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Competitive Analysis Of Porters Five Forces Model

Paper Type: Free Essay Subject: Marketing
Wordcount: 3081 words Published: 25th Apr 2017

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1. Competitive Analysis of Porter’s Five-Forces Model

Porter’s Five Forces model is a widely used approach to determine the strength of the competitive forces that will influence a company. (Exhibit1) The competitive pressures that Robert Mondavi faces in the U.S. domestic wine industry based on “Porter’s Five-Forces Model” are described below:

1.1. Bargaining Power of Suppliers

RMC has used backward integration strategy to increased control of grape suppliers. He has successfully convinced many of Krug’s top grape suppliers to sign long term contract with RMC for approximately 75% of its purchases. (Professor Roberto, 2002)

He also worked closely with each grower to improve grape quality and the contract has been structured where the compensation was tied to the grape quality & crop yields. This will improve the stability of the price as most of the growers depend on RMC for sustenance, thus give them very little bargaining power over RMC. Mondavi also convinced Krug’s top two suppliers to take financial stake in his new winery. (Silverman, Gilinsky, Guy & Baack, 2001) Since now they are the stakeholders & have long term contractual relationship with Mondavi, it has reduced the likelihood that suppliers will increase price.

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Furthermore, RMC has invested more than $50mil over the past 10 years to replant vineyards after the phylloxera epidemic. For long-term plan, Mondavi also acquired additional vineyards to increase its internal grape sourcing to 25% by 2005 so that his wineries won’t rely heavily on independent growers. (Professor Roberto, 2002) As such, threat of supplier bargaining power is low for RMC as they attempt to control the supplier’s operations right from production to distribution.

1.2. Bargaining Power of Customers

Sales of wine in U.S. are mainly controlled by three-tier distribution system. RMC sells wines to their customers who are the wholesalers/distributors, who then provided wines to local retails businesses which accounted for 78% of total sales volume in U.S. Supermarkets alone have contributed 52% of retails wine sales. (Silverman, Gilinsky, Guy & Baack, 2001)

However major changes had taken place in wholesale and retail wine business. Number of alcoholic beverage distributors had decreased by 75% in early 1960s and substantial market share are now controlled by top 5 distributors. (Exhibit 2) As a result, large distributors are enjoying economies of scales and prefer to distribute only top selling wine brands since the product can be replenished quickly. Bargaining power of distributors had increased significantly since they have a lot of wine brands to choose from.

Furthermore, five new world countries – Australia, Canada, Chile, New Zealand and U.S. have signed trade agreement in 2001 to keep markets open and reduce trade barriers. (Castaldi, Cholette, Hussain, 2006) With the globalization of wine industry, a lot of international wine brands are eyeing for space on the store shelves of these few powerful supermarkets. As a result, RMC faced increasing competition as they relied heavily on top distributors & retails chain for domestic sales, which accounted for two-third of its revenue. (Professor Roberto, 2002) As a result, bargaining power of customers is high for RMC

1.3. Potential Entry of New Competitors

Consolidation is occurring among wineries worldwide through merges and acquisitions in wine industry. In 1970s, several food and beverage conglomerates, like Nestle and Coca-Cola have entered premium market by acquiring premium to ultra-premium wineries. In 1980s, global alcoholic beverage companies, like Canandaigua and The Wine Group have acquired wineries to complement their beer & distilled spirits businesses. In 1990s, there were some 200 new wineries in the Napa Valley competed with RMC in premium market. (Silverman, Gilinsky, Guy & Baack, 2001)

A growing number of these wineries were nearly owned by multinational companies which have free-flow of cash and able to gain economic of scales in wine industry through merger or requisition strategy. Furthermore, they have substantial investment in working capital and funding to acquire new vineyards or even pay higher prices for grape supplies. Although RMC’s skills & expertise are difficult to imitate, but the knowledge and experience of these new competitors in alcoholic beverage industry with the support of their existing distribution assets will be an added advantage for them to compete in wine industry.

As a result, the new competitors with huge capital have dwindled capital resources of RMC, which ended in public listing to obtain more capital to compete and take advantage of future opportunities (Silverman, Gilinsky, Guy & Baack, 2001) As such, threat of new competitors is high for RMC especially when the big companies treat mergers and acquisitions as attractive ways to grow.

1.4. Rivalry among Competing Firms

Rivalry among competing firms is often the strongest of the five competitive forces especially in U.S. wine industry, which was composed of approximately 1,500 wineries with the top 10 accounting for 70% of U.S. production. (Silverman, Gilinsky, Guy & Baack, 2001)

RMC has experienced intense rivalry from few dominant & large volume producers like E&J Gallo Winery and Canandaigua Wine which have controlled 40-50% of market share (Exhibit 3). Furthermore, E&J Gallo also start to enter the premium wine segment aggressively to capitalize on changes in consumer demand toward premium wines. This will affect RMC which is primarily competing for premium wine market.

