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UNIT CODE * NAME MAR305

ASSESSMENT TITLE Feasibility Report

TUTOR’S NAME: DATE OF SUBMISSION: 21-03-2013.

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Robert ZobecDate:

DETAILS OF FEEDBACK

Executive Summary

This report discusses the feasibility of an organisation entering and trading in

a foreign market. The report gives a background view of the Dorrien Estate

wine-making facility and its product, wine. The report highlights that the

organisation is seeking to internationalise its operations and market its

product to one of the world’s fastest growing foreign markets, China.

The report discusses the advantages and disadvantages of an organisation

internationalising a product in a foreign market. Main advantages include

larger trade markets and selling opportunities and the benefits of risk

distribution and greater economies. Uncontrollable factors such as foreign

economies, political climates, technological and legal factors may be

disadvantageous for a company trading in a foreign market, along with the

challenges presented by socio-cultural factors, such as language and cultural

barriers, in conjunction with an organisations’ Self-Reference Criterion and

Ethnocentrism.

The state of the Chinese economy is discussed, highlighting that the nation is

the second largest economy in the world and plays an influential role in the

global economy. The Gross Domestic Product of China accounts for 11.7% of

the world economy. Coupled with a surplus Current Account of USD$65.8

Billion, the national wealth has given rise to high levels of disposable income

for citizens, leading to increased demand for foreign products, and in

particular, Australian wine.

Socio-cultural factors are analysed and show that the proliferation of

consumer wealth has seen a demand from China for high-quality wine from

Australia. Cultural attitudes reflect that wine is seen as sophisticated and

represents images of luxury and decadence, increasing consumption.

The report delivers a SWOT analysis covering key issues and concludes with

a summary of all points raised, along with recommending that the

internationalisation of Dorrien Estate is feasible if all economic and socio-

cultural factors are analysed, addressed, understood and taken into

consideration before marketing to the Chinese wine market.

Robert G. ZobecID 9529950

MAR305 Assignment 1: Feasibility Report

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Table of ContentsExecutiveSummary…………………………………………………..iii

1: Introduction...............................................................................1

2: Organisation and Product Background..................................1

3: Internationalisation Discussion..............................................23.1: Advantage and Benefits.....................................................23.2: Disadvantages and Challenges.........................................3

4: Economic Environment Summary..........................................44.1: China Gross Domestic Product........................................44.2: China Current Account......................................................54.3: Disposable Income per Capita..........................................7

5: Trade between Australia and China........................................7

6: The Socio-Cultural Environment.............................................9

7: Key Issues...............................................................................107.1: Strengths...........................................................................107.2: Weaknesses......................................................................107.3: Opportunities....................................................................107.4: Threats...............................................................................10

8: Summary and Recommendations.........................................11

Reference....................................................................................13

iii

1: Introduction

The purpose of this report is to outline all of the factors relating to the

internationalisation, penetration and marketing of an organisation into new,

emerging foreign trade markets. The report first delivers a background of the

organisation, Dorrien Estate and its product, wine. The report then leads into

a discussion of internationalisation of an organisation within a foreign market,

including an analysis of advantages, benefits and disadvantages of

internationalisation.

The report also addresses the current economic and socio-cultural climate of

the target market, China. An overview of the current state of the Chinese

economy is addressed, along with an evaluation of the current social and

cultural factors that may effect and influence the business and marketing

practices of the organisation in entering the Chinese Wine Market.

The report then outlines key issues and addresses relevant strengths,

weaknesses, opportunities and threats associated with entry of the

organisation into the target market. The report concludes with a summary of

all points raised and delivers recommendations based on the elements

discussed within the body of the report.

2: Organisation and Product Background

Dorrien Estate is a state-of-the-art winemaking facility based in the Barossa

Valley of South Australia. Owned by Woolworths, Dorrien Estate is a contract

winemaking facility that specialises in producing small parcels of premium

boutique wines for Australian growers and winemakers as well as producing

wine under its own label (Dorrien Estate, 2013). Dorrien Estate has the ability

to crush 16,000 tonnes of fruit and warehouses approximately half a million

cases of finished wine and is capable of holding 8.9 million litres of wine within

tanks located at the facility. (Dorrien Estate, 2013). The organisation does not

actively market it’s products in the international market and due to the large-

scale nature of operations, is seeking to export and market the commodity to

larger, international markets, with a focus on the Asian market, and in

particular, China.

