Innovation in the wine industry: between change and tradition

Corso di Laurea magistrale in

Economia e Gestione delle Aziende

Tesi di Laurea

Innovation in the wine industry

Between change and tradition

Relatore

Ch. Prof. Andrea Pontiggia

Ch. Prof. Francesco Zirpoli

Laureanda

Francesca Cunico

Matricola 845194

Anno Accademico

2013 / 2014

ABSTRACT

The aim of this dissertation is to investigate whether and how any innovative strategies may be done in the wine industry, a sector that has always been characterized and linked with the tradition and the historical characteristics of the specific territory. A wine is usually considered as more valuable as more experience and know-how lay behind it, but it is no surprise that innovative strategies may help Italian companies to face to the increasing international competition, especially from the so-called “New World” countries. With this perspective, the purpose of this research is to verify whether innovation and tradition may coexist and enhance themselves.

The study is conducted through the qualitative analysis of a case study, represented by one of the biggest and most important companies of the wine sector in Italy. The interviews with the managers of the company provided useful examples and deep insights on the innovative products and processes promoted by the company. Furthermore, the organizational culture and sources of innovation are researched and discussed.

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ACKNOWLEDGEMENTS

This study incurred in a very special moment in my life, when I passed through the “student’s life” from my first real working experience: it was not always easy to make those two lives coexist, so I would like to thank all the people who supported me.

First of all, I would like to thank my colleagues and the managers that I have the honor to interview: they were always open to solve my doubts and willing to help me with all the possible documentation and anecdotes. Even though my interviews were only four, the people who participated in this dissertation were definitely more and I am grateful to have received such a large support. In particular, I would like to thank Massimo Tuzzi, because he did not only give me the opportunity to enter in such a special company but he also gave me some useful advice despite his agenda was always really full.

Secondly, I would like to thank my supervisor, Prof. Andrea Pontiggia, for his precious indications and his trust on my work and all of my friends for their constant support with the difficult balance between the two lives mentioned before.

But above all, I am infinitely grateful to my family, in particular to my sisters Lara and Marta, because they have always believed in me and in my work and they com forted me in my moments of discouragement –we will celebrate with a bottle of good wine, I promise!

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CONTENTS

LIST

2 WHY INNOVATION IN THE WINE INDUSTRY? ... 7

3 LITERATURE REVIEW AND THEORETICAL FRAMEWORK... 17

4 THE GLOBAL WINE INDUSTRY ... 35

5 METHODOLOGY ... 52

6 CASA VINICOLA ZONIN ... 61

7 ANALYSIS ... 68

8 CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH ... 98

9 BIBLIOGRAPHY ... 103

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Abbreviations used

€/l Euros per liter

CVZ Casa Vinicola Zonin

GIV Gruppo Italiano Vini

l/hbt Liters per habitant

M€ Millions of Euros

mha Thousands of hectares

Mha Millions of hectares

mhl Thousands of hectoliters

Mhl Millions of hectoliters

Ml Millions of liters

mql Thousands of quintals (100 kg)

Mql Millions of quintals (100 kg)

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1

INTRODUCTION

Innovation is seen as one of the most important drivers for the success and growth of the companies nowadays (Christensen et al., 1999 and 2003; Kim and Mauborgne, 2005; Verganti, 2008): certainly, it is more easy to recognize it in some sectors and products rather than in others.

What about the wine industry? Wine is one of the most ancient drinks in the world and its sector is universally known as typically traditional. How is it possible to innovate in an industry with such peculiar characteristics? The aim of the present dissertation is to investigate and describe how a company manages to be innovative in a sector where tradition and history are so highly evaluated. The research is conducted through the analysis of a case study, represented by Casa Vinicola Zonin SpA, one of the most important family-owned wine companies in Italy.

Before proceeding with the reading of this essai, some points need to be clarified. First of all, this research aims to be investigative and to deliver some findings but of course it cannot be fully exhaustive on the matter, since several aspects require some technical competences and the author recognized the need to delineate the field of research. For this reason, the technical aspects regarding the technology innovation on the vine growing and wine production side are not touched. Secondly, since this is a dissertation for an International Management course, an international perspective is preferred. The consequence is that sometimes that results may appear generalized or less specific but this is because the chosen company, Casa Vinicola Zonin, deals with 105 countries and, in order to give an overview on the innovation in the wine sector, it was chosen to focus on its global presence rather that in some specific markets.

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Finally, one must consider that this analysis is based on one company’s perspective. The findings from the interviews were compared with the available literature but of course they do not aim to give the absolute truth on the success or failure of all the Italian wine companies. On the contrary, this research aims to explain the difficulties or the drivers of innovation in the wine industry and to bring a successful example, which was never considered in the management literature.

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WHY

INNOVATION

IN

THE

WINE

INDUSTRY?

Italy has always had a long history as wine producer and consumer and it is no surprise that today it ranks first in the world for the volume of wine production, with almost 45 millions of hectoliters of wine produced in 2013 (OIV, 2013). Therefore, there are some new competitive patterns and changes in the industry that must not be ignored since they constantly put the Bel Paese, together with the other acknowledged wine producing countries, in a challenging environment, where the strong tradition and the internationally recognized fame are no more sufficient to maintain a sustainable leading position in the world.

There are several reasons why the competitive scenario is getting more and more demanding.

First of all, the globalization of the sector put the so-called “Old World countries”1 in a difficult environment, where new entrants have constantly been establishing their position and gaining market share. In fact, nowadays the wine industry has completely changed its structure: even though “the big producers” (i.e. Italy, France and Spain) did not lose their supremacy and still rank in the top three of wine producers, the increasing market share conquered by the “New-World countries” cannot be ignored. For example, while in the 2000-2012 period all the most traditional wine producing countries had a decrease in the level of wine production (e.g. France 28,4%, Italy -15,15%, Spain -22%), in the same period countries like China, Chile, Australia and South Africa

1 _{In the literature, the “Old World” is mainly referred to the European countries (France, Italy, Spain and Germany in}

primis) as they are characterized by a long, uninterrupted history of wine production and consumption. On the other

side the “New World” comprehends those countries that are located out from the European borders and started to produce wine quite recently compared to Europe. The largest and most established New World wine producers are (in order) the United States, China, Australia, Chile, Argentina and South Africa (See Table 1 in Appendix A).

