Goizueta Partners Consulting Corporation was hired by Ernest Gallo to evaluate Gallo’s entry into the upscale wine market. Accordingly, this executive briefing analyzes how Gallo manages industry structure to enhance their market position and how this may hinder entry into the upscale market. It closes with a focus on how they can leverage these attributes to break into the up-scale wine market.

Gallo has a Very Strong Position in the Low Priced Industry Segment

The following is a summary of Gallo’s current industry position in the low price segment of the wine industry.

In sum, Gallo has a very strong position in the low-cost segment of the wine industry. Here, they face few competitors that can match their scale and expertise. In fact, Gallo is 3-5 times the size of their nearest competitor. In terms of advertising expenditures, Almaden, Paul Masson, Inglenook, and Sutter Home form are the most significant competitors. However, Gallo’s $15 million advertising budget outstrips them by 4 to 8 times. This creates very strong brand recognition and Gallo is able to dominate shelf space through exclusive arrangements and owning many of the distribution channels.

Their power over suppliers and distributors grants them leverage over other players to engage in price competition extremely effectively and aggressively.

Gallo’s Position is a Barrier to Entry into Upscale Markets

While these advantages grant Gallo a very strong position in the low-priced segment, they also serve as powerful barriers for their entry into the moderate or upscale segments of the wine market. The following points illustrate the dilemmas:

• The reputation as a low cost producer creates an image problem for the upscale market. Gallo's brand recognition actually works against their strategy. Earnest & Julio are too proud to drop their name from the product.
• The distribution channels differ slightly for the upscale market.
• Gallo’s technology advantage is geared toward volume rather than quality. All of their structures are oriented toward low costs and some aspects of quality have been sacrificed.
• Size and scale are not much of an advantage in the high end of the market so there are many players and Gallo is not well suited to this type of competition.

Recommendations for How Gallo Can Enter the Upscale Market

Based on this analysis, we make the following recommendations for how Gallo can overcome these barriers and enter the upscale market:

1. Develop a new brand name to avoid association with Gallo’s low-priced reputation

2. Identify ways to introduce technology into high quality wine production:

3. Identify new distribution channels and use their muscle in existing channels for the low priced products to get space for the upscale products.

4. Hire an outside firm to market the new brand using different channels and promotions than are used for other Gallo products.

Goizueta Partners Consulting Corporation was hired by Monsanto shareholders to assess Monsanto’s diversification strategy. Accordingly, this executive briefing analyzes why Monsanto failed to create value across lines of business when it diversified from chemicals into biotechnology. It closes with recommendations of steps they can take now to create value across the remaining business units (plant agriculture, animal husbandry, and pharmaceuticals).

Opportunities to Create Value Through Diversification

There are a limited number of strategies available for value creation across lines of business. The following table lists the primary methods, specific opportunities at Monsanto and finally the barriers that ultimately prevented value creation.

Monsanto sought to diversify away from the pure chemicals business because it is fundamentally low margin cost-based competition. Biotechnology was particularly attractive since the products and technology are proprietary. In other words, it was differentiation-based and allowed for higher margins.

However, there are many differentiation-based businesses they could have entered. They chose biotechnology because they saw it as complementary to their existing chemical business. Monsanto might have seen some opportunities initially to create value with its core competence in science or by combining marketing and distribution channels.

Why Monsanto Failed to Create Value Across Lines of Business

As the table illustrates, Monsanto faced some serious and unanticipated barriers to creating value across businesses. These are summarized below:

• The cultures for the cost-based chemicals business and the differentiation-based biotechnology business are incompatible. Employees on the two sides of the business became adversaries.
• A competency in conducting applied research (chemicals) differs from a competency in basic research (biotechnology). The former is best organized by market to assure that the innovations have applications. The later is best organized by scientific discipline to facilitate knowledge creation.
• The management team at the corporate headquarters did not actively seek out opportunities for the businesses to interact – they were more concerned with how to build the biotechnology capability.

Recommendations for How Monsanto Can Create Value

Based on this analysis, we make the following recommendations for how Monsanto can create value. In general, Monsanto can create value by separating the businesses. That is, the two businesses are clearly not creating value and may be holding each other back (e.g., destroying value):

1. Sell the chemicals division to DOW or some other competitor:

2. Spin off the chemicals division as separate entity:

Action Steps

The following are some initial action steps that should be taken to resolve this issue: