Global and International Business Contexts Essay
Global and International Business Contexts
This report has been written by the Boston Consulting Group and uses Porter’s national diamond analysis model to evaluate the attractiveness of investment opportunities in the Tunisian wine industry. Also discussed are two key management issues that need to be taken into account before developing operations in Tunisia followed by recommendations on two strategies for entry into the Tunisian wine industry market. In terms of background to this report, it should be noted that the global market for wine industry is changing significantly with substantial differences in the structure of the wine industry around the world. For instance, there are 232,900 wine producers in France but the top 10 brands control only 4% of the market. In contrast, four firms control over 75% of the Australian wine market. Hence there is a marked difference in industry structure when comparing the “New World” producers (e.g. Australia, Chile, United States) to the “Old World” firms. These structural differences are driven by institutional diversity and contrasting patterns of historical development in countries.
However, they are also driven by the competitive strategies employed by particular firms which are determining factors discussed in Porter’s Diamond model. Porter’s diamond model allows an analysis of why some industries within nations are more competitive than others and takes into account the home base of a business (Tunisia) as one element that plays an important part in successfully achieving competitive advantage in the global market. (See insert 1.1) Part 1: Porter’s National Diamond Analysis Porter’s national diamond analysis model has four main determinants, which are factor conditions, related and supporting industries, demand conditions as well as strategy, structure and rivalry. Factor Conditions Factor conditions are those factors that can be utilised by companies inherently found within a nation which might provide competitive advantage such as human resources, material resources, knowledge resources, capital resources and infrastructure.
These factor conditions can be built upon by companies to improve their competitiveness. Factor conditions could be divided into two resources as home grown resources and highly specialised resources. As Michael Porter described, the home grown resources are important and in the case of Tunisia includes the natural resource of a climate well suited to wine growing, plenty of sunshine, fertile soil as well as limited pollution which all aid the industry of grape planting. Political and historical factors through Tunisia’s history such as the romans, French occupation which resulted in over 600 caves being created for wine aging and a recent flourish in the Tunisian wine industry after the 1980’s has left Tunisia with a number of cooperatives and engineers all with specialist skills in wine production where modern techniques are being used creating innovation, technical progress and competitive advantage.
The relative low cost of employment and salary levels in Tunisia compared to European countries brings with it a further home grown Tunisian competitive advantage together with an increasingly skilled base of employees who have worked in the wine industry. (http://www.tunisieindustrie.nat) Salary Per hour rate In Tunisia: 48-hour workweek: 1.538 DT per hr – Equates to 53p (in British pounds) per hour 40-hour workweek: 1.584 DT (http://www.tunisieindustrie.nat)
This is the demand for products in the home market which can be influenced by three factors; the mix of customer’s needs, the scope of domestic demand and growth and how the needs of domestic market translate into the global market. Whilst the annual domestic wine consumption per person in Tunisia is only 8/9 litres compared to an average of 60 litres a year in France, a domestic wine industry is likely to encourage greater levels of demand at home from loyal customers to increasing levels of tourists (Ariaoui, 2007). Also consumer attitudes and behaviour play a role in domestic wine consumption because wine plays a very different role in European culture as compared to American, Australian culture or even Tunisian culture. In Europe wine remains part of everyday life and consumers often drink it along with the daily meal. Financial incentives offered by the Tunisian authorities have further helped to support the domestic wine industry making it more attractive to foreign investors. As in new world producers, these investments in the Tunisian wine industry have helped encourage innovation enabling Tunisian wine growers to enhance the consistency and the quality of their wines by reducing operating costs through the increasing use of machinery to harvest the grapes crops. Tunisia can also learn from the New World which has more extensive and well-developed markets for its grapes, making it easier for wineries to find multiple avenues for sourcing production.