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had all an increase of over 40% (OIV, 2013). The rapid and considerable growth of those countries certainly represents a threat for the incumbents and it should not be underestimated.

Secondly, if there have been new players who decided to enter in this sector, on the other side there are changes in the consumption patterns that have been making this ocean even more red2 -if one wants to mention Kim and Mauborgne’s words (2005). In fact, a slow decrease of the level of wine consumptions is approaching the world in a more and more considerable problem of overproduction. Here again it is necessary to point out how the two major groups of wine producers – Old-World and New-World – have been experiencing two different situations: if in Europe the recent recession contributed to an incredible shortfall of the consumptions, in non-traditional countries wine is knowing an increasing popularity – and that is the main reason why distinguishing the global industry in those two factions is still not a trivial or obsolete generalization but a useful tool to make some considerations at a macro-level.

Furthermore, the increasing internationalization of the sector made the companies face an enlarged public by one side –and this represents a considerable opportunity- but also different consuming behaviors, which contribute to render the market more and more uncertain and thus may weaken the competitive position of the companies. There are several studies (e.g. Cohen et al., 2009; Balestrini

et al., 2006; Nomisma, 2008) that showed how the buying process and consumption patterns of

wine consumers are completely different according to the national culture. The cross-cultural comparison is a factor that should not be ignored because the quality of the product in question is not objectively determinable but it is related to several, different and non-immediate factors. In fact,

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According to the “Blue Ocean strategy” book (Kim and Mauborgne, 2005), “Red Oceans” represent most part of the industries, which are characterized by low growth rates and a high level of competition. In those industries if one firm aims to gain market share it must necessarily compete with other firms. On the contrary, a “Blue Ocean” is a niche market whose boundaries are not limited. A Blue Ocean is a new market that the firm was able to create by focusing on product innovation.

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it is possible to recognize two schools of thought about the organoleptic characteristics of the wine. The first one identifies the quality of the product as strictly related to the terroir3 and thus a prerogative of the winemaker, who is considered as “the expert” because of his profound knowledge about the climate changes, the grape variety, the soil and the environment where the wine derived its origin: that is why, according to this perspective, the human intervention, with the adding of aromas, perfumes and spices, should be minimum, because the final product should fully reflect the quality of the land of origin. This represents the so-called “French method” (Cohet et al., 2009), which established itself in the worldwide market for several decades but nowadays it is finding some difficulties in maintaining its position in those countries that are approaching to wine and do not have such culture and tradition. Generally, Old-World countries tried to protect themselves by exalting the concept of terroir and introducing a stricter national legislation on the Denomination of Origin4, which demands specific requirements in order to officially recognize the quality of the product. Nevertheless, such laws did not produce an effective advantage for French and Italian producers, since they did not provide an effective guidance for production choices and generally ended up to confound the consumers, especially the international and non-expert ones (Corrado et al., 2009). In fact, an opposite, more recent trend shifted towards a market-oriented approach and elected the consumer as the main arbiter (Cusmano et al., 2010): in effect, wine quality can be appreciated only with the taste and it is no surprise if the success of a brand/winery is

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Terroir literally stands for “territory” in French, but in the wine sector it represents a broader concept. In fact, it does not only represent the natural and physics characteristics of the soil, the climate and the geology of the land, but it comprehends also the knowledge and expertise that are necessarily linked with the history and culture of the population living in that territory and all contribute to the intrinsic and unique qualities of a specif wine. (Cusmano et al., 2010) 4 _{In Italy, the Denomination of Origin aims to officially recognize the quality of the wine, thus demonstrating that it is} produced in a specific territory according to specific standards. This is guaranteed by the Denomination of Origin law, which originally distinguished DOC (Denominazione di Origine Controllata) and DOCG (Denominazione di Origine

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strictly dependent on consumers’ choices, often guided by independent consultants and industry media, such as wine guides (Corrado et al., 2009).

This fact led to the establishment of another important challenge for wine producers, especially for the Italian ones: the increasing importance of marketing activities. In fact, since the companies have faced a larger public, not always acquainted with drinking wine and characterized by different consuming behaviors, thinking carefully to the communication mix (such as packaging, advertising and product diversification) is becoming a necessary step for those companies who want to go global and increase their revenues. Competitive positioning and brand identity are considered key success factors in analogous sectors like Champagne and spirits, and this should be also in the wine industry: there should not be other investments and efforts for recognizing the terroir d’origine, the companies should start to build some brand awareness (Mora, 2006). Why? Because the quality of the product is no more sufficient since it must not be experienced before the bottle is open – and that happens necessarily after the time of purchase, in some cases years and years after.

Wine purchases are necessarily made on trust: it may be trust on the own knowledge and expertise about the product, trust on the brand or on the sommelier’s/waiter’s or guide’s advice (Fattorini, 1997). For this reason, the purchasing moment is so decisive that it explains itself why the distribution channels have recently been getting more and more powerful (Anderson, 2011). Their increasing bargaining power is another problematic issue that should not be ignored, since it may compromise wine producers’ competitive position, by squeezing producers’ profit margins and by preferring branded wines or bulk wines to be sold under own-store labels. This fact does not concern only supermarkets and department stores: Fattorini (1997) deeply analyzed how restaurateurs can affect consumers’ choices, even by redesigning the wine list or using dedicated tent cards. For this reason, some players in the value chain decide to move downstream, through

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mergers and acquisitions, in order to get the maximum control over the consumers’ choices and final profits (Mora, 2006). Another strategy is to find innovative ways of enhancing the brand awareness and promoting the product in order to make it more attractive for the consumer, despite the retail offers and merchandise activities; or to find an agreement with the distributor in order to collaborate in the selling process. The increasing bargaining power of the supermarkets and department stores, if on one side it may be considered as a threat, on the other side it represents a substantial market opportunity, since it gives the possibility to reach a greater segment of consumers.

