Leadership & Management

The Rise of the Mighty Microbrew

Researchers explain how industries dominated by large firms actually create an environment where smaller specialists can thrive.

August 01, 2002

| by Cherian George

Twenty years ago, the number of brewing firms in the United States was only around forty. It looked like an open-and-shut case of industry concentration. Management guru Michael Porter, in his classic book Competitive Strategy, cited beer brewing as a typical case of an industry in which economies of scale created high barriers to entry. Then, a funny thing happened. More and more firms entered the market. They were seemingly undeterred by the dominance of Anheuser-Busch, Miller, and the like. From 43 firms in 1983, the number of breweries operating in the United States rose to more than 1,400 by mid-2000.

For Glenn Carroll, the story of brewing is no aberration. The life cycles of various industries — ranging from airlines and auditing to music recording and newspaper publishing — tell the same paradoxical tale. Increased dominance of large firms actually creates an environment that is hospitable to the entry of smaller, specialist organizations. In the case of brewing, almost all the new entrants in the last two decades have been “microbreweries:” small firms that concern themselves with craftsmanship and taste.

With Anand Swaminathan of the University of California, Davis, Carroll has studied the emergence of the microbrewery movement to try to understand its dynamics. Carroll and Swaminathan use the idea of “resource partitioning,” which looks at how organizations target different segments within a market. Generalist companies tend to go for the market center, where resources — namely customers — are most abundant and which promises increasing returns to scale. Competition is fiercest there, and in line with conventional wisdom, the larger firms tend to kill off the smaller ones. However, the winning firms may not take over the entire market segments of the losers. This is because their target areas may not have been identical in the first place. Although all had an eye on the market center, some may have been slightly more downmarket, and some more upmarket, for example. The surviving firms may find it too costly to spread their efforts to cover the segments freed up by the death of their competitors. These spaces become available for smaller specialist firms to colonize.

Thus, concentration in the brewing business was associated with what some called pejoratively “industrial beer” — brands with virtually indistinguishable taste. Small, craft brewers moved in to provide consumers with a greater variety in taste, color, foam, alcohol level, and serving temperature. “The people behind the microbrewery movement, in an almost moralistic and evangelical way, thought that beer had become disgusting,” Carroll says. The movement has given the U.S. industry more firms and more product diversity than even Germany, which has a strong reputation for beer quality and is one of the world’s highest per-capita consumers of the beverage.

In their study, Carroll and Swaminathan introduce a twist to the resource partitioning theory. The market space cannot be thought of in terms of entirely objective product characteristics, they say. Instead, the appeal of microbreweries can be fully understood only by referring to cultural factors. They note that after observing the specialist market double annually while the overall beer market remained fairly flat, major breweries tried to develop their own specialty beers. Some of these products were as good as the microbrews and sometimes more consistently so. Yet the large breweries were unable to stem the tide of small firms. The microbreweries’ very identity as small-scale, underdog producers seems to give them a competitive edge in the specialty market. Catching on to this, major breweries have gone so far as to conceal their links to their specialty labels or to use contract manufacturers. On the other side, the microbrewery movement tries to expose these corporate links and guide consumers toward the genuine craft brews.

The researchers have found that fans of microbreweries react strongly against the mass producers and value the “authentic” quality of craft beers, which are perceived as standing for values other than just profit. Consumption of little-known craft brews also is associated with expertise and thus a certain social status — the parallel of being an aficionado of wine, cheese, or music.

This identity factor does not work the same way in all industries. In the airline industry, for example, small affiliates have found it beneficial to flaunt their ties with the giants (such as American Eagle with American Airlines). Even within the beer industry, the preference for handcrafted brews is not universal. In Hong Kong, the researchers found, traditional production is not romanticized as it is in the United States. Instead, home brewing is remembered by the locals as a source of irregularity in quality and even hygiene.

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