Related and Supporting Industries At present, Tunisia make wines ranging from average to high levels of quality and they export their products to the whole world including famous brand names such as Carignan, Mourvèdre and Muscat of Alexandria. The Tunisia government has supported their domestic wine industry through the construction of railways and roads (national infrastructure) to enhance the innovation and technological development in wine making which in turn is benefiting other related and supporting industries such as transport, holiday and leisure industry, technology and machinery. Taxes at 18% on wine consumption in Tunisia also provide an important income for the Tunisian treasury and so restrictions are unlikely in the future as in such nations as the US, Chile, and South Africa and should ensure continued support from the Tunisian government. Firm Strategy, Structure, and Rivalry The structure and management systems of firms in different countries can potentially affect competitiveness and how well a company is able to use its existing organisational structure whether it is hierarchal or flat, against current and potential competitive companies.
It is very important that the Tunisian wine industry pays close attention to its industry and company structures and strategies to ensure it is suitable for expansion into the global market. Porter argues that domestic rivalry which involves company structures and the need to pursue competitive within a country like Tunisia could help provide the wine industry with a basis for achieving global leadership. Structural differences including institutional differences in wine production countries vary considerably and are often influenced by regulatory agencies such as in France, for instance which employs very strict regulations that constrain production so that producers can only designate sparkling wine as “Champagne” if they produce it using three grape varieties grown in the region with the same name unlike Australia which has a very loose regulatory structure allowing winemakers to source grapes from diverse geographic regions within the country.
Different levels of subsidies have led to structural differences globally in wine making such as European governments who often subsidise their small farmers who grow grapes whereas subsidies tend to be lower or nonexistent in most New World nations. In addition, capital markets and corporate ownership patterns differ between geographic regions where typically Europe tends to have many more privately held firms in contrast to most of the largest winemakers in the United States and Australia who have become publicly traded corporations. Land ownership and historical patterns of development represent another major factor explaining the structural differences between global wine production areas. For example in the Old World, winemaking has been organised around family farms for centuries. and the land has remained in family ownership for generations. However currently, Tunisian landowners appear to be able to exert power in particular locations where high-quality land is scarce.
This appears to be a problem where most producers are small, and good new acreage in Tunisia is extremely scarce but it is worth noting that grapes now cover more than 10,000 hectares of land in Tunisia compared to around 100 hectares in 1889 and wine production ranks third in Tunisian agriculture just behind olive oil and wheat production (Ariaoui, 2007). Finally, the competitive strategies of firms can affect industry structure such as the United States and Australia where publicly traded firms are much more prevalent. These firms have altered the industry structure and competitive landscape through their acquisition strategies, consumer branding and advertising strategies, capital investment plans, and technology initiatives.
Consolidation of the wine Industry began to increase over the past decade, particularly among the New World producers with the consolidation of some premium wineries merging with direct rivals such as Rosemount creating some major global producers. In terms of industrial structure, Tunisia, as yet is a small but relatively high cost producer of wine in comparison but now successfully exports millions of litres of wine annually to Europe, Russia and the US with two thirds of its wine production being controlled by the UCCCV (Union Centrale des Coopératives Viticoles) and is looking for global partners to exploit and develop Tunisian wine production opportunities.
Part 2: Contemporary Management issues
It is undisputable that many of the global wine producing companies who used to dominate the market are now experiencing a decline in market share. There are several reasons that can be used to explain such a decline including leadership style. The appropriate leadership styles are those that can enable the manager to interact closely both with the employees and the customers and as a facilitator whose major role is to bring together and create an organisational culture that is streamlined a geared towards meeting the goals and mission of the organisation. If the Tunisian Wine Industry is keen to expand, its management team should know that leading others is not a simple task. As a people manager, a leader has to treat everyone as equal regardless of their title or position and maintain a pleasant demeanor (Ljungholm, 2014). It is about focusing on gaining trust and commitment rather than enforcing fear and compliance. To be able to lead well, leaders need to be guided by appropriate leadership theories. Some of the theories proposed include supportive leadership model and transformative leadership model.