Figure 1: Why the wine industry is getting more demanding WHY THE WINE

INDUSTRY IS GETTING MORE DEMANDING The Globalization brought some new competitors Shortfall of wine consumptions Different consuming behaviors in each country Increasing importance of Marketing Activities Increasing bargaining power of distribution channels

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For all the reasons described above (and summed up in Figure 1) the competitive scenario in the wine sector has got more and more complex and, even though the product is considered “traditional”, the company strategy must not be like that.

In general, innovation has always been described as a necessary driver for competitive advantage and one of the distinctive factors which differentiate the success of an enterprise from the fall of another (e.g. see Christensen et al., 1999 and 2003; Verganti, 20008; Schilling, 2008). Looking at the beverage industry, there are several examples of innovative firms which created not only new products (e.g. Cola-based drinks or energy/sport drinks) but also new habits of consumption (for example the “Happy Hour time”). This happened also in the alcoholic beverages industry, where innovation has always been present, especially on the product development and brand management side (with several social implications that are deeply discussed in the literature, see e.g. Jackson et

al. 2000; Casswell, 2004; Goldberg et al., 1994). An example is the Absolut Vodka case study: first

exported in the U.S. in 1979, it soon became one of the best-sold premium vodkas in the world, despite it operates in a highly competitive market where the distinction among the products is exceptionally low: in fact, since in most of the countries vodka is considered a drink used for making cocktails (where the taste is substantially covered by juice and other spirits), it is even more difficult to establish itself as a leader in the market, especially when the consumer has lots of difficulties in distinguishing one product from the other. Therefore, Absolut Vodka managed to be considered as unique, thanks to its innovative marketing efforts: first, it adopted a bottle with a unique, recognizable shape and then used it several times in advertising and commercial campaigns. Furthermore, through the continuous introduction of limited edition bottles, in collaboration with artists and designers, it levers on the collector spirit of the consumers, who are tempted to buy the product because of the captivating package, besides the content. Finally, the constant collaboration

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with the art community through the social media has made the brand even more fashionable and engaging for the consumers, especially the younger ones5.

At the same time in Italy, in 2003 the Campari Group acquired the brand Aperol, an Italian orange liquor derived from an infusion of herbs and roots, whose popularity was highly associated with the

Aperol Spritz, a cocktail made with Aperol, seltz and Prosecco that was very popular in the

North-East of Italy for aperitivo occasions. Aperitivo is that social moment after work, diffused especially in Italy, where people meet together and have a drink and appetizers before (or instead of) dinner. The company recognized that the consumers’ trends were moving towards light and “easy to enjoy” drinks, so it decided to invest in promoting the Aperol Spritz in Italy and abroad. The results were considerable: the sales of Aperol increased four times before the pre-acquisition levels and today they represent 11% of Campari’s total sales (Aversa, 2013). In this case innovation was not represented by a new product but it is rather a new presentation of an existing product, which was able to meet new consumers’ preferences and new markets, represented by international ones and the younger consumers.

One may think that the importance of innovative strategies mainly concerns the spirits industry, much more sensitive to marketing actions and fashion but actually also the beer industry offers some success cases. In fact, in an industry where new firms and new brands seem to be always ready to emerge with new products, new flavors and new experiences, 32 Via Dei Birrai is an Italian artisanal brewery which created a niche that satisfies by selling design products. In fact, with its unique minimalist label, so different from the traditional ones, a bottle does not even seem to contain beer. Furthermore, once the bottle is opened, the cork becomes an original keychain, with the logo or an alphabet letter printed on the surface: in this way, the consumer’s experience is

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extended from drinking beer to playing with the product, by collecting all the different corks and composing sentences with them. This gamification of the product is extended also to the six-bottles boxes, where the brand’s logo (a circle with the 32 number written inside) can be tore off and used as a coaster or, in alternative, it can be combined with other pieces to create original works of art. On the same box one can also find the business card of the company, showing how the most simple everyday things can be re-used in new sustainable and innovative ways6.

Considering all of these examples in the other industries…what can be said about wine?

Wine is one of the most ancient drinks in the world and it is one of the most representative products where the closeness and fidelity to tradition have usually been seen as positive indicators. Therefore this is not enough anymore if a company wants to maintain or achieve a competitive advantage in this demanding sector. As pointed out above, the wine industry has constantly become more and more international: new countries emerged worldwide, both as wine producers and consumers, posing a competitive challenge to older producers. The progressive internationalization of the markets and increased competition made those countries face new difficulties in order to find an organizational efficiency from one side and a high product quality from the other: this fact does not only concern the incumbents but also the new entrants who cannot rely on a long history of production and, as a consequence, they need to find other ways to make their offer attractive to the consumers. That is the reason why it is appropriate to talk about innovation in the wine industry: because it may give useful insights about how to create a blue space in a more and more red ocean. Furthermore, another factor makes this research original and it is strictly related to the peculiar characteristics of the product: unlike many other products of the beverage and food industry, wine's

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attractions rely not on bold consistent flavors but upon “a subtle array of shifting sensations that make its charm difficult to define” (Bisson et al., 2002, p. 696). When a consumer chooses to buy a bottle or a glass of wine, it is because it does not expect to have just a drink that “tastes good” but a unique sensory experience. Drinking a glass of wine is also considered a way to connect with a certain country, or region and to know it better: there is no surprise if, along with the wine production, wineries offer more and more oeno-gastronomic tours along the territory (the so-called “wine tourism”) (Id., 2002). In this situation, where the consumer has to engage with hundreds of types of wine, the brand becomes a synonymous of guaranty and quality. For example, Fattorini (1997) explained that most of the consumers going to the restaurant are inexpert at choosing wine: most of the times once they tried a wine that they enjoy and they remember the name, they simply stick to it, just to make the decision process easier and avoid the embarrassment of showing their possible lack of knowledge on the matter. For the complexity of the product an enterprise needs to implement new strategies in order to influence the consumer’s decision making process and innovation may help them with doing so.

