Valley to Valley (Napa to Willamette)
After working in the wine industry in Napa Valley for 10 years, I decided to pack up my things and move to the wine industry in the Willamette Valley.
My husband and I first visited Portland three years ago on vacation, and we fell in love with the city. The people here are much more relaxed; the city is clean and has such an urban, artsy feel to it; the food is amazing; and there are so many unique shops and a sense of creativity all around. Don’t get me wrong, Napa is beautiful with amazing food, a central location, and a small tight-knit community. It was just time for a change after living there for almost all of my life.
Napa vs. Willamette Valley wine….
This is a tough and sensitive subject! When I first started working here, my co-worker joked about Napa being good for auto parts. I sensed a little competition, similar to Napa vs. Sonoma. Napa and the Willamette Valley are two very different wine regions. One reason is the weather. Napa has a very hot and dry climate with very cold winters, ideal for Bordeaux varieties. The Willamette Valley is much cooler, making the weather more ideal for Burgundy varieties.
I do have to say that the Pinot Noirs here are delicious! They are much lighter than what I’m used to, but balanced and structured. I look forward to learning more about Oregon Pinot Noir and drinking more of it too!
7 Tips to Prepare for Natural Disasters
1. Get all staff involved and educated. Natural disasters can happen at any time, any where.
2. Facility Evaluation: Do you have an emergency evacuation plan?
3. Invite your local Fire Department to evaluate the surroundings. They like to be involved.
4. Hold mock fire drills, evacuation drills and measure responsiveness.
5. Assess and discuss what went right with the mock drills and what needs improving.
6. Hold fire extinguisher training. Learn where your exits are. When it's dark, smokey and exits are blocked, would you know what to do?
7. Invest in people - buy a defibrillator, pay for first aid and CPR training. Time means everything in an emergency.
Tip #2. Emergency Evacuation Plan
Tip #2. Fire Escape Ladder
Tip #6. Lighted Exit Signs
Tip #7. Defibrilator
B the Change - REX HILL / A to Z achieves B Corp Certification
At A to Z Wineworks, we take sustainability seriously. So seriously in fact that, for us, sustainability not only means how we farm our vineyards and recycle at the winery but, among other things, how we treat our employees, how we look at our chemical, water and carbon foot prints and how we relate to our community. In short, we look at the whole of our business and ask what can we do not only to create a profitable business and a great place to work, but how do decisions we make affect the vitality of our triple bottom line: our social, environmental and financial performance measures.
For years we had certified parts of our business with various certification systems and agencies (LIVE, organic, Demeter, OCSW…etcetera). In researching B Corp certification, we realized that of all the certification systems we work with, B Corp best reflects how we manage our company, our company culture and our values. Furthermore, we discovered that some B Corp certified companies were among those that we admired not only for their financial success, but for the fully sustainable way they were run, even after a sale.
It became only natural to seek B Corp certification. As we progressed through the certification process, it became quickly evident that B Corp and A to Z Wineworks were a perfect fit. We are very happy to be part of the family of B Corps certified companies. It feels great to be recognized for the work we have done to retain our values as we experienced exponential growth.
Strategic plans probably fail more often than they succeed. Perhaps the most prevalent reason is the practice of starting from the numbers and working backward toward strategy, a tendency common to financially driven companies that set their goals for revenue and earnings growth then cast about for a strategy to underwrite those goals.
This approach fairly abrogates the integrity of strategic planning. It is tantamount to a military general saying to commandants, “We can afford to lose 15% of our troops; what kind of battle strategy will that buy?” In that context, the proposition seems absurd but in corporate practice it is common. “What strategy will achieve an 8% growth in earnings next year?” But, in so doing, was a strategy discarded that would produce little increase in earnings for two years but 15% for the five following?
David Collis, who was cited in an earlier blog post for his seminal Harvard Business Review article, Can You Say What Your Strategy Is? (April 2008), cites three dimensions to a successful strategy. The first is objective. As Professor Collis puts it, what end is the strategy designed to achieve? In the case of A to Z, it was to become Oregon’s leading high quality value wine brand. Seems simple enough. However, that could mean a number of things. In what categories would we compete? From what regions? Where would we sell? Into what channels?