These models should enable the Tunisian wine industry to adapt new environment easily and are described below. Supportive leadership model Supportive leadership model, is where the manager supports every stakeholder emotionally and professionally in an attempt to ensure that he or she performs optimally. It also focuses in forging and creating collaborating and binding relationships among employees (Mahalinga Shiva, & Suar, 2012). The workplace is often made up of people from diverse backgrounds, with varying needs and wants and it calls for patience, understanding and proper leadership skills. The supportive model believes that influencing people to do something is more productive and sustainable than barking orders and instructions to people (Hutchinson & Jackson, 2013). A leader should always keep in mind that as a manager, he or she has to “Treat everyone as equal regardless of their title or position and remember to smile a lot and always maintain a pleasant demeanor.” The leader should focus on gaining trust and commitment rather than fear and compliance (Hutchinson & Jackson, 2013).
This cannot be achieved without deliberately motivating the people to become better. Motivating them requires that you first understand their training and development needs. The leader should learn to foster warm relationships amongst the Tunisian employees to understand them and identify ways in which interpersonal relationships can be improved for a more fulfilling work experience. Transformative leadership model The second most important model is transformational leadership theory or model. This is a new model that was formed in around 1970s following the realisation that there was need of greater flexibility in employment. The current employment conditions have changed significantly and this model is particularly relevant to the Tunisian wine industry which is relatively new as an industry (1980’s onwards) and because most of the Tunisians of employable age are from the millennial generation.
One thing to note about this new generation is that it is educated and culturally more mixed than any generation before them. In the US this typically means they are job-hoppers who hate officialdom and mistrust traditional hierarchies (Goudreau, 2013). This group of employees, according to Forbes, is willing to sacrifice pay for increased vacation time and the ability to work outside the office. According to the study conducted by Forbes, one of the ways of motivating this generation is that they want employers who offer flexibility or rather alternative work arrangement. The transformational leadership is characterised by a lot of motivation as under this leadership model, the leader is expected to provide constructive feedback, encourage employees to exert effort and to think creatively about complex problems (Xueli, Lin & Mian, 2014).
Transformational leadership is based on what is called lead, learn and grow model.. A leader can implement transformational leadership by keeping track of the impact of his action, engaging in formal evaluation at the right time (Abbasi, & Zamani-Miandashti, 2013). A leader must also be willing and able to learn on an ongoing basis and should realise that learning is never complete. That is why under transformational leadership, no one is an expert (Watts, & Corrie, 2013). Unlike in most European wine producing areas the problem with most leaders there, is that they tend to believe that they are qualified or that they are expert, whereas in Tunisia producers are looking for expertise outside of the country and seem willing to learn. Tunisia wine production has an opportunity to analyse and create and take into account the appropriate leadership style for the wine industry and country that will be maximise competitive advantage before wine production operations can be developed in the country.
Part 2: Continued Contemporary Management issues
Knowledge and Change Management
Rapid changes in business and technology and increasing competitions means organisations have to adapt the best training and education to enable them continue to stay on top of their games. The complexity, relative newness and competitiveness of the Tunisian wine industry environment requires that Tunisian companies will have to continuously raise the bar on their effectiveness to compete globally. Top performance increasingly demands excellence in all areas, including leadership, strategy, productivity, and adaptation to change, process improvement, and capability enhancement on knowledge, skills, abilities, and competencies, trust and motivation. An organisation in the wine industry should ensure that all levels of employees are given the opportunity to continue to improve by acquiring new skills through training.
Much of the improvements needed in business to meet the demands of changing markets and economic conditions can only result from well-implemented organisational change measured against increased technological excellence and operational efficiency as well as productivity. Kotter (2011) defines change management as the utilisation of basic structures and tools to control any organizational change effort. Change management’s goal is to minimise the distractions and impacts of the change.
Organisational change is incredibly complex and one of the key skills for managers is to understand the nature of change and to prepare themselves to lead and manage change in their unique organisational contexts. Where there is a lack of knowledge in the Tunisian wine business in terms of management strategies to deal with changing markets and economic conditions, Tunisia will need to look at their alliance business partners and those business sectors in Tunisia that are successful in order to transfer and recruit the necessary management skills to succeed.