In this sense, one of the most famous examples of an innovative strategy is described in Kim and Mauborgne’s book, Blue Ocean Strategy (2005), where Casella Wines case study was presented. In the U.S. wine market, dominated by Californian and European brands, this Australian brand managed to impose itself with a wine which was “easy to enjoy”. In fact, if most of the consumers in the U.S. used to refuse wine because of its complexity, Casella Wines started to sell [yellow tail], a type of wine which was much lighter and more fruity than the traditional wines present in the market: in this way the Australian company managed to create an affordable and accessible product, much closer to the beer’s and spirits’ identity than wine’s, thus attracting a big group of new consumers. Furthermore, when noticing that all the Denominations of Origin, the details on the label and so many varieties of wine did not produce any other effect except that of confusing and

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intimidating the mass U.S. consumers, unacquainted with those definitions, Casella Wines decided to eliminate any technical language and to sell only two kinds of product, Chardonnay (white wine) and Shiraz (red wine), using a very singular, simple and unconventional label with a yellow and orange kangaroo on a black background. With [yellow tail], Casella Wines broke with the tradition and took the distance from its competitors, more focused on promoting the terroir, the technical characteristics and the qualities of the winery: on the contrary, it decided to sell a wine more similar to a beer or another alcoholic drink, which was appreciated by the public for its simplicity to consume and to enjoy.

Finally, if on one side Casella Wines case study represented an example about how a company can actually implement an innovative strategy and create a niche market, on the other side another reason why it is important to examine innovation in the wine industry concerns the incumbents and the tradition which stays behind their production process. Italian wine producers are often small and medium enterprises with a long history in wine production but the increasing global competition puts them in the condition that they need to innovate without harming the quality of the product or the history of the winery: if their terroir d’origine should be a quality (compared, for example, to the previous case of [yellow tail], which was not created in a traditional wine country), it would be appropriate to take advantage of it without harming it “for the sake of innovation”. The relevant issue here is whether the relationship between tradition and innovation can be described as a compromise or a self-reinforcing union and how an enterprise may handle this relationship.

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3

LITERATURE

REVIEW

AND

THEORETICAL

FRAMEWORK

As already said, the purpose of this dissertation is to enrich the research on innovation by describing a case study about how it can be created in a traditional sector as the wine industry. If in the previous chapter much has been said about why it is necessary to innovate in this specific business, now it is opportune –if not even necessary- to define what innovation exactly is and how it can be created.

Innovation: dozens of books and articles have been published about this subject. The capacity of generating innovative ideas and solutions has been one the key success factors of several companies and the history amply demonstrated that. In this scenario, Apple is one of the most notable case studies, having continuously opened new markets with the introduction of its products (the most outstanding ones in terms of popularity and impact on the consumers but also on the competitors were the iPod, iPhone and iPad)7, but think also about Ideo, the design consultancy company taken as example for its creative methods and its “design-thinking approach”. For this reason, several authors described the case studies of the most innovative companies and studied the characteristics that enhanced the capacity of generating ideas and seeing things in unconventional ways.

However, some questions are still unanswered. For example, is innovation a social process, or the result of a deliberate strategy of the firm? Furthermore, does it depend on the strong personality of an individual (a leader) or is it made from the interaction of different perspectives and ideas? Those

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issues appear to be all confirmed by different examples from the reality but none of them emerged as a “general rule” that a firm may or should follow. This fact makes the subject even more interesting and worth to be discussed and deepened, since the boundaries of innovation are still not defined. There are several techniques and advices which appear to increase the level of creativity of the firm or of the individuals but it has not been recognized a “receipt of success” that bring this outcome. This is mainly because even this outcome is not unique: as it will shown in this chapter, innovation may actually affect different levels of the firm and even of the products and, above all, it may depend on different factors.

This dissertation does not aim to build a “theory of innovation”, but rather to bring another example of how it can be thought in a traditional sector. More specifically, this chapter aims to provide an overview of the theories on innovation as it is presented in the academic literature without the focus on specific examples or cases. At the end of the chapter, some considerations about practical applications are discussed.

Sources of Innovation

When talking about the origin of innovation, there is not a unique opinion among the extended literature and studies about this subject. Especially when talking about the sources of innovation, the origins may be so different that there is not a unique theory which explains how it can be created. Several books and studies (Christensen, 1999; Gladwell, 2011; Norma et al., 2014); focused their attention on examples and case studies of innovative firms and industries but when talking about how to replicate this process, the opinions are very different. As a consequence, innovation seems to be the result of a complex interaction of factors, that at this moment still appear to be unclear or, at least, not universally defined and accepted.

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What is most certain is that, first of all, innovation comes from new ideas, so the subsequent question is: where do those new ideas come from?

Individual Creativity

Some authors relate the innovation process with one or more specific subjects inside an organization and, more specifically, they focused their attention and their studies on the personality and behavioral characteristics.

Dyer et al. (2011) dedicated a whole book on the so-called “Innovator’s DNA” and promoted the principle that the degree of innovativeness of a person depends not only on its innate characteristics but overall on his daily behaviors. First of all, based on their experience, they started by the assumption that “innovative companies are almost always led by innovative leaders”: that is why, according to the authors, one company may seek for innovation only if it owns a creative and open-minded top management that can inspire and guide the organization. The basic theory of their book is that people who engage themselves in observing, questioning, looking to things in different ways and aiming to find new solutions are most likely to be the same people who seek to create an organization where the innovation efforts are facilitated and encouraged. With a regard on this purpose, they identified the top-five essential skills that the most innovative persons in the history shared and that every leader who wants to increase its creativity should perfect (see Figure 2 below).

- Associating. It means “connecting things together” and it is the ability to take ideas and

knowledge from various sources, that may come from totally different sectors or environments.

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Figure 2: The Innovator's DNA

With this perspective Frans Johansson introduced the term “the Medici effect”, which refers to the final result of an environment where different perspectives and opinion are reunited and interact with each other: the effect, as Italian history taught, was the Reinassance. It is no news that the human brain is not a library but a net of connections among neurons and the best way to get new innovative ideas is to create odd-combinations, zoom in and out and do what Dyer et al. (2011) call “Lego thinking”: collecting new ideas as children collect Lego bricks. If one thinks more deeply about this concept, the more and various Lego bricks are used to create a building, the more inventive the final result will be.

