Opportunities in the German wine market

Master Thesis International Business and Management

Place and date : Gorredijk, 1st of June 2010

Author : Hester Jensma

Student number : 1616730

Supervisor : Mr. Stakhovych

Second referent : Mr. Ritsema

In order of : Baarsma Wine Group Badweg 48

Executive summary

Table of contents

3.2 Theories used for company analysis 11

3.3 How does BWG normally expand internationally? 14 3.4 Why does BWGN want to enter the German market? 14

4 External analysis 15

4.1 General information wine market 15

4.2 Current competitors BWGN 16

4.3 Customers of BWGN’s export department 16

4.4 Suppliers of BWGN’s export department 16

4.5 Wine regulation 16

4.6 SWOT analysis 16

5 German wine market 17

5.1 Literature review theories 17

5.2 Application theories to BWGN 22

5.3 Should BWGN enter the German wine market? 22

6 Entry strategies 23

6.1 Best practice 23

6.2 Theory entry strategies 25

6.3 How should BWGN enter the German market? 28

7 Conclusion and recommendations 29

7.1 Limitation and recommendations for further research 29

References 30

Appendices 34

1 Winetelligence 34

2 Capabilities and resources BWGN analyzed by VRIO 35

3 Information on acquisitions BWG 35

4 Current competitors BWGN 35

5 Information on wine regulation 35

6 Porter’s Five Forces Model and Five Sources Model compared 36 7 Miscellaneous information German wine market 37

8 CAGE framework applied to Germany 39

9 Comparing various entry modes 39

10 Costs agent and domestic-based sales representative compared 40

11 Consumer buying trends imported wine 40

12 Market share of wines in Germany (by country of origin) 41

13 Distribution of wine in Germany 41

14 German wine market segmentation 42

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1

Introduction

Baarsma Wine Group Netherlands (BWGN) is a leading distributor of quality wines in Western-Europe, situated in Gorredijk, the Netherlands. It is part of Baarsma Wine Group (BWG). The Group works together worldwide with importers, wholesalers, retailers and wine specialists. Thanks to its expertise and experience the company has gained access to markets that remain closed to other companies. BWGN has an assortment of more than 1500 wines. It can deliver wines from all over the world to its customers. The objective of BWG is through autonomous growth and acquisitions to further extend the strong position in the European market and to expand further into the rest of the world.

One of BWGN’s focus markets is Germany. The German wine market is an important market for the company, especially regarding the size of this market and also the proximity of this market. BWGN has not been fully successful in entering this market yet. One of the problems is that the company perceives the German wine market as a complex market. Market research has been executed in the past by BWGN to determine if Germany would be a suitable market. The previous research explains to a certain extent the preferences of the German wine consumer. Other important questions, however, have not been answered. Examples of these are: what are the most important competitors in Germany and how should the market be best entered? Furthermore, the research has been conducted four years ago, so it is likely that the information in the research is too old to be reliable. Because of this lack of knowledge about the German market and the perceived complexity of this market, BWGN has not taken action yet to enter Germany. The aim of this research is therefore twofold: first of all the German wine market will be researched in depth to find out the peculiarities of the German wine market. The second step is to determine if BWGN should enter the German wine market, and if so, how the company should to this.

The thesis is divided into three sections. All sections are a mixture of theory, combined with applying this theory to the practice of BWGN. The first section discusses BWGN and its environment. This entails chapter 3 and 4. The next section is about the German wine market. In chapter 5, detailed information about this market can be found. The next step is to determine an appropriate entry strategy, this is section 3. In chapter 6 theory about entry strategies and the best strategy for BWGN will be discussed. Chapter 7 then concludes the thesis and makes recommendations about how BWGN should enter the German wine market and why.

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2

Research design

2.1

Research questions

This thesis aims to develop the German market research that has been done by BWGN in the past further so that the unanswered questions will be answered. The aim is to investigate exactly what makes the German wine market so complex. In addition, the best entry strategy for BWGN will be researched. This will allow BWGN to decide in the Summer of 2010 if the company should enter the German wine market and if so, what would be the best way to do this.

The main research question for this thesis is:

Should BWGN enter the German wine market and if so, which entry strategy would be most suitable for this company?

Several aspects play an important role here, which can be divided into several sections, namely a section about BWGN, one about the German wine market and one about entry strategies. All sections have their own questions.

Section 1: BWGN - Who is BWGN?

- How does the company normally expand internationally? - Why does BWGN want to enter the German market? - What does the wine market look like in general? - Which competitors are there?

The answers on these questions will give more in-depth information about what the company’s strengths and weaknesses are and what the aims are for the future. The information about this will allow the researcher to make a better suited approach to the best entry strategy for BWGN, when taking into account strengths and weaknesses of BWGN.

Section 2: German wine market

- Which theories are applicable when researching the German wine market? - What does the German wine market look like, according to these theories?

Since the German market is considered by BWGN as very complex and since in the past more companies have failed when trying to enter the German market, this part of the research is a fundamental part of the entire research. A potential danger is not knowing exactly what is going on in this market and making the wrong decisions based on wrong information. A thorough analysis of the market can reduce these problems. Several theories will be used to analyze the German market in a more profound way (this will be discussed later in this research proposal).

Section 3: Entry strategies

- Are there best practices to be found of Dutch companies entering the German market? - Which entry strategies exist in the literature?

- If entering the German market is a good idea, how should BWGN do this?

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In this research paper, several theories will be used to determine characteristics of the German market and characteristics of BWGN. This will helps to decide if entering the German market is a good idea for BWGN. For the internal analysis, the theories used are Porter’s Value Chain, the Resource Based View of the firm and the VRIO-framework. These theories help analyzing the company in a thorough way. The RBV argues that resources and capabilities are a source of sustained competitive advantage. Using this theory facilitates the identification of crucial resources and capabilities that each firm should possess in order to succeed in a given industry (Makhija, 2003). Porter’s model can be used to make an industry analysis. It uses five forces that determine the competitive intensity and therefore attractiveness of a market (Porter, 1980). The VRIO-framework is used in addition to the RBV to make a better analysis of BWGN.

