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Frog's Leap Winery- Strategic Analysis
- 2. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 2 Executive Summary The objective of this report is to critically analyse the strategic objective of Frog’s Leap Winery and it’s vision of incorporating sustainability within its business model. It has built its model by adopting sustainable agricultural practices, developing ecologically friendly infrastructure, creating a cost efficient supply chain and reducing it’s environmental impact, while increasing it’s financial bottom line. Consequently the goal is to ascertain if: 1. Frog’s Leap has achieved sustainability 2. How has this contributed to it’s competitiveness 3. What challenges it faces in the short, medium and long term 4. What recommendations can be proposed to increased it’s organisational strength It was determined that Frog’s Leap has developed into the industry leader in sustainability and as such developed a competitive advantage. However due to lack of investment in other ends of its value chain namely distribution, sales and marketing this competitive advantage was determined to be temporary. Through detailed SWOT, VRIO and Financial analysis, it was determined that Frog’s Leap faces several challenges over the next 10-20 years, namely: • Relatively small market share • Low Cash inflow from investments • Relatively small revenue generation in relation to it’s high debt loading Hence the report determines that for Frog’s Leap to realise it’s sustainability strategy, it needs to focus on strengthening it’s financial dimension in the short and medium terms while still continuing to strengthen it’s sustainability practices. As such this report recommends: • Exploiting the growing lifestyle and environmentally conscious market • Expanding existing loyalty programmes • Increase direct to consumers sales • Turn Strengths into Core Competency’s • Increase Export Market
- 3. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 3 Contents 1.0 Introduction 4 1.1 Current Situation 4 2.0 Frog’s Leap Sustainability Strategy 5 2.1 Ecological 5 2.2 Social 6 2.3 Economic 6 3.0 Industry Comparisons 7 3.1 Financial Position 7 3.2 Market Placement 8 4.0 Future Recommendations 9 4.1 Short-Medium Term Recommendations 9 4.2 Long Term Recommendations 10 5.0 Conclusion 10 6.0 Reference List 11 7.0 Appendices 12
- 4. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 4 1.0 Introduction In no other industry is operating in a sustainable way more important than within the agricultural industry. That is because what you are producing is inherently connected to the way you engage in your operating environment. In other words, ‘your connection to the land is directly linked to the profitability of your business’(Sharo 2010). The modern Frog’s Leap winery has been in operation since 1981. Within that time much has changed in the size and scope not only of the vineyard but also the market in which it operates. However, what has remained consistent throughout this period is the strategy owner John Williams has applied to the direction of the company to develop in a sustainable way. For the managers of Frog’s Leap this means not just creating a balance between financial performance and it’s social and ecological impacts (Kramar 2014), but having these sustainable outcomes drive its success, whereby redefining the meaning of the triple bottom line strategy. The objective of this report is to critically analyse the success of Frog’s Leap vineyard over the last ten years to 2011, not just within its sustainability initiatives but also how making sustainability an integral part of their strategy and business model has translated into financial success. Further to this through financial analysis and comparing it to industry standards this report will ascertain whether this strategy has been successful for Frog’s Leap and what strategy adjustments need to occur moving forward. Whereby the overall goal is to analyse the underlying challenges and opportunities for Frog’s Leap into the future. 1.1 Current Situation Frog’s Leap Vineyard is a small-medium sized vineyard in Napa Valley, California. Since it’s establishment in 1981 it has grown from a small boutique vineyard producing 653 cases of wine to a medium sized operation with an annual production of 62000 cases in 2010. In the last ten years it has implemented a strategy of capital growth through investment in land and infrastructure. It currently has 160 acres and employs 50 personnel, a virtual doubling of its size (Gilinsky 2011). Where Frog’s Leap differentiates itself from it’s competitors, is its consistent mission to grow in a sustainable manner and produce organic wine (Appendix C). Currently it is the recognised industry leader in sustainability and it has invested heavily in maintaining a