- Questioning. This skill actually suggests another important principle: not taking anything for granted. Innovators tend to put more in discussion basic assumptions, status-quo and boundaries: they start with questioning about what the reality currently is for moving to what it might be instead. For this reason, emblematic importance is given to the “What if” questions: because they open possibilities by forcing the respondent to look at the things in alternative ways. However, it is important to remember that questions alone are insufficient

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to create innovation: they work better when they are combined with the other Innovator’s DNA skills presented by the authors (Id., 2011).

- Observing. Innovators are great and constant observers and they often see what people do not usually notice. In order to explain this principle, the authors used the expression of the “vuja de”. While the déjà-vu is the feeling of having already seen something that appears for the first time, the vuja de refers to the feeling of noticing for the first time something that always existed but had actually been unnoticed or unconsidered by everybody until that moment.

- Networking. One of the best ways to get some ideas from outside and “think outside the box” is to actively interact with several persons, better if they come from different sectors and own different opinions and perspectives. That is why it is indispensable to do “idea networking” rather than “resource networking”: that means that the best way to get outside the mentioned box is to interact with people that one does not usually have to deal with or they are not part of its “normal” network. In fact, the typical innovator aims to get in situations where he is out of ease and is allowed to make also naïf questions because he knows that the personal enrichment will be invaluable. In this case, the process of getting new ideas is not planned: the authors talk about a “serendipity moment”, when the solution suddenly comes, even though it is not clear how exactly this has happened.

- Experimenting. Last, experimenting is the clue to verify if the found solution actually works. The history is plenty of examples that showed how experimenting led to a solution, or at least to a better knowledge of the problem. As Thomas Edison once said: “I haven’t failed…I’ve just found 10.000 ways that do not work.” (Id., 2011, pp.138-139). Among the five Innovator’s qualities here presented, experimenting is definitely the best way to identify practical problems and to build a database of what works and does not work for future

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research. Therefore, if the other skills are well developed, less experiments and prototypes are required, and a considerable amount of time and money can be saved.

Organizational Creativity

If some authors identified the individuals as the main drivers of a firm’s degree of innovativeness, some others rather assign this role to the organization as a whole. The principle is that the environment and the network where people are inserted affect them as they determine their capacity of generating ideas. According to Dyer et al. (2011) the organization is strongly affected by the founder’s personality: if the main leader of the company is characterized by the “Innovator’s DNA” mentioned above, there is more probability that he will instill it in the people who work with him. More specifically, the authors recognized three parameters that affect the organization’s degree of innovativeness, which can be summed up in the 3P framework (Dyer et al., 2011).

- People. Innovative leaders tend to be more inclined to surround themselves with people with the same creative spirit, who are curious, open-minded and willing to explore unknown fields of interest.

- Processes. If the organization is composed by people with the same discovery skills, it is automatic that the individual skills described above (i.e. Questioning, Associating, Observing, Networking and Experimenting) will be spread over the organization. In practice, the DNA of the individual becomes the DNA of the organization and consequently the processes mirror his behaviors.

- Philosophy. The underlying philosophy in highly innovative companies is that innovation is not the R&D department’s task but everyone’s responsibility. Furthermore, most of the resources are allocated in projects aiming to create disruptive innovations and there is a preference towards small but flexible teams. On this concept, Amazon gave an emblematic

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picture of the perfect dimension of a team, which is represented by “The Two Pizzas Philosophy”, that means that teams should be small enough to manage to be fed with two pizzas (Dyer et al., 2011).

Figure 3: The 3P framework (Source: Dyer et al., 2011, pp.170)

If one takes a look at the processes point of view, it may seem not so hard to include some ways that help an organization to tap the creativity of its individuals. The first step is the implementation of idea collection systems, such as the familiar suggestion box but also the company’s intranet, where the employees can share their ideas and actively interact and collaborate on the projects of others. Therefore, this is not enough for sure: the most innovative companies (e.g. Ideo) deeply invest in creativity training programs that help their managers to use verbal and non-verbal forms of communication that encourage their colleagues to freely express their thinking and be autonomous, thus sharpening the inner culture of the organization.

PEOPLE

• Senior executives lead the innovative charge and excel at discovery • Monitor and maintain an adequate proportion of

high-discovery-quotient people in every management level, functional area, and decision-making stage of the innovation process

PROCESSES

• Processes explicitly encourage employees to associate, question, observe, network and experiment

• Processes are designed to hire, train, reward and promote discovery-driven people

PHILOSOPHY

• Ph 1: Innovation is everyone's job - not just R&D's • Ph 2: Disruption is part of our innovation portfolio

• Ph 3: Deploy small, properly organized innovation project teams • Ph 4: Take smart risks in pursuit of innovation

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When talking about organizational creativity, it is a natural consequence wondering who is the real responsible for innovation in an organization. It has just been introduced some ways that the enterprises could use to increase their capacity to innovate, by modifying the culture of the organization and involve all the employees to the creativity process. But who is the main driver of this process?

As previously said, the founder or the top management has a high power on instilling the Innovator’s DNA to the organization and the employees. From the history it is possible to link innovative companies to inspirational and visionary leaders, see Steve Jobs, Richard Branson or Walt Disney. However, Christensen in his best-selling book The Innovator’s Dilemma (1999) noted that the most innovative ideas do not only come from within the organization but the top managers may also neither control nor be aware of them. This happens because the middle managers play a pre-selection role on the projects that are presented to the senior manager because, if the projects failed, it would be their fault and that could damage their position and reputation in the company. The fact is that even though the senior manager is visionary, he cannot have access to all the information and ideas that can emerge inside of an organization: that is why it is important to promote a culture of experimentation and failure acceptance.

In summary, the literature brings several indications on how to influence the degree of innovativeness of an organization. All of those factors appear to be necessary but none sufficient: the main conclusion that one may deduct is that innovation cannot be done by changing only one level or process in the organization, but it rather depends on the people, the behaviors and the philosophy of the organization. One important point was the Philosophy 1 presented in Figure 3: “innovation is everyone’s job, not just R&D’s”. This means that a firm aiming at create new ideas and new ways of doing its business should not consider only few level of its structure, but rather

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consider every part of the organization as equally important and determinant. This last conclusion is extremely critical because there is not a single type of innovation, but, as it may come from different sources, it may affect different segments of a firm’s activity.