To understand the German wine market, other important theories have been used, such as the Country Portfolio Analysis, the CAGE framework, the PESTEL criteria and Porter’s Five Forces model. All these theories aim to better understand a certain market. The Country Portfolio Analysis is used to give a general overview of the German wine market. The CAGE framework discusses the distance between the Netherlands and Germany, and the PESTEL framework measures the amount of risk that is present in the German wine market. Lastly, Porter’s Five Forces Model is used to understand the industry structure of the German wine market. The combined aim of using these theories is to have a thorough understanding of this market.

For the final part of this research, several entry modes will be analyzed and compared. With the information of the former sub sections, the best entry strategy for BWGN will be chosen.

2.2

Methodology

To be able to answer the research questions, use will be made of primary and secondary data. The primary data will be obtained through qualitative research methods (interviews), the secondary data will be obtained through desk research. One of the reasons to use desk research is that there is an extensive amount of literature available on entry strategies. This information can be used to determine which strategies would be suitable for BWGN and why. In addition, a lot of information about the German wine market and doing business in general in Germany can be found online. An important advantage of making use of desk research is that it is a cheap way of getting suitable information.

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2.3

Data collection

For the internal analysis data was obtained through information from the website of BWGN. Also use was made of the Annual Report 2008/2009 and the strategic plan, made in 2010. Furthermore, use was made of informal interviews of employees. This mainly consisted of participation in the daily activities of different departments and asking the employees questions in the meantime. The goal was to get to know the company better. Examples of departments where this was done was the warehouse, quality department, export department, transport and logistics department and sales department. Also a wine education helped to understand the product and business it involves better. For the external analysis, information was gathered at the exhibition WeinPro. In addition, other relevant information was obtained through the internet and different magazines.

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3

Internal analysis

This chapter aims to give an overview of BWG (including its values, strategy and organizational structure). The focus of this research paper is on the export department of BWGN. Therefore, whenever possible, the emphasis will be put on this department. The company is analyzed through several theories, namely Porter’s Value Chain Analysis and the Resource Based View of the firm. Furthermore, this chapter will give insight in the strengths and weaknesses of the company, which can be used as input for the SWOT analysis.

3.1

Who is BWG?

BWG is a worldwide wine-trading house of quality wines with a fast growing distribution network in all sectors of the wine market in North-West Europe. The Group is the leading distributor of wines in the Netherlands realized by several specialized business units operating in each channel of the Dutch wine market. In the Netherlands, BWG is situated in Hilversum, Gorredijk, Weert, Weesp, Zoetermeer, Leeuwarden, Ruinerwold and Zaandam. Internationally, BWG is established in South-Africa, France, Belgium, United Kingdom and Switzerland. The average number of employees in 2009 was 342 (Annual Report 2008/2009).

3.1.1 Values of the Group Mission

The main aim of the mission is to sell the philosophies and ideas of top management to its employees (Alsem, 2005). A mission is an important instrument in the guidance of a company towards its goals (Alsem, 2005). The mission of BWG is the following (Annual Report 2008/2009):

With pleasure and inspiration, in close co-operation with all our partners, we want to contribute to the development of the wine category and provide for the optimal availability of our wines. With our versatile and qualitative product offering, we aspire to offer the wine lover the enjoyment, excitement and taste of a fine glass of wine, every day and every time. In everything we do we put the consumer first!

Vision

The most important aspect of a vision is to communicate how the company can be of value to the customer. The core competencies of a company play an important role here (Alsem, 2005). The vision of BWG is the following: (Annual Report 2008/2009)

BWG wants to meet trade demands and build up brands which match the wishes of the consumer. The number of innovations made will rapidly increase and ‘time to consumer’ will become more and more important. Having an extensive distribution network to reach the consumer is consequently becoming the key factor in achieving success. This means being able to handle the complexity of different markets, market segments and a wide variety of consumers.

Group objectives

The corporate objective is to become the first choice provider of basic and premium wines in

North-West Europe and to strengthen the market position in this region by selling qualitative wines through dedicated people and by expanding its distribution network (Annual Report 2008/2009). Eventually, the mission and objectives of a company should be closely related to the strategy (Hambrick and Fredrickson, 2001).

3.1.2 Strategy

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company wants it to mean. It is important to have a strategy that is clear and which consists of different elements, but together these elements should form one strategy. This strategy can then make sure that the company works efficiently toward its goals. Furthermore, it should be remembered that many factors (for example internal processes) can help build a strong strategy, but the strategy itself is about how a company can engage its environment. The authors define strategy as ‘the central integrated, externally oriented concept of how a company should achieve its objectives’ (Hambrick et al., 2001). Furthermore, a strategy should consist of all strengths and weaknesses of the firm (Coman, 2008). The strategy of BWG can be summed up as follows:

• Expanding the distribution network in North-West Europe.

•Maintain and further strengthen the competitive position of the Group. • Continue to act as a partner and preferred supplier for key customers. • Positioning the Group as the ideal partner for brand-owners.

• Respond more rapidly to the developments taking place within the international market. • Reduce dependency on certain markets and product groups.

When applying the theory of Hambrick et al., (2001) a good strategy should consist of five elements, of which it is important that it describes in detail which steps will be taken (Hambrick et al., 2001). The first element is the Arena, which poses the question where the company will be active at. This involves describing which market segments and product categories the company will be active in. The second element is called Vehicles. This is about how the company will get to that point. Will it make use of joint-ventures for example? The third element consists of Differentiations: how will the company be successful in the market? This has a lot to do with marketing (price, styling), but also with product reliability, for example. The fourth element is Staging: how fast and in which way will the company take certain steps in order to reach its goals? This is about how fast expansion will take place. The last element is called Economic logic: how will the company obtain its returns? An example of this is that a company can ask premium prices when it offers an excellent service that no other company is able to provide (Hambrick et al., 2001). When applying this theory to the strategy of BWG it becomes clear that in the view of the authors BWG’s strategy could be improved. A strategy, according to these authors, should be an integrated concept of how the objectives of the company should be reached. The strategy of BWG is not an integrated concept. It consists more of different objectives. BWG should therefore make one strategy, which is made up of the 5 elements described above. These elements should all be described specifically and in detail. The way the strategy of BWG is made up now, not all elements are included and it is also not made specific. In addition to including all elements and making this specific, BWG should keep in mind the resources and capabilities of the company (for more information about this, see section 3.2.1) and the market and segments the company is active in.