Besides, large volume producer like E&J Gallo also gained economies of scale and have been viewed as sales powerhouse by many industry observers. They adopted strategy of substantial vertical integration by owning glass container manufacturer, bottle cork operation, lime quarry, a fleet of trucks and network of distribution centres throughout the country. (Professor Roberto, 2002) This enabled Gallo to enjoy a significant cost advantage. In this situation, rivalry is more likely.

Furthermore, most of the rivalries have focused on channels promotions strategy to increase brand awareness and broaden its customer base in the premium market. They employed a direct sales force, organize wine competitions, wine tourism as well as wine testing and education activities at their vineyard to build the public’s awareness. To sustain the competitiveness, RMC has gone far with the launched of its first radio & television advertising campaign nationwide. As such, rivalry among competing firms is high for RMC in premium wine segment.

1.5. Potential Development of Substitute Products

There are a lot of categories in alcoholic beverage industry such as beer and distilled spirits. When considering substitute for wine, many people will always think the wine substitute is beer. Actually all these are more of a compliment than substitute as each product has its own characteristic, can be differentiated and used to accompany different occasion.

However the threat of substitute products is moderately high for RMC within the wine category. For example, an incident happened in 1999 where all the distributors began to substitute competing Chardonnay brand on retailer’s shelves after RMC experienced shortfall in supplying Woodbridge Chardonnay brand. (Silverman, Gilinsky, Guy & Baack, 2001) Furthermore, there are a lot of wines with similar price, taste & quality are readily available from local or multinational brands. The wide selection of wines has confused the customers during the buying process and always have trouble to remember which wines they bought and liked. (Castaldi, Cholette, Hussain, 2006) As a result, the brand loyalty of customers is low and switching to an alternative product is more likely during the purchase process.

Although RMC has presence in all premium categories and hold a competitive advantage in economic of scales and price, but the threat of substitute products is still possible as most of the distributors only prefer to buy the wines which gained most awards and acclaim from wine enthusiasts.

Finally based on Porter’s Five Forces, it can be concluded that only threat of suppliers are favorable to RMC. Due to the high competitive and continuous threats from new entrance such as alcoholic beverage companies, it is important for RMC to be more innovative in developing world-class wines in order to sustain the domestic economic profits.

2. Key Success Factors of the Wine Industry

2.1. World Renowned Growing Area

U.S., a new world producing country in wine industry was composed of approximately 1,500 wineries. The most famous growing area is California, which are the top wine producer in U.S. and fourth leading wine producer in the world behind the countries like France, Italy and Spain. (Wine Institute.org, 2007) The uniqueness of California is the ideal climate, topography, and soil condition which enable RMC to produce premium wines that are able to compete with the premium European brands. Besides, California also attracted a lot of tourists throughout the year. Hence, it continuously provides a constant source of customers to RMC.

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2.2. Modern Winemaking Facilities & Technologies

Wine industry is a capital intensive industry and requires great winemaking techniques & facilities to produce high quality wines. Based on the study by Professor Roberto (2002), RMC operated six wineries in California and each of these wineries employed modern technology to insure the gentle handling of grape and the high quality of fermentation and aging processes. Besides, RMC also built a state-of-art winemaking facility and assembling a team of experts in the area of viticulture and winemaking. All these new techniques and development of experts have been an added advantage for RMC in the production of world-class premium wines.

2.3. Domestic Market Growth Potential

U.S has a very strong domestic market for wine industry due to its status of fourth largest producer of wine and third largest consumer in 1999. (Exhibit 4 & 5) Based on the study by Castaldi, Cholette, Hussain (2006), the highest concentration of table wine consumers was aged between 35 to 55 and 31.4% of consumption contributed by the adults in families earning over $75,000 annually. Normally this group of people has a very high disposable income and willing to pay more for premium wine. As a result, RMC is able to leverage on this favorable demographic to enjoy both economies of scale in the growing premium market. Those adults who are not regular wine consumers consist of teetotalers and beer or spirit supporters. (Castaldi, Cholette and Hussain, 2006) There are a lot of potential to convert this group of beer purchasers to become wine consumers. It can be done via innovative marketing strategy, e.g. health benefits related to moderate wine consumption. In conclusion, many project that U.S. will become the world’s largest wine market by 2008 with the steady rise of per-capita consumption in recent years. (Exhibit 5)

2.4. Focus in building Portfolio of Premium Wine Segment

RMC’s strategy is to focus on the premium wine segment. With the introduction of Woodbridge brand wine in the popular premium & super-premium categories, it has become the best seller wine and contributed more than half of the RMC’s revenue in 1999. To further broaden its customer base, RMC has introduced few new brands via domestic diversifications and global partnerships to fill various price points in the premium wine segment. RMC also further divided the ultra-premium category into two categories, which has not been adopted by the industry to-date. (Silverman, Gilinsky, Guy & Baack, 2001) This strategy enables RMC to consistently produce premium wines to reach different group of customers and further differentiates their products from competitors, which focus more on jug wines. As a result, RMC able to sustain the competitiveness in U.S. wine industry.