1

3: Internationalisation Discussion

The proliferation of globalisation, highlighted by Picton and Broderick (2005)

as the process through which individuals, organisations and governments

become increasingly interconnected, has led to the expansion of markets

across borders and continents and increased trading of commodities across

international borders by organisations. This expansion of markets and

increased global competition has led to organisations adopting and

implementing marketing processes and activities, referred to as international

marketing, to take advantage of growth and profit opportunities beyond

domestic boundaries (Simmonds, 1999; Rundh, 2007).

International Marketing is defined as the execution of activities by an

organisation which attempts to plan, price, promote and channel the flow of

commodities to various global markets (Cateora et al, 2012). International

marketing is closely aligned with internationalisation, which can be described

as the processes leading to identifying and entering international markets

(Elliot, Rundle-Theile & Waller, 2010). Internationalisation is an increasing

trend amongst organisations and can be attributed to a number of factors

including rapid domestic market saturation and limits placed on domestic

growth in the home country by public policies that limit further growth in

market share for an organisation (Chen, 2011). Internationalisation can be

advantageous for an organisation, but can also deliver challenges and

disadvantages.

3.1: Advantage and Benefits

There are many advantages for an organisation to internationalise its

operations. The expansion of trade across borders and continents allows

organisations to enter and compete in larger markets, which can lead to

greater market share and profits (Calof & Beamish, 1995). Internationalisation

allows for identification of organisational growth or niche opportunities located

across borders and continents (Anderson, 1999). Entering the international

marketplace allows for greater risk distribution for the company, alleviating the

susceptibility to domestic economic cycles and reducing the reliance on

domestic economies to generate profit (Cadogan, 2012).

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Firms also benefit from greater economies of scale by increasing the

dimension of operations, leading to reduced production costs and greater

profit margins (Williams, 2011). Internationalisation also has the benefit of

expanding both product and brand awareness across both domestic and

international markets. Companies also benefit from accessing new

technologies or information gathered from international markets, allowing for

more efficient and effective business and marketing practices (Cadogan,

2012; Williams, 2011). In line with these advantages and benefits, there are

also disadvantages and barriers.

3.2: Disadvantages and Challenges

In line with the advantages of internationalisation, there are also potential

disadvantages and challenges presented to organisations seeking to expand

business operations on an international scale. Organisations are faced with

several uncontrollable macro-economic aspects including demographic,

socio-cultural, economic, legal, political, technological and natural factors that

may affect international operations (Cateora et al, 2012).

Firstly, companies may be susceptible to economic downturns occurring in

foreign markets, along with fluctuations in monetary exchange rates that may

affect logistical and production costs, leading to reduced profit margins

(Rundh, 2007). Organisations are also vulnerable to political instability that

may adversely affect current trade agreements and profit repatriation policies

(Chung, Wang & Huang, 2012). Companies may also be at a disadvantage in

relation to reduced or inadequate information technologies and industrial

infrastructures in foreign markets. The difficulty of obtaining scarce, required

natural resources in foreign markets may also place companies at a

competitive disadvantage (Leisch, Welsh & Buckley, 2011).

In conjunction with numerous possible disadvantages, organisations face

several challenges that need to be addressed in order to successfully expand

and succeed within foreign environments. The primary challenge to success

in a foreign marketplace is a marketer’s self-reference criterion (SRC), which

is an unconscious reference to one’s own cultural values, experiences and

knowledge for a basis for decisions (Cateora et al, 2012). A marketers’ SRC

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can adversely affect business decisions relating to international environments,

as philosophies, values and knowledge may not be easily transferrable across

differing markets and cultures. In combination with SRC, ethnocentrism, which

is the belief in the superiority of one’s own culture or company (Cateora et al,

2012), is also seen as a challenge to successful internationalisation.

Ethnocentrism affects the ability of an organisation to effectively assess

foreign market situations and may impede the execution of accurate

management decisions in an international market environment.

Finally, companies are faced with religious, cultural and language barriers that

may adversely affect or change the ways business is conducted in a foreign

market. Organisations operating in more than one foreign marketplace also

face a greater range of managerial obstacles, as solutions and policies may

not be easily transferrable between foreign markets, and uncontrollable

factors may differ from country to country (Williams, 2011).

4: Economic Environment Summary

Dorrien Estate has chosen to enter the foreign market of the People’s

Republic of China, an in the course of due diligence, must have a thorough

knowledge of the current economic climate of the target market before

undertaking international marketing opportunities.

4.1: China Gross Domestic Product

With a population of 1.3 billion, China recently became the second largest

economy behind the United States of America (The World Bank, 2013), and is

increasingly playing an important and influential role in the global economy.