While at the time, the objective was a largely untapped opportunity, how we defined the scope of how we would compete (Collis’ second dimension) was critical to the success or failure of the objective. The categories of Pinot Noir and Pinot Gris were fairly defined for us as the state’s flagship varietals. However, when we tried to extend the scope of the brand to produce big reds from Southern Oregon, we met considerable resistance. Our brand was not sufficient to leverage even excellent wine from a relatively obscure region into a highly competitive global segment.
Similarly, we faced a scope decision of where and how we would sell. Seeing that over 40% of wine produced in Oregon was sold in Oregon and that relentless distributor consolidation would only circumscribe national opportunities further, we opted for something of an inverted market strategy where we worked from the outside in, developing national markets before the home market. By broadening channel scope from the outset, we hoped to stay ahead of the curve of consolidation. Conversely, with respect to international sales, we only enter markets that are “transparent”, i.e. where we can compete without a direct and costly presence. Thus, looked at concentrically, we defined the optimal channel scope for our resources to lie in the middle rings so to speak.
Resources is the keyword and third dimension of Collis’ structure. The most unique objective and focused scope are academic if the company lacks the necessary resources or competitive advantage to achieve them. This is the second common failure of strategic planning—the most creative strategy will inevitably fail if its execution is impracticable. While maintaining a limited market presence, home grocery delivery with the associated objective and scope of time-saving for over-extended individuals and families seems at first glance an extension of other home delivery services past and present such as milk delivery and dry cleaning. However, there was no competitive advantage as what was overlooked is that milk delivery and dry cleaning services are largely undifferentiated while a large share of grocery purchases and meal planning is done in the store. Few grocery lists account for all that is purchased. Moreover, the paper-thin margins of grocery could not support the weight of delivery service.
Disney wrongly assumed that the American love of Disneyland was ubiquitous and would be embraced in France with the same cultural curiosity as Levis and McDonald’s. What was overlooked is that Levis and McDonald’s were whimsical tastes of American culture (with McDonald’s going so far as to architecturally integrate its stores into surrounding cityscape) whereas Euro Disney was a sprawling American occupying force overrunning and profaning French culture and sensibility.
Frequently, strategic failure is simply a combination of errant scope and the loss of competitive advantage. One of the most glaring failures was the introduction of New Coke in the early 80’s when Pepsi claimed that younger drinkers preferred Pepsi’s sweeter taste. Wanting to broaden its appeal to a younger demographic (scope), Coke bit, and was bitten. The traditional Coke taste was its most important asset and without it, New Coke was just another new product introduction.
In 1989, Ford bought Jaguar, thinking that it would extend its product line into ultra-luxury automobiles. The strategy never succeeded for two related reasons. One was that in the U.S., Ford was indelibly identified as a producer of American cars; you were a Ford man, A GM man or a Chrysler man. The second was that despite the limited market for Lincoln, Jaguar was a great leap beyond. People weren’t interested in buying a $75K Ford. In other words, Ford did not have the marketing resources to compete in the ultra-luxury segment. Since selling Jaguar in 2007, Ford has masterfully returned to its American roots, selling durability and reliability, traits that had comprised its competitive advantage. The company has been so successful in building on this advantage that, ironically, it is now selling $75K pickup trucks.
Occasionally, there are marketing coups where in giving up one segment, a company attracts an even larger one. Pabst Blue Ribbon had been known for decades as a workingman’s beer since its founding in the 19th century. Its sales peaked in 1977 and then began a long decline. When the efforts to regain its consumer base failed, Pabst rebranded itself as PBR and marketed blue collar “authenticity” to the hipster crowd with fair success.
Nevertheless, it is a risky strategy and is best undertaken as a last resort. Virtually no company is big enough to strategically control industries or to redirect markets. Google is a rare exception. Ford, IBM, Sony, Microsoft, Apple and many others have all failed in their times. Fundamental to successful strategy is the ability to adapt to evolving technology, competitive changes, alterations in consumer desires or behavior, channel shifts, supply reconfigurations or regulatory conditions. This may mean compromising opportunities to avoid an unmanageable risk of unexpected outcomes.
Many years ago, a man I knew was talking about why he didn’t expand his stock brokerage business into other products such as bonds or into other markets. He replied that while he believed that he knew as much about stocks as anyone, he knew little about bonds. As to markets, he further knew that people chose a small brokerage for the personal relationship and that to expand to distant markets would obviate that resource. Summing up his experience, he said, “I used to think that successful people and companies were about big ideas; I’ve learned that instead it is about figuring out what you do better than anyone else, then getting up each morning and putting one foot in front of the other do it. It’s when you get bored that you get into trouble.”
The Silicon Valley Bank State of the Industry Survey: How Reliable are its Responses?
Too often, desired conclusions skew analysis to produce self-fulfilling results. While keeping faulty data from contributing to sampling error is simply a matter of objectivity and basic arithmetic, more subtle are the subjective factors that yield non-random samples. In the case of the Silicon Valley survey, the psychological disposition of the respondents is a significant distorting factor.
At the February Oregon Wine Symposium in Portland, Silicon Valley Bank principal, Rob McMillan, gave a preview of the bank’s 2012 State of the Industry Report, projecting Oregon industry growth of between 7% and 11%.
In presenting his data, Rob noted that 80 of some 400 Oregon wineries had responded. This corresponds to a confidence level of 95% (a generally standard target for researchers) with a confidence interval of plus or minus 10%. Thus, with 80 of 400 wineries reporting, if the sample were random, there is a 95% certainty that the range of growth will be between -1% and 19% (plus or minus 10% against the reported average of 9%. This describes industry conditions ranging from stagnation to boomy growth, random indeed.
Adding to the uncertainty is the definition of sales growth. Is one speaking of unit growth or revenue growth? Unit growth may well be accompanied by a drop in revenue (“We lose a dollar on every sale but we make it up on the volume.”) Or, the data may just be GIGO (Garbage In / Garbage Out) as with the 2011 Oregon Winery and Vineyard Report covering 2010.
In that report, industry revenue was reported at $252M on 1.93M cases, which works out to $131 per case. In 2009, the respective figures were $202M and 1.66M cases or, $122 per case. In the environment of rampant discounting that existed in 2010, a growth in case value simply was not possible.
Expressed as a story problem, if in 2009, I sold 10 cases of $600 wine for total revenue of $6000, I would have had to sell $7500 of wine to achieve the 25% reported revenue growth of 2010. Average industry discounting of only 10% below 2009 pricing (not much $50 Oregon Pinot Noir was going at frontline pricing or at least going very fast), would have required a nearly 40% increase in case sales to achieve 25% dollar growth.
If one’s winery is failing, it is highly unlikely that receiving a business conditions survey in the mail is going to be very appealing. Who would want to be reminded, question by question, of how bad things are? Even those making ends meet don’t particularly want to see what others are presumably doing at the top of the scale. Rather, surveys such as Silicon Valley’s tend to be overly optimistic as, even anonymously, people want the world to know how well they are doing. Moreover, as the Silicon Valley survey gives the option of identifying one’s winery, there is even more incentive for the haves to trumpet their success.
Sociology also plays a role in sample error. Electoral surveys that are as statistically well-constructed as possible have two inherent sociological flaws. First, opinionated people are more likely to pick up a telemarketing call during dinner and thus don’t necessarily represent the deliberating voter. Second, as the preponderance of calls go to land lines, the results are slanted to an older, more traditional demographic.
Similarly, surveys of customer satisfaction are more likely to be completed by people either very happy or unhappy with their purchases. In the case of fashion or durable goods purchases such as automobiles, buyers may rationally cite the reasons for their decision but, in the end, people buy to satisfy the complex Gestalt of ego.
Survey responses tend to attract a non-random sample by their very nature: those who perceive something to gain by responding, those more desirous of having their opinion heard or those inclined to boast of their success or distinguish a particular prowess. These factors coupled with conclusion driven analysis and poor sampling methods yield only a superficial view, like the 50 mile setting on a car’s GPS, a level of detail anyone familiar with a map of the United States already knows but doesn’t provide sufficient direction for where one wants to go.
The Capital Shell Game: Liquidity & Value
A principal tenet of shareholder wealth theory is that excess returns beyond those necessary to operate the business and fund capital expenditures should be returned to the shareholders who will most optimally reinvest. In a goods and ideas producing economy, this mechanism worked reasonably well. Shareholders would reinvest dividends and capital gains in companies that innovated and produced high quality products at competitive prices. This very much characterized the American economy from the end of WWII until late in the last century.