2.5. Globalization of Wine Industry

In 2001, U.S. wine industry has gone into globalization with the signing of Mutual Acceptance Agreement (MAA) on Oenological (winemaking) Practices with four new world countries, Canada, Australia, Chile and New Zealand. The main purpose is to promote greater international wine commerce and eases trade barriers for U.S. wine. (Wine Institute.org, 2007) This enables RMC to sell their product outside the region with lower tariffs, logistic cost and trade barriers. As a result, RMC has increasingly look abroad to increase sales, earnings and take advantage of certain macro-economic factors such as exchange rates. It also gives an opportunity for RMC to showcase other wines to enhance its reputation in international markets.

3.1 Steps to ensure the Success of Strategy Implementation

Robert Mondavi future business strategy is to form global join ventures as a way to develop world-class wine and transform RMC to become a truly global company that grow, produce and sell wines in all the best wine-growing regions in the world. (Silverman, Gilinsky, Guy & Baack, 2001) To ensure the success of strategy implementation, RMC need to focus on below few areas:

3.1.1. Positive Cash Flow

Successful strategy implementation always requires additional capital. Based on the RMC Financial Statement (FY1997-1999), although the revenue has increased from $300.80 millions to $370.60 millions, but the net profit margin has reduced significantly from 9.4% in FY1997 to 8.3% in FY1999 (Exhibit 6). Therefore, it is very important for the company to recover its financial position by further pay down its debt in order to generate more free cash flow. In addition, it will provide more financial resource for RMC to grow its portfolio by taking advantage of future opportunities.

3.1.2. Market Segmentation & Product Positioning

With the plan to venture globally, it is very important for RMC to determine the characteristic and needs of consumers as well as analyze consumer similarities and differences in every new market. As consumers are different in every country, RMC needs to produce different wines to meet different country preference. With market segmentation, it will enable RMC to position each of its wines appropriately to meet consumer needs and expectation. As a result, RMC will have better control on production, distribution and advertising for each of its wine. Finally, it will help RMC to improve operation efficiency and hence maximizing the profits.

3.1.3. Traditional & Online Advertising Campaign

To conquer the global market, it is extremely important for RMC to build its brand and broaden its customer base. Based on the study by Professor Roberto (2002), most of the premium wineries in U.S. do not spend much on consumer advertising. They tended to focus more on channel promotion. As such, it poses a large opportunity for RMC to strengthen its brand appearance in advertising medium. For example, RMC can focus on TV and radio advertising to build trust and emotional connection with consumers. RMC can also advertise in selected premium magazines to strengthen its premium market penetration. Furthermore, with the emerging of new online medium, it will also help RMC to reach those consumers who are difficult to reach via traditional media. In conclusion, advertising is an important tool for brand building.

3.1.4. Management & Operations Control

Strategy implementation will never success without the strong management and operations control. RMC needs to establish clear, reasonable, measurable and achievable annual objectives which are well communicated throughout an organization. With clear annual objectives, all the employees will have the same understanding and moving towards the same direction in implementing the strategy. It will also help in allocating resources more efficiently according to annual objectives and provide relevant training for each employee to further enhance their skills. Besides, performance-linked rewards must be well placed to motivate and improve the productivity of all employees. Lastly, adequate and timely evaluation is needed to ensure the performance conform to the strategy.

3.2. Potential Problems during the Strategy Implementation

3.2.1 Conflict between Employees

Conflict might occur between two or more parties in RMC. Normally misunderstanding & disagreement occur during the implementation process as each party has their own commitments and expectations to achieve. Conflict is unavoidable for all organizations especially for RMC which has a large workforce to manage. For example, in 1999 Michael Mondavi was caught between the 2 camps due to an argument for RMC’s future strategy. (Silverman, Gilinsky, Guy & Baack, 2001) As such, conflict need to be solved before negative consequences affect the organizational performance and strategy implementation.

3.2.2. Resistance to Change

Resistance to change is another potential problem that RMC might face during the strategy implementation. People fear to change because any changes in structure and strategies will affect or disrupt the current working environment. However, continuously adapt to changes is necessary for RMC to compete in the fast growing and increasingly competitive wine industry. Normally those organization best adapt to the changes will gain significant competitive advantage and strategy implementation can be relatively easy.

3.2.3 Challenge of Financial Management & Monetary Systems

RMC might face a challenge to maintain its financial stability over the next few years as strong financial budgets & capital are required to sustain the business worldwide. Furthermore, RMC will also deal with two or more exchange rates which can complicate its global operation. The global profitability will also affected by the direct impact from dollar when the economy slowdown.


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