Question

Use the following case in answering Problems 29 – 32:

Mary Smith, a Level II CFA candidate, was recently hired for an analyst position at the Bank of Ireland. Her first assignment is to examine the competitive strategies employed by various French wineries.

Smith’s report identifies four wineries that are the major players in the French wine industry. The key characteristics of each are cited in Table 12.6. In the body of Smith’s report, she includes a discussion of the competitive structure of the French wine industry. She notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily, and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate in order to survive.

Smith’s report notes that French consumers have strong bargaining power over the industry.

She supports this conclusion with five key points, which she labels “Bargaining Power of Buyers”:

• Many consumers are drinking more beer than wine with meals and on social occasions.
• Increasing sales over the Internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices.
• The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago.
• More than 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying four to five cases of wine at a time.
• The land where the soil is fertile enough to grow grapes necessary for the wine production process is scarce in France.

After completing the first draft of her report, Smith takes it to her boss, RonVanDriesen, to review. VanDriesen tells her that he is a wine connoisseur himself and often makes purchases from the South Winery. Smith tells VanDriesen, “In my report, I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides.” VanDriesen replies, “I have met members of the management team from the South Winery at a couple of the wine conventions I have attended. I believe that the South Winery could succeed at following

both cost leadership and a differentiation strategy if its operations were separated into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report.

Smith knows that a firm’s generic strategy should be the centerpiece of a firm’s strategic plan. On the basis of a compilation of research and documents, Smith makes three observations about the North Winery and its strategic planning process:

i. North Winery’s price and cost forecasts account for future changes in the structure of the French wine industry.

ii. North Winery places each of its business units into one of three categories: build, hold, or harvest.

iii. North Winery uses market share as the key measure of its competitive position.

Which of these observation(s) least support the conclusion that the North Winery’s strategic planning process is guided and informed by its generic competitive strategy?

Short answer

ii

Step-by-step solution

Definition

The process where the leaders define the vision of the future in alignment with their organizational goals and objectives is known as the strategic planning process.

Explanation of the strategic planning process

Smith’s analysis of competitive strategies employed by wineries identifies four major players. She would further note from the table above that the French wine industry has not changed the tastes of consumers over the last five years. Their profit margins have declined and so has the number of participants declined. It is therefore the need of the hour for French wineries to consolidate. Hence the correct answer would be an option (ii).