Individual Report - Assignment Example

Strategic Management of Chilean Wines Industry Name Institutional Affiliation Instructor Course Date Table of Contents Abstract 3 Geography and Overview of Chile 4 History 4 Politics 4 Chile’s Overall Business Environment. 4 History and Evolution of Chile’s Wine Industry 5 Strategic Level Industrial, Economic, Political and Cultural Context to Conducting Business and Management in Chilean Wine industry 6 Political Analysis 6 Economic Analysis 6 Social Analysis 7 Technology Analysis 7 Porters Five Forces Analysis 8 Bargaining Power of Buyers 8 Bargaining Power of the Suppliers 8 Threats of New Entrants 9 Threats of Substitutes 9 Strategic Management in Wine Industry Literature 9 Conclusion 12 Recommendations 13 References 15 Abstract Due her stable economic growth, Chile has been of great importance to the success of South America. Chile has managed to attract high number of local and foreign investor due to the existence of a favourable business environment which is characterized by steady and open market oriented economy. The presence of strong macroeconomic policies, great geographical location, well-established administrative and physical structures, strong cooperate memberships in investment and trade agreements, tariff liberalization and attractive tax policies has led to the rise of Chile in global competitiveness index. However, Chile’s success is at risk due to the entry of other nations into the same market. This is very risky if Chile does not improve its innovation performance through effective design and implementation of macroeconomic reforms in sectors of human capital, business innovation and the broad governance. Exports are significant to the economic growth due to the small population which translates to low domestics demands. The Chilean wine industry has managed to increase its production from domestic to export levels. Chile is currently enjoying successes in the international markets due to its strategic approach of offering reliable wines at affordable prices. This paper is a report on the strategic management in Chilean wine industry. It contains the industrial strategic level and the economic, cultural and political factors that determine the establishment and management of business in Chile. Also included in the report is the existing literature of the strategic management in the Chilean wine industry. The report ends by giving the recommendations concerning wine business in Chile. Geography and Overview of Chile Chile is located in the Southern South America, west of Bolivia and Argentina, and south of Peru. It is about 2,880 miles long and is bored by the Andes Mountains in the east and Pacific Ocean to the west. It is ranked 38 worldwide in land mass of 756,102 sq km. History Northern Chile was under the Inca rule but became Spanish sphere of influence in the 16th century. The central and southern Chile was inhabited by the Mapuche. It was declared independent in 1810 but its decisive victory over the Spanish was attained in 1818. Chile won its present regions by defeating Bolivia and Peru during the 1879-83 war. Politics Good economic policies have been attributed to the steady growth of the country’s economy since 1980s. This has helped Chile secure a commitment to a representative and democratic government. Chile increasingly assumed leadership roles both at regional and international spheres hence attaining its status of a stable and democratic state. Chile continued to realize stability of growth in sounder political climate especially after its free elections of 1990 which lead to the defeat of the then president, Augusto Pinochet. Chile’s Overall Business Environment. Chile’s business environment permits the creation of open markets hence stability of economy. This is facilitated by the presences of strong financial institutions, high levels of foreign trade, responsible leadership which is recognized both regionally and globally and sound government economic policies. Its well-established institutions with legal framework, free trade agreements and efficient regulatory systems minimizes risks and uncertainties by providing favourable economic and political environment which puts Chile on a better position to attract investors across the world. The foreign investment policies are open and liberal thus facilitating a multitude of business opportunities. It also provide the investor activities which leads to generation of capital as well as technology necessary for Chile’s economic growth and development (Joelson, 2007). History and Evolution of Chile’s Wine Industry The history of wine industry in Chile dates back to 1551 when wine first made by a Spanish conqueror. Chile was the first country in the Latin America region to produce wine. Initially, wine was produced for ceremonies during the 18th and 19th centuries. However, wealthy families produced wine to replicate French Chateau wines. Technology and grapes was imported from France. Export of quality wines to Europe in 19th was stimulated the outbreak of Phyllorexa. Wine production reduced drastically in the 20th century due to unfavourable import-substitution policies which did not support such exports. Wine