Economic Analysis Of Schoolhouse Lane Estates Winery - Essay Example

Economic Analysis Of Schoolhouse Lane Estates Winery Table of contents 1. Overview of the situation.........................................................2 2. Statement of the main problem...............................................2 2.1 Level of analysis..................................................................2 2.2 Problem type........................................................................2 3. List of critical factors...............................................................3 3.1 Competition..........................................................................3 3.2 Changing consumer tastes....................................................3 3.3 Changing market trends.......................................................3 4. Alternative solutions.................................................................3 4.1 Differentiation.....................................................................3 4.2 Diversification.....................................................................4 4.3 Invest in current market......................................................4 5. Recommendation....................................................................5 6. Rational and justification.......................................................5 7. References...............................................................................6 8. Appendix 1- Porter’s five forces model................................7 9. Appendix 2- Porter’s generic competitive strategy.............8 10. Appendix 3- Ansoff’s Matrix................................................9 11. Appendix 4- BCG matrix......................................................10 1. Overview of the situation The Schoolhouse Lane Estates winery was established in 1989 by Jan from the proceeds of money inherited after the death of her uncle. From humble beginnings as a pilot project, the 1994 harvest of grapes offered a new ray of hope since they were crushed to produce wine which was successfully sold. Schoolhouse Lane Estates’ wines including Cabernet Sauvignon, Merlot, Meritage and Chadonnay were all received well on the market which prompted the proprietor to acquire a winery in 1996 as business was poised for growth. Schoolhouse Lane Estates continued to expand until 2004 when a negative growth in the industry was witnessed. Thus, the case study opens with Janess (Jan) Thaw having considerable difficulty responding to information she had just received from her cousin, Stan White pertaining to the state of affairs in the wine industry which had began to decline owing to reduced demand of wines selling above $25 per bottle at retail price. This is against the background of Thaw’s intended plan to expand her Schoolhouse Lane Estates winery located in Cutchogue on the North Fork of Long Island. This brings uncertainty to her business strategy following a negative development in the wine industry. 2. Statement of main problem 2.1 Level of analysis The level of analysis of Schoolhouse Lane Estates winery is Level 1 since it is related to industrial issues. Of great concern is the fact that the wine industry is mature where there are many competitors ranging from vineyards owners as well wineries. This shows that this is a lucrative industry in which competition exists as illustrated by Porter’s analysis in (Appendix 1). 2.2 Problem type The problem to be overcome by Schoolhouse Lane Estates winery is that of competition where there has been a decline in the demand of wine seen as expensive owing to large supply on the market. (Porter’s analysis in Appendix 1 illustrates this). 3. List of critical factors 3.1 Competition The wine industry is characterised by strong competition. In 2004, it can be noted that there were 56 Vineyards and 30 wineries and 20 largest firms produced approximately 90 % of all American wine. During the same period, it can be noted that imports were also gaining popularity on the market which further shows that there are many actors in the market. 3.2 Changing consumer tastes It can be noted that during the late 90s, white and blush/rose wine sales declined to about 40% and 21% respectively where red wine considerably gained an increase in its sales. It is important for the marketers to be aware of the consumer needs and wants so as to be better positioned to satisfy them profitably. 3.3 Changing market trends It can be noted that the market is dynamic and is susceptible to inevitable changes such as the macro environment. Consumers’ spending is also greatly influenced by monetary factors as well as the nature of products available in the market. The rising demand for red wine has somehow affected the behaviour of the consumers. 4. Alternative solutions 4.1 Differentiation: In order to survive in the long term, Porter (1985) has argued that a firm needs to have sustainable competitive advantages. Differentiation is one viable option for Schoolhouse Lane Estates. (See Appendix 2). Advantages Disadvantages Uniqueness in the market May be difficult to attain Keep pace with competition Requires more money on investment Market strengthening Customers may lack interest An organisation with differentiated products is unique in that its products are likely to appeal to a large number of customers. This greatly enhances the organisation to keep pace with the changing market environment in the wine industry ensuring its competitiveness. However, to be purely unique in the market requires a lot of capital injection which may be costly to the organisation. 4.2 Diversification Other competitors have a wide range of product offerings hence the need for Schoolhouse Lane Estates to diversify its products. Appendix 3, Ansoff’s matrix suggests that diversification is one viable option in a competitive environment Schoolhouse Lane Estates can diversify its product range by developing new products such as wine that goes with meals for all ages. Advantages Disadvantages Product expansion Lack of expertise Likely to attract more customers Capital needed may be too high Diversification will lead to product expansion as the organisation will seek to introduce more products on the market that will attract the other customers. However, of great concern is that there may be lack of expertise among the people involved in spearheading the initiative which is also capital intensive hence expensive to carry out. 4.3 Invest in current market Schoolhouse Lane Estates can leverage on investing on the current market so as to be better positioned to strengthen it even in the face of competition that may exist. Advantages Disadvantages High chance of market dominance Cost of investment can be too high High chances of increasing market share Likely chances of strong competitors This will enable it to dominate the market if properly implemented since it will focus its efforts in well known areas which will be advantageous to its strategic position in the market. However, the cost of undertaking such an investment can be enormous which can be difficult to offset the costs incurred against the background of strong competition. 