Technology S-Curves and Types of innovation

When talking about innovation in the literature, the most common scheme used to represent innovation is the Technology S-Curve (Schilling, 2008).

As it is possible to see in Figure 4 below, the S-curve is obtained by plotting the technology’s performance against the effort employed to develop the technology, which can be represented by the time or the amount of money invested. What the Technology S-Curve shows is really simple: when working on a new technology (or in our case, on innovation) in the early stages there is a slow improvement of the performance, since the basics of the new technology are still uncertain and poorly understood, but then, as the effort/money/time invested are increasing, the improvement starts to accelerate as well. At the end, there is a moment when the technology reaches it limit and starts to bring diminishing returns.

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Even though the S-curve scheme is not a prescriptive tool, it is useful to understand how innovation works (on a general basis) and to make some important clarifications about the dimensions that are usually recurring and are presented as below (Schilling, 2008).

- Product Innovation versus Process Innovation. Some people may think that there is innovation when a new product comes out or new features are added. In reality, when innovation concerns the final output of an organization there is what it is called Product Innovation. Nevertheless, a company may innovate through the implementation of more efficient processes, that for example allow a faster or cheaper way of manufacturing goods or new marketing techniques: that is the Process Innovation and it is as important as the ideation and implementation of new products. Actually, these two types of innovations often occur together: better processes may enable the creation of new products (or the improvement of the existing ones) and new products may be used to develop the existing processes. Furthermore, one must notice that a Product Innovation must reach the market (otherwise it would be only an invention, a prototype) and it must represent a real improvement of the product (otherwise it would be only a change) (Verganti, 2008).

- Radical Innovation versus Incremental Innovation. This dimension does not concern what innovation affects, but rather how much it is effective. In fact, if the Incremental Innovation is a improvement (more or less considerable) of the performance or the features of an existing product or process, an innovation is considered Radical when it is extremely new and different from the existing solutions. For example, when Apple released the new iPad, it was definitely a radical innovation, because it was a completely new product, different from the existing technologies. When the new versions came out, there was Innovation because there were considerable improvements, e.g. on the battery or the screen resolution side, but they were only incremental innovations because nothing substantially new was created.

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However, it is necessary to point out that the radicalness of an innovation is often relative to the target public and, over all, to the innovation’s releasing time (and corresponding knowledge).

More specifically, according to the context in exam, it is possible to identify:

o Innovations for the market: which consist in absolute innovations, that have never been put in place previously to a specific category of clients.

o Innovations for the served market: that are innovations that were already present in neighboring markets (on the geographically or targeting point of view) but not in the one where the firm operates. For example, this happens very often when a firm tries to internationalize a new technology and to implement it in other markets where it has not been adopted yet.

o Innovations for the enterprise. They are innovations that already exist in the served market which are incorporated (and often improved) by the enterprise, even though later than the other firms operating in that market (Verganti, 2008).

This last distinction is really important when considering firms that are acting on a global basis, as the company presented in this dissertation: if for some markets a wine can be already part of the people’s habits of consumptions, they may represent a novelty for other markets. In addition, the different markets may also imply different level of acceptance of innovation: if in some countries unconventional ways of presenting a product are accepted, in other countries they may be completely refused (Bagozzi et al., 1999). This is because innovation is strictly connected with the culture and perception of the people, especially when talking about the food industry. Some examples of this will be presented in the Analysis of Casa Vinicola Zonin case study.

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Meaning-driven Innovations

Along with the previous definitions, a new perspective has recently been emerging in the literature and it is oriented towards an innovation which starts from the users’ point of view, by observing their activities and their needs (Norman and Verganti, 2014). It is not that different from the five skills that an Innovator should master, because it aims to get close to the users’ world and it is not driven only by the technological changes: this distinction is described in the Figure 5 below.

Figure 5: The two dimensions and four types of Innovation (Source: Norman and Verganti, 2014)

In this case, the two dimensions of the matrix are the technology and meaning change. An innovation can affect both of them in different ways: it depends on the drivers, which can be the technology, the users (i.e. the market) and the design.

Technology-Push Innovations are innovations which are driven by a high degree of technological

change and do not substantially affect the meaning of the product. Technology Epiphanies are driven by a radical technological change as well but at the same time they bring a significant change in the meaning of the product. They can derive also from the use of existing technologies in a

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completely different context. Third, Market-Pull Innovations are products which are designed and aim to satisfy consumers’ needs. The difference from the previous innovations is that Market-Pull Innovations start from the users’ perspective, not from the technological change, which in this case is relatively low. Last, Meaning-Driven Innovations are products that serve subtle and unspoken needs of the market, but in doing so they create new social and cultural contexts and habits that lead the market to associate a new meaning to the product itself.

Figure 6: Drivers of Innovation (Source: Verganti, 2008)

A more simplified version of this matrix is proposed by Verganti (2008) (see Figure 6), who decided to put in evidence the drivers of innovation: the market, the technological change and the design, intended as per Krippendorf’s famous definition: “The etymology of design goes back to the

latin de + signare and means making something, distinguishing it by a sign, giving it significance, designating its relation to other things, owners, users or gods. Based on this original meaning, one could say: design is making sense [of things].” (Krippendorff, 1989, pp.9)

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What is more remarkable in this model is that it shows a new way of looking at innovation: it does not only concern the technology and the functionalities of a product but it may affect the meaning of it, that concerns how we use that object and how we think about it. It is a concept that goes beyond the shape, the performance or the price: it becomes a cultural and social matter.

For this reason, design-driven innovations do not take a specific market for granted but they rather contribute to create new consumers needs and new space. In this case, consumers and firms collaborate to change the structure and the characteristics of the sector as they know it (Verganti, 2008). This is extremely important because it demonstrates how innovation cannot be considered only as a mere outcome of the enterprise, but rather a continuous process where enterprises and public communicate in order to find new meanings to the products.

This last definition highlights how innovation does not have only a single meaning: a firm may do innovation without changing its products or processes, but just because they created new ways of consumptions. This may be critical in the food and beverage sector, where the products are strictly linked to the habits of the consumers: a product remain the same but proposed in a different way, or in a different market, where people are not used to drink it.

