Analysis and Consideration Prior to Developing Operations in Australian Wine Industry - Research Paper Example

Running head: Analysis and consideration prior to developing operations in Australian wine industry Analysis and Consideration Prior To Developing Operations in Australian Wine Industry Insert Name Insert Grade Course Insert Tutor’s Name 25 November 2010 Analysis and Consideration Prior To Developing Operations in Australian Wine Industry Introduction This initial possibility report analyzes the practicality of establishing Seasoned Wines Company in Australia. The report used the porter’s theory of international trade to analyze the industry’s competitiveness and attractiveness. For a country to have an edge in competition, it should be capable of innovating and upgrading, and be driven by; firms strategies, structure, rivals, factor conditions and demand conditions, and finally, related and supporting industries (Howard & Merrett, 2007, p.196). The report looks at resources available, labor, market of wine products, competitiveness, and attractiveness of setting up the company. The recommendations given will aid the company to settle and establish itself without many problems. In addition, the techniques used to do this study include evaluation of other wine companies, government’s policies, and other deterministic factors. Here, competitiveness refers to the forces that are likely to hamper productivity while attractiveness refers to profitability of a business venture by a company. The continent has good climatic conditions for growing vineyards, a rich cultural heritage of wine making and skilled work force. Moreover, most of the wines industries and vineyards are owned by families, with a few commercial plantation and firms. Background of Australia wines industry Australia produces three percent of the world’s wine, and is the second to Italy largest wine exporter country (Allen, 2003, p.43). Primarily, the wine industry in Australia is experiencing rapid growth and international recognition in the present days (Gibson, 2010, p.301). This nation has some of the world’s most proficient winemakers, mainly based in the southern region. The industry highly depends on the export especially to the United Kingdom, Canada, and New Zealand. (Kym, 2004, p.264) The common regions of wine production are south and west Australia, Victoria, and New South Wales, which have a wide range of grapes produced. Grape production Australia is largely a tropical region; however, some parts such as the south have warm temperate and cooler climates (Gibson, 2010, p.301). Wine production is done in the cooler region of the country. Needless, other regions without the conducive climate for vineyards growing have used methods like irrigation that facilitate production of grapes. The Shiraz type of grape is the most common as it grows even in the warmer parts of Australia, while other types of grapes like the chardonnay and cabernet sauvignon have adapted well to the climatic conditions. In addition, the landscape has a system of rivers and canals that supply water used for irrigation, while soil is acidic and very high in salinity. The warm climatic condition facilitates extreme readiness in grapes. The graph below indicates the imports and export of wine in Australia Sources: Jowza, A., 2005. Comparative and Regional Studies of the Middle East and Central Asia. (Online).Available from: http://www1.american.edu/ted/shiraz.htm. Competitive forces in Australia wine industry According to Howard & Merrett (2007, p.195), “international competitiveness can be assessed by two measures; the extent to which the share of industry exports exceeds the country’s share of world exports and significant outbound foreign investment based on skills and assets created in the home country.” Australia’s share of the global wine export is higher compared to other nations. The table below indicates the compares Australia export with others. Source: Howard, D. & Merrett, D., 2007. The internationalization strategies of small-country firms: the Australian experience of globalization. London: Edward Elgar publishing. Barriers to entry Australia is one of the most competitive markets for new business into the wine industry (Hall, & Mitchell, 2008, p.44). The Australia wine market has three giant producers - BRL Hardy, Mildara Blass, and Southcorp who will pose stiff competition, taking into account that these companies are among the best producers of finest wine in the world (Dowling, 2005, p.76). Some examples of barriers include government-imposed patents. Government imposed barriers are tariffs that are aimed to restrict the number of companies venturing into that market; for instance, the authority of Australia has imposed both the tariff and non-tariff barriers to foreign import countries (Zanni, 2004, p.52) The capital requirement is high due to the costs of acquiring resources like human capital, land, and machinery. Hardy, Mildara Blass, and Southcorp companies are large, hence benefiting from economies of scale and giving them an upper hand over smaller companies. There being a protected regional market will challenge the penetration of Seasoned Wines in the market. On the other hand, Australia is large producer of aluminum; hence, packaging material will be cheap. Wine distribution to consumers is a challenge to winery. The firm will seek on ways to sell its products owing the competition from established brands and labels. For instance, the firm must identify which method it should use to distribute the products; supermarkets, high banner chains or destined for independent consumers, depending on the volume requirements, price, and understanding the patronage of each establishment. (Pierre, 2000, p. 37) However, the likelihood of retaliation from other wine companies is low due to the government policies on far trade and marketing. Moreover, the government encourages and facilitates cross boarder trading since it collects levies on these exports. Suppliers’ power The stages in wine production are grape growing or procurement, crushing, fermentation, aging and finally bottling and packaging. Each stage of production requires some supplies from different companies or farmers. The small-scale farmers’ suppliers bargaining power is low since the quality of their product is relatively low compared to other producers. Therefore, buying of grapes is easy since there is large production of grapes in Australia hence the company can afford to choose or drop a supplier. In addition, the human capital resource is readily available, with expertise capital being expensive, while the non-expertise is cheap due to the number of immigrants. For quality and premium products, the company may have to grow its vineyard to avoid over-reliance on a supplier who might not meet the standards. In order to meet the demands, Seasoned Company will require large acreage of vineyards, which will be expensive. Due to these facts, the suppliers of premium grapes have high bargaining power, the company should negotiate long term contracts to cut on costs (Ebers & Wied, 2007, p.4). The crushing and fermentation will be done by the firm; hence, there is no influence by suppliers. The packaging state requires supply of packaging material paperboards, plastic or glass; thus, the suppliers have high bargaining power. Buyers’ power There are two categories of buying power - price sensitivity and bargaining power. Price sensitivity includes factors like cost of purchases relative to total cost, profitability, quality, and value. Whereas bargaining power entails cost switching suppliers, information, knowledge, size, and concentration of buyers relative to suppliers (Hall, & Mitchell, 2008, p.44). This includes the buying power of both consumers and other businesses in the supply chain like wholesalers (Hall, & Mitchell, 2008, p.44). In the present era, there is a cultural shift in consumption of wine products due to aggressive marketing. Moreover, the buying power of big retail outlets has a significant impact on demand for various styles of wine and the price of wine (Dowling, 2005, p.45). With increasing level of income, wine consumption has gone up. The production of high quality wine, which retails at cheap will result to high number of sales. There is huge consumption of wine in Australia, hence creating local market for the firm’s products. With the high reputation of Australian wine products, the company will export its products to other consumers in other countries. However, super brands of wine will pose a challenge to our range of products especially the premium ones. The brands of the major wine players, being very expensive, will give our products a market among the middle class people in the society. Threats of substitute The most common threat to wine substitute is alcoholic beverages such as beer or already mixed drinks. This is so because both products have relatively same level of alcohol and target the same people. In addition, beer prices and availability will directly have an effect on the consumption of wine. The pricing, general perception of the value and relative perception of the quality of the substitutes affects the market of wine products. Rivals The dominance of BRL Hardy, Mildara Blass, and Southcorp companies and other smaller companies in the market will curtail our firms marketing. Due to the low entry requirements, the company should anticipate new entrants coming to establish branches in Australia. Beside other wine companies, Seasoned Wines will face fierce competition from other beverages such as beer. These new entrants could be either new wineries or wine companies from other regions. Beer consumption is largely taken over the culture of wine consumption hence limiting the market of wine products. Therefore, competition may arise due to price structuring, new branding strategies or introduction of new brands (Hall, & Mitchell, 2008, p.43). The level of demand is high both for local consumption and for export, so there is room for Seasoned Wines. In addition, the range of production varies from large scale in the multinational firms to medium and small production in smaller firms, while the supply of wine fluctuates depending on the climatic condition of a certain period; for instance, during dry or drought spells, the production of grapes is low and hence wine. During such periods, the demand for the little available wine is very high. Moreover, the concentration ratio of wine producing companies is high meaning that a large market share is held by a few large companies. Factor Conditions These include skilled workers, technology base, and innovation in the nation. A contributor of Australia wine industry is its skilled human capital. The wine makers, scientists and mangers plus the education and research institutions is of high quality. The availability of this work force will limit or cancel the need of employing experts, hence reducing the cost of operation. In addition, technology innovations for winemaking are readily available, and include pressure fermentation, refrigeration, and filtration techniques. Moreover, transportation and communication networks (railways, roads and water) will facilitate proper movement of raw materials, personnel and the company’s finished products. The country has devoted many resources in education and research institutions to enhance wine production; for instance, the industry has a Grapes and Wine Research Development Institute that is funded by both wineries and the growers. Demand Conditions Australia population consumes most of the wine produced despite the fact that the population is very low. The production of high quality wine at reasonable price has promoted wine consumption. In addition, aggressive marketing, education, and research institutions, wine judging system has resulted to Australia wine consumers to increase. Moreover, the buyers’ concentration ratio is low compared to the companies and the amount of wine produced in Australia. Related and supporting industries The presence of related and supporting industries affect the competitiveness of the company; supporting industries will provide cost effective inputs, innovations. These inputs are grapes, packaging (paper, plastic, or glass), and labor. The presence of international competitive supporting companies will ensure that our company will obtain important quality raw materials at a low cost. Indeed, Australia is a producer of aluminum hence there will be available packaging material at a reasonable cost. Government Policies: There is a strict quarantine in South Australia restricting phylloxera, which prevent rapid introduction of new and better varieties of wine (Amerine & Singleton, 1972, p.261). Australia wine industry has institutions that control activities on exported wine to guarantee compliance with importing country products like the Australian wine and Brandy Corporation (Zanni, 2004, p.52). Other national research institutions seek for strategic information on the wine market development and disseminate it to the industry plays. Moreover, the government has engaged in an Australia marketing agenda to promote the brand Australia hence opening more market for wine from Australia. What the organization should take account of The company should consider several factors before getting into the Australian wine industry; for instance, how to acquire the raw materials and other capital requirement at a reasonable cost. In addition, the company must decide how and what suppliers will provide basic raw material like grapes, as well as what methods to use to obtain these materials like to procurement or to produce. Given that, the Australia wine industry is dominated by three multinational wine producing firms, acquisition and mergers are happening constantly hence altering the dimension of the market. The organization should take account of technology advancement in wine production, as well as the concentration ratio, since a large market share is held by the large multinational companies. Critical Evaluation Porter’s theory suggests that the market share and profitability of a company depend on its edge of dealing with competitive forces in the market like threat of substitute products, existing competitors, buyers, and sellers’ power and competitors with similar products. The factors in Porter’s theory are all external factors influencing the competition environment, and classify competitive advantage in two groups - cost advantage and differential advantage. Cost advantage occurs when a company is able to produce goods or service with similar benefits but with lower cost than their competitors are. A differential advantage occurs when a company’s products or service provides benefits beyond those of their competitors. Advantages and disadvantages Porter’s theory helps to identify where the power of the company lies, and hence take advantage of their strengths, improve the weakness and avoid taking wrong steps. In addition, the five forces provide a simple perspective for assessing and analyzing the competitive strength and the position of Seasoned Wines in the new market. The analysis of Seasoned wines company competitive forces in the industry gives the company the information used for formulating important strategies of countering the forces. Porter’s model emphasizes on an outside analysis of the company’s environment over the internal company focus. Moreover, the model helps to understand how value is shared among factors in the company and provides insight in to redistribution of profits. The porter’s theory does not incorporate the risks a corporation is exposed to (Eldring, 2009, p.5). Other risk factors like political stability, climatic conditions, and natural disasters may influence the profitability of a company but this model does not include them. However, there is no clear distinction between differentiations and do not provide a strategic route to follow in a fast growing market. It is used to analyze whether new product or services have potential to profitable and cost. It assumes the market static structures and does not factor in the present day dynamic market with technological advancement. In addition, this model can only be used in the business industry level only but not in industry group or sector. Besides, the theory lies on some assumptions that source of value is structural advantage; uncertainty is low and the response to competitive behavior. Because of these assumptions, this model cannot be used by firms, which are under distress. This theory is only reactive, as it does not include ideas that a company can use to reshape an industry based on competitive forces analyzed. Additionally, the model excludes other motivations and over relies on the only five competitive forces. Buyers, suppliers and new competitors are assumed unrelated and do not operate in networks outside of the industry under observation. *Conclusion Australia is good place for Seasoned Wines. They only should make proper strategies and structures to deal with difficulties in the production. Primarily, Australia is naturally gifted to produce grapes due to its climatic patterns. A little modification can also allow areas not regarded as grape producing to grow grapes. Australia’s wine industry has developed and it is internationally demanded for its quality, thus, the amount of production is growing and can match the older wine producing nations like France and Italy. In addition, the country has skilled and experienced winemakers, hence no need for experts. Materials for wine production are readily available at a competitive rate; like grapes, packaging material, and crushing and fermentation machinery. Three multinationals companies have established themselves locally and worldwide. Additionally, the demand for wine locally and internationally is high due to aggressive marketing that has resulted to an increase in the number of wine consumers. Moreover, the wine industry is facing stiff competition from other alcoholic beverages products like beer. Finally, government policies especially in the distribution can affect the profitability of the company. Recommendation Seasoned wines should seek new emerging markets for its products in China, India and Russia where wine is becoming increasingly popular due to westernization, instead of competing with multinationals for the European market. (Resnick, 2008, p.54) The company should get long-term contracts for land lease since land is relatively expensive to buy. Procurement of grapes from reputable suppliers especially for the premium range of products before the company can develop its vineyard. Appropriate pricing and marketing strategies of wine products should be done so as to challenge the established brands. Distribution of products either locally or exports should be enhanced. Branding and labeling of products should differentiate Seasoned Wines from the other products already existing in the market. An exist strategy should be laid out which will be used in case the prospects of succeeding are low The company should explore the idea of producing new types of wine rather than the common type. Reference List Allen, M., 2003. The Rotarian. Vol.181.no. 9. NY: Rotary International. (Online). Available from: http://books.google.co.ke/books?id=mTQEAAAAMBAJ&pg=PA44&dq=Background+of+Australia+wines+industry&hl=en&ei=-kjrTIuRJcrR4gbX0O3VAQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CC0Q6AEwAQ#v=onepage&q&f=false (Accessed November 25, 2010). Amerine, M. & Singleton, V., 1972. Wine: an introduction for Americans. California: University of California press. Kym, A., 2004. The Worlds Wine Markets: Globalization at Work. Cheltenham, UK: Edward Elgar Pub. Dowling, G., 2005. The Art and Science of marketing: marketing for marketing managers. Oxford: Oxford University Press. Ebers, M. & Wied, S., 2007. SWOT Analysis Robert Mondavi and the wine Industry. Berlin: GRIN Verlag. Resnick, E., 2008. Wine Brands: Success Strategies for New Markets, New Consumers and New Trends. Basingstoke [England: Palgrave Macmillan. Eldring, J., 2009. Porter’s (1980) Generic Strategies, Performance and Risk: An Empirical Investigation with German Data. Berlin: Diplomica Verlag. Gibson, M., 2010. The Sommelier Prep Course: an introduction to the wines, Beers, and Spirits of the world. Ontario: John Wiley and Sons. Hall, C. & Mitchell, R., 2008. Wine marketing: a practical guide. MA: Butterworth-Heinemann publisher. Howard, D. & Merrett, D., 2007. The internationalization strategies of small-country firms: the Australian experience of globalization. London: Edward Elgar publishing. Jowza, A., 2005. Comparative and Regional Studies of the Middle East and Central Asia. (Online). Available from: http://www1.american.edu/ted/shiraz.htm (Accessed November 25, 2010). Zanni, L., 2004. Leading firms and wine clusters: understanding the revolution of the Tuscan Wine business through an international comparative analysis Italy. FrancoAngeli. (Online). Available from: http://books.google.co.ke/books?id=ffs8TlIdhfEC&pg=PA52&dq=government+barriers+in+wine+industry+in+australia&hl=en&ei=VOzrTLj4KJSa4Aa4n5Vn&sa=X&oi=book_result&ct=result&resnum=4&ved=0CDkQ6AEwAw#v=onepage&q=government%20barriers%20in%20wine%20industry%20in%20australia&f=false (Accessed November 25, 2010). Spahni, P., 2000. The International Wine Industry. Cambridge: Woodhead. Read More