5. Recommendation Alternative solution 3 is highly recommended since it will allow Schoolhouse Lane Estates to uniquely grow in the market as well as better positioned to venture into other new markets not yet discovered. 6. Rationale and justification As noted already, there are old players in the industry and the potential for new players as well is unlimited. Given that competition in the market is something that is healthy in the business environment, Schoolhouse Lane Estates can entrench its position in the market through attempting to differentiate its products as one of the most viable options. This gives it the opportunity to be unique and offer products of value to the customers. This will enable it to capitalise on the existing markets as well as penetrating potential markets where differentiated products are likely to appeal to new customers. Leveraging on existing markets is advantageous in that there are already some customers in the market and there would be likely chances of attracting new customers which will positively contribute to the revenue generated by the organisation and ultimately its profitability. Given that the wine industry is now mature, there is need to devise new ways of reinvigorating the market. Effective marketing strategies such as marketing communication through the use of such tools as advertising, personal selling, event marketing, word-of mouth and public relations is very important in attempting to capture the market. Appendix 4, BCG matrix attempts to illustrate the different stages in which the industry has reached as well as suggesting the best step to take as far as market growth is concerned. The wine industry has reached maturity stage hence the need for a holistic approach in turning all the stars into cash cows which will ensure a steady flow of revenue though growth will be low. References Armstrong, G. & Kotler P.(1996) Principles of Marketing, 7th Edition, Englewood Cliffs: Prentice Hall. Ansoff’s Matrix (N.D.) Retrieved on 31 August From: www.learnmarkerting.net McCarthy J.E & Perreault W. D. (1996), Basic Marketing: A Global Managerial Approach, 12th Edition, Irwin McGraw-Hill, USA. Porter’s Five Forces Model, Accessed on 31 August 2010 from: http://www.12manage.com/methods_porter_five_forces.html Porter's Generic Competitive Strategies (ways of competing), Retrieved on 31 August 2010, from: http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html Porter M.E. (1985), Competitive Advantage; Creating and Sustaining Superior Performance. New York: The Free Press. Randall G. (1994), Trade Marketing Strategies: The Partnership between manufacturers, brands and retailers, Butterworth-Heinemann, UK. Robinson W (1997), Strategic Management and Information Systems, 2nd Edition, Prentice Hall, UK Smith P.R. (1999), Great Answers to Tough Marketing Questions, Kogan Page, UK. Strydom J. (2004), Marketing, 3rd Edition, Juta & Co Ltd, SA. Appendix 1-Porter’s Five forces Model An article entitled; ‘Five competitive forces -Porter,’ the five forces model of Porter is, “an outside in business strategy tool that is used to make an analysis of how attractive an industry is,” (http://www.12manage.com/methods_porter_five_forces.html). This is often regarded as a reliable business tool in most cases (McCarthy J.E & Perreault W. D. 1996). Fig 1. Porter’s Five Forces Model Entry of competitors In this case, there is entrance of other actors. In business wise, no one company should enjoy monopoly in the market. Threat of substitute This depends on the probability of a substitute overtaking the product already in the market in terms of cost. Can the service or product be easily replaced? Indeed there are many substitutes. Bargaining Powers Of Buyers This depends on the interests and capacities of consumers on certain products. In this case focus is the company in question’s ability to capture the saturated market. Bargaining powers of suppliers Depends on how strong the sellers are. In this case there are many suppliers of wine. Rivalry among the existing players There are many actors apart from Schoolhouse Lane Estates as noted in the case study. Source http://www.12manage.com/methods_porter_five_forces.html The table above shows the five competitive factors that are likely to affect a business and will be used in this report to illustrate how the above mentioned companies are affected by these competitive forces. Appendix 2-Porter’s Generic competitive strategies Competitive Advantage Source: http://www.ifm.eng.cam.ac.uk/dstools/paradigm/genstrat.html University of Cambridge- Institute of Manufacturing Retrieved 31 August 2010. 1. A firm chooses to become the low cost producer in the industry in cost leadership. 2. In differentiation strategy a firm chooses to be unique from others. 3. In cost focus, a firm seeks a cost advantage in its target segment. 4. In differentiation target, a firm seeks to be different in its target segment. Differentiation In a differentiation strategy, an organisation seeks to be unique from other competitors in the industry where it offers products or services that are valued by the customers. For instance, Schoolhouse Lane Estates should strive to select one or more products with attributes that are perceived as important by the customers and then attempt to uniquely position itself in the market in order to meet such unique needs. Appendix 3 Ansoff’s Matrix Present Products New Markets New Source: www.learnmarkerting.net 1) Market penetration seeks to increase the sales of the present product through reduction of price or embarking on a high promotional drive. 2) Product development aims at developing new products in the market which can go hand in hand with the existing product to increase the market share. 3) Market development is concerned with selling the existing product to new market segments. 4) Diversification entails innovation of something new. Appendix 4- BCG Matrix Relative market share High (Cash generation ) Low High Market growth rate (Cash usage) Low a) The stars can be costly in terms of communication as the wine industry is getting mature but this SBU has great potential for Schoolhouse Lane Estates once the product has been accepted. In its drive to expand its business, these stars can be converted to cash cows which provide a steady revenue flow. b) The cash cows provide a steady revenue flow as they simply make money having a high market share though there will be low growth. This market is growing slowly but generating cash. There is little need of stressing about investment issues. In the case of Schoolhouse Lane Estates, this cash generated can be used to invest in other growth strategic areas such as market research. c) The aspect of national and international market is growing in the wine industry and this can be considered to be question mark because it has a small market share and the market is highly growing. d) Dogs: According to the case study, School House Lane Estates does not have any dogs which are a small market share in a mature market as evidenced by a steady performance of its products in the market. Read More