Finally, this multiplicity of declinations of the definition of innovation shows also that there is still not a common agreement on how innovation exactly is, what its effects and, above all, its sources are. Even though the definitions just presented give an overview that is quite accepted by the literature, when one has to recognize innovation in practice, the methods range from different perspectives, and the general perception is that it is not always easy to find an objective way to recognize innovative firms and products. A demonstration of this problem is presented in the following paragraph.

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Where innovation lies

It has just been said that when defining innovation, there are several different ways to think about it and it has just been shown that it does not affect only one aspect of a product. It was said that it does not affect only products either. But beyond the characteristics and definitions, where does innovation lie, i.e. what are the most innovative sectors?

This question is not out of place here. In fact, it is noticeable that there are some industries that seem to be more innovative than others or, at least, they seem to promote and favor more innovation. As Dyer et al. (2011, pp. 4-8) did, one might take a look at the main rankings of innovative firms published recently. For example, the media and information firm Thomson Reuters publishes The 100 Global Innovators report every year, which aims to rank the 100 most innovative firms of the year by considering some parameters such as the number of patent applications that are granted, how often those patents are cited by other companies, if those patents are refinement of existing ones8. Being aware of the limits of such kind of methodology (there cannot be a patent for an innovation that regards a change in the meaning of a product), the results of the last three years give useful insights. As shown in the Table 1, it is noticeable that some industries are more recurring and some others are not present at all.

In this case, the wine and beverage industry is totally absent from the list but, as pointed out above, this may depend on the fact that in this industry, even though there may be patents, they are not as frequent as in the other sectors present in the list. In addition, most of the patents present in the wine industry most probably concern the suppliers of the wine company, because they may interest the bottle, the closure or the label of the product.

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2011

2012

2013

Aerospace Aerospace Aerospace

Automotive Agriculture & Forestry Automotive

Chemicals Automotive Chemical

Computer hardware Chemical Computer Hardware

Computer software Colleges & Universities Computer Software

Consumer Products Computer Hardware Consumer Products

Electrical products Computer software Electrical Products

Health-care products Consumer Products Healthcare

Industrial manufacturing Electrical Products Industrial

Machinery Government Agencies Machinery

Petroleum Healthcare Media/Internet Search &

Navigation Systems

Pharmaceuticals Industrial Medical Devices

Scientific research Machinery Petroleum

Semiconductors & electronic components

Media/Internet Search &

Navigation Systems Pharmaceutical Telecommunications

equipment Petroleum Primary Metals

Transport equipment Pharmaceutical Scientific Research

Primary Metals Semiconductor & Electronic Components

Scientific research Telecommunication & Equipment

Semiconductor & Electronic

Components Transportation Equipment

Telecommunication Transportation Equipment

Table 1: Most Innovative Industries (Source: Thomson Reuters)

Results differ if we consider one of the most popular magazines for rankings: Forbes. In its section about the Most Innovative Companies in 201310, some firms from the beverage industry are present.

9 _{Data from The Economist online, 2011.}

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In effect, this is due by the different methodology: in Forbes’ research firms are evaluated by considering their innovation premium, that is the difference between their market capitalization and the net present value of the cash flows of companies of the same business11

, which should represent how much the investors expect the company to be innovative now and in the future.

Firm Ranking Pernod Ricard 20 Beam 21 Diageo 27 Anheuser-Busch InBev 45 Kweichow Moutai 46 PepsiCo 58 Carlsberg 66

Table 2: Firms in the beverage industry which are present in

“The Most Innovative Firms in 2013” list published by Forbes

Looking at the Table 2 above, some important considerations may be deducted. First of all, none of those companies is Italian. Italy is globally recognized not only as one of the major and most important producers of wine but also spirits and other alcoholic beverages (just think that two of the major Spirits groups – Campari and Martini- are Italian) but despite this, it still suffers from International competition. Therefore, one must consider that Forbes’ list is based on the market capitalization of the company. On this concern, in the last research released by Mediobanca (2013), on 111 Italian wine companies studied and interviewed, only 4 were interested about market capitalization and only in an indirect way, for example through the capitalization of the controlling

11 _{For further information about the methodology:} http://www.forbes.com/sites/innovatorsdna/2014/05/21/how-we-rank-the-worlds-most-innovative-growth-companies-2014/

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society (i.e. Campari Group). In Italy most of the wine companies are family-owned or cooperatives and this fact demonstrates how much tradition is rooted in this sector.

However, nowadays one of the main claims in the wine business is the “conjunction of innovation and tradition” (I1). Those two terms are not new in this sector and, at least in appearance, they are not considered to refuse each other. The real issue is whether this is actually done or it is only a payoff for marketing purposes, especially in Italy. The charts reported above showed that wine companies do not appear to be the most innovative ones in the world but it was also said that the definition of innovation that was considered actually brought some relevant limits. For this reason, a new way of analyzing the firm appears to be necessary, in order to consider the widest range of activities and characteristics as possible. This necessity gives even more importance to the research that is conducted in this dissertation and anticipates the research method that is applied: if on one side the literature reveals a deep study of innovative processes conducted by the enterprises (and the people who are working within them), on the other the main question is if those studies may find an application in a sector which does not present the normally recognized characteristics that are considered in the actual studies about innovation.

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4

THE

GLOBAL

WINE

INDUSTRY

This chapter aims to describe the global wine industry as a whole, by providing a picture and some data regarding its dimensions and its evolution. The data are primarily drawn from the OIV 2013 Statistical Report on World Viticulture, presented at the annual OIV convention. Some integrations are made – when occurred – with the statistics provided by the United Nations Food and Agriculture Organisation (FAO) and by the website I numeri del vino (www.inumeridelvino.it). Furthermore, differences among countries are discussed and future challenges and opportunities of the sector are presented.

Old World versus New World countries

It is no news that globalization has always affected the wine market, since local production and international trade always coexisted and characterized this sector. Nevertheless, when taking into account the quantitative dimensions of the wine industry and having a look at the large literature regarding its internationalization, the first question that comes in mind is whether the typical distinction between Old-World and New-World countries is still relevant.