Another important part of BWG’s strategy is Winetelligence. By Winetellingence, BWG means that it has made its vision on the market leading for all the activities of the organization. It is a way of working dominated by complete organizational development. The Winetelligence strategy on which BWG aims to develop the future of the wine category, is build on a couple of foundations, which includes belief in partnerships and focus on innovations. More detailed information about Winetelligence can be found in Appendix 1.

3.1.3 Customer intimacy

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‘segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches’(Treacy et al., 1993). For customer intimacy it is important to have thorough knowledge of the customer and at the same time to have flexible operations so that the company can respond immediately to any request of the customer. An advantage of this approach is that customer loyalty will be created (Treacy et al., 1993). Furthermore, what is important to keep in mind is that the other two value disciplines (operational excellence and product leadership) should also be sufficiently developed. If one of the value disciplines is not of a sufficient level, it will be difficult to excel in the chosen value discipline (Alsem, 2005).

3.1.4 Organizational structure

BWG has adopted a decentralized management structure. The Group is organized into a Holding Company and Business Units. While the Holding Company focuses on strategic management, M&A and monitoring of the Group’s business activities, the Business Units are responsible for taking operational decisions. Typical for the organization is the independent status of every Business Unit. Graphically the relationship between the Holding Company and the Business Units can be shown in the following way:

Figure 1 Organizational structure BWG (www.baarsma.com).

3.2

Theories used for company analysis

A more thorough analysis of the company can be made with the use of Porter’s Value Chain Analysis and the Resource Based View of the firm (RBV). These theories are used here, because the Value Chain Analysis allows for a structured analysis of the valuable resources and capabilities of a firm. This is helpful when making a SWOT analysis. The RBV theory is used here, because one of the aims of this paper is to determine appropriate entry strategies for BWGN and in the past many scholars have used the RBV to find appropriate entry strategies (Meyer, Wright and Pruthi, 2009). Since the RBV also focuses on resources and capabilities of a firm, it complements the Value Chain Analysis nicely.

3.2.1 Porter’s Value Chain Analysis

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industry the company operates in, is not considered very profitable (Hollensen, 2008). The value activities in the value chain should be seen as the way the company creates value for its customers (Hollensen, 2008). In order to determine which resources and capabilities are valuable to a company, the value chain analysis can be used (Barney and Hesterly, 2006). This is also important for the RBV, which will be discussed below.

Figure 2

Porter’s Value Chain (Porter, 1985).

Value activities can be divided into two broad types: primary activities and support activities. Primary activities are the ‘activities involved in the physical creation of the product, its sale and transfer to the buyer, as well as after-sales assistance.’ Support activities ‘support the primary activities and each other by providing purchased inputs, technology, human resources and various firm-wide functions’ (Hollensen, 2008). Below, the primary and support activities for BWGN will be summed up: Primary activities

Inbound logistics: the activities concerned with receiving, storing and distributing the inputs to the

product/service (Hollensen, 2008). (not available)

Operations: the transformation of these various inputs into the final product or service (Hollensen,

2008). (not available)

Outbound logistics: the collection, storage and distribution of the product to customers (Hollensen,

2008). (not available)

Marketing and sales: These provide the means whereby consumers are made aware of the product

or service and are able to purchase it (Hollensen, 2008). (not available)

Services: These are all the activities that enhance or maintain the value of a product or service

(Hollensen, 2008). (not available) Support activities

Technology development: All value activities have a ‘technology’, even it is simply ‘know-how’

(Barney et al., 2006; Hollensen, 2008). (not available)

Human resource management: It is concerned with the activities involved in recruiting, training,

developing and rewarding people within the organization (Barney et al., 2006; Hollensen, 2008). (not available)

Infrastructure: The systems of planning, finance, quality control, et cetera are crucially important to

an organization’s strategic capability in all primary activities. Infrastructure also consists of the structures and routines of the organization that sustain its culture (Barney et al., 2006; Hollensen, 2008). (not available)

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be used to identify international competitive advantage (Hollensen, 2008). Also entry into global markets requires an understanding of all factors within the value chain (Kaplinsky and Morris, 2000). In conclusion, (not available)

3.2.2 Resource Based View of the firm (RBV)

As a second theory in this chapter the RBV theory can be used. This theory is important for this research, because one of the aims is to determine appropriate entry mode choices for BWGN. In the past, many scholars have studied entry mode choices by using a RBV approach (Meyer, Wright and Pruthi, 2009). The RBV is ‘a model of firm performance that focuses on the resources and capabilities controlled by a firm as sources of competitive advantage‘ (Barney and Hesterly, 2006). Furthermore, the RBV can be used to analyze why firms that operate in the same industry perform differently (Kraaijenbrink, Spender, Groen, 2010).

To analyze which resources and capabilities a company has and to determine how competitive these resources and capabilities are, the VRIO-framework can be used (Barney et al., 2006). VRIO stands for Value, Rarity, Imitability and Organization. Barney was the first author to make a theoretical framework out of the resource-based literature (Newbert, 2008). In one of his first articles, Barney (1991) described the VRIN-framework, instead of the VRIO-framework. VRIN stands for valuable, rare, imitable and non-substitutability (Barney, 1991). Since he changed this in 2006 to the VRIO-framework, for this research the VRIO-framework will be used.

Before applying the VRIO-framework to BWGN, it is important to define resources and capabilities. Resources are ‘the tangible and intangible assets that a firm controls and that it can use to conceive and implement its strategies.’ Capabilities are ‘a subset of a firm’s resources and are defined as the tangible and intangible assets that enable a firm to take full advantage of the other resources it controls’ (Barney et al., 2006). A combination of resources and capabilities is necessary in order to be of value to a company (Newbert, 2008).

The questions that need to be asked for the VRIO-framework are:

Question of value: do resources and capabilities enable a firm to exploit an external opportunity

and/or neutralize an external threat? (Barney et al., 2006).

Question of rarity: is a resource currently controlled by only a small number of competing firms?

(Barney et al., 2006).

Question of imitability: do firms without a resource face a cost disadvantage in obtaining or

developing it? (Barney et al., 2006).

