Organizational Life Cycles in Small New Zealand Wineries

Article excerpt

Hanks (1990) noted that the life cycle analogy was developed in order to explain the development of organizations over time. Traditional management theories had failed to take into account issues such as organizational age, size, and complexity when they attempted to explain organizational effectiveness (Quinn and Cameron 1983). A central tenet of life cycle theory is that organizations move through a series of phases. Hanks et al. (1993, p.7) defined a life cycle phase as "a unique configuration of variables related to organization context or structure." In a review of lifecycle models, Hanks et al. (1993) found that common across all models were start-up, expansion, consolidation, and diversification stages. All models stated that organizations grow larger and more complex as they age. As organizations develop, they go through a series of stages, deal with a number of different challenges, conflicts, and problems, and adopt different strategies and skills. Hanks (1990, p. 1) argued that a valid life cycle m odel would be of great value to those managing growing firms:

It could provide a road map, identifying critical organizational transitions, as well as pitfalls the organization should seek to avoid as it grows in size and complexity. An accurate life cycle model could provide a timetable for adding levels of management, formalizing organization procedures and systems, and revising organization priorities. It could help management know when to "let go" of cherished past strategies or practices that will only hinder future growth.

Despite the proliferation of models, attempts to prove the existence of a general model of life cycles have failed (Levie and Hay 1998). They argued that although life cycle models may provide an explanation of firm growth at an industry level, the existence of a general theory is unlikely McMahon (1998), like Hanks et al. (1993), called for the use of qualitative research to attempt to develop inductive models of firm growth.

Life cycle models have also been criticized by small business experts for not taking into account the fact that many small business people may be motivated by factors other than a desire for profit and growth (O'Farrell and Hitchens 1988). Life cycle models assume that economic growth is desired and therefore it would be appropriate to examine whether life cycles occur in growth-oriented firms. The purpose of this article is to examine the developmental patterns of profit-driven wineries in New Zealand through the use of in-depth case studies.

The New Zealand Wine Industry

The current life cycle stage of the New Zealand wine industry is critical for understanding the context within which the sampled firms operate (Swaminathan 1995). Beal (2000, P. 34) argued that an industry's life cycle stage could be characterized by:

(1) Growth in the industry's sales during the past five years; (2) level of demand for the industry's products; (3) stage of development of the industry's products; (4) level of diffusion of information about the industry's products; (5) plant capacity over the past five years; (6) current price level of the industry's products; (7) growth in the different types of distribution channels for the industry's products; (8) level of the industry's advertising expenditures over the past three years.

Some of this information is contained in Table 1. From 1990-1999, the number of export markets for New Zealand wine has increased, opening up a range of new distribution channels. A recent industry survey highlighted increased marketing activities in the industry, and in this context, New Zealand has established a reputation for the production of fine wine (Beverland 1999). This information would support the view by Rabobank (1999) that the industry is in a growth stage. This has attracted a number of new small start-up wineries into the industry. A recent survey by Beverland (1999) found that although most of these start-ups are motivated by a desire for personal fulfilment and economic return, many had little understanding of business issues. With increased competition in both domestic and world markets, the ability of many of these small wineries to survive can be called into question.

Methodology

Wineries were selected on the basis of their age, size, ownership structure, brand profile, and performance. Details of the sample are highlighted in Table 2. The data collection followed the multiple case study method of Eisenhardt (1989). The authors examined 20 cases in total. Interviews generally lasted for one to three hours depending upon the amount of historical information covered. The questions included discussion of organizational history, key events, level of hierarchy and specialization, the development of control systems, strategy future challenges, and financial performance. For each case, secondary sources were sought and were incorporated in the form of a "mini-memo" (Strauss and Corbin 1990). These sources usually included information on start-up date, number of vintages, product range, levels of production, export markets served, and some company and performance-related information. Following the interviews, data were transcribed, edited, and summarized into memos. The data analysis followed the grounded theory approach of Strauss and Corbin (1990). This method involved one of constant cross-comparative analysis between each site. Following the writing up of an individual case, the memo was returned to the interviewees for review to ensure accuracy and internal validity. The cases were then analyzed for similar themes or results.

Findings

Prior to start-up, prospective winery owners attempted to gather resources, secure financial backing, gain key employees, and acquire finance and basic business skills. There was no time limit to this "stage," but the participants all concluded that they had to convince themselves and others that starting a company was a "good idea" and that they needed the right level of resources before starting a business. Once prospective owners had the resources and the confidence, the business was usually started within six months. During this period, prospective owners often had another job and would not give up their position until the winery was established and enjoyed a level of financial security.

