frog's leap winery- strategic analysis

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FROG’SLEAPSTRATEGICANALYSIS 1

Frog’sLeapStrategicAnalysis

MatthewPearce

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ExecutiveSummary TheobjectiveofthisreportistocriticallyanalysethestrategicobjectiveofFrog’sLeap

Winery and it’s visionof incorporating sustainabilitywithin itsbusinessmodel. It has

built its model by adopting sustainable agricultural practices, developing ecologically

friendly infrastructure, creating a cost efficient supply chain and reducing it’s

environmentalimpact,whileincreasingit’sfinancialbottomline.Consequentlythegoal

istoascertainif:

1. Frog’sLeaphasachievedsustainability

2. Howhasthiscontributedtoit’scompetitiveness

3. Whatchallengesitfacesintheshort,mediumandlongterm

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

sustainabilityandas suchdevelopedacompetitiveadvantage.Howeverdue to lackof

investmentinotherendsofitsvaluechainnamelydistribution,salesandmarketingthis

competitiveadvantagewasdeterminedtobetemporary.

ThroughdetailedSWOT,VRIOandFinancialanalysis,itwasdeterminedthatFrog’sLeap

facesseveralchallengesoverthenext10-20years,namely:

• Relativelysmallmarketshare

• LowCashinflowfrominvestments

• Relativelysmallrevenuegenerationinrelationtoit’shighdebtloading

HencethereportdeterminesthatforFrog’sLeaptorealiseit’ssustainabilitystrategy,it

needstofocusonstrengtheningit’sfinancialdimensionintheshortandmediumterms

while still continuing to strengthen it’s sustainability practices. As such this report

recommends:

• Exploitingthegrowinglifestyleandenvironmentallyconsciousmarket

• Expandingexistingloyaltyprogrammes

• Increasedirecttoconsumerssales

• TurnStrengthsintoCoreCompetency’s

• IncreaseExportMarket

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Contents1.0Introduction 4

1.1CurrentSituation 42.0Frog’sLeapSustainabilityStrategy 5 2.1Ecological 5 2.2Social 6 2.3Economic 63.0IndustryComparisons 7 3.1FinancialPosition 7 3.2MarketPlacement 84.0FutureRecommendations 9

4.1Short-MediumTermRecommendations 9

4.2LongTermRecommendations 10

5.0Conclusion 106.0ReferenceList 117.0Appendices 12

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1.0Introduction

Innoother industry isoperatinginasustainablewaymoreimportantthanwithinthe

agriculturalindustry.Thatisbecausewhatyouareproducingisinherentlyconnectedto

thewayyouengageinyouroperatingenvironment.Inotherwords,‘yourconnectionto

thelandisdirectlylinkedtotheprofitabilityofyourbusiness’(Sharo2010).

The modern Frog’s Leap winery has been in operation since 1981. Within that time

muchhaschangedinthesizeandscopenotonlyofthevineyardbutalsothemarketin

whichitoperates.However,whathasremainedconsistentthroughoutthisperiodisthe

strategyownerJohnWilliamshasappliedtothedirectionofthecompanytodevelopin

a sustainable way. For the managers of Frog’s Leap this means not just creating a

balancebetween financial performance and it’s social and ecological impacts (Kramar

2014),buthavingthesesustainableoutcomesdriveitssuccess,wherebyredefiningthe

meaningofthetriplebottomlinestrategy.

Theobjectiveof this report is tocriticallyanalyse thesuccessofFrog’sLeapvineyard

overthelasttenyearsto2011,notjustwithinitssustainabilityinitiativesbutalsohow

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 industrystandardsthisreportwillascertainwhetherthisstrategyhas

been successful for Frog’s Leap andwhat strategy adjustments need to occurmoving

forward. Whereby the overall goal is to analyse the underlying challenges and

opportunitiesforFrog’sLeapintothefuture.

1.1CurrentSituation

Frog’sLeapVineyardisasmall-mediumsizedvineyardinNapaValley,California.Since

it’sestablishment in1981ithasgrownfromasmallboutiquevineyardproducing653

casesofwinetoamediumsizedoperationwithanannualproductionof62000casesin

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

recognisedindustryleaderinsustainabilityandithasinvestedheavilyinmaintaininga

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leading Environmental Management System and it’s reputation as a sustainability-

driveninnovator(Kironetal.2013).Howeverafterthisperiodofrapidgrowth,Frog’s

Leapfindsitselfinanewperiodofitsdevelopment.