In the 80’s, a tectonic shift began to take place, however, as investment banks diversified from the traditional role of advising businesses and conventionally raising capital with securities and bank debt to create financial products and ultimately financial markets. These products grew ever more arcane as the banks competed for the best mathematicians and physicists MIT, Harvard, Princeton and Chicago had to offer.
Eventually, these instruments became Frankenstein algorithms whose creators could not divine or control unintended consequences. As many of the products were designed to trade outside the regulatory realm, investment banking enjoyed a shelter where the sheer velocity of trading produced billions of dollars of liquidity with no underlying value. Even something as basic as the Dow Jones Industrial Average grew from roughly eight million shares of daily trading in 1980 to four billion today.
As long ago as 1637 in Holland when a single tulip bulb could sell for ten times the annual salary of a skilled craftsman, financial investments detached from underlying value are not sustainable. In the global financial crisis, which began in 2007, the problem could be generalized as a lack of capital reserves to support the debt creating the illusion of liquidity. In the simplest rendition, homeowners borrowed more than their houses were ultimately worth when the real estate market crashed.
Investment banking functioned on the same flawed principle, only in far more complex ways. A credit default swap, for instance, is in fact insurance against the failure of a financial instrument or institution. However, because it is arbitrarily designated a swap and not insurance, it isn’t regulated under federal law and thus is exempt from having adequate capital reserves to back it. Without these reserves, the investment banks were unable to withstand what in commercial banking would effectively be “a run on the bank” and so, Bear Stearns and Lehman Brothers, after a century of business, fell in a matter of days. Others, “too big to fail”, were bailed out by the federal government.
The repeal of Glass-Steagall in 1999 was an accelerant as commercial banks became free to assume the trading and investment functions hitherto limited to merchant or investment banking. As a result, commercial banks began shifting deposits from lending to trading. Today, only 8% of bank deposits are lent to businesses.
Concurrently in the 80’s, a new investment entity was emerging in the form of private equity. Much in the news now because of Mitt Romney’s tenure at Bain & Co., private equity firms do invest in companies that produce goods and services, following the postwar model but tend to do so from a short-term financial play as the typical private equity investment lasts five years or less.
In 1980, there was about $5 billion in private equity investment. By 1995, that figure had climbed to $125 billion. Currently, according to Bain, private equity firms have nearly one trillion dollars of uninvested capital. In the same report, desirable private equity investments were characterized as having strong cash flow while requiring low capital expenditures and limited working capital. Indeed, it’s an attractive low-risk investment profile but one unlikely to create jobs or new products.
Private equity doesn’t tangibly invest in products, brands or people but rather, in financial statements. Products are inventory, brands are marketing expense and people are overhead. The goal is to minimize these costs to increase return on assets and return on equity. While a seemingly indisputable goal, when the investment horizon is short, the financial engineering may destroy the long-term competitive viability of the company after the investors have broken camp. Tangible capital is often destroyed rather than created, instead merely providing liquidity to start the cycle again.
The destruction of tangible capital is by no means limited to private equity. Publicly traded firms have similarly shifted from creating capital to creating liquidity. Since the beginning of the credit crisis, U.S. companies have accumulated nearly a trillion dollars in cash while capital expenditures have fallen 26%. Granted, there is little incentive to invest when there is excess capacity at hand yet these are not all smokestack firms that have competitively lost out overseas. Among them are Cisco with $40 billion in cash, Microsoft with just under that amount and Google with $35 billion. In 1980, total corporate net cash flow was around $200 billion; in 2011, it was just short of $2 trillion.
Far and away, the largest use of corporate cash is for takeovers. In 2011, global merger and acquisition activity exceeded three trillion dollars. In some cases, synergies are created that revitalize one or both entities but more often, the consolidation results in the elimination of jobs, plants and products. In 1980, there were 20 million manufacturing jobs in the U.S. Today, there are 15 million. When one considers that most of the high-tech industry has developed since 1980, our core manufacturing has probably fallen below 10 million. Some of this decline is attributable to greater productivity and the reliability and wearability of durable goods as well as a greater proportion of income being diverted to services such as medical care by an aging population. Nevertheless, one is more often surprised to see that a product is imprinted with ‘Made in the U.S.’
Without a change in incentives to invest in value producing capital, ten percent unemployment will be institutionalized and, correspondingly government will continue to grow to provide the income and services for the disenfranchised. This is not an apology for lack of initiative but simply stating a fact that an uneducated and unskilled work force cannot create jobs or services.
The American education system has become biased toward high value technicians—engineers, researchers, systems analysts—who comprise but a fraction of a complete work force. So, even where there are jobs, the jobs go unfilled for want of qualifications. Someone in a local high-tech firm recently lamented that he had fifty open jobs but couldn’t find qualified applicants.
Even if educational reforms were instituted, the stubborn fact remains that America doesn’t make things anymore, instead having first shipped jobs offshore, then capital, then knowledge. It remains to be seen if we can still create industries around technology to come. If instead, we continue on the present course, productive capital will continue to decline, unemployment will continue to grow and the gap between rich and poor will come to resemble the social fabric of 18th century Europe.
The Evolution of Industries
Industries tend to develop in four stages. While the particulars vary from industry to industry, there is nevertheless a common warp and weft on which the designs are woven.
The first stage is the birth of an idea or the knowledge phase. It may be the natural progression of an existing technology such as the laptop computer, the mobile phone, Blu-Ray or digital photography. Or, it may simply be a better mousetrap requiring little or no technological leap like roller bags, quick release ski bindings, or parking garage systems that use LED lights above the parking spaces to tally the open spots in a row or on a floor.
The leap doesn’t have to be a manufactured product. Overnight delivery, urgent care centers, multiplex cinemas, food courts and Southwest Airlines’ boarding system are all examples of low-tech or no-tech methods of better delivering a service. It took until the 1960’s for someone to visualize the efficiency of a single queue at banks, government offices and ticket booths.
Some inventions create needs people didn’t know they had. These too may be high-tech or low-tech. Examples are the VCR, the answering machine, GPS navigation systems, truck bed liners or Post-it notes.
The knowledge phase typically doesn’t last very long, particularly in the digital age where information spans the globe overnight. Ideas and products are readily pirated, tweaked and presented to the market as knock-offs. Despite the enormous resources companies employ to protect trademarks and patents, the protections are porous.
Thus emerges the production phase as competing technologies sort out. The VCR contest between Beta and VHS lasted for years, which is unusual; more common was Blu-ray supplanting conventional CD’s by dint of superior quality. Cellular-based and satellite-based portable phone technologies waged a titanic battle for supremacy with cell becoming the U.S. standard and satellite the European standard. The adoption of cellar technology in the U.S. despite the greater capacity of a satellite-based system demonstrates that the best technology doesn’t always win. It also explains why we remain in the drunk tank on fossil fuels.
Technologies can win out only to be challenged anew later. The PC dominated Apple with Microsoft’s relatively open architecture operating system, which permitted far more software applications to be developed for PC’s than for the tightly proprietary Apple operating system. While PC’s still vastly predominate, Apple has developed its own applications around avant-garde products that have captured an increasing market share.
Typically, the production phase is also short-lived if only because product life is similarly so. The marketing phase that emerges next usually endures longer because it is more asymmetrical. Virtually identical products may be marketed entirely differently. Current ads for the Volkswagen Passat are cast around wry humor while those for the Honda Civic tout history and engineering capability. Those for Miller Lite beer mock the manhood of one of a group of friends with his beer choice (not Miller) being “the second unmanly thing you’ve done today.” By comparison, Coors promotes a party atmosphere.
Beyond personality, the array of marketing elements taken together determines the lifespan of the product. Which features will customers pay for and which are superfluous? How are these features bundled? Bundling that cannot be easily compared has become the fundamental selling strategy in industries such as computers and new cars. How are products serviced or are they? Most electronics are discardable because of obsolescence.
How and where products are sold can be a major determinate of success. Beyond the innovative prowess of Apple, sleek freestanding stores in upscale shopping areas with ‘cool’ salespeople have complemented the products themselves. By contrast, the web-based build-it-yourself approach of most PC makers can overwhelm the average buyer. Schwan’s, originally a home delivery ice cream company in the 50’s, has sustained a niche long after home delivery went the way of telephone operators by capitalizing on small-refrigerated trucks to deliver a wide variety of frozen and refrigerated foods.
Products that survive the foregoing stand to become brands, the most enduring phase of the product life cycle. Of the first three phases, knowledge and production, while critical to reach the marketing stage, are the least important to brand. What makes a brand? It is the quality of permanence in consumers’ minds. Peanut butter, mayonnaise and tuna fish enjoy the greatest brand loyalty among grocery shoppers—of the two, it might be said that peanut butter was once innovative when the process for emulsifying the oil was discovered. Otherwise, they exist as fixtures in the consumer’s minds; even discounts rarely spur brand switching.
The anomaly of the wine industry is that the knowledge phase lasted 10,000 years. As recently as 20 years ago, the knowledge of winemaking was a sufficient competitive advantage unto itself. Today, however, good wine is simply the ante to play poker and, at the risk of offending artistic sensibilities, wine is now a marketing driven business. To the point of whether quality is still a differentiating factor, how many can remember a score from the Wine Spectator other than their own?
Bob Higgins, a founder of Highland Capital Partners in Boston, observed that when he invested in technology, he tended to lose money but when he invested in business models, he tended to make money. Applied to the wine industry, all wineries worldwide employ roughly the same methods to make wine. The successful ones persuade the consumer that they do something different. Persuasion is marketing.
What Business Are You In: Part II
With respect to the wine industry, the answers are widely divergent. As recently as thirty years ago, such was not the case. As late as 1980, winemaking knowledge was a competitive entry barrier in itself. In Europe, that knowledge was largely passed down through generations. In the 50’s and 60’s, Emile Peynaud, at the University of Bordeaux, pioneered the science of winemaking but traditionalists eschewed his methods.
In the U.S., the fledgling California industry of the 60’s and 70’s was more receptive to new ideas and turned to UC Davis to develop modern winemaking methods. The resulting successes caused Europeans, particularly the French, to gradually adopt a more scientific approach to balance craft. From there, formalized knowledge coalesced fairly quickly and by the mid-80’s, winemaking was no longer cabalistic.
Nevertheless, wineries persist on wine quality as their differentiating characteristic. While the winemaker and her tasting group might distinguish subtle nuances, relatively few consumers can. Rather, they rely on ratings to direct their palates. Some years ago, the old Pacific Wine Company posted a series of irreverent cartoons skewering wine pretensions. In one, a customer in a wine shop inveighs against a wine offered for tasting. The shop owner intones that “Parker gave it a 99,” to which the customer rejoins, “I’ll take a case.”
Lost upon many wineries is that they are really in the luxury business. At A to Z, while we promote Aristocratic Wines at Democratic Prices®, we have to constantly remind ourselves that for most wine consumers, $19 is an expensive bottle of wine. Moreover, when a consumer enters a wine shop, he is confronted with hundreds, if not thousands of offerings. Unable to distinguish the quality inside the bottle, his buying decision will ultimately consist of criteria outside the bottle—label, advertisement, prestige, anecdotal knowledge, a friend’s recommendation or a winery visit.
Once the luxury principle is accepted, the sales rationale can shift away from the simplistic (but nebulous) “because it’s better” claim better suited to a demonstrable can opener or a longer-lasting battery. In recognizing that principle, the winery is correspondingly accepting that whatever one’s artistic sensibilities, wine like all consumer goods, is a market-driven business. This realization can be freeing, leading one to examine what is truly unique about the wines and the winery. And ultimately, uniqueness is the sine qua non of a luxury good.
Through the 90’s, producers primarily depended on fine wine wholesalers to sell and deliver their products to independent specialty shops where fine wines were generally sold. By one estimate, there were 3,000 wine wholesalers in the U.S. in 1990. Some of these were giants dominated by brands such as Gallo. Subsequent tiers offered a fit for wineries of every volume and price, down to boutiques producing a couple thousand cases.
