Question: For an industry of your choice, identify and analyse the most important drivers and barriers affecting its development.

Answer
Drivers and barriers affecting development of any industry revolve in the fraternity of globalization. Globalisation in business is the worldwide movement toward economic, financial, trade, and communications integration (Frank, 1998). It implies the opening of local and nationalistic perspectives to a broader outlook of an interconnected and interdependent world with free transfer of capital, goods, and services across national frontiers. Drivers in the business concept are critical forces which can be built within business strategy to enable a company to attain its set goals (Gilbert, 1994). Barriers to industry development are forces that deters the business organization from attaining the desired goals and these are encountered both in the internal as well as external business environment (Hough et al 2011)

It is therefore imperative to evaluate key drivers and barriers affecting development in a bid to craft strategic tools that can stimulate strategic thinking, generate strategic foresight, provide a basis for testing existing strategies, explore and understand complexities of the future (Trompenaar et al, 2003). This can aid decision making and contribute to preparation for the future. As such, this essay seeks to explore key issues in strategic management and key theoretical models in the South African (SA) Wine Industry and that of the United Kingdom (UK) in order to stimulate strategic thinking and conversations, pave the way for new ideas and approaches and encourage innovation. This can prepare both the industry and wine producers for possible challenges that they may face in the future.

Globally the wine industry consists of more than 1 million winemakers who produce about 2.8 billion cases of wine a year (Roland, 2013). Recently there has been an increase in the global wine trade. This is achieved despite lower production levels and a reduction in the total global surface area covered by vineyards during the same year (International Organisation of Vine and Wine, 2014b: 22). Even though the market still has the potential to expand, it has been forecasted that global demand in wine is set to decline if demand is confined to existing patterns. This therefore mean that the future growth of the global wine market will be dependent on a number of factors, of which growing new markets, that will change existing demand patterns, is key.
According to the International Organisation of Vine and Wine (2013a: 18-28), South Africa was the 6th largest exporter of wine (in volume) and the 9th largest producer of wine globally in 2012. Over the last three years, the South African wine industry, contrary to the global industry, increased its wine production in terms of volume, as well as its domestic and international trade both in terms of volume and value (SA Wine Industry Statistics, 2013: 4-32). Notwithstanding this, when viewed globally, the South African wine industry is challenged by a number of issues such as slow growth and increasing financial distress due to rising overheads costs, attributed mainly to a weak currency and increasing energy expenses, that is, fuel and electricity.

These challenges range from political, economic, social, technological, environmental and legal (PESTEL) issues that the wine industry in South Africa is confronted with. The competitive landscape of the wine industry, both locally and abroad, is shaped by a large number of factors, both in the external and internal environment. These factors can be anything from globalisation to climate change and industry consolidation, to mention but a few. There is thus no such thing as a long-term competitive advantage but rather, leaders must constantly rethink the firm’s competitive advantages to stay profitable and ahead of the competition (Goldsmith, 2013). This mean that strategy is a necessary component for the success of a business. According to Yip (2004:19), a further dimension that adds to the understanding of the concept of strategy is that business strategy is a dynamic concept rather than a static concept. As such, the strategy process needs to be robustly flexible in order to accommodate unforeseen changes in the process of strategy execution.

It is however worth noting that regardless of how the landscape is categorised, each category consists of many factors that influence each other and the company’s ability to do business. Thus a company can influence some of these factors, but others are not within its ability to influence or control. Typical factors in the macro/contextual environment include the economic conditions, legislative environment (regulation and de-regulation), technological development and globalisation (Hough et al., 2011: 57). Factors in the internal/transactional environment usually relate to the company’s present strategy and structure, processes, competitive strengths, positioning and resources (Hough et al, 2011: 108).

Political factors such as trade agreements, both globally and regionally, have been in existence for many centuries. Agreements are normally economically and politically motivated. The UK has such agreements with many countries in the European Union (EU). They are negotiated between countries and therefore take time to formalise. In South Africa, to date current trade agreements have not resulted in any noteworthy changes that could affect the current South African wine industry. Potential new trade agreements, that cover wine exports to major wine importing countries, could have significant benefits for the South African wine industry if South Africa is party to such agreements. South Africa’s membership of groups such as Brazil, Russia, India, China, South Africa organisation (BRICS) and the South African Development Community (SADC) could lay the ground for such agreements. In the light of the above, potential new trade agreements are considered a driving force.