producers depended on a small domestic market. National legislations, political changes and international and domestic market translated into an increased surface for the production of wines. Chile is at the crossroad in its evolution. Industry experts emphasize the need for Chile to solidify its presence in the United Kingdom’s market, which is its largest market (Christiansen, 2015). The win producing areas in Chile is divided into 12 regions and sub-regions. The industry is expanding rapidly and it exploration is currently done on the slopes of Andes Mountains. This is because the soil around is poor in nutrient with high range of temperatures. Such soils produce wine with higher concentration of fruit. The tremendous growth in Chilean wine industry is driven by the desire and need to produce better wines in new areas. Strategic Level Industrial, Economic, Political and Cultural Context to Conducting Business and Management in Chilean Wine industry The viability of wine business in Chile is determined by examining the political, economic, social and technological environments. To do this, PESTEL analysis model is used to provide snapshot of the external factors that can impact on the operations of a wine business. Political Analysis The political dimensions of the Chilean wine sector cite the present regulatory bodies and legislations. The United States has gone through an era of Prohibition laws, and the 2010 debates about privatized alcoholic beverages sales. However, the government has come in strongly to support the wine industry through enactment of laws that allowed cooperatives to distribute wine directly to their consumers. Economic Analysis The economic features of a PEST analysis specifically for wine producers include the economic trends and patterns affecting the country, exchange rates, taxation of wine products and cyclical and seasonal patterns that affect the wine industry. Chile’s wine industry is quite promising owing to it economic stability. This is also evident from the influx of foreign investors who form joint venture with local firms. Social Analysis Wine is a precious commodity. Unlike the ancient time, it is currently used at any event at anytime. The fact that it is precious means that it is mainly consumed by the high class but not limited to the group of people only as ready market exist globally. Technology Analysis Chile is a high-tech industrial country. Its market-oriented economic system, affluent living standards and pattern of production has led to the growth and development of manufacturing sector of the economy. It has also transformed the economy from rural type to industrial and urban forms of economy (Chandra, 2011). The emergence of mobile bottling is set to spur the growth of small wineries. On the other side, computer software and hardware involving mobile marketing and customer relation management, will serve great purpose in management of information within wine producing firms. Prior to the investment in export oriented wineries, the wine industry of Chile was majorly run by small brand companies. The Chilean wine industry grew in the 1990s leading to the emergence of four distinct wine enterprises. a) The biggest brands with wide “brand” history e.g. Concha y Toro, San Pedro and Santa Rita. Some of these brands have created joint ventures with foreign companies b) Subsidiaries of large wholly owned ad joint venture foreign wineries. c) Medium sized companies which attempts to target niche export market. d) Large cooperatives that have attain a breakthrough in supplying international markets. E.g. Cooperativa Vitivinicola which produces wine under the brand name, Los Robles. Porters Five Forces Analysis In order to ascertain the suitability of Chile to business and management, a Porter’s five forces analysis is done on its Wine industry. The model is based on five elements as discussed below: Bargaining Power of Buyers The buyers’ power in the wine sector varies depending on the place. There are for instance strategic differences between the “New World” and Europe. In the New World, big companies dominate the market share while in Europe; there is intense competition between small family wineries. The buyers’ power seems to be greater in countries like located Europe than that of buyers in the New World e.g. Chile. This means that consumers in Europe are more sensitive to price and have sophisticated tastes than consumers in “New World”. The low purchasing power of consumers in Chile is attributed to the fact that wine is not sold in supermarkets in the United States except from Wal-mart also, branding strategy in the New World has led to the production of more differentiated wine products therefore reducing the purchasing power of the consumers (Anderson, 2014). Bargaining Power of the Suppliers As the production of wine surplus increase, the bargaining power of the suppliers reduces. This is because supply of the product is higher than what the consumers can take. It also weaken when the marking s not growing at the same pace as that of the competitors. Therefore, anyone intending to start a wine business in Chile should consider the level of demand and quantity that is available for the