Question of organization: are a firm’s other policies and procedures organized to support the

exploitation of its valuable, rare and costly-to-imitate resources? (Barney et al., 2006). The following resources and capabilities are important for BWGN and this research: (not available)

Important resources and capabilities that should be mentioned for the export department are: (not available)

In Appendix 2, the resources and capabilities of BWGN are analyzed according to the VRIO-framework. The result of this analysis is (not available).

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managers should develop the resources of their firms (Connor, 2002; Miller, 2003). However, since the VRIO-framework is also a tool for understanding the strengths and weaknesses of a company, this framework is useful for this thesis (Barney et al., 2006). While using the framework, the emphasis is if in general a resource or capability is rare or costly to imitate. Combined, Porter’s Value Chain, RBV and the VRIO framework provide a good insight into BWGN, which serves at the same time as an introduction of the company for this thesis.

3.3

How does BWG normally expand internationally?

(not available)

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4

External analysis

According to Alsem (2005) an external analysis consists of general information of the sector, an analysis of competitors, suppliers and customers. These four factors will be used to make an external analysis for BWGN as well. The external analysis will also be used to determine weaknesses and threats for BWGN. Together with the strengths and weaknesses of the internal analysis, they will form the SWOT-analysis. It should be mentioned here that the aim of this chapter is not to give a very thorough external analysis, since the focus of this research paper is on researching the German wine market and on finding suitable entry strategies for BWGN. Furthermore, the information given here is already known by BWGN. The internal and external analysis therefore aim to give a good overview of the company.

4.1

General information wine market

The wine industry is changing rapidly from a highly fragmented supply-driven agri-business to a competitive, professional beverage industry. Changing consumer demands, increasing retail purchasing power and the impact of brands are the major drivers of change.

Wine has been part of people’s lives for thousands of years. The main wine producers can be found in southern-Europe, North- and South-America, South-Africa, Australia and New-Zealand (Van Tuil, 2009). The largest wine producers in Europe are to be found in Spain, France and Italy (http://wijn.nl). Like in every other sector, some large players on the market can be found as well as small family-owned businesses (http://wijn.nl).

Wine is an important trading product. This is because it is a popular beverage in many parts of the world. Normally, a bottle of wine does not go directly from the vineyard to the consumer. It almost always involves intermediaries. The wine flows from vineyards in Chile to customers in China and Brazilian wine goes to South-Africa, for example. This makes the wine trade truly international. (Productschap Wijn, 2009)

There are six different types of wines: red, white, rosé, sherry, port and champagne. Many grape varieties exist, for example: pinot noir, gamay, malbec, cabernet sauvignon, merlot, sauvignon blanc, pinot grigio and aligoté (Van Tuil, 2009).

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4.2

Current competitors BWGN

(not available)

4.2.1 Current competitors of BWGN’s export department (not available)

4.3

Customers of BWGN’s export department

4.4

Suppliers of BWGN’s export department

4.5

Wine Regulation

A lot of regulation exists with respect to wine and wine trade. Especially the European Union made a lot of legislation about this. Some of the most important aspects will be discussed in depth in Appendix 5. In short, most regulation exists regarding labeling of the wine bottles, traceability of the wine and the documents that have to accompany wine bottles when being transported.

4.6

SWOT

Combined with information from the internal and external analysis and the strategic plan of BWGN, the following SWOT analysis can be derived:

(not available)

From this SWOT analysis, some important conclusions and questions can be derived, for which use will be made of a confrontation matrix (Berenschot Communicatie, 2003). In this matrix, the different strengths, weaknesses, opportunities and threats will be combined in the following way:

SO-Strategy: to use strengths to make most of opportunities. WO- Strategy: to utilize opportunities by overcoming weaknesses. ST-Strategy: to use strengths to anticipate threats.

WT-Strategy: to minimize weaknesses by anticipating threats (Berenschot Communicatie, 2003).

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5

German wine market

This chapter will start with a review of literature and theories concerning market research of foreign markets. It discusses the Country Portfolio Analysis, the CAGE framework, the PESTEL criteria and Porter’s Five Forces model. Together, these theories will be applied to the German wine market, through which they aim to give a good overview of the peculiarities of this market. With this information, BWGN can decide if entering the German market would be a good idea.

5.1

Literature review theories

In order to determine the attractiveness of a market, several methods and theories can be used. A type of analysis that is often used to determine which market would be attractive is the country portfolio analysis (Andersson and Lundström, 2007). Since, however, this technique researches different countries at the same time for its analysis, it is not entirely appropriate for BWGN. The question for this paper is not which country would be attractive, but if Germany would be an attractive market. But as a general analysis, the elements most often used for country portfolio analysis can be used here to give a general idea of the German market and therefore this theory is used for this thesis as well.

Elements that are most frequently used are: Gross Domestic Product, share of world exports, population and the population structure (Perlitz, 1985). Also GDP per capita, market size, total consumption of wine are often used (Ghemawat, 2001). Other factors that are important are the growth of the market, and knowing how competitors in the target market are performing. Tough competition makes a market less attractive, whereas unused potential in a market might be extra attractive to a company (Andersson et al., 2007).

5.1.2 CAGE Framework

As mentioned above, the country portfolio analysis is often used by companies to assess the attractiveness of a market (Andersson et al., 2007). Many companies, however, exaggerate the growth potential they see in foreign markets. Usually, the main focus is placed on the amount of sales that are possible in a foreign market. There are, however, also other dimensions that should be looked at in order to decide if a country is attractive. These dimensions are: cultural, administrative, geographical and economical. Together they make up the CAGE-framework. This framework helps to better understand the real distance between the home country and the new foreign market (Ghemawat, 2001). Since it is important to make an analysis of the German wine market that is as broad as possible (so no important elements are forgotten), the CAGE framework will be used in the analysis as well.

The elements of the CAGE framework often intertwine (usually when countries are administratively close, they are also culturally, geographically or economically close). It is important to distinguish between the four components, because they present very different challenges and opportunities (Ghemawat, 2007).