In the first five years, wineries were typically focused on production. Those operators that bought a vineyard as a going concern would focus on re-planting vineyards with key varietals, investing in oak barrels, building new plants, and establishing new viticultural practices. Since these vineyards may have been originally planted with poorly performing varietals, many of these were pulled out. It was important to establish a positive cash flow quickly One option was to buy grapes from grape growers to produce low-priced wines that contributed to cash flow but didn't impact negatively on the choice to produce high-quality branded wines in the future. Another option was to use the winery to produce wine for other wineries. These wineries engaged in little marketing and employees were often on short-term contracts or hired as independent consultants.

After the first five years, the wineries would have their own grapes coming into production and would focus on establishing their brands. Wineries that revitalized an old vineyard would start focusing on marketing and building brands at an earlier date, usually within the first two years following purchase. Between years five and eight, wineries would hire their own wine-makers and production staff but still use consultants for business activities, although the owner usually did the marketing. As production became established, marketing became the prime business focus. Wineries would often increase their storage space, expand the plant, and build their own bottling lines. Regarding marketing, due to their small size, most wineries would focus on public relations activities. In the wine trade, this consists of entering wine shows, sending wine to wine writers, and holding tasting evenings for wine clubs. At this stage, wineries relied on positive show results and press write-ups to sell their wine. At this sta ge, wineries also relied upon selling direct to the customer through their winery cellar door (sales through the cellar door averaged 85 percent), although within three years sales through the cellar door had fallen to 15 percent (even though production had increased). By this time, sales had expanded into channels such as supermarkets, wine retailers, restaurants, and exports. Towards the end of this period-- providing the winery was successful-- most business functions would be performed in-house while professional functions such as accountancy, law, and some scientific functions would be outsourced. Marketing plans were developed at this time and accounting systems tended to become more sophisticated. Also during this time, wineries would tend to either expand their product range by offering more varietals and wines at different price points or focus very narrowly on three or four varietals.

After eight years, wineries went in one of three directions. Some wineries would settle at a certain level of production and expand no further. Some owners commented that this level of production allowed them to retain control over the company without having to hire line managers and supervisors. This sometimes led to a period of decline, as the level of production was too low to meet the demands of retailers and export markets. Some wineries lost key people who felt stifled, resulting in a decline in quality and market activity Other wineries would consolidate for a period (on average, two quality vintages) and then go through a period of further expansion. These wineries often concentrated on improving debt-to-equity ratios or return to shareholders before moving ahead with further expansion. Finally, other wineries simply continued to expand.

Consolidation consisted of reducing product lines, deleting poorly performing labels, reducing debt, bringing the winery up to full production, and gaining key staff. Cash was often sought from equity partners to fund further expansion (the initial growth was generally funded by debt and retained earnings). Wineries that grew without consolidating continued to focus on increasing the production of key varietals while adding wines that were popular in the market. The focus of these wineries was predominantly upon branding, brand reinforcement, building and expanding distribution channels, and forming strong relationships with growers. Companies at this stage also continued to develop sophisticated financial and monitoring systems that enabled improvements in quality as well as financial performance. Specialized marketing and sales staff were hired at this stage. Wineries relied very little on cellar door sales, although they used the cellar door for brand building and brand enhancement. At this stage, at least 30 percent of production would be exported with wineries struggling to ration wine to key export markets.

The age of many of the wineries made it difficult to establish patterns beyond eight years; however, the emerging trend is that many wineries are seeking to grow further through equity capital injections from the secondary share exchange or through the formation of alliances with local and overseas wineries. Family firms tended to differ in this respect in that they were more reticent to seek outside shareholders for fear of losing control of the business. Although many did eventually elect to appoint non-family managers and seek outside equity capital, most did so while still retaining a majority holding in the business.

Discussion

The general model emerging from the data is presented in Table 3. The evidence for a pre-birth stage supports a criticism of life cycle models by small business writers (O'Farrell and Hitchens 1988) who argue that life cycle models typically ignore this stage. Once a winery was started, the owners focused on reaching a survival threshold (Downs 1966). Following pre-birth, a start-up stage can be identified. This generally comes from a successful wine review or wine show result. Once this result is gained, a small winery typically sells out of the product overnight. From this stage, firms go through an expansion stage. This stage involves increased production, increased numbers of skilled staff, and the development of strong brands through focused marketing activity. This activity involves the establishment of relationships with distributors, press, exporters, and loyal customers. Firms at this stage can risk developing too many product lines. Successful firms typically focus on producing a few products such a s Pinot Noir, Chardonnay, and Sauvignon Blanc, although this will be partly driven by the geographic location of the vineyard. This stage is characterized by strong growth and a clear focus on attaining human capital (Adizes 1988).

