Global and International Business Context - Essay Example

Global and International Business Contexts The Australian Wine Market and Porter’s National Diamond Here Number Here 2nd January2011 Word Count: 2,599 words (excludes title and contents pages, diagram and reference list) Table of Contents Table of Contents 2 Introduction 3 The Global Wine Market 3 The Australian Wine Market 3 Porter’s Diamond of Competitive Advantage 5 Figure 1: Porter’s Diamond of Competitive Advantage 5 Alternative and Additional Perspectives 7 A Critical Appraisal of Porter’s Diamond 11 Conclusion 14 Recommendations 14 References 15 Introduction This report provides a brief contextual analysis of the Australian wine market. It begins with a brief introduction to both the global and Australian wine markets, and is followed by the use of Porter’s National Diamond and other appropriate models to assess the competitiveness and investment attractiveness of the market. It also provides a critical analysis of Porter’s National Diamond, before providing conclusions and recommendations as to whether it is appropriate to enter the Australian wine market. The Global Wine Market The global wine market is highly fragmented with no one producer having dominance (Datamonitor 2010a). It was worth $263.8bn in 2009 and is forecast to continue growing, albeit slowly (ibid, p.2). Europe is the largest market for wine, holding 80.5% of the market by value. The Asia-Pacific region, which includes Australia, is worth 6.9%. The main buyers are supermarkets and hypermarkets, taking 37.9% of the market volume (ibid, p.14). Entry to the market does not require a large company or major capital investment as high quality wines command premium prices (ibid, p.15) but Datamonitor assess the likelihood of new entrants as being weak with moderate competitive rivalry. The Australian Wine Market The Australian wine market is fairly fragmented with the top three producers holding just under 50% of the market by volume (Datamonitor 2010b). It was worth $5,768.4mln in 2009 and is forecast to grow at approximately 2% per year, which is faster than the global wine market (ibid, p.2). The main provider of wine is Foster’s Group Limited, holding 20.8% market share by volume. Buyer power is more important in Australia as there are low switching costs to alternatives and an unusual concentration of food and beverage suppliers (ibid). For new entrants, there are barriers to entry: import duties, taxes and large distribution costs of imported wines (ibid). Competitive rivalry is considered moderate. Producers can use branding to strongly differentiate their products, providing a wide range. The primary distributors are specialist retailers, holding a share of 73.4% by volume in 2009 (ibid, p.23). For foreign producers, the options for entering the market include starting a new company or exporting. If exporting, there are a number of indirect taxes and duties that account for 50% of the value of the imports (ibid, pp.14-15) but if importing a premium brand, market entry can be achieved successfully by adding a large margin to account for the taxes. Datamonitor assess, however, that the likelihood of new entrants is weak. Porter’s Diamond of Competitive Advantage Figure 1: Porter’s Diamond of Competitive Advantage (Source: Porter, 1990, p.77) Porter (1990) analysed competition and identified four inter-related factors that determined a nation’s ability to compete. The Diamond of Competitive Advantage considers factor conditions, firm strategy structure and rivalry, demand conditions and related and supporting industries to be key influences on national competitiveness. Factor conditions relates to the country’s access to the factors of production – land, labour and capital – together with highly specialised resources that can only be found in that country and confer a competitive advantage. Demand conditions are those in the organisation’s home nation. Related and supporting industries are the providers of activities associated with the industry being assessed, without which the industry cannot survive. Firm strategy, structure and rivalry are the internal elements of the firm over which the organisation has control and which can be configured to take advantage of markets and opportunities. Applying Porter’s model to the Australian wine industry, factor conditions are the land available to grow the grapes for wine production, including the weather, which needs to be favourable. There are individuals who know how to make the wine and sufficient investment in the industry. However, there are no really unique factors that confer competitive advantage: Europe has the dominant world market share Demand conditions are fairly tough for the wine industry, with discerning consumers who have a wide variety of drinks to chose from, including wine. Because of this, according to Porter, the wine industry must innovate to satisfy the home market, putting it in a good position to meet international demand. Related and supporting industries will be the bottling plants, the label manufacturers and the chemical suppliers. Individual firms within Australia appear to pursue a wide range of strategies to get their products to market, including premium branding and mass production. Porter (1980) argues that it is the interaction of the four elements that determines how competitive a nation is overall. It may comparative advantage, that is, compared to a particular competitor nation, Australia may be better or worse within that industry, rather than absolute advantage, where they would be a world leader. He would argue, for example, that the imposition of nearly 50% indirect taxes on imported wines was designed to discourage competition and the government should reduce or remove these, forcing the industry to innovate to achieve a higher degree of competitive performance (ibid, p.84) rather than “intentionally driving up factor costs or the exchange rate” (ibid, p.87). Porter advocates deregulation of competition, the enforcement of strong domestic anti-mergers policies and the rejection of managed trade (ibid, p.88), which tend to be a product of a developed, free-market economy rather than a developing nation. They would be appropriate policies in Australia, should the government choose to implement them. Alternative and Additional Perspectives Porter’s diamond provides one view of how an organisation might address issues surrounding national competitiveness, but it is not the only one. Porter’s model is thirty years old and the world is a different place. Other commentators have different views. Budzinski (2009) considers that the world needs a multilevel competition policy system, following the recent world economic crisis. He is concerned about “competitive markets that are easily larger in geographic extent than jurisdictional borders” (ibid, pp.367-368) and the need to protect composition against both “governmental and private restrictions” (ibid, p.368). Budzinski considers global business behaviour to be “anticompetitive” and “welfare-reducing” (ibid) and believes that there needs to be a global competition authority to prevent anticompetitive practices occurring on a global level, although that authority needs to be independent of regulated markets, industries and nations. The anticompetitive stance ties in with Porter’s view, but contradicts Porter in considering globalisation to be something to be controlled. The wine market is a global market, but is in no danger of creating global monopolies due to the fragmented nature of the market. Another development in competitive strategy is working with other organisations rather than against them, to mutual advantage. This happens within the Australian wine industry between grape growers and wineries (Somogyi et al, 2010), something which Porter would consider inappropriate. But partnerships carry advantages that have evolved over time and are no longer considered strange. For a potential new entrant to the Australian wine industry considering setting up a company in Australia, such partnerships might preclude access to the best raw materials, forcing an organisation to compete in markets with lower margins rather than the premium markets. As different wines require different specifications of grapes (ibid) this is a serious issue for a potential new entrant to consider that is outside the scope of Porter’s Diamond. Somogyi et al (2010 p.27) highlight the importance of “communication, goal compatibility and use of power” when considering trust and satisfaction levels within grower/winery relationships. Other influences on competitive strategy include global organisations such as the World Trade Organisation. Multilateral trade negotiations that considered traditional trade issues, investment, competition policy and environment have been deadlocked for over nine years (Hufbauer and Kim, 2009, p.327). Interest continues in the talks because of the anticompetitive practices content and the recent world economic crisis. Porter would not expect the WTO to deal with global competition issues, especially their regulation, as this is, for him, anti-competitive. The WTO is primarily concerned with potential exploitation of developing nations, with the developing nations pushing for changes to current approaches. This would not affect entry into the Australian wine market, but is a consideration if the talks do finally restart and reach conclusions that affect how organisations can compete on the world stage. Working in favour of a potential entry into the Australian wine market is the impact of the Euro on international competitiveness of Eurozone firms. Ottaviano et al (2009, p.6) have identified evidence that shows that “for countries which are smaller or with better access to foreign markets, and for firms which specialise in sectors where international competition is fiercer and barriers to entry lower” overall competitiveness has increased. For a European country looking to enter the Australian wine market, this is good news. From the perspective of Porter’s model, the Euro did not exist in 1980, although there had been talk about creating a single European currency. Porter’s model assumes no interventions on foreign exchange rates, but the Euro changed how Europe did business with the rest of the world. The creation of a new world currency was not considered in Porter’s model. Quality management is a high priority today. Porter’s (1980) article spends much time criticising the Japanese way of doing things, yet one of the reasons that the Japanese were able to beat the USA at its own game was because of their focus on quality and continuous improvement. In the Australian wine industry, significant emphasis is placed on quality management in both processes and products (Orr, 1999) and any new entrant to the market will need to comply with high quality standards to compete successfully with the existing players. Another issue to consider is environmental impact and sustainability. While Porter does consider factor conditions, he does not consider the impact of their usage on the environment or on future ability to produce goods and services. Increasingly, consumers and governments are becoming concerned about industrial effects on the environment, and the Australian wine industry is no exception (Jordan et al 2007). This is likely to be a key factor to consider for any organisation looking to enter the market. A Critical Appraisal of Porter’s Diamond Several observations have already been made concerning omissions from Porter’s original theory, some of which relate to the age of the theory, with others relating to different opinions about the nature of competition and globalisation. Porter’s (1980) theory is a product of its time. It was developed at a time when many of the world’s industries were subject to government regulation, which had the effect of restricting competition, including international competition. Porter believes in a more free-market economy than this, and advocated the removal of competitive barriers, including government policies and regulations. Following changes in government at the end of the 1980s, both the USA and the UK embarked on policies specifically designed to remove market controls and allow proper markets to develop. The amount of regulation was reduced and consumption patterns changed as competition increased. Porter’s Diamond still has credibility and is used by academics and organisations. Chikan (2008 p.20) for example, uses Porter’s model to connect “national and firm level competitiveness studies”. Something that it does not consider is the importance of the supply chain, which is interesting, as Porter believes that sustained competitive advantage can be derived from the supply side of the value chain (Porter, 1991). Supply chain management is increasingly important as organisations extend their operations beyond their national borders and outsource activities to locations where they can be completed for a lower cost than the home nation. But the extent of globalisation is also not included within Porter’s (1980) Diamond, whereas today it is a key consideration for any organisation whether large or small, especially with the increasing influence of information and communications technologies and the internet. Several commentators have also considered Porter’s Diamond and found it wanting. Grein and Craig (1996) examined whether Porter’s (1980) model held over time at the national level. They identified three factors – infrastructure/demand, competitive investment and education – that correlated with Porter’s model: the relationships between these factors were “substantially the same for both industrialised and developing countries” (p.303). However, they found that this did not apply to “net exports and foreign direct investment” (ibid), a key difference. The conclusions drawn were that the relationships between the factors had changed over time and that there were important differences between developed and developing countries. It is not surprising that the latter point was discovered as Porter’s background is in the USA which is a heavily industrialised, highly developed nation. Porter had no experience in developing nations, but assumed they would operate in the same way as developed nations, which would seem to be an inaccurate conclusion. It is, however, one that has coloured many dealings between the industrialised nations and developing nations when multinational companies have expanded their operations. Even earlier than this, during the year of publication of Porter’s article, commentators were raising issues with the theory. Two reviews were undertaken by different individuals less than six months following its publication were critical of its content. Allio (1990 p.28) identifies contradictions within the argument and states that “the diamond model is more descriptive than causal or predictive”. The changing nature of competition is also highlighted, as Allio ponders whether the model is actually relevant “as we move forward into the era of the stateless corporation” (ibid). He concludes that Porter’s model “describes how to be but not what to do” (ibid). Leontiades (1990 p.30) provides context for the model, indicating that it is the last of three presented by Porter (the first two being his five forces model and the value chain model). He goes on to say that, with the number of possibilities underlying each of the four factors, Porter attempts to capture every eventuality that is not included within the four factors themselves. Leontiades doesn’t believe that a competitive plan to “compete effectively in global markets” could be drawn up based upon Porter’s model (ibid, p.31) and the emphasis on innovation as essential for success is somewhat let down by the absence of how to achieve such innovation. Leontiades’ conclusion, that Porter’s contribution “may be to awaken us all to the need for reevaluation of outdated notions” (ibid p.32), is a sad reflection of the amount of research that underpinned the theory. Conclusion For a European firm looking to enter the Australian wine market, there are several considerations, many of which are not covered by an analysis using Porter’s (1980) Diamond of Competitive Advantage. As such, it is necessary to look further afield to ensure all possible issues are identified before a decision is reached as to whether the market is viable and whether an exporting strategy should be pursued to test the waters before making a more permanent commitment, or whether a new company should be formed immediately to begin trading as soon as possible. The reports from Datamonitor (2010 both a and b) provide substantial amounts of information for any potential new entrant, and should be studied closely to glean all the information they contain. Recommendations There are several indicators that entry into the Australian market is a fair investment opportunity, however, there are barriers to entry depending on the strategy chosen and the market, while predicted to grow year on year, is slowing down overall and could be about to reach maturity, meaning increased competition from existing providers and potentially pressure on margins. If it is considered appropriate to invest in a new market, an exporting strategy should be selected to assess the viability of a more permanent operation, and to determine how well the company’s offerings compete within an extremely competitive market with many alternatives and existing players. If this should prove successful, the company should set up a resident operation to deliver its products more efficiently and profitably. References Allio, R. J. (1990) ‘Flaws in Porter’s Competitive Diamond?’ Planning Review September/October pp.28-33 Budzinski, O. (2009) ‘An international multilevel competition policy system’ International Economics and Economic Policy Vol. 6, pp.367-389 Chikan, A. (2008) ‘National and firm competitiveness: a general research model’ Competitiveness Review: An International Business Journal Vol. 18 Nos. 1/2 pp.20-28 Datamonitor (2010a) Industry Profile: Global Wine May, Datamonitor Europe, London Datamonitor (2010b) Industry Profile: Wine in Australia May, Datamonitor Europe, London Grein, A. F. and Craig, C. S. (1996) ‘Does Porter’s Diamond hold at the national level?’ The International Executive Vol. 38 No. 3 pp.303-322 Hufbauer, G. and Kim, J. (2009) ‘International competition policy and the WTO’ The Antitrust Bulletin Vol. 54 No. 2 pp. 327-335 Jordan, R., Zidda, P. and Lockshin, L. (2007) ‘Behind the Australian wine industry’s success: does environment matter?’ International Journal of Wine Business Research Vol. 19 No. 1 pp.14-32 Leontiades, M. (1990) ‘Flaws in Porter’s Competitive Diamond?’ Planning Review September/October pp.28-33 Orr, S. (1999) ‘The role of quality management in manufacturing strategy: experiences from the Australian wine industry’ Total Quality Management Vol. 10 No. 2 pp.271-279 Ottaviano, G. I. P., Taglioni, D. and di Mauro, F. (2009) ‘The Euro and the competitiveness of European firms’ Economic Policy January pp. 5-53 Porter, M. E. (1980) ‘The Competitive Advantage of Nations’ Harvard Business Review March/April, pp.73-93 Porter, M. E. (1991) ‘Towards a dynamic theory of strategy’ Strategic Management Journal Vol. 12 pp.95-117 Somogyi, S., Gyau, A. Li, E. and Bruwer, J. (2010) ‘Enhancing long-term grape grower/winery relationships in the Australian wine industry’ International Journal of Wine Business Research Vol. 22 No. 1 pp.27-41 Read More