market. Threats of New Entrants Apart from the key players in wine industry like Australia, United States and South Africa, other countries are posing a threat to Chile e.g. China. This implies that the entry of one player into the industry will lead to automatic entry of more competitors if not strategic measures are not taken. Threats of Substitutes New products are constantly being produced e.g. flavoured water, soft drinks and beer. If not monitored closely, they can gradually replace wine. Wine producers should pay more attention to the tastes and preferences of the consumers in and pricing strategy in order to minimize this threat. Strategic Management in Wine Industry Literature Despite being among the top producers of wine in the world, Chile has fairly small domestic market. However, export strategy has been used by wine producing firms for the development of market through the achievement of economies of scale, hence enabling them to become sustainably competitive in the entire marketplace. Argyrous and Bamberry (2009) argues that the success of wine industry depend on the existence of proper strategic management within the firms. The presence of domestic market should be considered a basis for the development of international markets. In addition, there is an increasing trend for companies to enter wine export markets within their first years of operations. This phenomenal trend is attributed to the existences of market conscious management systems within firm structures. Although it is very possible for some companies to enter the international markets as soon as they are established, such cases happen in special situations, usually linked to the company’s management attributes. Senior management with proper orientation of foreign market helps greatly in explaining the growth of the firms’ export. Similarly, strategic management of wine industries require the managers to possess comprehensive communication skills to allow effective and smooth flow of information. A good command of foreign languages and the manager’s age is vital for international growth as they are both correlated with exporting. The significance of the above managerial qualities tends to vary within the literature and they could indicate other component of strategic management such as the adequate knowledge of foreign markets. According to Bobik (2014), individual competence such as level and type of education, extend of foreign travels, ability to speak foreign language(s) and foreign nationality are likely to be interlinked with the decision-making activities regarding export activities. Overseas work experience has been emphasized by some researchers. Research has also found that managers who are domestically oriented are more risk than those who are internationally oriented. One element of attitudes of management which influence the export marketing strategy, and seems to have a consensus is the view that the process of exporting starts from physically close countries to that that are physically far countries as the firm gradually acquire international experience. In determining business strategies for destinations of wine exports, cultural ties and common language plays a crucial role. In wine industry, a few exploratory studies have determined how strategic management affects the performance of a wine exporting firm. Libernam et al. (2010) revealed that New Zealand and Australian wine industries were able to boost their exports and competitiveness in overseas markets by working in conjunction with the distributors who help in creating strong networks. Liberman et al. (2010) continued to state that the Chilean wineries that contained higher internalization levels invest more in information technology and innovation in their management. They also adhere to the international quality standards of management, management planning, market evaluation, employee training, as well as adoption of marketing strategy. Studies have also revealed that private trade associations and public organizations in Chile also assist increase the quantity of wine exported through development and promotion of wines internationally. Generally, literature suggests that strategic management; government and firm factors have impact on the levels of wine export and the overall wine industry. The Economist magazine (1999) presented a series of articles that examined the global wine industry. While the information is outdated, the trends highlighted have continued, and a lot of the insights are currently relevant. In the article titled “Rum Business,” an analysis of wine industry using Porter’s fie forces revealed that wine there are still limited factors that can make wine business more attractive and competitive. Such factors include high entry barriers, lack of reliance on suppliers, obvious substitutes and lucrative customers (Economist, 1999). Rachman (2012) highlighted the differences in the amount of consolidation that exists between the wine industries in the “Old World” of Europe in comparison with the companies in countries “New World” of other countries in southern America like Chile. In the “New World” for instance, production of wine is dominated by few companies which dominates