One of the few Australian companies to become the subject of a globally-applied strategy theory, Casella Wines, is experiencing difficulties with its business model.
Most stories about strategy describe an organisation’s success implementing someone else’s ideas, but Casella Wines is a strategy innovator. The strategy tool the company built its business upon is now used globally by numerous organisations, and has achieved widespread recognition.
From a humble base in Griffith, NSW, Casella Wines’ Yellow Tail brand caught the attention of researchers because of its compelling story of value creation. It built a staggering 75% share of the American wine market in 10 years.
The theory, known as Blue Ocean Strategy, was first developed by INSEAD professors W Chan Kim and Renee Mauborgne. Their book, titled Blue Ocean Strategy, was the result of research into innovative companies that created new industries and markets, which they nicknamed ‘Blue Oceans’. Yellow Tail’s inclusion ranks it alongside other greats including Cirque Du Soleil, South West Airlines, Starbucks and the Model T Ford.
Exploitation of a Blue Ocean is deemed preferable to that of a ‘Red Ocean’, which is the more conventional method of market positioning. Red Oceans require participants to identify and develop a sustainable competitive advantage by finding a point of differentiation from competitors, or becoming the lowest-cost operator.
Earning the right to swim in a Blue Ocean requires you to do both, although uniqueness is deemed better than solely differentiation. With operations in Australia and the bulk of its sales being earned in the US, the primary challenge facing Casella is the increasingly high value of the Australian dollar. It was only worth 57 cents against the US dollar when Casella first entered the US market and now it is slightly over parity.
The overarching challenge for Casella is to retain market share in the US while at the same time raising its selling prices. This is seen as a mandatory if it is to return to profitability, but equally a death-defying act for its Blue Ocean strategy.
At first blush, the answer to Casella’s dilemma is simple. The company needs to do two things. First: relocate all or part of its production facilities to the US. Second: diversify its brand portfolio to reduce its reliance on one region (albeit the biggest in the world) and a single brand (Yellow Tail). The deeper you think about these two issues, the more you realise the complexity and depth of the problem.
Resolution will require a lot of hard thinking and analysis. Even if the answer is simple, the solution is not apparent and it is far from being executed. Further, time may no longer be on their side.
The problem with strategy generally is that the entire concept is hard to appreciate and comprehend; strategic theory has never been really well explained.
Similarly, there has been little explanation as to which strategy theory should be used and when.
Take the Blue Ocean strategy, for example. It is extremely valuable for certain applications and times, but it is inappropriate to rely solely on this model all the time. This appears to be the problem for Casella. It initially developed a superior strategic business model, but the company is paying the price for the lack of ongoing strategising over time.
Whereas Yellow Tail faces an uncertain future and the potential loss of market share, the Casella Wine Corporation itself is at risk of entering a ‘strategic drift’. This is a situation where an ingrained conservative culture inhibits appropriate responses to environmental change and the obvious need to renew. The implications are significant: strategy and strategising is important, but so is the need to execute and then review.
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