Economic factors, with regards to exchange rate fluctuation, is generally accepted that it will fluctuate from time to time. In the UK where inflation rates are generally very low and the British pound stand firm against most currencies, this factor presents a conducive environment for the wine industry. However for SA, the fluctuations present both threats and opportunities for the industry, since a weak currency makes South African wine cheaper abroad, whereas this would increase costs of imported products such as fossil fuel, with a resultant impact on the cost of production. Inflation, similar to exchange rate fluctuations, can have a potential impact on the industry. Like exchange rate fluctuations, it is also is accepted as part of the economic environment in which the industry finds itself.
Social factors regarding changing patterns in consumption and increasing health considerations/consciousness and brand consciousness are going to impact on the industry by 2021 for both SA and the UK. As a result, the industry will have to find ways to attract and appeal to this market. A specific marketing approach and brand building, which is different to that which is currently used, will have to be considered (Vinintell, 2013a: 5). This represents a potential change in patterns of consumption and buying and therefore it would present an opportunity to grow the industry. In light of the above, this factor is considered to be a driving force.

Taking Technological factors into consideration, the increase in the export of bulk wine from South Africa can be attributed to advanced cellar technology. In the UK technological advancement has enabled online business which greatly reduce transaction costs and enhance profitability. Even though it has been acknowledged that bulk wine and bottled wine have separate specialised business models (Rannekleiv et al, 2014: 1-2), there is room for sharing some success factors across these two types of business models so that both could benefit from this existing strength or competitive advantage. As such, this factor presents an opportunity for the industry and is considered to be a driving force.

Environmental factors regarding climate change can have a notable impact on the wine industry on a global as well a local/domestic level. It is predicted that it will impact on the suitability of the current wine producing areas, in terms of overall climatic conditions. It is estimated that this area will be reduced by 25 percent to 85 percent by 2050. Old World wine producing countries such as the UK are predicted to be the most significantly affected by climate change since new suitable areas will be located further north in Europe (Hannah et al., 2013: 6908). This factor presents an opportunity for South Africa to export more wine to these countries, which currently still have high consumption levels, as well as to their exporting partners who will receive less wine. The industry must thus start to find ways to establish viable footprints within these countries that they could use to grow market share when the impact of climate change on the wine industry becomes apparent. This factor is therefore considered to be a driving force.

Legal factors regarding non-tariff barriers, international legal requirements with labelling and bottling, as well as customs and taxation by importing countries, present further barriers to accessing markets by adding costs, with respect to exports. The potential change in legislation for the UK, which may increase the legal age at which alcohol may be consumed (Vinintell, 2012b: 14), is not considered a threat though the extent of it is uncertain. This factor however may not bring significant change within the industry. The potential new legislation which will ban the advertising of alcohol will have a notable impact on the wine industry (Industry Association for Responsible Alcohol Use, 2013: 106-141). For SA, it is estimated that the initial impact of such legislation would cause a 5 to 8 percent decrease in buying of branded liquor (Vinintell, 2012b: 16). As such, the industry will have to find more innovative ways to market their products. This factor will bring about a change within the industry and is considered to be a driving force.

Threat of substitutes is also another factor to be considered in the wine industry in SA. Even though the threat of substitutes in this industry, globally and locally, is high, it has been this way since the 1960s when wine started to lose its overall market share as part of the global alcoholic beverage industry. The threat of substitutes is therefore not considered to be an influential driving force within this industry in the UK.

According to Porter (2008: 29), “the point of industry analysis is not to declare whether the industry is attractive or unattractive, but to understand the underpinnings of competition and the root causes of profitability”. He propounded the five forces model to analyse the business environment, thus in order to understand these forces, and by implication the industry, an industry analysis is therefore a prerequisite. In addition, an industry analysis also provides a baseline with which to compare and identify the company’s strengths, weaknesses, threats and opportunities. In the same vain, Hough et al. (2011: 83) take the industry analysis a step further by adding the concept of driving forces. He contends that driving forces underlie, shape and change industry conditions and that it is therefore important to identify and assess the impact of these driving forces so that it can be taken into account in strategy development.