- 5. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 5 leading Environmental Management System and it’s reputation as a sustainability- driven innovator (Kiron et al. 2013). However after this period of rapid growth, Frog’s Leap finds itself in a new period of its development. Part of becoming a sustainable enterprise is to make sure that your sustainability efforts are both implemented throughout the value chain and are an essential part of your business model (Perrott 2014). As John Williams claims for his own company, ‘the goal of sustainability is to sustain yourself’ (Gilinsky 2011). This has not only been a mindset in Frog’s Leap, but a driver of profitability and economic value throughout it’s history. 2.0 Frog’s Leap Sustainability Strategy While the concept of sustainability is not unique in Frog’s Leap’s case, it’s approach to defining what sustainability means to them (Appendix C); implementing initiatives early on it’s strategy and therefore creating the foundations of dynamic capability in it’s value chain operations (Gamble, Thomson & Peteraf 2013) is. This has meant that it has not only been able to create more balance between financial, ecological and social outcomes, but it has placed itself to both benefit from new growing markets, where consumers see sustainability in products as essential (Rice 2009) and establish itself as the leading sustainability-driven innovator in the market (Kiron et al. 2013). Thereby Frog’s Leap winery has created it’s competitive advantage through sustainability practices. 2.1 Ecological ‘Every decision is reviewed for it’s ecological and sustainable impact.’ John Williams Frog’s Leap’s describes its ecological efforts thus far as picking, ‘the low hanging fruit’ (Gilinsky 2011). What this essentially translates into is for the last fifteen years their efforts have focused on environmental issues that relate directly to their core business and operations and in line with their core philosophical thinking (Appendix C). Environmental aspects such as rising energy costs, water scarcity, chemical exposure and climate change have a direct impact on the efficiency of a vineyard, the taste and flavour of the wine and hence the appeal of the core product (Sharo 2010). As a sustainability-driven innovator, Frog’s Leap has established a reputation of having the most sophisticated Environmental Management System within the industry and has constantly come up with new ways to reduce their footprint while having a positive
- 6. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 6 economic impact. Its investment into energy self-sufficiency through solar and geo- thermal initiatives has not only secured ‘free electricity,’ in the long term, it has provided energy credits in the short term allowing it to produce positive cash flow from the investment. Combined with developing the industries first Leadership in Energy and Environmental Design (LEED) building they have reduced their energy usage from 30- 40%, water usage from 40% and CO2 emissions by 1600t since 2005. Thanks to it’s adherence to biodynamic farming techniques and efficiency it has reduced significantly it’s impact on the local environment, has strongly contributed to lower operational costs, adding to the quality of the core product and strengthening the winery’s central message, brand and market orientation (Jelinek & Bergey 2013). 2.2 Social ‘They’re well trained and experienced. They’re engaged and a highly motivated workforce.’ John Williams Rather than develop their social legitimacy through traditional corporate avenues of community engagement, Frog’s Leap has looked much closer to home in establishing strong Sustainable Human Resource Management (SHRM) practices. This links value- driven people management practices and policies, ‘to the achievement of organisational outcomes and performance, most particularly financial and market outcomes’ (Kramar 2014, p. 1069). In Frog’s Leap’s case they have dedicated themselves to providing the industries top working conditions. In Practical terms, all employees of Frog’s Leap are employed full time, have structured retirement plans and receive health benefits, in an industry where contracted seasonal work is the established norm (Gilinsky 2011). What this has translated into for Frog’s Leap is a highly knowledgeable, skilled and loyal workforce who have added to the dynamic capabilities of the firm and created a knowledge based value (Jelinek & Bergey 2013). 2.3 Economic ‘This is not just an experiment. We are a thriving business with above average margins and below average operating expenses.’ John Williams How then have these initiatives translated into a positive financial bottom line? A direct link to this would be the significantly decreasing of operational costs over the last 10 years. Cost of Goods Sold has dropped from 46.8% of sales to 40.8% while production has increased (Appendix A). Additionally total operating expenses have risen from
- 7. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 7 28.8% to 39.7% even though the vineyards staff, land and infrastructure has virtually doubled in that time. Hence by investing in ecological efficiency and SHRM, Frog’s Leap has been able to strengthen it’s supply chain management, streamline operations and create an economically viable organisation (Appendix B). However while Frog’s Leap has established a dynamic operating environment and managed to advance it’s ecological and social goals, this has come at a cost to it’s short term financial position. With a debt load of approximately $22 million Frog’s Leap has found itself increasingly less financially flexible and so to maintain it’s competitive advantage it would need to focus on strengthening it financies not just from efficiency, but in revenue generation. 3.0 Industry Comparison An essential element in evaluating Frog’s Leap’s performance entails examining the company’s ‘resources and competitive capabilities’ (Gamble, Thomson & Peteraf 2013) as compared to the market. To appraise Frog’s Leap’s performance to date, this report examines both it’s financial position and market placement as compared to it’s industry peers in the northern California wineries region. 3.1 Financial Position Through mostly cost cutting initiatives Frog’s Leap has gradually increased it’s gross profit margins over the last ten-year period (Figure 1). However this is substantially below industry standards and reflects the lack of investment in new revenue streams. While many of their competitors have invested substantially in increasing direct to consumer sales and market share Frog’s Leap has placed moderate investment in this area instead relying on their established brand name and customer loyalty (Gilinsky 2011). As such with the increase in production Frog’s Leap’s sales have grown more moderately (Appendix A).
- 8. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 8 Subsequently, lower comparative profit combined with heavy investment in infrastructure and land has led to a low cash flow in the organisation and a high inventory count (Appendix A). This in turn has had a consequential affect to their liquidity (Figure 2). While their current ratio looks positive, their quick ratio shows that without their inventory they are in the medium risk category for debt servicing. Combined with a low interest coverage ratio, the focus now for Frog’s Leap is to increase cash and profitability figures through increases in revenue. What is encouraging is that their liquidity is above industry standards, and is moving in a positive direction as they look to pay down their debt burden and increase sales comparatively (Appendix A). Although not a critical risk, this is something to be mindful of in the short term as global uncertainty in the market could increase the risk of default (Gilinsky 2011). This again is reflected in the interest coverage ratio (Figure 3) which suggests that while Frog’s Leap is in a good position to meet it’s current obligations, it would want to consider it’s situation carefully before increasing it’s debt burden, focus instead should be increasing cash inflow from it’s current investments. 3.2 Market Placement A VRIO analysis (Appendix B) suggests that Frog’s Leap has an Unexploited Competitive Advantage within it’s market place. It’s wine product is of a high value and is frequently ranked within the top premium wines within Napa Valley (Gilinsky 2011). It charges above average prices for it’s product and with a growing loyal consumer base it moves inventory much faster than industry averages (Figure 4). While it’s product is growing in popularity, organic wine is still quite rare within the industry. Of 404 premium wineries in Napa Valley only 60 (14%) were considered ‘Green’ (Gilinsky 2011). Further to this, it is considered difficult and expensive to imitate. The advantage of Frog’s Leap is that it has had a strategy of sustainability since it’s inception. For a competitor to revert green would be time consuming and expensive.