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Ghemawat (2001) identified several factors that can be related to the CAGE dimensions, as can be seen in the scheme below:

Table 3: CAGE framework (Ghemawat, 2001

An advantage of the CAGE framework is that it helps to identify important differences between countries, through which it becomes clear which countries are most similar to the home country and which countries are not (Ghemawat, 2007). These differences can be measured in ‘distances’. Johanson and Vahlne (1977) identified three types of distances: psychic distance, cultural distance and geographic distance. According to these authors psychic distance is ‘differences in language, culture, political system, level of education or level of industrial development.’ Cultural distance can be considered part of psychic distance. Lastly, geographic distance is the real distance (in kilometers for example) between the home country and the foreign market. Although these measures of distance are important, the CAGE framework provides a much broader view of distance (Ghemawat, 2007).

The importance of CAGE is illustrated clearly in the case of Wal-Mart. Wal-Mart’s international sales are not as high as its US domestic sales. The question is why. According to Ghemawat (2001) this is because Wal-Mart failed to account for Distance. Wal-Mart did not change its business model when going abroad. As a consequence, it was only successful in countries that are similar to the USA (according to the CAGE dimensions). Examples of these countries are Canada, and the United Kingdom (Ghemawat, 2007).

Ghemawat (2007) also explains why in his opinion country analysis alone is not sufficient to determine the attractiveness of a market. This is because country analysis only focuses on unilateral attributes of countries (for example finance, labor and management). Factors like import barriers and tariffs are multilateral, because these factors measure the administrative distance between the home country and the rest of the world. The point is that unilateral and multilateral factors do not account for the ‘differences in differences’ as Ghemawat (2007) calls it. In the example of Wal-Mart this means that Wal-Mart Germany is much farther from the USA than Wal-Mart Canada. What is measured here, are the bilateral measures of distance. Adding bilateral measures of distance, instead Cultural distance Administrative

distance

Geographic distance Economic distance

Different languages Different ethnicities Different religions Different social norms

Absence of colonial ties Absence of shared monetary or political association Political hostility Government policies Institutional weakness Physical remoteness Lack of a common border

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of only measuring unilateral or multilateral factors is the key contribution of the CAGE framework for country analysis (Ghemawat, 2007).

Other authors provide similar frameworks. Miller (1992) suggests that an analysis of the competitive situation in the market should also be considered in the CAGE framework. Furthermore, he adds several factors which he calls uncertainties. In his article he explains these uncertainties extensively. General environmental uncertainties consist of political uncertainties and are therefore similar to administrative distance in the CAGE framework. The industry uncertainties of Miller (1992) consist of shifts in market supply and uncertainty concerning quality. The last uncertainty he adds is firm-specific uncertainties which consist of R&D and legal liability, for example (Miller, 1992).

So in the view of Miller (1992) companies perceive the general environment, industry and firm-specific variables as uncertain. This is an important issue, because managing risk is one of the main concerns for firms that are active in international markets (Ghoshal, 1987). Furthermore, some companies use uncertainty avoidance. This is the case when the risk of operating in a certain market is perceived to be very high. Firms that are already operating in a foreign market but perceive the market as very risky will sometimes choose to divest from this market. For a firm deciding to enter a market, but who perceives the market as risky, this could mean that the entry decision will be postponed until the risk factors of the foreign market are of an acceptable level (Wernerfelt and Karnani, 1987). According to Miller (1992), firms can avoid uncertain situations by using a niche strategy or by entering only low uncertainty markets.

It is often argued in the literature that the world is becoming increasingly globalized and interdependent and that the importance of national differences is declining (Whitley, 1998). Ghemawat (2001) also says that it is often argued that information technology and global communications make the world smaller in a sense that the world is becoming more homogeneous. However, he argues that this line of reasoning is not only incorrect, but also dangerous (Ghemawat, 2001). Boyer and Hollingsworth (1997) argue that the organization and operation of markets vary immensely among countries, therefore it does not make sense to believe that these factors do not have an influence on cross-border markets and competition. According to Ghemawat (2001) the two factors that are most overlooked in this sense are cultural and administrative distance. In combination with the information about the CAGE framework, it is clear why BWGN should understand in depth what the German wine market is about.

5.1.3 Country risk analysis

When country risk is analyzed in the literature, it is mostly about risk that concerns currency risk. More types of risks exist, but currency risk is one of the most important risks (Geczy et al., 1997). Country risk is usually divided in different kinds of groups. Lasserre (2002) for example talks about political risks, economic risks, competitive risks and operational risks. Together these make up country risk. According to the author, the purpose of country risk analysis is ‘to assess the probability that adverse circumstances owing to political, economic or social actions will negatively affect business performance’(Lasserre, 2002). Assessing country risk becomes increasingly important, because of increasing globalization (Damodaran, 2003). Furthermore, because of the increase of foreign direct investment, the issue of assessing potential economic and political risks becomes more significant (Bettis, Oetzel and Zenner, 2001).

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which will affect a company’s operations. Examples of these changes are tax changes, changing laws and government policy changes. (www.oup.com) The factors in the PESTEL framework are often highly correlated. (Bettis et al., 2001) The Asian crisis is an example which posed great risk to companies worldwide. However, also in ‘normal’ times risk can play a large role, when there are large fluctuations in a currency or when there are changes in governments which can impact the business environment (Bettis et al., 2001).

The PESTEL framework consists of the following factors:

Political factors: this refers to government policy, for example the way the government intervenes in

the national economy or EU enlargement (www.oup.com). This can also include unrest or societal crisis (Lasserre, 2002).

Economic factors: this is an important factor, because economic drivers change and therefore have

an influence on profitability (Lasserre, 2002). Examples here are interest rates, economic growth and inflation (www.oup.com).

Social factors: this includes changes in social trends which can influence the popularity of a firm’s

products, but also, for example, the amount of citizens that are able to work. An example here is an ageing population, which leads to a higher demand for medicine (www.oup.com).

Technological factors: new technologies lead to new products and processes. These innovations

impose advantages to consumers as well as to companies (www.oup.com).

Environmental factors: this includes climate change and the weather. Global warming plays an

important role here as well, because there is now a greater demand for environmentally friendly products (www.oup.com).

Legal factors: this has to do with the legal context in which companies operate. Legal changes have

an effect on companies, in case there is an increase in minimum wage, or when new competition law is created for example (www.oup.com).

It is important to mention here that once the PESTEL factors for a certain country are known, the next important step is to determine which factors will most likely change in the future and which factors will have the largest impact on the company. This will allow the company to make a planning in such a way that potentially changing factors will be accounted for (www.oup.com). Since most foreign direct investment, for example, involves a time frame of three to five years, it is important for companies to know, to a certain extent, what they can expect in the future. In this way, assessing risk is an important part of strategic decision making (Bettis et al., 2001). It should furthermore be mentioned that country risk does not only apply to emerging countries. As Damodaran (2003) states it: ‘country risk comes not from where it incorporates and trades but from where it does its business.’ This means that country risk can be important for companies that trade in developed markets as well, when they are at the same time actively involved in emerging markets (Damodaran, 2003).

The PESTEL framework can be applied on a more specific level, for instance only for a specific division of a company. This will allow for a better use of relevant factors to that division. This makes the analysis more useful. In addition, the framework can be applied locally, nationally or globally. This means that a retailer may use local economic growth rates for the local factor, national laws or national interest rates for national factors and the opening up of new markets for global factors (www.oup.com). The adaption of the framework to these local, national and global factors is called LoNGPESTEL (www.oup.com).

5.1.4 Porter’s Five Forces Model

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one of the most useful frameworks for analyzing the competitive environment of a company (Hollensen, 2008). This is the reason Porter’s Model is used for this thesis.

Porter (1980) argues that competition in an industry is about the underlying economic structure in this industry. Therefore it has nothing to do with good or bad luck or the behavior of competitors (Porter, 1980). When the underlying industry structure is known, it becomes easier to determine competition and profitability in the industry (Porter, 2008). The five competitive forces that determine the state of competition in and the profit potential of an industry are bargaining power of suppliers, threat of new entrants, bargaining power of buyers, threat of substitute products or services and rivalry among existing firms (Porter, 1980; Hollensen, 2008). Normally, these forces will not all be equally threatening in the same industry, because some forces can be considered a greater threat than others (Barney and Hesterly, 2006). The goal for every company in the industry is to find a way that the company can defend itself most effectively against these forces (or use these forces in its favor). Usually in an industry there are one or a few critical forces. The company should gear strategic priority to this force (Porter, 2008). Of course, the best way to do this differs from industry to industry (Hollensen, 2008). When a company knows what the underlying pressures in the industry are about, it can use this to determine critical strengths and weaknesses of the company, it can determine the position of the company in the industry and it gives insight into the most effective strategy changes for a company (Porter, 1980). In this way, the analysis is of utmost importance in formulating the company’s competitive strategy (Hollensen, 2008). Furthermore, the fives forces can help to determine the performance level of firms in an industry, since the level of performance can be related to the level of threats in an industry (Barney and Hesterly, 2006). Finally, it should be remembered that although the Five Forces Model focuses on a certain industry at a certain time, industry structure changes over time as well (Porter, 2008). In this sense it is of utmost importance to define the industry properly. A situation of ‘marketing myopia’ (where the market is defined too narrowly) should be avoided (Levitt, 1960).

The Five Forces Model will be helpful in this respect and will therefore now be explained further, according to Porter’s theory:

Threat of new entrance: this depends on the entry barriers that exist in the industry and also on the

reaction towards the new entrant from existing competitors (Porter, 1980). The most important entry barriers are: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, and government policy (Porter, 1980).

Rivalry among existing firms: when a competitor sees an opportunity or feels the need in the market

to perform better, this will cause rivalry (Porter, 1980).

Threat of substitute products or services: firms that operate in the same industry normally compete

with industries that produce similar or substitute products. Substitutes limit the prices companies can charge for their products and therefore also limit profitability (Porter, 1980).

Bargaining power of buyers: buyers prefer paying the lowest price possible. At the same time, they

want the highest quality possible. By on the one hand forcing down prices and on the other hand demanding a higher quality, in combination with playing competitors against each other, the profitability of an industry becomes lower (Porter, 1980).

Bargaining power of suppliers: suppliers are in a powerful position, compared to other industry

participants, because they can threaten to raise prices or reduce the quality of goods and services (Porter, 1980).

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company needs competitive resources, competences and relations compared to other firms in the international market (Hollensen, 2008).

Thus, Porter’s framework concerns the competitive advantage of firms and how they can best operate in a very competitive market. The five forces help the firm to become as competitive as possible in an industry (Hollensen, 2008). In the last couple of years, however, several authors (Kanter, 1994; Burton, 1995) have argued that this is not the only way to operate. They state that, instead of competitive relations, cooperative relations between industry participants are also possible. Kanter (1994) calls this the ‘collaborative advantage as a foundation of superior business performance’. In practice, companies will have to make a decision about how much to collaborate and how competitive they should be. In other words: they have to find a position in between two extremes: being entirely competitive or entirely collaborative (Hollensen, 2008). This point of view asked for a sister framework that focuses on collaboration instead of competition, as the Five Forces Model does. This sister framework is called the Five-Sources Framework (Burton, 1995). More information about this framework can be found in Appendix 6.

These theoretical frameworks will now be applied to the situation of BWGN in order to determine the attractiveness of the German wine market.

5.2

Application theories to BWGN

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6

Entry strategies

In this chapter it will be first discussed if there exists a general “best-practice” way of entering the German market. This will be mainly analyzed according to the experience Wal-Mart had when entering this market and according to experiences by Dutch companies that entered the market. After that, theory about entry strategies will be given, as well as suitable options for BWGN to enter the German wine market.

6.1

Best practice

In this section, it will be analyzed if there exists a “best-practice” way of entering the German market. Wal-Mart’s entry into Germany will be analyzed first. The case of Wal-Mart is important for this research, because it offers an excellent example of how a company should not enter the German market (Arndt and Knorr, 2003). Furthermore, experience from Dutch companies that entered the German market can be used as important lessons to keep in mind for BWGN when entering the German market.

6.1.1 Wal-Mart case analysis

The reason why the American company Wal-Mart wanted to enter Germany was because of the size and location of this market (Talaulicar, 2009). Wal-Mart acquired several German hypermarkets like Wertkauf hypermarket and Interspar hypermarket (Talaulicar, 2009). All these acquisitions made a fast entry into Germany possible.

From the start, Wal-Mart had many problems in Germany. The main problems the company encountered were that it was not allowed to sell its products below the cost of production, there were limited shopping hours and there were difficulties with the trade unions in Germany. Secondly, the companies that were acquired turned out to be weak and the stores were located in unfavorable locations. They were hardly profitable and the stores needed renovation (Talaulicar, 2009). Also, Wal-Mart could only lease the stores, instead of having full ownership of them (Arnold, Fernie, Gerhard, Hahn, and Pioch, 2006). Furthermore, it proved difficult to unite the two separate chains, because the two companies were very distinct when looking at the organizational cultures. In addition, both companies had a rather different portfolio of stores. Interspar stores did not have a common history and through this also had different corporate cultures (Berggoetz, Laue, 2002). Wal-Mart tried to impose a new corporate culture on both companies, which did not work out (Arnold et al., 2006). Finally, another important point was that management forgot to look into the peculiarities of the German business, legal and cultural situation (Talaulicar, 2009). These factors all lead to low profitability and bad publicity. In 2006 Wal-Mart decided to sell its stores to Metro AG.

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a large mistake. According to Wal-Mart every customer in the world is alike, no matter where they live or shop (Arnold et al., 2006). As Arndt, et al. (2003) describe it: the market entry of Wal-Mart in Germany failed, because the company did not understand the German market, the business culture and the German customer (Arndt, et al., 2003). A striking example of this is that in the United States every Wal-Mart has a ‘greeter’, someone that says hello and smiles to the customer when he enters the store. In Germany, this was not appreciated at all. Some people even reported store officials that they were harassed by the greeters (Arnold et al., 2006). When better research was performed, Wal-Mart would have known that the German market is a difficult market because of low prices, the large role discounters play in the market, the in general low profit margins and high competition (Arnold et al., 2006).

According to Arndt, et al., (2003) the reasons that Wal-Mart failed in Germany were that the internationalization strategy of Wal-Mart was not good enough to deal with the very competitive German market and that the company did not know this market well enough (Arndt et al., 2003). The way Wal-Mart operates is by applying global standards. It should, however, take into account regional differences in culture (Berggoetz, et al., 2002). Furthermore, Wal-Mart was not able to offer the Germans a new concept. In the eyes of the German, Wal-Mart offered the same concept as local competitors do (Arndt, et al., 2003). When taking into account the fact that Germans are home-biased, as stated in the CAGE-framework, this is a dangerous thing to do.

A few points that Wal-Mart misunderstood when talking about the German culture is that with relationships, German are used on focusing on the task that needs to be performed instead of on people alone. Furthermore, the Germans are well known for their punctuality, sticking to the initial solution and the fact that they have a long-term focus. In addition, Germans like to reach agreements through consensus and by getting there, they prefer direct communication, frankness and precise instructions (Berggoetz, et al., 2002). As for buying patterns, German consumers find price and value very important, as compared to service and quality. This leads to a high elasticity of demand for German consumers (Arndt, et al., 2003).

Arndt, et al., (2003) made a list of points a company should keep in mind when entering a new foreign market:

The company should find a niche in the foreign market which is overlooked by the local competitors.

Organic growth into the new market is advisable as well as cooperation with locals.

When fast entry is necessary, a company should acquire a leading party in the foreign market.

Whichever entry strategy is used, the adaption to local preferences and tastes is of utmost importance, no matter how well the existing business formulas or operations normally work. This also means that the company should understand profoundly how business is done in the foreign country.

Invest in local employees and talent, which helps to manage the unavoidable cultural gaps. To make the exposure to political risk as small as possible, companies should not enter politically unstable regions or countries (Arndt, et al., 2003).

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however. Normally, most firms gain the most valuable information by ‘learning by doing’ (Lord and Ranft, 1999). Furthermore, the strategy and the company itself must be flexible enough to adapt themselves to the peculiarities of this country and the company must offer the consumer something that the local providers do not yet offer.

6.1.2 Experience Dutch companies

Many more companies have tried to enter the German market or other foreign markets and gained experience through this process of internationalization. At the website of the Dutch Chamber of Commerce, several employees of Dutch companies that entered the German market, expressed their views on entering this market. Most advice about how to enter this market concerns cultural differences and the different way of doing business. For example, finding new partners is mostly only possible through good word-of-mouth. Many Dutch companies find it very difficult to find new partners and customers in Germany (www.kvk.nl). Other points to keep in mind are:

Germans like making plans, they like security and quality and they are more formal than the Dutch.

What is important in Germany is Leistung schafft Vertrauen (if you perform well, you will gain trust).

Most companies experience large differences between different parts of Germany. They argue that if a company wants to enter the entire German market, the use of agents is very important.

It is not easy to enter the German market as a foreigner, because most Germans prefer German products. A way for a Dutch firm to enter this market is either through cooperation with a German firm or by focusing on internationally oriented players. Also the importance of visiting exhibitions is stressed.

Good preparation and knowing what you are talking about is seen as important when interacting with Germans.

Other factors that can be helpful are speaking the German language and offering superior quality and service.

Establishing good relationships. Once a good relationship with a German company is established, this is usually a partner for a long time.

Hierarchy in Germany is much more common than it is in the Netherlands (MKB Nederland, 2010).

6.1.3 Experience BWGN with the German market (not available)

6.2

Theory entry strategies

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risk and split ownership and the hierarchical (investment) modes are characterized by high control, high risk and low flexibility (Hollensen, 2008). Besides this, every entry mode can be divided into several ‘sub entry modes’: The export mode consists of indirect export modes (export buying agent, piggyback), direct export modes (agent, distributor) and the cooperative export mode (export marketing group). The intermediate mode consists of contract manufacturing, licensing, franchising, and strategic alliances. The hierarchical mode consists of domestic-based sales representatives, sales subsidiary, sales and production subsidiary, region centre and the transnational organization (Hollensen, 2008).

