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Research on Strategies for Rapid Development of Shaoxing Wine: A Value Innovation Perspective NAI Li2, SHENG WZ1, 2, PANG Fei1 1. School of business and management, Shaoxing Uni., Shaoxing, P.R.China, 312000 2. Research center for science, technology and education policy, Zhejiang Uni., Hangzhou, P.R.China, 310012 [email protected] Abstract: Rice wine, port wine and beer are three ancient wine categories in the world. Shaoxing wine is the typical representative of rice wine. At present, beer and port wine are the mainstream products in liquor market while rice wine is only in the edge of the market. Further more, the leading position of Shaoxing wine is under serious threat with the rise of Shanghai rice wine. Based on in-depth industry survey and literature review of value innovation, this paper analyses and explores development strategies of Shaoxing wine industry hope to provide some implication to the industry. Keywords: value innovation, rapid development, rice wine, Shaoxing wine 1 Introduction and problem statement Contrast to the mainstream products position of other two ancient wine categories, rice wine only accounts for a limited market share: about 4.5% of the liquor market according to Food weekly in Chinese. Shaoxing wine, as the typical representative of rice wine, its annual revenue is about 2 billion RMB in these years according to Shaoxing Economic and Trade Commission. Although under the great historic name and the certificate of origin protection, Shaoxing wine still doesn’t get cognition of young national consumers (Aiming, 2007): Market constrained in the regional middle-aged consumers of east China and Japan. In the same time, Shanghai rice wine shocks its traditional market a lot. Nowadays, Shaoxing wine is the rice wine with highest gross margin, but the most profitable rice wine brand in China is in Shanghai. Why young national consumers don’t cognize Shaoxing wine? Can Shaoxing wine industry break out of its existing industry frames to get rid of the un-equalizing status quo? Focusing on these questions, we first made a second data collection of rice wine industry and made a literature review of rapid development and value innovation. Next, depth interviews with managers of marketing, production and administrative staff of two famous Shaoxing wine Corp. and file analysis were going on. We also did some contrast experiments to check the natural characteristics of Shaoxing wine. At last, we analyzed the development history of Shaoxing wine and discussed its development potential based on the characteristics of Shaoxing wine and value innovation theory. 2 Literature reviews of rapid development and value innovation 2.1 Concept of rapid development The concept of rapid development derives from the concept of creative destruction (Schumpeter, 1942). The traditional industry logic focuses on matching and beating their rivals, it results to taking on similar strategic dimensions which leads to cut-throat competition and incremental improvement. Entrepreneur converts a new idea or invention into a successful innovation through creation of new products and business models. The creative destruction leads to the dynamism of industries. There are two aspects of meaning to the concept of rapid development: One is the speed of development (rapid growth), the other is the ways of development (leaping to a new stage). It can be understood in aspects of efficiency and effectiveness in the process of development. To enterprises or industries, rapid development means to launch new value concepts and continuously re-invent the way customer value is created and delivered (Matthyssens & Vandenbempt & Berghman, 2006) through different competitive mindset and Sponsored by National Social Science Fund 09BJY050 and Social Science Fund of Shaoxing City 115016 460 systematic way of opportunities seeking (Kim & Mauborgne, 2004). It means breaking free from taken-for-granted assumptions about competition, industries and their intra- and inter-organizational (Spender, 1989) in value innovation ways of doing business. 2.1 Literature review of value innovation Value innovation relates to a re-conceptualization of matured industry models (Matthyssens & Vandenbempt & Berghman, 2006). It involves a redefinition of a business by focusing on the powerful commonalities in the features that customers value (Kim & Mauborgne, 2004). Through creating enough economic surplus to support a price that makes business sense and thrills customers with the benefits (Dillon & Lee & Matheson, 2005), value innovation creates new markets (new products or services) and new ways of competing (new business models). In short, value innovation creates new aggregate demand through a leap in value at an accessible price (Dillon & Lee & Matheson, 2005). Kim & Mauborgne (2004) pointed out five basic dimensions of strategic logic difference between conventional logic and the logic of value innovation (see fig. 1). These differences determine how managers operate their enterprise: What opportunities they seek and pursue and how they understand risk. Fig. 1 Differences in five basic dimensions between conventional logic and the logic of value innovation Basic dimensions Conventional logic Logic of value innovation Industry assumptions Strategic focus Customers Assets and capabilities Product and service offerings Industry conditions are given Building competitive advantage