Partofbecomingasustainableenterpriseistomakesurethatyoursustainabilityefforts

are both implemented throughout the value chain and are an essential part of your

businessmodel(Perrott2014).AsJohnWilliamsclaimsforhisowncompany,‘thegoal

ofsustainabilityistosustainyourself’(Gilinsky2011).Thishasnotonlybeenamindset

inFrog’sLeap,butadriverofprofitabilityandeconomicvaluethroughoutit’shistory.

2.0Frog’sLeapSustainabilityStrategy

Whiletheconceptofsustainability isnotunique inFrog’sLeap’scase, it’sapproachto

definingwhatsustainabilitymeanstothem(AppendixC);implementinginitiativesearly

onit’sstrategyandthereforecreatingthefoundationsofdynamiccapabilityinit’svalue

chainoperations(Gamble,Thomson&Peteraf2013) is.Thishasmeant that ithasnot

onlybeenabletocreatemorebalancebetweenfinancial,ecologicalandsocialoutcomes,

butithasplaceditselftobothbenefitfromnewgrowingmarkets,whereconsumerssee

sustainability in products as essential (Rice 2009) and establish itself as the leading

sustainability-driven innovator in themarket (Kironet al.2013).TherebyFrog’sLeap

wineryhascreatedit’scompetitiveadvantagethroughsustainabilitypractices.

2.1Ecological‘Everydecisionisreviewedforit’secologicalandsustainableimpact.’JohnWilliams

Frog’sLeap’sdescribes itsecologicalefforts thus faraspicking, ‘the lowhanging fruit’

(Gilinsky 2011).What this essentially translates into is for the last fifteen years their

effortshavefocusedonenvironmentalissuesthatrelatedirectlytotheircorebusiness

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 changehaveadirect impacton the efficiencyof a vineyard, the taste and

flavourofthewineandhencetheappealofthecoreproduct(Sharo2010).

Asasustainability-driveninnovator,Frog’sLeaphasestablishedareputationofhaving

themostsophisticatedEnvironmentalManagementSystemwithintheindustryandhas

constantly come up with newways to reduce their footprint while having a positive

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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

providedenergycreditsintheshorttermallowingittoproducepositivecashflowfrom

theinvestment.CombinedwithdevelopingtheindustriesfirstLeadershipinEnergyand

EnvironmentalDesign(LEED)buildingtheyhavereducedtheirenergyusagefrom30-

40%, water usage from 40% and CO2 emissions by 1600t since 2005. Thanks to it’s

adherencetobiodynamicfarmingtechniquesandefficiencyithasreducedsignificantly

it’s impact on the local environment, has strongly contributed to lower operational

costs,addingto thequalityof thecoreproductandstrengtheningthewinery’scentral

message,brandandmarketorientation(Jelinek&Bergey2013).

2.2Social‘They’re well trained and experienced. They’re engaged and a highly motivated

workforce.’JohnWilliams

Rather than develop their social legitimacy through traditional corporate avenues of

community engagement, Frog’s Leap has lookedmuch closer to home in establishing

strong Sustainable Human ResourceManagement (SHRM) practices. This links value-

drivenpeoplemanagementpracticesandpolicies,‘totheachievementoforganisational

outcomesandperformance,mostparticularlyfinancialandmarketoutcomes’(Kramar

2014,p.1069). InFrog’sLeap’s case theyhavededicated themselves toproviding the

industries topworkingconditions. InPractical terms,allemployeesofFrog’sLeapare

employedfulltime,havestructuredretirementplansandreceivehealthbenefits, inan

industrywherecontractedseasonalworkistheestablishednorm(Gilinsky2011).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

knowledgebasedvalue(Jelinek&Bergey2013).

2.3Economic‘This is not just an experiment. We are a thriving business with above average

marginsandbelowaverageoperatingexpenses.’JohnWilliams

Howthenhavetheseinitiativestranslatedintoapositivefinancialbottomline?Adirect

link to thiswouldbe the significantlydecreasingof operational costs over the last 10

years.CostofGoodsSoldhasdroppedfrom46.8%ofsalesto40.8%whileproduction

has increased (Appendix A). Additionally total operating expenses have risen from

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28.8% to39.7%even though thevineyards staff, landand infrastructurehasvirtually

doubledinthattime.HencebyinvestinginecologicalefficiencyandSHRM,Frog’sLeap

has been able to strengthen it’s supply chainmanagement, streamline operations and

createaneconomicallyviableorganisation(AppendixB).

