Analyzing the External Environment

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External Analysis and the Wine Industry*
Analyzing the External environment is important in the strategic decision making for the organization in that these factors will affect the company’s choice of direction and its internal processes. There are two specific categories of the external environment factors that will be discussed, the remote environment and the industry environment. The remote environmental factors important to the success of the organization are the economic, political, technological factors. In order to create their strategic action plan, the company must also have a clear understanding of its competitive forces included in the industry environmental factors. The factors the company must look at are the entry barriers including capital requirements and policies regarding distribution channels. Remote environmental factors are created without the actions of the company. These factors may present the organization with opportunities, threats, and constraints that the company has no control of. One area of the environment that directly affects the company is the economic trend factors. As an example wine may be considered a luxury item, the health of the economy is important to the company. In an economic downturn, consumer spending is lowered and therefore, consumers are less willing to spend their money on a luxury good, and more apt to buy products that are a necessity. For example, California is the largest market for many wineries in the California market. During the 2001 - 2002 timeframe, the economy in Northern California has weakened based on the failing and other internet businesses. Restaurants in these areas that were once prospering because of the strong economic forces are now closed. Also, retail stores in these geographic areas are not turning inventories as fast, and therefore, not purchasing the wine at the same levels. In effect, wine case sales in Northern California are down 5% over last year to date. Other remote environmental factors of great consideration to the formulation of company strategy are the political forces. Two political factors influencing the company include the “three-tier system” and direct shipment regulations. The alcoholic beverage industry in the United States is regulated on the state level. Each state is responsible for designing how it will conduct business and in what format. Since prohibition in the 1920’s, California for example, has been operating under the “three-tier system” which means that the supplier sells to the distributor and the distributor sells products to the retailer. The retailer then sells alcoholic beverages to the end consumer. The politics of this system is based on the historical power of the distributors. This middle man was created after prohibition to regulate the industry so that suppliers and retailers could not create monopolies or partnerships in the market place. Distributors spend millions of dollars each year lobbying to keep their position in the industry. As a supplier, the winery is at the mercy of their distributors. They can make or break a brand based on their commitment to the brand and their commitment to their customers. Another political factor is the direct shipment regulation. As with the “three-tier” system, the state also decides on how direct shipments are made from state to state.

Since the emergence of the Internet, direct shipping from wineries in California to other states in the nation, has become a topic of controversy. Some states are reciprocity states, defined as: shipments can occur back and forth between two states as long as each state involved follows the same reciprocity rules. Other states command that it is illegal to receive a shipment of a California wine. Again, the distributors in each state lobby their governments to stop direct shipments due to the fact that they lose money each time a shipment occurs without their involvement. As a supplier, the organization is in favor of direct...
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