Part 3: Market entry strategy – Strategy No 1
Formulating a mode of entry is very important factor that a company or industry intending to expand into a new market should bear in mind and predicts whether the company will turn out to be successful or not. The entry mode, according to International Business Publications (2009), is important in protecting the company from facing challenges such as legal, registration and even cultural challenges. In selecting the entry mode, the company should put into consideration the cost of doing business in destination country, and determine which entry mode will help in cutting down those costs and at the same time will ensure that the Tunisian wine industry gets maximum profits and also the largest market share in the target nation. In terms of advantages and based on the market situation, this paper proposes that the Tunisian Wine Industry should adopt cross-border strategic alliances to take advantage of a number of benefits compared with the export strategies.
For example it creates different synergies in the domestic and foreign markets. In addition, it promotes production alliances, which help each of the allied firms to reduce production costs both in their domestic plants as well as their foreign plants. As far as distribution costs is concerned, the cross-border marketing, which is a product of cross-border strategic alliance, reduces the allied firms’ distribution costs in their foreign market (Qiu, 2006). Compared to other entry mode methods, cross-border strategic alliances create different synergies in the domestic and foreign markets (Qiu, 2006). Some of the synergies include production cost synergies and distribution costs synergies.
These synergies will help the Tunisian wine industry to reduce the production and distribution costs and hence increase profits. In terms of disadvantages, cross-border strategic alliances can sometimes lead to a loss of control of individual wine production and their related services. Members of Tunisian wine production may well find that they can become restricted and unable to take decisions by themselves without first referring to the alliance partners. In addition, the complexity of making business alliances work is high and could further complicate business structures, exacerbate cultural differences and have detrimental effects on intercompany working relationships.
Part 3: Market entry strategy – Strategy No 2
Alternatively, the Tunisian Wine Industry may enter into new market through what is called licensing. Licensing mode of market entry allows foreign firms, either exclusively or non-exclusively to manufacture a licensed product in a certain market under specific condition and for this reason is particularly relevant to the situation faced by the Tunisian wine industry. A licensor in the home country makes limited rights or resources available to the licensee in the foreign country in which he or she is to do the business. This includes any resources may like patents, technology trademarks, managerial skills that can make it possible for the licensee to manufacture and sell in the foreign country a similar product to the one the licensor has already been producing and supplying in his home country. This enables the licensor to have several shares in similar companies without necessarily having to open a new branch in other countries.
The licensor is usually paid on basis of one time payments, mechanical fees and royalty payments usually calculated as a percentage of sales resultant thereafter. The decision of making an international license agreement depend on the respect that foreign government show for intellectual property. The licensee should be able to cooperate with the licensor to avoid unhealthy completion in the market. In terms of advantages, licensing is a flexible agreement and can be adjusted any time to suit the conveniences of the both parties. However, this mode of entry can be disadvantageous to the licensee, as parts of the profits have to be shared to the licensor on these terms. Recovering the initial profit and getting reasonable profits can take a relatively longer period of time. Again it can also result in the loss of control over manufacturing and marketing of goods and export to other countries. A further risk to the Tunisian wine industry to take into account when considering this strategy is that the foreign licensee may sell similar competitive wine products after the licensing agreement has expired.
Recommendations To Board of Directors
To conclude, when entering into a new market, there are many existing factors to keep in mind. Porter’s national diamond model can help potential investors by allowing them to understand the macro environment in the Tunisian wine industry. Generally speaking, factor condition, demand condition, related and supporting industries and rivalry could encourage the entering activities. It is worth noting that the past high cost performance of Tunisian wine could also become a strong competitive advantage by restricting new entrants into the Tunisian wine producing market. As for recommendations, Tunisia offers the advantages of a natural wine producing climate and fertile soils, a relatively low cost of employment, significant financial incentives and investment in the countries’ infrastructure by the Tunisian government and unrestricted company structures and land ownership.
The limitations of Tunisian wine industry relate to the relatively higher costs of wine production in Tunisia, increase in licensing opportunities across the wine industry and cross border alliances which can complicate international working relationships and introduce some uncertainty in the future as licensees from other countries continue to exploit Tunisian wine production opportunities resulting in possible delays in the release of profits available to international investing businesses.
Appendices: Appendix 1
Insert 1.1 – Porters National Diamond Analysis Model
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