In the past decade, however, the number of wine wholesalers in the U.S. has shrunk to around 500. At the same time, distributors have moved away from selling to concentrate on logistics and fulfillment where technology allows them to manage without the major investment in people which selling requires. Thus, it is increasingly incumbent upon wineries to undertake their own sales, which makes it all the more imperative to differentiate with marketing.
In the 80’s, wine touring, especially in California, began to attract consumers. As it did, the business model shifted away from wine production for unknown consumers to a highly engaged one-on-one selling experience that brought wine education, entertainment and the stagecraft of the winery into the equation. Wine quality was simply the price of admission as sales became increasingly dependent on the ambient marketing appeal. Lured by the higher margins of bypassing wholesalers, droves of wineries chased the deceptively simple grail of direct sales, flooding the market and making it all the more obligatory to have a compellingly unique value proposition to attract customers.
Similarly, new trade laws opened many states to potentially lucrative direct shipping. However, most wineries overlooked but quickly learned that these more liberal trade laws changed the competitive landscape for everyone and that to succeed, the winery had to bring the same unique value proposition to New York as at home.
The luxury principle can be supported in myriad ways. In the case of A to Z, it is an affordable luxury. Or, the appeal can be opulence as with wineries that more resemble palaces or, it can be an old barn that beckons to the authenticity of the land. It can be an exclusive relationship with the winemaker or a wine club where events are lavish. There are as many luxury opportunities as there are wineries but first, one must get out of the beverage business.
What Business Are You In: Part I
In the Spring of 2008, David Collis, then of Harvard, and the late Michael Rukstad, coauthored an article in the Harvard Business Review titled Can You Say What Your Strategy Is? Professors Collis and Rukstad challenged executives to distill the objective, scope and advantage of their business to 35 words or less. In the research leading up to the article, they found that few people could and offered the obvious conclusion that if they couldn’t, neither could anyone else.
The business one really is in is often not the same as the business one is apparently in. Many years ago, after acquiring Taylor Wine Company, Coca-Cola subsequently purchased Sterling Vineyards with the idea of vertically integrating into fine wines. While Taylor had successfully fit Coca Cola’s business model, the Sterling acquisition was a misadventure.
Why? Because while Coca Cola well understood that its distribution capability was a core strategic asset, it neglected the fact that it was not adaptable to every beverage. Whereas, Coke, Sprite, Taylor wines and Minute Maid beverages all had common channels in supermarkets and the growing convenience store segment, fine wine was not sold in these channels. It was a classic example of over-estimating the scope of one’s strategic assets.
Similarly, Harry & David, the longtime mail order provider of elegant fruit gift baskets, decided to enter the direct retail segment and opened stores in upscale boutique malls, a move that contributed to the company’s ultimate bankruptcy. Harry and David forgot when and why people bought their products. Potential customers kept the Harry & David catalog on hand and, as needed, ordered gift baskets to be shipped. Besides incurring the learning curve of competing in direct retail, Harry & David failed to consider that shoppers will tend to focus on items that can only be purchased in that particular venue. Thus, the retail outlets became redundant as customers still went home to order by catalog rather than squander shopping time at their favorite boutique before having to pick the kids up at school.
Retailers long ago realized that they were in the business of buying and selling goods. They only needed access to a storefront—they didn’t need to own it. Before that, airlines determined that they were in the business of quickly moving people from one point to another. (Remember, I’m talking about a long time ago.) Similarly, airlines didn’t need to own aircraft but only have access to them. Thus were born the commercial real estate and equipment leasing businesses. Someone’s back office is always someone else’s front office.
Nuances of what seems to be the same business strategy can make the difference between success and failure. Blockbuster designed and marketed itself as a neighborhood storefront provider of films on CD and cassette. Netflix structured and positioned itself as a distributor of films. In this critical distinction, Blockbuster went the way of the telegraph and fax machine, its strategic assets fixed in a passing technology. Netflix, by keeping its focus on being able to most efficiently distribute emerging technologies such as streaming, continues to sidestep obsolescence.
Because of the warp speed of technological change, high-tech companies tend to have short shelf lives. For example, when laptops first emerged, competitive advantages were about speed and performance. Now it’s about battery life and wireless connectivity.