Following this stage, successful companies increased production, gained control over the supply of grapes, and developed strong brands that made them less dependent upon wine show results for demand. Successful wineries developed secondary labels to use when the harvest was poor. As organizations aged, they also increased their number of employees. There was some initial evidence to suggest that older wineries started to seek new sources of capital via equity financing arrangements, whereas less successful companies tended to rely on debt financing.

Each stage was characterized by a dominant problem. For example, although it was not the case that wineries in the initial stages paid little attention to marketing or branding, the dominant problem at this time was ensuring an efficient level of production and ensuring quality products. If they achieved this, then the product literally sold itself. Marketing only became a dominant problem when production levels rose to such an extent that performing well at a wine show or selling through the cellar door was no longer sufficient to sell their entire output. Again, production at this point was still important, but the problems surrounding production in the early stages of growth had been overcome and were now routine. Likewise, in the final stage of initial growth, the predominant problem became one of financial return and market orientation. Brands had been built and product quality was high, but the owners were now looking at gaining an adequate return on their investment. At this stage, cost control, greate r profit margins, and more deliberate planning were the key problems faced by the organization. This supports the work of Hanks et al. (1993) and Kazanjian and Drazin (1983).

Thus, the 20 cases show support for a mid-range life cycle theory for the New Zealand wine industry. However, further testing is needed to establish the model's wider applicability. This research is exploratory, and the focus on a small set of cases in the localized industry may limit generalizability. The unique problems faced by the wine industry may also limit generalizability to sectors that have shorter product development cycles. Future research into organizational life cycles needs to examine the longitudinal development of firms across a range of industries. The emergent model does add support to the literature on life cycles, although there are some significant differences. The range of options confronting wineries suggests that movement through the stages is not predetermined. The similarity within an industry grouping of organizational development and growth offers support for a resource dependence model of organizational life cycle that does allow room for strategic choice and variation within an organizational population. Finally, the model is similar to life cycle models for large firms. While it deliberately doesn't account for the non-economic motivation of small firm owners, it does seem that life cycle models within small firms are merely a variation on those of large firms, with the main difference being one of scope.

References

Adizes, I. (1988). Corporate Life Cycles. New Jersey: Prentice-Hall.

Beal, R.M. (2000). "Competing Effectively: Environmental Scanning, Competitive Strategy, and Organizational Performance in Small Manufacturing Firms," Journal of Small Business Management 38(1), 27-47.

Beverland, M.B. (1999). "Shakeout! Will Small Wineries Survive in the Global Wine Trade?" New Zealand Strategic Management 4(2), 31-39.

Downs, A. (1966). Inside Bureaucracy. Boston, Mass.: Little, Brown and Co.

Eisenhardt, K.M. (1989). "Building Theories from Case Study Research," Academy of Management Review 14(4), 532-550.

Hanks, S.H. (1990). "An Empirical Examination of the Organization Life Cycle in High Technology Organizations," Ph.D. dissertation, University of Utah.

Hanks, S.H., C.J. Watson, E. Jansen, and G.N. Chandler (1993). "Tightening the Life-Cycle Construct: A Taxonomic Study of Growth Stage Configurations in High-Technology Organizations," Entrepreneurship Theory and Practice 18(2), 5-24.

Kazanjian, R.K., and R. Drazin (1989). "An Empirical Test of a Stage of Growth Progression Model," Management Science 35(12), 1489-1502.

Levie, M., and P. Hay (1998). "Progress or Just Proliferation? A Historical Review of Stages of Models of Early Corporate Growth," working paper, London Business School.

McMahon, R.G.P. (1998). "Stage Models of SME Growth Reconsidered," Small Enterprise Research, 6(2), 20-36.

O'Farrell, P.N., and D. Hitchens (1988). "Alternative Theories of Small-Firm Growth: A Critical Review," Environment And Planning 20, 1365-1383.

Quinn, R.E., and K. Cameron (1983). "Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence," Management Science 29(1), 33-51.

Rabobank (1999). The World Wine Business. Netherlands: Rabobank International.

Strauss, A.L., and J. Corbin (1990). Basics of Qualitative Research: Grounded Theory Procedures and Techniques. Newbury Park, Calif.: Sage.

Swaminathan, A. (1995). "The Proliferation of Specialist Organizations in the American Wine Industry, 1941-1990," Administrative Science Quarterly 40(4), 653-681.