about 80% of the market. Through sophisticated marketing, he companies have managed to price wine keenly and consistently according to the purchasing power, tastes and preferences of their consumers. On the other hand, wine production in the “Old World” was viewed as an agricultural commodity with based on the traditions of the family. The variations of wine depended on annual changes in climate and farmland. The approach to wine production was based on the French word ‘terroir’, which means soil, with a strong belief that the properties of wine are highly connected to the soils in which the grapes are grown and the prevailing climatic conditions. In the “New Wold” emphasis is given to the technology and consistency of climate which has helped the producers reduce the fluctuations in wine quality. Wine industry is discussed in the globalization context by Anderson (2003). The rise of New World Wines and the changes in consumption behaviours are discussed. Anderson is uncertain of the fact that wine may become homogenised due to the increased globalization. According to Anderson, this has not happened due to the fact that consolidation took place from a low base and the majority of wines from the New World presently being sold at the expenses of better generic wines from Europe. Anderson (2011) states that collaboration among various firms at an industry wide level is important for Chile wine industry to achieve market success. This involves generation and productive use of information, more so when selling differentiated wine. Conclusion Many years ago, Chilean wine industry was essentially a combination of national markets. Wine was also produced and sold within the domestic market. With the advent of globalization, more unified global marketplace has been formed. Moreover, the differences in geographical characteristics have led to the production of different varieties of wine, implying that there will be diversity in tastes among customers. Wine industry may experience complex growth as the consumers acquire more education concerning wine. Chile has great potential of becoming the world leader of wine exporter. Realizing such achievement requires national commitment. Investing in agriculture and training will help improve wine industry in productivity and innovation. Improvement of wine industry will translate to the improvement of the national GDP thereby ensuring the sustainability of the sector. The economic history of Chile has proven that it is going to overcome its challenge and problems. This will be a great milestone to the achievements of the Latin American region. It will also be able to compete for the world leadership in cluster sectors as it has demonstrated in its wine industry. Recommendations Individuals seeking to establish business in Chile should expand their capacity to meet market demand and o achieve economies of scale by ensuring sufficient investment in production of wine. However, they should take care not to be trapped by the excess capacity and overproduction in an industrial sector that already has excess capacity and overproduction internationally. If the Chilean wine business is to succeed, those who intend to venture into the industry should explore premium markets in order to take advantage over producers of wine in the New World. Targeting niche markets such as the Pacific region enables new small players in the industry to obtain premium prices for their wine rather than competing with the already established players in the industry. Finally, prospective participants should invest in the cost of participating in trade and travelling across all market destinations. This is because the cost of travelling and participating I trade related activities has proved to be a challenge to majority of new entrants to the market. Institutions of higher education should also provide export and strategic management courses to help novice exporters and smaller wineries establish a good foundation for the management of their business. The institutions will also offer basic knowledge and effective practices at businesses ethics from regional and global and international perspectives. References Anderson, K. (2011). Prospects ahead for the wine industry. In CIES Wine Anderson, K. (2014). World's Wine Markets. Cheltenham, Edward Elgar Pub. Bobik, M. (2014). Thirst for wine: inside China's wine industry, the success factors of marketing wine in China. Chandra, V. (2011). Technology, adaptation, and exports: how some developing countries got it right. Washington, DC, World Bank. Christiansen, B. (2015). Handbook of research on global business opportunities. Companies must do to stay liquid. The Economist, Vol. 353, No. 8150. Economist, (1999). (No author identified.). A rum business: what wine? Economist, Vol. 353, No. 8150, pp. 92-97. Joelson, D. (2007). Tasting Chile a celebration of authentic Chilean foods and wines. New York, NY, Hippocrene Books. Liberman Sammy, Baena Veronica, Moreno Fatima (2010 ;). International expansion of the Chilean wine industry: an empirical study concerning the factors and exportation levels. Cuadernos de. Gestion Rachman, G. (2012). Christmas Survey: Terroir and technology. The Read More