In addition to choosing the entry mode it is important to determine the entry objectives (what is the company looking for in a country) and to decide on the timing of entry (Lasserre, 2007). An entry objective could be to develop the market, because it offers opportunities in size or for growth. It could be said that all countries in the world offer some sort of opportunity, because most have a favorable population size or income structure, for example. Some countries, however, are considered to be even more important, because they are critical for long term competitiveness. These countries are key countries, and Germany is considered one of them, by most companies (Lasserre, 2007). It is important to note that no perfect strategy or solution of entering a foreign market exists (Lasserre, 2007). At the same time, many companies adopt different strategies, even though they enter the same market and also many companies use several strategies for several different markets (Hollensen, 2008). Furthermore, most firms combine entry modes when entering a foreign market (Petersen and Welch, 2002). In any case, when choosing an entry mode, many factors should be taken into account. These factors vary within every market and every company (Hollensen, 2008). Lasserre (2007) mentions that government policies, country risks, market attractiveness, strategic objectives, internal capabilities and timing play a role when choosing an entry mode (Lasserre, 2007). The factors that influence the choice for an entry mode are, according to Hollensen (2008) internal factors, external factors, desired mode characteristics and transaction specific behavior (Hollensen, 2008). These factors will now be explained further:

Internal factors:

- Size: this gives an indication of the resources that are available to the company. In general,

the more available resources, the more involvement in internationalization. Most smaller companies do not have enough resources and will therefore enter foreign markets by using export (Hollensen, 2008). When the firm grows, however, most will move towards a hierarchical mode (Sanchez-Peinado, Pla-Barber and Herbert, 2007).

- International experience: the more international experience a company has, the more

uncertainty about a market will be reduced. This makes it more likely that firms use more resources in foreign markets (Hollensen, 2008). Johanson and Vahlne (1977) suggest that uncertainty in a market will be reduced by gaining experience through operations in this market (Johanson et al., 2007; Sanchez-Peinado et al., 2007).

- Product/service: to determine where production should be located, characteristics of a

product or service should be kept in mind, such as the perishability of a product and its value/weight ratio (Hollensen, 2008).

External factors:

- Sociocultural distance: when firms perceive the foreign market as very distinct from the

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- Country risk: limiting its exposure is important for a company operating in countries with high

country risk. Most firms will therefore use entry modes that entail low resource commitments, such as export modes (Hollensen, 2008).

- Market size and growth: these aspects are the most important aspects when deciding on the

mode of entry. A company will commit more resources to the foreign market when the size of the market is large and growth is high. This means that a company will, in that case, be more likely to commit itself to wholly-owned subsidiaries or to participate in a joint-venture (Hollensen, 2008). - Direct and indirect trade barriers: examples here are tariffs or quotas. Between the

Netherlands and Germany there are no tariffs or quotas. What plays an important role however, and what has been mentioned before, is the preference that Germans have for local suppliers (they are home-biased). When this is the case, a good option would be to find local partners in the market which can help by developing local contracts, negotiating sales and establishing distribution channels (Hollensen, 2008).

- Intensity of competition: when competition is high in the foreign market, companies will

usually prefer an entry mode for which it has to commit low resources to the market, as for example export modes. The rationale behind this is that when there is high competition, profits in general will be lower and therefore committing many resources is not advisable (Hollensen, 2008).

- Small number of relevant intermediaries available: when there are only a few intermediaries

available in the foreign market, most firms will use hierarchical modes of entry (Hollensen, 2008). Desired mode characteristics:

- Risk averse: when the company is risk averse, it will want to commit low resources to the

foreign market. The entry modes that are suitable here are export modes or licensing (Hollensen, 2008).

- Control: when low levels of control are necessary in the foreign market most firms will favor

exporting. Higher levels of control (and therefore also higher resource commitments) play a role with licensing, joint-ventures and wholly-owned subsidiaries (Hollensen, 2008).

- Flexibility: another important factor to keep in mind when deciding on an entry mode is how

flexible the company wants to be. The hierarchical entry mode, for example, is very costly and not very flexible (Hollensen, 2008).

Transaction-specific factors:

- Transactions costs: normally there will be a friction between sellers and buyers, because

most people behave in an opportunistic way (Hollensen, 2008).

- Opportunistic behavior: partners in the foreign market (for example agents) may behave

more in their self-interest instead of the interest of the company (Hollensen, 2008).

- Tacit nature by know-how: this aspect is hard to grasp, but Hollensen (2008) describes it in

the following way: ‘when the nature of the firm-specific know-how transferred is tacit it is by definition difficult to codify and patent, and therefore it is more difficult to transfer through contracts with external partners.’ The preferred entry mode will then be hierarchical modes (Hollensen, 2008).

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market innovation or building an entry strategy on established distribution relationships drawn from other businesses (‘piggybacking’) (Porter, 1980). In either case, knowledge is power, so the better the company knows the peculiarities of a foreign market, the better it will be able to operate effectively and successfully in this market (Pehrsson, 2004). If a company has preconceptions of a certain market, for example, this can also be dangerous. If the preconceptions are not true, this leads to new barriers of entry (Ellis, 2008). What should be kept in mind, however, is that if a company possesses a sustained competitive advantage in its home country, this does not automatically mean that it will have this sustained competitive advantage in the host country as well (Barney et al., 2008). Also, what is seen as an entrance barrier by one company, does not necessarily have to be an entrance barrier for another company (Pehrsson, 2004).

Whichever strategy the company decides to use, it is in any case important that the company learns from the experiences in the foreign country (Barney et al., 2008). According to Hamel (1991) there are three determinants which show if a company will be able to develop new resources and capabilities in its international operations: the intent to learn, the transparency of learning partners and the receptivity to learn. The intent to learn is important, because if the intent to learn is strong, it is more likely that a firm will learn from its international activities. It is also important to communicate the experiences throughout the firm. In the case of business partners it is important that the communication is transparent, so that experiences in the international context can be better shared. The receptiveness for learning depends on the culture, operations and history of the firm and therefore vary widely (Hamel, 1991).

Furthermore, what is important when being active internationally is that the firm must be prepared to unlearn. This means that the way the firm engages in international activities is an open-minded way, without using old patterns of behavior and of doing business (Barney et al., 2008). Other authors stress the importance of learning from foreign operations and adapting to new settings. This is the only way benefits of internationalization can be realized (Hutzschenreuter and Voll, 2008; Newman and Nollen, 1996). When companies learn about the foreign market, this will decrease the uncertainty of this market (Pehrsson, 2008).

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7

Conclusions and recommendations

(not available)

7.1

Limitations and recommendations for further research