Table 1

Summary of New Zealand Wine Industry Statistics 1990-1999 [1]


Characteristics                          1990   1991   1992   1993

Number of wineries                        131    150    166    175
Total vineyard area (hectares)           5,800  5,980  6,100  6,100
Producing area (hectares)                4,880  5,440  5,800  5,980
Average yield (tonnes/hectare)           14.4   12.1    9.3    7.1
Total production (million litres)        54.4   49.9   41.6   32.5
Domestic sales (million litres)          39.2   41.1   43.6   37.4
Consumption per capita (litres NZ wine)  11.7   12.1   12.8   11.0
Export volume (million litres)             4     5.6    7.1    8.6
Export value [2]                         18.4   25.3   34.7   48.3




Characteristics                          1994   1995   1996   1997

Number of wineries                        190    204    238    262
Total vineyard area (hectares)           6,680  7,500  7,800  8,455
Producing area (hectares)                6,110  6,110  6,610  7,410
Average yield (tonnes/hectare)            8.8   12.2   11.2    8.1
Total production (million litres)        41.1   56.4   57.3   45.8
Domestic sales (million litres)          28.5   30.9   35.6   38.8
Consumption per capita (litres NZ wine)   8.1    8.7    9.9   10.4
Export volume (million litres)            7.9    7.8    11    13.1
Export value [2]                         41.5   40.8   60.3   75.9




Characteristics                          1998    1999

Number of wineries                        293    334
Total vineyard area (hectares)           8,930  10,386
Producing area (hectares)                7,580  8,731
Average yield (tonnes/hectare)           10.3    9.2
Total production (million litres)        60.6    60.2
Domestic sales (million litres)          38.2    38.6
Consumption per capita (litres NZ wine)  10.1    10.1
Export volume (million litres)           15.2    16.6
Export value [2]                         97.6   125.3



(1)Source: Bank of New Zealand, 1999.

(2)Millions of $NZ FOB.
Table 2

Profile of Sample Wineries


Production size                   Less than 200,000 litres sales per
                                  year
                                  First crush average 11.5 tonnes
                                  Current crush average 75.6 tonners
Strategy                          Aiming for growth in size of
                                  production
                                  Niche focused at top end of the
                                  market
Employees (average)               3 full time staff
                                  5 part time staff
                                  10 seasonal staff
Ownership structure               10 family firms
                                  5 private companies with unlisted
                                  shareholdings
                                  3 public companies listed on
                                  secondary
                                  exchange
                                  2 owner operated
Age                               0-3 years: 2
                                  4-6 years: 6
                                  7-9 years: 7
                                  9+ years: 5
Greatest achievement (frequency)  Profitability: 14
                                  Product quality: 10
                                  Export success: 7
                                  Production levels: 7
                                  Brand reputation: 7
                                  Winery expansion: 6
Future challenges (frequency)     Increased competition: 12
                                  Sustaining quality production: 9
                                  Maintaining supply: 5
                                  Economies of scale (cost factors):
                                  4
                                  Profitability: 4
                                  Financing growth: 3
Performance                       Brand development: 2
                                  Profitable last five years: 11
                                  Unprofitable last five years: 4
Distribution channel (percent
sold)
Restaurants                       39.90
Exports                           33.92
Specialist wine shops             23.33
Specialist liquor chains          22.86
Cellar door                       22.52
Supermarkets                      14.42
Mail order                        13.59
Internet                          8.5
Average price per bottle of wine  $NZ 25
                                  Range $NZ 70
Table 3

Proposed Model of Organizational Life Cycle for Small New Zealand
Wineries


Stage            Pre-birth             Start-up

Time period      6 months once         0-5 years
                   resources gathered
Key focus        Resource gathering    Production
                                       Cash flow


Production       None                  Replanting
                                       Vineyard focus
                                       Some winery development

Marketing        None                  Public relations, wine shows
                                         and press, cellar door sales

Distribution     None                  Cellar door


Staff functions  Owner and wine-maker  Production, generally
                                         part time
Challenge        Gain resources        Survival



Stage            Expansion

Time period      5-8 years

Key focus        Brand building
                 Production growth
                 Market expansion

Production       Winery development
                 Vineyard expansion
                 Bottling lines
                 Storage
Marketing        Wine shows, press, in
                   store marketing and
                   limited advertising
Distribution     Cellar door to
                   traditional retail

Staff functions  Production, marketing
                   generally full time
Challenge        Gaining distribution channels



Stage            Growth

Time period      8 years +

Key focus        Rationalize product range
                 ROI
                 Market orientation
                 Debt reduction
Production       Winery expanison
                 Further vineyard expansion
                 Quality control systems

Marketing        International wine shows
                   and press, public relations,
                   cellar door and advertising
Distribution     Export
                 Retail
                 Little cellar door
Staff functions  Some management staff

Challenge        Systems and planning