10,076 deaths caused by drunk drivers in USA from 2006 to 2010 (Centers for Decease Control and Prevention n.d.). Globally, alcohol consumption contributed 3.3 million deaths equally estimated 6% of all deaths (Global status report on alcohol and health 2014, p. XIV). The most well-known decease caused by alcohol, non-communicable deceases (NCD) became a global target of World Health Assembly. In 2012, this organization set up a goal to reduce avoidable mortality from NCD by 25% by 2025. (Horton 2013) Many countries are warned about the harm of alcohol to the future of human health and well being. They start to reduce the approach of alcohol to their people by using regulations. The most popular and effective regulation is restriction on advertising and sales of alcohol.
In many countries, they make it illegal to promote alcohol on TV and radio, on broadcast advertisements with any relation to children, driving, sports and alcohol abuse. This ban is very popular in European countries whose authorities put alcohol advertising on extremely heavy pressure. (marketline 2015) Further more, the governments in some countries also protect young people from harmful impact of alcohol by restricting the age of audiences. For example, the Advertising Standard Authority of UK defined that “alcohol ads must not be directed at people under 18 or contain anything that is likely to appeal to them by reflecting youth culture or by linking alcohol with irresponsible behaviour, social success or sexual attractiveness” and “ Alcohol ads are banned from appearing in and around programmes commissioned for or principally targeted at audiences below the age of 18, as well as programmes likely to appeal particularly to audiences below the age of 18”.
These regulations have many negative influences on the business of Diageo. Firstly, alcohol ban advertising reduces a huge number of audiences who are approachable. TV is the most popular advertising channel which also has a huge number of audiences. The alcohol advertising ban makes Diageo lose so much money since the company already lose a lot of potential customers from TV audiences.
Secondly, this regulation also lessens the impact of high brands which also reduce competitive strength of the company. Diageo is the owner of many famous and luxury brands in spirit market. Most of them are international brands and have brilliant quality and long history. It is an absolute competitive advantage to compare with any local brand. However, the local brands have an advantage that helps them compete confidently with Diageo. The local brands have been in the market long enough to approach a wide range of drinkers. On the other hand, even Diageo has many big international brands, the enterprise enters the market later and being restricted by the advertising prohibition, it becomes very difficult to the firm to be realized by a wide range of customers. It takes lots of money and time. Then the impact of high brands still helps Diageo to attract customers but without the help of advertising, it cannot demonstrate the effectiveness as expected.
Finally, alcohol advertising prohibition can reverse a market from being huge potential into a suicide investment if the company does not have immediate and suitable reaction. The alcohol advertising prohibition laws in Turkey in 2013 created many troubles for Diageo. In 2011, Turkey was a potential and attractive growth market. The International Monetary Fund forecasted Turkish GDP increased 5% thanks to developing in Foreign Direct Investment and disposal incomes. The company also found out that estimated 60% of the population were under 35 years old and 800,000 new legal-age drinkers participate in the market annually. In order to penetrate in the Turkish market, Diageo decided to make an acquisition of Mey Icki with a £1.3 billion deal. It was a great strategic move by Diageo. At that time, Mey Icki contained 70% share of the local spirit market. The main product of Mey Icki is raki, a traditional Turkish spirit. The raki market in 2011 had an annual rate of growth approximately 8% which is equivalent a 5-year historical growth compound. This successful deal provided Diageo the dominance position in Turkish spirit market. The company contained the highest market share in the local market, a nationwide distribution channel which Diageo aimed to introduce others premium brands to Turkish market like Smirnoff and Guinness (Gorham 2011) However, in 2013, the Turkish government passed through the laws which prevent alcohol products from being advertised and sold at late night (10 pm – 6 am). It was a serious surprise attack on the plan of penetrating in Turkish market. The enterprise had to deal with many severe problems caused by the new laws. In 3 weeks after the prohibition was passed, 5.3% of Diageo stock value was gone. (bloomberg 2013) Mey Icki, the fourth most-advertised alcohol brand in Turkey lost their main promotion which meant the main purpose of Diageo when buying the brand, using traditional brand to promote the other premium brands, collapsed.

3.2 Critical evaluation

3.3 Areas for improvement

Reference List

Appendices
Appendix 1 – Company Profile
Appendix 2

References: