Emerging Wine Industry Market in Australia - Research Paper Example

Emerging Wine Industry Market In Australia Table of Contents Introduction 2 Task A 3 Australian Wine Industry 3 Porter’s National Diamond Model and Australia 4 Recommendation 11 Task B 11 Porter’s National Diamond Model 11 Conclusion 14 References 15 Introduction Over the years international expansion has been one of the most widely used strategies that are adopted for staying competitive in the business and most importantly this theory is applicable to almost any industry in the world irrespective of its nature and size. Global wine industry is such an industry where organizations have always been focusing on the international market. However, selection of the country for expansion is a crucial task for the organizations. In the present global business environment each and every organization first examines the country and situation of the respective industry in that country before making any investment. Several strategic tools are there for analyzing the industry as well as the business environment of the country. Among these tools Porter’s National Diamond model is one of the most widely practiced. However, there are other models like PESTEL and Porter’s five forces model which are also very useful. This paper is prepared for a European company that has been operating in the wine industry and now it wants to enter into the Australian wine market. The paper is divided into two sections. The first one is attempted to provide an insight of the Australia and Australian wine industry in terms of its competitiveness and capability of attracting investment. It includes an overview of Australian wine industry. Porter’s Diamond Model is used with the purpose of properly analyzing the industry. The second part contains a critical evaluation of Porter’s National Diamond Model. All the sources that are used are properly cited in the reference section. Task A Australian Wine Industry Australian wine industry is one of the largest wine industries throughout the world. In 2005 the country was the sixth largest wine producer in the world. Almost all types and styles of wines are produced in Australia. The country’s wine industry along with the wine grape growing industry has been growing significantly since 1990. According to a report that was published in 2006, almost half of the wine that is produced in the country is exported. As per the information provided by the Australian government, in 2006-07 almost 1.23 billion litres of wine was sold by Australia. Among these 1.23 billion litres, only 449 million litres were sold in the domestic market and rest was sold in the foreign market (Department of Foreign Affairs and Trade, 2008). United Kingdom is largest market where Australian wine is mainly exported to. In 2006-07 almost 269 million litres (valued $977 million) of wine were exported to UK. Apart from UK, Australia exports wine to the countries like United States, Germany, Canada and New Zealand. Wine industry is one of the largest industries in Australia in terms of its capability of generating employment. According to the government of the country, near about 28000 people are directly employed by this big industry (Department of Foreign Affairs and Trade, 2008). Quality is an important issue in case of Australian wine. State governments monitor the activities of the wine producing organizations so that a certain level of standard regarding quality is maintained. The Federal Government of the country claims that it helps the industry by taking various steps like reduction of the trade barriers (Department of Foreign Affairs and Trade, 2008). One of the main objectives of the government in this regard is to improve the operating environment for the firms. There are different bodies that control the operations of the industry. For instance, there is an organization named The Australian Wine and Brandy Corporation whose main objective is promoting and controlling the export of Australian brandy and wine (Department of Foreign Affairs and Trade, 2008). Furthermore, there is The Grape and Wine Research and Development Corporation which is responsible for making investment in wine and grape research and development. Further in-dept analysis of the industry is provided in the following part of the paper and this analysis is done by using Porter’s National Diamond Model. Porter’s National Diamond Model and Australia The national diamond model which was introduced by Michael Porter assists the firms in the process of taking strategic decisions regarding making investment in a new foreign country. In this model there are four aspects that are likely to greatly influence the firms’ decisions. These are ‘firm strategy, rivalry and structure’, ‘demand conditions’, ‘supporting and related industries’ and ‘factor conditions’. Australia and Australian wine industry can be made to undergo an in-dept analysis in the context of these four aspects. [Source: Businessmate.org] Firm Structure, Strategy and Rivalry In Australia organizations are generally of five types in terms of their structure. In other words organizations can be operated as ‘private limited company’ or ‘public limited company’ or ‘limited company’ or ‘partnership’ or ‘sole trader’. Companies that are new in the country can register themselves with Australian Securities and Investment Commission. As far as the strategies are concerned they vary from organization to organization and industry to industry. The wine industry in Australia includes almost 2300 small, medium and large sized organizations (Australian Wine and Brandy Corporation-c, 2009). In addition to these, there are several organizations which are actually the association of these wine producers. These associations are developed on the basis of the locations and nature of interests. For instance there are many state-wise associations like Queensland Wine Industry Association, Victorian Wine Industry Association and Wine Industry Tasmania Ltd (Australian Wine and Brandy Corporation-a, 2006). These associations look after the interests of the wine producers. They are responsible for providing advisory services, training and development programs. Furthermore, they are also responsible for negotiating with the state government on behalf of the producers regarding various policy and regulatory issues. Apart from these associations there are other organizations that greatly influence the industry. Two of such organizations are Australian Wine and Brandy Corporation (AWBC) and Grape and Wine Research and Development Corporation (GWRDC). These two are basically government bodies that mainly take care of export and research related issues (Australian Wine and Brandy Corporation-a, 2006). There are three important industry bodies namely Winemakers’ Federation of Australia (WFA), Australian Wine Research Institute (AWRI) and Wine Grape Growers Australia (WGGA). Major objectives of these bodies are addressing different national and international issues on behalf of the wineries, promoting the industry by running various programs, negotiating with the government and developing policy and strategic plans (Australian Wine and Brandy Corporation-a, 2006). The wine industry can be more deeply analyzed by using Porter’s five forces model. According to this model there are five important forces that control the structure of most of the industries in the world. These forces are bargaining power of buyers, suppliers’ bargaining power, rivalry among the players, threat of new player and threat of substitutes. In Australian wine industry buyers have significant bargaining power. Institutional buyers have more bargaining power as compared to retail buyers. As far as suppliers are concerned they have ‘low to moderate’ power to bargain with the wine makers. The principle reason behind this is that there is large number of grape growers and as a result volume of supplies is continuously rising but unfortunately demand is not growing in the domestic as well as international market (Sheales et al, 2006). As far as selection of suppliers is concerned, wine producers in Australia have wide choices and hence they have more bargaining power over their suppliers. Threat of new entrants is low in the Australian market as there are already several players in the industry. Any new company has to compete with the players that are already established and with the falling demand it is likely to be very difficult for any new entrant to gain market share. Threat of substituent is gradually increasing as demand of wine is found to be declining. It may happen that in future wine is replaced by some other drinks. As far as competition is concerned the industry is highly competitive. One of the main reasons behind such fact is the presence of huge number of wine makers. Moreover, various research reports suggest that the companies are facing several difficulties in maintaining their profitability and this is happening in a market condition where demand relatively flat and supplies are continuously increasing (Sheales et al, 2006). According to the reports of the government of Australia wine consumption in the financial year 2007-08 was reduced by 1%. In the same year total sales of wine was declined by almost 5% (Jackson, Stokes & Dyack, n.d.). Another important aspect is that import of foreign wine is increased. According to reports, in 2007-08 imported wines represented almost 11% of total domestic wine sales (Jackson, Stokes & Dyack, n.d.). It is also observed that tastes of Australian wine consumers is changing significantly and it is reflected by the facts like increasing import of foreign wine and declining sales of Australian wine. In simple words it can be said that the situation is quite complicated for a company that wants get into the Australian market for the first time. Wine Imports by Australia [Source: Australian Government] Demand Conditions As it is discussed earlier that the demand condition in Australia is not as great as it was few years back. In the report that was published by Australian Wine and Brandy Corporation in 2006, it was forecasted that by 2010-11 demand of wine in the domestic market will be around 504 million litres (Australian Wine and Brandy Corporation, 2006). However, it is found that, since 2006 the demand is continuously declining. In 2006 almost 435 million litres of wine were sold in the domestic market of Australia, but in 2007 this figure came down to 431 million litres and in 2008 it was around 426 million litres (Australian Wine and Brandy Corporation-b, 2008). Furthermore it is also found that, not only in the domestic market, Australian wine is loosing its popularity in the global market as well. Australian government has accepted this fact. According to their report the export markets are becoming more and more competitive. The competition is getting intense with the deteriorating conditions of the global economy and Australian wine is facing tough challenges in such situation (Jackson, Stokes & Dyack, n.d.). Moreover, consumers in Australia are getting more attracted towards the global and this support the fact that the preferences of domestic consumers are going through a significant change. [Source: Australian Wine and Brandy Corporation, 2008] Factor Conditions It is true that Australian wine producers are not in great conditions in terms of their profitability, but one fact has to be accepted that wine industry is one of the most crucial industries in the country and this is only possible when there are enough resources available for the industry. Australia is one of the largest producers of wine grape. There is large number of wine grape farms in the country. For instance, in the Riverina region there are more than 400 farms. Furthermore, in the McLaren Vale region there are almost 300 farms (Sheales et al, 2006). In 2001, almost 366,000 acres land was used for the production of wine grape (Cellarnotes.net, n.d.). The government gives enough importance to the wine industry. As mentioned earlier there are several bodies that look after the industry and its interests. Moreover the government provides ‘tax incentives’ to the wine grape producers. Production of grapes has significantly increased during the period of 1995-2005. At the same time price of the grapes has declined remarkably. [Source: Abare Research Report 06. 16, 2006] As far as human resources is concerned they are very much skilled, otherwise such rise in the volume of production would not have been possible. Moreover there are organizations like Grape and Wine Research and Development Corporation (GWRDC) that takes care of the research and development side. Different state-wise associations invest significant amount of resources in providing training and development. Supporting Industry The wine industry in Australia has been receiving sufficient assistance from various ancillary industries. The main supporting industry in case of Australian wine industry is the wine grape growing industry and it is mentioned earlier that it is quite a large industry that is capable of supplying the raw materials to the producers on a constant basis. Various reports of the government suggest that there are huge amount of inventories of raw materials are maintained in order to deal with any kind of crisis situation (Sheales et al, 2006). Recommendation Considering the above analysis it can be recommended that the organization that is willing in entering the Australian market should make its entry without wasting time. It is time when demand of Australian wine in Australia is declining as the consumers are inclining towards the foreign brands. As a result it is a great opportunity for the European company to make investment in the Australian market. It is true that the industry is highly competitive, but competition can be won by taking effective strategic decisions, properly utilizing resources and making significant capital investment. Initially the firm should make some strategic alliances with some of the top wine grape growers. It can offer higher prices to the farmers as the present price of wine grape in the country is quite low. Furthermore, the company should make itself associated with various industry bodies so that it gets all the supports and facilities from the government and other important organisations. An extensive marketing communication program should be developed and implemented in order to promote the wine brands after properly identifying the target consumers. Task B Porter’s National Diamond Model The national diamond model which is developed by Michael Porter is one of the most useful models that help the firms in making various strategic decisions regarding the selection of a particular country for making investment. Organizations use this model while choosing one nation over another. The model is comprised of four determinants which are ‘factor conditions’, ‘demand conditions’, ‘supporting industries’ and ‘firm structure, strategy and competition’. Factors conditions are referred to those factors that are likely to be exploited by the companies. Some of these factors are skilled workforce, availability of raw materials etc. The demand condition is referred to the level of demand of a particular product in the domestic market. It can be determined by comparing the demand of the product in the international market with that of in the domestic market. Related industries are crucial for the sustainable development of a particular industry. If supporting industries are competitive in nature, the mother industry is likely to get more innovative materials that are cost efficient too. The last determinant i.e. ‘firm structure, strategy and rivalry’ is referred to the management systems and structure that are followed by the organizations in a particular country. One of the major advantages of this model is that it can be used to analyze any country in the world. It is not a region specific or country specific model. It is a general model that is applicable to any country and its market. Furthermore, it assists the decision makers to have a clear understanding regarding the factors or resources that are needed to be properly exploited in order to gain competitive advantages. The model can also be used during the process of internationalization when business leaders have to identify whether the conditions in the home country are capable of creating competitive advantage on an international level. Despite of having several advantages, the model is criticized by the experts like Penttinen and D’Cruz. According to them the diamond model is not suitable for the open economies that are small in size and that greatly depend on the other economies (Beamish and Killing, 1997). Porter himself faced difficulties while applying the model on the small economies and on the industries that are geographically dispersed. Another limitation of this single diamond model is its poor capability of prediction. According to Cartwright, who tried to use this model while studying New Zealand, found that it is not a useful model for the internationally competitive industries which are land-based and export dependent (Cho and Moon, 2000). Furthermore some experts believe no model can survive without being corrected and revised. According to them, Porter’s model can be modified and made into a ‘multiple diamond’ one (Cho and Moon, 2000). In Porter’s national diamond model there is an exogenous factor – ‘Government’. Tong-sŏng Cho and Hwy-Chang Moon believe that the government factor can be integrated into the actual model and as a result the shape of the model will be a pentagon. However, according to Porter, government’s main role is to influence the four determinants and hence it should stay out of the actual diamond (Cho and Moon, 2000). [Source: Anonymous] Conclusion Australia and Australian wine industry are found to be highly competitive for a new entrant. After analyzing the country and the industry by using Porter’s national diamond model and Porter’s five forces model it can be said that the European wine manufacturer may make its entry into the Australian market if it is ready to invest significant amount of resources. The national diamond model is considered to be a useful strategic model, but it has received several criticisms from different industry experts. However, it is expected that despite of these criticisms the model will be widely used and if necessary it may be even modified in near future. References Australian Wine and Brandy Corporation, 2006, Lower harvest yield forecast for 2007, but current plantings adequate to meet projected demand, [Pdf] Available at: http://www.wineaustralia.com/australia/Portals/2/MediaReleases/SupplyDemand2006MediaRelease.pdf [Accessed on December 13, 2010]. Australian Wine and Brandy Corporation-a, 2006, Australian Wine Sector Organisations, [Pdf] Available at: http://www.wineaustralia.com/australia/portals/2/pdf/wineorgflowchartNov2006.pdf [Accessed on December 13, 2010]. Australian Wine and Brandy Corporation-b, 2008, Australian Wine Sector At A Glance, 2008, Wine Facts, [Pdf] Available at: http://www.wineaustralia.com/australia/Portals/2/pdf/AustWineSector_At_a_Glance_CY_08rev.pdf [Accessed on December 13, 2010]. Australian Wine and Brandy Corporation-c, 2009, Wine Facts, [Pdf] Available at: http://www.wineaustralia.com/australia/Portals/2/pdf/General%20factsheet.pdf [Accessed on December 13, 2010]. Cho, T. and Moon, H. 2000, From Adam Smith to Michael Porter: evolution of competitiveness theory, World Scientific Cellarnotes.net, No Date, Australia, [Online] Available at: http://www.cellarnotes.net/australia.html [Accessed on December 13, 2010]. Beamish, P. W. and Killing, J. P. 1997, Cooperative Strategies: North American perspectives, Lexington Books Department of Foreign Affairs and Trade, 2008, The Australian wine industry, About Australia, [Online] Available at: http://www.dfat.gov.au/facts/wine.html [Accessed on December 13, 2010]. Jackson, T. Stokes, T & Dyack, B. No Date, Australian Commodities, Australian Government, [Online] Available at: http://www.abare.gov.au/interactive/09ac_mar/htm/wine.htm [Accessed on December 13, 2010]. Sheales, T et al, 2006, Australian Wine Industry Challenges for the Future, Abare Research Report 06. 16, [Pdf] Available at: http://aaa.ccpit.org/Category7/mAttachment/2006/Dec/14/asset000070002011270file1.pdf [Accessed on December 13, 2010]. Read More