- 9. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 9 However this report acknowledges that while sustainability has been supported by the organisation in it’s upstream processes of supply chain management and operations, this has been at the expense of downstream processes of distribution, sales and marketing and service leading to lower than average profit margin (Appendix B) resulting in lower delivery standards and sales figures (Figure 4). 4.0 Frog’s Leap Future Recommendations ‘We’ve picked off some of the low hanging fruit and now to continue to push forward in this arena it’s the hard stuff that’s left.’ Doug DeMerritt 4.1 Short-Medium Term Recommendations As examined above the greatest weakness that Frog’s Leap has is it’s lack of market penetration. This has led to lower sales and revenue generation compared to investments. While it’s operations have focused primarily on it’s sustainability, it has created an operation gap within distribution, marketing and sales (Appendix B) and in consequence has effected it’s bottom line. It’s focus now must be on strengthening these areas. 1. Exploit growing LOHAS market With a focus on lifestyle and sustainability and a spending power of $209 billion, this is the natural market place for high-end ‘green’ products (Gilinsky 2011). By engaging in social media and viral marketing it needs to increase it engagement of this market place. 2. Expand ‘Fellowship of the Frog’ and ‘Wine by the Glass’ Programmes These programmes need to be marketed and expanded to encompass a greater number of people while still maintaining a boutique winery feel. This can be achieved by offering increasing wine tours and making them more accessible;
- 10. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 1 0 expanding online ordering options; and partnering with restaurants, organic vineyards and distributers. 3. Increase Direct to Consumers Sales Currently only 13% of wine produced is being sold directly to the consumer. An increase in wine tours and online purchase options will not only increase this, but also increase inventory turnover and subsequently sales and revenue. 4.2 Long Term Recommendations 4. Turn Strengths into Core Competency’s Frog’s Leap has invested much into it’s green infrastructure and name. While this will continue to cut costs and enhance reputation in the medium term, Frog’s Leap needs to constantly focus on new innovations and investments that will see it maintain it’s dominance in this market. 5. Increase Export Market Currently this accounts for 7% of the wine sales. While the immediate focus should be on the domestic market segment, long term focus should be one expanding exports to overseas Asian markets where Frog’s Leap has a strong brand name. 5.0 Conclusion In Conclusion, Frog’s Leap over the last 20 years has fulfilled it’s strategic goals to become a specialist winery focused on growing green organic wines in a sustainable way. This has resulted on its becoming a leader within the marketplace and developing a core customer base. By adopting a sustainable business model it has gained a competitive advantage in the industry through engaging community, employees, reducing costs and increasing profits (Sharo 2010). The success of sustainability at Frog’s Leap exemplifies that the ‘traditional financial bottom line is complimented by a social and ecological one’ (Ehnert, Harry & Zink 2014). However moving forward, Frog’s Leap needs to focus on increasing its financial sustainability as a strong financial dimension will always allow an organisation to increase it’s contribution to its ecological and social ones.
- 11. MATTHEW PEARCE FROG’S LEAP STRATEGIC ANALYSIS 1 1 6.0 References Gamble, J., Thomson, A. & Peteraf, M. 2013, Essentials of Strategic Management: The Quest for Competitive Advantage, 3rd edn, McGraw-Hill Irwin, New York. Gilinsky, D.A. 2011, Frog's Leap 2011, Sonoma State University Wine Business Institute. Jelinek, M. & Bergey, P. 2013, 'Innovation and the strategic driver of sustainability: big data knowledge for profit and survival', IEEE Engineering Management Review, vol. 41, no. 2, pp. 14-21. Kiron, D., Kruschwitz, N., Reeves, M. & Goh, E. 2013, 'The Benefits of Sustainability-Driven Innovation', MIT Sloan Management Review, vol. 54, no. 2, pp. 69-73. Kramar, R. 2014, 'Beyond strategic human resource managment: is sustainable human resource managment the next approach?', The International Journal of Human Resource Management, vol. 25, no. 8, pp. 1069-89. Perrott, B. 2014, 'The sustainable organisation: blueprint for an integrated model', Journal of Business Strategy, vol. 35, no. 3, pp. 26-37. Rice, J. 2009, Creating competitive advantage through sustainability, viewed March 30 2015, <http://www.fruitfulstrategy.com/blog/2009/07/creating-competitive- advantage-throughsustainability/%3E. Sharo, D. 2010, Sustainable Winemaking: A Liquid Revolution, Strategic Sustainability Consulting, <http://static.squarespace.com/static/4ffc3ba1e4b036a61fbde6ff/t/50d 277fbe4b06152e1371ba6/1355970555148/White+Paper_Sustainable+ Winemaking_060110.pdf%3E.