Competitive Advantage of Traditional Wine Producing Nations such as France, Spain and Italy - Case Study Example

Introduction Basic economic theories have always given three key sources of wealth or competitive advantage for stakeholders in business economics: land and natural resources, capital, and labour (Amit, 1993). The optimal combination of these three assets provides sustainable competitive development across nations and societies (Arie De Geus, 1997). During majority of human being history land i.e. tangible asset is considered as primary factor of economic dominance. Further capital (i.e. tangible asset) and labour (i.e. intangible asset) enhanced their positioning in economic development post 20th century till knowledge era (Barney, 1991). This might hold true in the case of global wine market dynamics. Is it the case that tangible and intangible assets have enhanced competitive dynamics of the global wine marketspace in past decades? Our research note focuses on understanding and analysing he changing economic dynamics in global wine marketspace for past 10-15 decades i.e. change in market share from traditional wine producing nations such as France, Italy and Spain to niche entrants such as Australia and United States. The case will further analyse the primary elements causing the change in industry dynamics and sustainable competitive advantage between traditional and niche wine producing nations. Resource based View Traditionally France, Italy and Spain have controlled dominant market positioning in global wine segment (18th-early 20th century). The early mover advantage and optimal optimisation of tangible and intangible assets have enhanced core competency on long-term basis of European wine producers such as France, Italy and Spain. Before 1966 French, Italian and Spanish wine stakeholders created value propositions for B2C and B2B customer base such as high quality standards, skilled labour force, strong regional and national distribution networks (consolidated value chain) across the globe along with favourable governmental regulations (wine treated as national pride in France and Germany). Thus resource based competitive advantage analysis of traditional wine producing nations before 1966 stood as follows: Source: Prahalad & Hamel (1990) The change in macro economic conditions and negligence by national governments such as French, German and Italian offered scenario for new entrants such as United States and Australia into global wine marketspace. Skewed supply-demand, changing consumer preference in traditional wine markets related to consumption, purchasing power parity etc and non-favourable asset mix (higher labour cost, low net margins for manufacturers due to taxation etc) called for change in industry dynamics and competitive index across global wine marketspace. Although niche wine producing nations such as Australia and United States were active but lacked scalability. Favourable macro economic and intrinsic asset mix enhanced their sustainable competitive advantage post 1966. Thus resource based competitive advantage analysis of new wine producing nations after 1966 stood as follows: Thus it could be seen from the above initial analysis related to intrinsic factors or resource based competitive advantage for traditional and new wine producing nations that micro and macro economic elements combination offers sustainable development on long-term basis. Aligning tangible and intangible assets with macro economic factors such as consumer demand and preference have seen new entrants such as Australia and United States take away market share of global wine segment from traditional dominant powers such as France, Italy and Spain. In the next section we would be analysing the changing market dynamics and bargaining power index for traditional and new wine producing nations to enhance reliability of the research note. Institutions based View The changing macro economic of industry dynamics and aligning internal resources has enhanced competitive advantages for corporations worldwide in knowledge economy (Porter, 1980). Lower industry wide bargaining power has made companies and nations operational into particular industry or sector obsolete (Porter, 1980). Negligence of traditional wine producing nation’s i.e. dominant manufacturers before 1966 related to changing market dynamics reduced bargaining power and hampered sustainable competitive advantage. Traditional wine producing nation’s market dynamics stood as follows: New Entrants: The fragmented domestic wine marketspace before 1966 across Italy, France and Germany reduced brand loyalty and customer retention rates for dominant producers. Thus high competition further reduced focus on exports and emerging wine marketspaces such as United States, United Kingdom and Australia. Supplier: The value chain was loosely coupled in domestic markets such as Italy, France and Spain. Manufacturer’s net margin was low due to higher dependency on wholesalers and retailers. Thus supplier bargaining power was low across the region. Post 1966, these loosely consolidated value chain was implemented by French and Italian wine manufacturers in international markets thus hampering their competitive advantage on long-term basis. The wrong replication strategy reduced brand shares. Government: Wine was treated as nation pride. The culture enhanced bottlenecks such as high quality standards enhancing overhead costs and reducing manufacturers net margins along with conservative expansion approach and government intervention into wine producers growth strategies. Buyer: Traditional wine producing nations such as France, Italy and Spain couldn’t perform proper consumer preference and demand due diligence due to conservative national government approach towards the domestic marketspace. French and Italian manufacturers were focussing on cheap low cost wine brands while consumers required premium and ultra premium across domestic and emerging markets. On the other hand, the traditional manufacturers lost to new entrants such as United States and Australia (early mover advantage) in United Kingdom. Finally, French and Italian wine manufacturers focussed on domestic market even after noticing rapid decline in consumption rates and improved consumer preference for other alcoholic drinks such as cider, beer and vodka. Product: Wine production is highly labour intensive marketspace. The cost of labour rapidly increased in countries such as Italy, France and Germany thus manufacturers focused on economies of scale i.e. volume sales in order to enhance competitive advantage. Thus traditional wine producing manufacturers focussed on low-medium range brand portfolios to enhance volume share. The fastest growing consumer segmentation i.e. urban population was neglected. Thus it could be seen that lower supplier, competitive, consumer and product bargaining power along with unfavourable national government rules & regulations hampered competitive advantage of traditional wine producing stakeholders in Italy, Spain and France. Niche wine producing nation’s market dynamics stood as follows: New Entrants: Perfect competition oriented domestic wine and early mover advantage in largest marketspace i.e. United Kingdom enhanced global and transnational brand loyalty and customer retention rates for manufacturers from United States and Australia. Constructive perfect competition helped United States and Australia centric manufacturers to focus on exports and implement best practices in cultural similar markets such as United Kingdom (language proximity). Supplier: Majority of United States and Australian manufacturers controlled total value chain enhancing net margins and cash flows. Manufacturer’s higher bargaining power improved end user value proposition and customer retention rates. Government: Wine was never considered as nation pride. Flexible government regulation and high support related to irrigation and approval of less expensive huge wine estates to stakeholders enhance manufacturer’s net margins. Buyer: Niche wine producing nations such as United States and Australia were market driven and performed proper due diligence related to consumer preference and changing taste and segmentation. Majority of manufacturers from niche wine producing nations offered smaller packaging aligned with consumer demand along with higher concentration of premium and ultra premium wine brand portfolio to enhance retention rates globally on long-term basis. Product: Wine production is highly labour intensive marketspace. The cost of labour remained stable due to flexible immigration policies by national governments in Australia and United States further enhancing value share of niche wine producing nations on global footprint in wine marketspace. The fastest growing consumer segmentation i.e. urban population were primary consumers and product and packaging were aligned with core users. Conclusion Thus it could be seen from the above global wine industry dynamics case study that aligning intrinsic and extrinsic elements enhanced competitive advantages for firms and nations on long-term basis. On the other hand, stakeholder’s in particular economic environment should align optimal resources with changing macro economic industry dynamics to achieve long-term sustainability in 21st century knowledge economy. The competitive advantage of traditional wine producing nations such as France, Spain and Italy was reduced to new entrants such as Australia and United States due to following long-term pitfalls: Domestic governmental stringent rules and regulations: The domestic governments of France and Italy offered lower inceptive for innovative wine stakeholders and regulation hampered the perfect competition scenario thus enhancing marginal costs and reducing marginal revenues. In perfect competition marginal cost=marginal revenues. Extrinsic intangible asset lapse Lower emphasis on growing market trends: Traditional wine producing nations neglected the impact of growth in wine consumption in European financial capital i.e. United Kingdom. Neglecting changing consumer preference: Majority of consumers across the globe were preferring premium wine due to consumer perception of wine as healthy alcoholic beverage and societal status quo. The traditional wine producing nations were focussing on volume sales than value sales. Bottom- line: The competitive advantage and sustainability of traditional wine producing nations were hampered due to lower alignment of extrinsic and intrinsic tangible and intangible asset pools to enhance value propositions for the end users. On the other hand, destructive home market industry dynamics such as government regulations further hampered the growth and brand equity on global basis. References Porter, M. E. (1980), "Competitive Strategy: Techniques for Analyzing Industries and Competitors", New York, NY: Free Press Geus, Arie de, (1997) The Living Company, Boston Mass: Harvard Business School Press. Barney, J.B., (1991), Firm Resources and Sustained Competitive Advantage. Journal of Management; 17, (1), pp.99–120. Amit, R.; Shoemaker, P.J.H. (1993), Strategic assets and organizational rent. Strategic Management Journal; 14, (1), pp.33–46. Prahalad, C. K., and Hamel, G. (1990) “The Core Competence of the Corporation”, Harvard Business Review, Vol. 68, No. 3, pp. 79-91. Read More