However while Frog’s Leap has established a dynamic operating environment and

managedtoadvanceit’secologicalandsocialgoals,thishascomeatacosttoit’sshort

termfinancialposition.Withadebt loadofapproximately$22millionFrog’sLeaphas

found itself increasingly less financially flexible and so to maintain it’s competitive

advantageitwouldneedtofocusonstrengtheningit financiesnot justfromefficiency,

butinrevenuegeneration.

3.0IndustryComparison

An essential element in evaluating Frog’s Leap’s performance entails examining the

company’s ‘resourcesandcompetitivecapabilities’(Gamble,Thomson&Peteraf2013)

ascomparedtothemarket.ToappraiseFrog’sLeap’sperformancetodate, thisreport

examinesbothit’sfinancialpositionandmarketplacementascomparedtoit’sindustry

peersinthenorthernCaliforniawineriesregion.

3.1FinancialPosition

Throughmostly 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 industrystandardsandreflects the lackof investment innewrevenuestreams.

While many of their competitors have invested substantially in increasing direct to

consumersalesandmarket shareFrog’sLeaphasplacedmoderate investment in this

area instead relying on their established brand name and customer loyalty (Gilinsky

2011). As suchwith the increase in production Frog’s Leap’s sales have grownmore

moderately(AppendixA).

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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(Figure2).Whiletheircurrentratiolookspositive,theirquickratioshowsthat

without their inventory they are in the medium risk category for debt servicing.

Combinedwithalowinterestcoverageratio,thefocusnowforFrog’sLeapistoincrease

cashandprofitabilityfiguresthroughincreasesinrevenue.

Whatisencouragingisthattheirliquidityisaboveindustrystandards,andismovingin

a positive direction as they look to pay down their debt burden and increase sales

comparatively(AppendixA).Althoughnotacriticalrisk,thisissomethingtobemindful

ofintheshorttermasglobaluncertaintyinthemarketcouldincreasetheriskofdefault

(Gilinsky2011).Thisagain is reflected in the interest coverage ratio (Figure3)which

suggeststhatwhileFrog’sLeapis inagoodpositiontomeet it’scurrentobligations, it

wouldwanttoconsiderit’ssituationcarefullybeforeincreasingit’sdebtburden,focus

insteadshouldbeincreasingcashinflowfromit’scurrentinvestments.

3.2MarketPlacementAVRIOanalysis(AppendixB)suggeststhatFrog’sLeaphasanUnexploitedCompetitive

Advantagewithinit’smarketplace.It’swineproductisofahighvalueandisfrequently

rankedwithin the top premiumwineswithin Napa Valley (Gilinsky 2011). It charges

aboveaveragepricesforit’sproductandwithagrowingloyalconsumerbaseitmoves

inventorymuchfasterthanindustryaverages(Figure4).While it’sproduct isgrowing

in popularity, organic wine is still quite rare within the industry. Of 404 premium

wineriesinNapaValleyonly60(14%)wereconsidered‘Green’(Gilinsky2011).Further

tothis,itisconsidereddifficultandexpensivetoimitate.TheadvantageofFrog’sLeapis

thatithashadastrategyofsustainabilitysinceit’sinception.Foracompetitortorevert

greenwouldbetimeconsumingandexpensive.

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Howeverthisreportacknowledgesthatwhilesustainabilityhasbeensupportedbythe

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)

resultinginlowerdeliverystandardsandsalesfigures(Figure4).

4.0Frog’sLeapFutureRecommendations‘We’vepickedoffsomeofthelowhangingfruitandnowtocontinuetopushforward

inthisarenait’sthehardstuffthat’sleft.’DougDeMerritt

4.1 Short-MediumTermRecommendationsAs 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 operationshave focusedprimarily on it’s sustainability, it has

createdanoperationgapwithindistribution,marketingandsales(AppendixB)andin

consequencehaseffectedit’sbottomline.It’sfocusnowmustbeonstrengtheningthese

areas.

1. ExploitgrowingLOHASmarketWithafocusonlifestyleandsustainabilityandaspendingpowerof$209billion,

thisisthenaturalmarketplaceforhigh-end‘green’products(Gilinsky2011).By

engaginginsocialmediaandviralmarketingitneedstoincreaseitengagement

ofthismarketplace.

2. Expand‘FellowshipoftheFrog’and‘WinebytheGlass’Programmes

Theseprogrammesneedtobemarketedandexpandedtoencompassagreater

number of people while still maintaining a boutique winery feel. This can be

achieved by offering increasingwine tours andmaking themmore accessible;

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expanding online ordering options; and partnering with restaurants, organic

vineyardsanddistributers.

3. IncreaseDirecttoConsumersSalesCurrentlyonly13%ofwineproducedisbeingsolddirectlytotheconsumer.An

increase inwine toursandonlinepurchaseoptionswillnotonly increase this,

butalsoincreaseinventoryturnoverandsubsequentlysalesandrevenue.

4.2LongTermRecommendations

4. TurnStrengthsintoCoreCompetency’s

Frog’s Leap has investedmuch into it’s green infrastructure and name.While

this will continue to cut costs and enhance reputation in the medium term,

Frog’sLeapneedstoconstantlyfocusonnewinnovationsandinvestmentsthat

willseeitmaintainit’sdominanceinthismarket.

5. IncreaseExportMarket

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 Asianmarketswhere Frog’s Leap has a strong

brandname.

5.0Conclusion

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.Thishasresultedonitsbecomingaleaderwithinthemarketplaceanddevelopinga

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’sLeapexemplifiesthatthe‘traditionalfinancialbottomlineiscomplimentedbya

socialandecologicalone’(Ehnert,Harry&Zink2014).Howevermovingforward,Frog’s

Leap needs to focus on increasing its financial sustainability as a strong financial

dimensionwillalwaysallowanorganisationtoincreaseit’scontributiontoitsecological

andsocialones.

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6.0References

Gamble, J.,Thomson,A.&Peteraf,M.2013,EssentialsofStrategicManagement:TheQuest for Competitive Advantage, 3rd edn, McGraw-Hill Irwin, NewYork.

Gilinsky, D.A. 2011, Frog'sLeap2011,Sonoma State UniversityWine BusinessInstitute.

Jelinek, M. & Bergey, P. 2013, 'Innovation and the strategic driver ofsustainability: big data knowledge for profit and survival', IEEEEngineeringManagementReview,vol.41,no.2,pp.14-21.

Kiron, D., Kruschwitz, N., Reeves, M. & Goh, E. 2013, 'The Benefits ofSustainability-DrivenInnovation',MITSloanManagementReview,vol.54,no.2,pp.69-73.

Kramar,R.2014, 'Beyondstrategichumanresourcemanagment: is sustainablehuman resource managment the next approach?', The InternationalJournalofHumanResourceManagement,vol.25,no.8,pp.1069-89.

Perrott, B. 2014, 'The sustainable organisation: blueprint for an integratedmodel',JournalofBusinessStrategy,vol.35,no.3,pp.26-37.

Rice, J. 2009, Creating competitive advantage through sustainability, viewedMarch 30 2015,<http://www.fruitfulstrategy.com/blog/2009/07/creating-competitive-advantage-throughsustainability/%3E.

Sharo, D. 2010, Sustainable Winemaking: A Liquid Revolution, StrategicSustainability Consulting,<http://static.squarespace.com/static/4ffc3ba1e4b036a61fbde6ff/t/50d277fbe4b06152e1371ba6/1355970555148/White+Paper_Sustainable+Winemaking_060110.pdf%3E.

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7.0Appendices

AppendixA:Frog’sLeapStatementsofIncomeandBalanceSheets

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AppendixB:CompanyAnalysis

Figure2:Frog'sLeapSWOTAnalysis

Figure1:Frog'sLeapVRIOAnalysis

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Figure2:Frog'sLeapValueChain(Gamble,2013)

SupplyChainManagementClearStrategic

GoalsSustiainabiltiy-

DrivenInnovators

OperationsDecreased

ElectricityCostLowWaterUsage

SustainableHRM

Distribution80%

Distributors,13%DirecttoConsumers,7%Exports

SlowInventoryTurnover

SalesandMarketingStrongBrandDifferentiationLowMarketPenetrationLowViralMarketing

ServiceSmallLoyaltyProgrammesinfrequentVineyardTours

ProfitMarginLowerProfitMargins

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AppendixC:Frog’sLeapMissionandVisionStatements

frog's leap winery- strategic analysis

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