This distinction is not reflected only on the territorial and historical point of view: in fact, while the Old World countries have principally been dominated by many small family vineyards and cooperative vineries, the New World producers are characterized by a high degree of concentration and vertical integration. As a matter of fact, in 2009, if the majority of wine sales in the New World were held by the four largest firms, in the Old World only 6% was held by the four largest firms (Anderson et al., 2011). Furthermore, the global wine industry’s concentration has been far lower than the average levels of the beverage and tobacco sectors: if in the late 1990s the three largest

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firms represented 35% of the beer industry, 42% of the spirits industry and 78% of soft drinks, in the wine industry they held only 6% of global sales (7% in 2009) (Id., 2011). As Simpson (2009) points out, this difference is due to historical reasons. European countries were the first vine growing territories and still in the XIII century they were basically constituted by family businesses: this was because the traditional viticulture was characterized by low economies of scale, low entry costs but high transaction costs, since wine was a product whose quality and quantity varied considerably according to the nature and climate changes. What is remarkable is that hundreds of vine-growers held a considerable political influence and this led to the demand and the achievement of protection by the Governments. That protection was represented by the encouragement and support gave by the Government to cooperative structures – which lowered transaction-costs and could take advantage of the economies of scale coming from the later innovations – and the promotion and guarantee of regional brands (called “appellations d’origine contrôlée”, which are analogous to the Denominations of Origin): as a consequence, the economic power of merchants was limited compared to the vine growers’ and thus the tendency towards vertical integration was low.

On the contrary, in the New World countries there were few wine producers so their electoral influence was limited. That was due to the fact that the market was very far away from the place of production and most consumers were unacquainted to drink wine: this lead the merchants to invest more in marketing strategies in order to attract the consumers to a new drink. For this reason their economic power was greater and thus the incentive to vertical integration. Furthermore, consolidation among companies allowed them to avoid the “war of prices” and to maintain higher profits (Simpson, 2009). Furthermore, at least until the early 1990s, the wine production and consumption were principally localized and all the New World wine-producing countries were

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relatively far away from each other (and from the Old World as well) and thus pretty isolated (Castaldi et al., 2006).

Therefore, the distinction between Old- and New-World countries appear to be firstly motivated by historical and geographical reasons. It is only in the last decades that the connections between those two groups became stronger and the main wine-producing firms more export-oriented. Of course globalization affected also the wine sector and made boundaries and distances more and more relative. As a consequence, the wine consumption and the production patterns changed accordingly.

The Global wine consumptions

Figure 7: The Major Wine Consumers (Source: OIV)

When looking at the level of the global wine consumptions, it is evident that the wine industry is definitely a mature industry. In fact, the global wine consumption had an increase of only 7,52% in the 2000-2012 period, from 226 mhl to 243 mhl – that means an average annual growth rate of 0,6%. What is most notable is that Italy, Spain and Portugal, despite their long tradition in wine

FRA USA ITA GER CHIN UK RUS ARG SPA AUS POR

2000 34.500 21.200 30.800 20.150 10.695 9.696 4.699 12.491 14.046 3.899 4.595 2011 29.322 28.425 23.052 19.707 16.339 12.860 11.276 9.809 9.894 5.325 4.550 0 5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000 m h l

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production and deep-rooted customs, have both experienced a considerable decrease of the level of wine consumptions even though they still rank at the top of the most consuming countries in the world, as evident from the Figure 7 above. The decrease of the level of wine consumptions is confirmed also by the individual data: if in the year 2000 the average Italian person used to drink 54 liters of wine, in 2012 he drank 29,8% less (37,1 liters per year). In Spain the drop was even greater: from 34,9 liters per capita in 2000 to 19,9 liters in 2012 (-39%). France was suffering the same contraction until 2010, when its national (and then individual) consumptions restarted to increase (See Tables 2 and 3 in Appendix A).

This “European shortfall” was primarily due to the recent recession and the lifestyle changes in the European consumers: if in some countries like France and Italy wine used to be consumed at almost every meal, nowadays, especially among the young consumers, it has progressively been substituted by bottled water, beer, juice and soft drinks (FAO, 2009). In addition, in certain countries (such as Italy and France) there is a stricter legislation about drink and drive while in others (e.g. in Sweden) there are special restrictions on advertising alcoholic beverage (Campbell et al., 2006).

By contrast, the only markets which are significant in terms of quantity and growth of national consumptions are USA and China. Finally, the case of Russian Federation must be pointed out, with an exceptional growth of 121,20% in the 2000-2012 period. This Russian growth is reflected also in the individual consumptions, which increased +145% in the same period of time, even though the Czech Republic had the most considerable variation (+187,88% from 2000 to 2012). However, despite those positive changes, it must be pointed out that the level of individual consumptions of those countries are far lower than the values of France, Italy and Spain.

Then, the comparison of the world wine consumption and production shows how the two values changed from 2000 to 2012: the resulting image is a market characterized by a considerable

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oversupply which reached its maximum in 2004 but then progressively reduced before reaching an approximate equilibrium in 2012. In fact, when balancing the two values one must consider that wine is produced also for industrial purpose (e.g. for distillation), which are not considered in the consumptions, and this helps the market to remain in part in equilibrium.

Figure 8: Balance of the Global Wine Production and Consumption (Source: OIV)

Even though it should be pointed out that the distinction between Old- and New-World countries is mainly referred to the production point of view, from the reported data consumptions decrease in those countries where wine was traditionally grown and has always been a traditional beverage, part of the people’s everyday life. This phenomenon mainly interests the European countries, especially Italy, France, Spain and Portugal, where there is a substantial stagnation of the market, without any growth on consumptions. However, they still are the hard core of the global consumptions, where the individuals and national consumptions reach their maximum levels. They are mature markets where wine has always been part of the population’s food traditions and little place can be explored in that sense: they are red oceans, where the competition is high and mainly driven by the price (Wine Intelligence, 2013; De Luca et al., 2006). On the other side, wine is knowing an increasing success among new consumers, especially from the so-called New-World countries, where it is still

0 50 100 150 200 250 300 350 Mhl