to beat the rivals Competing at the margin for incremental share Retaining and expanding customer bases through further segmentation and customization Focusing on the differences in what customers value Viewing business opportunities through the lens of their existing assets and capabilities Offering traditional products and services Max. the value of their offers Looking for blockbuster ideas and quantum leaps in value Pursuing a quantum leap in value to dominate the market Freeing up resources to identify and deliver completely new resources of value Targeting the mass of buyers Focusing on the key commonalities in what customers value Having more insight into where value for buyer resides and how it is changing Having much more likely to act on the insight Thinking in terms of the total solution buyers seek Overcoming the chief compromises their industry force customers to make Matthyssens, Vandenbempt and Berghman (2006) related key organizational practices of value innovation to process of market sensing, sense making, transformation and application to commercial ends. Dillon, Lee and Matheson (2005) further proposed that enterprise value was delivered through an iterative business process, based on five stages: Business intelligence to generate value propositions and identify new businesses models that create extraordinary value for customers, value modeling and analysis to validate extraordinary value for customers, decisions and prioritization to embrace risk and allocate resources for success, communications and implementation to maximize success by leveraging resources, and value validation to confirm value. They proposed that there are four questions must be asked in order to translate the thinking into a new value curve: Which of the factors that our industry takes for granted should be eliminated? Which factors should be reduced well below the industry’s standard? Which should be raised well above the industry’s standard? Which factors should be created that the industry has never offered? In general, value innovation offers a considerable increase in value. It can be realized by simultaneous pursuit of radical superior value for buyer and lower cost for companies (Matthyssens & Vandenbempt & Berghman, 2006). Value innovation will generate a lot of word-of-mouth praise. These advantages will fundamentally change the competing conditions and drive innovators to rapid growth. However, value innovation requires the re-conceptualization of business and new ways of doing business. Getting support cross industry boundary becomes necessary. 461 3 Situation analysis of Shaoxing wine industry 3.1 Characteristics of Shaoxing wine The main characteristics of Shaoxing wine identified as consumer perceived success factors are reflected in its rich amino acid content, heat content, health claim and cooking. The first characteristic of Shaoxing wine is its rich amino acid content. Paul Shuzo Co., Ltd of Japan analyzed its contents in auto-analyzer of amino acid in 1974 (Zhu Baoyong, 1982). It showed 21 kinds of amino acid and the total content of amino acid is 6770mg/L. As contrast, the total amino acid content of dry red wine was 1581mg/L. Further more, there were 8 kinds of amino acid belong to the special ones that human body cannot synthesize itself and has to be taken directly from outside. This result ensured the industry's position of Shaoxing wine in Japan. Up to date, Japan is still the largest exporting destination of Shaoxing wine. Although rice wines of other region also contain similar amino acids, their contents of amino acids are much less than Shaoxing wine. The second characteristic of Shaoxing wine is its rich heat content. The heat contents of Shaoxing wine, red dry wine and beer are 5024, 3550, 1490 KJ/L (Zhu Baoyong, 1982). This characteristic helped Shaoxing wine won the reputation of “liquid cake”. It is also in accordance with the traditional usage of Shaoxing wine for keeping warm in winter. The third characteristic of Shaoxing wine is its health claim. According to Compendium of Material Medical (Li Shizhen, 1578), rice wine can be used in treatments of dredging blood vessels, thickening stomach, nursing skin, supporting liver and eliminating foul qi, etc. In Chinese medicine prescriptions, various herbs are soaked or stir-fried or boiled with rice wine to enhance their efficacy. A cooperating research of Zhejiang Univ. and Guyuelongshan Corp. examined its health functions of lead excretion, memory enhancement, immunity enhancement, senility deferring, capacity improvement of antioxidant and hypoxia and regulation of intestinal flora (Xie Guangfa, 2008). The fourth characteristic of Shaoxing wine is its flavoring function. It is widely known that Shaoxing wine can make seafood and meals smell better and more delicious. Contrast experiments showed obvious differences in smell, color and taste of seafood flavoring with Shaoxing wine than other kinds of rice wine. The main characteristic of Shaoxing wine as perceived barriers to its market expansion is its uncommon taste. On the other hand, its rich nutrient and heat content also becomes its barriers to a certain extent in modern life. 3.2 Development history of Shaoxing wine The development of Shaoxing wine has passed through two phases. The first phase is the industrialization period which focused on production capacity and stability of product quality. Starting from the brewage and yeast research of Shaoxing