The Gross Domestic Product (GDP), which is the total value of goods

produced and services provided in a country during one year, in China was

worth 7298.10 billion US dollars in 2011, as shown in figure 1. The GDP value

of China represents 11.77 percent of the world economy (World Trade

Organisation, 2013), highlighting the fact the country has a very robust

economy and strong trading power.

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4.2: China Current Account

As shown in figure 2, China has a Current Account of USD$65.8 Billion. The

current account is the sum of the balance of trade (exports less imports of

goods and services), net factor income and net transfer payments (Griffin &

Pastay, 2013) China’s current account reflects the fact that the country has a

positive account surplus, which highlights the fact the country’s wealth

generation exceeds its expenditure, allowing the country to invest and create

better domestic infrastructure and employment opportunities, which in turn

leads to an increased standard of living for the population. This increase in

living standards has led to a greater demand for foreign products by Chinese

consumers, opening up new markets for products.

Figure 1: China GDP (www.tradingeconomics.com, 2013)

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Figure 2: China Current Account (www.tradingeconomics.com, 2013)

Figure 3: China Disposable Income Per Capita (www.tradingeconomics.com,

2013)

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4.3: Disposable Income per Capita

The rapid growth of the Chinese economy in recent years has led to a rise in

the Disposable Income per Capita for a larger proportion of the Chinese

population, as shown in figure 3. Disposable Income is the amount of money

that households or persons have available to spend and save after paying

income taxes and pension contributions to the government (Griffin & Pustay,

2013). Higher levels of disposable income has seen increases in demand for

foreign products, which in turn opens up new opportunities for Dorrien Estate

to promote and sell wine in the Chinese Market.

5: Trade between Australia and China

Currently, there is no Free Trade Agreement (FTA) between Australia and

China. An FTA is an international agreement between two or more countries

to eliminate tariffs on all trade between them (Department of Foreign Affairs

and Trade, 2013). Wine imported to China from Australia is subject to tariffs

as well as a range of other taxes, duties and fees such as a liquor tax, an

education tax, a value-added tax of 17.5%(VAT) and a consumption tax

(Department of Agriculture, Fisheries and Forestry, 2012). A tariff is defined

as a tax imposed by a government on goods entering its country (Cateora et

al, 2012). Import tariffs provide an effective barrier to trade by raising the price

of a commodity in the importing country, and as a result, demand for the

imported good fails (Griffin & Pustay, 2013). In spite of the barriers of entry

imposed, Australian wine exports to China have seen a significant rise and

China has surpassed Japan, becoming the largest export market in Asia for

the Australian wine industry since 2007(Wine Australia, 2013), with Australia

also ranking second largest overall supplier of bottled wine to China after

France, as shown in figure 4.

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Figure 4: China Wine Market Imports by Country of Origin (Department of

Foreign Affairs and Trading, 2013)

Currently, there are no import limits or product exclusions relating to the

export of wine to China from Australia. China currently has free trade

agreements with both Chile and New Zealand in respect to wine imports.

Australia and China entered into bi-lateral dialogue in 2005 and the Australian

Trade Commission is working closely with the Chinese government to

eliminate tariffs imposed on wine and other agricultural imports by China

(Department of Foreign Affairs and Trade, 2013). A reduction or elimination of

current tariffs would benefit the Australian wine industry with an increased

demand for Australian wine in the Chinese market and a significant reduction

in price of Australian wine for the Chinese consumer (Department of

Agriculture, Fisheries and Forestry, 2012). In line with understanding the

current economic climate of China, Dorrien Estate must be aware of and

evaluate the Chinese socio-cultural environment.

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6: The Socio-Cultural Environment

Upon entering a new foreign trade market, organisations must be ‘globally

aware’, taking into consideration and being conscious of cultural and social

influences, along with having a sound knowledge of economic and political

trends (Williams, 2011). Socio-cultural factors such as thoughts, beliefs,

rituals, cultural, social and historical values can affect consumer attitudes and

shape buyer behaviour (Clow & Baack, 2012; Pickton & Broderick, 2005), with

culture seen as one of the most critical factors for organisations to consider

when entering new foreign markets, as it can hinder an organisations’ global

integration and coordination on international marketing strategy (Tae Won &

Sang Il, 2011, p.19). Dorrien Estate must take into consideration the outlined

socio-cultural factors. Understanding wine consumption behaviour and the

cultural and behavioural attitudes will assist the organisation to develop

innovative marketing strategies, increase sales and produce higher profits (Lui

& Murphy, 2007).

In Chinese culture, wine has always represented an image of both luxury and

decadence (Camillo, 2010; Thorpe, 2009). The majority of Chinese

consumers assess the quality of imported wine based on perceived factors,

including (in order of priority) price, country of origin, packaging labeling,

image and quality, and less emphasis on variety, aging or cellar management.

(Camillo, 2010: Jenster & Chen, 2008) Literature shows that social interaction

and word-of-mouth recommendation, primarily through friends and co-workers

is the most widely accepted channel of awareness among Chinese

consumers (Lui & Murphy, 2007; Yu et al, 2009). Due to the expansion of the

Chinese economy and the proliferation of middle and upper income classes,

consumption and knowledge of imported wines is seen as a symbol of status

and sophistication. Another critical socio-cultural factor is the perception that

wine is healthier than Chinese spirits because wine contains less alcohol (Lui

& Murphy, 2007; Yu et al, 2009). Furthermore, China’s culture of face value,

mainzi (“Face” in Mandarin) is a factor than plays a critical role in Chinese

culture (Camillo, 2010, p.74). Chinese purchase expensive wine for public

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occasions and celebrations, yielding more “face”, or recognition and respect in

the presence of others. Chinese consumers also purchase and consume wine

for the perceived health benefits as well as symbolic reasons, such as good

luck, as the colour red in China is seen as a symbol of good fortune and

prosperity (Lui & Murphy, 2007; Camillo, 2010; Yu et al, 2009).

7: Key Issues

7.1: Strengths

China is an expanding economy and as shown in figures 1, 2 and 3, reflect

that the Chinese economy is growing, with the standard of living and levels of

disposable income rising, leading to increased consumer spending and

demand for both foreign and domestic products. The growth of the economy

has allowed organisations to internationalise and enter the Chinese market.

The large scope of the Chinese market

7.2: Weaknesses

Differing managerial processes, lack of socio-cultural understanding,

organisational ethnocentrism and SRC can be detrimental to an organisation

seeking to expand into the Chinese market. Dorrien Estate must have a

thorough understanding of Chinese business practices and socio-cultural

factors and be ‘globally aware’ in order to be competitive and capture market

share in the Chinese trade environment.

7.3: Opportunities

Social-cultural attitudes and beliefs of the Chinese consumer towards wine

open up a range of opportunities for Dorrien Estate. With effective marketing

and a good understanding of social and cultural trends, the organisation has

the opportunity to deliver quality products to an ever-expanding consumer

base.

7.4: Threats

Uncontrollable elements such as economic, political, competitive and cultural

factors can be perceived to be a threat to market entry by Dorrien Estate.

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Import tariffs and free trade agreements with other countries can also attribute

to difficulty in gaining a competitive advantage within the Chinese wine

market. Due to the proliferation of the Chinese economy and the new,

emerging demand for foreign wine, other organisations are entering the

Chinese market, leading to a greater amount of competition within the

marketplace.

8: Summary and Recommendations

China is an emerging global power with a thriving economy. Increasing

standards of living, rising levels of disposable income and expanding social

classes has led to an increasing demand for foreign products and services,

including imported wine. Dorrien Estate is seeking to enter the Chinese

market and take advantage of the growing trend of imported wine

consumption. In entering the foreign market, the organisation must take into

consideration certain uncontrollable political, legal economic, cultural,

technological, environmental and competitive factors. Advantages can be

gained from internationalising the organisation, including larger target

markets, greater brand awareness and risk distribution. In entering the

Chinese market, Dorrien Estate also faces several disadvantages such as

heavy tariffs imposed on wine imported from Australia, and the unfamiliarity of

fluctuating exchange rates and increased competitor activity due to the

thriving Chinese market. The organisation also faces the challenges of

understanding an interpreting the socio-cultural values and must address and

adapt the organisational SRC and have a clear understanding of ethnocentric

philosophises that may hinder marketing to the foreign market.

Although there are tariffs currently imposed on Australian wine imports and

there is strong competition from other organisations due to free trade

agreements, the report has shown that Chinese buyer behaviour and socio-

cultural attitudes reflect that Australian wine is perceived to be of high quality

and value and there is a great demand for Australian product due to the

perception of wine consumption being associated to symbols of status,

wealth, heath and well-being.

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Dorrien Estate can take advantage of these beliefs and attitudes when

executing its marketing strategy and plan. In light of all the analysis given in

the report, it can be recommended that Dorrien Estate has a good opportunity

to internationalise and gain a good percentage of market share, leading to

greater brand and product awareness and competitive advantage.

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