Few companies have the ability to adapt beyond their initial advance or subsequent enhancement thereof; far fewer have the ability to remake themselves completely. In the 90’s as the world moved away from mainframes and stand alone mini-computers to PC’s and server based technologies, IBM was slow to adapt and many gave the company up as a relic. However, IBM was using its considerable resources to carefully determine what business it could endure in.
So while most incumbents in the computer industry chose to compete in the soon-to-be commodity market for personal computers, IBM looked for opportunities where it could create entry barriers with its advantage of enormous cash and technical resources. The result was that while IBM nominally competed in the PC market, it turned its greater attention to developing complex control systems for such diverse applications as manufacturing plants, refineries, railroad traffic and urban traffic management. In this instance, IBM redefined itself from a manufacturer of computer hardware to a provider of software-based solutions for complex systems without regard to an applications niche. Thus, like Netflix, it avoided the trap of technological obsolescence by creating a strategy that naturally evolved with emerging technologies—whether it created those technologies or not.
The underlying principle—for better or for worse—of these examples is the importance of understanding a company’s strategic advantages and how best to deploy them to create entry barriers and sustainable competitive advantage. Most companies nominally define the business they are in which tends to foster obsolescence or misguided expansion. Blockbuster failed to account for the shelf life of its business model while Harry & David forgot when and where people buy. On the other hand, Netflix and IBM matched their business strengths and strategies to the reality of technological and market development.
Part II will look at how this applies to the wine industry.
Cult and Culture
Every year, The Wall Street Journal features a contest called Winning Workplaces to highlight outstanding small companies. When one reads profiles of the winners, the criteria for selection focus on such things as training, a hands-on work ethic, wellness programs, open book policies and sustainability. Rarely, if ever, is the overall culture addressed.
I suppose the reason is that company culture is hard to define, harder than say that of a sports team or an orchestra where the narrowness of objective tends to attract similar personalities and correspondingly creates cultural constraints. In a company, the diversity of disciplines, from engineering to finance to HR to marketing, attracts a corresponding diversity of personalities. To have a fulfilling environment for this breadth of individuality, the company culture itself must be broadly defined.
We have all heard ad nauseum of companies where “We are family here.” More often than not, that becomes euphemistic for “Your first devotion is to us.” This is not culture but rather, cult, where only those who adhere to the tribal ethic will thrive and prosper. Cult most often orbits about a patriarchal star—less matriarchal as women tend to subsume ego better—or a military work ethic.
Organizations that revolve around cult are more susceptible to ethical breaches as blind loyalty becomes a surrogate for a charter of principles as a foundation. There is also usually a revolving door of employment as whatever might be defined as culture most resembles junior high where one is either in or not and, if not, relegated to insignificance in the company.
Culture, on the other hand, a priori must be inclusive. While hierarchy is necessary to the management of an organization, that verticality must be complemented by the horizontality of culture. While perhaps not as whimsical as a cult-driven organization, one that defaults to chain of command is equally stultifying. An effective culture is, in many ways, independent of a management hierarchy. It is a set of tacitly understood principles—strategic, ethical, social, philosophical—that define the scope of the organization’s activities.
If these principles—different than policies—supersede individual arbitration, the culture not only creates a fulfilling environment for a wide range of people and skills but also instills a climate of self-management where the participants feel committed to uphold the cultural values in exchange for the autonomy conveyed. In a culture that values autonomy, a job description is a skeleton outline of goals and functions but allows creative latitude in how those goals are achieved and functions performed. Autonomous organizations generate far more creativity than those that rely on policy and protocol as people are willing to take initiative and risks in developing new ideas, trying new approaches to old problems or building better mousetraps.
In the largest sense, autonomy fosters a sense of ownership in the overall success of the organization as one feels that her contribution makes a distinguishable difference. More so, if hierarchal management is confined to necessity, the organization is empowered horizontally which cultivates the cross-fertilization of ideas. Finally, if the culture rather than the hierarchy becomes the implicit raison d’être of the organization, ego tends to give way to collaboration.
Just as culture is hard to define, it is elusive to create. Cult and hierarchy are comparatively primitive organisms where culture is the result of evolution—it can’t be created in a day. One thing is clear, however; the seedbed of culture is trust—trust that begins with senior management to empower the whole of the organization. That trust will then grow across the organization and synergies will bloom from there.
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