The South African wine industry should thus factor globalization as driver and a growth strategy which according to Brock et al (2008: 601), refers to seeking market opportunities in foreign market. An internationalisation strategy, like any business strategy in general, should consider the external environments such as economic, political, legislative, social and internal environments such as the competition, positioning, resources, and infrastructure of the business of the specific foreign country or region. Hill (2012: 93) calls this process considering the overall attractiveness of the potential foreign market and divides it into three general categories of benefits, costs and risks.

Many different types of internationalisation strategies are available and these include, localisation, transnational and global standardisation, that provide for different scenarios, depending on the strategic objectives and resources of the company and the planned extent (in terms of scale) of the internationalisation (Hill, 2012). An export strategy is one such type of strategy that specifically describes how to reduce risks and increase benefits through exporting products (Hill, 2012: 535).

There is also need for both the UK and SA to consider diversification as a driver within the business strategy context. Diversification is defined by Lichtenthaler (2005: 698) as: “an increase in products and markets of a company”. It can be related in the sense that the new products or markets are linked to the existing core business, or unrelated in the sense that the company moves into a completely new market or product which is completely unrelated to its existing business. In both instances, a clear business/corporate strategy that provides guidelines for either identifying both related or unrelated opportunities for diversification is required (Lichtenthaler, 2005: 698). The benefits of related diversification can range from achieving competitive advantage and leveraging the benefits of economies of scale and economies of scope to increasing market power (Amit et al, 1988: 100). These are synergistic benefits resulting from a strategic fit.

According to Zook et al (2003: 67-68), the most sustained and profitable growth comes when a company diversifies into related business by pushing the boundaries of the core business into adjacent space. They further contend that companies that have developed a repeatable formula for success, could use this as a competitive advantage to facilitate success of related diversification. In this context, repeatable formulas refer to instances such as knowing customers and their patterns and trends and using this information to replicate success in the same manner that was used to create the current success. However according to Kenny (2012), a diversified company should have an overarching corporate strategy that informs and directs the individual business unit strategies.

Another very important driver is innovation which is a means by which to achieve or invent a sustainable competitive advantage and business success. According to Johannessen et al (2001: 20-21), until recently, innovation has been a term with a very general understanding and which encapsulated the element of newness. Crossan et al (2010: 1155) capture the most recent and comprehensive understanding of the concept of innovation as: “production or adoption, assimilation and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services and markets, development of new methods of production and establishment of new management systems. It is both a process and an outcome.” Process and outcome in this context refers to answering the question of how and what, respectively. It is imperative to note that strategic innovation combines the understanding of strategy and innovation into a multi-dimensional single approach to strategy formulation by specifically identifying opportunities to accommodate, support and create an innovative approach within the strategy. This concept can also be understood to refer to the approach of executing or implementing a given strategy (Gilbert, 1994). According to Choi et al (2001: 425), some common themes that are generally associated with strategic innovation are consolidation, convergence, mass customisation and virtualization.

More so, Strategic planning and strategic thinking as a driver is equally important as others. There are many schools of thought that argue the distinction, or lack thereof and relationship between strategic planning and strategic thinking (Heracleaus, 1998: 481-482). Mintzberg (1978) contend that the two concepts are distinct and that both form part of and are required for strategic management, while others like Porter (2008) maintain that strategic planning is mainly analytical and a pre-requisite for strategic thinking (Heracleaus, 1998: 481-482). This means that after examining all the positions and critiques, there is need to formulate a position based on the level of learning or knowledge generated by each concept. From this perspective, the relation between the two concepts largely echoes the position put forward by Minzberg (1987), in that strategic thinking is related to strategic planning and that both are required from a strategic management and strategy development point of view.

In this regard, strategy development as a process can largely be seen as being influenced and driven by strategic thinking and being supported and realised as a result of strategic planning. According to Graetz (2002: 456-457). Strategic thinking embodies the following characteristics: it involves comprehending a systemic view of an organization; it intentionally looks for alternatives beyond those that are directly linked to reality; it involves an understanding and interrelationship between the past, present and future; it is hypothesis driven since it examines answers to questions such as “what if” followed by “if this then”; and finally it invokes a response to capitalise and act on emerging opportunities.

It is therefore imperative that after taking into consideration the drivers and barriers discussed in this essay, companies craft strategic management models that takes into account cultural, administrative, geographical and economical. All these are enshrined in the CAGE framework propounded by Ghemawat (2007). In so doing, the companies can enjoy sustainability and cannot easily be crippled by market forces and barriers to industry development within the wine industry.

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