wine supported by Ministry of Light Industry in 1964, the production capacity and product stability of Shaoxing wine got improved rapidly. The second phase is the value discovery period of vintage which focused on marketing. The wines with years of aging in the market got revalued. It up-grated the Shaoxing wine industry. In these two phases, Shaoxing wine was in the dominating position of rice wine industry. At present, the industry entered into the post-second phase. Market expansion has not been effectively realized and the industry is competing at the margin for incremental share. Further more, its most profitable traditional market are stolen by the Shanghai rice wine. New value searching state of Shaoxing wine is still in process of market sensing and sense making. The industry is calling for value innovation. 3.3 Development potential of Shaoxing wine Activated by the development of Shanghai wine, Shaoxing wine industry is actively exploring its value innovation paths. Imitating Shanghai wine, new style wines come out to be light in taste, be bottled in similar package, be in fashionable names and even to be in new image with additional elements of traditional Chinese herbs. As a result, the main characteristic difference between new Shaoxing wine and Shanghai wine are gradually disappearing. The boundary between some new variety of Shaoxing wine and Shanghai wine gets blurring. According to value innovation theory, quantum leaps insights in 462 value reside in the changing consumer needs which can be perceived by business intelligence of market sensing. But the realization of the new value propositions has to be certain supported by product or service researches. To Shaoxing wine, Brewing is the fundamental part of the industry. The former development stages of the industry were all based on its core of brewing industry. Results from our focus team which consisted of management experts, practitioners of marketing and brewing and innovation professions are also in line with this propose. Although the new Shaoxing wines are competing for market share to Shanghai wine nowadays, their values are still not validated scientifically. First, the new wines don’t reveal the intrinsic characteristics of Shaoxing wine in rich amino acids and juice thickness compared with Shanghai wine. Secondly, the benefits of new wines to human being are just supported by traditional Chinese medical theory instead of somatic science. The result of cooperating research of Guyuelongshan Corp. with Zhejiang University just examined the traditional functions based on guinea pigs. Although value innovation needs further reason, most consumer even don’t know this research. In contrast, the effects of veratryl alcohol in port wine which give consumer the scientific reason to consume with seafood, Shaoxing wine should give consumer the clear reason for consuming. The third one is that the foundation concepts of the new wines are not from direct customer perception. In other words, the new wines are just from concept copy instead of value innovation to elements consumers focused. Lesson from port wine and historian prospect of Shaoxing wine show that value of wine is mainly from its interaction with culture and life. But it is misapprehended by most people of the industry. They neglect to digest the culture sticky in history and integrate it with life. Although the new wines present the progress of Shaoxing wine industry, it is not enough for leap –forward development. Leap-forward development need to be supported by products with real valuation innovation. To Shaoxing wine, it would be important to combine its intrinsic cultural and physical characteristics, customer perception of modern life and scientific research. Unfortunately, the conventional logic still drives the industry allocating their most resources to marketing. 4 Conclusion Shaoxing wine industry has experienced the two phases of innovation: Production innovation and market innovation. The next phase will be value innovation. The value innovation of wine industry resides in its core process of brewing. It seems that the industry has entered into a myopia trap of emphasis on marketing and overlooking the fundamental research of brewing. On the contrary, the brewing research is just the place where the extraordinary value of Shaoxing wine hidden and the industry can be relied on. Viewed from the development history of Shaoxing wine, the industry has been accustomed to skimming markets without brewing research. It is perhaps the reason why Shaoxing wine with highest gross margin in rice industry cannot develop rapidly. References [1]. J. Schumpeter. Capitalism, Socialism and Democracy, Harper, New York, 1942 [2]. P. Matthyssens, K. Vandenbempt and L. Berghman. Value innovation in business markets: Breaking the industry recipe, Industrial Marketing Management, 35 (2006), pp.751 – 761 [3]. C. Kim and R. Mauborgne. Value innovation: The strategic logic of high growth, Harvard business review, top-line growth, July-August, 2004 [4]. T. A. Dillon, R. K. Lee and D. Matheson. Value innovation: Passport to wealth creation, Research-Technology Management, Mar.-April, 2005 [5]. Aiming. Wine industry in China (2), Chinese Wine, Mar. 2007 (In Chinese) [6]. Zhu Baoyong. Brewing technology, Light press, 1982 (In Chinese) [7]. Xie Guangfa. The health function research of Guyuelongshan brand Shaoxing wine, Newspaper of Chinese Wines, 20/02/2008 (In Chinese) 463